Com. v. Cerveny

• Decision Date: 14 September 1977
• Parties: COMMONWEALTH v. William J. CERVENY et al. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 802

367 N.E.2d 802

373 Mass. 345

COMMONWEALTH v. William J. CERVENY et al. ¹

Supreme Judicial Court of Massachusetts, Hampden.

Argued May 2, 1977.

Decided Sept. 14, 1977.

Francis J. DiMento, Boston, Thomas C. Cameron, Boston, with him for defendants.

Henry A. Moran, Jr., Springfield, Sp. Asst. Dist. Atty., for the Com.

Before HENNESSEY, C. J., and QUIRICO, BRAUCHER, KAPLAN and LIACOS, JJ.

KAPLAN, Justice.

A Hampden County jury found the defendant William J. Cerveny guilty on five indictments charging perjury by written instrument, ² and on four indictments charging attempted larceny by false pretense. ³ They found Valley View Nursing Home, Inc., guilty on three indictments charging that, as a health provider, it falsified information required to be filed with the Rate Setting Commission; ⁴ West Springfield Nursing Home, Inc., guilty on two indictments with similar charges; and Ridgeview Nursing Home, Inc., and Eldercare Nursing Home, Inc., each guilty on one indictment. Cerveny was sentenced to concurrent terms on the perjury convictions, and concurrent terms, to be served "from and after," on the convictions of attempted larceny. ⁵ The corporate codefendants received fines on their several convictions. The defendants named have appealed pursuant to G.L. c. 278, §§ 33A-33G.

The charges and convictions sprang from the submission to the Rate Setting Commission of certain annual reports of the operations of the corporations three nursing homes and one rest home signed by Cerveny under penalties of perjury, and alleged to contain material falsehoods. The reports, on "Form RSC-1," were for Valley View and West Springfield for the year 1971; for Valley View for 1972; and for all four corporations for 1973. These reports were intended for use by the commission in fixing the per diem rates at which the corporations would be compensated by the Department of Public Welfare for the care they provided to patients publicly assisted under "Medicaid."

Although the trial was protracted, it is possible to state the main facts and pose the chief legal questions quite briefly.

Through holding company ownership, Cerveny owned and controlled the four defendant corporations, all doing business in the Springfield-Westfield area. Cerveny dominated the affairs of the entities as the principal operating officer of each.

The RSC-1 report form, usually filed in March, reflected the operations of the home for the preceding calendar year; included was a balance sheet as at December 31. Detailed regulations of the Rate Setting Commission, which referred to and incorporated the form, defined the terms of the form and otherwise prescribed how it was to be filled out.

Examining the regulations including the form, we can say roughly that four factors entered into the rate: allowances for operating expenses, for administration, for inflation (a cost adjustment factor), and for average equity capital. The latter permitted a return to the owner on his investment: if the home were run on borrowed money, interest thereon would be an allowable expense reimbursed through the rate setting process; it was conceived that where the owner was using his own money he was entitled to a counterpart allowance. "Average" meant essentially the average of the differences between assets and liabilities at the beginning and the end of the year. In the list of items which might or might not figure in average equity capital, we have to note particularly two exclusions: "inter-company accounts" (including those between parent and subsidiary); and assets not directly related to or necessary for the provision of care to publicly aided patients (excessive cash would be an example).

The prototypical transaction carried out by Cerveny which placed the defendants in the dock was designed artificially to increase "cash on hand or cash in the bank" and thus to increase equity capital as an element on which the per diem rate was calculated. The holding company owed a nursing home a substantial amount of money as the result of a loan (which we may assume to have been real). Properly, this would show up as an inter-company account and could not be treated as an asset of the home in calculating equity capital. On December 31 of a given year, Cerveny would cause the holding company to draw a check on its bank in favor of the home in the amount of the loan. In fact the holding company had no or a very small balance in its account in the bank. The check was posted as a credit to the home and was reflected in "cash on hand or cash in the bank" as at December 31 on the balance sheet part of the RSC-1 form submitted. On January 2 or 3 ⁶ the home drew its check on the same bank in favor of the holding company in an equivalent amount, thus in effect reinstating the loan. It was important to the particular scheme that the holding company's check should not be recognized and dealt with as an overdraft returned for insufficient funds--until it was neutralized, so to speak, by the equivalent check of the home. This was accomplished by an understanding with a complaisant employee of the bank at which all the corporations maintained their accounts. (A total of over three-quarters of a million dollars was nominally paid and lent back in this manner by the holding company and the four corporations in the end 1973 transactions.)

