Fraud, Fraud, Fraud

By Stephen Koepp

The crime was perfect only in its ghoulish symbolism: the perpetrators allegedly drew blood from poor people, paying them as little as 50 cents a vial, then falsely claimed the samples came from Medicaid patients and billed the Government for millions of dollars' worth of bogus laboratory tests. The alleged Medicaid rip-off, for which a physician and nine others were indicted in New York City, was only the most lurid example in a chain gang of new and continuing fraud cases that shuffled across front pages last week. In virtually every one of half a dozen scams, members of the public had been fleeced by names they thought they could trust, ranging from the Hertz rental- car company to New York City's senior Congressman, Mario Biaggi.

The current dragnet for white-collar criminals culminates a roaring, greedy decade that created not only legitimate prosperity but also boundless motivation for stealing. Fraud was never so tempting or remorseless, thanks to the proliferation of electronic money and fast, faceless financial transactions. In the past the primary safeguard against such theft had been trust, but in the go-go '80s that ethical obstacle blew away like an old cobweb. Now, finally, the epidemic of cheating may be cresting, since greed is going out of style in some quarters, and the spectacle of once upright citizens slouching off to jail may provide a deterrent.

Even so, last week's developments suggested that much more fraud may emerge in the near future as the misdeeds of the gilded '80s are uncovered and brought to justice. What is encouraging, however, is the way in which many law-enforcement agencies are conducting the cleanup with a newfound toughness and technical skill. Among the developments:

-- Hertz, the largest U.S. auto-rental agency, pleaded guilty in federal court to overcharging customers and their insurance companies for repairs to cars that the motorists had damaged in collisions. The company agreed to pay a fine of $6.9 million and to make full restitution to some 100,000 victims, who overpaid at least $13.7 million from 1978 through mid-1985. According to the Government's probe, which was first disclosed in January, Hertz paid wholesale prices for auto repairs but charged customers full retail price without advising them of the markup. In other cases, Hertz prepared phony repair appraisals and charged customers for work that was never done. Hertz says it has fired 20 employees who carried out the scam, including the company's accident-control manager.

-- Investigators in New York City uncovered a "blood-trafficking" ring in which suspects bought samples from drug addicts and other poor people and then sold the blood to medical labs that bilked the state's Medicaid program of at least $15 million for useless tests. At 14 of the 41 labs examined, investigators found sufficient improprieties to bar the operations immediately from the Medicaid program.

Last week a Queens grand jury handed up the first criminal indictments from the probe, charging ten people with cheating Medicaid out of $3.6 million since 1986. The leaders of the ring were Surinder Panshi, 39, a Queens physician, and his father Gurdial Panshi, 68. The Panshis allegedly launched their scheme by buying three clinics that were authorized to conduct tests for Medicaid patients. They then established a network of blood collectors who combed poor neighborhoods for people willing to sell their blood for about $10 for 20 vials. The Panshi ring allegedly paid their collectors a lucrative $25 a vial, to which the suspects attached the forged signature of a physician who was supposedly requesting a test on the blood, along with the name of a legitimate Medicaid recipient. The Panshi labs would perform tests on the blood to generate legitimate-looking data, and the Government was billed as much as $2,000 a sample. Surplus vials of the blood were trafficked to other illicit clinics at a markup.

-- In one of the first uses of racketeering laws against securities traders, a federal grand jury indicted six men on criminal charges that they evaded taxes through dozens of fraudulent stock deals. The accused -- five top officers of Princeton/Newport, an investment partnership with offices in New Jersey and California, and a former trader for the Wall Street firm Drexel Burnham Lambert -- could face prison terms of up to 20 years each and fines totaling $19 million.

They allegedly used a technique called stock parking, in which an investor sells shares temporarily to someone else to hide their real ownership from Government agencies like the Internal Revenue Service. In this case, Princeton/Newport was allegedly parking stocks at Drexel so that the New Jersey firm could claim short-term tax losses on the sale. The laws against racketeering, which involves repeated crimes carried out by a person or a business, have traditionally been used against the Mafia. Bringing racketeering charges against stock swindlers is an aggressive new tactic in the war on white-collar crime.

