Drawing Down 

Investigation deepens into millions of dollars that flowed out of HDL.

click to enlarge A U.S. trustee is trying to figure out why “huge amounts of money” went out the door at HDL before it went bankrupt.

Scott Elmquist

A U.S. trustee is trying to figure out why “huge amounts of money” went out the door at HDL before it went bankrupt.

A U.S. trustee in the bankruptcy court case of Health Diagnostic Laboratory is looking into millions of dollars in distributions to the company’s top stockholders, including founder and former chief executive Tonya Mallory and its current chief executive, Joseph McConnell.

When reviewing the troubled organization’s financial statements, trustee Robert A. Van Arsdale said in court he saw that “some huge amounts of money” were dispersed in the two years before HDL went bankrupt. He instructed the company’s lawyers to provide documentation.

Asked for details, Arsdale refers Style to Shannon May, a U.S. Justice Department spokeswoman in Washington. She declines to comment, but says more information might be available during an Aug. 5 hearing in U.S. Bankruptcy Court.

HDL spokesman Doug Sbertoli didn’t respond to several requests for information.

Mallory resigned from the company in September after federal investigators accused her firm of paying kickbacks to doctors to use its blood-testing services for Medicare patients. In April, it agreed to a $47 million settlement with the U.S. Department of Justice, which intervened in two whistleblower lawsuits against it. Fines in the case could top $100 million.

Mallory and two colleagues — Cal Dent and Brad Johnson, owners of an Alabama-based marketing company — were excluded from the settlement. That could make them open to criminal prosecution. A U.S. attorney in South Carolina has said he intends to pursue such an investigation.

HDL is a seven-year-old company touted as an example of new high-tech business in Richmond. It amassed revenues unusually quickly, but was accused of buying revenues by paying doctors as much as $17 per blood sample. Racked by bad publicity, lawsuits and fines, the firm declared Chapter 11 bankruptcy June 8 and has won permission to put itself up for sale.

As part of bankruptcy proceedings, Van Arsdale has pored over HDL’s financials. He notes that millions of dollars were paid out to some top shareholders of the privately held company during the past several years.

The Wall Street Journal reported in March that from 2011 to 2013, HDL’s 16 stockholders received distributions totaling $119 million, according to internal company documents the newspaper received.

Of that, $50 million went to the firm’s three cofounders — Mallory, McDonnell and Russell Warnick, the Journal reported. Because of the type of company HDL is, some $71 million of the total sum went to pay taxes.

Dent and Johnson of Blue Wave, the Alabama marketing company with close connections to Mallory, received $220 million from 2010 to 2014. Of that, $173 million went to Dent and Johnson themselves.

HDL grew revenues so remarkably fast “that it caught the eyes of people in the lab business,” says Robert Michel, editor of the industry newsletter Dark Daily, which tracks the national medical laboratory testing sector. In 2012 and 2013, he says, the company made revenues in excess of $800 million.

Lauren Husten, who writes a medical blog for Forbes, says that HDL’s profit margins reached a remarkable 33 percent. The industry average is closer to 10 percent.

Also curious was how much money was being paid out. Some of it apparently went to doctors, who received up to 1,700 checks each month as “draw fees” paid back to them for using HDL’s blood analysis. Other disbursements went to stockholders.

“That’s just money that disappears out of the business as cash,” Michel says.

Although it’s still unclear whether criminal probes are underway for former and current HDL executives and others, Michel says federal regulators have been performing broad investigatory sweeps across the country to look into alleged doctor misconduct.

He refers to a New Jersey criminal case that ensnared not only the officials of a blood testing company, but also the doctors who collected fees to use its services.

Biodiagnostic Laboratory Services of Parsippany was paying $4 million in bribes to doctors for using its blood testing, according to federal investigators. Some doctors were pocketing from $1,500 to $5,000 a month to choose the laboratory.

So far, 38 people have been convicted in the case, including 25 doctors in New Jersey, New York and Connecticut. “To our knowledge, this is the largest number of medical professionals ever prosecuted in the same case,” U.S. Attorney Paul Fishman said in a release.

Michel says one question is whether the HDL case could expand to include criminal problems of doctors who accepted the “draw fees” each time they used a company test.

While the investigations continue, HDL is enduring other embarrassments, such as layoffs, lawsuits from insurance companies, having to remove its corporate logos from the Siegel Center at Virginia Commonwealth University and the Redskins Training Camp, and leasing part of its $100 million, state-of-the-art building in the Virginia BioTechnology Research Park.


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