04/05/2087 99:32 9725037907 THS / TRENDEC PAGE at CAUSE NO, 20007-538,383 1 CITY OF LUBBOCK, TEXAS § IN THE 72°° DISTRICT COURT Movant § § vs. § OF f. ICON BENEFIT ADMINISTRATORS § IL, LP.; and AMERICAN § ADMINISTRATIVE GROUP, INC. 5 Respondents § LUBBOCK COUNTY, TEXAS § AKRIDAVIT OF DANNY A. DEKENBAUGH STATE OF TEXAS § § COUNTY OF DALLAS 5 Before me, the undersigned authority, personally appeared Danny A. Defenbaugh, who being duly swom, deposed as follows: | “My name is Danny Defenbaugb. Tam at least eighteen years of age, competent,and of {~-—--———-souure- nin: Tram the president of Defenbaugh & Associates: Lam personally acquainted with the . facts stated herein which are true aud correct. ‘Attached are true and correct copies of the following which are incorporated herein by reference: 1. Exhibit A-l - Assessment and analysis of an audit report styled “independent Consultant's Report on the City of Lubbock (COL) Claims Operational and Compliance of American Administrative Group (AAG)” (Revised 03-29-07) originally prepared 03/23/2007. 2, Exhibit A-2 - Curriculum Vitae of Danny A. Defenbaugh. 3. Exhibit A.3 ~ Curriculum Vitae of Edward R. Krasiewski. Further, Affiant saith not, NY A. DEFENBAUGH SWORN TO AND SUBSCRIBED before me on the Sth day of April, 2007. ‘Notary Public In and For The State of Texas ASPIDAVI OF DANNY A. DEFENBAUGHL posnsonvitagcait of ene A Dealt ‘SaeraeeEXHIBIT A1@ Chon. ——Defenbangh & Associates, Ine. : 4 < Gateway Tower me 8111 LBJ Freeway Suite 1100 Dallas, Texas 75251 Z 972/726-1911 (O) 972/ 233-7358 (F) a we wivw.DannyDefenbaugh.com Se BACKGROUND ‘The following report details a review assessment and analysis of an audit report styled “Independent Consultant's Report on the City of Lubbock (COL) Claims Operational and Compliance Review of American Administrative Group (AAG)” (Revised 03-29-07) originally prepared 03/23/2007 and conducted by Benefit Plan Audit Services (BPA) on behalf of the City of Lubbock. The below assessment and analysis was conducted by ‘Security Consultant (SC) Danny A. Defenbaugh and Certified Fraud Examiner (CFE) Ed Krasiewski (Consultants) of Defenbaygh e Asrodates, Inc ‘This evaluation was conducted through adherence of Generally Accepted Government Auditing Standards (GAGAS) which are nationally (and Texas) accepted standards and practices and describe certain observations, findings and conclusion. Generally Accepted Government Auditing Standards (GAGAS), are intended for use by government auditors to ensure that they maintain competence, integrity, objectivity, and ‘independence tn platiiing, con cnducting ad reporting thelr Work, and a to be followed by auditors and audit organizations when required by law, regulation, contract, agreement, or poligy. Engagements that are performed in accordance with GAGAS should have confidence that the work is objective and credible." SUMMARY OF FINDINGS BPA’s report was replete with errors and omissions and not in conformance with Generally Accepted Government Auditing Standards. Consultants identified inaccurate and misleading percentage calculations; inaccurate statistical extrapolated calculations; and transposition errors. BPA failed to identify so-called “industry standards;” failed to identify methodology in determining extrapolations; and compromised Independent Consuitant status with biased reporting. * Government Auditing Swndards: 2008 Revision released on June 01,2003 (GA0-03-673G) by the ‘Comptroller General of the United States “Lense (A114 by the Teas Private Security Board 1 S805 N- Lamar Iv, Austin, esas 76752 12-24-7710DETAILS COL chose Benefit Plan Audit Services (BPA) (“Auditor”) as its auditor. The Auditor advertises itself as follows: “Targeted Claims Evaluations — This is where we can "show you the money" your administrator is throwing away. We select a targeted sample of paid claims, focusing on high dollar claims and claims for services which are most likely to include overpayments. Since our sample is skewed to save you money, the results will not give: you a statistical rate to measure your administrator's overall performance. But, you will get the "biggest bang for the buck" if you want to find out where your "lost dollars are buried." and, “We evaluate your