Brothers Face Charges of $1-Billion Fraud : Crime: Two high-living immigrants from the former Soviet Union go on trial, accused of running the biggest health care scam in U.S. history.

When he was arrested at a Rosemead restaurant, Michael Smushkevich, alias Mikhailious Smouchkevitchous, alias Jacobo Martinez Greenberg, alias Ivan Pavlov Sanchez, was wearing two gold medallions on three gold chains and a diamond-studded watch.

Only seven years after emigrating from the Soviet Union, the charismatic, teddy-bear-shaped businessman seemed to have achieved the American dream and then some: He threw lavish parties at Russian restaurants in Hollywood, had a fleet of Mercedeses and Lincolns, a Larson powerboat, a comfortable suburban house, a child each by his wife and his mistress--and, charge prosecutors, a thriving family business ripping off health insurance companies and the U.S. government to the tune of about $1 billion.

Not bad for a graduate of the decidedly un-market-oriented Moscow Missile Construction Institute.

His brother, David, had done even better. Soon after arriving in America, the Soviet-trained medical doctor had quickly graduated from hauling frozen meat and sewing buttons on suits to running his own business of mobile medical labs and living in a million-dollar house guarded by security cameras. He boasted that he owned Russian icons, antiques and samovars worth millions. He cruised among his many companies from Oceanside to Encino in Rolls-Royces and Lincoln Continentals.

But for the near future, the Smushkevich brothers will be holed up in the decidedly more austere surroundings of the federal courthouse in downtown Los Angeles, where opening statements in their closely watched trial are slated to begin today. The brothers stand accused of orchestrating the biggest health care fraud in U.S. history.

The case not only has generated intense interest in medical and insurance circles but also has sent shock waves through Los Angeles’ Russian immigrant community, where the brothers were widely known as trailblazing entrepreneurs.

Prosecutors charge that the Smushkeviches made their fortune by using telemarketing pitches to lure patients into a vast network of clinics dotting Southern California, putting them through high-tech tests they did not need and charging insurance companies an average of $8,000 a person. Taxpayer-funded military insurance plans were also defrauded, the government alleges. Their enterprises allegedly billed more than twice what the state of California spends on medical care for indigent patients each year.

The Smushkeviches’ lawyers contend that their clients are innocent of wrongdoing and were providing legitimate, indeed lifesaving, services aimed at early detection of disease. Greedy insurance companies, they argue, are trying to deny payment for necessary medical care, and have pushed the government to pursue the criminal case.

Judge Terry Hatter, the presiding judge in a federal mail fraud and racketeering case against the brothers, has turned down all media requests for interviews with the defendants. Prosecutors, who have been sifting through more than 10 million documents seized from the brothers’ Byzantine medical empire of at least 350 companies, declined comment, citing a gag order by the judge.

This is not the first time the Smushkeviches have found themselves in court. In 1987, David was convicted of Medicare fraud. And in 1988, a number of insurance companies won a civil judgment of $17 million against the brothers for fraudulent claims--an award they were never able to collect because the Smushkeviches filed for bankruptcy.

Documents in those cases, including voluminous depositions of David and Michael, provide a detailed look at the brothers’ colorful personal lives and vast business network.

According to the current 155-count indictment, the Smushkeviches and 10 other defendants drew patients to their offices through advertisements offering free physicals. The defendants would then claim in paperwork that the patients had serious health problems, including cancer and heart disease in order to justify insurance billings for expensive tests and treatment. This was done, the indictment charges, even when the patients were entirely healthy.

While some patients were told that they had these health problems, others had no idea what was going into their records. In either case, thousands of healthy people, the prosecution charges, were transformed into sickly cash cows.

To Ursula Pezzolla, an Orange County woman who went to a Smushkevich clinic, “it was like a rape.”

Lured by a call from a telemarketer, Pezzolla and her husband visited a Tustin health club and nearby clinic and had electrodes attached to their ankles and wrists, sweated on a treadmill and submitted to a battery of apparently high-tech tests. She was terrified when she was told at the end that she had “serious heart disease.” But it was all a lie, postal inspectors told her a few weeks later, designed to collect from insurers.

William Marr received a call from a telemarketer promising free blood tests, ultrasound studies of all his organs, Doppler testing on carotid and peripheral arteries and high-tech tests of his lungs. He was never asked if he had any medical complaints.

But Marr was not the ideal victim. Both a medical doctor and a consultant for a health insurance company, he was immediately suspicious of the pitch and decided to check it out.

