National Century Financial Enterprises case ranks up there with Enron and WorldCom, prosecutors say.

Trials in huge fraud case to begin
Sunday, February 3, 2008 3:32 AM
By Jodi Andes

THE COLUMBUS DISPATCH
As fraud cases go, the National Century Financial Enterprises case ranks up there with Enron and WorldCom, prosecutors say.

Investors in the Dublin-based company lost more than $1.9 billion after the financing giant filed for bankruptcy in 2002. And at least 275 health-care companies collapsed, putting thousands out of work and affecting thousands of patients. (I wonder if the governor of AZ is aware of this case?)

National Century's collapse never gained much attention outside business circles, largely because it was a privately held company. But some, such as large pension funds and the state of Arizona, lost millions.

"I always say it's the largest, most significant case you've never heard of," said Kathy Patrick, an Arizona attorney representing 30 clients who lost a total of $1.6 billion.

By comparison, the scandals that destroyed publicly traded Enron and WorldCom hit thousands of stockholders. The Enron scandal wiped out 5,600 jobs and $2.1 billion in pensions and destroyed $60 billion in market value. The $11 billion WorldCom accounting fraud resulted in investor losses estimated at $180 billion, and it put more than 20,000 people out of work and destroyed their retirement funds.

Eleven people have been charged in connection with the National Century collapse. Four already have pleaded guilty and agreed to testify against the others.

The rest will defend themselves in four trials that are expected to span most of the year. The first starts Monday, and the last is scheduled to begin on Oct. 1.

Former CEO and co-founder Lance K. Poulsen is to be tried twice -- on March 7, with a co-defendant, on a charge of witness tampering, and again on Aug. 4, on charges of fraud, conspiracy and money laundering.

The trial that starts on Monday is expected to last at least two months. Facing charges ranging from conspiracy to money laundering are the other two co-founders, Rebecca S. Parrett and Donald H. Ayers, as well as former executives Randolph H. Speer, Roger S. Faulkenberry and James E. Dierker. If convicted on all charges, all but Dierker could be sentenced to life in prison.

At 39, Dierker is the youngest defendant. He could be sentenced to 25 years in prison if convicted.

Those familiar with the case say it is one to watch because of its immediate and continuing effect on the national economy.

A company is born
Ayers, Parrett and Poulsen founded National Century in 1991 to offer financing to small hospitals, clinics, nursing homes and other health-care providers.

National Century agreed to buy the providers' uncollected debt owed by patients, or accounts receivable, and give the providers cash to cover expenses. The smaller companies didn't have to wait for insurance reimbursement, and National Century kept a fee or percentage of what it collected.

To get cash to give the smaller companies, National Century sold bonds to investors -- including some big pension funds, which were among those hit hardest by National Century's collapse.

The pension fund for New York City police, firefighters and other workers began investing in National Century in 2000. The company's bonds were attractive because of their life span -- usually three years -- and high bond rating, said New York lawyer Steve Fineman.

Fitch Investor Services and Standard & Poor's gave National Century the highest rating -- AAA.

"It showed it was a conservative investment," Fineman said.

But within two years, and only a year after the Sept. 11 terrorist attack, the New York City workers' fund lost $89 million. The hit was not big enough to cause workers to lose their pensions, but big enough that the fund still is trying to recoup five years later, he said.

New York City workers were not alone.

A consortium of Arizona investors, including the state government, was hit hardest and has sued National Century executives for $1.6 billion. Millions came from the state's investment pool, money that funds such things as roads and schools and supplements the expenses of everyday government, said Kathy Patrick, who represents the consortium.

After the money was lost, public projects were delayed and some workers were laid off, Patrick said.

The cost of the National Century collapse hasn't yet been measured, but it's safe to assume that consumers are feeling the effects, said W.C. Benton, a health-care business professor at Ohio State University's Fisher College of Business

"The fact that the doctors go out of business means fewer clinics," he said. "Prices increase because of fewer places of service."

National Century financed a few small hospitals, and at least one in Texas filed for bankruptcy, but no hospital in Ohio was affected, said Tiffany Himmelreich, a spokeswoman for the Ohio Hospital Association.

Services proved popular
Early on, National Century carved out an attractive business niche.

Few if any companies were providing such a service at the time, Benton said. And the three founders had the experience to make it work.

Poulsen had a background in marketing and financing. Ayers was a former president of Grant Medical Center. Parrett, now divorced from Ayers, had experience handling receivable accounts at Grant. Obtaining the necessary capital wasn't a problem. National Century raised $4.4 billion from investors between 1998 and 2002 to lend to health-care providers.

The company's headquarters were at 6125 Memorial Dr. in Dublin. National Century grew to have 327 employees in the suburb and three other cities.

From the outside, its loans appeared very safe, Patrick said.

For every dollar loaned out, the company promised to keep 17 cents in reserve. Health-care providers were told they would receive 80 or 90 cents on the dollar of the debt assumed for collection by National Century, federal documents show.

Getting less than what they were owed in exchange for money in hand quickly was appealing to physicians for several reasons, Benton said.

They wouldn't have to wait months for Medicaid reimbursement or for patients to pay their bills. Nor would they have to bother with paper-intensive billing, a side of the business most doctors dislike, he said.

"It was a great idea to keep from having to have some billing center in your office," Benton said.

National Century became a reliable -- and sometimes the sole -- stream of income for health-care providers as the company grew to become one of the nation's largest health-care financers, Benton said.

That's why so many health-care providers collapsed in the wake of National Century's bankruptcy.

"When the cash is cut off, you can't pay your suppliers or your employees," Benton said.

Business practices questioned
By 2000, allegations of wrongdoing began to surface.

Assistant U.S. attorneys say that the company's collapse resulted from criminal decisions, not a failed business plan.

Greed set in, they say.

According to federal indictments:

Company executives loaned money to companies in which they were principal stakeholders "to pay operating expenses of these health-care providers which was to benefit Poulsen, Ayers and Parrett."

Executives used the money to support lavish lifestyles, which involved such things as Poulsen's 60-foot yacht and Parrett's 4,725-square-foot Arizona home with a five-car garage.

In some cases, National Century agreed to take over providers' debts without formally buying the accounts, which amounted to the company having millions in unsecured loans. In 2001 and 2002, National Century advanced $700 million in loans to companies without purchasing the accounts receivable.

As reserves weakened, investors and Securities Exchange Commission officials were given false financial reports that said National Century's two subsidiaries, NPF VI and NPF XII, were healthy. But money was being shifted between the two to make it appear they had adequate money in reserve, the indictment says.

The company declared bankruptcy in 2002 and shut down shortly after.

Company executives have maintained their innocence. Attorneys and U.S. District Judge Algenon L. Marbley have prepared for a long, tedious legal fight.

One of the challenges will be to make topics such as "securitization" easy for jurors to understand, said Greg Peterson, Parrett's attorney. He is concerned that complex business practices will be overly simplified and misrepresented.

"Oversimplifying things is very dangerous," Peterson said. "These are very dry issues. It's a tall order for a juror to sit there and pay attention."

On the other side, victims fear that if National Century executives emerge unscathed, that could provide an arena for fraud in an investment area that has long been considered safe, Patrick said.

"These are the types of investments that are held in mutual funds and pension funds across the country," she said. "It's important that the investments be true because pensions rely on them.

"This is a really pivotal trial."

Dispatch staff reporter Suzanne Hoholik and researchers Linda Deitch and Amy Disch contributed to this story.

jandes@dispatch.com