'Nobody should be comfortable.' Shore prescription probe closing in on targets large and small

LINWOOD, N.J. — Their houses are nice, if unremarkable, a few within walking distance of the chatty Linwood bike path, not far from the now-vacant house that was the home of the late Dr. James Kauffman and his murdered wife, April.

Their lives, too, seemed pleasant, also mostly unremarkable, dads in their late 30s and 40s, days spent coaching kids' sports teams, working good jobs, kids on trikes, community activities.

So far, the 19 people who pleaded guilty in federal court to their roles in a $28 million compound-pharmacy health benefits scheme have been pharmaceutical reps,  two firefighters (one from Atlantic City, one from Margate), a Pleasantville teacher of the year and baseball coach, a guidance counselor, a well-liked Linwood mom who worked as a drug rep, a Margate doctor, and a gym floor installer.

But, sources say, there is at least one bigger fish in suburban Atlantic County who has yet to plead guilty: a pharmaceutical salesman who, multiple sources say, worked directly with James Kauffman, the busy endocrinologist who authorities said killed himself in a Hudson County jail in January while awaiting trial on charges he arranged the May 2012 murder of his wife.

And there is a prosecutor, Atlantic County's Damon Tyner, whose office stands ready to take aim at the lower-level participants once the feds are done with those who profited the most.

"Nobody should be comfortable," Tyner said in a recent interview.

Tyner warned that even those whose transgressions may have occurred at the lower rungs of the health-care fraud's complicated $28 million hierarchy — the vast scheme relied on recruiting public workers with generous state health benefits, like teachers and firefighters  — are not out of the woods.

The signature of John Gaffney, the doctor who has pleaded guilty to a $25 million role in the scheme for which he received $25,000 in kickbacks, appeared on prescriptions for more than 200 people, according to the criminal information filed by the U.S. attorney in Camden. Gaffney also admitted signing blank forms that were then copied by other co-conspirators, the government said.

Tyner won't discuss Kauffman's participation in the scheme, now unraveling plea by guilty plea in U.S. District Court in Camden, in which Shore-area public employees were recruited for their benefits and given kickbacks as doctors they never saw filled and refilled expensive and unnecessary prescriptions for things like scar, anti-fungal, and libido creams at prices as high as $10,000 a month.

Despite involvement by the Atlantic County Prosecutor's Office in a June 2017 raid on Kauffman's Egg Harbor Township offices, and predictions of hundreds of Shore-area public employees — and even a state trooper — being involved, no charges related to the health-care fraud have been filed at the local level.

But Tyner said the county's investigation is ongoing, and information is regularly shared with federal investigators.

Out of all the breathless gossip since last summer has come a series of guilty-plea hearings held in the muffled acoustics of the large courtroom of U.S. District Judge Robert Kugler in Camden, hearings rarely attended by more than the three FBI agents sitting near the front, sometimes a father of a defendant or a wife, and at most one or two reporters.

Some of the 19 defendants have acknowledged seeking counseling for the stress and anxiety of the charges; most lost their jobs as a result. When asked, most told the judge they'd had a few drinks the night before the guilty plea to calm their nerves.

After Matthew Tedesco, the 42-year-old sales rep who was the first to plead guilty, was video-recorded by reporters as he walked out of the courthouse after the first plea, subsequent defendants have figured out how to leave through a back door onto a loading dock, where they have slipped out after visiting with bail officials, leaving any comments to the parade of lawyers, some prominent, who have taken on these cases.

The 19 people pleading guilty since last Aug. 17 were charged with receiving a total of $18.5 million in criminal proceeds paid to them, the government said, ranging from Tedesco's $11,166,844.20 to Tara Lamonaca's $89,855.13.

The amount of restitution they have agreed to repay — amounts that reflect the total cost of the fraud they were involved in, beyond the money they personally received — ranges from Tedesco's $28,773,906.97 to Galloway drug rep Andrew Gerstel's $483,946.74.

Although one defendant, Margate Firefighter Michael Sher, was described as giving an "envelope of cash" to a doctor, the precise amounts of the restitution and forfeiture amounts suggest payments that were made with checks or other noncash means, traceable by government investigators.

In all, prosecutors say, the out-of-town compounding pharmacy, still unidentified in public proceedings, mailed $50 million in prescriptions to people in New Jersey, all billable to taxpayer-funded state and public school health plans.

In Margate, where City Hall complied with FBI subpoenas asking for information on ballooning health-care and prescription costs, rumors since last spring had officials and residents fearing that their fire department and even their schools would be decimated by the probe, their neighbors rounded up.

But so far, only one Margate firefighter, Sher, 40, has pleaded guilty. Retired Atlantic City Firefighter Michael Pepper also admitted his guilt. Two teachers, Richard "Erich" McAllister, 43, of Pleasantville, and Shawn Sypherd, 46, of Middle Township, and Michael Pilate, 39, a Pleasantville guidance counselor, are the other public employees who have pleaded guilty. All face forfeitures and criminal restitution and are awaiting sentencing, where, like the others, they face up to 10 years in prison and a fine of up to $250,000.

