Once again, no mention of the ex-executive who will be last to go on trial in this 'Larger than Enron' case. Last?
After everyone involved, including the President of this company? Why last?
is everyione aware of the origin of this ex-executive? James K Happ...the ex-employee of Richard Rainwater. Never mentioned by any 'reporter'. I wonder why?
Tuesday, September 30, 2008 - 1:54 PM EDT |
Modified: Tuesday, September 30, 2008 - 2:01 PM
Poulsen trial kicks off WednesdayBusiness First of Columbus - by Kevin Kemper
The president of what was once the nation’s largest financier of physician practices and other health-care firms is scheduled to go on trial Wednesday for what the government calls the nation’s largest corporate fraud at a private company.
Lance Poulsen, a founder and former chairman of Dublin-based National Century Financial Enterprises Inc., will stand trial in U.S. District Court in Columbus on charges that he defrauded investors out of nearly $3 billion dollars. The government has charged the 65-year-old Poulsen with one count each of conspiracy, wire fraud and money laundering conspiracy, four counts of concealment of money laundering and six counts of securities fraud. He has pleaded not guilty to all the charges.
Poulsen is the sixth National Century executive to stand trial. The five who went before him were found guilty of similar charges by a jury in March and are serving prison sentences ranging from five to 15 years.
The criminal trial that begins Oct. 1 will be Poulsen’s second. Another federal jury in Columbus found Poulsen guilty in March of attempting to bribe Sherry Gibson, a former National Century executive scheduled to testify against him. U.S. District Court Judge Algenon Marbley, who is handling all the National Century criminal cases, sentenced Poulsen to 10 years in prison and a $17,500 fine. Demmler has not yet been sentenced.
National Century was a financier for health-care providers, specializing in buying their receivables at a discount for quick cash. It then packaged the receivables as asset-backed bonds and sold them to investors. The Dublin company collapsed into bankruptcy in 2002, forcing other medical businesses to fail and prompting the U.S. Justice Department to begin looking into the company’s failure.
Poulsen’s trial begins 9 a.m. Wednesday with jury selection. The trial is expected to last several weeks.
Showing posts with label ENRON. Show all posts
Showing posts with label ENRON. Show all posts
Wednesday, October 1, 2008
Tuesday, July 15, 2008
J.P. Morgan Chase and Citigroup engaged in, and indeed helped their clients design, complex...allowed Enron to hide the true extent of its borrowings
SEC Settles Enforcement Proceedings against J.P. Morgan Chase and Citigroup
FOR IMMEDIATE RELEASE
2003-87
J.P. Morgan Chase Agrees to Pay $135 Million to Settle SEC Allegations that It Helped Enron Commit Fraud
Citigroup Agrees to Pay $120 Million to Settle SEC Allegations that It Helped Enron and Dynegy Commit Fraud
Washington, D.C., July 28, 2003 -- The Securities and Exchange Commission today instituted and settled enforcement proceedings against two major financial institutions, J.P. Morgan Chase & Co. and Citigroup, Inc., for their roles in Enron Corp.'s manipulation of its financial statements. Each institution helped Enron mislead its investors by characterizing what were essentially loan proceeds as cash from operating activities. The proceeding against Citigroup also resolves the Commission's charges stemming from the assistance Citigroup provided Dynegy Inc. in manipulating that company's financial statements through similar conduct.
As to J.P. Morgan Chase, the Commission filed a civil injunctive action in U.S. District Court in Texas. Without admitting or denying the Commission's allegations, J.P. Morgan Chase consented to the entry of a final judgment in that action that would (i) permanently enjoin J.P. Morgan Chase from violating the antifraud provisions of the federal securities laws, and (ii) order J.P. Morgan Chase to pay $135 million as disgorgement, penalty, and interest.
As to Citigroup, the Commission instituted an administrative proceeding and issued an order making findings and imposing sanctions. Without admitting or denying the Commission's findings, Citigroup consented to the issuance of the Commission's Order whereby Citigroup (i) was ordered to cease and desist from committing or causing any violation of the antifraud provisions of the federal securities laws, and (ii) agreed to pay $120 million as disgorgement, interest, and penalty. Of that amount, $101 million pertains to Citigroup's Enron-related conduct and $19 million pertains to the Dynegy conduct.
The Commission intends to direct the money paid by J.P. Morgan Chase and Citigroup to fraud victims ($236 million to Enron fraud victims and $19 million to Dynegy fraud victims) pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.
"These two cases serve as yet another reminder that you can't turn a blind eye to the consequences of your actions — if you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws," said Stephen M. Cutler, Director of SEC's Enforcement Division. His deputy, Linda Chatman Thomsen, added: "As today's actions illustrate, we intend to continue to hold counter-parties responsible for helping companies manipulate their reported results. Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company."
