Three major banks and two accounting firms are defending a lawsuit filed late last month by investors who claim to have lost more than $1.3 billion in asset-backed securities sold by National Century Financial Enterprises.
The suit, filed in Maricopa (Ariz.) County Superior Court, claims NCFE was "nothing but a Ponzi scheme kept afloat through repeated issuances of worthless notes." It says investors "were induced to buy the notes as a result of written and oral assurances made by people and institutions the investors believed they could trust."
Involving one of the largest corporate failures in healthcare, the suit exemplifies recent attempts by investors to hold banks and audit firms accountable for corporate scandals.
The Dublin, Ohio, healthcare financing company and its owners have been accused of advancing loans to healthcare firms, including some hospitals, without sufficient collateral. NCFE principals had ownership stakes in some of the companies that received financing. NCFE filed for Chapter 11 bankruptcy protection in November 2002. As of last month, more than $5.5 billion in claims had been filed against the company.
Named in the 153-page suit are Credit Suisse First Boston, J.P. Morgan Chase & Co., Bank One Corp., PricewaterhouseCoopers and Deloitte & Touche. Also named were four of NCFE's directors and shareholders: former Chairman Lance Poulsen; his wife, Barbara Poulsen; Donald Ayers; and Rebecca Parrett.
Three employees of J.P. Morgan who served on the NCFE board, Harold Pote, Thomas Mendell and Eric Wilkinson, also are among the defendants. According to the suit, all three were partners in the Beacon Group, an investment banking firm that owned 20% of NCFE and was acquired by J.P. Morgan in 2000.
The lawsuit accuses Credit Suisse, which was a placement agent for and financial adviser to NCFE, of marketing NCFE's notes while it knew that representations made to investors were false. The suit also claims the bank maintained an "enormous, undisclosed interest" in one of NCFE's financing vehicles.
According to the lawsuit, Credit Suisse and Bank One underwrote and managed at least 22 bond issues totaling about $3 billion by NCFE and its subsidiaries between 1998 and 2002. The suit claims Bank One and J.P. Morgan failed in their roles as trustees to protect reserve accounts to make sure proceeds of the bond sales were appropriately used to purchase healthcare accounts receivable.
According to the suit, the two accounting firms failed to detect and report misuse of funds while acting as NCFE's auditors between 1995 and 2001.
Among the plaintiffs are 94 governments in Arizona, which invested in a pool established by the state treasurer's office. Collectively, they lost about $100 million, said Kathy Patrick, a partner in the Houston litigation firm Gibbs & Bruns, which filed the suit.
"They were AA and AAA rated notes, rated more highly at the time than the general obligation bonds of the state of Arizona," Patrick said. Spokesmen for all three banks declined to comment last week. A spokesman for PricewaterhouseCoopers said the claim was "totally without merit." A call to Deloitte & Touche was not returned.
In related news last week, California Home Builders, a real estate company, offered the high bid of $6.95 million for the real estate assets of shuttered Pine Grove Hospital in Canoga Park, Calif., one of five hospitals owned by Doctors Community Healthcare Corp. Doctors Community, Scottsdale, Ariz., was among several healthcare companies financed by NCFE that declared bankruptcy after the company collapsed.