National Century Financial Enterprises Inc. lent struggling health care providers more than $1.46 billion without the required collateral, including $414 million to "some kind of investment vehicle" for National Century's owners, according to documents filed yesterday in a federal bankruptcy court.
The court filing, by an auditor for Bank One, raises questions about the scope of alleged self-dealing by principals of Ohio-based National Century, which declared bankruptcy on Monday and is the focus of a fraud investigation by the FBI and other authorities in Ohio, Kentucky and Maryland.
National Century's collapse threatens the viability of some hospitals, clinics and nursing services across the country, including Greater Southeast Community Hospital in the District, whose parent company has also sought bankruptcy protection.
The documents assert that National Century principals routinely made unsecured loans that violated financing agreements designed to reduce the loans' risks. Under those agreements, National Century was required to provide quick cash to vulnerable health care providers, such as Greater Southeast, in return for control of the providers' reimbursements from private and government insurers.
The lender then issued bonds to be paid off from the flow of those payments, known as receivables. It has about $3.35 billion in outstanding bonds.
The FBI, which raided National Century's campus in Dublin, Ohio, on Saturday, is examining whether National Century founder Lance K. Poulsen, his wife and two other investors funneled money to clients they both funded and owned, as part of a scheme to defraud investors, according to one person close to the company. Federal authorities are also scrutinizing the company's collection of Medicaid and Medicare reimbursements. Attorneys for the bondholders are searching for hundreds of millions of dollars that are unaccounted for.
According to an affidavit filed by Stephen Brown, a vice president in Bank One's audit department, National Century lent more money than it should have under its bondholder agreements to Homecare Concepts of America Inc. by $414 million, Doctors Community Healthcare Corp. by at least $279 million and Med Diversified Inc. by at least $70 million. National Century owns a substantial stake in each company and kept records detailing the overfunding, the documents show. Greater Southeast Community Hospital Corp., owned by Doctors Community, was overfunded by $162 million, the affidavit said.
National Century clients said the company earned high fees on all the money it lent.
In a meeting last week with Brown, National Century's chief financial officer, Randy Speer, described the overfunding as advances on "future receivables," according to the affidavit. Speer could not be reached for comment last night, and a company spokesman did not return calls. An official from Bank One, which served as a trustee for a bond reserve account from which the bank said more than $300 million was removed, declined to comment. In a recent court filing, Bank One said "the evidence of systematic financial trickery continues to mount."
Court cases and documents on file with the Securities and Exchange Commission show that the National Century principals, including Barbara Poulsen, Rebecca Parrett and Donald H. Ayers, created a tangle of financial partnerships and cross-holdings in many of the companies they helped to finance. The other investor behind National Century is a fund managed by two J.P. Morgan Chase executives.
Homecare Concepts, for example, is 100 percent owned by an entity called Thor, according to documents filed with Brown's affidavit. In a deposition for a lawsuit last year, Poulsen said he owned about a quarter of Thor Capital Holdings Inc. The remainder was owned by Ayers, Parrett, an investor named Craig W. Porter and "some other investors," Poulsen said.
A company also associated with Poulsen, Healthcare Capital LLC, formerly Intercontinental Investments Ltd., was an affiliate named in National Century's bankruptcy filing. National Century owned another entity, called Kachina Inc., which originally was "formed for the purpose of investing in various companies," Poulsen said in the deposition. Kachina's directors include the Poulsens, Ayers and Parrett.
A lawsuit filed in 2000 pending in a Massachusetts state court, disclosed details about the web of companies controlled by Poulsen and his National Century partners.
In 1998 National Medical Care Inc. (NMC), a company that owns a large dialysis-treatment provider, Fresenius Medical Care North America, sold its home-care business to Home Medical of America., a company partly owned by Thor.
National Century provided funding for the transaction based in part on accounts receivable acquired from NMC, the suit said. NMC alleged that Homecare Concepts of America, National Century, Thor, Kachina and others defrauded them out of $37 million. They alleged, in a memo, "a type of fraud known as a 'bust-out scheme.' " "They created a seemingly legitimate business (HMA), used it to acquire substantial assets financed by substantial debt to NMC, then stripped it of cash and 'busted out' the business by disposing of its operating assets in a series of transactions that benefited only" Thor's and National Century's owners, the memo said.
The defendants denied the charges and filed a counterclaim, also alleging fraud.
In papers filed with the U.S. Bankruptcy Court for the Southern District of Ohio, National Century said it owed about $ 3.6 billion to bondholders and other creditors, including investment bank Credit Suisse First Boston Corp. and large money-management firms that buy bonds. Although the privately owned company claimed assets of $3.8 billion as of Sept. 30, accountants examining its books say the figure is probably much lower, according to one person familiar with the case.