(FORTUNE Magazine) – There was a shortage of regular guys on the road. At least that's how it seemed to six young Russians driving on the Southern State Parkway. They had left the Brighton Beach section of Brooklyn--known as "Little Odessa" for its large Russian emigre population--more than an hour ago. It was now after eight o'clock. They were deep in the suburban sprawl of Long Island, and they still hadn't spotted one. The group was divided between two cars, two men and a woman in each. All were under 30, and most had met that night for the first time. The driver of the lead car had recruited them for this evening's assignment: to participate in a planned car accident with an unsuspecting motorist. They had been promised at least $500 each, plus a percentage of any insurance settlement. But first they needed a victim. And the driver, who had done this many times before, was insisting on a "regular guy." No cars with families or "foreign" license plates. Just a lone male driver with New York plates. There would be fewer complications with the insurance company, the driver had explained.

It was very dark now, and a steady rain made the road slick and the visibility poor. Inside the lead car nobody talked about what was about to happen. They already knew the plan. The young man in the back seat chatted nervously with the girl--the stranger--sitting next to him. He had never done this before.

And then they saw him. Their regular guy. Alone in the center lane of the three-lane highway. Quickly, the driver of the lead car maneuvered in front of the victim. When he was in position, the chase car overtook the lead car and cut in front of it, forcing the driver to slam on his brakes. Between the rain and the dark, the victim didn't stand a chance. He tried to swerve into the left lane, but the front of his car collided with the rear of the lead car. The impact was minor. The victim steered his car onto the right shoulder of the highway. The lead car, with its muffler dislodged and dragging behind it, pulled over 100 yards or so ahead of him.

The switch occurred in an instant. The chase car stopped alongside the lead car. The two passengers in the back seat jumped out, the driver of the lead car jumped in, and they drove away. When the victim looked up moments later, he saw four figures--two males and two females--walking toward him. One had a cellphone out and had already dialed 911. The victim asked them if they were okay. They all said yes; nobody had been injured.

When the state trooper arrived to take his accident report, a young Russian who had been a passenger in the lead car identified himself as the driver. The car had already been registered and insured in his name. For his efforts he earned almost $7,000--$2,000 soon after the accident, and the remainder from his share of the bodily injury settlement. "I heard about people doing this before, that a lot of Russians had been doing it," he says. "So it wasn't a big deal to me. I didn't care. It was like, so what?"

I can't tell you their names. Or even the type of cars they were driving. If I do, someone might find them. And when you're involved with organized crime and you talk about it, you don't want to be found. What I can tell you is that the accident, which occurred in the winter of 2002, proved to be a very big deal indeed. In the months that followed, the four passengers listed on the police report were arrested. Their testimony ultimately led investigators in Suffolk County, Long Island, to uncover what may turn out to be the largest organized insurance-fraud ring in U.S. history. In mid-August, Suffolk County district attorney Thomas Spota announced that a grand jury had indicted 567 people and corporations connected with the ring, which he says is tied to more than 1,000 car accidents in the New York area. The list of indictments includes passengers; the "runners" who recruited them and orchestrated the accidents; the doctors who "diagnosed" and "treated" the victims; the medical clinics that processed their insurance claims; and the financiers the district attorney alleges are the masterminds of a vast and interconnected criminal enterprise.

Only 240 of the indictments have been made available to the public. The rest, along with many of the facts in the case, remain under seal. Over the past two months, however, FORTUNE has interviewed dozens of officials involved with the case, including insurance company investigators, prosecutors, defense attorneys, and detectives; reviewed hundreds of pages of confidential documents; and heard the stories of people charged in the scheme, who agreed to speak on the condition that we shield their identities. The picture that emerges is of a sophisticated organized-crime syndicate that rivals any drug lord's, and that systematically bilked some of the best-known names in the insurance industry out of hundreds of millions of dollars. The losses from the case are still being tallied. State Farm has acknowledged potential exposure of $48 million, and experts involved in the case predict that when Allstate, GEICO, and others weigh in, that number could easily reach $500 million.

Investigators have also found evidence of other serious crimes allegedly committed by members of the ring, including money laundering and extortion. Many of those indicted are Russian emigres, and some of the illicit funds have been tracked to large corporations in Russia. Prosecutors refer to the investigation as the "Boris" case--an acronym for Big Organized Russian Insurance Scam.