J.P. Morgan Chase and Citigroup engaged in, and indeed helped their clients design, complex structured finance transactions. The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans. As alleged in the charging documents, by engaging in certain structural contortions, these financial institutions helped their clients: (1) inflate reported cash flow from operating activities; (2) underreport cash flow from financing activities; and (3) underreport debt. As a result, Enron and Dynegy presented false and misleading pictures of their financial health and results of operations. Significantly, with respect to Enron, both financial institutions knew that Enron engaged in these transactions specifically to allay investor, analyst, and rating agency concerns about its cash flow from operating activities and outstanding debt. Citigroup knew that Dynegy had similar motives for its structured finance transaction.
As alleged by the Commission, these institutions knew that Enron engaged in the structured finance transactions that are the subject of today's Commission actions to match its so-called mark-to-market earnings (paper earnings based on changes in the market value of certain assets held by Enron) with cash flow from operating activities. As alleged, by matching mark-to-market earnings with cash flow from operating activities, Enron sought to convince analysts and credit rating agencies that its reported mark-to-market earnings were real, i.e., that the value of the underlying assets would ultimately be converted into cash.
The Commission further alleges that these institutions also knew that these structured finance transactions yielded another substantial benefit to Enron: they allowed Enron to hide the true extent of its borrowings from investors and rating agencies because sums borrowed in these structured finance transactions did not appear as "debt" on Enron's balance sheet. Instead they appeared as "price risk management liabilities," "minority interest," or otherwise. In addition, Enron's obligation to repay those sums was not otherwise disclosed.
Specifically as to J.P. Morgan Chase, the Commission's allegations stem from J.P. Morgan Chase's participation in so-called prepay transactions with Enron which were loans disguised as commodity trades to achieve Enron's reporting and accounting objectives. These prepays were in substance loans because their structure eliminated all commodity price risk that would normally exist in commodity trades. This was accomplished through a series of trades whereby Enron passed the commodity price risk to a J.P. Morgan Chase-sponsored special purpose vehicle, which passed the risk to J.P. Morgan Chase, which, in turn, passed the risk back to Enron. While each step of this structure appeared to be a commodity trade, with all elements of the structure taken together, Enron received cash upfront and agreed to future repayment of that cash with negotiated interest. The interest amount was set at the time of the contract, was calculated with reference to LIBOR, and was independent of any changes in the price of the underlying commodity. The only risk in the transactions was J.P. Morgan Chase's risk that Enron would not make its payments when due, i.e., credit risk.
The Commission's action with respect to Citigroup also stems from certain prepay transactions with Enron that, while structured somewhat differently than the Chase transactions, had the same overall purpose and effect. Like the J.P. Morgan Chase prepays, the Citigroup prepays passed the commodity price risk from Enron to a Citigroup-sponsored special purpose vehicle to Citigroup and back to Enron. As in the J.P. Morgan Chase prepays, Enron's future obligations under the Citigroup prepays consisted of repayments of principal and interest that were independent of any changes in the price of the underlying commodity.
Additionally, the Commission's action against Citigroup is based on two other transactions with Enron, Project Nahanni and Project Bacchus, each of which was also a structure that transformed cash from financing into cash from operations. As the Commission found, in project Nahanni, Citigroup knowingly helped Enron structure a transaction, that allowed Enron to generate cash from operating activities by selling Treasury bills bought with the proceeds of a loan. Project Bacchus was structured by Enron as a sale of an interest in certain of its pulp and paper businesses to a special purpose entity capitalized by Citigroup with a $194 million loan and $6 million in equity. According to the Commission, however, in substance, Project Bacchus was a $200 million financing from Citigroup, because Citigroup was not at risk for its equity investment in the project.
The Citigroup action also contains findings relating to a transaction with Dynegy — Project Alpha — which was a complex financing that Dynegy used to borrow $300 million. According to the Commission's findings, Citigroup knew that Dynegy implemented Alpha to address the mismatch between its mark-to-market earnings and operating cash flow, and that it characterized as cash from operations what was essentially a loan transaction. As Citigroup knew, Dynegy, too, was concerned that the mismatch between earnings and cash flow from operations would raise questions about the quality of Dynegy's earnings and its ability to sustain those earnings.
In determining to settle its action against Citigroup, the Commission took into account Citigroup's cooperation with the Commission's investigation, as well as its timely efforts to resolve the matter.
The Commission brought its Enron-related actions in coordination with the New York County District Attorney's Office, which, also today, entered into settlement agreements with J.P. Morgan Chase and Citigroup.
