Feds seek to settle score over $170M Lakeway hospital loan

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LAKEWAY, Texas (KXAN) — The Department of Justice has filed another round of fraud allegations against the people involved in the 2010 application for a Housing and Urban Development loan to build the Lakeway Regional Medical Center.

The latest filing comes just three months after a settlement in June.

The June settlement required developers of the Lakeway Regional Medical Center to pay $1.1 million to end a DOJ effort to financially punish them over allegations they participated in an effort to “improperly” obtain the taxpayer-backed loan and receiving kickbacks associated with the loaned tax dollars.

The latest filing accuses Lakeway Regional Medical Center, Surgical Development Partners, LLC; SDP of Austin Enterprises, LLC; G. Edward Alexander; Frank Sossi and John Prater of participating in a “scheme” to defraud the government in securing the $166.8 million-dollar loan to build the LRMC.

The federal government has accused multiple officers and developers of the Lakeway Regional Medical Center of committing fraud in securing a $170 million loan to build this hospital.

Alexander is identified in the lawsuit as a former LRMC board member and Chief Executive Officer of SDP. Sossi is identified as an attorney who was LRMC’s attorney and former LRMC CEO. Prater is identified as the Chief Financial Officer of both SDP and LRMC.

The original management team needed $38 million dollars as a down payment in order to get the loan, according to the lawsuit filed by the DOJ on Wednesday. The group filed documents showing 85 “physician investors” had put up enough cash to satisfy the “cash to close” requirement of the HUD loan.

The lawsuit claims LRMC’s management group lost $5 million in those initial investments within days of closing on the loan. “Rather than inform HUD of these facts, Defendants LRMC, SDP, SDP-Austin, Sossi, Alexander and Prater conspired to cover the shortfall with a number of kiting and kickback schemes,” Assistant United States Attorney Thomas Parnham, Jr. wrote in the latest filing.

The kickback, the government said, happened when two board members floated the hospital group a loan to help toward the $38 million down payment. The group then agreed to repay those LRMC board members $900,000 in “kickbacks” labeled as “Fees” plus “early redemption of purchased notes,” according to the filing.

In October 2009, just four months before Federal Housing Administration Commissioner David Stevens approved the $166.8 million loan, the lawsuit claims LRMC had already lost multiple investors and did not tell the government about it when the loan was approved.

On May 21, 2010, the lawsuit shows LRMC and HUD held the initial loan closing. Just four days before closing, the government alleges LRMC knew it didn’t have the $38 million needed for the down payment and in two board meetings, the LRMC board agreed to “engage in three fraudulent practices in order to deceive HUD,” according to the federal filing.

In the weeks before closing, the DOJ said LRMC claimed to have 102 doctor investors when it actually only had 76 investors at the loan closing.

The lawsuit also claims LRMC refused to refund investors who wanted to back out of the deal before the loan ever closed. LRMC then used that refund money as part of the down payment, then repaid those investors with the loan money, according to the filing.

The government described what LRMC did as a “scheme” and described the investor refund plan as “kiting.”

This LRMC reconciliation sheet shows the hospital was running a $2 million deficit within a month of closing on the HUD loan.

By June of 2010 — just weeks after closing on the loan —the lawsuit shows internal documents obtained by the government revealed LRMC was “insolvent immediately”.  

In May of 2013, the final step in the loan process was finished. LRMC failed to make payments on the loan in August, September and October and HUD sent out a notice of default on the loan, according to the lawsuit.

HUD ended up paying out $172.9 million to pay off the loan after LRMC defaulted. In December 2014, HUD auctioned the loan off for $50,000,000. Today, the former LRMC hospital building is operated by Baylor Scott and White.

Baylor Scott and White is not party to any of the allegations in the federal False Claims Act lawsuit against LRMC and the other defendants.

An answer to the federal lawsuit has not been filed and no dates set for any future court dates. Attorneys for the defendants is also not listed in the filing.

Copyright 2019 Nexstar Broadcasting, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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