People v. Pierce – The Court of Appeal Issues Opinion Regarding Ability of a Criminal Fraud Defendant to Subpoena Records From Victim Insurance Companies

Published Feb 7, 2020

People v. Pierce (2019) 38 Cal.App.5th 321 – The Fifth District Court of Appeal Addresses the Use of Penal Code Section 550(a)(5) in Workers’ Compensation Fraud Cases, the Ability of Criminal Defendants to Serve Discovery on Victim Carriers, and the Tactic of Attempting to Recuse Prosecutors on the Basis that Prosecutions are Funded by the Insurance Commissioner

Itak Moradi, Knox Ricksen LLP

In People v. Pierce, the Court of Appeal, Fifth Appellate District addressed three issues of importance to the anti-fraud community – the use of Penal Code section 550(a)(5) in workers’ compensation fraud prosecutions, the ability of criminal defendants to subpoena documents from victim carriers, and a tactic employed by criminal defendants in fraud cases to attempt to recuse prosecutors.

The facts of the Pierce case are known to many workers’ compensation and auto fraud investigators working in the Central Valley. In June 2012, chiropractor Dwayne Dolphus Pierce, II and six co-defendants (Tomas Ballesteros Rios, M.D., John Brent Arakelian, D.C., Maria Cecilia Rios Cabangangan, Charles Orlando Lewis, M.D., Cathy Aguilar Pierce, and Chi Hong Yang, M.D.) were indicted by a Kern County grand jury with conspiracy to commit insurance fraud.

In 2004, Pierce and Rios formed a medical corporation, “P&R Med-Legal Medical Corporation,” solicited medical doctors to work for P&R as traveling doctors, and dispatched those doctors to chiropractic clinics throughout California to ostensibly evaluate worker’s compensation and personal injury patients. The traveling doctors were instructed to conduct an examination, prescribe medication, and recommend further chiropractic care. The evaluations were cursory examinations utilizing a pre-scripted report template containing the language necessary to justify the prescriptions and treatment recommendations. The traveling doctors followed orders and prescribed and dispensed pre-determined medication regardless of medical necessity and uniformly recommended further chiropractic care. Narrative reports were prepared and presented to carriers without input from the doctors, whose signatures were affixed to the reports without their review or input. The medication was pre-determined: A representative from P&R would meet the traveling doctor at the chiropractic clinic with white bags of medication to be prescribed and dispensed to multiple patients at each clinic visit.

P&R staff and doctors testified that the traveling doctors could not alter the chiropractor’s diagnosis, that the doctors’ signatures were electronically affixed without the doctors’ review of the report; that the doctors were told to “randomly circle” different billing codes so the submitted reports were not identical; and that bills were up-coded and/or falsified as the doctors were not conducting comprehensive examinations and were not conducting telephone conferences.

The trial commenced against Pierce on October 22, 2015, after the other defendants pled out or were dismissed. On January 8, 2016, the jury found Pierce guilty of conspiracy to commit insurance fraud and on September 16, 2016, he was placed on probation for five years, with the condition that he serve one year in the county jail and pay $770,421 in restitution.

Pierce appealed contending that the trial court prejudicially erred on the basis, among other things, that it should have stricken reference to California Penal Code section 550(a)(5) from the conspiracy charge as “surplusage,” that it should not have quashed subpoenas issued to victim insurance companies, and that it should not have denied a motion to recuse the Kern County District Attorney’s Office in toto because of grant funding from the Insurance Commissioner.

Penal Code Section 550 makes unlawful various acts relating to the knowing preparation or presentation of a false claim for benefits to an insurer. As the only subsection of Section 550(a) that makes unlawful the preparation of a false document with the intent to present it in support of any false or fraudulent claim, without limiting it to a claim for “loss or injury” or for a “health care benefit” as do the other subsections, the trial court held that subsection (a)(5) was intended to apply to false claims against worker’s compensation carriers. The Court of Appeal agreed with the trial court’s ruling – “… it was intended by the Legislature to apply to all fraudulent workers’ compensation claims.”

Pierce also claimed on appeal that the trial court erred in quashing subpoenas to multiple insurance carrier victims for documents essentially related to claims handling and the carriers’ evaluation of the fraudulent claims. Pierce requested that the carriers produce communications with anyone regarding the claims, medical consultant opinions, claims manuals, among other documents. The carriers filed motions to quash on the basis of relevance, that claim handling is irrelevant to a charge under Insurance Code section 1871.4. Pierce argued that such documents were necessary to show protocol regarding bill review and approval, and thereby whether the use of outside medical opinion for denying bills followed that protocol. The Court of Appeal affirmed the trial court’s decision and held that whether or not such carriers actually follow their own policies is irrelevant: “The issue is whether or not the billings submitted were fraudulent under applicable legal standards. If, for the sake of argument, we were to assume that the documents sought might disclose one or more instances of a denial of payment in violation of the insurance carrier’s internal policies, this would not evidence whether or not the billings were fraudulent.” The only documents that were held to be relevant were communication between the carrier and the prosecutor.

