Wednesday, October 16, 2013

The Mystery of the Fugitive Founder (and Longterm President of an Offshore Medical School for US Students)

We recently wrote about for-profit medical schools located offshore from the US, but catering to American students, not students from the countries in which they operate.  Now some new media reports raise further questions, if not mysteries about another set of such schools.  

Two Bloomberg articles on a trial underway focused on the alleged use of offshore accounts to avoid US taxes.  These accounts were connected to the former long-term President and founder of two offshore medical schools, and his spouse, a dean at one of the schools.  


The first Bloomberg article opened thus:


Patricia Hough, according to her lawyers, is an altruistic psychiatrist who helped her husband build two Caribbean medical schools. To prosecutors, she is a tax cheat who used offshore accounts to avoid paying taxes on millions of dollars from the schools’ sale.

Jury selection began today in federal court in Fort Myers, Florida, where Hough, 67, is accused of using accounts at UBS AG, the largest Swiss bank, and elsewhere to hide assets and income from the Internal Revenue Service, including almost $34 million she and her husband made when the schools were sold in 2007. 

The Bloomberg article asserted,

 At the heart of the case is whether she misused accounts associated with the Saba University School of Medicine Foundation.

The main question to me is not whether Dr Hough is guilty or innocent, which I cannot tell.  There are more intriguing  mysteries raised by this case.

How Did Non-Profit Medical Schools Become For-Profit?
 
According to Bloomberg,

  Hough’s lawyers say she helped [her husband, David] Fredrick build Saba University School of Medicine, on the island of Saba in the  Netherland Antilles, and the Medical University of the Americas, or MUA, on Nevis in the West Indies.

To do so,

 Through the Saba foundation, which they first funded in 1988, according to a government trial brief filed Oct. 3, the couple opened the Saba University School of Medicine in 1993. Fredrick served as president and a foundation director. Hough was associate dean for clinical medicine. 

Also,

In 1999, Fredrick and Hough began the Medical University of the Americas, a for-profit school on Nevis in the West Indies, according to the government filing.
There seems to be no question that the schools were started by a foundation based in the Netherland Antilles.  A report of a site visit of the Saba University School of Medicine by the Division of Licensing of the Medical Board of California in 2004 summarized this history,

In 1986, the government of the Netherlands Antilles proposed to a group of American educators that a medical school be established on the small island of Saba, N.A.  It was to be relatively small, of high quality and established for the dual ppurpose of benefiting the economy of the island (of only 1500 population) and attracting N.A. citizens to medical careers in the N.A.

A committee of Dutch citizens from Curacao, the seat of the N.A. government, approved the preliminary plans and the school was founded as a non-profit foundation under Dutch law....

The Saba University website still states that the school is accredited in the Netherlands,

Saba University School of Medicine’s Doctor of Medicine (M.D.) program is accredited by the NVAO (in Dutch: Nederlands-Vlaamse Accreditatieorganisatie). The NVAO is the Accreditation Organization of the Netherlands and Flanders. This organization was established by international treaty and ensures the quality of higher education in the Netherlands and Flanders.



So apparently Saba University was started as a non-profit organization meant to focus on medical education for the Netherlands Antilles, and thus accredited there.  But then, somehow,  according to Bloomberg.


Equinox Capital, a private-equity firm based in Greenwich, Connecticut, bought the Saba school and MUA for $36 million in 2007. The transaction included $34 million for land held in the name of Fredrick’s daughter from an earlier marriage, according to prosecutors.

Hough and Fredrick didn’t tell the IRS about most of the proceeds of the sale and transferred money among various undeclared accounts to buy the plane and real estate, make gifts to family members and pay personal expenses, prosecutors said.

There also seems to be no question that Equinox Capital did buy the schools.  The summary of a 2007 press release from the company stated,

 Equinox Capital III, L.P. announced that it has completed the recapitalization of Saba University School of Medicine B.V. ('Saba'). Founded in 1986, Saba is a leading for-profit university that awards four-year graduate degrees in Doctors of Medicine (M.D.). 