The kind of insurance fraud alleged in the Boris case is not just a New York phenomenon. It has become a national epidemic. And we are all paying for it. Last year an estimated $30 billion, about $300 of every American's auto insurance bill, went to cover the cost of fraud. "People read every day on the front page of the Wall Street Journal about Dennis Kozlowski and Frank Quattrone and the mutual fund companies trading after hours," says Dr. Robert Hartwig, chief economist at the Insurance Information Institute. "But in reality, your pocket is being picked every single day by scamsters who are being allowed to use the system to enrich themselves."

Something Fishy

It all began in March 2002, with a coincidence. Late one evening Peter Smith, an assistant district attorney with the Suffolk County insurance crimes unit, was paging through a pile of fraud reports from the New York Insurance Bureau when he came across a familiar name: Alan Jacobs. Intrigued, Smith scanned the report for the corresponding address. Sure enough, it was the Long Island residence Smith had visited less than a month before for a Super Bowl party. During the party Jacobs (not his real name) mentioned that he had been in a car accident recently. There was something suspicious, he said, about the way the car in front of him just stopped right in the middle of the Southern State Parkway.

The fraud report in Smith's hands meant insurance giant State Farm shared Jacobs's concerns. It listed the four passengers in the car Jacobs had hit--two men and two women, all with Russian names and Brooklyn addresses, which Smith recognized as belonging to streets in Brighton Beach. The report noted that the address of one of the female passengers was identical to an address given by a different female passenger in a different accident two weeks earlier. Both roommates' accidents involved cars from Brooklyn in rear-end collisions on Long Island highways, and both drivers had purchased their insurance policies from the same Brighton Beach insurance broker--less than 30 days before each accident.

Smith was familiar with the hallmarks of a staged car accident. Only a few months earlier a Suffolk County grand jury had indicted more than 400 people in a ring of auto body shops accused of paying people to stage accidents. But the Jacobs accident involved something Smith had never seen before--an innocent victim. A regular guy.

Smith subpoenaed State Farm's claim file from the Jacobs accident, a mass of paperwork that included hundreds of medical bills for treatments the Russian passengers had received for injuries stemming from the accident. These covered diagnostic tests, dozens of doctor visits, and numerous medical devices. The total billed to State Farm was $87,545. The medical care was consistent with a serious car wreck. Yet Smith knew from his conversation at the Super Bowl party that nobody in the wreck had appeared to be injured.

Suffolk County detectives James Mihalik and Tom Collins arrested the four Russians and confronted them with the evidence. The young Russian listed on the police report as the driver of the car--we will call him Yevgeny--confessed. He admitted that he and the other passengers had orchestrated the accident to profit from the insurance claim, just as investigators had suspected. But what he told them next came as a surprise. He hadn't been driving the car that night. There had been a switch, and the actual driver--who had recruited Yevgeny and the others and planned the accident--had fled the scene in a second car. The recruiter, whom we will call Vasily, had been involved in dozens of accidents and didn't want his name on the police report.

Armed with Yevgeny's confession, Mihalik and Collins arrested Vasily. They didn't know whether he was the architect of a vast criminal enterprise or just a minor player, so they offered him a deal: leniency in exchange for cooperation. What he told them was startling. He was recruiting accident victims on behalf of several medical clinics, including Northern Medical--the Brighton Beach clinic where Yevgeny and the other passengers had received their "treatment." Vasily admitted setting up between 40 and 50 accidents, and said Northern Medical paid him $1,500 cash for every accident victim he sent them. He was staging so many accidents, the investigators learned, that he needed to get innocent drivers like Jacobs involved to sustain the appearance of randomness.

Vasily also revealed the name of a man who he said had trained him: Aleksandr Tarashchansky. When detectives arrested Tarashchansky a few days later, he was carrying a day planner. Inside were 400 pages filled with names and notations, which investigators say are records of staged car accidents.

By now Smith and his colleagues realized their pursuit of the Jacobs case had led them to a major fraud ring. They began to refer to Yevgeny and other claimants as "crash dummies" for their role in the accidents, and they called Vasily and other recruiters "runners" for their role as intermediaries between the claimants and the medical clinics. Smith coined the phrase "superrunner" to describe the prolific Tarashchansky.

