Editor's note: To uncover this story on widespread fraud linked to California's drug rehab program, CNN's Special Investigations Unit has teamed up with the independent, nonprofit Center for Investigative Reporting as part of Anderson Cooper AC360's "Keeping them Honest" reports. AC360 airs Monday through Friday at 8 and 10 p.m. ET on CNN.

(CNN) -- Next to a smoke shop deep in the San Fernando Valley, employees at Able Family Support pull back the metal gates and open the doors to catch an unfettered flow of government money.

The clinic, reimbursed by taxpayers for each client it sees, offers in-person drug and alcohol counseling.

And Able Family is thriving, according to its billing records. In real life, on this hazy Southern California day, business moves at a slower pace.

No more than 30 people trickle into the rehab center until the doors are locked 10 hours later. Unbeknownst to clinic staff, reporters were stationed in parked cars counting the people who came and went on April 4.

The counting resumed a month later when the clinic submitted its bill to Los Angeles County seeking reimbursement -- not for 30 people, but for 179. The government promptly paid it -- $6,400 for clients Able Family reported it saw April 4.

In a rehab racket plagued by regulatory holes, paperwork trumps reality, a yearlong investigation by The Center for Investigative Reporting and CNN has found.

Thousands of pages of government records and dozens of interviews with counselors, patients and regulators reveal a widespread scheme to bilk the state's Medicaid system, the nation's largest. The populous Los Angeles region is one of the nation's top hot spots for health care fraud, and former state officials agree it is also ground zero for the rehab racket.

Related: California lawmakers order audit of taxpayer-funded rehab program

Infographic: Rehab investigation gets results

Drug Medi-Cal paid out $94 million in the past two fiscal years to 56 clinics in Southern California that have shown signs of deception or questionable billing practices, representing half of all public funding to the program, CIR and CNN found. Over the past six years, more than half a billion dollars have poured into the program statewide.

The simple stakeout on April 4 raises questions about the adequacy of government oversight of the program to help the poor and addicted, built on an honor system in which honor often is lacking. Oversight is marred by infrequent and cursory inspections and by a failure to act even when red flags appear.

Government officials who try to root out fraud clash with weak regulations, bureaucratic apathy and corruption in their own ranks. Once open, bad clinics rarely are shut down. CIR and CNN identified a dozen clinics caught cheating the system that not only remained in business, but also were rewarded with more public funds.

When told of the April 4 stakeout at Able Family, county regulators said they now have questions about whether the payments were legitimate. The findings merit a closer review but "look very incriminating," said a spokeswoman for Los Angeles County's substance abuse department. Able Family operates a small satellite clinic near downtown, the county noted -- but a security guard there said about 25 people came to that office each day.

The clinic's director, Alexander Ferdman, would not explain the discrepancy.

"I can't explain, because you will cut and paste and edit, and my answers will be to a totally different question," Ferdman said in a telephone interview, before hanging up.

CIR and CNN have exposed how clinics use coercion and forgery to defraud a taxpayer-funded program meant to help struggling addicts. The investigation also found that people ineligible to run Medi-Cal clinics did not just slip through the cracks -- they walked through doors regulators left wide open.

Some never should have been allowed in.

Felons are supposed to be blocked from running clinics. That didn't stop Ferdman. He entered the rehab racket two years after leaving a Texas prison, where he served time for orchestrating an organized crime scam. Over the course of a decade, he built his clinic into a $2 million-a-year operation -- all from taxpayer money.

Those on the Medicaid blacklist aren't allowed to bill for rehab funds. But George Ilouno did so repeatedly. Convicted of defrauding the student loan program, Ilouno was barred from collecting a single Medicaid dollar. Still, the state and county paid him more than a million.

Clients who went to GB Medical Services in Long Beach and counselors who worked there described years of graft. Ilouno and his staff bribed clients to show up, they claimed. Counselors fabricated therapy sessions that never took place.

One counselor told state investigators that such fraud was "rampant from Long Beach to Los Angeles," crediting the scammers' "success to the incompetence of the ... auditors," an arrest declaration says.