-- The probe of insider trading based on purloined early copies of Business Week magazine expanded to include at least 16 suspects on both coasts. In the most fully investigated case so far, former Merrill Lynch Broker William Dillon, 33, is believed to have paid employees at a magazine printing plant in Connecticut to give him copies of Business Week a full day before the issue was available to the general public so he could buy stocks recommended in the "Inside Wall Street" column before the price went up. Dillon typically paid $30 an issue, but allegedly reaped profits of $2,000 or more a week.

. Merrill Lynch fired Dillon late last month after it discovered his suspicious trading pattern. Prudential-Bache, detecting an apparently separate but very similar scam, late last month fired a broker in its Anaheim, Calif., office whom it has accused of getting early copies of Business Week from a printing plant in Torrance, Calif. Last week the company that operates both plants, R.R. Donnelley & Sons (which also prints some copies of TIME), fired three workers; a fourth resigned.

Now at least two dozen brokerage houses are checking to see whether any of their employees were also privy to the Business Week leaks. Many brokerages have turned over their trading records to the New York Stock Exchange, which is conducting a computer analysis. Says one investigator: "There is nowhere to hide. We're going to catch anyone who profited by advance knowledge of the column." Such individuals could face criminal charges for wire and mail fraud.

-- Mario Biaggi, a Bronx Democrat who has served for 20 years in Congress, was convicted of 15 felony counts for his part in the Wedtech scandal. The federal jury found Biaggi guilty of extorting $1.8 million in Wedtech stock and $50,000 in cash in return for his influence in getting federal military contracts for the Bronx-based manufacturing company. The day after the conviction Biaggi tearfully resigned his seat in Congress.

Biaggi, 70, who was once one of New York City's most decorated police officers, professed his innocence and plans to appeal the conviction. Said he: "Not a single penny, gift, trip, not a share of stock, ever came to me." But the jury apparently took the word of four former Wedtech executives who testified against Biaggi. In a separate case, Biaggi was sentenced last year to 30 months in prison for obstructing justice and accepting a free trip to Florida as a payoff for his assistance to a Brooklyn shipyard.

-- The Pentagon procurement scandal cost 89 people their jobs when Unisys, the computer maker, canceled all its contracts with tiny, Florida-based Armtec, a manufacturer of electronics used in radar systems. Since Unisys is Armtec's main customer, the action forced the company to shut down its operations. Federal agents are investigating Armtec as a possible conduit for illegal payments from Unisys employees to federal officials involved in arms procurement. In particular, the Government is studying the relationship between Unisys, Armtec and Congressman Bill Chappell Jr., a Florida Democrat ^ who is chairman of the House Appropriations Committee's subcommittee on defense. Chappell persuaded Armtec to locate in his district and supported the MK-92 radar system, which is built by Unisys with Armtec as a subcontractor.

Many scholars believe that sleaze comes in cycles and that this decade's ethical looseness was partly inspired by the deregulatory, anything-goes mood of the Reagan era. "People convince themselves that a new norm of acceptability applies because of the general atmosphere of corruption," says Michael Josephson, founder of the Josephson Institute for the Advancement of Ethics in Los Angeles. The emphasis on money as an absolute barometer of success was equally corrupting. Says Donald Shriver, head of the Union Theological Seminary: "The Protestant work heritage is being stood on its head because making money has become a good unto itself."

The mentality of profits-at-any-price will not change overnight, but new deterrents are on the way. Last week House Democrats John Dingell of Michigan and Edward Markey of Massachusetts introduced a bill that would raise the maximum penalty for insider trading for individuals to $1 million from the current $100,000, and would provide a bounty for informants. This fall 60 universities will teach ethics courses developed in a $5 million program sponsored by the Arthur Andersen accounting firm. Says James Bere, chairman of Borg-Warner: "I'm impressed by the number of people of my generation who are calling for values again. Still, there's a definite problem. Many of the young people who come in to work for us don't know right from wrong." Perhaps the best way to learn is by observing all the pinstripe perpetrators marching across the front pages.

With reporting by Raji Samghabadi/New York, with other bureaus