The Commission also acknowledges the assistance of the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the New York State Banking Department in connection with today's Enron-related actions. Today, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency entered into separate written agreements with Citigroup. The Federal Reserve Bank of New York and the New York State Banking Department entered into a written agreement with J.P. Morgan Chase. These agreements, between the institutions and their primary banking regulators, obligate them to enhance their risk management programs and internal controls so as to reduce the risk of similar misconduct.
With these two actions, the Securities and Exchange Commission has raised to six the total number of separate actions it has brought in connection with the Enron matter in the twenty months since Enron declared bankruptcy. The various defendants and respondents include three major financial institutions, Enron's former Chief Financial Officer, and eight other former senior Enron executives. The commission has so far garnered $324 million for the benefit of the victims of the Enron fraud.
The Commission's investigations relating to Enron and Dynegy are continuing.
For further information contact:
Linda Chatman Thomsen, Deputy Director, Division of Enforcement — (202) 942-4501
Harold F. Degenhardt, District Administrator, Fort Worth District Office — (817) 978-6469
Charles J. Clark, Assistant Director, Division of Enforcement — (202) 942-4731
Additional Materials Available at www.sec.gov
FOR IMMEDIATE RELEASE
2003-87
J.P. Morgan Chase Agrees to Pay $135 Million to Settle SEC Allegations that It Helped Enron Commit Fraud
Citigroup Agrees to Pay $120 Million to Settle SEC Allegations that It Helped Enron and Dynegy Commit Fraud
Washington, D.C., July 28, 2003 -- The Securities and Exchange Commission today instituted and settled enforcement proceedings against two major financial institutions, J.P. Morgan Chase & Co. and Citigroup, Inc., for their roles in Enron Corp.'s manipulation of its financial statements. Each institution helped Enron mislead its investors by characterizing what were essentially loan proceeds as cash from operating activities. The proceeding against Citigroup also resolves the Commission's charges stemming from the assistance Citigroup provided Dynegy Inc. in manipulating that company's financial statements through similar conduct.
As to J.P. Morgan Chase, the Commission filed a civil injunctive action in U.S. District Court in Texas. Without admitting or denying the Commission's allegations, J.P. Morgan Chase consented to the entry of a final judgment in that action that would (i) permanently enjoin J.P. Morgan Chase from violating the antifraud provisions of the federal securities laws, and (ii) order J.P. Morgan Chase to pay $135 million as disgorgement, penalty, and interest.
As to Citigroup, the Commission instituted an administrative proceeding and issued an order making findings and imposing sanctions. Without admitting or denying the Commission's findings, Citigroup consented to the issuance of the Commission's Order whereby Citigroup (i) was ordered to cease and desist from committing or causing any violation of the antifraud provisions of the federal securities laws, and (ii) agreed to pay $120 million as disgorgement, interest, and penalty. Of that amount, $101 million pertains to Citigroup's Enron-related conduct and $19 million pertains to the Dynegy conduct.
The Commission intends to direct the money paid by J.P. Morgan Chase and Citigroup to fraud victims ($236 million to Enron fraud victims and $19 million to Dynegy fraud victims) pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.
"These two cases serve as yet another reminder that you can't turn a blind eye to the consequences of your actions — if you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws," said Stephen M. Cutler, Director of SEC's Enforcement Division. His deputy, Linda Chatman Thomsen, added: "As today's actions illustrate, we intend to continue to hold counter-parties responsible for helping companies manipulate their reported results. Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company."
J.P. Morgan Chase and Citigroup engaged in, and indeed helped their clients design, complex structured finance transactions. The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans. As alleged in the charging documents, by engaging in certain structural contortions, these financial institutions helped their clients: (1) inflate reported cash flow from operating activities; (2) underreport cash flow from financing activities; and (3) underreport debt. As a result, Enron and Dynegy presented false and misleading pictures of their financial health and results of operations. Significantly, with respect to Enron, both financial institutions knew that Enron engaged in these transactions specifically to allay investor, analyst, and rating agency concerns about its cash flow from operating activities and outstanding debt. Citigroup knew that Dynegy had similar motives for its structured finance transaction.
As alleged by the Commission, these institutions knew that Enron engaged in the structured finance transactions that are the subject of today's Commission actions to match its so-called mark-to-market earnings (paper earnings based on changes in the market value of certain assets held by Enron) with cash flow from operating activities. As alleged, by matching mark-to-market earnings with cash flow from operating activities, Enron sought to convince analysts and credit rating agencies that its reported mark-to-market earnings were real, i.e., that the value of the underlying assets would ultimately be converted into cash.
