A Securities and Exchange lawsuit filed late last month against former top executives of National Century Financial Enterprises, the fallen backer of financially distressed healthcare providers, offered little retribution for the hospitals and physicians wounded by NCFE's demise.
Alleging that the executives schemed to defraud investors in securities issued by subsidiaries of the failed private corporation, the SEC's civil action arrived more than three years after a major healthcare implosion in which investors discovered that the companies had hidden "massive cash and collateral shortfalls from investors and auditors," the SEC said. The discovery led to the sudden collapse of NCFE in October 2002 and forced, by association, approximately 275 healthcare providers to file for bankruptcy protection. Investors lost more than $2.6 billion in the debacle, the SEC said.
The lawsuit, filed in federal court in Columbus, Ohio, on Dec. 21, 2005, moved the glacially paced investigation to the highest echelon of NCFE, naming Lance Poulsen, principal and former chief executive officer of NCFE; Donald Ayers, principal and former chief operating officer; Rebecca Parrett, principal and former director of NCFE's accounts receivable servicer department; and Randolph Speer, former chief financial officer of NCFE. The commission is seeking to permanently bar each from serving as an officer or director of a public company and to pay back illegally obtained gains, interest and penalties.
Ayers is "looking forward to aggressively defending the action," said his attorney, Brian Dickerson, a partner at Maguire & Schneider. "One positive is that we now can actually see what type of evidence the SEC claims to have possessed to support the allegations."
Speer and attorneys for Poulsen and Parrett did not respond to requests for interviews.
This newest legal development represents yet another aftershock from the devastating chain reaction that was triggered by the NCFE bankruptcy. The collapse sent a shudder through a small corner of the healthcare financing market serving only the neediest providers.
"There is obviously a legitimate business to be done in the purchase of healthcare receivables properly implemented," said Kathy Patrick, a partner in the law firm of Gibbs & Bruns. Patrick represents a group of large NCFE investors who filed a lawsuit against three major banks and two accounting firms that were involved with the failed company (June 2, 2003, p. 6). "This is a business that works and works well for everyone involved, but when triple-A asset-backed paper collapses like this, it sends a chill through the market and makes people skeptical about investing in healthcare asset-backed securities in the future."
Robert Burson, an SEC spokesman, said the commission took three years to sue the executives because "It was important for us to build our case." The SEC said the probe is continuing.
Meanwhile, the FBI and other agencies have been building a criminal case since documents were seized in a raid on NCFE offices in November 2002, said Fred Alverson, a spokesman for the U.S. attorney in Columbus. So far, no criminal charges have been filed against the four defendants named in the most recent SEC lawsuit, but the U.S. attorney may file a motion in coming weeks requesting a stay in the SEC's civil complaint pending the outcome of the criminal probe, Alverson said.
The SEC investigation concerns the misdeeds pertaining to defrauded investors. The commission has no regulatory oversight on the operations of NCFE or its financing business, Burson said.
NCFE was engaged in a financing tool known as factoring, in which companies purchase medical accounts receivable from healthcare providers who are typically in dire financial straits. The transaction would be similar to a cash-strapped individual selling future paychecks to a lender at a discount.
"My two cents is that National Century -- for the years it was straight -- played an important role in helping financially stressed hospitals to remain solvent," said Fred Hyde, an independent hospital consultant and clinical professor at Columbia University's Mailman School of Public Health. "That role was to essentially overcome the structural or unintentional delay that hospitals experience in receiving accounts receivable (from managed-care organizations). For a lot of smaller hospitals as they came into the electronic billing era, this was indispensable."
The SEC complaint notes that NCFE, through two wholly owned subsidiaries, purchased medical accounts receivable from healthcare providers and then packaged them as securities that were sold to investors. From at least February 1999 to October 2002, the companies offered and sold about $3.25 billion in notes through 15 private placements to institutional investors, the SEC said.
The complaint alleges the defendants veered away from the law when they improperly depleted the required reserve accounts and collateral base by "advancing" at least $1.2 billion to healthcare providers without receiving eligible receivables in return. The advances were unsecured loans to distressed healthcare providers, many of them wholly or partly owned by NCFE and the principals, the SEC charged.
The SEC has already prevailed in civil judgments against three other former NCFE executives who have also pleaded guilty to criminal charges in federal court: Sherry Gibson, a former executive vice president of compliance; John Snoble, a former vice president and controller; and Brian Stucke, a former associate vice president for business services. Gibson, who pleaded guilty to conspiracy to commit securities fraud, is serving a four-year sentence at the Lexington (Ky.) Federal Medical Center and is scheduled to be released on March 28, 2008. Stucke, who pleaded guilty to conspiracy to commit securities fraud, and Snoble, who pleaded guilty to money-laundering conspiracy, are awaiting sentencing.
