California gave $139 million ventilator contract to medical supply firm once raided by FBI

May 13--In March 2013, FBI agents raided Heriberto Diaz's medical supply company in Bakersfield, searching for evidence of Medicare fraud.

Seven years later, Diaz's company, Ashli Healthcare Inc., holds a $139 million contract to supply ventilators and other equipment to the state -- one of the biggest contracts the Newsom administration has signed without going through the usual competitive bidding process as it scrambled to gear up for the coronavirus pandemic.

The FBI's raid on Ashli's one-story gray stucco warehouse and offices coincided with searches at two medical offices in Bakersfield. An FBI agent wrote in an affidavit that the three businesses were suspected of cooperating on a scheme to bilk the taxpayers out of millions by billing Medicare for devices for patients who didn't need them -- including at least 125 who had already died.

Immediately after the raid, Ashli released a statement saying the investigation "will reaffirm our ongoing ethical business practices." Diaz and the doctors whose offices were searched were never charged. The U.S. attorney's office said in a court filing two years ago that the investigation was closed without any indictments issued.

The state's Ashli Healthcare deal is just one of the hundreds of no-bid contracts signed without public input as officials frantically tried to staff COVID-19 field hospitals, find lodging for the homeless and stock up on testing kits, ventilators and personal protective equipment like masks, gowns and gloves during the COVID-19 crisis.

The state has awarded approximately 410 no-bid contracts worth at least $50,000 apiece since March 1, according to a Sacramento Bee analysis. The contracts total about $3 billion.

The deal with Ashli Healthcare covers 8,000 ventilators and other equipment. Only three other no-bid deals for medical supplies in California are known to be larger, including a $1 billion contract to buy masks.

In an interview Wednesday, Diaz said his company has about 150 ventilators in a warehouse. He said he's in contact with a manufacturing company, Ventec, about obtaining the thousands of devices agreed to in the contract and that he's "more than confident" he'll receive the devices and, in turn, be able to provide to the state.

Diaz said the deal got off the ground after a coworker who handles contracts suggested it to him. Diaz said he won't be paid until he delivers the equipment, and that he has not yet received any money from the state.

"I think we've provided them with a handful so far," Diaz said. "But they are being manufactured."

Ashli Healthcare, which Diaz said has 25 employees, did not have a functioning website Wednesday. Diaz sounded flummoxed when asked about it not working.

"For some reason, it's not coming up," Diaz said. "I'll have to find out what's going on with that."

As for the now-closed federal investigation, Diaz said he felt the federal agents "wanted to make sure everything was clean, everything was good."

"They came in, they did what they did. You know? I felt good about it. It basically, you know, it kind of, it went away. I spoke with my attorney a little bit about it. What's this about, right?" Diaz said. "And basically, he said, "You're just doing a good job, and a lot of times as you ramp up really fast, it can raise a red flag.' "

Several other large contracts between California and private companies also have raised red flags in the rush to equip the state for the COVID-19 pandemic.

The state's largest no-bid deal for equipment is the $1 billion contract with Chinese auto manufacturer BYD. The deal for N95 and surgical masks was blocked by the federal government on Wednesday. Federal mask regulators said the deal couldn't move forward after finding problems with the masks' "design, manufacturing and quality inspection."

Gov. Gavin Newsom has said California's already received some masks, but $247.5 million of the initial wire transfer is being refunded under the terms of the contract because of a delay in receiving them.

Earlier this month, a $456 million deal for 100 million masks California ordered from a company called Blue Flame fell through. The Washington Post reported the company is now under criminal investigation by the Justice Department.

The Blue Flame deal, first reported by news outlet CalMatters, fell apart six hours after state officials initiated the wire transfer to the company for 100 million face masks. The state kept the money, but Newsom described it as a cautionary tale at a news conference last week.

California also canceled a nearly $800 million mask contract with Bear Mountain Development Co. LLC after the company failed to deliver most of the supplies, the Los Angeles Times reported. The state didn't pay the company for any masks or face shields that weren't delivered, according to the Times.

State officials did not immediately return calls for comment about the Ashli Healthcare contract.

In the interview, Diaz said the process for securing the contract did not burden the company and he was not aware of how much vetting the state did. As far as he knows, the 2013 investigation didn't come up during the vetting process, he said.

"I can't remember it being too invasive," he said. "I think it was a little bit easier to do when you're not paying for everything up front, you know what I mean?"

FBI: Company billed for dead patients

Special agent Sharron Cannella had spent six of her eight years with the FBI on Medicare investigations, and she thought she'd found a promising case in Bakersfield.

Ashli Healthcare and two Bakersfield medical organizations, Valley Medical Group and High Grove Medical Center, appeared to have cooked up a scheme to bilk the Medicare system out of millions.

