As Paracelsus Healthcare Corp. works to free itself from the shackles of bankruptcy, the Houston-based hospital chain received a painful reminder of problems in its corporate past that contributed to its financial predicament.
"SEC slaps hands in cookie jar in earnings management scheme," read the headline on a June 18 press release from the Securities and Exchange Commission. The slapped hands belonged to four former Paracelsus executives who settled SEC civil fraud charges last week and agreed to pay fines totaling $250,000.
The SEC filed the settlement in U.S. District Court in Houston along with an 18-page complaint against the four. The settlement resolves the complaint's allegations without the executives admitting or denying wrongdoing.
The SEC alleged that the former executives, including former Paracelsus Chief Executive Officer Ron Messenger, caused the company to overstate its earnings by 9% to 303% from 1993 to 1996. The executives allegedly created a $16 million "cookie jar" reserve that was used to conceal a decline in earnings. They also failed to properly write off $15 million in uncollectible accounts receivable and supplied auditors with false and misleading information to cover up their actions, the SEC alleged.
"When you have people cooking the books, that undermines faith in the markets, and we have to move swiftly and decisively," said Harold Degenhardt, administrator for the SEC's district office in Fort Worth, Texas.
According to the SEC, Messenger agreed to pay a $100,000 penalty. Gary Hubschman, a former vice president of operations finance at Paracelsus, will pay $75,000; James Rush, former chief financial officer, will pay $50,000; and Scott Barton, former controller, will pay $25,000. In addition, Rush and Barton have been barred for three years from practicing as accountants before the SEC.
Attempts to reach the lawyers representing the four executives were unsuccessful. Through an assistant, Messenger's lawyer, John Dowd, refused to comment.
The allegations date back to the years immediately preceding Paracelsus' 1996 acquisition of Champion Healthcare Corp. of Houston. The company was forced to restate its earnings in April 1997, and several shareholder groups sued the company for breaching its fiduciary duties. All four executives left the company soon after earnings inconsistencies became apparent, and they were replaced by executives who came from the Champion side of the company.
"We're just glad to have it behind us, and obviously we're glad that there's no enforcement action against the company," said Deborah Frankovich, Paracelsus' treasurer and senior vice president.
The SEC's Degenhardt said the settlement should not affect the company's bankruptcy proceedings. Paracelsus, which operates 10 hospitals, filed for protection under Chapter 11 last September and still awaits a formal order approving its voluntary reorganization plan. Once it receives approval, it is expected to emerge from Chapter 11 with a new name, Clarent Hospital Corp.
"One thing one can say from this is that coming out of bankruptcy, they're going to have a management team that people can have a great deal of confidence in," Degenhardt said. "When they uncovered this, they brought it to the attention of the right people."