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UNITED STATES EX REL. CHERRY HILL CONVALESCENT CTR

November 10, 1997

UNITED STATES ex rel., CHERRY HILL CONVALESCENT CENTER, INC., A New Jersey Corporation, Plaintiff,
v.
HEALTHCARE REHAB SYSTEMS, INC., A Pennsylvania Corporation, et al., Defendant.



The opinion of the court was delivered by: KUGLER

 KUGLER, UNITED STATES MAGISTRATE JUDGE:

 In order to ascertain whether any confidential information was transmitted between HRS and Heffler during the period Heffler acted as HRS's accountant, and to determine the nature of HRS-related records retained by Heffler, the court held an evidentiary hearing on August 7, 1997 and August 27, 1997. At the hearing, the court heard oral argument on the motions to disqualify and testimony from George Siatta, partner in the Heffler firm. The parties introduced fifteen exhibits into the record. The court directed counsel to prepare supplemental briefs which were submitted on or before October 2, 1997. Edward F. Borden, Jr., Esquire, on behalf of the law firm of Saul, Ewing, Remick & Saul LLP, filed a cross-motion for leave to withdraw as counsel for CHCC on October 2, 1997.

 Upon consideration of the parties' submissions and oral arguments, and the testimony given at the hearing, the following constitutes my findings of fact and conclusions of law.

 I. FINDINGS OF FACT

 1. Heffler, Radetich & Saitta *fn1" is a certified accounting firm located in Philadelphia, Pennsylvania. Heffler is a member of the American Institute of Certified Public Accountants (AIPCA) and the Pennsylvania Institute of Certified Public Accountants (PICPA).

 2. Defendant HRS is a Pennsylvania corporation which provides rehabilitation services, including physical therapy, to persons such as residents of nursing homes. Defendant Doug Kosmin is the President of HRS. Defendant James Luchansky is the Executive Vice President of HRS.

 3. In 1990, HRS retained Heffler to provide general accounting services. Heffler performed a variety of accounting services for HRS from 1990 until October 1994, including five independent annual audits of HRS's financial condition during the period August 21, 1990 through June 1994. These audits were performed in accordance with AICPA's Generally Accepted Auditing Standards (GAAS). In each audit, Heffler reached the unqualified opinion that HRS's financial statements adequately represented the financial position of the company. (Exhibit B, Certification of Robert A. Magnanini, Esquire).

 4. In performing accounting work for HRS, Heffler was provided with access to HRS's business and financial records. Heffler was under a professional and legal obligation to keep confidential any information obtained about HRS in the course of its duties.

 5. Mark Rovinski, former partner at Heffler and head of the Nursing Home Division, was the accountant primarily responsible for handling the accounting work performed by Heffler for HRS. During the tenure of Heffler's association with HRS, Mr. Rovinski and two assistants, Anthony Esposito and Antello Ianieri, audited HRS's records. *fn2" (Knauf Affidavit P 7, Exhibit A to Brief in Opposition to Defendants' Motion to Disqualify).

 6. George Saitta is a certified public accountant and has been a partner with the firm for fifteen (15) years. Mr. Saitta heads the healthcare area of the firm's practice, and specializes in third-party reimbursement audits on behalf of the government. Mr. Saitta performed a limited amount of business management and Medicare reimbursement consulting for HRS, but was not directly involved in the audits of HRS performed by Heffler. (Saitta, 8/27/97, at 3, 4, 5, 15 & 44; Knaup Affidavit P 8).

 7. In November 1990, CHCC became a client of Heffler through the efforts of Mr. Kosmin, who introduced Mr. Rovinski to CHCC'c management. (CH-6). At approximately the same time, CHCC became a client of HRS. HRS began providing physical therapy to patients at CHCC's facility.

 8. In September 1993, counsel for HRS responded to Heffler's inquiries, made pursuant to its annual audit of HRS, regarding pending and future litigation involving HRS. HRS's counsel notified Heffler of litigation between HRS and CHCC including CHCC's intention to file a counterclaim against HRS alleging fraud in connection with HRS's billing methods. (D-4; Exhibit C, Certification of Robert A. Magnanini, Esquire).

 9. On February 3, 1994, CHCC, a nursing home, brought this action as a qui tam plaintiff on behalf of the United States Government for violations of the False Claims Act, 31 U.S.C. § 3730(b) et seq. In its complaint, CHCC alleges that the defendants defrauded the United States Government during the period from November 1990 to May 1993 by overcharging CHCC and other clients for physical therapy services and then causing fraudulent bills to be submitted to the Medicare program. (Second Amended Complaint P 39).

 10. In October 1994, Mr. Rovinski, Mr. Esposito and Mr. Ianieri left Heffler to work for the accounting firms of M.D. Oppenheim & Company. (Knaup Affidavit P 9).

 11. On October 31, 1994, Craig Knaup was hired by Heffler as Manager, Long-Term Care Division, and was placed in charge of CHCC's account. Mr. Knaup's responsibilities with regard to CHCC included preparing cost reports and appeals from cost reports and providing reimbursement consulting. (Knaup Affidavit P 2).