According to a statement he made to a postal inspector, Marr went to a Smushkevich clinic in Santa Ana and the health club in Tustin, where he received numerous tests. He noted that many were improperly conducted. His insurance company was billed $7,500. The claims forms said Marr suffered from diabetes, heart disease, high blood pressure, a stroke, cancer, allergic conditions, viral infections and other maladies. Marr said he had none of those conditions.

Unlike many alleged fraud schemes by recent immigrants, the Smushkeviches’ businesses did not appear to target their own community. Still, their case has been a painful one for the 50,000-strong Russian emigre community in Los Angeles, which already has been shaken by growing reports of the “Russian Mafia” around the country. According to one emigre attorney, until their arrests, the brothers seemed to some to be exemplary figures. “They were seen as a success story,” he said, “and more importantly as carriers of certain values in the community: resourcefulness, enterprise, the ability to generalize skills in a new area, boldness and an ability to take care of one’s own.”

People who know David, 42, and Michael, 47, describe them as quick-witted workaholic entrepreneurs who endured many hardships to make it in America and who enjoyed sharing the fruits of their labors. A picture of David’s life story emerges from interviews conducted by criminologist Sheila Balkan, who wrote a report supporting his arguments for a suspended sentence when he was convicted of Medicare fraud.

David told Balkan that he grew up in Vilnius, Lithuania, where his father and mother were high officials in the Communist Party. A brilliant student, David became a doctor under pressure from his parents. But after David’s father died, he felt politically vulnerable and decided to leave the Soviet Union.

In 1975, David, his wife, Alla, and their son immigrated to the United States. With help from a Jewish immigrant aid association, the Smushkeviches established themselves in the Fairfax district, where David studied English at Fairfax High School. Although Alla had a master’s degree in economics, she took a job as a nurse’s aide because of language difficulties, while David worked as a laborer in warehouses.

David quickly moved from heaving boxes of medical equipment and other goods to working for medical temporary-help firms that sent him from hospital to hospital to monitor blood pressure or assist in surgery.

Before long, he moved into management and, by 1980, was earning $10,000 a month as president of a company called Shared Cardiovascular Services, which provided diagnostic equipment to hospitals. He soon set up other companies providing marketing and billing services to doctors’ offices and organized fleets of Hondas to zip around the San Fernando Valley delivering blood samples. In 1985 he was paying himself a salary of more than $500,000 a year as president of Intelligent Health Services, while his wife collected $150,000.

David helped financially support no fewer than 20 relatives as they came to the United States, according to Alla.

“I am certain that if he were not self-employed, he certainly would be found among the rising young executives in some Fortune 500 company,” wrote Dr. George Huard, who hired him to manage his medical practice, in a character reference in court documents.

Michael followed David to America in 1979 with his wife, Tamara, and their son. He rented equipment from his brother to set up a number of companies that used ultrasound and echocardiogram machines to diagnose disease.

Still struggling with English, just three years after arriving, Michael established American Medical Diagnostics, the first of his many enterprises. In its first year of operation, by telemarketing high-tech exams that cost little or nothing to patients, it billed insurance companies nearly $11 million--a good chunk of which the government charges was illegal.

In 1986, however, the Smushkeviches’ American dream began unraveling. David was indicted on charges of Medicare fraud and served a year in prison. He was later placed under house arrest but fled to Europe. In February, 1988, tipped off by complaints from patients and insurance companies, postal inspectors raided 25 of the Smushkevich business locations and seized all of their records.

Michael fled to Tijuana, where, prosecutors charge, he ran a money-laundering business, sending $1.2 million from the United States to banks in Luxembourg and Mexico. In the fall of 1988, Michael filed for bankruptcy, declaring assets of $8.9 million.

After the latest charges were filed, David was extradited from the Netherlands and Michael was arrested in California.

Today, the alleged nerve center of Michael’s operations at 5640 Moreno St. in sleepy Montclair, where 14 diagnostic labs supposedly operated out of a single storefront, is no more. In the tiny strip mall with a karate studio, a bike shop and a convenience store, a shish kebab restaurant now occupies the space from which a multimillion-dollar medical enterprise has disappeared into thin air.

Although the brothers’ network of medical enterprises has been shut down, it lives on in fragmented and cloned form. Insurance companies say they are tracking hundreds of spinoff or copycat operations that are still running rolling labs in California and across the country.