Fortunately they already had an ideal structure from which to pursue the investigation. A legacy of the earlier auto body shop case in Suffolk County was that district attorney Thomas Spota had formed a permanent insurance crimes unit. In addition to a team of dedicated Suffolk County detectives and prosecutors, the unit included New York State detectives and investigators from both the New York State Insurance Fraud Bureau and the National Insurance Crime Bureau (NICB), a nonprofit organization funded by the insurance industry. They all worked side by side in a couple of cramped offices in Hauppauge, Long Island.

The unorthodox collaboration enabled the investigation to proceed simultaneously on two fronts. With access to some of the most sophisticated data-mining technology in the country, NICB analysts uncovered a vast web of connections between the Jacobs accident and other claims; detectives then arrested the participants in many of these accidents, who often revealed additional information that could be relayed back to the analysts. "It's a classic pyramid approach," says Wayne Pollaci, an NICB special agent assigned to the unit. "We're taking the bricks one by one from the bottom and working our way up and hoping that the whole thing collapses on itself."

Investigators marked their progress on the Boris case on a giant wall chart. Each accident was represented by an icon of a car; the addresses of the crash dummies by little houses. Lines radiating from each icon connected with others. The chart expanded until it stretched across several walls, but it remained unclear who or what was driving all these accidents.

In the midst of their investigation, Smith and his team were aided by an unexpected source: State Farm. In August 2002 the company filed a civil suit in Suffolk County against the participants in 35 fraudulent car accidents, which State Farm's internal special investigations unit had managed to connect. One of the claimants had given the same Brighton Beach address as a passenger in the Jacobs case. When the NICB analyzed the names, addresses, vehicles, medical providers, and other information culled from the civil suit, the data--compiled in an extraordinary 400-page document known as the Boris Book--revealed what Smith had been seeking all along. The claimants, he saw, had gone for treatment to a relatively small number of clinics. More suspicious, claimants often visited clinics miles from their homes, and sometimes all the passengers from the same accident went to the same clinic.

The investigators already knew from the Jacobs case that all four passengers went to Northern Medical because the runner had been paid to send them there. They surmised that the other accidents might be connected the same way. "We finally realized that the accidents were not being organized by the people who were committing them," says Smith. "Instead the entire scheme was driven by their association with particular medical clinics. At the time that was news to us."

Medical Mills

A week after his car accident Yevgeny paid a visit to Northern Medical, one of several small medical offices inside an innocuous low-rise red-brick building on Brighton Beach's main thoroughfare, Ocean Avenue. He had been sent there by Vasily, the runner who drafted him for the accident. "[Vasily] was recruiting people for different medical offices," says Yevgeny. "He gave the owner the police report [from the accident]; they gave him money for the patients." Vasily had also coached his young charge about what to say if anyone asked him about his injuries. "He said if anyone asked, to make up stories," says Yevgeny. "He said, 'Tell them your leg hurts, your neck, your back.' " When Yevgeny walked in the door, the clinic was already prepared for him. "They had all my information," he says. "Gave me all the paperwork to fill out. Told me to come three times a week." He also signed over his insurance benefits, so that money from all claims would go directly to the clinic.

For the next four months Yevgeny made thrice-weekly visits to Northern Medical. Sometimes he traveled there in style, in a livery cab paid for by the clinic. He would sit in a chair while a procession of practitioners--a physical therapist, an acupuncturist, a chiropractor, and sometimes a psychologist--attended to him. The entire process took less than 15 minutes. "It was about seven minutes on the acupuncture," Yevgeny recalls. "That's the needles, right? The chiropractor is like three minutes. Cracks your bones."

Over the course of Yevgeny's therapy, 16 different medical companies billed State Farm more than $20,000 for a variety of diagnostic tests and treatments. The clinic also gave Yevgeny a large bag filled with medical devices. He says there were about ten items inside, but no one ever told him what they were or showed him how to use them.

Yevgeny says the owner of the clinic and the manager who admitted him both knew he wasn't injured. But he isn't sure whether any of the medical providers did. "If you tell them your hand hurts, what are they going to do?" he says. "They are going to treat your hand." He did notice, however, that they were preoccupied with making sure he signed for the treatment. "They were always saying, 'Don't forget to sign,'" he says.