The ensuing investigation has been small consolation for the healthcare organizations that dissolved in NCFE's wake. For one, the collapse of PhyAmerica, an emergency department staffing group, in November 2002 validated repeated warnings to physicians about the dangers in working for corporate staffing companies, said Robert McNamara, past-president of the American Academy of Emergency Medicine and chairman of emergency medicine at Temple University Hospital in Philadelphia.
Before PhyAmerica filed for bankruptcy protection in November 2002, it owned emergency department contracts in approximately 30 states, providing services through 2,200 physicians to nearly 3.5 million patients annually, according to the AAEM. Front-line emergency physicians employed by PhyAmerica "had no idea" that PhyAmerica was selling its receivables to NCFE, McNamara said, and when the staffing company went under, many doctors found out too late that there was no money to pay for malpractice claims.
The academy got some money for the doctors at a bankruptcy hearing, but "I know a lot of them had to spend a good deal of their personal funds for legal support," McNamara said.
An early NCFE victim no longer around to voice its opinion was Boston Regional Medical Center, Stoneham, Mass., which "absolutely" was bankrupted because of NCFE, closing its doors in 1999, said James Cottos, vice president of consulting firm Strategic Management Services. A former investigator for HHS' inspector general's office, Cottos was working for forensic accounting firm FTI/Kahn Consulting in 2001 when he filed an affidavit in support of Boston Regional's claims against NCFE. In his affidavit on file with the U.S. Bankruptcy Court in Boston, Cottos said that NCFE "shortchanged" the hospital by more than $12 million.
Under the terms of its agreement with Boston Regional, NCFE was to purchase the hospital's receivables at a 3% discount but in reality, was taking as much as 20% of the receivables in fees and program costs, he said. NCFE slowly bankrupted Boston Regional by first improperly withdrawing small amounts from the hospital, "then making a larger withdrawal once the first passed" without notice, he said in the affidavit. That pattern is "common to embezzlement and fraud schemes," Cottos said in the affidavit.
Boston Regional and NCFE eventually settled their dispute for undisclosed terms six months before NCFE collapsed, Cottos said.
Another long-forgotten victim was Lincoln Hospital Medical Center in Los Angeles, which now operates as Promise Hospital of East Los Angeles, said Rich McCarthy, its CEO. NCFE also left destitute four hospitals owned by Doctors Community Healthcare Corp., including two in Washington, although Doctors Community eventually purchased the companies' assets back from bankruptcy auctions (Dec. 12, 2003, p. 8). Officials at Doctors Community did not respond to several requests for interviews.
Nevertheless, the NCFE experience does not seem to have had lasting effects on the market, especially in the not-for-profit healthcare sector, said Fred Hessler, a managing director in the healthcare group at investment bank Citigroup. Only "very marginal credits" use this particular financing tool. Investment-grade not-for-profits with ready access to the tax-exempt bond market have little need for factoring services.
NCFE's collapse did instill a degree of fear among providers and in the capital markets, but that is old news, said Phil Hooker, president of Alamo Capital, a division of Presidential Financial Corp. NCFE's notoriety apparently has not dissuaded other finance companies from entering the healthcare market: Last month Presidential, a commercial lender providing credit lines to businesses generally unable to qualify for conventional bank financing, acquired Alamo.
Hyde, the independent consultant, said factoring is a tool that small hospitals will always need as long as the healthcare system is "dependent on the integrity of the payer." Unlike large hospitals and healthcare systems, smaller players don't have the "horsepower to hammer" payers for their receivables. "Getting paid for what you do remains the No. 1 financial management challenge in smaller hospitals. I'm not sure enough attention is given to it. As a result, financial entrepreneurs find niches," Hyde said.
The aggrieved investors are "hopeful the SEC doesn't stop simply with the founders but goes further and seeks enforcement against others who brought NCFE to the market," said Patrick, the attorney representing some NCFE investors. "NCFE doesn't get access to conservative investors who buy investment-grade notes without the help of a prestigious investment bank like Credit Suisse First Boston, which sold these notes to the investors. They were also audited by PricewaterhouseCoopers, a major and reputable firm, and there was no indication to investors that these were anything but a triple-A rated money market equivalent."
Spokespersons for Credit Suisse First Boston and PricewaterhouseCoopers declined to comment.
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