a FILE

Southern District of New York

By: MATTHEW L. SCHWARTZ
Assistant United States Attorney
86 Chambers Street
New York, New York 10007
Telephone: (212) 637-1945
Facsimile: (212) 637-2750
E-mail: matthew.schwartz@usdoj.gov

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK
-X

UNITED STATES OF AMERICA,

Plaintiff,

v. ECF CASE

DANIEL B. KARRON, 08 Civ.

Defendant.
-x

Plaintiff the United States of America, by its attorney Michael J. Garcia,

United States Attorney for the Southern District of New York, herein alleges for its

complaint as follows:

INTRODUCTION

1. This is a civil action brought by plaintiff, the United States of America,

on behalf of its agency the United States Department of Commerce ("Commerce"),

against the defendant, Daniel B. Karron ("Karron"), under the provisions of the

False Claims Act, 31 U.S.C. § 3729, et seq. (the "False Claims Act"), to recover

damages sustained by, and penalties owed to, the United States as a result of

Karron's having knowingly presented or caused to be presented to the United States

false or fraudulent claims for payment in connection with cooperative agreements

under Commerce's Advanced Technology Program ("ATP") to Computer Aided

Surgery, Inc. ("CASI").

2. The United States brings additional claims against Karron under the

common law for conversion, unjust enrichment, fraud, and payment under mistake

of fact.

PARTIES

3. Plaintiff is the United States of America, on behalf of the United

States Department of Commerce.

4. At the time of the events alleged in this Complaint, Karron was the

President and Chief Technical Officer of CASI, as well as a 90% shareholder.

Karron resides at 300 East 33rd Street, Suite 4N, New York, New York 10016.

5. CASI is a limited liability corporation organized under the laws of the

State of New York with its principal place of business at 300 East 33rd Street, Suite

4N, New York, New York 10016.

JURISDICTION AND VENUE

6. This Court has jurisdiction over the claims brought under the False

Claims Act pursuant to 31 U.S.C. § 3730(a) and 28 U.S.C. §§ 1331 and 1345, over

the remaining claims pursuant to 28 U.S.C. § 1345, and over all claims pursuant to

the Court's general equitable jurisdiction.

7. Venue lies in this District pursuant to 31 U.S.C. § 3732(a) and 28

U.S.C. §§ 1391(b) and 1391(c) because Karron's last known address is 300 East 33rd
Street, Suite 4N, New York, New York 10016, which is located in the Southern

District of New York.

FACTUAL ALLEGATIONS

8. ATP was designed by Commerce to support high-risk scientific

research, and is administered by the National Institute of Standards and

Technology.

9. On or about July 6, 2001, and August 6, 2001, Karron submitted an

ATP proposal to Commerce on behalf of CASI entitled "Anatomic Computer

Modeling for Precise and Accurate Therapies." Karron signed the proposal as

CASI's "Authorized Company Representative."

10. According to the proposal, CASI was going to "develop an application

to upload calibrated, encrypted raw images from medical imaging instrumentalities

(MRI, CT, Ultrasound, etc.), over the Internet. The system will generate precise

and accurate, encrypted 3D tiled models with variable Level of Detail ... for

applications including: Radiation Therapy (RT), robotic minimally invasive

surgery, patient communication, education and other customer applications via the

Internet. . . . The novel idea that enables this technological leap forward is Digital

Morse Theory (DMT)." (Emphasis omitted).

11. The proposal included an estimated three-year budget that projected

CASI's costs at $2,100,500, with $2,000,000 of that expected to come from

Commerce, via ATP.

12. As part of the process of applying for an ATP cooperative agreement,

Karron submitted a Severability Statement, which set out performance benchmarks

over the term of the agreement. By the end of Year 1, CASI was to have installed a

server capable of doing DMT decomposition of two dimensional images supplied via

the Internet. At the end of Year 2, CASI was supposed to apply DMT to stacks of

two dimensional images. And by the end of Year 3, CASI was to have DMT

completely "up and running" for testing by third parties.

13. On or about September 29, 2001, Commerce awarded CASI an ATP

cooperative agreement of $2,100,500, with $2,000,000 of that coming from

Commerce, payable over three years, beginning on October 1, 2001, and concluding

on September 30, 2004 (the "Grant"). The Grant included an annual salary to

Karron of $175,000, and specified that he was to spend 100% of his time on the

Grant project.

