U.S. Diagnostic, the nation's largest operator of diagnostic imaging centers, has been hit with four shareholder lawsuits that allege the company failed to disclose the criminal record of a key strategic consultant.
The complaints, filed last week in U.S. District Court in West Palm Beach, Fla., claim that U.S. Diagnostic broke securities laws and injured shareholders by concealing the fact that Keith G. Greenberg pleaded guilty to felony federal fraud charges in 1994 and served 30 days in prison in 1995.
The class-action lawsuits seek compensation for shareholders, and their allegations raise a cloud over the company that could dampen Wall Street's enthusiasm for financing West Palm Beach-based U.S. Diagnostic's torrid acquisition spree, which Greenberg helped direct.
U.S. Diagnostic has said securities laws didn't require that it disclose Greenberg's past because he was retained as a consultant working for an independent company known as Coyote Consulting. However, U.S. Diagnostic is reviewing its relationship with Greenberg's firm, said Joseph Scime, a company spokesman. "We're working on restructuring the relationship at this time," he said.
Greenberg could not be reached for comment.
Greenberg has advised U.S. Diagnostic in its aggressive strategy to build regional networks of imaging centers to snare managed-care contracts. During 1996, U.S. Diagnostic bought or became manager of 110 imaging centers. At year-end, the company, which was founded in 1993, owned 115 diagnostic imaging centers and managed 19 others in 16 states, making it the largest single player in the outpatient diagnostic imaging business.
Terms of Coyote Consulting's agreement, which were obtained by MODERN HEALTHCARE, show Greenberg's compensation could equal that of U.S. Diagnostic Chief Executive Officer Jeffrey Goffman. According to the agreement as amended in 1995, Coyote Consulting was to be paid a base consulting fee of $185,000 annually and a $65,000 bonus in 1996 if U.S. Diagnostic revenues rise at least 20% above 1995's. Further, the agreement provided that Coyote would be reimbursed as much as $100,000 each year to hire up to five employees and would reap a finder's fee of 2% of the price paid for each imaging center acquired.
A variety of company documents appear to blur the distinction between Greenberg's role as a consultant or company executive, fueling investors' allegations that he was for all intents and purposes a U.S. Diagnostic executive.
For instance, U.S. Diagnostic's 1995 annual report, the most recent available, identified Greenberg as co-founder of the company and part of the "management team" serving as "director of marketing, mergers and acquisitions." And a pair of company press releases issued last August said Greenberg was "responsible for USDL's mergers and acquisitions."
Even if the shareholder lawsuits fail, the Securities and Exchange Commission could step in to penalize the company. A securities lawyer who spoke on condition of anonymity called the class-action allegations "intriguing," adding, "I'd be shocked if the SEC doesn't take some action."
Greenberg's past came to light just before Christmas when Bear, Stearns & Co. withdrew a buy recommendation for U.S. Diagnostic stock and simultaneously suspended covering the firm. In the terse discontinuation notice issued Dec. 23, Bear, Stearns said the move came after it learned of an undisclosed guilty plea to federal fraud charges in 1994 by Greenberg, "who has, over the last year, been introduced to us as . . . a co-founder of USDL and a member of the management team."
The day of the announcement, U.S. Diagnostic's share price tumbled 22% to $9.38 in NASDAQ trading. The shares have yet to fully recover from that loss, trading in the $10 range last week.
In spite of the lawsuits and questions concerning Greenberg, U.S. Diagnostic said its business plan remains unaltered.