The medical empire of Steven Scott, M.D., is under attack.
Two shareholders of PhyAmerica Physician Group, a Durham, N.C.-based PPM, are asking a court to place the firm in receivership to block Scott's plan to privatize the company and to nullify recent appointments to PhyAmerica's board.
They are the same stock owners who accused chairman and CEO Scott and other PhyAmerica directors of "looting" the company in a suit filed under racketeering laws last year.
Meanwhile, the company that has bankrolled many of Scott's purchases of failing PPMs, IPAs and HMOs is the target of a federal probe into possible Medicare and Medicaid fraud. The financier, National Century Financial Enterprises of Dublin, Ohio, and its Chairman/CEO Lance Poulsen, also are accused in the racketeering suit.
PhyAmerica, which specializes in managing emergency room physicians, was created from the merger of Coastal Physician Group, founded by Scott in 1977, and rival PPM Sterling Healthcare.
The company suffered another legal setback last August when a North Carolina appellate court affirmed an earlier ruling that Henry Murphy, former interim president and CEO of Coastal, was entitled to a $755,000 transaction fee for his work in restructuring the company's debt. Murphy says that the restructuring involved a $151 million sale of Coastal receivables to NCFE in 1997, but PhyAmerica officials have refused to confirm that figure.
PhyAmerica and NCFE officials did not respond to requests for comment.
PhyAmerica stock bottomed out at 9 cents on Oct. 26 and stood at about 11 cents in the waning days of 2000, down from a peak of $40.25 in 1994 when it was known as Coastal. The company was delisted from the New York Stock Exchange in December 1998 and never told shareholders what led to the delisting.
"This failure to disclose the basis for the delisting has rendered the company's shares virtually impossible to trade," the racketeering lawsuit charges.
Scott's buyout offer of 15 cents per share values the firm at $6.4 million; he would pay $2.8 million for the 43% of PhyAmerica he currently does not control through personal holdings, family members and affiliated companies. It is a pittance compared to Coastal's $69.3 million acquisition of Sterling in July 1999.
Shareholders Charles Bosco of East Liverpool, Ohio, and Michael McGee of Palatine, Ill., believe the staggering decline is no coincidence.
"They're using this thing as their own private bank," Bosco says of Scott, Poulsen and PhyAmerica's board of directors. All three are defendants in the class action suit Bosco and McGee filed in March under the federal Racketeer Influenced and Corrupt Organizations Act on behalf of all PhyAmerica shareholders.
The racketeering suit remains bogged down in the discovery stage.
The suit accuses Scott of undervaluing Coastal and PhyAmerica assets so other companies he owns could buy pieces of the medical management firm, including several HMOs, at bargain rates and through shady financing schemes.
The plaintiffs also charge that Scott manipulated Sterling's balance sheet and hid behind the confidentiality of contracts with NCFE to underreport PhyAmerica income and pocket the difference.
Bosco and McGee say in the racketeering suit that they believe Scott had planned for some time to buy out other PhyAmerica shareholders once the company's value plummeted. PhyAmerica publicly disclosed Scott's privatization plan on Nov. 14.
Two weeks later, Bosco and McGee went back to court to challenge the proposed buyout and to ask a judge to appoint a receiver for PhyAmerica. Because Scott controls the majority of shares, "He can force the (other 43%) to sell the shares, and that's not right," Bosco says.
The shareholders' latest legal action does not name NCFE as a defendant but says that federal prosecutors in Kentucky are investigating Poulsen's finance company for possible Medicare and Medicaid fraud.
A spokesperson for the U.S. Attorney's office in Kentucky did not respond to questions about the investigation.
Supporting documents filed in the case say that securities ratings services Duff & Phelps and Fitch IBCA were probing NCFE for other potential violations.
