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CEO of Virginia Health Care Technology Company Guilty of Fraud

Sreedhar Potarazu, 51, of Potomac, Maryland pled guilty on Friday, December 2, to charges of inducing interstate travel to commit a fraud and failing to account for and pay over employment taxes.

According to the statement of facts filed with the plea agreement, Potarazu was an ophthalmic surgeon who was licensed in Maryland and Virginia, founded in or about September 2000, VitalSpring Technologies Inc. (VitalSpring), a Delaware corporation.  VitalSpring operated in McLean, Virginia and provided data analysis and services relating to health care expenditures.  In or around the end of 2015, VitalSpring started doing business as Enziime, LLC, a Delaware corporation.  From its inception, Potarazu was VitalSpring’s Chief Executive Officer, President, and served as a member of the Board of Directors.

Beginning in or around 2009, Potarazu provided materially false and misleading information to VitalSpring’s shareholders to induce more than $30 million in capital investments in the company.  Potarazu represented to VitalSpring shareholders on numerous occasions that VitalSpring’s sale was imminent, which would have resulted in profits for shareholders, and also concealed from shareholders that VitalSpring failed to account for and pay over more than $7.5 million in employment taxes to the Internal Revenue Service (IRS).

Scheme to Defraud

From VitalSpring’s inception, but specifically from 2009 to the present, Potarazu solicited investments in VitalSpring from investors and shareholders by way of in-person meetings, emails, telephone conference calls, webinars, and phone calls.  From in or about 2009 through in or about 2016, Potarazu raised approximately $32 million from more than 160 victim investors.

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 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.  Since 2009, VitalSpring never generated a profit.  To substantiate the false statements concerning the bank account balances, 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 VitalSpring’s accruing employment tax liability.

In November 2014, Potarazu created a Special Review Committee (SRC) in response to a lawsuit filed by shareholders in Delaware that claimed Potarazu misled the victim investors about VitalSpring’s finances, the status of VitalSpring’s 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.  Members of the SRC traveled interstate to the Eastern District of Virginia to attend meetings in which Potarazu presented false information for their review.

Potarazu also falsely represented to VitalSpring shareholders that the company was going to be sold imminently, and in at least one instance, that a deal was in place. Potarazu falsely represented that a sale of VitalSpring would yield substantial returns to its investors.

In truth, VitalSpring was never going to be imminently sold.  Potarazu provided false financial records, including fake balance sheets, fabricated bank statements, and false tax returns to several prospective buyers, financial advisors, and investment banks. When Potarazu was questioned in December 2014 by Prospective Buyer 1 as to the accuracy and authenticity of bank records provided, Potarazu then presented Prospective Buyer 1 with false or misleading emails purporting to be from a bank employee in order to bolster the legitimacy of the false bank records. Potarazu also presented Prospective Buyer 1 with a fake website that was made to look like a website for a major national bank, and a link to this website, which referred Prospective Buyer 1 to VitalSpring’s false bank statements. Additionally, Potarazu used a shadow, secondary email account for one of VitalSpring’s legitimate employees, to provide false information to Prospective Buyer 1, thus creating the appearance that Potarazu himself had not provided the information.

In October 2014, Prospective Buyer 2 informed Potarazu that it was no longer interested in VitalSpring.  Potarazu continued to represent to shareholders for months afterwards that there was a still a pending deal with Prospective Buyer 2. In March 2015 and February 2016, Potarazu organized, or caused to be organized, conference calls to confirm the existence of the sale of the company. A different shareholder spoke on each call with a purported representative of Prospective Buyer 2. In advance of the calls, Potarazu asked the shareholders to give him a list of questions they intended to ask the buyer. Potarazu caused an individual to pose as the purported representative of Prospective Buyer 2 on these conference calls.

From 2011 to 2015, in addition to his salary paid by VitalSpring, Potarazu diverted a portion of the investments from the victim investors for his own personal use.

Employment Tax Fraud

Potarazu admitted that from 2007 to 2016, VitalSpring accrued an employment tax liability of more than $7.5 million. As CEO and President of VitalSpring, Potarazu was a “responsible person” obligated to collect, truthfully account for, and pay over VitalSpring’s employment taxes.  Ultimate and final decision-making authority regarding VitalSpring’s business activities rested with Potarazu.

Potarazu was aware of the employment tax liability as early as 2007 and, between 2007 and 2016, was frequently apprised of VitalSpring’s payroll tax responsibilities by his employees.  In addition, IRS special agents interviewed Potarazu in 2011 and informed him of the employment tax liability.  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.  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, Potarazu failed to pay over any tax withheld from wages of VitalSpring’s employees.

Between 2008 and 2015, instead of paying over employment tax, Potarazu caused VitalSpring to make millions of dollars of expenditures, including thousands of dollars in transfers to himself and others, the publication of Potarazu’s book called, “Get Off the Dime,” a sedan car service, and travel.

Potarazu faces a maximum penalty of 10 years in prison sentenced on March 3, 2017. The maximum statutory sentence is prescribed by Congress and is provided here for informational purposes, as the sentencing of the defendant will be determined by the court based on the advisory Sentencing Guidelines and other statutory factors.