The Commission further alleges that these institutions also knew that these structured finance transactions yielded another substantial benefit to Enron: they allowed Enron to hide the true extent of its borrowings from investors and rating agencies because sums borrowed in these structured finance transactions did not appear as "debt" on Enron's balance sheet. Instead they appeared as "price risk management liabilities," "minority interest," or otherwise. In addition, Enron's obligation to repay those sums was not otherwise disclosed.
Specifically as to J.P. Morgan Chase, the Commission's allegations stem from J.P. Morgan Chase's participation in so-called prepay transactions with Enron which were loans disguised as commodity trades to achieve Enron's reporting and accounting objectives. These prepays were in substance loans because their structure eliminated all commodity price risk that would normally exist in commodity trades. This was accomplished through a series of trades whereby Enron passed the commodity price risk to a J.P. Morgan Chase-sponsored special purpose vehicle, which passed the risk to J.P. Morgan Chase, which, in turn, passed the risk back to Enron. While each step of this structure appeared to be a commodity trade, with all elements of the structure taken together, Enron received cash upfront and agreed to future repayment of that cash with negotiated interest. The interest amount was set at the time of the contract, was calculated with reference to LIBOR, and was independent of any changes in the price of the underlying commodity. The only risk in the transactions was J.P. Morgan Chase's risk that Enron would not make its payments when due, i.e., credit risk.
The Commission's action with respect to Citigroup also stems from certain prepay transactions with Enron that, while structured somewhat differently than the Chase transactions, had the same overall purpose and effect. Like the J.P. Morgan Chase prepays, the Citigroup prepays passed the commodity price risk from Enron to a Citigroup-sponsored special purpose vehicle to Citigroup and back to Enron. As in the J.P. Morgan Chase prepays, Enron's future obligations under the Citigroup prepays consisted of repayments of principal and interest that were independent of any changes in the price of the underlying commodity.
Additionally, the Commission's action against Citigroup is based on two other transactions with Enron, Project Nahanni and Project Bacchus, each of which was also a structure that transformed cash from financing into cash from operations. As the Commission found, in project Nahanni, Citigroup knowingly helped Enron structure a transaction, that allowed Enron to generate cash from operating activities by selling Treasury bills bought with the proceeds of a loan. Project Bacchus was structured by Enron as a sale of an interest in certain of its pulp and paper businesses to a special purpose entity capitalized by Citigroup with a $194 million loan and $6 million in equity. According to the Commission, however, in substance, Project Bacchus was a $200 million financing from Citigroup, because Citigroup was not at risk for its equity investment in the project.
The Citigroup action also contains findings relating to a transaction with Dynegy — Project Alpha — which was a complex financing that Dynegy used to borrow $300 million. According to the Commission's findings, Citigroup knew that Dynegy implemented Alpha to address the mismatch between its mark-to-market earnings and operating cash flow, and that it characterized as cash from operations what was essentially a loan transaction. As Citigroup knew, Dynegy, too, was concerned that the mismatch between earnings and cash flow from operations would raise questions about the quality of Dynegy's earnings and its ability to sustain those earnings.
In determining to settle its action against Citigroup, the Commission took into account Citigroup's cooperation with the Commission's investigation, as well as its timely efforts to resolve the matter.
The Commission brought its Enron-related actions in coordination with the New York County District Attorney's Office, which, also today, entered into settlement agreements with J.P. Morgan Chase and Citigroup.
The Commission also acknowledges the assistance of the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the New York State Banking Department in connection with today's Enron-related actions. Today, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency entered into separate written agreements with Citigroup. The Federal Reserve Bank of New York and the New York State Banking Department entered into a written agreement with J.P. Morgan Chase. These agreements, between the institutions and their primary banking regulators, obligate them to enhance their risk management programs and internal controls so as to reduce the risk of similar misconduct.
With these two actions, the Securities and Exchange Commission has raised to six the total number of separate actions it has brought in connection with the Enron matter in the twenty months since Enron declared bankruptcy. The various defendants and respondents include three major financial institutions, Enron's former Chief Financial Officer, and eight other former senior Enron executives. The commission has so far garnered $324 million for the benefit of the victims of the Enron fraud.
The Commission's investigations relating to Enron and Dynegy are continuing.
For further information contact:
Linda Chatman Thomsen, Deputy Director, Division of Enforcement — (202) 942-4501
Harold F. Degenhardt, District Administrator, Fort Worth District Office — (817) 978-6469
Charles J. Clark, Assistant Director, Division of Enforcement — (202) 942-4731
Additional Materials Available at www.sec.gov
Monday, March 10, 2008
Forbes ....October 2001 NCFE was viewed as a "train wreck waiting to happen."
