Alleged financial fraud led a laboratory subsidiary of Wellmont Health System, Kingsport, Tenn., into Chapter 11 protection last month. The three-hospital system said it expects the problems at the subsidiary, known as MEDex Regional Laboratories, to affect Wellmont's financial results for fiscal 2003, ending June 30.
Federal authorities earlier this month charged Michael Ladd, MEDex's former chief executive officer, with eight counts of making false statements and reports for the purpose of influencing the actions of a federally insured bank. Ladd, 50, is accused of forging the signatures of six physicians who formerly owned a 50% stake in MEDex and the signatures of two Wellmont officials, including Eddie George, the system's president and CEO. In the criminal complaint filed in U.S. District Court in Greeneville, Tenn., the U.S. attorney in Greeneville accused Ladd of forging the signatures on guaranty agreements for loans and credit lines totaling $5 million that were granted to MEDex in July 2002 and February 2003. The lender, a local affiliate of SunTrust Banks, Atlanta, required the guaranty agreements, according to the criminal complaint.
George said the MEDex bankruptcy would lower Wellmont's investment income in this year's financial results, but he said the system doesn't anticipate any restatements of prior years' results. The charge, George added, would be relatively small for Wellmont, which earned $5.4 million, including more than $4 million in investment income, in fiscal 2002 on revenue of $757 million.
George said he hopes the system will show a small operating profit for fiscal 2003, but he acknowledged that investments, because of MEDex and the performance of the stock market, "haven't done so well." He declined to predict whether the system would end the year in the black or in the red.
A recently hired chief financial officer and MEDex's auditors discovered the unauthorized loans Ladd had taken out for the company as they completed work on three years' worth of audits in March, the complaint alleged.
Ladd resigned in March, according to the complaint.
Wellmont came into its original 50% share of MEDex as an indirect result of the 1996 merger of Bristol (Tenn.) Regional Medical Center and Holston Valley Hospital and Medical Center, Kingsport, that created Wellmont, George said.
The nonemployed pathologists ran the lab at Holston Valley using the name MEDex, but in 1999, the lab operations at Bristol also were brought under MEDex, with Wellmont receiving a 50% stake, he said. The physicians transferred the remaining stake to Wellmont amid MEDex's bankruptcy proceedings, George said.
As for the allegations against Ladd, George said: "I've been in this business 32 years. You can do a lot of checks and balances ... but operating a small company, it's just hard when someone has an intent to do this, to game the system, so to speak. It's something that's perhaps impossible to totally prevent. We've been told by both the federal investigators and the auditors that we got on it fairly quickly."