Risk & Compliance

Ex-Healthcare CFO Accused of $309M Fraud

Sotirios “Sam” Zaharis and two other former Constellation Healthcare execs allegedly duped investor Chinh Chu into acquiring the company for $309 m...
Matthew HellerMay 17, 2018

The former CFO and two other former executives of Constellation Healthcare Technologies have been charged with duping an investor into acquiring the medical-billing company for $309 million by misrepresenting its financial condition.

The U.S. Securities and Exchange Commission said on Wednesday that the three executives provided the investor, former Blackstone dealmaker Chinh Chu, with scores of “brazenly fabricated and falsified documents,” including sham acquisition agreements, financial statements, customer agreements, invoices, and due-diligence materials.

A few days before the go-private deal was consummated in January 2017, CFO Sotirios “Sam” Zaharis allegedly sent Chu a spreadsheet showing a CHT subsidiary had more than $4.96 million in accounts receivable and $30.96 million in goodwill.

“Zaharis knew, or was reckless in not knowing, that those statements were false because MDRX, a fictitious entity, had no accounts receivable or goodwill,” the SEC said in a civil complaint that also named former Constellation CEO Parmjit “Paul” Parmar and company secretary Ravi Chivukula as defendants.

In a parallel case, New Jersey prosecutors on Wednesday announced criminal charges of conspiracy and securities fraud against the three men.

“Using phony balance sheets, doctored bank statements, and other fabrications to conceal the theft of investor monies … will not go undetected or unpunished,” Marc P. Berger, director of the SEC’s New York Regional Office, said in a news release.

Chu was not named in either the SEC or criminal cases but his acquisition of CHT was widely reported at the time. He paid an approximately 45% premium to CHT’s stock price in his first solo deal.

CHT traded on the London Stock Exchange’s sub-market for smaller, growing companies. Between September 2015 and March 2016, it announced the acquisitions of three companies including MDRX but according to the SEC, all of them were sham transactions.

Parmar, Zaharis, and Chivukula allegedly misrepresented CHT’s historical and expected financials to Chu, including the revenues and EBITDA of the three fictitious subsidiaries.

Unable to service the debt from the buyout, CHT filed bankruptcy in March. Parmar netted $55.2 million from the sale of his shares to Chu, the SEC said.

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