National century bust
By Rutberg, Sidney
Publication: The Secured Lender
Date: Saturday, March 1 2003
Subject: Financial services, Bankruptcy, Asset backed securities
Location: United States
National Century Financial Enterprises was billed as the largest and fastest growing receivables finance firm in the healthcare industry. Its receivables-backed paper was rated AAA by Moody's. It signed up for top-of-the-line software technology to control its ever-expanding business so that 300 employees could handle $3 billion in assets.
Since its founding about a dozen years ago, it said it purchased $15 billion in healthcare receivables and, with the help of Credit Suisse First Boston, it securitized $6 billion of them. The company claimed to have earned a net profit in 2001 of $40 million on revenues of $300 million. Trustees of the NCFE securitizations were also top-drawer bankers, J. P. Morgan Chase and Bank One. In short, NCFE was the hottest healthcare financial services organization in the country.
But in late October 2002 Moody's pulled the triple-A rating on the NCFE-sponsored receivables-backed notes and on November 18, 2002, National Century Financial Enterprises filed a bankruptcy petition under Chapter 11 in Columbus, Ohio, with some $3.35 billion in these notes outstanding. About a week earlier, Lance K. Poulsen, one of the founders and chief executive, left the company. The NCFE bankruptcy left many of its clients without financing and several took the Chapter 11 route. Since the bankruptcy, NCFE is being run by the New York-based turnaround specialists, Alvarez & Marsal.
Back in March 2002, a San Jose software company announced with great enthusiasm that it had landed NCFE as a client and that NCFE would be running its entire business operation on the California company's systems. The software company crowed about NCFE and said that with the new technology, NCFE could afford to go after smaller healthcare businesses "whose receivables were below the threshold of NCFE's business model."
It turns out that NCFE, based in Dublin, Ohio, was not all it seemed to be. Among the problems: NCFE or its principals had an equity ownership in the company's major clients; healthcare receivables at best tend to have very squishy valuations; to provide funding for its favored clients, NCFE dipped into the reserves set up as additional collateral for the asset-backed securities issued, and the operations it was financing were largely unsuccessful. There are also charges that NCFE didn't own all the receivables it placed as collateral for the securitizations. Put this all together and it spelled Chapter 11.
In pulling its highest rating from the NCFE paper, Moody's said the action "reflects Moody's concern about NCFE's financial stability, its ongoing ability to service the receivables and its role in directing transaction cash flows" for the notes. Moody's added that "the unique forms of dilution and credit risks associated with healthcare receivables necessitates a transaction structure and servicing that insulates the investor from such risks."
Cutting through Moody's jargon, Ivan Abrams, president of Abrams & Company, Inc., a New York-based finance company that operates in the healthcare field, notes that under the best of circumstances, healthcare is a treacherous area for asset-based financing.
Mr. Abrams noted that, while the healthcare industry is huge and with the aging population probably the fastest growing sector of the economy, it requires a highly disciplined approach. "I really have no first-hand knowledge of what happened at National Century, but I did notice one transaction with a large cash-flow component. This just doesn't make sense in healthcare financing."
Mr. Abrams adds that in the past doctors and healthcare facilities "made money hand over fist so there was no need for disciplined financial management. This psychology has carried over into the present and often there is little sophisticated financial management of these facilities. Thus, in financing this area, lenders must be especially vigilant."
On top of that, dealing with the government (Medicare and Medicaid) can be a slippery slope. "Your records might show that the government owes you $2.6 million and suddenly the government decides that because of some obscure reason it only owes $1.6 million. You've just lost a million dollars. The government has the right to do that."
Also, Mr. Abrams continued, reimbursement levels are constantly changing and this often encourages healthcare providers to boost their billing in the hope that the government or private insurers might pay more. This further complicates the proper evaluation of the receivables.
According to an attorney with a client stuck in the NCFE fiasco, the company must have really taken the advice of the software company to seek "below-threshold" clients. The attorney, who requested anonymity, said that NCFE catered to poor performing healthcare companies "and its formula provided for advances that were a h
Lending to deadbeat companies and providing higher advances to clients than the competition can trigger rapid growth, but it is also the secret to going broke, he said, calling NCFE's operation "a kind of Ponzi scheme." ell of a lot above industry standards."