A statement from Prairie Capital, which is now an investor in the schools, noted that now

 R3 Education is a Massachusetts-based holding company that controls The Saba University School of Medicine ('Saba'), The Medical University of the Americas ('MUA') and St. Matthew University ("SMU").

After,

 Prairie Capital partnered with Equinox Capital to acquire the three universities.

It is enough to cause some dizziness.  Let me recap.  Mr Fredrick and Dr Hough somehow founded two medical schools apparently under the auspices of a foundation, the Saba University School of Medicine Foundation, which the couple ran.  The goal of the foundation was to attract Netherland Antilles citizens to medical careers in the NA.   However, the Saba University school became an off-shore facility for US medical students.  The two schools were later acquired by Prairie Capital and Equinox Capital, and they are now run as for-profit operations by R3 Education.

So somehow Saba University transitioned from being a non-profit meant to serve the medical education needs of the Netherlands Antilles to a for-profit owned by US private equity firms (and apparently now focused on serving Americans.)

How did that happen?  What was the rationale for the change?  Did any Dutch authorities consider the implications for their country?  Did any American organizations concerned with the quality of education and credentials of US physicians consider the implications?

Where Did the Money Go?

According to Bloomberg, US prosecutors made some striking allegations,

Both the foundation and MUA failed to tell the IRS about accounts held at UBS, Liechtenstein Landesbank and other banks, the U.S. charges.

Singenberger and Luetolf helped the foundation and MUA move money through British Virgin Islands or Hong Kong entities they controlled called Top Fast Finance Ltd., Ample Dynamic Trading Ltd., New Vanguard Holdings Ltd. and Apex Consultants Ltd., according to prosecutors.

'Hough and Fredrick were the beneficial owners of and had signatory authority over all over these accounts and owned and controlled each of them,' prosecutors said in their brief. 

The prosecution also alleged that Mr Fredrick and Dr Hough spent the money they allegedly got from selling the two medical schools rather lavishly.  Per the second Bloomberg article,

[Prosceutor] Kessler said Hough and her husband used the proceeds of the school sales to buy a $1.6 million airplane, a $1.1 million house in Asheville, North Carolina, a $590,000 house in Greenville, North Carolina, and an $800,000 condominium in Sarasota, Florida. She said they also gave money to relatives.

The prosecutors charged that the money the private equity firms paid went to Mr Fredrick and Dr Hough.  But while Mr Fredrick was President of Saba University, and apparently ran the foundation that was supposed to support it, he did not own either.  So why would the money go to him, and his wife?  If the money did not go to them, where did it go?

As the trial continued, as documented in a second Bloomberg article, Dr Hough's lawyer denied that she got the money,

Dan Saunders, an attorney for Hough, said his client never believed the money held at UBS AG (UBSN), the largest Swiss bank, and in other offshore banks belonged to her. Rather, he said, she thought it belonged to the foundation that ran the schools.

'It wasn’t her money, and she never believed it was,' Saunders said in his opening statement. 

If that is true, however, why is money that supposedly belongs to a foundation sitting quietly in a Swiss bank?

Dr Hough's lawyer said,

 Saunders said the accounts did serve a business purpose: to protect the assets of their nonprofit foundation from people attempting a hostile takeover.

Hostile takeovers of publicly held corporations do occur, of course.  However, how could a hostile takeover of a foundation occur, and who would possibly want or be able to do so?

So thus far, no one has offered a rationale explanation for how the schools were sold, why they were sold, and where the money resulting from the sale went.

Where in the World is Mr Fredrick?

So far, while the defendant is Dr Hough, the role of her husband, Mr Fredrick, apparently the President of Saba University from its founding at least until 2007, seems key.  Yet little of the coverage focused on Mr Fredrick.  The reason for that suggests the next mystery, per  the first Bloomberg article,

Fredrick vanished after the indictment, leaving Hough to face trial alone. U.S. District Judge John Steele, who is overseeing the trial, has declared Fredrick a fugitive.

