BULL STREET - The art of the Con

Paracelsus Poorcare

“Philippus Theophrastus Aureolus Bombastus von Hohenheim, known to history as Paracelsus, was a kind of Timothy Leary of his day; a self-promoting 16th-century Swiss alchemist who also dabbled in metaphysical medical hokum (as well as some real medicine) and whose vagabond life came to a sudden end, it is said, either though poisoning or during a drunken debauch.  So it might seem odd that a modern hospital company would honor itself with the name of a medieval charlatan who, when he was not hastening his patients’ deaths with mystic moonshine, was forever trying to turn base metals into gold.” ([159])

Paracelsus Healthcare medical facility began as the vision of Dr. Hartmut Krukemeyer and in 1981, he began building his empire in West Covina, California.  Times were good for Dr. Krukemeyer and before you know it, he had built a substantial empire. By 1986, Paracelsus knew that they had hit the big time because the U. S.  Attorney in Los Angeles with mail fraud in an attempt to extort money from Medicare.  The charges were the normal one in a case like this; the fact that Paracelsus had: “billed unallowable expenses such as gold tournaments in Monterey, California, and Lake Tahoe, Nevada; spousal travel; country club dues and expenses; gifts to physicians; limousines and charter jets; political contributions; expenses for foreign acquisition and expenses for unsuccessful domestic acquisitions.” 

For a while, Paracelsus argued that the money was used as intended by Medicare but when faced with solid evidence, the company was forced to cough up over $3 million in order to make the government whole for what had been stolen.  But the Paracelsus was not done with their government related problems yet; in 1988, the Los Angeles County Department of Health started filing deficiency statements against the company charging its Hollywood facility with sloppy record-keeping, poor training procedures, failure to follow-up regarding know medical problems, deficient and faulty blood transfusion and lack of security for drugs.

Almost exactly the same problem occurred the following year in and this time it was the Orange County district attorney that filed charges regarding the company’s conduct at another California facility.  On this occasion, the company was able to avoid the bullet because they were able to show that the problems were employee driven.  Mail fraud charges were ultimately leveled against several of the facility’s senior management people.  Whether the company was involved directly or not, they’re seemed to be no question that Paracelsus management control systems were either non-existent or totally out of control.

Although, the empire was substantial, due to a number of disconcerting events, it was not making any money.  The good doctor ([160]) was Chairman of the Board of directors of Paracelsus and the beneficial owner of all of its outstanding stock and started searching for a merger partner that could turn a legitimate profit.  He came up a great candidate, the smaller, profitable and public company by the of Champion Healthcare Corporation, listed on the American Stock Exchange and selling at around $8 per share.  . 

The combination of the two ultimately became a public company specializing in acute care and specialty hospitals in California, Florida, Georgia, Kansas, Louisiana, Tennessee, and Texas.  On October 9, 1996, Paracelsus announced that its results for the third quarter would not meet expectations and that it would have to restate the three previous three quarters.  The stock dropped literally overnight by over 50% and the lawsuits were commenced. Simultaneously, Angelo Mozilo, who had served on the board for some time, resigned and has since been incommunicado relative to anything concerning the company.  The outside directors retained special counsel; the big Washington law firm specializing in securities matters, Wilmer, Cutler & Pickering to find out why the company had been asleep at the switch.  

In September of 1997, a RICO suit was filed against the company in U. S. District Court in Los Angeles. This action was by several large insurance companies charging almost exactly, what Aetna had charged, years earlier. Moreover, in January of 1998, the Department of Justice of the United States alleged that the Company had defrauded the Federal Medicare and Medicaid programs by billing them for treatments patients never received.  In what is almost unbelievable chutzpah, the facility would have the patients come in for alcohol or drug treatment and then release them without a doctor ever seeing them. The government contended that in most cases, the patients’ treatments did not meet the government’s requirements for reimbursement and when the company realized that their claims would be turned down, company officials lied about what had occurred.

This case may never have come to light had it not been for whistleblower James C. Mays, who brought it to the government’s attention and who will received almost six-hundred thousand dollars for his efforts.