Among the more prominent victims of NCFE were Credit Suisse First Boston, the underwriter of the NCFErelated securities, and Ambac Financial Group, a large New York-based credit guarantor and financial services company. Credit Suisse, in a strongly worded press release
issued November 25 of last year, just days after the bankruptcy, announced that it, along with other holders of notes related to NCFE, "suffered losses as a result of what appears to be massive fraud at NCFE. It is increasingly apparent that NCFE and its officers deliberately misled CSFB and other investors. CSFB intends to assess the situation as information develops related to NCFE, its officers and directors, and others, and will vigorously pursue those responsible for the losses."
Meanwhile, CSFB said that based on the information available at that time, it was writing down its investment in NCFE paper by 83 percent, from $214 million to $44 million, and will adjust the amount as more complete information becomes available.
Ambac's principal operating subsidiary, Ambac Assurance Corp., a guarantor of public finance and structured finance debt, is rated triple A by Moody's Investor Service, Standard & Poor's and other ratings firms. The parent announced on the day that NCFE filed for bankruptcy that it was taking an after-tax write-down of $79.4 million on notes secured by receivables of NCFE customers. Ambac said it owned $54 million of NCFE-related notes issued by NPF X1I and $120.5 million of another NCFE-sponsored entity. The announcement pointed out that the notes were rated Triple-A until October 25, 2002.
Ambac added that the write-down was based on the best information it had at the time and that it was joining with a group of bondholders to seek recovery of the losses, but noted that no estimate of recovery was included in the write-down. To assure investors that Ambac could afford the write-off, the company pointed out that the fair value of its total portfolio is about $11.7 billion and that after the write-down, it still had net unrealized gains of around $400 million. Additionally, Ambac made it clear that it had no guarantee insurance or other exposure to programs sponsored by NCFE.
Forbes magazine, in scolding the ratings companies and investors for not recognizing the NCFE problems earlier, pointed out last October that the healthcare finance company had been up to its ears in litigation and its ownership interests in a number of its significant clients posed a major conflict of interest. Forbes also noted that, in the healthcare receivables community, NCFE was viewed as a "train wreck waiting to happen."
Among the clients that NCFE or its principals held interests in were Med Diversified, a home healthcare provider in Andover, Massachusetts, Rx Medical Services, a hospital management company based in Fort Lauderdale, and PhyAmerica Physician Group, of Durham, North Carolina.
A Chapter 11 petition filed by PhyAmerica in Baltimore on November 11, lays the blame directly at the feet of NCFE. Noting that it has financed its operations through NCFE since June 1997, PhyAmerica states that since midOctober "scheduled funding was late or unpredictable."
PhyAmerica points out that, on October 25 when Moody's cut the rating on the NCFE paper, the ratings agency stated that NCFE had a "liquidity problem" in funding its clients. NCFE admitted using reserve funds to continue making advances to its clients resulting in an "equity account reserve deficit." A press release by the Fitch rating agency was more specific, PhyAmerica stated. Fitch put the deficit at nearly $325 million, and brought the reserve fund down to .06 percent from the required 17 percent.
On October 31, Mr. Poulsen, at the time CEO of NCFE, sent a letter to PhyAmerica and hundreds of other clients informing them that NCFE would no longer be able to
release funds from the program
PhyAmerica's press release on its Chapter 11 filing also reports that other NCFE borrowers have turned to the bankruptcy courts since NCFE funding dried up. These include Meridian Corp. in Memphis and Tender Loving Care, a home health provider in Boston.
Med Diversified, in which Mr. Poulsen is reported to be the largest stockholder, has also filed for bankruptcy under Chapter 11 and has stated that it plans to file a $1 billion suit against NCFE and the trustees of the NCFE notes, Bank One and J.P. Morgan Chase & Co.
A story in the Washington Post on November 17 made it clear that some of NCFE's shenanigans may provide a fraud case for the federal government. Armed with a search warrant, FBI agents descended on the company's headquarters on a Saturday morning, removing computer equipment, books and records. According to the Washington Post story, NCFE claimed it earned a net profit of $40 million on revenue of $300 million in 2001.
Also, the Securities and Exchange Commission is looking into the goings-on at National Century. The National Century Financial Enterprises story is a long way from over.
By Rutberg, Sidney
Publication: The Secured Lender
Date: Saturday, March 1 2003
Subject: Financial services, Bankruptcy, Asset backed securities
Location: United States
National Century Financial Enterprises was billed as the largest and fastest growing receivables finance firm in the healthcare industry. Its receivables-backed paper was rated AAA by Moody's. It signed up for top-of-the-line software technology to control its ever-expanding business so that 300 employees could handle $3 billion in assets.
Since its founding about a dozen years ago, it said it purchased $15 billion in healthcare receivables and, with the help of Credit Suisse First Boston, it securitized $6 billion of them. The company claimed to have earned a net profit in 2001 of $40 million on revenues of $300 million. Trustees of the NCFE securitizations were also top-drawer bankers, J. P. Morgan Chase and Bank One. In short, NCFE was the hottest healthcare financial services organization in the country.
