Two Biotech Firms And Their Co-Founder To Pay $10 Million To Resolve Allegations Of Mischarging Federal Grants

SAN FRANCISCO – Two biotechnology companies and their co-founder will pay more than $10 million to the United States to resolve allegations under the False Claims Act that they engaged in improper billing to federal grants, announced United States Attorney Stephanie M. Hinds, Special Agent in Charge Steven J. Ryan of the Department of Health and Human Services Office of Inspector General (HHS-OIG), Special Agent in Charge L. Scott Moreland of the Major Procurement Fraud Field Office of the Department of the Army Criminal Investigation Division (Army CID), and Special Agent in Charge Bryan Denny of the Western Field Office of the Department of Defense Office of Inspector General, Defense Criminal Investigative Service (DCIS). 

Dr. Paul Andrew Rhodes co-founded two technology companies, iSense, LLC (iSense) and Specific Diagnostics, Inc. (Specific). iSense, a Florida-based company with offices at one time in Mountain View, designs and develops applications for colorimetric sensor arrays. Specific, headquartered in San Jose, designs antimicrobial susceptibility tests. Dr. Rhodes, iSense, and Specific entered into a settlement agreement to resolve allegations by the United States that the firms mischarged federal grants by billing for costs incurred by another business and by billing for compensation in amounts exceeding authorized federal limits. The settlement also resolves allegations of backdating services and cost-sharing agreements and knowingly presenting a backdated agreement to the United States. 

The total amount of the settlement to be paid is $10,068,875. Of that amount, iSense will pay $4,000,000, Specific will pay $4,000,000, and Dr. Rhodes will pay $2,068,875.

“This office continues to combat fraud wherever it lurks in Silicon Valley,” said U.S. Attorney Stephanie M. Hinds. “Federal awards for biotech research are a critical aspect of this country’s strategy to promote and support innovation and research. Regrettably, some recipients mislead auditors and divert funds to enrich themselves – misconduct that we will tirelessly pursue.” 

“Recipients of HHS-provided awards are expected to be responsible, honest stewards of the funds,” stated Steven J. Ryan, Special Agent in Charge with HHS-OIG. “Our agency and law enforcement partners readily and thoroughly investigate allegations of improper claim submission related to these awards.”

“The settlement restores credibility to the federal acquisition process by resolving allegations that the contractor improperly billed the Department of Defense and others for disallowed, unreasonable, or mischaracterized costs,” said Bryan D. Denny, Special Agent in Charge of the DCIS Western Field Office. “DCIS and its law enforcement partners will continue our collective efforts to root out all forms of procurement and contracting irregularities affecting the federal procurement process that waste invaluable taxpayer resources.” 

“Today’s announcement highlights our continued commitment to work closely and seamlessly with our outstanding fellow law enforcement agencies to protect the financial interests of the United States Army and the United States Government as a whole,” said Special Agent in Charge L. Scott Moreland, Army CID.

This settlement agreement resolves multiple allegations. First, the settlement agreement resolves allegations that from January 1, 2015, to December 31, 2019, iSense, owned primarily by Dr. Rhodes, knowingly misallocated to itself costs incurred by Specific, which was partially owned by Dr. Rhodes. In one example, the United States alleges that in 2016 iSense shared space with Specific but the costs for that space were allocated to iSense and submitted for payment under DOD grants. Similarly, iSense shared a controller with Specific; however, the United States alleges the controller’s salary was allocated to iSense and submitted for payment under DOD grants. The United States also alleges that iSense and Dr. Rhodes knowingly submitted backdated cost-sharing agreements with Specific to the federal government. 

The settlement agreement further resolves allegations relating to National Institutes of Health grants in which iSense submitted the costs for employee work hours from July 1, 2014, to June 30, 2019, in amounts that exceeded the applicable salary cap and otherwise overcharged for hours worked by employees. Specific is alleged to have engaged in similar conduct from February 1, 2017, to December 31, 2018, and the settlement agreement also resolves those allegations. 

Lastly, the settlement agreement resolves allegations that from February 1, 2018, to July 28, 2020, Specific and Dr. Rhodes knowingly submitted backdated services agreements with iSense as properly dated. 

Assistant U.S. Attorney Benjamin J. Wolinsky handled this matter for the government. The investigation and settlement resulted from a coordinated effort by the U.S. Attorney’s Office for the Northern District of California, HHS-OIG, DCIS, and the Major Procurement Fraud Field Office of Army-CID. 

The investigation and resolution of this matter illustrates the government’s emphasis on combating fraud in federal grants. One of the most powerful tools in this effort is the False Claims Act. Tips and complaints from all sources about potential fraud, waste, abuse, and mismanagement, can be reported to the Department of Health and Human Services at (800) 447-8477 and to the Department of Defense at (800) 424-9098.

The claims resolved by the settlement are allegations only; there has been no determination of liability.