Pierce also attempted to force the recusal of the entire Kern County District Attorney’s office, contending that the funding the office receives from the Insurance Commissioner and the Fraud Assessment Commission for the purpose of prosecuting worker’s compensation fraud, impacts the district attorney’s decision whether to prosecute such claims. The Court of Appeal appears to have ended this tactic:

“In January of 2015, Pierce again moved to recuse the trial prosecutor, and this time, all deputy district attorney members of the Kern County Workers’ Compensation Fraud Unit, and/or the entire Kern County District Attorney’s Office under section 1424. As argued by Pierce: “The Kern County District Attorney’s Workers Compensation Fraud Unit is funded by the California Insurance Commissioner upon the advice and consent of the Fraud Division and Fraud Assessment Commission as to the most effective distribution of grant funds to the various California District Attorneys (10 C.C.R. §2698.52(f)). The grant funds available are based upon assessments statutorily imposed upon insurance companies as determined each year by the fraud assessment commission (Insurance Code Section 1872.83(b)(1)). In addition, amounts collected as fines for violations of Workers Compensation statutes are added to the assessments (Insurance Code Section 1872.83(b)(4)[, ](c)).”

According to Pierce, this statutory funding scheme for the fraud unit “empowers the insurance commissioner to exercise control over criminal prosecutions,” locking the district attorney into a particular course of action. As evidence of this, Pierce cited, inter alia, to the Kern County District Attorney’s Office statement to the Department of Insurance that it would always seek Labor Code fines in addition to criminal restitution and fines, negating the flexibility envisioned by the California Legislature in enacting the Labor Code civil fines.

The district attorney filed an opposition, and Pierce filed a reply to the opposition.

Following a hearing on the issue, the trial court denied Pierce’s recusal motion, explaining, in part:

“In this instance, the Court finds no actual conflict and no apparent conflict. This Court further finds there has been no showing of an ‘actual likelihood’ of prejudice. It is of further significance that the entity providing the financial assistance is a public agency and not the actual victim (corporate or otherwise). [¶] Prosecutors certainly have the right to set policies and to publicize policies. In most instances, following policies goes a long way to dispel any suggestion of unequal application of the law. Prosecuting agencies have the right (and the power and the discretion) to make exceptions to policies and sometimes do. Adopting or publicizing policies does not deprive the DA’s office of the discretion or authority to deviate from policies. In fact, the prior dispositions in this case, suggest that the DA has exercised discretion in examining the contextual involvement of individual defendants and relative strengths and weaknesses of evidence that differ between defendants, as well as other factors. The fact that the District Attorney’s office has set and publicized certain policies (which appear to be consistent with Legislative intent), which it is not legally obligated to follow, does not constitute an actual or potential conflict of interest. [¶] There is nothing improper about a public agency seeking an efficient return on its investment or considering issues of efficiency in making law enforcement decisions. [¶] … [¶] Here, at most, Defendants have shown that under certain conditions, a prosecutor might have a theoretical motive to pursue a non-meritorious case. This is not sufficient to meet the Defendants’ burden of proving an actual or apparent conflict of interest, sufficiently grave to demonstrate an actual likelihood of prejudice towards moving Defendants.”

The District Court of Appeal agreed with the trial court’s ruling:

“As stated by the trial court: ‘Taken to its logical conclusion, [Pierce’s] argument would preclude the prosecution of any crime in which the victim was a resident of Kern County, since the District Attorney’s Office is funded in part by county funds, and the source of such funds are taxes paid by Kern County residents.’ We agree with the trial court’s finding that no actual conflict or apparent conflict existed, and that there was no showing of an actual likelihood of prejudice requiring recusal.”

Pierce provides valuable authority for charging Penal Code section 550(a)(5) in workers’ compensation fraud cases, that a defendant may be charged with knowingly preparing a false document with the intent to submit it in support of a false or fraudulent claim. In addition, the ruling adds to a body of authority concerning the relevance of claims handling to actions filed under section 550 or Insurance Code section 1871.4; that claims handling is irrelevant to the consideration of whether a defendant knowingly presented a false, fraudulent or misleading claim. Lastly, the ruling disposes of the position that a prosecutor may be recused for a conflict of interest due to prosecution funding by the Insurance Commissioner upon the advice and consent of the Fraud Assessment Commission. It simply does not create a conflict of interest.

The prosecution of Pierce was handled at the trial court level by Kate Zimmermann, Deputy District Attorney, Kern County District Attorney’s Office and by Michael P. Farrell, Assistant Attorney General, and William K. Kim and Louis M. Vasquez, Deputy Attorneys General at the appellate level. Pierce was represented by W. Scott Quinlan at the trial court and appellate levels.

According to the Board of Chiropractic Examiners, Pierce voluntarily surrendered his license to practice chiropractic on June 3, 2017, after an accusation was filed on March 6, 2017.

Board of Chiropractic Examiners’ records show that John Brent Arakelian’s license to practice chiropractic was revoked on December 17, 2015.

Medical Board of California records show that Tomas Rios failed to report his insurance fraud conviction to the Board; that as of December 30, 2016, his license was revoked and stayed, and that he was placed on probation until January 29, 2024. His license is currently delinquent and as a result, he may not practice medicine in California.

Medical Board of California records show that Charles Orlando Lewis’ license to practice medicine is revoked, effective May 25, 2016.

Medical Board of California records show that Chi Hong Yang’s license to practice medicine was surrendered on March 16, 2017.

The criminal action paralleled a civil qui tam action filed by Knox Ricksen LLP on behalf of Allstate Insurance Company. The qui tam action, entitled People of the State of California ex rel. Allstate Insurance Company v. San Joaquin Accident & Medical et al. was filed in Fresno County based on the same facts alleged in the criminal action. While the criminal action focused on fraudulent acts perpetrated against workers’ compensation carriers, the Allstate qui tam involved auto claims exclusively. The qui tam was stayed because of the parallel criminal action and ultimately was successfully settled prior to the Pierce trial.

Itak Moradi is an associate with Knox Ricksen LLP, specializing in handling fraud cases for insurance companies, including actions filed under California Insurance Code section 1871.7.

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