In the Matter of the Complaint Against       )
                                                                   )
VINCENT N. AVALLONE                            )
2303 S. Lambert St.                                   )
                                                                   )
                at                                                )
                                                                   )
Philadelphia, PA 19145-3513                     )  P. S. Docket No. PF-59

ATTORNEY FOR POSTAL SERVICE:         Geoffrey A. Drucker, Esq.
                                                                   Enforcement Division
                                                                   United States Postal Service
                                                                   Washington, DC 20260-1148

ATTORNEY FOR RESPONDENT:                Frank J. Marcone, Esq.
                                                                   19 West Third Street
                                                                   Media, PA 19063-2803

INITIAL DECISION

This proceeding arises out of a Complaint issued by the Reviewing Official of the United States Postal Service under the Program Fraud Civil Remedies Act of 1986, Pub. L. 99-509, 31 U.S.C. §§3801-3812, and 39 C.F.R. Parts 273 and 962. In the Complaint, the Postal Service alleges that Vincent N. Avallone ("Respondent") violated 31 U.S.C. §3802(a)(1) by making two false claims for disability compensation, contending that Respondent is liable for an assessment of $2,718.02 (twice the amount of the alleged false claims) plus civil penalties of $10,000 ($5,000 for each claim), for a total liability of $12,718.02

On August 16, 1993, Respondent timely filed an Answer and a Petition for Hearing, in which he denied the allegations of the Complaint.

A hearing was held by the undersigned on March 16, 1994, in Philadelphia, Pennsylvania. Both parties were represented by counsel, who introduced documentary evidence, presented oral argument, and examined and cross-examined witnesses. The Postal Service presented the testimony of Postal Inspectors Thomas Carroll and Craig R. Smith. The Postal Service called Respondent to the stand but on the advice of counsel, he declined to testify on Fifth Amendment grounds. Respondent's only witness was Ricardo Pascetta.

By notice dated March 28, 1994, the parties were informed that post-hearing briefs were due within 30 days, or on or before April 26, 1994. The Postal Service timely filed a post-hearing brief on the due date. To date, no brief or request for extension of time has been filed by Respondent. Based on the entire record herein, including the testimony adduced at the hearing, observation of the witnesses and their demeanor, the exhibits, and the post-hearing brief filed by the Postal Service, the following is found and concluded:

I. FINDINGS OF FACT

A. Background

1. At all times relevant to this Complaint, Respondent lived at 2303 S. Lambert Street in Philadelphia, Pennsylvania (Comp.¶2, Ans.¶2).⁽¹⁾

2. As of July 23, 1991, Respondent was employed as a letter carrier at the Southwark Station of the Philadelphia Post Office. On this date, Respondent claimed on a Department of Labor Form CA-1 that he suffered a groin injury when he lifted a sack of mail. (Comp.¶11, Ans. ¶11, CX-1.)

3. From July 25 to September 8, 1991, Respondent worked for the Postal Service on a limited duty assignment at the Southwark Station (Comp.¶12, Ans. ¶12). On September 9, 1991, Respondent underwent surgery for his groin injury (Comp.¶13, Ans.¶13).

4. On September 18, 1991, Respondent claimed on a Department of Labor Form CA-2a that his surgery was work-related because its purpose was to repair his groin injury. The Postal Service continued paying Respondent at his normal rate of pay from September 9 to October 14, 1991. (Comp.¶14, Ans. ¶14, CX-2.)

5. On October 15, 1991, Respondent submitted a Department of Labor Form CA-7 seeking compensation for lost wages from October 22 to November 1, 1991 (CX-3). The Office of Workers' Compensation Programs ("OWCP") of the Department of Labor accepted and paid Respondent's claim (Comp.¶15, Ans.¶15).

B. The False Claims Alleged in the Complaint

6. On November 1, 1991, Respondent submitted a Department of Labor Form CA-8 seeking continuing disability compensation for the period from November 2 to 15, 1991 (CX-4). Respondent indicated on this form that he did not engage in any type of work during the period for which he was requesting compensation. Respondent received $849.38 in disability compensation benefits for that period. (Comp.¶22, Ans.¶22; Comp.¶26, Ans.¶26.)

7. On November 20, 1991, Respondent submitted a Department of Labor Form CA-8 in which he sought continuing disability compensation benefits for the period from November 16 to 29, 1991 (CX-6). Respondent also indicated on this form that he did not work during the period for which he was requesting compensation (Comp.¶28, Ans.¶28). Respondent received $509.63 in compensation benefits for the period from November 16 to November 23, 1991, only, because he returned to work on November 26 and the OWCP apparently determined that the 24th and 25th of that month were his regular days off (Comp.¶32, Ans.¶32).