Paracelsus Healthcare Corporation announced the settlement of shareholder lawsuits.  “The suits were filed after an investigation by outside directors and attorneys found massive “errors and irregularities” in the Houston Company’s books.  As a result of the findings, Paracelsus reported a $233.2 million loss for 1996 to over problems that had not been evident before.  The company will also restate earnings for 1992 through 1995, reducing them from a total of $62.4 million to $44.6 million.  A significant part of the problem was the company had reported it was due millions of dollars in Medicare reimbursements even though it was unlikely it would ever be paid by the government.”[161]  Management as usual was able to put a good twist on a bad occurrence, “Signing the global settlement agreements is a major achievement, they will mark a welcome end to the distractions and problems that have haunted us since the merger.”  ([162])
  

On October 12, 1999, Paracelsus Healthcare Corporation announced that it was transferring the stock of its subsidiary, which held substantially all of its Salt Lake City, Utah assets, including five hospitals with 640 beds to IASIS ([163]) Healthcare Corporation.  Basically, the company received $280 million, which was just about enough to bring down all of the senior bank debt with a small amount of money left over to pay some of the bills.  Simultaneously the company sold Senatobia Community Hospital to Associates Capital Group, literally in exchange for getting off the hook on a bunch of debt.  Overall, after the completion of the two transactions, when all the good news was announced and the partying had ended, the company found itself with about 35% fewer beds and almost as close to insolvency as it had been before the transaction.  Unbelievably, Paracelsus indicates that they made a gain on the sale to IASIS of $75 million and a gain on the sale in Senatobia of about $2 million.  Between the two sales, the company has just collected $280 million in cash and $77 million in pre-tax profits and the situation is doing nothing but getting worse.

To illustrate how quickly the company is dropping below the horizon one only has to compare the year-to-year sales results for the most recent month, March 2000.  In 1998, the sales were $186 million, in 1999, the sales were $150 million, and in 2000, the sales were $95 million.  Seems like a trend.  In another amazing surprise, the company lost 28 cents per share in December 1999, the quarter that they were going to have that enormous $77 million non-recurring gain.  It just seems to have vanished right of the face of the earth.

On March 10, 2000, Paracelsus Healthcare Corporation announced that James G. VanDevender resigned as Interim Chief Executive Officer and Director effective February 29, 2000.  I wonder whether or not it was material that the corporation did not have a CEO for ten days.  Undoubtedly what happened was the fact that VanDevender said something, “Guys, I just can’t take the pressure anymore, I’m history, and he said that 11 days ago.  The boys were trying to talk James out of his decision for the over a week and when they saw that they couldn’t, they were forced to announce it almost two weeks late.

Then these brilliant strategists came up with the fact that Robert L. Smith was replacing VanDevender on March 27, 2000.  Isn’t that just the strangest situation, one guy resigns 11 days before it is announced and he is being replaced by someone that isn’t going to come on board until 17 days from the date of the release.  God knows what is going to happen between February 29 and March 27 at Paracelsus, but I sure wouldn’t want to be the interim CEO during that period of time. 

On March 15, 2000 Paracelsus announced that it did not expect to pay by March 16, 2000, the scheduled interest payment of $16.25 million on its $325 million 10% Senior Subordinated Notes.  The interest payment originally was due on February 15, 2000, and is subject to a 30-day grace period that will expire on the 16.  To make the day even worse, it was also announced that a wholly owned, second-tier subsidiary of Paracelsus, PHC Finance, Inc. had filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court. 

After these two announcements, back to back, you wouldn’t believe that the company could create a positive spin could you but just look at what they came up with:

“In the past several years, Paracelsus has sought to improve its operating and financial performance by focusing on a solid group of hospitals, disposing of unprofitable operations, sharply reducing debt, streamlining our cost structure, and resolving litigation.  The latest developments represent an effort to continue the improvement process by addressing capital structure issues at the parent company level that still stand in the way of our plans to restore the company’s financial health,”

I guess that if you believe that missing a dividend payment on your debt and a subsidiary go bankrupt at literally the same time is good news, then I really don’t want to be around if they are going to say something bad.

Almost every day has been a bad hair day for Paracelsus and in an effort to keep the ball rolling, on May 17, 2000, the New York Stock Exchange said that the company does not meet minimums for total market capitalization and stockholder equity of $50 million each, as well as the exchange’s $1 minimum price and it was being delisted.  In the meantime, trading is suspended on the stock until the Exchange takes final action. Ultimately, the stock will be traded on the NASD OTC Bulletin Board with the symbol, “PLHC.”

In the meantime, in August of 1996 the company issued $325 million of Senior Subordinated Notes and 4.6 million shares of stock at $8.50 per share. As we discussed above, the company was already in the process of restating their earnings less than two months later.  Alternatively, to put things more succinctly, let us read from the court documents.  We are first going to quote from an announcement made by the company on October 10, 1996:

“The company is not in a position at this time to quantify the amount or range of its expected earning shortfall and does not expect to do so until either November 15, 1996, when it anticipates filing its Form 10-Q for the third quarter, or when the internal inquiry is completed.  Presently it is not possible to provide any specific timeframe as to when the inquiry will be completed.  The Company anticipates that once the inquiry is completed and acted upon by the Board of Directors that the results will be disclosed as appropriate.”