medical, dental, vision, pharmacy, and/or flexible spending account claims by tailoring our standard random claims evaluation to fit your concerns.” ‘This Auditor advertised that he will “skew” his samples in order to give his clients “the biggest bang for the buck”. This type advertising is biased on its face and could be construed as “for hire to target” in this case, AG from the outset. BPA founder and Chief Executive Officer is Robert Frcek swore to an affidavit on March 2, 2007 wherein he expresses opinions and draws conclusions before the audit of AG is complete and_while_the_audit.s_still. ongoing * _In-his.affidavit, Mr Ercek identified ___ himself as a member of the American Institute of Certified Public Accounts with over twenty-six years in auditing. * Auditors need to observe the principles of serving the public interest and maintaining the. highest degree of integrity, objectivity, and independence.* Concerning independence, in all matters relating to the audit work, the audit organization and the individual auditor, whether government or public, should be free both in fact and appearance from personal, external, and organizational impairments to independence. Auditors and audit organizations have a responsibility to maintain independence so that opinions, conclusions, judgments, and recommendations will be impartial and will be viewed ax impartial by knowledgeable third parties. Auditors should avoid situations which could lead reasonable third parties with knowledge of the relevant facts and circumstances to conclude that the auditors are not able to maintain independence and, thus, are not capable of exercising ‘objective and impartial judgment con all issues associated with conducting and reporting on the work,” 2 BPA Website 04/02/07 2 BPA Website 04/02/07 ‘ Freek sworn affidavit 03/02/07 £ Frock sworn affidavit 08/02/07 * Tbid, Government Auditing Standards, Chapter 1, 1.19 - Auditor's Responsibility "Ibid, Government Auditing Standards, Chapter 3, 3.03 and 3.04 - Independence “Liensed (A11487) by the Texas Private Seurity Board, 2 ‘5605 N, Lamar BWd, Ausla, Texts 78752, SI-24-7H10Accuracy requires that the evidence presented be true and that findings be correctly portrayed. The need for accuracy is based on the need to assure report users that what is reported is credible and reliable. One inaccuracy in a report can cast doubt on the reliability of an entire report and can divert attention from the substance of the report. Also, use of inaccurate evidence can damage the credibility of the issuing audit organization and reduce the effectiveness of its reports.'° BPA auditors skewed the favorable percentage of 97.6% payment accuracy, which was in AAG’s favor, down to 94.20% by calculating seven (7) claims amount “strata” accuracy percentages. By taking the averages of each strata and weighing the average, BPA distorted the calculated average down to a percentage favorable to the COL, thereby being able to declare the performance of AAG as Unsatisfactory. (One level of attestation is that auditors perform sufficient testing to express an opinion on whether the subject matier is based on (or in conformity with) the criteria in all material respects or the assertion is presented (or farly stated), in all material respect, based on the criteria BPA identifies that Amendment No. 4 effective 7/01/2005 was a directive by the COL for “AAG to reduce the allowable for non-par providers to Medicare Allowable, based on Medicare’s Resource Based Relative Value Scale (RBRVS). However, BPA does not give this consideration during extrapolation calculations, rather, BPA considers the calculates percentages overall as though Amendment No, 4 was in effect during the entire —— -audit. petiod of January 1,.2004. through October 31,-2006....This procedure. skews-the percentages of the statistical detail for extrapolation calculations of payments more than $20,000.00, again to the detriment of AAG. Accuracy requires that the evidence presented be true and that findings be correctly Portrayed. The need for accuracy is based on the need to assure report users that what is reported is credible and reliable. One inaccuracy in a report can cast doubt on the reliability of an entire report and can divert attention from the substance of the report. Also, use of inaccurate evidence can damage the credibility of the issuing audit organization and reduce the effectiveness of its reports.’