For the latest news on this case, please read: In fraud case, West Stockbridge defendant's competency questioned.

The former head of a Lenox school for troubled young women and his son and son-in-law are facing prison time and have agreed to pay back the state of Vermont and the U.S. government $3 million for what the U.S. Attorney's Office calls "egregious" tax and health care fraud connected to a Bennington, Vt., school they had operated.

Matthew Merritt Jr., 81, of West Stockbridge; his son, Matthew Merritt III, 54, of Lenox; and Raymond Crowley, 58, the elder Merritt's son-in-law, of Great Barrington, agreed to plea deals that wrapped up both civil and criminal cases with fines and possible prison time connected with Bennington School Inc., a for-profit private corporation that operated a residential program in Bennington for troubled boys and girls.

A fourth defendant, Jeffrey LaBonte, 59, also agreed to a plea deal in which he must pay $1,300,000 and will receive a lesser sentence than the federal guidelines. LaBonte's residence was not available Tuesday.

The U.S. Attorney's office said on Wednesday that Merritt Jr. will be in U.S. District Court in Burlington, Vt., on Thursday for the formal pleas; the others' court dates weren't available on Wednesday.

According to the U.S. Attorney's Office, the men fraudulently overcharged $3.6 million to the state of Vermont, which placed troubled students at the school and paid for their tuition and expenses through Medicaid. Sixty percent of that amount came from federal money, while the rest was funded directly from the state of Vermont.

The U.S. Attorney's Office said that the elder Merritt, who was Bennington School's president, and LaBonte, the executive director, with the help of Crowley, the CFO, and the younger Merritt, who was plant manager, implemented a system of compensation that provided cars, gasoline, personal expenses, and salaries for family members who didn't work for the school, among other perks. None of this was reported on their individual tax returns. The perks were "embedded in the books and records of [Bennington School], which were used to create the reports, budgets and other financial documents that [Bennington School] presented as accurate and allowable" to bill the state of Vermont.

All four men relinquished their jobs and stakes in the school in January. Bennington School is now being run by a different operation.

The defendants dispute the state's calculation, but have agreed to settle to "avoid further investigation and litigation," according to the U.S. Attorney's Office. None of the attorneys representing the defendants immediately returned phone calls.

All four defendants have agreed to plead guilty to one charge each of federal tax fraud.

The plea deal for the elder Merritt, who will also plead guilty to federal health care fraud, means he won't be facing more than 24 months in prison. The maximum sentence is 10 years for federal health care fraud and three years for tax fraud.

His son, as well as Crowley, are facing no more than 18 months in prison as part of the deal.

LaBonte, who cooperated with the investigation, according to the U.S. Attorney's Office, will be facing an undisclosed prison term of less than three years.

The total restitution of $4.3 million is to be split between the state of Vermont and the U.S. government.

The Merritts previously ran Valleyhead School in Lenox, which closed in 2009, after 40 years of business. The school was founded by the elder Merritt and J. Anne Merritt in 1969.

To reach Andrew Amelinckx:
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