Last week, the Securities and Exchange Commission filed a civil lawsuit charging three of AHERF's outside auditors with securities fraud in connection with their 1997 audit of the since-failed system.
AHERF, a 14-hospital system based in Pittsburgh, went bankrupt in 1998 and left its creditors holding about $1.5 billion in unpaid bills.
The civil lawsuit, filed in U.S. District Court in Philadelphia, alleges that the three auditors-William Buettner, Mark Kirstein and Amy Frazier-actively participated in a fraudulent scheme by AHERF to mask the foundation's financial troubles by shifting funds on financial statements from 1997. All three defendants were certified public accountants with Coopers & Lybrand, now PricewaterhouseCoopers. Buettner was a partner with the firm, while Kirstein and Frazier were managers on the audit.
Ronald Long, administrator in the SEC's Philadelphia office, said the defendants allegedly helped AHERF transfer reserves from its healthier hospitals to those that were losing money.
"This is not a case where the auditors were lied to or did not understand what was happening or were clumsy," Long said. "The auditors knew, helped create and completed the audit so investors would not find what was improper."
The alleged scheme involved transferring $99.6 million of reserves from the books of some of AHERF's financially healthier assets to the Delaware Valley Obligated Group, which was losing money. The money was used to increase Delaware Valley's reserves or reduce expenses related to the write-off of uncollectible receivables, the SEC alleged. AHERF's 1997 financial statement credits the system with net income of $21.9 million when it should have posted a $37.7 million net loss, the SEC said in its complaint.
"This case is significant because in the way the system is set up now, the auditors are charged with going in and finding out if the companies are committing fraud and playing shell games," Long said. "In this case, it's our contention that the auditors added shells to the game and assisted in hiding the balance from the investing public."
An attorney for Buettner wasn't available for comment by deadline. Martin Perschetz, Frazier's attorney, said the SEC lawsuit is baseless and should not have been brought against his client.
"Amy Frazier strongly denies any allegation of fraud," he said. "It is absurd to suggest that Amy, a hardworking and thoroughly honest audit manager, had anything to do with alleged misconduct at AHERF."
Richard Zabel, Kirstein's attorney, called the allegations against his client "completely and utterly false" and said he plans to contest them as vigorously as possible.
PricewaterhouseCoopers spokesman Steven Silber said the firm is reviewing the complaint, which was against the three individuals, not the firm.
"The overriding point about the collapse of AHERF was that it was a business, not an audit, failure," he said. "The bankruptcy itself resulted from a decade-long flawed business strategy and had nothing to do with the audit."
As for the lawsuit, Silber said, "We do stand behind our work and our people."
The lawsuit presents the SEC's version of events, while PricewaterhouseCoopers plans to offer its interpretation in court, he said.
If the three are found guilty, the court could order them not to violate securities laws in the future and they could face civil penalties of roughly $110,000 per person, Long said. Buettner has since retired; Kirstein and Frazier continue to work for PricewaterhouseCoopers, he said.
AHERF's well-publicized bankruptcy was the first case in which the SEC charged not-for-profit healthcare executives with misleading bond buyers. Some of the system's top executives were arrested on charges of raiding endowment funds and were sued for misrepresenting the systems' finances. While most of the charges have been settled, former AHERF Chief Executive Officer Sherif Abdelhak awaits trial on 715 criminal counts that he illegally used funds from more than 350 charitable endowments to prop up the system, and former AHERF Chief Financial Officer David McConnell faces trial on one felony count of theft. Allegheny County Judge Robert Dauer in Pittsburgh dismissed charges against AHERF former general counsel Nancy Wynstra. The cases against Abdelhak and McConnell are pending in Allegheny County court in Pittsburgh, although no trial date has been set.