? Consultants find it both remarkable and extraordinary that most all calculation errors or variances identified were to the detriment of AAG. In at least three (3) areas of the report (Pages 6 and 16), BPA makes reference to the ‘word “numerous” (adjustments or instances), In conducting an audit of this magnitude and importance, Consultants find that the auditor, BPA, failed to provide specificity in their count of the actual number of adjustments or instances. Consultants find that in standard audit practices, the word “numerous” is somewhat misleading to a reader who "bid, Goverment Auditing Standards, Chapter 8 8.43 - Accurate "Tid, Government Aueiting Standards, Chapter 6, 602 ~ Examination " Tid, Government Auditing Standards, Chapter 8, 8.43 ~ Accurate “Licensed (A11487 by the Texas Private Security Boar, 4 5805 N, Lamar Bid, Austin, Texas 78752, S12-24-7710‘As annotated on Page 1 of the report, BPA identifies an “SUnderpaid” amount of $7,764.71 yet on Page 5, 25, and 33, BPA stated the amount as $7,674.71. Although this appears to be a transposition error, it is an inaccuracy which, dependent upon the figure will effect any other calculation used. This error appears to have bearing on the percentage of 94.20%, This being the case, this error also has bearing on the “extrapolated population file” numbers as well. ‘As annotated on Page 17, Analysis of Reported PPO Savings, BPAS auditors stated % of Charges were 52.3% for two different amounts namely, $51,688,705.16 and $51,367,214.56. One of these percentages is incorrect; but they cannot be the same percent. Variance is shown as 0.6%, Accuracy requires that the evidence presented be true and that findings be correctly portrayed. The need for accuracy is based on the need to assure report users that what is reported is credible and reliable, One inaccuracy in a report can cast doubt on the reliability of an entire report and can divert attention from the substance of the report. Also, use of inaccurate evidence can damage the credibility of the issuing audit organization and reduce the effectiveness of its reports.* On Page 5 Paragraph (Par) 3, BPA audit report states “For the 195 payments reviewed, ‘we (BPA) noted 18 valued errors (or 96.89% paid correctly), which is unsatisfactory.” Consultants.note.the correct. percentage. is.90.80% not_96.89%...On_the_basis.of. these. percentages being questionable and inaccurate, we would question the validity of the extrapolated amounts both underpaid and overpaid within the population file, as identified on Page 5 Par 3 and 4, Accuracy requires that the evidence presented be true and that findings be correctly ‘Portrayed. The need for accuracy is based on the need to assure report users that what is reported is credible and reliable. One inaccuracy in a report can cast doubt on the reliability of an entire report and can divert attention from the substance of the report. Also, use of inaccurate evidence can damage the credibility of the issuing audit organization arid reduce the effectiveness of its reports.” ‘On Page 33, Section X entitled Claims Assessment Summary Statistics, BPA reported the Combined Payment Accuracy Percentage as 94.20% which Consultants have identified as flawed because of transposition error. The Combined $ Overpaid/Underpaid Claims of $81,049.51 represents 2.4% of the Total $ Amount of Checks Evaluated of $3,375,280.74. ‘Therefore, as previously communicated, this error becomes an inaccuracy which multiplies exponentially whenever utilized. Particularly when identifying and illustrating a conclusion, once faulty numbers are employed, the entire premise becomes defective. bid, Government Auditing Standards, Chapter 8, 8.43 - Accurate ° Tid, Government Auditing Standards, Chapter 8 8.43 - Accurate ‘Licensed (A11487) by the Texas Private Security Board 3 ‘80S N. Lamar Blvd, Austin, Texas 78752, S12-424-710‘might have the impression there were “substantial” adjustments, Audit reports should be specific, not vague. The report is improved when it provides evidence of what the auditors found regarding the