So why did Mr Fredrick flea, and of course, where did he go?

Obviously, the fact that Mr Fredrick, who was the President of Saba University for many years, chose not to defend himself against charges that he hid the money he somehow obtained from the sale of that and another medical school, but rather fled, suggests that he may not have had a very good defense against those charges.  What does that say about the leadership of these medical schools?

 Summary

So the coverage of this intriguing trial, when added to some other publicly available information, suggests a wealth of mysteries about the founding, current nature, and leadership of two Caribbean medical schools which currently are run as for-profit firms and owned by US private equity firms, and whose student bodies come almost exclusively from the US.

So the really big mysteries are those about the implications for the medical education these schools provide, the students they attract, the physicians who graduate from their programs, the US patients of such physicians, and the US government which largely provides the loans which paid for these students' education (look here).

Despite the extraordinary nature of this case (again, involving the longterm president of an offshore medical school that sought to educate a substantial number of US physicians, and who is now a fugitive from justice), the only interest in it so far seems to be its implications for US prosecutions of hidden offshore accounts.

This case illustrates why we must reexamine our fascination for "market based" approaches to health care, when almost nothing about any part of health care resembles, or could resemble a free market (see this post).  We need to make health care more transparent, and shine more sunshine on the nooks and crannies, like off-shore but US corporate owned medical schools.  We need to facilitate health care leadership and governance that puts patients' and the public's health first, way ahead of the personal enrichment of the participants.  




ADDENDUM (29 October, 2013) - Dr Hough was convicted of defrauding the IRS and income tax evasion, see the Bloomberg article.  So far I see no response, certainly no apology or disavowal, by the current managers and owners of the medical school. 

25 comments:

luke @ bode diagrams said...

If their medical school is located in an offshore jurisdiction, there is no suprise they are using offshore structures and bank accounts :)) this is just one example; there are much more extreme examples such as GE that paid almost no corporate taxes in America while receiving subsidies. I cannot be completely sure of that but I have recently read it somewhere..

Afraid said...

Did they find the guy yet?

Roy M. Poses MD said...

Afraid,

I can't find anything in the media to indicate they have.

kenneth Barn said...

I'm very curious how the transition -from non-profit to for-profit-- was made without causing any noise or stir in the media or the government. Was it not a big deal back then?

Sabagrad2010 said...

As a Saba graduate I have better insight then this writer and his incorrect facts. #1 Just recently Saba obtained US funding loans. I took only private loans at a high interest rate so no tax payer paid for my education. #2 the enrollment of this school is probably 50/50 US / Canadian not all US students. #3 We all do the same board tests and rotations as a US trained medical student and its harder to obtain residency then US trained students. No excuses for the founders and yes they got greedy after the sale and should have declared that money but doesn't mean that didn't start a fantastic school producing some great doctors. Only reason they got caught was UBS dumped the data to the IRS and those secret account were known.

Roy M. Poses MD said...

Sabagrad2010, whoever you may be,

The US government will give loans to students at all sorts of schools, including schools outside of the US, and for-profit schools with dodge reputations. It is true that Saba students can now get US loans. That does not contradict anything I said above.

Although I suppose my introduction about offshore schools implied that they cater mainly to US students, the fact that Saba also caters to Canadian students does not change any of the concerns I raised. Note that it appears that Saba was founded as a non-profit to educate residents of the Netherlands Antilles, and somehow has transformed into a for-profit that educates mainly American, and maybe Canadian students.

Maybe the school is "fantastic," in one sense or the other, and maybe not. Do even begin to consider whether it is in any way equivalent to US and Canadian schools, one would have to see comparisons of distributions of board scores, rates of obtaining particular kinds of residencies, etc.

Does your last sentence imply that if they were not caught, all would be well?

