Kendall McDaniel worked for WorldCom at its Long Island office when its accounting problems surfaced. After she was laid off she resumed taking paralegal courses, where she learned that employees who participate in corporate misconduct can go to jail.
So when she saw what she thought was improper billing at Hanger Orthopedic Group Inc. she reported her concerns to supervisors. And when she decided their responses were inadequate, she called the company's compliance hotline.
That phone call and subsequent actions by McDaniel led to shareholder lawsuits and an inquiry by the Securities and Exchange Commission and federal prosecutors. Hanger's stock price fell 25 percent; it closed on Friday at $11.33 a share, down 28 cents.
Bethesda-based Hanger is the nation's largest maker of prosthetics and orthotics with more than 600 patient care centers, about 3,000 employees and annual revenue of more than $500 million.
Hanger's attorney, Arthur H. Bill of Foley & Lardner LLP, declined to comment on McDaniel's allegations. The company has denied the broader allegations in the shareholders' lawsuits.
In a class-action lawsuit filed Tuesday in U.S. District Court in Alexandria, investors alleged that Hanger executives and directors caused shares in the company to trade at artificially inflated levels by issuing false and misleading financial statements.
"We believe the class action allegations of fraudulent conduct by the Company's executive officers and directors are without merit and irresponsible," Hanger chief executive Ivan R. Sabel said in a statement issued Friday.
McDaniel said her brush with corporate fraud at WorldCom, some of whose executives faced criminal charges, "showed me what happens when someone comes out too late. . . . I lost my job due to fraud."
"I want to be a lawyer," she said. "My name can't be attached to fraud."
McDaniel, 26, a Long Island native, is working toward an associate degree in paralegal studies while working and raising a 7-year-old son with her boyfriend.
McDaniel started working for Hanger a year ago as a temporary employee. In December, she was hired as an office administrator in Hanger's West Hempstead patient-care center. Her main responsibility was to process patient orders for insurance providers. "It was my job to be more vigilant, to bring any problems to the attention of the practitioners," she said.
The 10 practitioners in her office worked at hospital clinics around Long Island, fitting patients for prosthetics and supportive equipment such as braces. Last year, she said, her office billed for $1.6 million and collected $1.2 million. McDaniel said practitioners and managers who met ever-rising revenue targets could receive substantial bonuses.
McDaniel said some practitioners met their targets by charging insurers for items doctors did not prescribe and patients never received. McDaniel said that once, after she refused to process an invoice because it did not have the proper paperwork, one of the practitioners forged a doctor's name on a "letter of medical necessity" and handed it to her. McDaniel said the same practitioner asked her once to take home forms needing signatures and have her son sign them. "My comment was, 'Why don't you take it home and have your wife sign it?' " she said.
She said one of her jobs was to check patient orders flagged by Hanger's auditing office, which looks for orders that are not filled out correctly, lack supporting paperwork or seem questionable in some other way. She said she called some patients to find out whether they had received the listed equipment, and they said they had not.
McDaniel said that starting in February, she brought her complaints to supervisors. She said her bosses assured her that they would address her concerns, but nothing happened. Early this month, McDaniel said, she blew up at her supervisor because she thought she was not pursuing her complaints aggressively enough.
McDaniel's supervisor declined to comment and referred calls to corporate headquarters, which also declined to comment.
As McDaniel was leaving the office that day, she noticed that posted on the wall was a number for Hanger's compliance hotline. Hanger set up the hotline three years ago for employees to report violations of health care regulations. As a result of the Sarbanes-Oxley Act, the company expanded the hotline in December to take calls about accounting practices, according to Bill, the Hanger lawyer.
McDaniel said she had learned the difference between noncompliance and fraud in her classes, and she decided she had witnessed fraud. So she picked up the phone and started talking.
The next day, she did not go to work. She said company officials called and told her they had investigated her allegations, that one of the practitioners she had identified would be demoted and that she would report to a different supervisor. McDaniel said she thought that would not stop the problems.
So she sought legal advice. First she turned to the American Civil Liberties Union, then Melville, N.Y., personal-injury lawyer Kenneth M. Mollins. He advised her to go public. On June 14, WNBC-TV in New York reported McDaniel's allegations. The next day, Hanger's share price fell more than 10 percent and the New York Stock Exchange suspended trading for part of June 15 at the company's request.
Hanger later announced that it had hired a law firm to investigate the allegations. On June 18, the U.S. attorney for the Eastern District of New York subpoenaed Hanger "seeking information concerning 14 of the Company's patient care centers located in downstate New York," according to a Hanger press release. Also that day, the SEC requested information from the company. At least four class-action lawsuits have been filed against Hanger on behalf of investors.
McDaniel is on paid administrative leave pending the outcome of the company's investigation. She said she's glad she spoke out. "People are listening now. Before I felt like I was talking until the air ran out of my body."