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A direct mail lettershop and its production manager bilked the U.S. Postal Service out of millions of dollars by falsifying reports and using them to obtain refunds on postage, according to court documents.

Mastersort, of Santa Ana, CA, agreed to pay $3 million in restitution after pleading guilty last fall to two counts of mail fraud.

The firm's former production manager, Jayprakash Dhanak, pleaded guilty to one count. He is likely to receive a maximum of 33 months in prison and may face a fine of up to $2.5 million when he is sentenced later this month, according to his attorney Edward Ord.

A disagreement remains over the exact amount of the loss to the USPS, and that could affect the sum paid by Dhanak, Ord said.

The U.S. Postal Inspection Service, which began investigating the case early in 1997, is unsure of when the scheme began, but is sure that it ended around April of that year.

According to the indictment, the defendants used the internal identification numbers of their customers to manipulate the amounts of metered and permit mail sorted at the facility, and then submitted false reports to the postal service for refunds and deductions.

Mastersort employees, acting on the instructions of Dhanak and his wife Leela, utilized a number of tactics to pull this off, the indictment alleged.

For example, mail was “double-counted” or processed twice to increase the amount of mail reported. The identification codes entered into the automated sorting machines were altered to sort permit mail as metered mail.

Samples of mail provided to postal clerks were altered to hide this manipulation, the indictment continued.

In addition, the firm submitted documents to the USPS (Forms 3600-P and 3600-R) that underreported the amount of permit mail and overreported the amount of metered mail.

The postal service issued $2.5 million in value-added refund checks to Mastersort for metered mail that had been overreported, the indictment continued.

The indictment also charged that Jayprakash Dhanak received cash payments for permit mail that was not reported to the postal service.

Charges against Leela Dhanak, an employee of Mastersort at the time of the investigation, are expected to be dropped at the Feb. 10 sentencing, according to her attorney David McNeil Morse.

A civil case brought by the U.S. Department of Justice alleging similar allegations had been resolved by the time Mastersort entered its guilty plea.

Mastersort was purchased in January 1999 as a going concern by Ancora Capital & Management Group LLC, an organization formed to acquire companies in the mail-sorting business. All the activities that formed the basis for the indictment predated the acquisition, said Joseph Russoniello, an attorney for Mastersort.

Ancora vice president David M. Johnson said the group had been aware of the investigation and that none of Mastersort's management or its board of directors remained with the firm following the acquisition.

He said that a $3 million fund was created by Mastersort to reimburse Ancora for legal costs, restitution and other penalties.

The $3 million in restitution to be paid by Mastersort represents losses suffered by the postal service between January 1995 and January 1997. Mastersort will be formally sentenced in March.