Matthew Merritt Jr., 82, of West Stockbridge, Massachusetts, has been sentenced to 18 months in federal prison after his guilty plea to charges that he engaged in a scheme to defraud a health care program and commit tax fraud. U.S. District Judge William K. Sessions, III, sitting in Burlington, also ordered that Merritt Jr. serve one year of supervised release following his prison term.
Merritt Jr. is the founder and former president of Bennington School Inc. (BSI). According to court records, the Office of the U.S. Attorney for the District of Vermont and the Office of the Vermont Attorney General previously entered into a global resolution of criminal and civil investigative matters concerning alleged tax and health care fraud by former officers of BSI. Pursuant to that resolution agreement, Merritt Jr., along with his son, Matthew Merritt III, BSI’s plant manager, and his son-in-law, Ray Crowley, who served as chief financial officer of BSI, pleaded guilty to one charge each of federal tax fraud, which is a felony.
In addition, Merritt Jr. pleaded guilty to a federal felony charge of engaging in a scheme to defraud a health care program. To resolve potential civil health care fraud liability, the three Merritt family members have paid a total of $3,000,000 to the United States and the state of Vermont.
Jeff LaBonte, the executive director of BSI, also pleaded guilty to a federal tax fraud charge and paid $1,300,000 to resolve his potential civil health care fraud liability.
Of the total $4.3 million recovery, Vermont has received $2,113,708, and the United States has received $2,186,292.
According to prosecutors, until 2013, BSI, a for-profit, closely-held corporation, operated a residential program in Bennington, Vermont, that offered therapeutic and educational services for socially and emotionally challenged boys and girls. Over the course of the last two decades, the state of Vermont placed many students at BSI and was responsible for their tuition and other expenses. The funding for these placements came from the Vermont Medicaid program (approximately 60 percent federal funding and 40 percent state funding) and from several Vermont state agencies, including the Department of Education, the Department of Mental Health, and the Department of Children and Families. This funding was based on a per diem rate for each student, determined on an annual basis by the Division of Rate Setting (DRS) within the Vermont Agency of Human Services. The annual rate set by DRS was determined upon a review of BSI’s application materials, including various accounting reports and budgets. In particular, the formula for the rate calculated by DRS for Medicaid and Education payments to BSI was based upon the school’s reported allowable expenses. The higher the allowed expenses, the higher the per diem rate for each student.
According to prosecutors, Merritt Jr. and LaBonte, with the assistance of Crowley and Merritt III, implemented a system of compensating certain employees of BSI by providing personal benefits, such as cars, gasoline, oil for personal residences, payments of personal expenses on credit card accounts, salaries for family members who did not work at BSI, and reimbursements for various personal expenses. These forms of compensation were never reported on the individual’s tax returns, the government contended. In addition, it asserted, these unallowable expenses were embedded in the books and records of BSI, which were used to create the reports, budgets, and other financial documents that BSI presented to DRS as accurate and allowable for rate setting.
The government began an investigation in 2011 following a request by BSI for a rate change due to reduced enrollment. In processing that request, DRS auditors took a close look at some of the financial information submitted and determined an audit should be performed. The audit, completed in 2012, resulted in a recalculation of the rate BSI received during the years 2003-2012. DRS calculated the total amount of overpayment by the state during those years to be more than $3.6 million. Under the False Claims Act, 31 U.S.C. § 3729, and potential state law remedies, should the government prevail at a trial, the defendants would be liable for treble damages, as well as mandatory penalties up to $11,000 per claim. The defendants disputed DRS’s calculation, and the parties settled to avoid further investigation and litigation.
For his federal health care fraud conviction, Merritt Jr. faced a maximum term of imprisonment of 10 years under 18 U.S.C. § 1347. For his federal tax fraud conviction, he faced a maximum prison term of three years under 26 U.S.C. § 7206. Pursuant to a written plea agreement, the parties agreed that Merritt Jr.’s total term of imprisonment should not exceed 24 months. At sentencing, Merritt Jr. asked that Judge Sessions impose no prison sentence, while the United States argued that Merritt Jr. should serve the full 24 months in prison. In determining the 18 month sentence, Judge Sessions noted, among other factors, the gravity of Merritt Jr.’s crimes, the fact that he engaged in the fraudulent conduct over the course of many years, and the harm Merritt Jr.’s crimes caused the community.
For their federal tax fraud convictions, Merritt III and Crowley each faced a maximum prison term of three years under 26 U.S.C. § 7206. Pursuant to a written plea agreement, the parties agreed that Merritt III and Crowley’s prison terms should not exceed 18 months. In a sentencing hearing held on December 23, 2013, Judge Sessions sentenced Crowley to one year of probation, which includes six months of home confinement, and 200 hours of community service.
The same day, Judge Sessions sentenced Merritt III to one year of probation, which includes six months of home confinement and 200 hours of community service. Judge Sessions also ordered Merritt III to pay an additional $30,000 fine.
For his federal tax fraud conviction, Labonte faced a maximum prison term of three years under 26 U.S.C. § 7206. Pursuant to a written plea agreement, the government agreed to make the nature and extent of Labonte’s cooperation known to the federal court and, as a result of his cooperation, request that the court sentence Labonte to a term of imprisonment below that recommended by the advisory sentencing guidelines. In a November 18, 2013 sentencing hearing, Judge Sessions sentenced Labonte to a one-year term of probation, which includes four months of home confinement and 100 hours of community service. Judge Sessions also ordered Labonte to pay an additional $30,000 fine.
The school continues to operate as a fully licensed residential treatment program. However, as of January 1, 2013, management and ownership of the programs at Bennington School were transferred to Vermont Permanency Initiative Inc., which is part of the Becket Family of Services. Merritt Jr. has resigned as president and trustee of BSI, and LaBonte, Merritt III, and Crowley have left the school’s employ.
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