American Greed

How a country lawyer pulled off the biggest Social Security fraud ever, and why it could happen again

The bigger the pool of taxpayer money, the bigger the magnet it is for fraudsters. And there is not much that is bigger than the $2.8 trillion Social Security trust fund. But even by those standards, the $550 million fraud pulled off by Kentucky attorney Eric C. Conn — the largest Social Security fraud in history — is mind-boggling.

"Conn had a brilliant business design," said attorney Ned Pillersdorf, who is working with Conn's victims, in an interview with CNBC's "American Greed." "Set up shop, do a lot of advertising in an area where we have a lot of people who are truly disabled. Bribe the judge, a corrupt judge. He made millions."

Disability insurance is a key feature of the Social Security system. People who have worked and paid into the system long enough can receive benefits. But under strict federal rules, they must show that their disability prevents them from working in any capacity, and is expected to last at least one year.

Operating in Kentucky coal country — where thousands of jobs have been lost, and many people rely on disability payments to get by — Conn advertised himself as "Mr. Social Security." On billboards and in commercials that saturated the local airwaves, he promised he could win disability payments that people could not secure on their own.

Conn seemed to have the track record to prove it. Under federal rules, disability lawyers collect a percentage of the claims that they win, up to $6,000 per case. By 2010, Conn was the third-highest-paid disability lawyer in the country, collecting $3.9 million from the Social Security Administration that year alone.

What Conn was not telling clients — or the Social Security Administration — was that his purported 99 percent success rate was the result of hundreds of thousands of dollars in illegal payments to Social Security Administrative Law Judge David Daugherty, who essentially rubber-stamped the claims. When the scam finally came to light, Social Security suspended disability payments to some 1,700 recipients, leaving many in desperate straits.

Widespread damage

Leroy Burchett was a former printing press crewman and delivery truck driver plagued with debilitating pain after two spinal surgeries. He had gone to Conn as a last-ditch effort, according to his wife, Emma. When Leroy got word in 2015 that his disability payments would be cut off as a result of Conn's fraud, Emma says the pressure was too much to bear.

"So my husband's just in complete panic, because, you know, everything's gone," she told "American Greed." "He said, 'I don't know what I'm gonna do. I just, what are we gonna do?'"

Within days, the panic would take a dark turn.

"He got up that morning, and it was like he was a totally different person," Emma Burchett recalled. "He came through the house yelling and cussing at me and cussing at the kids. He was throwing things, and kicking things. He was just crazy. I opened the door and he was sitting on the edge of the bed with a gun. I took that gun away from him. And he said the same words to me again. He said, 'You're not going to stop this. Nothing can fix this.' He stormed back outside. And my kids were standing right there. And he said, 'I just can't take this.' And he pulled another gun out from behind his back, and he shot himself in the chin."

Conn eventually pleaded guilty last year to a two-count federal complaint of stealing from the government and paying illegal gratuities. But he fled while awaiting sentencing, and was sentenced in absentia to 12 years in prison. Finally captured in Honduras in December, Conn is being held without bond pending additional charges related to his escape, to which he has pleaded not guilty. And federal prosecutors, claiming Conn violated his plea agreement, are seeking to try him on an 18-count criminal indictment — including conspiracy, fraud, money laundering and destroying evidence — which Conn has moved to dismiss.

Daugherty, who admitted accepting $609,000 in bribes, pleaded guilty to two felony counts and is serving a four-year prison sentence.

But for hundreds of Conn's clients, the nightmare endures. Pillersdorf is part of a team of attorneys trying to help. He posts regular updates on his Facebook page.

"One of the main reasons I do this has been really No. 1 suicide prevention, No. 2 to let these people know what's going on, and to let people know they're not being abandoned," he said.

Shoring up the system

Meanwhile, the Social Security Administration and the government watchdog agency that oversees it are trying to make certain that nothing like this happens again.

"It's very helpful when we have these large-scale cases," said John Grasso, special agent In charge at the Social Security Administration's Office of Inspector General's New York field office. "It often does lead to changes."

He said Social Security has stiffened penalties for disability fraud, particularly for what he called "facilitators," including doctors, lawyers, and third-party representatives.

The agency is also working more closely with other government agencies — including law enforcement — to analyze claims data that signals potential fraud. In 2015, Congress increased funding for a program known as Cooperative Disability Investigation, enough to put CDI teams in every state.

Grasso said those tools are already bearing fruit. His office helped bust a ring of New York City police and firefighters collecting fraudulent payments for mental disabilities, as well as a disability scam in Puerto Rico involving dozens of doctors.

Still, Grasso is appealing to the public for help. He urges people applying for disability payments to beware of third parties such as attorneys and claim representatives who make grandiose promises. Social Security has strict rules about how those representatives are compensated, so be wary of any requests for payment upfront, and make certain payments are kept in escrow pending the outcome of the claim.

If you suspect fraud, contact the inspector general's toll-free hotline at 1-800-269-0271.

Despite all of that, Grasso says he is "very confident" that people will continue trying to defraud the system, possibly on the scale of Conn.

"I think it's American greed. That's exactly what it is," he said. "If the opportunity is there, people are going to take that opportunity, and until you put that wall up and you show that there's consequences for it, people are going to continue to do it."

Go inside Eric Conn's massive con, and see how he almost got away with it, on an all new episode of CNBC's "American Greed," Monday, April 2, at 10 p.m. ET/PT only on CNBC.