WASHINGTON — Federal prosecutors are looking into a $7.5 million settlement between the District of Columbia government and its former Medicaid contractor, businessman Jeffrey Thompson, and the investigation has led to an unusual public spat between the U.S. Attorney and the city’s attorney general.

U.S. Attorney Ronald Machen said in a statement Wednesday that district Attorney General Irvin Nathan is refusing to turn over documents relevant to the investigation. Nathan told The Washington Post that the documents are protected by attorney-client privilege and are not incriminating.

“The district’s withholding of relevant documents is currently preventing federal investigators from fully understanding actions taken by district officials,” Machen said in his statement. “We hope that the D.C. attorney general will reconsider his position in light of the strong public interest in uncovering any criminal wrongdoing in the district government.”

Through a spokesman, Nathan declined to be interviewed by The Associated Press. He told The Post, which first disclosed the fight over the documents on Wednesday, that Machen’s office is seeking emails and other documents related to a 2011 settlement between the city and D.C. Chartered Health Plan, which then had a contract worth more than $300 million annually to manage the care of Medicaid recipients.

Chartered, which is now defunct, was wholly owned by Thompson, who court documents show is the subject of a grand jury investigation. Thompson is suspected of funneling $653,000 in illicit funds into Mayor Vincent Gray’s 2010 campaign.

Several of his associates have pleaded guilty to felonies — some for their involvement in what prosecutors called the “shadow campaign” for Gray; others for making straw contributions on Thompson’s behalf to candidates for local and federal office. Although Thompson is not identified by name in court documents that detail the scheme, he has been identified in open court and by attorneys as the suspected source of the illicit funds.

Wayne Turnage, director of the district’s Department of Health Care Finance, said he was interviewed by the U.S. Attorney’s office in September and provided a detailed timeline and supporting documentation about the settlement with Thompson. He vehemently denied that he was pressured in any way by the Gray administration to make Thompson whole.

“The issue was, did the mayor or the (administration) ever ask me to forward a recommendation, recommending a settlement for Jeffrey Thompson? The answer is unequivocally no,” Turnage said.

The settlement came about after Thompson told Turnage in April 2011 — less than four months after Gray took office — that his firm had not been adequately reimbursed for the rates it was paying to children’s dental providers. Turnage said he asked an actuary to look at the rates, and it was determined that they were unsound. He said Thompson’s firm lost more than $10 million but agreed to settle for $7.5 million and drop a pending lawsuit.

The settlement was questioned by D.C. Councilmember David Catania, who called it an inappropriate bailout and said Thompson’s losses were his fault, not the city’s.

The new wrinkle in the sprawling federal investigation of corruption in district politics comes as Gray, a Democrat, is mulling whether to seek a second term. Four D.C. Councilmembers are among the candidates to replace him. The Democratic primary is April 1, and candidates must submit signatures to get on the ballot by Jan. 2.

(© Copyright 2013 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)

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