Federal Medicaid authorities place responsibility for safeguarding taxpayer dollars squarely with California's Department of Health Care Services. And a year after CIR filed its first public records request about Drug Medi-Cal fraud, the department moved earlier this month to temporarily cut funding to 16 rehab clinics.

But according to interviews with former state officials, the department has fielded concerns about rehab clinic fraud for at least five years yet has done almost nothing to combat it.

"Everyone talked the talk, everyone was zero tolerance for fraud and abuse, but no one would do anything about it," said Joy Jarfors, who retired in 2010 from a manager position at the Department of Alcohol and Drug Programs, which shared the job of clinic oversight until last July.

Responsibility for policing Drug Medi-Cal is split. The state certifies the clinics, but counties handle the money and shoulder the financial risk when mistakes are made. Both county and state analysts audit the clinics annually.

To many inside government and out, it has not been clear who's in charge. In that vacuum, fraud has thrived.

The alcohol and drug department this month merged with the Department of Health Care Services. Diana Dooley, secretary of the governor's Health and Human Services Agency, has overseen both departments since December 2010 but declined to give a sit-down interview about what went wrong.

In a statement announcing the temporary suspensions, Department of Health Care Services Director Toby Douglas said the 16 clinic sites have been referred to the state's Department of Justice. On Wednesday, the health department's chief deputy director, Karen Johnson, said her staff also would be "fanning out statewide to review every rehab facility."

Douglas' deputy in charge of audits and investigations, Bruce Lim, said the action was spurred by media inquiries, one of many ways regulators identify problems. Investigators are reviewing issues raised by CIR and CNN, including questions about clinics with felons at the helm, he added.

"That's a top priority for us and a concern," Lim said.

Lim, who has been the investigations chief for three years, said he could not identify the clinics or address criticism that his department has long ignored the problem.

"I can't speak for the past," he said.

Past fraud conviction

On September 29, 2003, a state alcohol and drug program analyst arrived at a busy Panorama City strip mall to certify the state's newest Drug Medi-Cal clinic, Able Family Support.

Karen Morrison scrutinized the governing body's meeting schedule and reviewed staff résumés. Records from the visit offer no hint that she asked -- or knew -- about the criminal record of the man who greeted her.

Morrison, now a real estate agent, said she does not recall the visit or a provider with a felony history.

But Alexander Ferdman was on parole at the time, having served one year of a seven-year sentence for engaging in organized crime.

Prosecutors in Texas had pegged Ferdman as the ringleader of a scam that robbed auto insurers of millions. An indictment from the Travis County district attorney's office says a team of fixers staged crashes and recruited actual crash victims as pawns to generate fake legal and medical bills.

One witness described Ferdman as the man who paid off operatives from a briefcase full of cash.

Although the state can grant special exceptions for felons to be Medi-Cal providers, it doesn't appear that regulators did so for Ferdman. When he moved to California to open a rehab clinic, nothing in state records indicated that regulators knew about Ferdman's organized crime conviction.

A standard form in 2003 asked about clinic leaders' convictions, but missed the mark, inquiring only about fraud against the government. Ferdman defrauded private insurers. And by late 2011, when Ferdman was asked in a routine disclosure form whether he had been convicted in the last 10 years, he could honestly respond "no."

Ferdman told reporters that he accepted a plea agreement in the Texas case because he was facing "99 years." He denied any wrongdoing.

"There was no fraud, and there was no record of it in any way," Ferdman said. "It's a very long story."

Soon after the state cleared his rehab center to open in 2003, Ferdman made some questionable spending decisions.

A state review of the center's 2004 budget revealed that public funds intended to help low-income addicts covered $10,000 in gifts and travel, including $605 spent at a Palm Springs spa resort, a $586 crab feast, $108 for flowers and a Betty Boop souvenir.

In his written response to state auditors, Ferdman defended the spending as "business purchases" necessary for "promoting and outreach" for the clinic.

Taxpayers also spent $2,000 a month on car expenses for Ferdman and Able Family's co-founder, Leonid Aksert. Ferdman told auditors that the travel stipend was approved by the center's board of directors. State records show that the five-member board included Ferdman, Aksert and their wives.

