Hidden cash shortfall

Hidden cash shortfall
Books falsified, former officer testifies
Friday, February 22, 2008 3:09 AM
By Jodi Andes

THE COLUMBUS DISPATCH
There were two sets of books at National Century Financial Enterprises.

One set, the actual books, showed that the company had been short on cash since 1995. Only a few executives of that Dublin-based company were privy to those.

The other set, the financials the rest of the world saw, included numbers that were dreamt up and plugged in monthly, Sherry Gibson, a former executive vice president of the company, testified yesterday.

"I added receivables. I changed the aging categories. I added payor information. I manipulated the reserve accounts," Gibson told jurors in a monotone voice, describing how she falsified the company books.

Investors relied on those books when investing billions of dollars in the health-care financing company.

When National Century filed for bankruptcy in November 2002, investors lost $1.9 billion, making it the largest case of private corporate fraud in the nation's history, prosecutors say.

Gibson, who has spent time in prison after admitting her role in the company's downfall, is a key witness for the prosecution in the ongoing trial of five former company executives.

Initially, she said, those with access to the company's true financials were owners Rebecca S. Parrett, Donald H. Ayers, and Lance K. Poulsen.

But fellow vice presidents Randolph H. Speer, Roger S. Faulkenberry and James E. Dierker were copied on memos about the actual accounting numbers that investors, auditors, rating agencies -- and other company employees -- never knew existed.

Parrett, Ayers, Speer, Faulkenberry, and Dierker are being tried together in federal district court in Columbus on charges of securities fraud, wire fraud and money laundering before Judge Algenon L. Marbley.

Poulsen is expected to be tried separately on similar charges in August.

Gibson pleaded guilty to conspiracy to commit securities fraud during the FBI and IRS investigation of National Century, and became a key government witness against her former co-workers.

She started with the company as a receptionist/secretary when she was 24. At the time, she had no health-care experience, but she learned the complex financing and was deeply loyal to Poulsen, other employees have testified.

Gibson rose to become an executive vice president, earning $150,000 a year.

At 43, she is now a felon having served three years in a federal prison in Kentucky for her crime.

U.S. Department of Justice trial attorney Wes Porter questioned Gibson all day in an examination that drew more than 70 objections from the eight defense attorneys.

The objections, led mostly by defense attorneys Fred Benton and Javier Armengau, averaged one every five minutes during Gibson's six hours of testimony.

Prosecutors have alleged that greed played a role in the company's downfall, but Gibson is the first witness to explain what the perks were like at the company.

The three company owners awarded employees bonuses every three months, as long as the company met its projections. And from 1996 to mid-2002, the company did.

She and the defendants all had the ability to offer health-care providers, such as hospitals and clinics, millions in unsecured loans while earning bonuses on the loans as well.

For example, she earned $25,000 bonuses four times in 2002.

Employees also could earn special bonuses. She received one worth $50,000 and was given a $1 million bonus in potential stock options if National Century ever went public or was sold.

National Century, though, was never sold before it collapsed.

jandes@dispatch.com