* 36 accused of scheming to defraud
* Auto insurers targeted in alleged $279 mln scheme
* Scheme said to take advantage of NY no-fault law
By Jonathan Stempel and Ben Berkowitz
NEW YORK, Feb 29 (Reuters) - Three dozen people were charged with scheming to defraud automobile insurers out of more than $279 million in accident benefits, in a scheme said to involve doctors, lawyers and patients who were coached to fake injuries.
Federal and New York City investigators said the defendants took part in a "medical fraud mill" involving bogus clinics in and around New York City that billed insurers for unnecessary or nonexistent treatments.
They said the ring was designed to exploit New York's "no-fault" auto insurance law, which requires vehicles registered in the state to carry insurance that lets drivers and passengers obtain up to $50,000 for accident injuries, regardless of fault.
Several of the defendants are of Russian descent, and 35 of the defendants live in New York or New Jersey.
Authorities called the criminal case the largest involving no-fault auto insurance fraud, and the first of its kind to allege violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO), a law often used to fight organized crime.
They estimated that $113 million was actually lost in the scheme, which began around 2007. Ten doctors and three lawyers were among those charged. The indictment was unsealed Wednesday in the U.S. District Court in Manhattan.
"Today's charges expose a colossal criminal trifecta, as the fraud's tentacles simultaneously reached into the medical system, the legal system, and the insurance system, pulling out cash to fund the defendants' lavish lifestyles," U.S. Attorney Preet Bharara in Manhattan said in a statement.
Auto insurers such as Allstate Corp consider New York one of the most difficult markets in which to profit, in part because of the no-fault law.
At a press conference in Manhattan, Bharara said "pretty much every" insurer that participates in New York's no-fault program was a target of the alleged fraud. Wiretaps were also used in the investigation, he said.
According to the indictment, defendants Mikhail Zemlyansky, who used aliases like "Russian Mike," and Michael Danilovich, also known as "Fat Mike," directed one of the two main branches in the alleged scheme, while defendants Yuriy Zayonts, also known as "KGB," and Mikhail Kremerman ran the other.
Investigators said doctors were paid to set up fake bank accounts and prescribe unnecessary procedures or treatments, such as MRIs, neck and back braces, and five-day-a-week physical therapy sessions.
Lawyers, meanwhile, filed fake personal injury lawsuits to obtain additional awards, while defendants known as "runners" got cash kickbacks for referrals and to coach patients on how to fake injuries, the investigators said.
"The criminal enterprise, while it lasted, was obscenely profitable," said Janice Fedarcyk, an FBI assistant director-in-charge.
Raymond Kelly, New York City's police commissioner, at the press conference said two of the "patients" in the scheme were in fact undercover New York City police officers.
"Our undercover officers were treated like thousands of other 'patients' receiving therapy, tests and medical equipment they didn't need," he said.
All 36 defendants were arrested on Wednesday. Thirty-five were expected to be arraigned in Manhattan on Wednesday. The 36th lives in Duluth, Minnesota, and is expected to appear in federal court there on Thursday.
Each defendant faces a maximum of 30 to 70 years in prison if convicted.
The charges came one day after the arrests of Texas doctor Jacques Roy and six others in a separate fraud case. Those defendants were charged with trying to defraud federal healthcare programs out of nearly $375 million.
A lawyer for an insurance industry-backed lobbying group said he hopes Wednesday's arrests will persuade lawmakers to move more aggressively against auto insurance fraud.
"It's great that we got 36 arrests ... but we should also give our local DAs (district attorneys) power under state law," said David Schwartz, a lawyer for New Yorkers Stand Against Insurance Fraud.
In a study released last year, the Insurance Research Council said 20 percent of no-fault claims in New York City in 2010 had elements of fraud, and as many as one-third of claims appeared to be inflated.
Meanwhile, the Insurance Information Institute estimated last year that insured drivers in the state annually made more than $200 million of excess premium payments because of fraud.
Allstate, the largest publicly traded U.S. home and auto insurer, described the situation in New York as an "insurance fraud crisis." A spokeswoman was not immediately available to comment on the indictments.
The case is U.S. v. Zemlyansky et al, U.S. District Court, Southern District of New York, No. 12-cr-00171.