The Plaintiff’s point out that these stunning announcements came less than two months after Paracelsus completed its acquisition of Champion for about $168 million of Paracelsus stock, issued and sold $325 million of debt securities and issued and sold nearly $40 million of common stock ([164]).  Once Dr. Manfred Krukemeyer[165] had inked the merger deal with Champion and told them how good his earning were going to be, the good Doctor declared a dividend for himself of $21.1 million.  ([166]) Naturally, Krukemeyer knew that things were going too well and he thought that nobody would notice either the $21 million had disappeared or the fact that he had totally distorted his financial projections in order to make sure that the deal closed.  By this time, Krukemeyer was getting highly professional advice and by now had one of the most prestigious firms on Wall Street doing his bidding, the prestigious, Donaldson, Lufkin & Jenrette. They moved quickly and had the stock moved from the American to the New York Stock Exchange itself, where the stock proceeded to lay a large sized egg and went nowhere. 

               

The prospectus on the deal that was issued by the brokerage firm contained some interesting reading if anyone took the time to bother, they related to the cost of the settlement of some litigation earlier in the year before the talks with Champion had begun:

“No details of the litigation were given in the prospectus, although it did divulge that the company had paid a total of $22 million to end the court actions. However, in part, the settlement, which has been sealed, dealt with a suit filed against Paracelsus by Aetna Life Insurance, which had accused the health-care concern of massive fraud.” ([167])

What wasn’t included in the sealed court documents seemed to be the following:

“According to court records, Paracelsus, over several years, allegedly bribed telemarketers to tout insured but clinically healthy persons to various Paracelsus hospitals, which then concocted bogus medical records to evidence medical problems and billed insurers for “treatment” of non-existent ailments. Thus, according to papers filed by Aetna, a person who might be temporarily glum because of a weight problem, lack of attention from the opposite sex, religious doubt, a tiresome spouse, too much boozing, loss of a job or some other not-uncommon travail might be offered free round-trip airline tickets to a Paracelsus facility in sunny Southern California, with promised side-trips to Disneyland and Venice Beach thrown in. There, the papers allege, Paracelsus, having made kickbacks to the telemarketer, would diagnose the “patient” as having “major depression,” “suicidal inclinations” or the like, and send Aetna or some other insurer a tidy bill.”

“Individuals who had been told by telemarketing salespeople to expect “a restful atmosphere… in a “resort” or “spa-like” setting,” the Aetna complaint says, would be “admitted to psychiatric hospitals in decaying urban areas…”where, allegedly, they would receive care for compulsive-eating disorders; for the treatment of religious doubt through baptisms, Bible studies, “praise and worship” and even exorcisms; or treatment of chemical dependency in an unlicensed facility. “ 

The Aetna complaint goes on and on but the bottom line was always the same, as little as possible was spent on the patient, they were coerced to stay until their insurance ran out and when it did they were summarily dumped. The company in several cases came close to being charged with kidnapping by not releasing patients when they want to stop their treatments and leave the facility. Aetna made it clear in their filings that literally everyone in Paracelsus senior management either was involved or knew what was going on.

The suckers, err—Plaintiff’s also named R. J. Messenger, the President, CEO and Board Member, of Paracelsus and James T. Rush, Vice President, Finance and Chief Financial Officer of Paracelsus and indicated that they both had access to adverse non-public information about its business and finances via access to internal corporate documents including Paracelsus’s operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to them in connection with their responsibilities.

The defendants were charged with basically accruing inadequate reserves for bad debts and collection expenses associated with collecting from third party payers on revenue it had recognized in the first and second quarters of fiscal 1996.  In the third quarter of fiscal 1996, the insiders again caused the Company inappropriately to fail to adequately reserve for bad debt and collection expenses.  These practices caused the Company’s financial statements to be presented in violation of Generally Accepted Accounting Principles (“GAAP”) and to be false and misleading. 

This transaction, unless we are missing something somewhere literally looks like theft of the first magnitude. We are somewhat surprised that no one has sought fit to inform these folks that if they continue to issue inflammatory press releases they are going to get into more and more trouble as time goes on. It is interesting to note that several of the senior people that came aboard the company in early times are still with management. That the stock is still controlled by the good doctor and these folks just seem to be set to go their own way, no matter what the consequences are to their shareholders and themselves. In the meantime, the company is a mere shell of what it was.

 

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