8. The Postal Service must reimburse the OWCP for the amount of benefits issued to postal employees and must pay a fee to cover its administrative costs. 5 U.S.C. §8147. (Comp.¶10, Ans.¶10).

C. Respondent's Karate Studio

9. Since January 26, 1990, Respondent has maintained an account in the name of "Ric Pascetta's American Goju Karate" at the Pennsylvania Savings Bank. Respondent was the sole signatory on this account, and his checks and deposit slips identified the account as "Vincent N. Avallone T.A. Ric Pascetta's American Goju Karate".⁽²⁾ Respondent regularly conducted business through this account, including the period from the date of his injury on July 23, 1991, until he returned to work on November 26, 1991 (CX-14, CX-15, CX-16).

10. On November 13, 1991, Postal Inspector Thomas Carroll, acting on information from the Postal Service Injury Compensation Unit, drove to a dance studio in South Philadelphia which carried an advertisement and telephone number on its door for American Goju Karate ( Tr.15). Using an undercover identity, Inspector Carroll phoned the number listed on the advertisement and told the man who answered the phone that he was interested in taking some karate lessons (Tr.16). The man who answered the phone identified himself as Vincent Avallone and invited the inspector to come over that evening to talk to him about taking lessons and to see the studio, but he would not discuss the price of lessons over the phone. (Tr. 16-17, 125-126.)

11. Inspector Carroll was unable to visit the karate studio until November 19, 1991, at which time he was accompanied by his partner, Postal Inspector Craig Smith. Both inspectors were working undercover. Respondent greeted them and gave them a personal history questionnaire to complete. He also handed them a business card for "Vincent N. Avallone, Head Instructor, American Goju Karate, South Philadelphia Branch School"; a brochure for Ric Pascetta's American Goju Karate Branch Schools, including the South Philadelphia Branch School; and a November 1991 class schedule for American Goju Karate of South Philadelphia. (Tr. 18-23, 134-137, CX-9, CX-10.)

12. Respondent told the undercover inspectors that he conducted classes at the studio four nights per week (Tr. 126). During their approximately forty minute visit to the karate studio, Inspectors Carroll and Smith observed a karate class that was being taught to about twelve children. Respondent intermittently left the inspectors, entered the classroom, and gave demonstrations of kicks and exercises and provided instruction (Tr. 23, 136-137).

13. In between visits to the classroom, Respondent continued his discussion with Inspectors Carroll and Smith and encouraged them to sign up for classes. Respondent told them that for $99 they would be enrolled and given two months of instruction (Tr.24). When Inspector Carroll remarked that the price of lessons seemed rather high, Respondent replied: "It is a business" (Tr. 24). When Inspector Smith showed hesitation about taking lessons, Respondent offered him a free karate uniform if he signed up that evening (Tr. 137).

14. Inspector Carroll stayed in the studio and observed Respondent instruct an adult class (Tr.24). As the inspector was leaving the studio that evening, Respondent gave him some flyers and asked him to distribute them to other people. The flyers advertised two months of instruction for $99 at "Ric Pascetta's American Goju Karate, Head Instructor Vincent N. Avallone". (Tr. 22, CX-9.)

15. Inspector Carroll returned to the karate studio on November 21, 1991, at which time he signed up for classes. Respondent instructed him to make his check out to Vincent Avallone in the amount of $99, and he gave the inspector a receipt. (Tr. 25, CX-12.) Inspector Carroll then participated in a karate class with about five other students (Tr.27-28). During the class, Inspector Carroll observed Respondent demonstrating kicks and instructing the class (Tr.27). Inspector Carroll also talked to Respondent between exercises. Respondent stated that he had been operated on for a hernia and that shortly after the surgery, he had instructed classes while sitting in a chair. Respondent added that he had to do this in order to keep the business going. (Tr. 28-29.)

16. On November 22, 1991, Inspector Carroll attended another karate class at Respondent's studio. Respondent taught the class for approximately forty-five minutes, leading warm-up exercises and demonstrating various punches and kicks (Tr. 31-32, 62, CX-11).

D. Was Respondent Obligated to Report His Karate Studio Activities

As Self-Employment on the Labor Department CA-8 Forms?

17. The basis for the Postal Service's allegations of false claims are the CA-8 forms executed by Respondent on November 1, 1991 (CX-4) and on November 20, 1991 (CX-6). The CA-8 forms contain the following instruction at item 9b. "Commission and Self-Employment. Show all activities, whether or not income resulted from your efforts". (Emphasis supplied.) Below this instruction are boxes for "Dates & Hours Worked", "Name and Address of Business", "Type of Activity Performed" and "Income Derived".