actual situation. Reporting the scope or extent of the condition allows the report user to gain an accurate perspective.” ‘The report generated by BPA provides the appearance of reporting in concert with what results the COL’ wants in the report, for example, in setting the so-called “industry standard” as referenced on Page 6 Par 2. By implementing the so-called “weighted average statistical rates based upon stratified extrapolated random sampling” to measure AAG’s claim processing performance, various percentages broken down into seven (7) categories lowered, or pulled down, AAG?s performance percent from 97.6% to 94.20% to appear inferior. BPA never identified if other Third Party Administrators (TPAS) and/or healthcare industry companies were ever evaluated utilizing this particular sampling method. As importantly, BPA comments that the standard utilized on Page 5 Par 2, was “At COL’s direction, we (BPA) determined the sample size for claim payments greater then $20, 000.00 using a 98% Confidence Rate, a 2% Occurrence Rate, and a +/- 2% Precision. We (BPA) calculated a separate set of statistics for these payments greater than $20,000.00.” BPA does not state whether this obvious change in audit practice is within industry standards or even proper. Further, BPA revised its report “based on the “COL's request that we (BPA) expand our discussion to include industry practice for the issue of counting telephone calls for prescription refills as visits for _-.- —_-._.—--purposes_of.meeting the. Conditional Guarantee. in the.contract.""*_ Any appearance_of_ faimess and impartiality on the part of BPA has vanished. BPA appears to give the impression that industry standards will be published, and followed, when convenient to BPA, or when necessary to establishing the results desired by BPA’s client, in this case the COL. An audit report is improved when it provides information so that the report user will be able to determine what is the required or desired state or what is expected from the ‘program or operation. The criteria are easier to understand when stated fairly, explicitly, ‘and completely, and the source of the criteria is identified in the audit report."* Auditors must be vigilant regarding external impairment factors which may restrict the work or interfere with auditors' ability to form independent and objective opinions and conclusions such as external interference or influence that could improperly or imprudently limit or modify the scope of an audit or threaten to do so.'® BPA, on Page 6 Par 6, states “The fact that the data file understated the payment amounts impact the validity of our extrapolation.” Consultants question the judgment of BPA in ® Ibid, Goverment Auditing Standards, Chapter 6, 6.340 - Condition “BPA Founder Rober J. Freek’s 3/30/07 email to COL Attomey Anita Burgess and others to include COL City Manager Lee Ann Dumbald 'STbid, Government Auditing Standards, Chapter 5 5.158 - Criteria. “ Tbid, Government Auditing Standards, Chapter 3, 3.19 & 3.19a ~ External Impairments ‘Leensed(A1IA87) by the Texas Private Security Board, 5 15805 N. Lamar BN, Austin, Texas 78752, 812-424-7H0the conduct of this audit when BPA alleges that the information being used is invalid within itself, The entire results of the audit are dependent on identifying facts. Consultants find this type of behavior on the part of BPA as egregious and a conspicuous error in reasoning. Without accurate information a standard objective basis cannot be established. The attestation engagement report is improved when it provides persuasive evidence on the factor or factors responsible for the difference between condition and criteria. In reporting the cause, auditors may consider whether the evidence provides a reasonable and convincing argument for why the stated cause is the key factor or factors contributing to the difference as opposed to other possible causes, such as poorly designed criteria or factors uncontrollable by program management. The auditors also may consider whether the identified cause could serve as a basis for the recommendations." ‘The attestation engagement report is improved when it provides a clear, logical link to establish the impact of the difference between what the auditors found (condition) and what should be (criteria). Effect is easier to understand when it is stated clearly, concisely, and, f possible, in quantifiable terms, The significance of the reported effect ean be demonstrated through credible evidence."