14. Karron signed the Grant documents on or about October 5, 2001. By

doing so, Karron certified that he "agree[d] to comply with [certain] Award

provisions," including (i) Commerce's Financial Assistance Standard Terms and

Conditions; (ii) 15 C.F.R. Part 14, Uniform Administrative Requirements for Grants

and Agreements with Institutions of Higher Education, Hospitals, Other Non-

Profit, and Commercial Organizations; (iii) 48 C.F.R. Part 31, Contract Cost

Principles and Procedures; (iv) General Terms and Conditions of the ATP; (v)

Program Specific Audit Guidelines for ATP Cooperative Agreements with Single

Companies; and (vi) Special Award Condition #6.

15. In particular, the Grant was conditioned on using the Grant funds in
accordance with Commerce-approved budgets, including using those funds only on

direct costs associated with the Grant project. See also 15 U.S.C. § 278n(b)(5)

("Federal funds awarded under [ATP] may be used only for direct costs and not for

indirect costs, profits, or management fees of a contractor."); 15 C.F.R. §§ 295.2(d) &

(h) (defining "direct costs" and "indirect costs" for purposes of ATP). Any variations

from the Commerce-approved budget had to be approved in advance. CASI was also

prohibited from applying Grant funds towards expenses incurred prior to October 1,

2001.

16. Karron signed Amendments to the Grant on or about November 7,

2001; January 17, 2002; July 24, 2002; July 29, 2002; and December 21, 2002. The

Amendments reiterated the requirements of the previous paragraph.

17. In addition, Karron signed numerous quarterly Financial Status

Reports. Each Status Report indicated CASI's quarterly outlay related to the

Grant, and contained an explicit certification that the "report is correct and

complete and that all outlays and unliquidated obligations are for the purposes set

forth in the award documents."

18. In addition to signing numerous certifications stating that he would

comply with all applicable regulations, Karron was personally and repeatedly

informed about ATP's requirements.

19. At a "kickoff meeting" in November 2001, for example, Bettijoyce Lide,

the ATP program manager responsible for the Grant, conducted a slide-show

presentation for Karron and the rest of the CASI team that set forth the terms and
conditions of the Grant, including, most notably, the requirement of "prior

approval" for all expenditures outside of the ATP-approved budget. Karron

specifically asked whether ATP funds could be used for rent based on CASI's alleged

"unique circumstances," but Lide reiterated the need for prior approval. Karron

later asserted that "no approval would be needed if he would just come and

schmooze and take [Lide and the ATP staff] to lunch."

20. Before that meeting in November 2001, Karron had asked Hope

Snowden, an ATP grant specialist responsible for reviewing CASI's budget

submissions, whether ATP funds could be used to pay for rent and utilities. Karron

and his business manager Lee Gurfein called her repeatedly, "like a day apart, and

they would consistently get the same exact answer": "the answer was no, time and

time again." Snowden repeated that answer at the November 2001 kickoff meeting

as well, and also explained the rules against using ATP funds to pay for indirect

costs. Even after the November 2001 meeting, Karron continued to call, asking if

he could use ATP funds for rent and utilities.

21. Despite these explicit and repeated warnings, both written and oral,

Karron wilfully violated the terms of the Grant, misapplying nearly half a million

dollars towards unauthorized expenses and then lying about it.

22. On or about June 27, 2003, Commerce suspended the Grant for non-

compliance with its terms. Commerce cited the failure to comply with Special

Award Condition #7, which prohibited expenditure of Grant money on indirect

costs, and imposed a cost sharing ratio for direct costs that required CASI to
contribute $110,500 over the life of the Grant.

23. Among other things, Commerce determined that CASI had never made

its contribution of matching funds, as required by the Grant.

24. Commerce also determined that CASI had drawn down several

hundred thousand dollars of advances on ATP funds that were spent on items that

had nothing to do with the Grant project at all, concluding that CASI's "only source

of revenue during the period of the award has been the [ATP] funds."

25. Among other things, Karron used ATP Grant funds to pay for: rent and

utilities for Karron's apartment; improvements to his apartment, including a track

lighting system and a cleaning service; Karron's medical and related bills, including

for medications, psychotherapy, dental work, and electrolysis; restaurant meals;

household items such as blenders, vacuum cleaners, power drills, and a GPS

navigation device; and childcare for a CASI employee.

26. In addition, Karron intermingled the ATP Grant funds with other

money, disbursing the Grant money into three accounts: an ATP-specific account, a

general CASI account, and Karron's own personal bank account.

27. Karron was the only person to have signatory authority at any of these

accounts, and each expenditure of the ATP funds is directly traceable to him.