 12. On November 30, 1994, Mr. Saitta and Mr. Knaup attended a dinner meeting with Mr. Kosmin to discuss the possibility of retaining HRS as a client of Heffler despite the departure of Mr. Rovinski from the firm. (Saitta, 8/27/97, at 28-30).

 13. On January 17, 1995, Mr. Kosmin advised Mr. Saitta by letter that HRS had retained M.D. Oppenheim and Company to provide accounting services and that HRS authorized M.D. Oppenheim and Company to review all workpapers and documents in the possession of Heffler related to HRS. (CH-3). Heffler did not perform any accounting services for HRS between October 1994 when Mr. Rovinski left the firm and January 1995 when HRS formally terminated its professional relationship with Heffler. (Knaup Affidavit P 11). Mr. Rovinski presently continues to provide HRS with accounting services.

 14. After HRS terminated its relationship with Heffler, Heffler remained in the possession of documents related to HRS. Approximately two boxes of these records are presently in the possession of Heffler. At no time during HRS's association with Heffler, and at no time subsequent to the termination of this relationship, was there an ethics screen established to shield any information or documents relating to HRS from Heffler employees.

 15. At least one Heffler employee has performed an inventory of the HRS-related documents which remain in the possession of Heffler. (CH-1; Saitta, 8/27/97, at 23-24). At least one Heffler employee has examined the HRS-related documents to determine if any materials therein indicate that Mr. Saitta had any involvement with the HRS file. (Saitta, 8/27/97, at 26).

 16. Mr. Saitta was notified about the instant lawsuit involving CHCC and HRS in either 1995 or 1996. *fn3" Mr. Saitta was made aware of CHCC's allegations of fraud against HRS in a conversation with R. Steven Scherfel, President of CHCC. During that conversation, Mr. Scherfel agreed that Heffler would provide assistance to CHCC in the lawsuit as part of its ongoing accountant-client relationship with CHCC. As a result of this agreement, Mr. Siatta arranged for Mr. Knaup to handle the day-to-day obligations associated with assisting CHCC. (Saitta, 8/27/97, at 5-8).

 17. Mr. Knaup has performed reimbursement consulting for CHCC in connection with this lawsuit. (Knaup Affidavit P 3). At no time has Mr. Knaup examined the HRS-related documents retained by Heffler, or received confidential information relating to the accounting work performed by Heffler for HRS. (Knaup Affidavit P 12 & 14).

 18. On March 21, 1996, the law firm of Saul, Ewing, Remick & Saul entered an appearance on the record as counsel for CHCC in this matter. Edward F. Borden, Jr. assumed the role of principal counsel for CHCC.

 19. In connection to his work for CHCC in this matter, Mr. Knaup attended a document review at the offices of HRS with CHCC's counsel on October 30 & 31, 1996.

 20. In a letter from Stuart S. Kurlander, Esquire, attorney for HRS, to Mr. Borden dated November 25, 1996, defendants formally objected to CHCC's use of Mr. Knaup as an expert in this litigation on the grounds that Heffler's prior engagement as HRS's accountant created a conflict of interest. *fn4" (Exhibit I, Certification of Robert A. Magnanini, Esquire).

 21. In a letter dated April 16, 1997, Mr. Borden notified the court that Heffler was serving as an expert consultant to CHCC and to him in this matter. Mr. Borden also invoked the attorney-client communication privilege and the attorney work product doctrine with respect to certain Heffler materials requested by defendants relating to CHCC. (Exhibit E, Certification of Robert A. Magnanini, Esquire).

 22. In a letter to Mr. Saitta dated April 23, 1997, Mr. Kosmin objected to CHCC's use of Heffler as a consultant. Mr. Kosmin expressed his concern that Heffler had unique access to HRS's confidential records which could prove material to this litigation. (Exhibit A, Certification of Robert A. Magnanini, Esquire).

 23. On April 24, 1997, Mr. Saitta responded to Mr. Kosmin's objection. Mr. Saitta asserted that Heffler had not been retained by Mr. Borden as a consultant, but that Heffler, in the course of servicing its client, was acting on behalf of CHCC. Further, Mr. Saitta affirmed that HRS's workpapers remain confidential. (Exhibit F, Certification of Robert A. Magnanini, Esquire).

 24. In a letter dated May 16, 1997, Roger S. Goldman, Esquire, of the law firm Latham & Watkins, attorney for defendants, notified Mr. Borden that defendants were planning to move to disqualify Heffler and the firm of Saul, Ewing, Remick and Saul from participating in this litigation.

 25. There is no evidence that anyone at Heffler has passed confidential information about HRS to CHCC.

 II. MOTION TO DISQUALIFY EXPERT

 The defendants move to disqualify the Heffler accounting firm from acting as a consulting expert on behalf of CHCC in this litigation. The defendants argue that the accounting firm is privy to confidential information relevant to this litigation because of the existence of an accountant-client relationship between ...


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