The hardest hit, officials said, were policyholders in Pennsylvania, where two employer-sponsored trusts - Suburban Professional and Business Owners Association's medical trust in Folsom, Delaware County, and Construction Industries Insurance Trust, in Pittsburgh - had health-care agreements with Cabot Day.
"The victims here . . . were working people who thought they were buying what they needed in terms of medical insurance and found out it was absolutely bogus," said Gus Schick, assistant inspector general at the Office of Labor Racketeering in Washington.
The indictment was made public as the Justice Department announced in Washington that it intended to double the number of FBI agents investigating health-care fraud and set up special prosecution units in 12 cities, including Philadelphia.
Robert M. McKee, who heads the Office of Labor Racketeering here, said that the rising cost of health care has created a climate ripe for fraud.
"Small employers are so hungry for reasonably costing insurance sometimes that they may not go as far as they should or could" in checking out the provider companies, he said.
McKee, who said that Cabot Day was not licensed to operate anywhere in the United States, said the federal investigation got rolling with information
from the insurance departments in Pennsylvania and Delaware, including a series of complaints and inquiries about unpaid medical bills.
The 60-page indictment, which was returned last week but kept under seal until yesterday, paints a picture of greedy insurance officials who engaged in fraud through a pattern of misrepresentations and false promises.
"Screw them!" was what one defendant - J. William Vanderveer, general counsel at Cabot Day - allegedly responded when one insurance company employee expressed concern that claims were not being paid, the indictment contended.
"This is a very significant case demonstrating how individuals who are
bent on crime in the health-care field can siphon off the premiums . . . and leave injured workers holding the bag," said U.S. Attorney Michael M. Baylson at a news conference called to announce the indictment.
The defendants are Vanderveer; Frank L. O'Bryan, 45; Neil E. Smith, 61; and Robert M. Munroe, 41, all executives of the company, who live in Colorado; and Fred M. Dellorfano Jr., 51, a Boston lawyer, who was identified as an escrow agent of the firm.
Assistant U.S. Attorney Andrea G. Foulkes said the defendants - if convicted of all charges - are subject to prison terms of about 15 years under federal sentencing guidelines.
Federal authorities also are seeking to force the defendants to forfeit $5.6 million, Vanderveer's Colorado condo and the assets of Cabot Day and four other business entities allegedly used in the scheme.
The indictment described an alleged scheme that in some ways seemed incredibly simple: Take in lots of health-insurance premiums, pay only a fraction of claims and keep the rest.
But the five defendants - three of whom are lawyers - used 16 different bank and investment accounts and the company buried itself deep in corporate red tape, making the alleged fraud tough to investigate.
"They hoped to dazzle the unwary observer with a whole series of misrepresentations to make them appear legitimate when in fact they are not," said prosecutor Foulkes, who is handling the case with prosecutor Robert K. Gordon.
Cabot Day, for example, was described in the indictment as an off-shore reinsurance company chartered on the island of Tortola in the British Virgin Islands, acquired as a shell corporation by defendant Frank O'Bryan and then controlled by O'Bryan in Denver.
Suburban Professional, the indictment said, had an agreement with Cabot Day, and sent $144,000 in premium payments for reinsurance coverage, but Cabot Day paid virtually none of the $182,292 in claims submitted on behalf of employees.
The Pittsburgh-based Construction Industries Insurance Trust held assets for about 250 employers in the construction and construction-related industries in Pennsylvania, California, Delaware, West Virginia, Ohio and elsewhere for about 5,500 employees and their dependents.
The trust sent at least $3.7 million in premiums to Cabot Day and - according to the indictment - defendants O'Bryan, Vanderveer, Dellorfano and Munroe paid only about $853,767 in claims, leaving about $3.1 million in unpaid CIIT insurance claims.
O'Bryan, Vanderveer and Dellorfano, with the assistance of Munroe, used CIIT funds for their own benefit and to continue the fraud, according to the indictment.