State auditors asked Los Angeles County to repay the state $68,000 provided to Able Family in 2004. Ultimately, Able Family repaid half of the money the state wanted back.

That wouldn't be the last time Ferdman and Able Family came to the attention of auditors.

Medical license denied, clinic approved

Rebecca Lira was disgusted in 2001 as she watched fraud seep into the rehab system she had helped build two decades before. "I really wanted to close all of them down, bust all of them, if you will," she said.

A deputy director with the state Department of Alcohol and Drug Programs, Lira decided to confront the problem by grilling people who applied to launch new clinics.

She said she called applicants and quizzed them about their treatment philosophy. Many hung up and called back in a half-hour with answers. Others just hung up. "Those are the fly-by-nights -- those are the programs that are, in my opinion ... abusing the system," Lira said.

One of the providers she questioned was the program director at GB Medical Services, George Ilouno. Lira concluded that he had "no clue," records show.

Ilouno's problems ran much deeper than limited knowledge of addiction treatment.

State medical regulators had blocked Ilouno from becoming a physician's assistant in 2001, noting that he had been convicted of lying on student loan applications. The medical board concluded that Ilouno's "multiple acts of wrongdoing demonstrated an ongoing pattern of fraud."

As a result, the inspector general for the federal Health and Human Services Department put Ilouno on its blacklist, preventing him from billing Medicaid. State Medi-Cal authorities added him to their banned list as well.

Lira's staff vetted GB Medical Services after Ilouno and his wife, Benedicta, co-founded GB Medical in June 2006. Required paperwork filed two months later asked directly: Were any of GB Medical's owners suspended from billing Medicaid or convicted of misdemeanor government fraud?

Benedicta Ilouno indicated she was the sole owner and had a clean record.

Lira's staff, busy asking the couple for staff résumés and a detailed budget, had documents detailing George Ilouno's co-founder role. But there is no record that they followed up.

By late 2007, the Ilounos were in business, according to a letter signed by Lira staffer Allen Scott, a licensing and certification supervisor. Former staff members say George Ilouno ran day-to-day operations.

And, they say, the rehab clinic was scamming from the start.

Counselor Art Hill filed a complaint with state regulators in 2008 charging that staff paid young women $30 to $40 to sign papers saying they were getting drug counseling at GB Medical.

Hill's concerns eventually would be validated after his complaint touched off a criminal probe that led to pleas of no contest by three employees this year. But back in 2008, a state alcohol and drug program investigator deemed his claims unsubstantiated after interviewing staff and clients.

The addict-turned-counselor told CIR that clients spoke openly during his group therapy sessions about being paid to attend. Hill included their comments in his write-ups on the sessions, but he said George Ilouno ordered him to substitute made-up tales of addicts striving to get sober.

One time, Hill said, Ilouno asked him to giftwrap bottles of alcohol, including Hennessy cognac, for the rehab patients. Hill said he won't work in Drug Medi-Cal again after seeing clients exploited.

"As far as staying sober or trying to be clean," he said, "the program is not helping them."

On behalf of Ilouno, Malibu criminal defense attorney Robert Helfend denied that rehab clients were given alcohol or that session notes were changed. He did not address the claim that clients were paid, but denied that "clients demanded rising sums of money or financial favors."

Kanisha Dickerson insists she and four of her teenage children each received at least $5 whenever they attended counseling sessions at GB Medical in 2008. Ilouno would sometimes call her into his office and pay her himself, she said.

Her daughter, Darshaye Miles, 19, said she bought marijuana with the $5 she earned going to rehab. Little counseling or guidance was offered, she said, even to people who needed it.

"I really want the world to hear the story about these alcohol programs because I think that they just scam," Miles said. "They (are) just doing it to get their money."

The state's probe of GB Medical continued for half a decade, while more than $1 million in Medi-Cal funds went to the operation. In that timeframe, at least 15 state and county officials signed off on certifications, reviews and funding increases.