28. Commerce also concluded that Karron had falsified the quarterly

Financial Status Reports to cover up these violations, falsely overstating the

project-related expenditures to hide the impermissible draw-downs, and falsely

claiming that CASI had made its contribution of matching funds.

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 29. There is no doubt that these violations were intentional. In addition to

the repeated warnings from Commerce personnel about the Grant's requirements,

CASI's own employees repeatedly warned Karron to stop misapplying the Grant

funds.

30. For example, Frank Spring, a bookkeeper Karron hired in July 2002 to

manager CASI's books, had a series of conversations with Karron after he noticed

that certain non-Grant-related expenses — "rent, utilities, certain amounts of

capital expenditures . . . , and medical expenses" — were classified as ATP expenses

in CASI's books and records. Moreover, "between one dozen and two dozen times,"

Karron changed items that Spring had treated as non-ATP expenses in CASI's

books to allowable expenses.

31. Likewise, Karron's business manager Gurfein warned him that he was

violating the terms of the Grant. Karron admitted to Gurfein that he had

transferred $75,000 out of the initial $150,000 of the Grant to his own account, to

pay off "personal obligations to his family" and credit card debts. Gurfein

responded that Karron "couldn't do that," and reminded him that he needed to

"apply for a written approval" to deviate from the ATP-approved budget.

32. A subsequent business manager, Robert Benedict, went so far as to ask

CASI's board of directors to have CASI's checkbooks, along with the company's

books and records, turned over to the bookkeepers for safeguarding, because of his

fears about Karron's misapplication of the Grant money. Karron then began using

PayPal, an electronic bills-paying service, to circumvent this restriction, using

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PayPal to write checks and then paying PayPal using the company's American

Express card. Benedict told Karron that "this was very serious" and that "he could

go to jail for this," noting that "he could have between 300[,000] and 500,000 of

disallowed expenditures."

33. Karron's wilfullness is also evidenced by his lies to cover up the

misapplication. For example, Karron devised a scheme to shoehorn rent and

utilities into the Grant, whereby he would pretend to live in Connecticut, rather

than the truth, which is that he was operating CASI out of his own apartment. In

an e-mail to a friend on December 18, 2002, for example, Karron wrote that "I will

make a lease with Windy [in Connecticut] and make like I only keep a folding bed

on 33rd Street. If ATP buys into this idea, then I can charge my rent on the

apartment to the grant and pay my mortgage."

34. Commerce paid out $1,345,500.00 under the Grant before it was

suspended in June 2003.

35. Commerce would not have awarded CASI the $2,100,500 Grant and

paid out $1,345,500.00 under the Grant if it had known that, in fact, CASI's

proposal was false, and that Karron intended to misapply the funds towards

unallowable indirect costs and non-project-related costs, and that Karron intended

not to contribute CASI's matching share towards the project.

36. Likewise, Commerce would not have continued to make payments

under the Grant if it had known that Karron's quarterly Financial Status Reports

were false, and designed to cover up his misapplication of the Grant money.
 37. On or about June 13, 2007, a federal grand jury in the Southern

District of New York indicted Karron on one count of misapplying federal grant

funds, in violation of 18 U.S.C. § 666. On or about May 21, 2008, a superceding

indictment was filed in United States v. Karron, 07 Cr. 541 (RPP), adding a

forfeiture count.

38. On or about June 11, 2008, a federal jury convicted Karron of violating

18 U.S.C. § 666 in connection with the Grant.

39. On or about October 24 and 31, 2008, the Hon. Robert P. Patterson

sentenced Karron to a term of seven and a half months imprisonment, three years

supervised release, a $100 mandatory assessment, and restitution in the amount of

$120,000.00.

FIRST CLAIM
(FALSE CLAIMS ACT, 31 U.S.C. § 3729(a)(l))

40. The United States incorporates by reference paragraphs 1 through 39

above as if fully set forth herein.

41. The United States seeks relief against Karron under Section 3729(a)(l)

of the False Claims Act, 31 U.S.C. § 3729(a)(l).

42. As set forth above, Karron knowingly, or with reckless disregard for

the truth, presented and caused to be presented to an officer, employee or agent of

the United States, through Commerce, either directly or indirectly, false or

fraudulent claims for ATP Grant payments.

43. The United States, through Commerce, paid such false or fraudulent

claims because of the acts and conduct of Karron.

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 44. By reason of Karron's false claims, the United States has sustained

damages in an amount to be determined at trial.

SECOND CLAIM
(FALSE CLAIMS ACT, 31 U.S.C. § 3729(a)(2))

45. The United States incorporates by reference paragraphs 1 through 39

above as if fully set forth herein.

