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by Melissa Davis and Janice Shell

* Editor’s Note: The following article is the second story in a two-part series on Bio-Reference Laboratories (NASDAQ:BRLI). >>See Part I.

Back when Bio-Reference Laboratories first began to capitalize on the growing market for lucrative specialty tests, the company installed a new executive – later accused of demanding “envelopes full of cash” from his underlings – to help oversee its big expansion plans.

Bio-Reference employed former Vice President of Sales John Littleton for the better part of a decade – delivering record numbers to Wall Street along the way -- before finally terminating him in early 2009 over suspected violations that had, by then, apparently dragged on for years. At that point, Bio-Reference itself calculated, Littleton had improperly collected a staggering $1.6 million by abusing his expense account and collecting secret bounties for recruiting new employees to the company. Although Bio-Reference ordered Littleton to forfeit that mountain of cash (pocketing funds allegedly owed to its extorted sales representatives instead), records show, the lab curiously stopped short of filing actual charges against him.

“BRL brought no criminal prosecution of Littleton, though his actions were self-evidently criminal,” court filings state. Moreover, “it did not inform its shareholders of the details of his actions …

“BRL simply accepted the $1.6 million – the proceeds of extortion – without returning any of it to the victims of the scheme,” the documents add. “In fact, Senior Vice President of Sales Charles Todd laughingly announced at a meeting of sales managers that BRL had just lowered its overhead by $1.6 million” as a result of that big payment.

A regular magnet for con men back in its early days, Barron’s observed this year, Bio-Reference has long blamed its checkered past on honest mistakes made by a young and naïve company. Even as a well-established laboratory, however, Bio-Reference has apparently failed to break free of that familiar pattern.

Bio-Reference still employed Littleton less than three years ago, for example, while the company continues to embrace Todd – accused of ignoring (and possibly joining) his former aide’s extortion scheme – as one of its most important leaders to this day. The company has installed an outright felon in its executive suite as well, records show, granting him the second-largest compensation package awarded to any member of its senior management team. Bio-Reference even faces some lingering ties to organized crime, court records indicate, with a suspected Gambino associate recently filing a multimillion-dollar lawsuit against the lab for allegedly breaking its promise to resume paying him once he got out of jail.

The same year that Bio-Reference reportedly ousted that alleged gangster, records indicate, the company welcomed Littleton – later accused of Mob-like tactics himself – as a “valuable” addition to its existing leadership team. Since then, two former Bio-Reference salesmen (Sam Ruta and Matt Carey) have filedcourt documents that paint an alarming picture of a company that they abandoned in obvious disgust just two short years ago. Unlike Bio-Reference itself, which stuck with a cryptic explanation for terminating Littleton, those former sales reps elaborated at length by sharing ugly details about his alleged extortion scheme and the “Wild West” culture that they blamed for his abuse.

“The extortion scheme was so pervasive and so brazen that it would be easy to dismiss as fiction, were it not explicitly documented in emails from one of the management perpetrators (from his internal BRL account) demanding, among other things, secret meetings, envelopes full of cash and an $8,000 Rolex watch,” court filings state. “When Mr. Ruta and Mr. Carey complained about this system to Littleton, he informed them that this was ‘business as usual’ in the company and that there was nothing they could do about it …

“After a time at BRL, Mr. Carey and Mr. Ruta discovered a culture of corruption – a place with little regard for basic rules -- where extortion, fraud and intimidation were routine. (They) reasonably believed that, had they complained further, they would have lost their jobs or worse.”

In fact, records indicate, Bio-Reference sued both of those former salesmen – who accused the company of attempting to silence them -- shortly after they walked out the door. That move apparently backfired, however, with the salesmen filing a counterclaim against Bio-Reference that included damaging evidence of the misconduct they encountered during their six years at the company. Notably, while Bio-Reference denied most of the allegations presented in that complaint, the lab readily acknowledged that it had filed no charges against Littleton for his alleged extortion scheme.