In an affidavit Cannella filed in U.S. District Court in March 2013, she said she suspected that doctors at Valley and High Grove were making "fraudulent referrals" to Ashli.

Ashli would then bill Medicare for unnecessary ventilators, respirators and other devices. The idea was the three organizations could con the Medicare system out of millions.

Multiple factors fed the agent's suspicions.

A routine audit of Ashli's records showed that in one month alone, September 2012, the company purchased 15 units of a particular ventilator -- and billed Medicare for 231 of the machines.

Ashli's overall Medicare billings more than doubled in 2012, to $7 million -- the kind of spike that's considered "an indicator of fraud," Cannella wrote.

Other red flags popped up: The patients for whom these devices were supposedly being ordered lived all over the country, including one in Powder Springs, Ga. The FBI agent found it unbelievable that a company like Ashli, which didn't have a website at the time and had told Medicare officials it only distributed in California, would have customers coast to coast.

The four physicians responsible for the bulk of the purchases weren't pulmonary specialists and had no business prescribing large volumes of respiratory equipment. And they, too, would have no business treating patients as far away as Georgia, the agent said.

What's more, Ashli "billed for beneficiaries who were deceased and billed for services purportedly provided after their 'date of death'," the agent wrote. In all, Ashli "billed Medicare for over 125 deceased beneficiaries."

The patients weren't the only ones turning up dead. Cannella said more than $100,000 worth of equipment had been procured for patients by a nurse practitioner at Valley Medical Group two months after she died. Ashli was reimbursed $78,000 by Medicare for those purchases.

Asked Wednesday about the 2013 allegations, he said only that he ran a supply company and shifted responsibility for any billing to the healthcare providers.

"We deal with various providers. We deal with hundreds of different providers," Diaz said of the conspiracy allegations. "It's something that isn't done as far as conspiracy, that kind of thing. Nothing like that exists within our organization. It really doesn't. That proved fact when it was all said and done."

The FBI raids, carried out March 12, 2013, uncovered a trove of patient files, Medicare records, Ashli's financial statements, billing invoices, mobile SIM cards and more.

When word of the investigation leaked out, the FBI confirmed the searches had taken place but didn't reveal any details. Ashli issued a statement in Diaz's name saying: "We are fully cooperating with federal investigators and we are confident this will reaffirm our ongoing ethical business practices."

And that was the end of it, at least publicly. The case disappeared from view until January 2018, when federal prosecutors based in Fresno filed court papers asking that the affidavit and search warrant documents be unsealed. The investigation was over and no charges were filed, prosecutors said. They gave no explanation.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, said the raid "would certainly seem to raise some questions (about the state contract), though it could be they were entirely innocent."

He said the contract, as well as other questionable ones the state's entered into in recent weeks, shows the need for further scrutiny on the companies with whom the state is paying in the COVID-19 crisis.

"It is extremely important that any vendors with whom the California government contracts are fully vetted," he said. "If we don't have time to fully vet them, at least do some cursory due diligence to ensure the taxpayers won't be ripped off."

California defends its contracts

Mark Ghilarducci, director of the state's Office of Emergency Services, defended the state's procurement and vetting processes during a California Assembly oversight hearing Monday. There were thousands of offers that needed to be vetted, and officials say they continue to refine that process.

"Not one dime -- not one dime -- of taxpayer dollars has been lost," Ghilarducci said.

The state has received more than 7,700 supply offers in recent weeks. Submissions are screened and then subject to the state's "enhanced vetting process," which Ghilarducci said now includes consultation from health and supply chain experts as well as local, state and federal law enforcement and the FBI.

"We saw amongst vendors fraud, promises not kept, overstated capabilities, and an overwhelming number of individuals and companies working hard to take advantage of the situation," Ghilarducci said.

"It was really a miracle in many ways that there weren't more challenges."

Lawmakers on the committee were generally appreciative of the state's procurement and screening processes and challenges. It was easy to second-guess decisions in hindsight, they said, but the changes in the vetting process should help.

"What we can't have is another $3 billion of iffy contracts," said Jim Patterson, R-Fresno, the accountability committee's vice chair.

State agencies procured about 410 emergency, non-competitively-bid contracts worth at least $50,000 from March 1 through May 12, according to a Sacramento Bee analysis of a state procurement database.

Those contracts -- which may include some procurements not related to COVID-19 -- were worth about $3 billion.

During the same period in 2019, there were 57 emergency, non-competitively-bid contracts worth more than $50,000, for a total of about $45 million, The Bee review found.

"It has been said that this was the wild, Wild West," Ghilarducci said. "It was actually the wild, wild world."

The Bee's Phillip Reese and Sam Stanton contributed to this story.

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