46. The United States seeks relief against Karron under Section 3729(a)(2)

of the False Claims Act, 31 U.S.C. § 3729(a)(2).

47. As set forth above, Karron knowingly, or in reckless disregard for the

truth, made, used, and caused to be made and used, false records and statements to

get false and fraudulent claims for ATP Grant money paid by Commerce.

48. The United States, through Commerce, paid such false or fraudulent

claims because of the acts and conduct of Karron.

49. By reason of these false claims, the United States has sustained

damages in an amount to be determined at trial.

THIRD CLAIM
(CONVERSION)

50. The United States incorporates by reference paragraphs 1 through 39

above as if fully set forth herein.

51. All ATP Grant payments up to the amount of $1,345,500.00 made to

CASI are the lawful property of the United States of America.

52. Karron knowingly converted these funds for his own use, in derogation

of the rights of the United States, which is entitled to these funds.

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 53. As a result of the conversion by Karron, the United States has been

damaged in the amount of $1,345,500.00, representing the ATP Grant payments

Karron has wrongfully withheld from the United States.

FOURTH CLAIM
(UNJUST ENRICHMENT)

54. The United States incorporates by reference paragraphs 1 through 39

above as if fully set forth herein.

55. The United States made ATP Grant payments to CASI and for the

benefit of Karron when they were not entitled to those payments.

56. Karron has been unjustly enriched by retaining the use and enjoyment

of the ATP Grant payments, to which he was not entitled.

57. Karron has been unjustly enriched in the amount of $1,345,500.00,

representing the ATP Grant payments which he used for his own benefit, but to

which he was not entitled.

58. The circumstances of Karron's receipt of these ATP Grant payments

are such that, in equity and good conscience, Karron should not retain these

payments.

FIFTH CLAIM
(FRAUD)

59. The United States incorporates by reference paragraphs 1 through 39

above as if fully set forth herein.

60. Karron made material misrepresentations of fact to the United States,

through Commerce, with knowledge of, or in reckless disregard of, their truth, in

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connection with CASI's claim for ATP Grant payments.

61. Karron intended that the United States rely upon the accuracy of the

false representations referenced above.

62. The United States made substantial payments of money to CASI in

justifiable reliance upon their false representations.

63. Karron's actions caused the United States to be damaged in an amount

to be determined at trial.

SIXTH CLAIM
(PAYMENT MADE UNDER MISTAKE OF FACT)

64. The United States incorporates by reference paragraphs 1 through 39

above as if fully set forth herein.

65. The United States seeks relief against Karron to recover monies paid

under mistake of fact.

66. The United States made ATP Grant payments to CASI under the

erroneous belief that the information in Karron's claims for payment complied with

the applicable rules and guidelines. This erroneous belief was material to the

United States' decision to make these payments. In such circumstances, payment

was by mistake and was not authorized.

67. Because of these payments by mistake, Karron has received money to

which they are not entitled.

68. By reason of the foregoing, the United States was damaged in an

amount to be determined at trial.

WHEREFORE, plaintiff, the United States of America, requests that

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judgment be entered in its favor and against defendant Daniel B. Karron as follows:

(a) On all Claims for relief, summary judgment as to liability pursuant to

the estoppel provisions of the False Claims Act, 31 U.S.C. § 3731(d),

and the doctrines of collateral estoppel and res judicata, based on

Karron's conviction.

(b) On the First and Second Claims for relief (Violations of the False

Claims Act, 31 U.S.C. §§ 3729(a)(l) and (2)), for treble the United

States' damages, $1,345,500.00, plus an $11,000.00 penalty for each

false claim presented;

(c) On the First and Second Claims for relief, an award of costs pursuant

to 31 U.S.C. § 3729(a);

(d) On the Third Claim for relief (Conversion), in an amount to be

determined at trial, together with costs and interest;

(e) On the Fourth Claim for relief (Unjust Enrichment), in an amount to

be determined at trial, together with costs and interest;

(f) On the Fifth Claim for relief (Fraud), in an amount to be determined at

trial, together with costs and interest;

(g) On the Sixth Claim for relief (Payment Made Under Mistake of Fact),

in an amount to be determined at trial, together with costs and

interest; and

(h) awarding such further relief as is proper.

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Dated: New York, New York
November 24, 2008

MICHAEL J. GARCIA
United Statfes^Cttorn$y

By:

Assistant United States Attorney

Telephone: (212) 637-1945
Facsimile: (212) 637-2750
E-mail: matthew.schwartz@usdoj.gov

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