When asked by TheStreetSweeper about this curious decision, Bio-Reference insisted that it had “pursued a path that produced the best outcome in the most expeditious and least disruptive manner, resulting in all funds being recovered” by the company. Although Littleton in fact delivered that repayment less than a week after Bio-Reference fired him, somehow coughing up all of the money that he had reportedly stolen over the course of several years, he arguably could have suffered a far worse fate than that.

“He must have had some real good dirt on someone or something that he threatened to go public with for the powers-that-be not to prosecute him,” one industry sales rep speculated in a popular chat room. “A million-six is no small potatoes!!!”

Ugly Stains

Bio-Reference originally hired both Ruta and Carey, as well as Senior Vice President James Weisberger, after they left another controversial laboratory – with past ties to its own company -- that had systematically cooked its books and faced looming catastrophe as a result.

That specialty lab, known as Impath, had actually purchased a cancer-testing business from Bio-Reference years earlier and went on to become a Nasdaq darling by reporting explosive growth to Wall Street. In mid-2003 (as its sales reps flocked to Bio-Reference), however, Impath dropped a bombshell on the market that signaled outright doom for the company.

Impath suddenly announced potential accounting irregularities that could lead to a material restatement,Dow Jones reported at the time, with the Nasdaq halting the company’s stock as a result. Within two months, Dow Jones noted, Impath had filed for bankruptcy protection – after artificially inflating its financial results for years -- and would later see key members of its senior management team (including the CEO, the president and the finance chief) ultimately convicted on fraud-related charges.

“The higher (the stock) went,” a federal prosecutor stated in a 2006 criminal trial covered by theAssociated Press, “the more pressure there was on Impath’s executives to keep it going.”

For Bio-Reference, that disaster spelled opportunity. After all, records show, Bio-Reference had by then already spent years trying to reclaim its presence in a specialty lab market that – thanks to richer fees – literally exploded after Impath wound up with its original cancer-testing business.

“Changes in the reimbursement rates for oncology testing – particularly by Medicare, the primary payer for such testing – have significantly increased the value of this specialized market niche,” Bio-Reference CEO Marc Grodman explained in 2000, the same year that rival Impath saw its stock soar to record-breaking highs. So “we are assembling a terrific staff with technical expertise and marketing savvy, and we expect to have immediate penetration in the marketplace.”

When Bio-Reference sold its GenCare oncology lab to Impath back in the mid-1990s, records show, it actually held onto the leaders of that company. In fact, corporate filings reveal, Bio-Reference now counts GenCare founder Charles “Chuck” Todd and his longtime sidekick Richard Faherty – a convicted felon who served jail time in the past – among the highest-ranking members of its entire senior management team.

Before arriving at GenCare and landing a plum job at Bio-Reference itself, records indicate, Faherty basically ruined his original career as an attorney. Convicted decades ago of stealing money from his clients, The Record newspaper reported back in 1986, Faherty wound up permanently disbarred and unable to work “in any way, shape or form” within his chosen field.

When Faherty initially regained his freedom after spending about a year behind bars, The Record revealed, he seemed grateful to secure even a menial job at a local “messenger service.” However, records indicate, within two short years – less than halfway through his court-ordered probation term – Faherty had apparently scored a more respectable position at GenCare (where he shifted his focus to information technology) that would eventually lead to a lucrative second career.

In fact, as the chief information officer at Bio-Reference, Faherty now makes even more money than his old boss at GenCare does. Last year, corporate filings show, Faherty walked away with a total compensation package valued at almost $750,000 – a payout second only to that awarded to the CEO himself -- supplementing his generous six-figure salary with rental fees for company use of his private airplane. For a former jailbird who filed for bankruptcy in 1988 (when Bio-Reference employed him as a mere consultant), Faherty sure is flying high these days.

This week, Bio-Reference acknowledged that the company knew about Faherty’s past conviction upon hiring him but “determined that the offense was no factor in the individual’s ability to do his job.” Bio-Reference then went a step further by praising his performance at the company since that time.

“He has conducted himself with honesty and integrity during his time with us,” Bio-Reference assured, “and given us no reason to regret our decision.”