Finally, as long as you remain anonymous, it is hard to evaluate the credibility of what you say.

PS - As I well add above, Hough was convicted of defrauding the IRS and income tax evasion.

Anonymous said...

Interesting discussion though a little bit wrong on facts. I was also involved in Saba. It is common for successful graduates to laud the University, but for the most part they are self-taught and speaks to their capacity to learn independently, something everyone should value in a physician. However not to the value of instruction that takes place there. It is quite variable and often incompetent. Dr. Poses makes an interesting observation about the shift from non-profit to for-profit. It would seem that the money from the sale should have remained for the benefit of the school, no? And not considered something to be used for homes and personal aircraft. However the former student is partly right about US government financing - Saba did not acquire access to Stafford loans until this year. However they did use a back door for getting their hands into Federally guaranteed student loans according to this Bloomberg article: http://www.bloomberg.com/news/2013-12-03/for-profit-caribbean-medical-schools-use-federal-funds-loophole.html

Dr. Poses also makes an assumption about the value of Dutch oversight in the Antilles. It was pretty weak up until 2010. The Antilles was the wild west in 1986 I would imagine, because in 2000 when I got involved those islands were corrupt, family run mafias. The reason schools opened up down there was because they could get way with anything. For example, if a student had a legitimate complaint, they would be ejected from the school, and without a student visa, deported, having no legal redress. Unqualified students are regularly admitted only to fail out or fail to gain residencies. I know of no case where a student successfully appealed to the Dutch, and the Antillean governments were partners in crime with the schools, lest they lose income.

The actual question is where in the world is David Fredrick hiding? He is this stocky arrogant peacock of a man given to bling. Not exactly a Unabomber type, living in a shack. One can only assume he squirreled away some of that loot. It will make for a fun story when he gets bagged.

And don't be so upset about anonymity. It is a useful thing after getting your hands dirty in the Caribe.

Anonymous said...

As a recent Saba Grad myself (class of 2012) I must first agree that there are no excuses for what Dr. Fredrick and his wife have done. I also have to add though that this does not have any implications towards the education that occurs at the school nor speak of the quality of physicians that graduate from there. My involvement with the school begins and ends with my medical education and residency placement. I do not think it would be fair to generalize any judgements about the students who attend the school and Dr. Fredrick's actions. 90% of us have never met Dr. Fredrick or his wife or any of the other "corporate" parties involved. We went there with one goal and that was to become physicians. I would also disagree with Dr. Poses in saying that I do feel the education was more than adequate. Most of my collegues that I continue to keep in touch with have excellent board scores most of which are at least 20 points higher than the US National average. Your suggestion of comparing which residencies saba students match would also disappoint you as our students have matched in everything from family medicine to orthopedic surgery. Furthermore, if we are lacking in some residencies I can assure you it is not because of lack of qualification but simple prejudice in certain fields of matching a "caribbean graduate" into their programs.

Basically, how did it go from non-for profit to a for-profit, who hid money where and where did it go and where is Dr. Fredrick are all great questions. They do not however pertain to me as a graduate of Saba University nor to any of my other fellow physicians who graduated from there as we had no involvement in that part what so ever. I hope they face justice for their crimes but to imply anything about the school, the education the students or physicians who are linked to it I think has no merit and would be unfair.

Alan C said...

According to one of the reporters who wrote the Bloomberg articles, as of February 2014 Fredrick has not been apprehended.

By the way, Saba is one of the top four medical schools in the Caribbean and has an excellent USMLE pass rate. I guarantee that your hospital (any hospital in the US and Canada) has residents that graduated from Saba.

Roy M. Poses MD said...

Alan C, whoever you are -

I see that Saba continues to have its anonymous defenders.

By what criterion is it a "top four" school in the Caribbean? And what does that say about how it compares to medical schools elsewhere?

Alan C said...