18. On the CA-8 form executed by Respondent on November 1,1991, he wrote N/A in all of the boxes under 9b. On the CA-8 form executed on November 20, 1991, Respondent answered other questions on the form, signed and dated it, but he left all of the boxes in section 9b blank.

19. By stating that item 9b was not applicable on one form and leaving it blank on another, Respondent indicated that he had not been self-employed during the period of time for which the claims were made and compensation was paid--November 2 to November 23, 1991. A preponderance of the credible evidence shows, however, that Respondent was self-employed as a karate instructor and the operator of a karate studio during this entire time.

20. The fact that Respondent had maintained a bank account under the name "Vincent N. Avallone T.A. Ric Pascetta's American Goju Karate" since January 26, 1990, indicates that the karate studio was an ongoing operation when Respondent was injured on July 23, 1991. After his injury, Respondent continued to conduct business through this account and showed a positive balance throughout the month of November 1991. When Postal Inspector Carroll learned about Respondent's karate studio and telephoned there on November 13, 1991, Respondent took the call and invited the inspector to meet him at the studio that evening to sign up for lessons. During visits to the studio on November 19, 21, and 22, 1991, Inspector Carroll observed Respondent collecting money for karate lessons, overseeing and teaching karate classes, and actively seeking additional students through various advertisements. The check Inspector Carroll gave Respondent to pay for a series of karate lessons was processed through his "American Goju Karate" bank account.

In conversations with Inspector Carroll, Respondent referred to the karate studio as a business and told the undercover inspector that he had taught sitting in a chair shortly after his surgery, in order to keep the business going. Respondent also told the inspector that he taught karate classes at the studio four nights per week. Furthermore, among other items Respondent gave the inspector, was a class schedule showing that Respondent's studio offered karate classes or testing four nights per week for the entire month of November 1991, except for Thanksgiving Day (CX10).

In short, the Postal Service presented a prima facie case that Respondent was self-employed during periods of time in which he filed claims for continuing disability compensation. The burden then shifted to Respondent to rebut this evidence.

21. As noted above, Respondent declined to testify at the hearing on Fifth Amendment grounds. However, the testimony of Respondent's witness and the argument of his attorney (Tr. 170-230, 270-281), indicates that Respondent took the position that his karate studio was not employment but was, rather, a hobby or an altruistic endeavor designed to help the young people of the community. Respondent's contention is not supported by the evidence.

Respondent's only witness, Mr. Ricardo ("Ric") Pascetta, testified that he is in the business of operating a karate school and that Respondent has been a student of his for about ten years (Tr.170,175). Mr. Pascetta testified that Respondent obtained his permission to start a karate club, but that it was not designed as a profit-making business (Tr.185).

Mr. Pascetta was questioned about the brochure for Ric Pascetta's American Goju Karate Branch Schools, including Respondent's studio, that had been given to Inspector Carroll by Respondent. Specifically, he was asked how Respondent's operation differed from the other schools. Mr. Pascetta testified that the other karate facilities listed on the brochure are full-time businesses, but that Respondent's operation is not (Tr. 208). Mr. Pascetta acknowledged, however, that the other karate schools listed on the brochure had started out as part-time operations similar to that of Respondent and had eventually developed into full-time businesses (Tr.208-209, 222-223, CX-9). Mr. Pascetta attempted to distinguish Respondent's karate studio from the other karate schools advertised in the brochure on the ground that the other schools are open every night and week-ends, and that Respondent only offered classes 2-3 times per week (Tr.225). However, Mr. Pascetta acknowledged that he had never been to Respondent's studio and that he only knew what Respondent told him about the finances of the operation (Tr. 225-227). Moreover, undisputed evidence shows that at least during the month of November 1991--the period covering the compensation claims at issue here--Respondent offered one or more classes four nights per week (Tr.23-24, 126, CX 10).

22. I find that Respondent has failed to controvert the evidence introduced by the Postal Service showing that he was self-employed as a karate instructor and operator of a karate studio during the period of time from November 2, 1991 to November 23, 1991, when he claimed and received disability compensation. Respondent's failure to report his self-employment on the Department of Labor CA-8 Forms signed on November 1 and November 20, 1991, constitutes each of those forms a false claim as defined in the Program Fraud Civil Remedies Act.