Once the state Department of Justice launched a formal investigation in 2008, authorities could have followed a state law calling on them to suspend Ilouno's Drug Medi-Cal operation. But they didn't.

Even after a Department of Justice investigator served Los Angeles County with a court order for the clinic's financial records in 2010, the county gave GB Medical a $90,000 annual raise. Its taxpayer funding reached $440,000 last year.

John Viernes Jr., director of Substance Abuse Prevention and Control in Los Angeles County, said he approved the raise after a Department of Justice agent said the investigation was on a back burner and might be closed.

Viernes also said he took into account the fact that his auditors didn't find anything incriminating in their own annual review.

This March, Ilouno was charged with Medi-Cal fraud, grand theft and giving kickbacks. Three counselors were charged with fraud and grand theft; a clinic driver was charged with paying kickbacks. The arrest declaration included an analysis of billing records for the fiscal year ending in 2010, which found $64,400 had been obtained fraudulently.

Ilouno has pleaded not guilty. His attorney, Helfend, said in a letter to CIR that counselors acted without GB Medical's knowledge or consent. GB Medical, he added, is prepared to work on a repayment plan, if that becomes necessary.

Of the counselors charged, two pleaded no contest to felony Medi-Cal fraud. The driver pleaded no contest to a misdemeanor charge of paying kickbacks, and the fourth staff member has not yet entered a plea.

After Ilouno's arrest, GB Medical remained open and continued collecting public funds. Its billing slowed dramatically, though, with three clients one day and five the next.

Asked why funding had continued, Los Angeles County spokeswoman Lydia Becerra said her department was unaware that Ilouno had been arrested.

Approached by reporters in the parking lot of his Long Beach clinic in April, Ilouno declined to comment and hopped in his Mercedes, his tires squealing as he sped away. In July, a sign posted on GB Medical's door said the clinic no longer provides Drug Medi-Cal services.

Difficulty policing fraud

Around the time the state alcohol and drug department cleared GB Medical to operate, the only full-time investigator on the department's team was growing disillusioned.

That was in 2008, a turning point in state oversight. Soon, the larger Department of Health Care Services would gain more control through an unusual series of events, but it would wait years -- until earlier this month -- to initiate major changes.

Drug and alcohol investigator Lorna Flores recalls turning down bribes from clinics even as she tried to clean up the program.

"I speculated that we were seeing the tip of an iceberg," said Flores, who today works in the private rehab sector with her former boss, Rebecca Lira. "At that time, I would have said 50 percent of the programs out there are potentially fraudulent in L.A. County."

Flores left state service soon after Lira, in 2008, disheartened that she could not seem to solve the problem.

Then, things took a strange turn.

Gary Goethe assumed control of the small Drug Medi-Cal investigations unit. In 2009, the FBI arrested him on charges of extorting cash from a clinic owner. Goethe pleaded guilty but characterizes his actions as trying to root out fraud through an overzealous sting.

"I was really trying to elicit wrongdoing from providers," Goethe said in an interview. "I was left out to dry by myself, with no support from the department on my fraud efforts."

Karen Johnson, the chief deputy director of the Department of Health Care Services, said Goethe's arrest undermined investigative efforts.

After Goethe's arrest, a state drug and alcohol official ordered staff to stop passing cases of suspected fraud directly to criminal investigators. Instead, cases would be referred to health services, which would decide whether to refer them to law enforcement.

Jarfors, then the Drug Medi-Cal supervisor, said the edict pushed her staff too far from the action of prosecuting fraud.

Little had come out of monthly anti-fraud meetings led by investigation leaders in the Department of Health Care Services, Jarfors claimed. "We practically stood on tables just screaming, we brought it up at every opportunity that we could, and nothing would be done," she said.

Daniel Steinhart, Jarfors' boss, agreed that the anti-fraud meetings were all talk and no action. And he said he knows his order to shift decision-making to the Department of Health Care Services disappointed his staff. They believed the larger department viewed rehab clinic cases as minor compared with other health scams.

"The general belief was (the rehab cases) were small potatoes -- they weren't interested," Steinhart said.