Roy M Poses MD, whoever you are -

I would judge a top medical school by several things: first time pass rate on Step 1, passing the rest of the USMLE on schedule, percentage of placements in clinical rotations and where, prestige of residency specialties and where, board certifications, things like that. Saba regularly matches in all specialties and I personally know students who did or are doing residencies at the teaching hospitals of Johns Hopkins, Yale, Mount Sinai, Barnes-Jewish, McMasters, probably whichever prestigious hospital where you're on the staff, etc.

Personally, I would put St Matthews, Ross, AUC, and Saba up against ANY medical school in the US or Canada. If that surprises you, you should do some homework.

Cheers,
Alan Cheney, Ph.D.

Roy M. Poses MD said...

Dr Cheney,

This is getting a bit far afield from the original post, which was about the leadership of Saba.

Ultimately, isn't the most important measure of a medical school the quality of the physicians it produces? Of course, that is pretty hard to measure, so I guess the surrogate measures you propose are plausible, although I am sure some could argue with them.

Since you seem bound to argue in favor of Saba, would you perhaps have a citation for its performance on the measures you cite versus other medical schools?

Alan C said...

I agree, Dr Poses, that the October discussion has strayed, but to be honest, I didn't start the disparaging of Saba. I admit to some sensitivity to undeserved underdogs, having earned a Ph.D. from - God forbid - a state university, but one that boasts the first Ph.D. program to have ever earned American Psychological Assn accreditation in both Clinical and Counseling Psychology. Ah but it's in Texas and not New England. Oh the shame!

I don't care to document my claims to Saba's credentials and results but I will say Saba was the first non-US medical school in 15 years to earn approval of the California Medical Board. The others of the 'big 4' had already earned that distinction.

Anonymous said...

Dr. Poses. Sorry to say. Most Saba graduates probably did better on their medical boards than you did. Is that why you are really upset?

Roy M. Poses MD said...

I wonder why this particular post draws so many comments, and why many of them seem intent on defending Saba University without directly addressing the concerns raised in my posts?

In any case, I thank Dr Cheney for his thoughtful and courteous remarks, but do note that he did not directly address the main contents of my post, and eventually declined to "document" his claims.

However, the last anonymous comment could only manage an ad hominem attack on me. By the way, how would the commenter know my medical board scores, why would he or she think they were relevant, and how would he or she argue that medical board scores are the best measure of the performance of a medical school?

Anonymous said...

FYI - "Alan C" was a faculty member at Saba University School of Medicine for many years ... hence the bias.

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Roy M. Poses MD said...

Ms Shah,

Thanks for the comment.

You might have noted that while this post was about one for-profit off-shore medical school catering to US and Canadian students, it raises questions about the whole genre.

I see that you work at another such school, and included its web-site in your comment.

Have you any response to my larger questions about for-profit offshore medical schools that cater to North American students?

Anonymous said...

Dear Dr. Poses,

First, I am not a Saba graduate and have nothing to do with any offshore medical school. But I have watched their development in the last 15 years. Believe me, I have enough data to write an excellent PhD thesis on Offshore medical schools. My conclusion is that they are a lesson in entrepreneurial genius of the American businessman. Their successes go a long way to support the idea that we can do as well, if not better, than what our governments can do in terms of managing our own businesses. And this is from someone who morbidly dislike republicans and their ideas!

I know you're in disbelief. You can't fathom the fact that graduates of some random offshore medical schools, schools with crooks as managers, can have education comparable to your ivy-league degree. Sorry, they do! I have worked with both groups; offshore and onshore MDs. I actually make bold to suggest that an average offshore MD graduate is better trained, more devoted and more professional than physicians trained in medical schools on American soil. Of course, I'm talking about those that went there and succeeded. I don't know about those that graduated and never made it into residency. Who knows, maybe I'm just seeing a minority.

