Federal and New York State fraud investigations into a network of nonprofit substance abuse treatment homes—whose owners allegedly diverted millions of Medicaid dollars to purchase luxury cars and expensive homes in Long Island and Florida—have plunged into disarray a system designed to help addicts and the homeless reintegrate with society.
But an investigation by The Crime Report and NBC News shows that the company for years exploited a lack of adequate official oversight of programs that are often the last hope for thousands of troubled individuals caught up in the justice system.
Alan Brand and his son Jason were indicted October 22 by New York Attorney General Eric Schneiderman on criminal charges of fraud and money laundering in connection with the operations of Narco Freedom, a New York City-based nonprofit. Six days later, the federal government also sued Narco Freedom.
Despite the allegations, officials have not moved to shut down the company, because it could leave thousands of individuals—many of whom are in desperate need of methadone treatment—without assistance, the investigation by NBC News and The Crime Report has found.
The Brands have pleaded not guilty to the charges and Narco Freedom strongly contests both state and federal allegations.
Narco Freedom currently serves some 10 percent of New York City's methadone patients, and its employees offer counseling to hundreds of substance abusers. It also operates unofficial, unlicensed housing for some 1,500 of its patients, many of whom are returning from jail and prison.
Closing Narco Freedom facilities “would lead to approximately 3,200 patients without access to treatment,” according to New York State’s Office of Alcoholism and Substance Abuse Services (OASAS), in an affidavit filed in state court in November.
Nevertheless, a review of hundreds of pages of tax documents, regulatory reviews and court documents obtained through Freedom of Information requests, as well as interviews with patients and former employees, raises questions about why it took authorities so long to act.
The documents indicate that city and state agencies were aware of the questionable aspects of Narco Freedom's operations at least as far back as 2008. Yet the programs were apparently able to continue thanks to the Brands' ability to navigate an often-opaque regulatory process.
In an environment where homelessness and substance abuse has placed added pressure on strapped city and state agencies, the indictments suggest the poor and the addicted were good business for the Brands.
Alan (left) and Jason Brand (Images via New York State Attorney General)
They drove luxury cars allegedly paid for with Medicaid dollars. They hired friends and relatives. They bought sprawling houses on Long Island, and vacation homes in Florida; and had generous benefit packages for which, according to state prosecutors, Narco Freedom footed the bill. Meanwhile, investigators say, they assured Medicaid funds rolled in by luring desperate addicts with the promise of housing, then packed them into dilapidated buildings plagued by rats and bedbugs.
Following the criminal indictment, state prosecutors froze Alan and Jason Brand's bank accounts and properties, and seized six cars, among them a Jaguar, a Corvette and a 2013 Tesla.
“Narco Freedom is not truly functioning as a not-for-profit corporation, but is rather a corporation operated for the personal benefit of Mr. Brand,” Robert A. Kent, general counsel to OASAS, wrote in an affidavit filed as part of the state's case.
A 2013 investigation by The Crime Report first raised questions about Narco Freedom's operations, but it wasn't until a year later that U.S. Attorney Preet Bharara filed to civilly enjoin the company from continuing what the office describes as widespread fraud.
Public Dollars, Private Profit
The story of Narco Freedom may prove a cautionary tale.
Narco Freedom serves some of New York City's poorest and most vulnerable drug addicts. About 90 percent of its nearly $40 million in revenue each year comes from Medicaid.
As agencies that dealt with Narco Freedom failed to address growing complaints and warning signs, the organization grew. Now both prosecutors and regulators are struggling to figure out how to curtail what they say is widespread fraud, without leaving hundreds homeless and thousands without treatment.
Narco Freedom is headquartered at a rundown, windowless block of a building in the South Bronx, one of the poorest congressional districts in the country. Patients often mill outside, waiting for treatment from the clinics here, or for the truck that gives out free bagged lunches to the poor.
In a side parking lot, shining luxury cars look curiously out of place, yet some of the vehicles were perks made possible because the Brands were essentially in charge of several intertwined for- and non-profit operations.
The Brands ran a series of side operations that did business with the drug treatment program. There were at least six for-profit companies created to “systematically embezzle [Narco Freedom] funds,” state prosecutors claim. The state criminal complaint said the firms submitted inflated invoices to Narco Freedom for services like construction and medical supplies, assuring that public dollars that came into their non-profit ended up in their for-profit coffers.