Funding hard to cut off

The head of L.A. County's substance abuse department for five years is at once part of the problem and part of the solution.

John Viernes has worked with other county substance abuse leaders to point out flaws in the Drug Medi-Cal counseling program and has advocated for other styles of treatment proven to turn around lives.

But he's also signed off on raises for providers repeatedly accused of cheating or caught in deceptive billing practices.

Viernes says he has little choice.

The state allows almost anyone to open a clinic, he said. And once it's running, owners are entitled to public funding for as many patients as they sign up under a 1994 court ruling, Sobky v. Smoley, which establishes Medi-Cal patients' right to drug treatment. The county, according to Viernes, is obligated to contract with state-certified clinics and sign off on their funding.

"This program is just not well run," Viernes said of state oversight.

Viernes' deputy Michael Kerr supervises a staff of seven "contract monitors" who inspect 120 counseling clinics annually, plus 20 more methadone clinics. Each clinic may have one or more sites; some have more than a dozen.

Around the state, Drug Medi-Cal clinics submit bills and regularly receive payment from the counties within weeks. State and county auditors discover taxpayer money has been squandered only if they later review the clinics' client charts.

The county's enforcement vigor has waned considerably in recent years. Viernes signed off on a blitz of nine contract terminations in 2009, shutting down one Wilshire Boulevard clinic that paid two clients $20 each to sign admission paperwork used to generate $11,000 in bills for phantom care.

His team cut off another pair of clinics -- in Los Angeles and Compton -- caught billing for the same clients' care at the same time, eight miles apart.

Even as complaints and evidence of cheating piled up, the county pulled back -- and closed no clinics this year. Viernes said officials have shifted toward helping clinics improve when they fail to meet standards.

The state alcohol and drug department has suspended or terminated certification for at least three clinics since 2009, under a state law that calls for such action during a fraud probe. The Department of Health Care Services declined to identify any cases in which it had cut off a clinic until its crackdown in July.

Funding still flows

Seven years after Alexander Ferdman had his Palm Springs spending spree, auditors in L.A. County began to question whether some of the counseling sessions at his clinic actually took place.

Able Family billed for a group therapy session held on a Sunday when the counseling center was closed, according to a July 2011 county billing review. The 10 a.m. on-site review also turned up notes recounting results of a group therapy session that had not yet been held.

County auditors issued a report warning Ferdman that the county considers such findings evidence of "fraudulent practices" and that the clinic could lose its contract. The county ultimately docked him $7,000.

And then the funding boosts came. Viernes approved an increase in Able Family's funding from $1.6 million in 2011 to nearly $2 million in 2013. Kerr, the county's Drug Medi-Cal supervisor, said such funding increases are approved routinely if clinics fix problems cited in audits.

When reporters laid out the results of their April 2013 stakeout to county regulators, officials pledged to follow up. County auditors went out to dig through paperwork at the clinic last week, only to find Able Family closed.

The clinic's medical director, Dr. Howard Oliver, told CNN that Able Family had been suspended by the state -- a month after reporters confronted California's top health official about Ferdman's record and after the county was notified about the stakeout results.

The doctor praised Ferdman, saying he was helping people and "I've never seen him do anything wrong."

Back in Texas, defense attorney Barrett Hansen was bemused to learn of Ferdman's 10-year career in government contracting. Hansen worked as a prosecutor on Ferdman's insurance fraud case.

"If the state of California is willing to throw money at him," she said, "he's willing to catch it."

Part 2: Teens used as rehab pawns

Got a story idea or tip for CNN's investigations team? Go to cnn.com/investigate or click here to submit. CNN senior investigative producer Scott Zamost, CNN investigative correspondent Drew Griffin, CIR reporter Joanna Lin, CIR intern Mihir Zaveri and Stephen K. Doig, Knight Chair in Journalism at Arizona State University, contributed to this report. This story was edited by Amy Pyle, Robert Salladay and Mark Katches, with contributions from Richard T. Griffiths of CNN. It was copy edited by Nikki Frick and Christine Lee.

Reprinted with permission of Center for Investigative Reporting.