® Objectivity requires that the presentation of the entire report be balanced in content and tone. A report's credibility is significantly enhanced when it presents evidence in an unbiased manner.so that report users.can be persuaded by the facts.-The.report should be. fair and not misleading and should place the audit results in perspective. This means resenting the audit results impartially and fairly. In describing shortcomings in performance, auditors should put findings in context. For example, the audited entity may have faced unusual difficulties or circumstances,” BPA made an issue of their being prevented from doing a “walk-through of all departments and interviewing personnel” while conducting the audit, From a security standpoint and given BPA’s client, COL has identified itself as being an adversary in a pending lawsuit, Consultants find AAG’s executives conducted themselves in an appropriate, and we would add, commendable manner by limiting BPA’s access. CONCLUSION Through the use of many inaccurate and inconsistent calculations, transposition of amounts, biased methodology to evaluate performance, Consultants Defenbaugh and Krasiewski find that BPA’s audit report is invalid and is biased, impartial and skewed to favor the COL to the detriment of AAG. END REPORT DAD/EK04022007 " Ibid, Government Auditing Standards, Chapter §, 634 c- Cause "Ibid, Government Auditing Standards, Chapter 6, 6.34 d ~ Effect "Tid, Government Auditing Standards, Chapter 8, 846 ~ Objective ‘Licensed (A11487) by the Texas Private Seeurity Board, 6 5805 N- Lamar Bid, Austin, Texas 79752, 512-424-7710EXHIBIT A2rene, Defenbaugh & Associates, Inc Sage = Gateway Tower 8111 18) Freeway Sue 1100 | Daten Texas 75251 ” 972/726-1911 (O) 972/ 233-7358 (F) -— ‘rane Danbeferbghcom suo DANNY A. DEFENBAUGH President -D&A Danny wes employed by the Fedral Bureau of Investigation (FBI) for skmost 33 years retiring i ‘April 2002 a5 the Special Agent in Charge of the Dallas FBI Regional Office. His primary investigative responsblites centered on violent crimes, Le, Kidnapping, extortion, hijacking, and ‘terrorist/bombing matters. He served as a Special Agent in Chicago, IL, and as a Supervisor in Miami, FL; in the Explosives Unit ofthe Laborstory Division at FBI Headquarter, in the Inspection Division; end in the Office of Profesional Responsibility. Danny later served asthe ‘Assistant Special Agent in Charge of the FBI Feld Oife in Mobile, AL. Danny was a FBI-certified bomb technician for most of his FBI career and traveled to over 25 foreign counties in furtherance of the FBI's interest in thwarting international terrorism. He personally supervised over 150 bombing investigations, to include all the Puerto Rican terorst group, FALN bombings in Chicago and the bombing investigations of the thee terrorist attacks against American installations in Beirut, Lebanon, Danny bas testified as either an expert witness —- -——-—-or investigator over 100 times in federal state and local courts, to include the U.S. Congress-and----———— Military Tribunals. While asigned to the FBI Miami Field Office, he supervised the Major Case Squad encompassing all major violent crimes, international and domestic terrorism and all bombing matters. In addition, he was the Supervisor for the South Floride Violent CCrimes/Fugitive Task Force. In 1995, Danny was promoted to Inspector and named Inspector in Charge of the Oklahoma City bombing iavestigaion. From 1998 until his retirement, Denny was the Special Agent in Charge ofthe Dalles Field Office of the FBI. FBI Dallas was designated one cof the ten core offices leading the September I, 2001 investigation of the Pentagon/Twin Towers terrorist attacks. Danny has conducted a wide variety of inspections and audits from performance audits to fraud, ‘waste and abuse audits of federal and local law enforcement operations and management to | sexual abuse of children audits to personnel audits of priests for the Catholic Conference and individual diocese. Danny is the