Prosecutors say these potential conflicts of interest were never disclosed on Narco Freedom's tax filings, in violation of the law.
The Brands also operated nearly two dozen “three quarter” houses, which provided temporary roofs for hundreds of addicts and those returning from prison, for those enrolled in Brand-controlled drug treatment programs. Federal prosecutors say these houses are at the center of a Medicaid-kickback scheme.
In 2012, Jason Brand paid himself $526,000 through these companies, prosecutors say, in addition his $109,000 Narco Freedom salary.
Alan Brand earned $386,000 per year as CEO of Narco Freedom, among the highest salaries for an executive of a Medicaid-financed non-profit, according to a 2013 report from the U.S. House of Representatives. But that was just the beginning.
Alan Brand also co-owned the N.R.I. Group, a for-profit drug treatment organization, with Anthony Cornachio, a Long Island attorney and a longtime associate of Brand's. They earned annual salaries of $172,000 and $106,000 respectively, according to tax filings.
The two were also the highest paid employees of Canarsie AWARE, a Medicaid-funded nonprofit in Brooklyn, according to public tax records, from which they each earned $125,775 in 2010.
Relatives on Payroll
It was not just Alan and Jason Brand that benefited from their control of these operations. Six of Cornachio's relatives are on the payroll of NRI, according to state investigators, two of whom are also salaried employees of Narco Freedom. Jason Brand and his mother, Nancy, were paid $50,000 a year from Canarsie between 2009 and 2012, state investigators allege. And Alan Brand's younger son, Jonathan Brand, earned $97,750 a year and drove a company 911 Porsche Carrera in compensation for what state prosecutors say was a no-show job.
As Brand and Cornachio profited, documents show the programs they ran were rife with problems. OASAS has, within the last year, revoked the operating certificates of NRI and Canarsie for, among other things, failing to properly assess patient needs, imposing static treatment plans and mandatory make-up sessions. NRI's medical director and several of its key staff did not meet licensing and experience requirements.
Moreover, an investigation by the New York State Office of Medicaid Inspector General found that, between 2003 and 2007, the $11,149,895 Canarsie Aware received in Medicaid fees from the state included more than $6,741,375 in overcharges. Former Narco Freedom employees claim Brand also had deep ties to CIS Counseling services, a treatment program that shut down in 2011 amid lawsuits and sanctions from OASAS. CIS patients were later moved over to Narco Freedom, according to records obtained from OASAS.
Cornachio did not respond to repeated requests for comment. But an attorney for the Brands defended their legacy in an emailed statement.
“The charges against Alan and Jason Brand will be vigorously contested,” said Richard Harrow in the statement. “Through their work at Narco Freedom, Alan and Jason Brand have provided extraordinary public service to the Bronx and the City of New York.”
“The drug and alcohol rehabilitation programs in addition to the mental health and primary care services of Narco Freedom have benefited tens of thousands of New Yorkers and have saved lives.”
A July 2014 OASAS review of one of Narco Freedom's outpatient programs uncovered many problems similar to those found at CIS. Counselors applied identical treatment plans to patients regardless of their clinical needs and imposed mandatory make-up sessions. Reviewers also found nearly all patients were determined to need the exact same level of care, “indicating all the applicable patients had the exact same issues, which can not possibly be accurate,” said Kent, OASAS counsel, in state court documents.
Too Big to Fail
But OASAS has not moved to shut down Narco Freedom, in part because regulators fear it is too big to fail.
Instead the agency has moved to appoint a temporary operator, an effort Narco Freedom is fighting. The matter is pending.
Meanwhile, federal prosecutors grapple with what to do with Narco Freedom's network of unofficial housing that they say plays a key role in ongoing Medicaid fraud.
In 2001, court documents show, Alan Brand approached a local contractor named Jay Deutchman and proposed they start up a series of “three quarter” houses. The homes would guarantee that clients flowed to Narco Freedom's outpatient treatment programs and ensure they kept up with appointments, much as the promise of staying healthy ensured methadone patients kept coming back.