There was proof of how an RSC-1 report usually would be treated when received by the Rate Setting Commission. It was given an initial screening, often by a person without a background in accounting, to check surface computations. An accountant then performed a "desk audit," i. e., an examination of the items to see whether they conformed on their face with regulations: for example, whether a maximum permitted for automobile expenses had been exceeded. These accountants--there were approximately three such accountants to examine more than 750 annual reports--did not attempt to check on the accuracy of the figures reported. At this stage the interim rate was computed, applying to the second year following the year covered by the report (thus a 1974 rate based on the 1972 year-end report).

Later, usually much later, a "field audit" was scheduled: one or two field auditors actually visited the home and sought to verify the figures. Again, time pressure could be anticipated as all the work was done by eight or nine field men. The results of the field audit were reviewed by higher authority, leading to a commission vote on the final rate. Adjustments would be made for any difference between the interim and final rates. Usually the final rate would be determined long after payments were received at the interim rate. If the interim payments turned out to be excessive, the home was obliged to compensate the Commonwealth, but it appears that no interest would be charged for the use of the money to which, strictly, the home had not been entitled.

We take up Cerveny's exceptions. No separate treatment is needed of the appeals of the corporations. ⁷

1. Denial of directed verdicts of acquittal. (a) Preliminary. With respect to the claimed error in the judge's refusal of motions for directed verdicts at the close of the Commonwealth's case and at the close of all the evidence, it may be noted, first, that the defense has not pursued in this court the point made during trial that the contrivances with the checks and the filling out of the forms were all a means of making a test case about the legality of the commission's regulations, presumably on the subject of inter-company accounts. The defense never defined just what this question could be; nor was any explanation offered why procedures appropriate for making such a legal test were conspicuously avoided.

As if to trivialize the wrong, if there was one, the defense seeks to make it appear that the only complaint was that the holding company's check was not backed up by funds. But the legal position could be the same if the holding company momentarily had had sufficient money in the bank: if (for example) it had borrowed on December 30 from an outside source for a period of a few days an amount equal to the loan from the nursing home, used the borrowed money to pay that loan on December 31, and then had the home reconstitute the loan in the same amount on January 2 to enable the holding company to discharge the temporary loan. An RSC-1 report showing the cash would still be false in substance where the "wash" was planned from the beginning and calculated corruptly to raise the rate.

(b) Materiality. There is argument that the falsehood was not "material," an element of the offense of perjury under G.L. c. 268, § 1A (text at note 2 supra ); ⁸ that the balance sheet, as reported, would still call on its face for disallowance of the amount added to cash because it would necessarily represent excessive cash for the nursing home. Not so; whether the amount would appear in fact excessive could well turn on how liquid the home happened to be at the time. Further, there was no commission rule in force by which an accountant could decide automatically or readily what cash was excessive and therefore to be eliminated from equity capital. Cerveny, then, could count on the blandness of the item as reported, together with the inefficiency and slowness of the examining process at the commission, to give the entire item (or possibly some reduced sum) a good chance to get by without suspicion. In lieu of an "inter-company account" on the report easy to see and eliminate as an asset by rule of thumb, Cerveny substituted a seemingly acceptable asset whose falsity could be discovered, if at all, only after substantial investigative effort.

Cerveny's statements on the forms were thus false "in a material matter" in the meaning of the statute. As we said in Commonwealth v. Giles, 350 Mass. 102, 213 N.E.2d 476 (1966), interpreting cognate language of G.L. c. 268, § 1: "Materiality in respect of perjury means relevance...