Sreedhar Potarazu is apparently very intelligent. He’s an ophthalmic surgeon in Potomoc, Maryland. He’s also an entrepreneur and an author. He’s also likely to be spending a few years at ClubFed.
Dr. Potarazu formed VitalSpring Technologies, Inc., in 2000. Based in McLean, Virginia, the company provided software that purportedly helped to lower costs and improved service quality for health care. VitalSpring changed its name to Enziime LLC late in 2015.
Companies that grow need money, and that was the case for VitalSpring/Enziime. Dr. Portarazu started to skip paying employment taxes to the IRS. As we’ve said before and we’ll say again, if you want to be investigated by the IRS stop making payroll tax deposits; as best as we can tell, the IRS investigates 100% of such failures. Dr. Porarazu started to not fully pay his employment taxes in 2007. From the DOJ Press Release:
In all but one quarter between the first quarter of 2007 and the last quarter of 2011, as well as the second and third quarters of 2015, Potarazu failed to file VitalSpring’s Employer’s Quarterly Federal Tax Return (Forms 941) with the IRS. Potarazu also failed to pay over any of the employment tax withheld from VitalSpring’s employees’ wages in all but one quarter between the second quarter of 2007 and the third quarter of 2011, as well as the third and fourth quarters of 2015.
Not filing employment tax forms (Form 941) won’t stop the IRS from investigating. Once an employee files his income tax return and shows the withholding of federal income tax and the IRS can’t find that withholding, an investigation is guaranteed. The IRS interviewed Dr. Potarazu in 2011 and let him know of the liability (which he apparently already knew about). The employment tax liability totaled $7.5 million.
So the company needed money. There are several good strategies in such a situation: Making a payment plan with the IRS and slowing down growth so the need for money lessens are two that immediately come to mind. Dr. Potarazu raised $32 million from 2009 through 2016. Since the company wasn’t turning a profit, investors needed reassurances about the business. It’s how he raised the money that caused the problems:
Potarazu induced investments from shareholders by making false representations, concealing material facts, and telling deceptive half-truths about VitalSpring’s financial condition, tax compliance, and alleged imminent sale. Potarazu also caused someone to pose as a representative of a prospective buyer on shareholder conference calls to add legitimacy to his claims regarding VitalSpring’s imminent sale.
VitalSpring had not generated a profit since 2009. Nonetheless, Potarazu falsely represented to shareholders that VitalSpring’s financial position and profitability was improving from 2009 to 2015, and that VitalSpring had millions of dollars in cash reserves. To support his scheme, Potarazu presented fake bank statements to some shareholders that showed inflated balances.
Potarazu also concealed from shareholders that VitalSpring owed substantial employment tax to the IRS. Potarazu provided or caused to be provided false corporate income tax returns to some shareholders that overstated VitalSpring’s income and omitted the accruing employment tax liability.
Committing fraud to investors is not a good strategy. And doubling down on it will make things worse:
In November 2014, Potarazu created a Special Review Committee (SRC) in response to a lawsuit filed in Delaware by shareholders that claimed Potarazu misled the victim investors about VitalSpring’s finances, the status of the impending sale, and Potarazu’s compensation. Potarazu provided the SRC with false financial records, fake tax returns, and fake bank statements to induce the SRC to believe that VitalSpring was financially healthy and to cause the SRC to make materially false representations to the Delaware court and victim investors. He also falsely represented that the alleged imminent sale would yield substantial returns to the shareholders, and used this to induce additional investments. Members of the SRC traveled interstate to the Eastern District of Virginia to attend meetings in which Potarazu presented false information for their review.
There was no sale pending. Dr. Potarazu even made up emails from a purported bank employee and provided a buyer with a link to a phony website. And he used some of the money from investors for his personal use.
Dr. Potarazu pleaded guilty to inducing interstate travel to commit a fraud and failing to account for and pay over employment taxes. He’ll be sentenced next year and will likely have plenty of time at ClubFed to write a second book.