But in late October 2002 Moody's pulled the triple-A rating on the NCFE-sponsored receivables-backed notes and on November 18, 2002, National Century Financial Enterprises filed a bankruptcy petition under Chapter 11 in Columbus, Ohio, with some $3.35 billion in these notes outstanding. About a week earlier, Lance K. Poulsen, one of the founders and chief executive, left the company. The NCFE bankruptcy left many of its clients without financing and several took the Chapter 11 route. Since the bankruptcy, NCFE is being run by the New York-based turnaround specialists, Alvarez & Marsal.
Back in March 2002, a San Jose software company announced with great enthusiasm that it had landed NCFE as a client and that NCFE would be running its entire business operation on the California company's systems. The software company crowed about NCFE and said that with the new technology, NCFE could afford to go after smaller healthcare businesses "whose receivables were below the threshold of NCFE's business model."
It turns out that NCFE, based in Dublin, Ohio, was not all it seemed to be. Among the problems: NCFE or its principals had an equity ownership in the company's major clients; healthcare receivables at best tend to have very squishy valuations; to provide funding for its favored clients, NCFE dipped into the reserves set up as additional collateral for the asset-backed securities issued, and the operations it was financing were largely unsuccessful. There are also charges that NCFE didn't own all the receivables it placed as collateral for the securitizations. Put this all together and it spelled Chapter 11.
In pulling its highest rating from the NCFE paper, Moody's said the action "reflects Moody's concern about NCFE's financial stability, its ongoing ability to service the receivables and its role in directing transaction cash flows" for the notes. Moody's added that "the unique forms of dilution and credit risks associated with healthcare receivables necessitates a transaction structure and servicing that insulates the investor from such risks."
Cutting through Moody's jargon, Ivan Abrams, president of Abrams & Company, Inc., a New York-based finance company that operates in the healthcare field, notes that under the best of circumstances, healthcare is a treacherous area for asset-based financing.
Mr. Abrams noted that, while the healthcare industry is huge and with the aging population probably the fastest growing sector of the economy, it requires a highly disciplined approach. "I really have no first-hand knowledge of what happened at National Century, but I did notice one transaction with a large cash-flow component. This just doesn't make sense in healthcare financing."
Mr. Abrams adds that in the past doctors and healthcare facilities "made money hand over fist so there was no need for disciplined financial management. This psychology has carried over into the present and often there is little sophisticated financial management of these facilities. Thus, in financing this area, lenders must be especially vigilant."
On top of that, dealing with the government (Medicare and Medicaid) can be a slippery slope. "Your records might show that the government owes you $2.6 million and suddenly the government decides that because of some obscure reason it only owes $1.6 million. You've just lost a million dollars. The government has the right to do that."
Also, Mr. Abrams continued, reimbursement levels are constantly changing and this often encourages healthcare providers to boost their billing in the hope that the government or private insurers might pay more. This further complicates the proper evaluation of the receivables.
According to an attorney with a client stuck in the NCFE fiasco, the company must have really taken the advice of the software company to seek "below-threshold" clients. The attorney, who requested anonymity, said that NCFE catered to poor performing healthcare companies "and its formula provided for advances that were a h
Lending to deadbeat companies and providing higher advances to clients than the competition can trigger rapid growth, but it is also the secret to going broke, he said, calling NCFE's operation "a kind of Ponzi scheme." ell of a lot above industry standards."
Among the more prominent victims of NCFE were Credit Suisse First Boston, the underwriter of the NCFErelated securities, and Ambac Financial Group, a large New York-based credit guarantor and financial services company. Credit Suisse, in a strongly worded press release
issued November 25 of last year, just days after the bankruptcy, announced that it, along with other holders of notes related to NCFE, "suffered losses as a result of what appears to be massive fraud at NCFE. It is increasingly apparent that NCFE and its officers deliberately misled CSFB and other investors. CSFB intends to assess the situation as information develops related to NCFE, its officers and directors, and others, and will vigorously pursue those responsible for the losses."
Meanwhile, CSFB said that based on the information available at that time, it was writing down its investment in NCFE paper by 83 percent, from $214 million to $44 million, and will adjust the amount as more complete information becomes available.