Northern Medical is no longer in operation. It was indicted, along with 112 other New York area medical corporations, for insurance fraud. According to investigators in the Suffolk County insurance crimes unit, Northern Medical operated as a no-fault medical mill.

To understand how the mills operate, it is important to have a basic understanding of no-fault law. In 13 states, including New York, drivers pay an insurance premium that covers themselves and the occupants of their car. In the event of an accident, each driver's insurance company pays its own client's expenses up front.

In New York every victim injured in a car accident is entitled to up to $50,000 of personal injury protection (PIP) to cover both health-care costs and lost wages. The type and amount of treatment is up to the medical provider. If they choose, victims also have the opportunity to sue the other driver--but only for "bodily injury and emotional distress."

The system worked well enough in the fee-for-service era, but with the advent of managed care, no-fault payments emerged as an anomaly--a corner of the medical business funded by car insurers, not by HMOs or other supervised plans. "We have a situation," says Hartwig of the Insurance Information Institute, "where under the law a doctor--and it could be a chiropractor, a massage therapist, an acupuncturist, you name it--is free to provide up to $50,000 worth of medical coverage essentially with no oversight." Skip Short, a leading insurance lawyer, says that "by the end of the 1990s, no-fault had become the Wild West of fraud."

For a no-fault clinic operating in New York, every police report functions like an ATM card allowing it to open an insurance claim--essentially a $50,000 bank account--for each accident victim. Insurance companies do put limits on how much can be billed for particular procedures, so clinics have developed a referral system to move each claim as close as possible to the $50,000 threshold. The idea is for the attending physician to refer the victim for multiple diagnostic tests, treatments, and medical devices. Says a special investigations agent from one of the large insurance companies: "Out of one master facility you will have six subfacilities--acupuncture, chiropractor, physical therapy, psychology, dental, neurology. They are all 'renting' space out of the one facility, so it looks like there are six or seven separate places there, but when you go in it turns out they are all working from a single office."

The mills obtain their patients by paying runners. "The runner is the hub of the operation and makes the link between the people on the street and the people who put the scheme together," says New York State insurance superintendent Gregory Serio. He says runners have begun to establish territories, much like pushers in the drug trade. "We have documented cases, in Brooklyn and elsewhere, where runners treading on each other's competitive turf actually have resulted in violence."

Runners present a business problem for the clinics: They need to be paid in cash. If a clinic sees 200 patients a month, that means having $300,000 in cash on hand. The clinics solve this issue by requiring cash kickbacks from livery cabs, MRI clinics, and other attendant services. "We used to get $250 for every MRI scan, $150 from the neck brace," says Natasha (not her real name), a woman who isn't involved in the Boris case but who operated several no-fault mills in the New York area before the authorities shut them down. She also referred patients to a lawyer who would represent them in their bodily injury suit. "He would kick back somewhere from $500 to $1,000 per patient," Natasha says.

Peter Smith and his team knew it was difficult to prosecute suspected mills. The few successful prosecutions in the past had relied on costly, time-consuming undercover operations that ended up nailing only one or two clinics. For the Boris case investigators tried a different strategy. They had already arrested crash dummies and had details about their treatment. Now they arrested the doctors who had treated them and compared their accounts with those of their patients. When confronted with evidence that they had signed for tests or treatments they never administered, many of the doctors confessed. But rather than being the criminal masterminds Smith and his team expected, most turned out to be pawns, just like the crash dummies and runners.

Owners in the Shadows

Dr. Richard Goldstein moved to New York in the mid-1990s to care for a sick relative. He found temporary work substituting for other doctors but was anxious to find a more stable position. When an attorney--a friend of a friend--approached Goldstein (not his real name) about joining a medical clinic in Brooklyn, he happily accepted. The clinic specialized in treating victims of car accidents, whose care was paid for by their insurance companies. When new patients arrived, the clinic's internist referred them to Goldstein and other practitioners in the facility for testing and treatment. Goldstein was responsible for performing diagnostic tests. He worked two or three days a week and in the beginning saw about a dozen patients per day. The two Russian men who managed the facility asked Goldstein to open up a new medical professional corporation--or PC, as they are commonly known--so that he could bill the insurance companies for the patients he was seeing.

