O.C.-based Sovereign Health demands that FBI release document justifying raid on its treatment centers

Sept. 12--The FBI was hunting for evidence of health care fraud, wire fraud, conspiracy, "laundering of monetary instruments" and illegal payments for patient referrals in June when more than 100 agents raided Sovereign Health's offices and treatment centers, according to paperwork filed in federal court by attorneys for the company.

The San Clemente-based addiction treatment and behavioral health care provider operates facilities in Los Angeles, Orange, Riverside and San Diego counties, as well as in several other states. With outpatient facilities and dozens of licensed beds, it's a big player in Southern California, home to one the densest concentrations of drug and alcohol rehab centers in the nation.

Sovereign's filings, which include search warrants and subpoenas prepared by the government and marked "under seal," also indicate a criminal grand jury is gathering evidence that might be used against it.

Federal regulators wanted Sovereign to keep information about the raid away from the public, and at least one letter from the U.S. Department of Justice to the company demanding information said: "Because this subpoena relates to an ongoing criminal investigation, we request that you do not disclose the existence of or compliance with the subpoena. Premature disclosure could impede the investigation."

The FBI was seeking documents related to obtaining insurance coverage for patients, a foundation or scholarship program, as well as bank and brokerage account statements, cancelled checks, billing manuals and other financial records, the documents show.

Some operators have been criticized for, among other things, using charitable foundations to buy insurance for patients, or to pay premiums, copays or deductibles, then billing insurers millions.

The affidavit offering the justification for the raids, however, remains under seal by a court order. Sovereign questions the legality of the government's searches and seizures, and is demanding that the court produce the underlying affidavit.

"(T)he affidavit likely contains false and misleading information and omits other material information," Sovereign argues in a motion filed in federal court. Sovereign and its CEO need to sit it "in order to determine whether the searches were lawfully authorized, and to take appropriate action if they were not. The Fourth Amendment entitles them to do so."

Thom Mrozek, spokesman for the U.S. Department of Justice, confirmed that the government has filed a response to Sovereign's claim in court, and that its response is sealed, but he declined further comment.

Such silence is common during an ongoing investigation, where prosecutors might be probing other people or businesses not yet known to be under investigation and don't want to tip their hand, or to protect the identities of confidential informants. Legal scholars said requests such as Sovereign's also aren't unusual, as defense attorneys often want to find out what the government knows, or believes it knows, about their clients.

"They're looking for discovery," said Lawrence Rosenthal, a professor at Chapman University's Fowler School of Law. "They have a business that is presumably worth a lot of money, and they're worried that investment is now at risk. They want to know what the government knows so that, if they can, they can try to put an end to this. The longer it goes on, from their perspective, the worse it is for their business."

The raids have hurt business, Sovereign said, arguing that there's no justification for keeping the affidavit secret.

"The warrants have been executed, ensuring their disclosure will not frustrate their purpose. There is no genuine concern of evidence destruction or witness intimidation in what is, in essence, an insurance fraud investigation of a health care provider and executive with no criminal history, represented by experienced counsel," Sovereign's motion says.

A hearing is slated for Sept. 19.

The raids came amid increased criticism of the drug treatment centers and sober living homes by local officials and the health insurance companies.

A recent Southern California News Group investigation of the addiction treatment industry highlighted practices that prosecutors, regulators and industry insiders say have bled untold millions from public and private pockets, upended neighborhoods and often failed to set addicts on a path to sobriety. Middlemen -- known sometimes as "junkie hunters" or "body brokers" -- find patients and essentially market them (and their insurance coverage) to treatment centers willing to pay the most. The revolving door between detox centers, treatment facilities, sober living homes and, often, the streets, generates huge money for operators who know how to game the system -- often at the expense of insurance companies and, by proxy, the public.

The paperwork filed by Sovereign repeats its assertion that the government is working on behalf of a large insurer, Health Net.

Last year, Sovereign and its affiliates sued Health Net, alleging the insurer failed to pay $55 million for medical services rendered. Health Net "engaged in a disgraceful scheme to enrich themselves by backtracking on their insurance promises to recovering addicts and the mentally ill," its complaint said, adding the "misconduct is part of a sad pattern of prioritizing dollars over decency."

In a countersuit filed in February, Health Net argued that Sovereign's companies are engaged in massive fraud that harms consumers and threatens the ongoing viability of health insurers. The scheme involved fraudulently obtaining insurance policies for people, then submitting thousands of false and fraudulent claims, Health Net alleged. Within the span of a single year, Sovereign's companies went from billing Health Net less than $50,000 a month to more than $13 million a month, the insurer said.

Sovereign has denied Health Net's claims. Sovereign, in its motion seeking to unseal the affidavit supporting the search warrant, argues that its legal battle with the insurer is at the root of the FBI probe. "(T)he warrants authorized seizure of records strikingly similar to those sought by Health Net in its civil discovery requests,"

argued.

The company also argued in court filings that the FBI appears to be erroneously asserting Sovereign has taken funds from Medicare and other federal health coverage programs, and it pressed its claims that the raids and news of the investigation have cost it financially and disrupted its ability to attract and serve clients.

After the raids, the number of patients in Sovereign-related facilities fell from 280 to 165, said risk management specialist Sara Baxter in a declaration filed in court. Of those, 68 said they left because of the raids, she said, and other prospective clients have declined to seek treatment from Sovereign. "Numerous" employees resigned or sought medical leave due to anxiety, and the firm's primary bank said Sovereign's accounts would be closed within 30 days, her declaration said.

"In some cases, Sovereign's operations have been disrupted or slowed as clinical staff treating patients have been without necessary files and documents and have had to secure replacements for their seized laptops and cell phones, or find ways to work without them," Sovereign's filings said.

"Given the extraordinary effect of a search warrant on a subject's privacy rights, the subject has a right to know the basis for such an invasion of privacy," it said. "If the warrants were unlawfully obtained, Sovereign will have a substantial claim for damages, as well as a right to demand immediate return of all items seized."

See Sovereign's filings here:

2017.08.15 Dec. of S. Baxter ISO Combined Motion to Unseal Search Warran...

Memorandum of Points & Authorities ISO Combined Motion to Unseal Warrant...

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