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November 4, 2009 4:48 PM

Feds Implicate Troutman Sanders Real Estate Partner in $50 Million Kickback Scheme

Posted by Brian Baxter

UPDATE: Nov. 5, 6:42 p.m. A statement from Troutman Sanders has been added to the fifth and sixth paragraphs of this story.

CORRECTION: Nov. 5, 10:33 a.m. The second-to-last paragraph of a previous version of this story stated that Leonard Grunstein left Herrick, Feinstein for Troutman Sanders in 2005. It should have said he left the firm for Jenkens & Gilchrist in April 2002, before the alleged misconduct between Omnicare and Mariner occurred. We regret the error.

A banner week for lawyers behaving badly got even more interesting on Tuesday when Troutman Sanders real estate partner Leonard Grunstein was named in a complaint filed by federal prosecutors in Boston.

The complaint alleges that Grunstein, wealthy real estate investor Rubin Schron, and investment banker Murray Forman participated in a scheme to accept $50 million in kickbacks from Covington, Ky.-based pharmaceutical vendor Omnicare in order to provide services to a nursing-home company called Mariner Health Care in which the three men are principals.

Leonardgrunstein

The allegations against the 57-year-old Grunstein (right), Schron, and Forman were revealed when Omnicare, the nation's largest provider of pharmacy services to nursing homes, agreed to pay $98 million to settle Justice Department allegations that it engaged in kickback schemes with nursing homes and drugmakers.

The deal allows Omnicare to settle federal and state claims related to four whistleblower actions filed under the False Claims Act and pursued by the Justice Department. (In a related matter, IVAX Pharmaceuticals, a unit of generic drug making giant Teva, is to pay the government $14 million to settle kickback allegations it was facing.)

Paul Shaw, a K&L Gates litigation partner in Boston representing Omnicare on the settlement, did not immediately respond to a request for comment. Calls to Grunstein and his lawyer Bruce Singal from Boston's Donoghue Barrett & Singal went unreturned. A Troutman spokesman told The Am Law Daily that Grunstein will take a leave of absence from the firm until the case is resolved.

"The firm is confident there will be a successful resolution to the case and that Mr. Grunstein will return to work," Troutman said in a statement.

According to the government's 32-page complaint against Grunstein and several other defendants unsealed on Tuesday, the alleged kickback scheme originated in June 2004 when Schron paid $1 billion for Mariner, which operates some 270 nursing and long-term care facilities in 23 states. Schron, represented by Grunstein on the deal, financed the acquisition with $200 million of his own equity and $800 million borrowed from Credit Suisse.

Because a large part of the value of any nursing home is the real estate it occupies, say sources familiar with the case, Schron essentially spun off the land inhabited by Mariner facilities into a separate entity that he controlled. The mortgage on that real estate was used to finance the deal and several other entities were set up to manage the nursing homes.

But before the acquisition could be completed, Schron realized that he needed more cash to close a $40 million financing shortfall. The government's complaint alleges that Schron, Grunstein, and Forman threatened to cancel Mariner's contracts for pharmacy services with Omnicare in order to get Omnicare to kick in that $40 million.

To achieve their goal, the government alleges the three men arranged for Mariner to sell a small subsidiary called MMS to Omnicare. But MMS, which provided feeding-tube products to nursing homes and had only a few million in assets, was sold to Omnicare for a whopping $50 million. Around the same time, in December 2004, Schron's aquisition of Mariner closed and Omnicare's pharmacy contract with the nursing home chain was extended for 15 years. It is the MMS deal specifically that the government claims served as the conduit for the kickback.

In an effort to make the transaction look like it was occurring at arm's length, the complaint states, the name of Grunstein's brother Howard, who lives in Israel, was used to sign bogus certificates stating that the transactions were unrelated. But at least one healthcare lawyer for Schron's acquisition group at now-defunct Jenkens & Gilchrist--Grunstein's firm at the time--appeared to realize that the timing of both transactions might look suspicious to regulators.

In an excerpt of an e-mail sent to Grunstein and former Jenkens partner Darren Alch included in the government's complaint, an unidentified Jenkens partner states the following:

"[Darren] thinks that three or four months delay between the closings (or longer, obviously) would be better, but a closing at the end of February (subject to check with [Omnicare's outside counsel] again) . . . might be OK--not safe, but assuming no one at OIG is really watching closely."

Unfortunately for the defendants, regulators at the Department of Health and Human Services' Office of the Inspector General (OIG) were watching closely. As part of the agreement announced by federal prosecutors on Tuesday, Omnicare has settled its part of the case. But the Mariner defendants--the entities plus Schron, Grunstein, and Forman--have not.

The government was alerted to the shenanigans occurring between Omnicare and Mariner by Adam Resnick, a Chicago-based healthcare entrepreneur who filed a qui tam (or whistleblower) suit in February 2006. The government joined the case in December 2008 and filed its own suit shortly thereafter. The case was under seal until Tuesday to allow for settlement discussions between the parties.

Resnick has his own sordid history--he spent time in prison after contributing to the collapse of a small Chicago bank in 2002 and later authored a book on his pathological gambling addiction--but his lawyers defend his actions exposing the kickback scheme between Omnicare and Mariner.

Tim McCormack

"Resnick had a lot of connections in the nursing home and healthcare industry, so he often brought companies together to do business," says Tim McCormack (left), an associate at whistleblower firm Phillips & Cohen, who advised Resnick along with name partner Mary Louise Cohen. McCormack says that when Resnick worked with a company that audited pharmacy claims for nursing homes, he learned about Omnicare's illicit arrangement with Mariner.

By blowing the whistle on the kickback scam, McCormack says Resnick is entitled to a share of the $19.8 million that Omnicare will pay the government to settle Resnick's qui tam case. (Taken together with Omnicare's three other related settlements and the IVAX settlement, the government's total settlement value is $112 million.)

"Resnick's share will be several million dollars, most of which will go to pay his restitution [in the bank matter]," says McCormack, acknowledging that his firm will also be paid. "He was instrumental in helping the government uncover this complex scheme and the U.S. attorney's office in Boston did a great job in unwinding these complicated transactions."

Assistant U.S. attorneys Gregg Shapiro and Christine Wichers in Boston and attorneys Joyce Branda, Daniel Anderson, and Laurie Oberembt from the civil division at Main Justice in Washington, D.C., are prosecuting the case against Grunstein and the other Mariner principals.

Grunstein, who heads the investments and capitalization real estate practice groups at Troutman, has long been considered a dean of the New York real estate bar. He was profiled in The New York Observer last month for conceiving the idea for a suit against Tishman Speyer, which accused the landlord of Manhattan's Stuyvesant Town-Peter Cooper Village complex of illegally deregulating rent-stabilized apartments. (In an October ruling, a New York state appellate court held that Tishman could not continue the deregulation program and accept public tax benefits.)

But the Omnicare scandal isn't the first to touch Grunstein. In February, the lawyer's name appeared on a 162-page customer list of Bernard L. Madoff Investment Securities. Grunstein's name appears "c/o" of a Madoff account called CCC Trust, and the list identifies him by his former firm Herrick Feinstein, which Grunstein left in April 2002 for Jenkens.

William Kettlewell from Boston's Dwyer & Collora is representing Forman; Schron, part of an investor group that owns the landmark Woolworth Building, has turned to Foley Hoag business crimes and government investigations chair Nicholas Theodorou. Neither lawyer returned a request for comment.

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