HSA Embezzling Case Is a Heads-Up for Employers
Barry Stokes, the self-styled “Consumer-Driven Guy” whose company reportedly administered 14,000 health savings accounts totaling $8.7 million, sits in jail awaiting the start of a criminal trial May 22 in which he is charged with embezzling money from his former clients.
In what is likely the first prosecution of HSA fraud, the case exemplifies the caution benefits administrators must exercise when hiring third-party administrators to manage health care assets.
Until last fall, employers who had health care-related accounts with 1Point had little reason to be suspicious. Clients of 1Point say the administrator regularly sent statements to members who were contributing money from their paychecks to their various accounts. For the most part, customers who used debit cards to pay for medical services out of their flexible spending accounts had money in their accounts.
Susan Smith, the executive director of the TML Intergovernmental Employee Benefits Pool, which is the benefits administrator for approximately 600 cities and other local governments in
He had a Web site, consumerdrivenguy.com, and issued press releases commenting on what he called “the health care revolution.”
When Stokes won the business of TML’s 15,000 members, Smith believed Stokes when he said the assets would be deposited with Mellon Bank.
“We never really asked him to prove it to us,” Smith says. “We never had trouble accessing the funds. … When he said that’s how he had it set up, we just believed him. But obviously that did not happen.”
Smith says she saw few warning signs of a pending implosion except when a few members complained in September that checks they had written from their flexible spending accounts had bounced.
Around that time, an auto parts maker, Beck/Arnley Worldparts, based in
The auto parts maker got a phone call from Stokes’ attorney on September 8, saying the money in the plan was “gone and likely unrecoverable,” according to a complaint filed in September in U.S. District Court in
A judge quickly declared the company bankrupt, and soon other clients began asking questions. A federal grand jury in the Middle District of Tennessee indicted Stokes in November for allegedly stealing more than $210,000 from the retirement funds he administered.
McLemore says Stokes was “robbing Peter to pay Paul. And it worked right up till the end.”
When the news came out, Smith’s phone “didn’t stop ringing. Everyone was in a tailspin.”
“People here were in panic mode calling each other and asking what was going to happen” to their money, she says.
TML lost half a million dollars, Smith says, and eventually paid its members back by dipping into its own funds. The group is now one of more than a thousand creditors seeking to get their money back from 1Point.
“It was definitely not a fun learning experience,” Smith says, “especially with health care costing so much today.”
Of the many lessons learned, one is that money left with third-party administrators is not protected by the Federal Deposit Insurance Corp.
A lot of people thought the plans themselves were FDIC protected. “That, of course, is a complete illusion,” McLemore says.
Unlike health reimbursement arrangements and flexible spending accounts, money for health savings accounts must be held by an FDIC-insured bank, thus giving account holders some security, says TML’s legal counsel, Scott Wilson. However, as TML found out, employers must make sure that funds are actually deposited in a bank.
Stokes may have used his clients’ money, in part, to purchase a vast collection of Japanese woodblock prints. Creditors hope those will fetch as much as $1 million on the auction block.
That payout, however, will do little to restore what is owed. At a November court meeting in
TML is now administering its members’ assets and realizing that they are able to do it for roughly the same amount it cost the group to hire 1Point.
If they decide to work with a third-party administrator again,
But, Smith adds, the group did meet with the company’s lawyers. “We met with everybody,” she says. “It happened like he promised until we woke up and he absconded with our money. Until then there were not a lot of signs that it wasn’t working right.”