The scheme spread quickly. Employees went into jails, prisons and detox programs promising the poor and soon-to-be-released a bed in a so-called “Freedom House,” in exchange for attending its treatment programs. At one point, about 1,500 people lived in 21 “Freedom Houses,” mostly multi-story apartment buildings in poor areas, 14 of them owned by Deutchman, who also rented buildings to other treatment programs.
While marketed as being linked to treatment, the houses offered no clinical care on site; so they were neither licensed nor overseen by any city or state agency.
Patient rights regulations ensure patients are free from “undue influence” when choosing their provider—a provision OASAS counsel Kent now says Narco Freedom appears to have violated by requiring “Freedom House” resident to use its services. Complaints to OASAS, obtained by Freedom of Information requests, show OASAS was aware of Narco Freedom's “three quarter houses” as far back as 2008.
But the company claims it always made clear it was a drug treatment program that offered housing as a perk, and patients were free to leave the housing to seek treatment elsewhere.
In practice, however, it was not so simple. One agency that came to rely heavily on “Freedom Houses” was New York State parole. In early December, Department of Corrections and Community Supervision Deputy Commissioner Thomas Herzog testified that parole regularly directed those leaving prison to Narco Freedom in order to secure housing.
Herzog's testimony conflicted with his agency's response to prior inquiries by The Crime Report. During a 2013 interview, an agency spokesperson said officers merely approved housing chosen by parolees — and did not assume those beds were tied to treatment.
In December, Herzog testified parole officers knew that those sent to “Freedom Houses” would subsequently be required to attend Narco Freedom outpatient programs as a condition of their housing, even if the parole officer wanted to direct them to other programs' services. It was a deal parole was willing make, he said, in order to secure roofs for, as of November, 471 parolees.
“It becomes an issue of last resort for us,” said Herzog. “Sometimes we have to even settle on something that's sub-optimal.”
The housing was often not just sub-optimal, but decrepit and dangerous, according to residents and city citations.
Bedbugs and Rodents
More than a dozen men sleep per room in some of the homes, which are regularly riddled with bedbugs and rodents. Buildings records reveal violations not only for infestations, but also for floors without hot water, mold, water leaking through ceilings and cracked walls.
“It's dirty, nasty—there's water leaking (and) they got rats,” said Rafael Valdez, a resident of a “Freedom House” on 154th Street in the Bronx, who said he was forced out after completing Narco Freedom's program in September. After the federal lawsuit was filed, Valdez was offered a room in a different “Freedom House.”
In federal court affidavits and interviews, residents described open use of the synthetic drug K2, heroin, and overdoses in the homes.
“Freedom Houses” at 373 and 375 E. 154th St., in the Bronx. (Photo by Lisa Riordan Seville)
Many residents stay because they are mandated by parole. Others say the roof of a “Freedom House” is better than none at all. And because regular attendance at outpatient treatment is a condition of keeping their beds, Medicaid money has flowed to Narco Freedom.
Interviews and a review of court documents allege Alan Brand designed “Freedom Houses” to ensure just that.
“Sober housing would provide that incentive for Narco Freedom,” Deutchman said.
Most “Freedom House” residents paid $215 per month in rent through the city's Housing Resources Administration (HRA). But their residence was also conditioned on attending counseling three to seven times per week, a formula Brand allegedly designed to ensure profits. For that, Narco Freedom brought in $84 per session from Medicaid. If the houses were full, the organization turned a profit, and so did Deutchman.
Federal prosecutors say this setup qualifies as an ongoing violation of the federal anti-kickback statute
In recent years, Alan Brand allegedly received “remuneration” (which the feds classify as “kickbacks” in their complaint) amounting to $13,000 a month in funds earmarked for the non-profit that were siphoned into personal accounts. Deutchman acknowledged paying the money during a December federal court hearing.
Changes in the city helped the model thrive. Nearly 60,000 people are now homeless each night in New York City, more than double the number in 2001. Moreover, a dramatic drop in New York State's prison population, and heavy marketing by Narco Freedom, helped to make parole increasingly reliant on the homes.
“There's a housing crisis, so it gave rise to this idea that was a great business model to make money,” said Matthew Main, an attorney with MFY Legal Services, which has represented tenants who were unlawfully evicted from Narco Freedom housing. “It really breeds the greed instead of focusing on the service.”