"I would have thought a year ago, it would be moving quicker than it has been," said Margate Mayor Michael Becker. "Someday we'll be able to make sense of it, but that day is not today."

Sentencings first scheduled for March have been pushed back to July and could be further delayed, as federal prosecutors close in on additional targets

Sources say the prosecution by guilty plea could expand as federal prosecutors aim for the top of the scheme, in particular one alleged conspirator who may have had an even bigger role than Tedesco, who has thus far been identified as the ringleader and is awaiting sentencing.

That conspirator has resisted pleading guilty and could end up being arrested, people familiar with the investigation said.

"If there is a pyramid, I would be comfortable saying he sits atop it," said one source with knowledge of the compounding scheme, speaking of the still-uncharged sales rep who, two sources said, had an "intertwined relationship" with Kauffman.

Kauffman conspired with members of the Pagan motorcycle gang to have his wife killed to keep her from exposing another drug scheme, this one involving opioids and the Pagans, authorities have said.

Tedesco's attorney, Michael Elliot, is a Dallas-based defense lawyer who previously prosecuted health-care fraud for the federal government. He said the investigation may play out to show his client was not the ringleader he was portrayed to be.

"I think it will develop over time," Elliot said, "and it will show what was originally reported wasn't the whole story."

Tedesco is working hard to repay the $11 million of criminal proceeds he is required to forfeit to the government, and the $28.7 million in restitution he owes, Elliot said.

"Obviously Mr. Tedesco has accepted responsibility," Elliot said. "He's spent time to repay the money. He's working to repay. He's doing everything he can to earn a living. Given the position that he's in, he's in a tough spot."

It may all have started in Texas, with a $100 million scheme that took advantage of Tricare, the health insurance for the U.S. military, with kickbacks given to "marketers," sometimes funneled through straw charities. The money seemed plentiful. Word got around.

In New Jersey, it was firefighters, teachers, and municipal workers who had the plans with the generous mail-order prescription benefits.

Once the ringleaders brought the plan to New Jersey, they linked up with doctors willing to sign the prescriptions and with pharmaceutical representatives who knew how the process worked and could market the creams. Then the recruitment process began to bring in the outer ring of firefighters, teachers, municipal workers.

"They would call it the Wheel," said one source with knowledge of how the scheme worked. "In every wheel, various spokes."

The scheme's orchestrators found neighbors, friends, colleagues willing  — for a kickback — to provide their insurance information to obtain medically unnecessary prescriptions for creams and vitamins mixed to order by compounding pharmacies. Prescription costs in towns like Margate quadrupled during the time prosecutors have focused on: January 2015 to April 2016.

"It gets out of control," said one source. "Now I'm getting the compound cream for pain. It's $10K a tube. Now you're coming to me, saying, 'What about your libido, let's do that.' Next thing you know, you're getting $30,000 worth of creams every month.

"Now here comes the FBI," the source said. "It was something that started with the Tricare. Everybody figured out, we can do this."

Even "Skinny Joey" Merlino got involved, according to federal prosecutors, who charged him with leading a Mafia attempt to muscle into health-care fraud with a similar racket involving prescriptions for topical pain cream. Those charges were dropped, and last month Merlino pleaded guilty to one count of gambling.

The Shore-area first responders and teachers and the suburban South Jersey drug reps may not have viewed what they were doing as akin to a mob racket, but the charges of conspiring to defraud the health-care system amount to a vast criminal syndicate.

"At the end of the day, what you've got is this thing that's out there, and people are starting to make big money," said one source. "They think, 'It's a grey area, everybody's doing it. I've got to get a piece of this.' "

On financial disclosure forms associated with the plea agreements, Kugler, the judge, said he has not seen anything near the amounts the defendants are accused of receiving for their roles in the conspiracy.

"I'm putting everyone on notice," Kugler said at the hearing for Sher, the Margate firefighter. "I expect to hear how they received it, what they did with it, and where it is now."

Of the 19 who have pleaded guilty so far, only Sher said he would dispute the amount the government says he was paid: $1.7 million for his role in more than $7 million in fraudulent prescriptions. His attorney, William Hughes Jr., said that "if done correctly," recruiting people for a commission would not be illegal. And he said that Sher "didn't personally pocket $1.7 million."

But the precise numbers obtained by the government, down to the penny, show that the profits associated with the conspiratorial spokes were well accounted for, multiple kickbacks and fees paid out in checks.

Attorney James Leonard, who represented drug salesman Thomas Hodnett, 41, of Voorhees, the fourth to plead guilty, described it this way: Anyone, he said, "could see this was fraud."

Staff writer Harold Brubaker contributed to this article.