II. CONCLUSIONS OF LAW

A. Civil Penalties

1. The first issue is whether Respondent is subject to civil penalties in the total amount of $10,000 under 31 U.S.C. §3802 (a)(1) for making two false claims for continuing disability compensation. The Postal Service seeks a $5,000 penalty for each of the two claims for which Respondent received compensation covering the period from November 2, 1991, to November 23, 1991. Each CA-8 Form constitutes a separate claim. 31 U.S.C. §3801(b)(1). Respondent's statements and omissions on the two CA-8 forms indicating that he was not self-employed during the periods for which he claimed compensation, are materially false. On one form Respondent answered "N/A" to questions concerning self-employment activities. In common usage, "N/A" means "not applicable". Since Respondent was self-employed, the questions were applicable to him. United States v. Mattox, 689 F. 2d 531, 532 (5th Cir. 1982). Cf. United States v. Borman, 992 F.2d 124, 126 (7th Cir.1993). Similarly, leaving a blank is equivalent to an answer "none" or a statement that there are no facts required to be reported. United States v. Mattox, at 532. The information required to be provided was material and pertinent to the issue of whether Respondent was entitled to compensation as a totally or partially disabled employee and the proper amount of the compensation. 20 C.F.R. §10.303.

2. Respondent submitted those statements in support of his claims knowing, or having reason to know, that they were false. His contention that his karate studio activities were merely a hobby is not sustained by the evidence. Even assuming, arguendo, that Respondent made no profit from his karate studio during the period for which he claimed disability compensation, the CA-8 forms clearly require that any self-employment, whether or not it resulted in a profit, must be reported. See, Frank Forkapa, P.S. Docket No. PF-42, slip op. at 8 (I.D. Feb. 17, 1993).

3. Under these circumstances, Respondent is subject to, in addition to any other remedy that may be prescribed by law, a civil penalty of not more than $5,000 for each of the two false claims. The Postal Service contends that the maximum penalty of $10,000 should be imposed in this case for several reasons. The amount of the penalty must be determined by examining all of the circumstances surrounding the false claims, including all aggravating and mitigating factors. See, S. Rep. No. 99-212, 99th Cong., 1st Sess. 18 (1985). Many government agencies have adopted a set of model regulations proposed by the President's Council on Integrity and Efficiency, which contains a list of factors which may be considered as guidance. E.g., 45 C.F.R. §79.31 (1988); 52 Fed. Reg. 27423, 27432. The undersigned is not bound by the regulations of other agencies, but has discussed some of those factors below.

4. There is a high degree of culpability in this case. Respondent clearly knew or should have known that he was deceiving the government by failing to report his self-employment.

5. The amount of money falsely claimed is also an important factor to consider. The statute provides for a maximum penalty of $5,000 where a single false claim is filed, even if that claim were, for example $70,000. In the instant case, a total of $1,359.01 was falsely claimed. It would be difficult to justify the imposition of a $10,000 penalty under such circumstances.

6. An aggravating circumstance exists where the false claims occur over a lengthy prior of time or are large in number. Here, Respondent filed a total of two false claims over a period of less than one month. The small number of claims, closely related to each other, and made over a short period of time, is a mitigating factor.

7. Finally, in determining the amount of a penalty or assessment, the Administrative Law Judge must consider that the purposes of the statute are to recompense the government for losses resulting from false claims, to deter the making of such claims in the future, and to protect the integrity of the government program in question. S.Rep. No. 99-212, 99th Cong., 1st Sess. 2 (1985).

8. After considering all of the circumstances of these claims, I conclude that Respondent is liable for civil penalties in the aggregate amount of $5,000.

B. Assessment

9. The next issue is the amount of the assessment to be imposed upon Respondent under §3802(a)(1). The statute provides, in pertinent part, that a person making a false claim shall be subject to an assessment, in lieu of damages sustained by the United States because of such claim, of not more than twice the amount of such claim. Since Respondent made false claims for a total of $1,359.01, he is liable for an assessment of no more than $2,718.02. Since it is not unreasonable to assume that the damages of the Postal Service, including the cost of investigation and litigation, have far exceeded this amount, and considering the aggravating and mitigating circumstances discussed above, it is concluded that Respondent is liable for the maximum assessment of $2,718.02.⁽³⁾

C. Conclusion

10. In summary, Respondent is liable to the Postal Service under 31 U.S.C. §3802(a)(1) for a civil penalty of $5,000 plus an assessment of $2,718.02, for a total liability of $7,718.02.

Judith A. Dowd
Acting Chief Administrative Law Judge

1. "Comp." refers to the Complaint filed by the Postal Service and "Ans." refers to the Answer filed by Respondent. "CX" references are to exhibits offered in evidence by the Postal Service (Complainant) and "Tr." references are to the pages of the transcript of the hearing.

2. "T.A." stands for "trading as" (Tr. 33, CX13, CX-15).

3. Although not binding herein, the model regulations state that "[b]ecause of the intangible costs of fraud, the expense of investigating such conduct, and the need to deter others who might be similarly tempted, ordinarily double damages and a significant civil penalty should be imposed." 45 C.F.R. §79.31(a) (1988).