The U.S. Attorney filed to enjoin the company from continuing to require patients in their housing to attend Narco Freedom treatment exclusively. They have also filed to ensure that Narco Freedom does not evict residents without notice.
At a hearing in early December, Narco Freedom argued that the program used the houses to induce regular program attendance—not as “remuneration” for services, but as an “evidence based practice.”
“The housing is offered as an adjunct to the treatment and therapy offered by Narco Freedom, and, in fact, results in better clinical outcomes for the patients,” argued Linda Clark, counsel for Narco Freedom, in a federal filing in December. She added that the housing would not to be financially sustainable unless patients went exclusively to Narco Freedom.
“Nobody’s giving people iPads or taking them to Atlantic City,” Clark maintained, arguing that housing, was key to the success of the program.
Moreover, attorneys for Narco Freedom asserted that passage of the Affordable Care Act changed the definition of “remuneration” to exclude remuneration that promotes access to care and poses a low risk of harm—which, they say, is what the “Freedom Houses” do.
The future of Narco Freedom will likely hinge on the outcome of state and federal proceedings, which could continue for years. Meanwhile, many of the key players are either getting forced out or targeted by law enforcement.
In October, Deutchman pleaded guilty to falsifying business records and criminal tax fraud; the Brands are no longer officially involved with Narco Freedom, but through an attorney, they vowed to fight the charges.
Although the upheaval presents a blow to Narco Freedom's operations, the program has long proven resilient in the face of criticism. In 1976, a report to the United States Senate on Medicaid fraud held Narco Freedom up as a key example of abuse of the methadone maintenance program. Its medical director had been suspended for drug use.
A disproportionate amount of its budget went to salaries and wages of its executives and “consultants” who also sat on the board, according to the report. Its then-owners, brothers Alan and Howard Cohen, also ran a series of dental offices that the report dubbed a “classic example of a Medicaid mill.”
Alan Cohen was murdered in the 1980s, and Alan Brand, who according to The New York Times was Cohen's business partner in real estate, later became CEO of Narco Freedom. Under Brand, Narco Freedom became a linchpin of the outpatient drug treatment system. He expanded into primary care, and started up four outpatient drug treatment programs for those addicted to everything from marijuana to cocaine.
Charges in state and federal court indicate Narco Freedom's problematic operations may have continued, and even escalated, with Brand as CEO.
Now Gerald Bethea, Narco Freedom's longtime director of operations, has stepped in as CEO. The company argues that Bethea's understanding of the company and experience in various substance abuse treatment roles makes him the perfect person to lead Narco Freedom, but he is currently overseen by a board whose members also have deep ties to the Brands and Anthony Cornachio.
A judge is set to rule on the federal government's request for a preliminary injunction in January. Meanwhile, state prosecutors have asked for their own injunction that would appoint another treatment program, Acacia Network, to operate Narco Freedom.
Narco Freedom is fighting both injunctions.
Residents of the “Freedom Houses” have less philosophical concerns. During a visit in November to 373 E. 154th Street, a “Freedom House” in the Bronx, residents said they've asked staffers to do something about the rats that scour their cabinets and to fix routinely backed up bathrooms. But mostly they worry about what they'll do if they are told to leave.
It's a question that has taken on a new urgency as experts and attorneys debate the outcome of Narco Freedom's legal cases. The looming question is, will a future solution potentially leave hundreds of “Freedom House” residents homeless in a city where services are already stretched thin?
When an organization similar to Narco Freedom, CIS Counseling, hit legal troubles in 2011, it shut down. At 66 Clay Street in Brooklyn, a CIS-affiliated sober home owned by Deutchman, residents were hung out to dry. Deutchman evicted everyone, but many refused to leave, huddling night after cold night for months in a building that began to literally fall apart.
A 2012 fire left sections of floor missing several stories up, and drug overdoses and vermin were rampant, but some residents remained. As with the residents of Narco Freedom houses, they said there was nowhere for them to go.
“It’s not that we want to stay,” said Chris Szkiladz. “We’d move out of here when we have money to get a place to stay.”
Graham Kates is Deputy Managing Editor of The Crime Report. Lisa Riordan Seville is a freelance investigative reporter. Her work appears regularly on NBC News and NBCNews.com, as well as other outlets. They welcome comments from readers.