Soon after he started Goldstein began to notice a number of suspicious occurrences at the clinic. The Russian managers didn't seem to know much about medicine. One of them stayed in a back room and drank vodka all day. Even more surprising were the patients. None of them seemed injured. When he asked management about it, they showed him the police reports from the accidents and told him, "We don't see anyone who isn't in a verified accident."

Goldstein discovered that the clinic was paying people to refer patients. One day, he says, two men barged in and threatened to kill one of the managers if he didn't pay them the money he owed them. "One of them screamed, 'I brought you six people, where's my money?' " says Goldstein.

The number of patients increased. "It would take me 45 minutes to do a full work-up," says Goldstein. "They wanted me to see ten people in an hour." When he told them he couldn't keep up, they said, "We paid a lot of money for these people; you have to do it." Occasionally Goldstein would have a patient he knew was legitimately injured. The owners would interrupt him and say, "Let's move it. We've got ten people waiting."

Over time Goldstein found work as a consultant at several other no-fault clinics. Each one asked him to open up a new corporation--a "clean PC"--so that the insurance companies wouldn't confuse his billings for one clinic with those for another. He says all of them were alike. "I would hear, 'There is a great clinic--the people running it are much better,' " he says. "And when I got there I found they were exactly the same."

Investigators in the Suffolk County insurance crimes unit heard similar accounts from many of the doctors they arrested. When they followed the money trail it led away from the doctors toward the true owners of the clinics and medical labs: an interconnected network of shadowy management companies.

In order to bill an insurance company for medical services under no-fault, a medical PC has to file the claim. But private investors can't open a clinic. Federal and state laws require the owner of a professional corporation to both practice at the facility and be licensed in the profession--to maintain both financial and operational control. Beginning in the mid-1990s, however, investors found a way to skirt the law. They recruited doctors, like Goldstein, willing to open a PC in their own name and turn it over to the investors for a fee. These investors incorporated management companies, which they used to lease the premises and equipment and pay the support staff. The PC was used solely to collect claims from the insurance companies and to pay the doctor, who couldn't legally be an employee of the management company. Investigators who raided one management company found half-a-dozen workers receiving e-mailed radiology reports from around New York addressed to Dr. Valery Kalika, a radiologist who had opened a PC there. They would stamp his signature on the forms and send them to insurers; the company collected $60,000 to $100,000 a month in his name. (Kalika has been indicted and charged with fraud.)

The events surrounding another doctor indicted in the ring, Igor Chanmin, sound ready-made for an episode of The Sopranos. Chanmin incorporated eight medical PCs, and his brother Petr managed them. According to a cooperating witness in the Boris case, Petr gave one of his runners approximately $30,000 in cash to buy ten older-model American cars, which were meant to be used for staged accidents to generate clients for the Chanmins' clinics. The runner absconded with the money. Some of Petr's men found the runner, took him to one of the clinics, and beat him severely. They then took him to Petr's boat with the idea that they were going to dump him in the ocean. The boat wouldn't start, however, so they left him, still alive, in a bloody heap on the dock.

When the Suffolk County ICU investigated the management company that controlled the Chanmins' clinics, the trail led to a no-fault law firm in Manhattan. The firm was issuing checks to Igor Chanmin and other doctors. A Russian attorney at the firm, now under arrest for insurance fraud, is believed by investigators to be one of about a dozen financiers in control of the entire Suffolk County ring. He alone controls more than 20 management companies, which in turn control dozens of PCs.

Once they get their hands on the money, they need to launder it, investigators say. "Some of the money from [another] management company was sent to Swiss bank accounts, and then from there into two large Russian corporations," says Smith, who declines to identify them. He will say only that one is a pharmaceutical company and the other is an energy company. Analysts at the NICB are still studying the records, but Michael Fella, a director of NICB field operations, estimates that the management company could have billed between $30 million and $40 million during a four-year period. "Monies are being laundered in this case," says Fella. "You need cash to pay the runners on the street. You have to launder money through bogus companies or paper companies. Trust funds are set up, offshore accounts."

"These criminals may not be your traditional equivalent to the Mafia or La Cosa Nostra," says Fella, who formerly worked the organized-crime beat for the NYPD. "But they are organized and they're criminals and they're Russian. And some of them are in fact kicking back [funds] to known Russian organized criminals in Brighton Beach." Fella has observed some of the Russians meeting with members of the Italian Mob. "The Russians are enthralled by the Godfather movies," he says. "They emulate that behavior with the kissing, the hugging, the sit-downs. But when it comes to white-collar crime, they are much smarter than the Italians."