As for Dr. Fredrick, I hope he gets found out quickly. But that doesn't take away the respect he deserves for managing, with his wife, to start and maintain such excellent schools for so many years. Though the IRS may see him as a tax thief, the thousands he gave a chance at achieving their lifelong dreams will always see him as a hero. By the way, where was the US government when he was running around and working hard to establish a private medical school? How much did the USA lend him to make his work easier? It was wrong of him not pay his taxes. However, it was because he did not make use of the intelligence that comes with his PhD; he could have given up his US citizenship once he realized the project was becoming successful. That would have prevented the mess in which he found himself now.

Roy M. Poses MD said...

Anonymous of 27 March, 2014,

It's amazing that Saba is still attracting anonymous defenders. Let me address a few of your points.

Apparently Frederick started the school as a non-profit, and presumably benefited both from external funding and whatever favorable treatment non-profits get in the Netherlands Antilles. Is this brilliant "entrepreneurial" behavior or is it gaming the local (not US) governmental rules?

Hough and Frederick were obviously successful in personally enriching themselves, but one is now convicted and the other is on the lam, as they say in crime novels. Overall , they do not sound like successes to me.

Your discussion of Hough and Frederick doing better in some sense than "governments can do in terms of managing our own businesses" appears to be a straw-man argument. No one was proposing that the US, Netherlands Antilles, or some other government should have been running the school.

Do you have any actual data about the quality of the education in random off-shore medical schools versus that in the Ivy League?

By the way, your mention of the Ivy League is at least a straw man, if not an ad hominem, since I certainly was not trying to compare my education (years ago) to the current education at Saba.

Also, if you mean to compare graduates of particular schools, you should consider doing so in an unbiased manner. Comparing all those initially enrolled in one school to only those who graduated from another school and then began a residency is somewhat of an apples and oranges comparison.

Finally, what sort of respect do you think someone who fled rather than face criminal charges deserves? Given that he sought to establish a school in another country, why should the US government had given Frederick loans or made his work easier? How do you know that had he changed his citizenship he would have avoided prosecution by another country under different laws?

I am disappointed that those who want to defend Saba seem to have difficulty addressing my main points, and to often have difficulty making logical and evidence-based arguments.

Alan C said...

'In the year of our Lord 1432, there arose a grievous quarrel among the brethren over the number of teeth in the mouth of a horse.

'For thirteen days the disputation raged without ceasing. All the ancient books and chronicles were fetched out, and wonderful and ponderous erudition such as was never before heard of in this region was made manifest.

'At the beginning of the fourteenth day, a youthful friar of goodly bearing asked his learned superiors for permission to add a word, and straightway, to the wonderment of the disputants, whose deep wisdom he sore vexed, he beseeched them to unbend in a manner coarse and unheard-of and to look in the open mouth of a horse and find answer to their questionings.'

I'm personally weary of this discussion. Is Saba, specifically, a good medical school that turns out many outstanding physicians? To use another aphorism, 'The proof of the pudding is in the eating.'

It was pointed out that I taught at Saba for a long time and thus my 'bias;' that's also called first-hand experience. I know that of my 300 ex-students, many have and are serving residencies in the most competitive specialties at the most prestigious teaching hospitals. I'm not going to lose any sleep over whether Dr Poses ever becomes convinced.

Roy M. Poses MD said...

Alan C,

If you weary of this discussion, why did you just prolong it?

Alan C said...

It's a politeness thing I learned in charm school. I'm blowing virtual bye-bye air kisses to you all. Catch them and hold them next to your heart.

Anonymous said...

There are many ex employees of Saba, a few ex business partners and the like that have set up these blogs to revel in this mess and sully the reps of all involved. Please consider the family of Pat and David, who are heartbroken over these events.

Roy M. Poses MD said...

Re Anonymous of 21 April, 2014 -

The quality of the anonymous defenses of Saba is really dropping. Maybe Dr Hough and Mr Fredrick should have thought about their families early on.

The blogs to which this refers is not quite clear, but the notion that I am an ex-business partner or ex-employee is laughable.