Ambac's principal operating subsidiary, Ambac Assurance Corp., a guarantor of public finance and structured finance debt, is rated triple A by Moody's Investor Service, Standard & Poor's and other ratings firms. The parent announced on the day that NCFE filed for bankruptcy that it was taking an after-tax write-down of $79.4 million on notes secured by receivables of NCFE customers. Ambac said it owned $54 million of NCFE-related notes issued by NPF X1I and $120.5 million of another NCFE-sponsored entity. The announcement pointed out that the notes were rated Triple-A until October 25, 2002.
Ambac added that the write-down was based on the best information it had at the time and that it was joining with a group of bondholders to seek recovery of the losses, but noted that no estimate of recovery was included in the write-down. To assure investors that Ambac could afford the write-off, the company pointed out that the fair value of its total portfolio is about $11.7 billion and that after the write-down, it still had net unrealized gains of around $400 million. Additionally, Ambac made it clear that it had no guarantee insurance or other exposure to programs sponsored by NCFE.
Forbes magazine, in scolding the ratings companies and investors for not recognizing the NCFE problems earlier, pointed out last October that the healthcare finance company had been up to its ears in litigation and its ownership interests in a number of its significant clients posed a major conflict of interest. Forbes also noted that, in the healthcare receivables community, NCFE was viewed as a "train wreck waiting to happen."
Among the clients that NCFE or its principals held interests in were Med Diversified, a home healthcare provider in Andover, Massachusetts, Rx Medical Services, a hospital management company based in Fort Lauderdale, and PhyAmerica Physician Group, of Durham, North Carolina.
A Chapter 11 petition filed by PhyAmerica in Baltimore on November 11, lays the blame directly at the feet of NCFE. Noting that it has financed its operations through NCFE since June 1997, PhyAmerica states that since midOctober "scheduled funding was late or unpredictable."
PhyAmerica points out that, on October 25 when Moody's cut the rating on the NCFE paper, the ratings agency stated that NCFE had a "liquidity problem" in funding its clients. NCFE admitted using reserve funds to continue making advances to its clients resulting in an "equity account reserve deficit." A press release by the Fitch rating agency was more specific, PhyAmerica stated. Fitch put the deficit at nearly $325 million, and brought the reserve fund down to .06 percent from the required 17 percent.
On October 31, Mr. Poulsen, at the time CEO of NCFE, sent a letter to PhyAmerica and hundreds of other clients informing them that NCFE would no longer be able to
release funds from the program
PhyAmerica's press release on its Chapter 11 filing also reports that other NCFE borrowers have turned to the bankruptcy courts since NCFE funding dried up. These include Meridian Corp. in Memphis and Tender Loving Care, a home health provider in Boston.
Med Diversified, in which Mr. Poulsen is reported to be the largest stockholder, has also filed for bankruptcy under Chapter 11 and has stated that it plans to file a $1 billion suit against NCFE and the trustees of the NCFE notes, Bank One and J.P. Morgan Chase & Co.
A story in the Washington Post on November 17 made it clear that some of NCFE's shenanigans may provide a fraud case for the federal government. Armed with a search warrant, FBI agents descended on the company's headquarters on a Saturday morning, removing computer equipment, books and records. According to the Washington Post story, NCFE claimed it earned a net profit of $40 million on revenue of $300 million in 2001.
Also, the Securities and Exchange Commission is looking into the goings-on at National Century. The National Century Financial Enterprises story is a long way from over.
Friday, February 22, 2008
Looks like we might have a judge that is really paying attention!!
Talbot acknowledged National Century's financing kept her company's hospitals in business. Doctors Community Health Care Corp Doctors Community Health Care Corp., hmmmmmm
U.S. District Court Judge Algenon L. Marbley
"In a case as complex as this, it is easy to confuse, unwittingly, the trier of fact (jury)," Marbley said after the jury had been sent out of the courtroom. "This borders on the brink of surplusage."
(Webster: Surplusage-irrelevant or superfluous words or matter)
After admonishing Dickerson to make his questions relevant, Marbley said, "I'm not going to let confusion creep into this trial."
Excerpts from:
Wednesday, February 20, 2008 - 5:00 PM EST
National Century overpaid hospital operator by half-billion dollarsBusiness First of Columbus - by Kevin Kemper Business First
U.S. District Court Judge Algenon L. Marbley
"In a case as complex as this, it is easy to confuse, unwittingly, the trier of fact (jury)," Marbley said after the jury had been sent out of the courtroom. "This borders on the brink of surplusage."
(Webster: Surplusage-irrelevant or superfluous words or matter)
After admonishing Dickerson to make his questions relevant, Marbley said, "I'm not going to let confusion creep into this trial."
Excerpts from:
Wednesday, February 20, 2008 - 5:00 PM EST
National Century overpaid hospital operator by half-billion dollarsBusiness First of Columbus - by Kevin Kemper Business First
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