In another layer of complexity, the management companies had enlisted the help of billing companies to facilitate the payment of their claims. In the Boris case virtually all the claims were filed by three New York--area law firms--Sanders & Grossman, Israel & Israel, and Baker & Barshay. Through their representation of more than 100 medical PCs, the firms can swamp an insurance company with thousands of claims in a single day. New York State law requires that insurance companies either pay or deny a claim within 30 days. In this blizzard of paper, fraudulent claims inevitably slip through.

If an insurer denies a claim, the PC has the opportunity to dispute the ruling by filing a lawsuit. The billing companies file hundreds of lawsuits on the same day. The cost of investigating and fighting them all is prohibitive, leading most insurers to agree to block settlements. "These firms are the engines of insurance fraud," says Robert Wallach, chief executive of the Robert Plan, a Long Island insurer served with 7,000 suits in a single day--some of less than $1.

The D.A. doesn't have evidence these firms knowingly filed fraudulent claims. Robert Baker of Baker & Barshay and Marc Grossman of Sanders & Grossman deny any wrongdoing; Israel & Israel declined to comment. "The insurance companies haven't given us any evidence these claims are fraudulent," says Baker. "Would you want me to represent you if I just walked away?"

Risk and Reward

Peter Smith is famous these days--at least as famous as you can get in the world of insurance fraud. In the past year he has traveled to Chicago and South Carolina to speak at conferences about his successes on the Boris case. Dressed in a black suit, wrinkled white shirt, and nondescript tie, his thinning gray hair framing a round face, Smith does not cut an imposing figure. Instead he has the affable, garrulous manner of a country preacher. But when Smith talks about the criminals he is pursuing, his jaw clenches and his eyes darken with anger. "When they came out here and jammed on the brakes in front of Alan Jacobs, a Suffolk County resident," he says, "that offended us personally."

In large part, Smith's newfound celebrity can be attributed to the unorthodox--some might say visionary--approach the Suffolk County district attorney's office has employed in investigating and prosecuting these crimes. "Before this case insurance companies and district attorneys thought that it was corrupt medical providers fueling these schemes," says Smith. "They would take down a medical clinic, make arrests, and say that they've solved these crimes. But nobody's ever gotten to this level before--where you find an investor who has set up 20 medical companies for the sole purpose of committing insurance fraud."

Investigators know they are pursuing a wily and elusive target. While a number of crash dummies, runners, and doctors have agreed to cooperate with the investigation, many of those indicted--including all of the financiers--are fighting the charges vigorously. "The only evidence I've seen looks like a wiring schematic for a Maserati," says William Wexler, a defense attorney for Igor Chanmin, echoing his colleagues' disdain for the prosecutors' approach. "The D.A.'s office has yet to say what proof they have that my client was involved."

One strategy on the part of defense lawyers has been to argue that Suffolk County doesn't have proper jurisdiction over these crimes. After all, most of the clinics, the doctors, and even the accidents are in Brooklyn. "I'm arguing every day in court that we even have the jurisdiction to handle these cases," says Smith. "I may not end up being able to prosecute 99% of the crimes in the Tarashchansky book."

While the unconventional approach pursued by the Suffolk County insurance crimes unit has certainly brought attention to the staggering scope of the country's no-fault insurance fraud problem, some experts wonder how much impact even a successful prosecution may have. Third-degree insurance fraud--the crime most of those in the Suffolk County ring are charged with--carries a prison sentence of just 2 1/3 to seven years. "A federal agent told me he doesn't know why anybody would rob a bank these days," says insurance lawyer Skip Short. "All they have to do is open up a no-fault facility. They are not going to suffer bodily harm. The prison sentences are more limited. And they can make a ton of money."

Natasha, the woman who ran several fraudulent clinics that were shut down, is not concerned for the fate of her fellow Russians. "If they are going to go to jail, they're going to come out and they're going to have a lot of money," she says. "Russian mentality, that's how it goes. They are used to it. In Russia they had to steal to make a good living. But at least you come out, you have money. And I'm sure they have it. Because they live the life of kings and queens. The diamonds that they have, Tiffany's don't have."

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