Red Flags

Bio-Reference has apparently stopped short of granting Faherty stock in the company for some reason, however, since the lab excludes him from its list of executive stockholders in its official proxy statements. Meanwhile, records show, other Bio-Reference insiders have clearly capitalized on their own stock awards by cashing in millions of dollars worth of gains over the years.

Since 2005, when the company began relying on expensive specialty tests for much of its growth, Bio-Reference officers and directors have pocketed more than $21 million worth of stock-related profits. They spent barely $60,000 purchasing stock during that same period, records show, with the vast majority of that ($50,000) used to exercise cheap options for shares that could immediately be sold at much higher prices.

For its part, Bio-Reference denied that its executives have primarily sold – rather than purchased – stock in the company, even though their trading records offer clear evidence of that very pattern.

Moreover, records indicate, Bio-Reference insiders aggressively stepped up their selling activity as the damaging evidence against Littleton and his alleged extortion scheme kept mounting. They dumped more than $7 million worth of stock in the year leading up to Littleton’s official termination, records show, and cashed in a similar amount in the critical nine-month period – which ended with public complaints about behind-the-scenes abuses – that followed. They pocketed $4 million from stock sales in October of 2009 alone, records show, carrying out those lucrative trades just weeks before Ruta and Carey officially blew the whistle on the company in court.

Their complaint would look downright scary, it turns out, suggesting that Bio-Reference had concealed widespread corruption – infecting the highest levels of senior management – that, if revealed, could push ordinary investors to sell their stock as well. It claimed that Bio-Reference had fabricated the key driver of its growth (pointing to surging lab orders rather than dramatic price increases), for example, while alleging that senior executives had regularly treated company resources as their very own. It then elaborated by stating that Bio-Reference officers routinely caught free rides on the corporate jet for “personal pleasure trips,” with one high-ranking executive even using company funds to purchase cases of liquor for his wine cellar at home.

Nevertheless, the lawsuit concluded, Bio-Reference quietly singled out the most obvious scapegoat for punishment – unable to bury clear evidence of his extortion scheme – and chose to ignore others who committed serious abuses of their own.

“Rather than commence a full internal investigation and disclose the results (including the unlawful conduct of its senior management) to its shareholders, BRL selected a single manager – Vice President John Littleton, who was in fact a major perpetrator of the scheme – and fired him,” the lawsuit states. “Although BRL had reason to believe that other members of senior management … had been involved in or at least aware of the scheme or others related to it, the company took no steps to investigate or deal with the pervasive corruption.”

Bio-Reference traded near its current five-year low around the time the company terminated Littleton,records show, but then staged a big comeback that barely faltered when its former salesmen filed court documents that -- while alarming -- reached a limited audience at best. The company then went on to report escalating demand for its laboratory services, fueled by orders for expensive specialty lab tests, which pushed its stock to a record-breaking high of almost $26 a share. Bio-Reference finally began to lose some of those impressive gains this summer, however, and weathered a major hit last week – ultimately sinking to a two-year low of just $15.75 a share – after TheStreetSweeper took its first hard look at the company.

Dark Secrets

In late August, with the stock already fading from an all-time peak, Bio-Reference found itself slapped with yet another troubling legal complaint.

This time, records show, Vincent “Vinny” Nasso – a reported associate of the Gambino crime family – sued Bio-Reference for allegedly failing to pay him the sales commissions that he had supposedly accumulated since his 2002 indictment on fraud-related charges. When Nasso began working as a salesman at Bio-Reference in 1989, the lawsuit claims, the company promised him 10% of all the cash that it collected from any business that he generated for the life of those laboratory accounts. Although Bio-Reference honored that arrangement for more than a decade, the lawsuit indicates, the company stopped paying Nasso following his indictment and – despite alleged promises from the CEO himself – failed to deliver the sales commissions that he has earned since that time.