only FBI Agent to receive two Attomey General Awards, In 1983, he received the Attomey General's Award for Excellence in Law Enforcement, In 1998, he received the ‘Attomey General's Award for Exceptional Service for his management of the Oklahoma City bombing investigation. Danny received the Presidential Rank Award of Meritorious Executive in 1999, He has eamed a Bachelor of Science degree in Administration of Justice from American University in Washington, DC, and a Master's degree in Forensic Science from George ‘Weshingion University, Washington, DC. Danny is also a graduate of the Harvard University Program for Senior Managers in Government.Danny owns Defenbaugh & Associates, Inc. a security consultant and investigations company specializing in Due Diligence, Security Threat Vulnerability Assessments, and investigations. He is a Certified Infrastructure Preparedness Specialist (CIPS) and is Sandia Laboratory Risk Assessment Methodology-Water certified. He is the Chairman of the Department of Homeland | Security Region VI Infrastructure Advisory Panel for Private Security. He is a consultant to the Joint Commission on Accreditation of Healthcare Organizations (JCAHO). He is also a member ‘of Team Adam which initiative was established by the National Center for Missing & Exploited Children (NCMEC). Danny has appeared on all major US, and many foreigh, news networks as a topical expert on terrorism, bombings, and crime and security issuesEXHIBIT A3< oe Defenbangh & Associates, Ine. Oe Gateway Tower 8111 LBJ Freeway Suite 1100 o Dallas, Texas 75251 4 972/726-1911 (0) 972/ 233-7358 (F) = ‘www.DannyDefenbaugh.com Se Edward R. Krasiewski Certified Fraud Examiner Ed was formerly employed by the Federal Bureau of Investigation (FBI) as a Special Agent in Philadelphia and Dallas, During his service with the FBI, Ed investigated major White Collar Crime assignments from Governmental Fraud, Bank Fraud, to Bribery of Public Officials. Ed supervised a Task Force of agents assigned to investigate the misuse of US Department of Education funds by local colleges and proprietary schools resulting in bribery convictions of a number of Federal officials. Prior to joining the FBI in 1972, Ed was executive officer and Controller of a test equipment manufacturer and subsidiary of Mobil Oil and also a Financial Analyst for ‘Westinghouse Broadcasting Corp, both located in the New York City area. After his temure at the FBI, Ed formed his own private investigations company, Colt Investigations, Ino. later known as Krasiewski & Associates. During those years, significant cases were investigated on behalf of corporate clients, major law firms, Federal regulatory agencies —-——~"~ and insurance companies. 1 Some highlighted investigations conducted by Ed over the years are: In Panama, Ed | headed a team of accountants and investigators who determined a $200 million cost | overrun in building a Panamanian pipeline next to Panama Canal was fraudulently conceived and funds diverted to the general contractor, During the Savings & Loan and Bank failures in the early 1990s, Ed maintained two offices, one in Dallas and one in | Houston, with six full time investigators contracted by FDIC and Resolution Trust Corp (RTC) to conduct financial searches for concealed assets on defaulting borrowers; In addition, RTC contracted with Ed's firm to review loan portfolios of failed S&Ls in the Denver, Colorado area to ascertain potential E & O insurance claims against officers and directors; On behalf of a major life insurance company, Ed investigated the criminal fraud activity on the part of independent insurance agents signing up life insurance policies on individuals who had the AIDS virus or were HIV positive resulting in a savings of $3 million in potential claims; a trading database used in the scheme was Enron Online, Ed graduated from St. Peters College, Jersey City, NJ with a Bachelor of Science degree in Accounting. Further graduate studies were taken in accounting and taxation at Fairleigh Dickerson University, Teaneck, NJ. Ed is also a Certified Fraud Examiner as well as Texas licensed insufance agent. Ed served two years active duty in the U. $. Army. Ed has been an Associate of Defenbaugh & Associates since June 1, 2006.