Nasso estimated this summer that Bio-Reference already owed him at least $5 million (with the meter still running) for unpaid sales commissions, records show, a sum equal to more than one-quarter of the cash listed by the company on its latest balance sheet. While his attorney declined to elaborate on the situation in detail (or arrange an interview with his notorious client), he did assure TheStreetSweeper that Nasso had generated “quite a lot of business” for Bio-Reference during his long tenure at the company.

To be sure, records indicate, Bio-Reference relies on unions – the very customers apparently targeted byNasso himself – for a decent chunk of its clinical laboratory business. When questioned byTheStreetSweeper about its relationship with Nasso, however, Bio-Reference portrayed him merely as a former “part-time salesman” terminated by the company years ago.

Nasso actually landed in trouble for a scandal involving a separate health-related company, recordsindicate, which he reportedly operated with pharmacist Joel Grodman – the brother of Bio-Reference’s top executive – while doubling as a salesman for Bio-Reference itself. The duo’s pharmacy benefits company allegedly secured a lucrative contract with a Mob-controlled union years earlier, The Village Voicereported back in 2003, by paying $400,000 worth of illegal kickbacks to former Gambino boss Peter Gottiand other members of the criminal underworld. When Nasso later warned a reputed Gambino captain that the company could lose that sweetheart deal because Joel Grodman (“the Jew”) wanted to increase the excessive fees charged to the union, court records show, his boss sounded like a character straight out of a typical gangster movie.

“Tell him to go fuck himself,” Anthony “Sonny” Ciccone told Nasso in a phone call recorded by the Feds. “Tell him, ‘You do what I tell you to do … I’m calling the shots over here, not you.’

“And tell him, ‘The day you don’t like it, I got another guy to replace you. You’re only here on account of me.’ Fuck him.”

That contract was already doomed by then, records indicate, with the Feds indicting 17 suspected Gambino members and associates – including Nasso and Ciccone – the year after that wiretapped conversation took place. Both men ultimately landed in prison, records show, with Ciccone receiving the longest sentence (15 years) handed down in the entire case.

Joel Grodman himself fared much better, news records indicate, escaping criminal charges by cooperating with the government instead. While never implicated in that particular case, The Village Voice noted in a 2003 investigative series on union corruption, Bio-Reference has allegedly capitalized on its Mob connections to secure lucrative business as well.

“Those articles contained issues and allegations that are significantly incorrect and contain material misstatements and falsehoods,” Bio-Reference insisted earlier this week. “No legitimate news service picked up the stories in 2003, and the company elected not to respond to the misstatements, misrepresentations of facts and lies contained therein. Using any of these materials would clearly represent an intentional attempt to mislead your readers.”

However, when encouraged by TheStreetSweeper to identify and address the perceived inaccuracies in those detailed stories by The Village Voice – a fearless, and wildly successful, weekly co-founded byNorman Mailer decades ago – the company never responded to that invitation.

Black Eyes

As a young public company, Barron’s reported in a big article this May, Bio-Reference partnered with other shady characters later slapped with criminal charges as well. The following examples, cited in thatBarron’s article and summarized below, offer stark reminders of an ugly past that still haunts the company to this day.

For starters, Bio-Reference originally went public (as Med-Mobile) with the help of a shady banker -- Genovese associate Paul T. Russo – who had already led one failed investment firm and ultimately found himself convicted for conspiracy and fraud. Bio-Reference then switched to J.T. Moran Financial, with its own CEO actually joining the J.T. Moran board, where the namesake founder of that firm – which inspired the movie “Boiler Room” – later wound up convicted on criminal charges himself.

“After an equity financing for Med-Mobile,” Barron’s explained, “Moran in 1991 pled guilty to manipulating ‘house stocks,’ or those a broker dominates – including Med-Mobile – to defraud investors.”

Bio-Reference had by then replaced J.T. Moran with Towers Financial, whose leader would later plead guilty to fraud (and receive a 20-year prison term) for operating a massive Ponzi scheme. Meanwhile, Bio-Reference went on to hire A.S. Goldmen – now infamous for crimes that extend well beyond fraud –to manage a public offering that would allow the company to escape from the penny-stock arena and regain its listing on the respectable Nasdaq stock exchange. Former Goldmen CFO Stuart Winkler actuallyconspired to murder the trial judge hearing a fraud case against the firm, accused of orchestrating multiple “pump-and-dump” schemes over the years, while a former Goldmen broker died around that same timeframe in a double-homicide that still remains unsolved to this day.

After Goldmen collapsed, an old lawsuit indicates, Bio-Reference may have tried to pump up the company’s stock price on its own. Former Bio-Reference Vice President David Bennett has claimed in courtthat Grodman repeatedly pressured him to buy stock in the company – and pour additional funds into adoomed health-foods operation the lab had acquired -- in an effort to artificially inflate the value of its shares. When Bennett refused, court records state, the CEO questioned his loyalty and ultimately fired him for failing to comply with his demands. Bennett responded by suing Bio-Reference for alleged breach of contract, records indicate, although the company eventually prevailed in that case and recently denied that it had ever pushed any executive to help bolster the market price of its shares.

One industry veteran told TheStreetSweeper that other former Bio-Reference insiders have quietly shared even more disturbing tales about the company – nicknamed “the Mafia lab” behind its back – but literally feel too frightened to go public with their stories.

Meanwhile, by the time that Bennett left the company, Bio-Reference had revised its expansion strategy (eventually abandoning its failed grocery operation and some Internet-based ventures launched during the dot-com boom) by intensifying its focus on the lucrative specialty lab business. The company still embraced the same tarnished auditing firm throughout that evolution, however, relying on MSPC (previously known as Moore Stephens, P.C.) to double-check financial statements prepared by a finance chief who never secured a CPA license.

“MSPC has met all requirements of the SEC (Securities and Exchange Commission) to audit public companies,” Bio-Reference pointed out this week, “and have been our auditors, without issue of any type regarding our business, since the late 1980s.”

That auditing firm has taken heat over its work for other clients, however, including several Chinese reverse-merger companies accused of flagrantly violating basic accounting rules. For example, recordsshow, its Moore Stephens Wurth Frazer & Torbet division blessed the financial statements issued by China Energy Savings Technology – the target of multiple SEC enforcement actions – and wound up sanctioned by regulators itself as a result. The very division retained by Bio-Reference also counts China Sky One Medical (Nasdaq: CSKI) among its clients, records indicate, with that company suspected of fudging the numbers that it has reported to investors as well.

In the past, Moore Stephens catered to a couple of particularly notorious clients in New Jersey (the same state that Bio-Reference calls home) and came under fire by government authorities back then, too. Specifically, records show, Moore Stephens served as the auditor for First Jersey Securities and Stratton Oakmont – both infamous boiler rooms – before their leaders later wound up behind bars. The self-proclaimed “Wolf of Wall Street,” Stratton Oakmont founder Jordan Belfort has since written two colorful bestsellers about the games he used to play and now presents his own experience as a cautionary tale to others around the world.

In a recent interview with FinanceAsia, a major business publication based in Hong Kong, Belfort indicated that “dysfunctional behavior usually emanates from the highest echelons within a corporation.” If so,history suggests, Bio-Reference – accused of breaking rules as a matter of routine – could pose serious risks to even present-day investors in the company.

“At the heart of it,” Belfort emphasized last month, “is the culture. If you look at any company that is out of control,” he concluded, “it’s coming from the very top (the management), which allowed the culture to exist.”

Disclosure: TheStreetSweeper, through its members, established a short position in Bio-Reference Laboratories prior to an earlier story on the company with the intention of profiting on declines in the share price. It has since repurchased those 97,183 shares, originally sold at $19.64 a share, at prices ranging from $17.82 to $16.12 a share. TheStreetSweeper has sold no additional shares of BRLI short since that time and therefore held no financial position in the stock upon publication of this story. Going forward, however, TheStreetSweeper may choose to establish a new short position in BRLI and will fully disclose the details of any future transactions in the stock as those trades occur. As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in any of the companies they cover.

Source: Bio-Reference: Loads Of Dirty Laundry