Lance K. Poulsen exuded confidence during the panel discussion at the Atlantis Paradise Island resort in the Bahamas one afternoon last October as he trumpeted the virtues of National Century Financial Enterprises Inc., the health care financier he had built into an industry leader over the past decade.

Listening closely were executives from Credit Suisse First Boston Corp. and Moody's Investors Service, Wall Street firms that supplied the funds and the positive credit ratings that helped propel his company from a small-time lender into a multibillion-dollar giant. The meeting was called "Healthcare Securitization: Checking the Vital Signs," and the prognosis that balmy day was as upbeat as Poulsen's marketing brochures.

Just three weeks later, National Century was engulfed in scandal.

The FBI raided the company's Ohio headquarters as investors alleged that National Century misappropriated more than $3 billion raised through bond sales. Poulsen and his partners resigned, even as they denied wrongdoing. Their privately held company quickly filed for Chapter 11 bankruptcy protection. Its collapse sent more than a dozen health-industry clients around the country into financial chaos, including nursing homes, home health care providers, and Greater Southeast Community and Hadley Memorial hospitals in the District, whose parent company declared bankruptcy. Also hurt were many bondholders, from large mutual funds to small cities in Arizona, which stand to lose millions.

After publicly traded corporations such as Enron Corp. and WorldCom Inc. blew up, Congress tightened regulations and prosecutors pursued wrongdoers. But the National Century story highlights another important failure in the system of checks and balances in U.S. capitalism: the lack of oversight for companies that are privately owned but still absorb billions of dollars in investments from outsiders.

Public and private documents, and interviews with participants, show that bond raters, underwriters and accountants -- the institutions that burnished National Century's credibility during its quick rise -- missed, downplayed or ignored warning signs until shortly before the company's collapse.

National Century 's annual audits were sometimes late. The company changed outside accountants three times in recent years, often a red flag to securities experts. One credit-rating company stopped rating National Century bonds entirely in 1995. Another received, investigated and discounted anonymous letters that offered specific examples of what they called the company's fraudulent conduct. Meantime, Poulsen and his partners were making personal investments in some of their clients, including several that were publicly traded.

Through it all, some of the biggest blue chips in the financial world continued to work closely with National Century, collecting substantial fees. Moody's and Fitch Ratings Ltd. rated the company's bonds in increasingly large deals, grading them AAA until weeks before the bankruptcy filing. Accounting firms PricewaterhouseCoopers and Deloitte & Touche audited the company's books. Credit Suisse and a few other Wall Street banks acted as underwriters, essentially guaranteeing that all the bonds would be sold. And J.P. Morgan Chase & Co. and Bank One Corp., as trustees, maintained bank accounts for National Century, its clients and the bondholders.

All the players in the National Century case disclaim responsibility for not noticing the red flags, each interpreting its oversight role narrowly. Moody's, for example, said it relied on information from National Century and on the work performed by Credit Suisse and other underwriters. Credit Suisse, in turn, blamed Moody's and the banks for not being vigilant. The banks said it wasn't their role to investigate the company's financial underpinnings.

Mark Sargent, a securities law specialist and dean of the Villanova University School of Law, said National Century's fall shows that the financial system imposes little real responsibility on the dealmakers and bond raters to perform due diligence on behalf of investors.

Because there are few consequences under securities regulations for failing to detect signs of fraud, Sargent noted, there's no incentive to take action against questionable companies and forgo the fees. "It's another systematic failure of the gatekeepers," he said. "It's arranged in such a way that it provides no mechanism for bringing fraud or conflict of interest to the surface."

Anonymous Warnings

Poulsen, a former brewery marketer and insurance salesman, started National Century in Ohio in early 1991. The basic business idea was to provide struggling hospitals, nursing homes and other health care operations with quick cash infusions, in exchange for control of the receivables, or bills due, from insurers. Then bonds were sold by Wall Street on behalf of National Century, with the agreement that the cash flow from the receivables would be used to pay off the debt. In all, the company floated about $19 billion in bonds, according to promotional material and the bond agreements.

Unlike companies that sell shares of their stock to the public, National Century was not obligated to register its bond offerings with the Securities and Exchange Commission, a way investors can monitor the terms of such deals. Instead, National Century was allowed to claim an exemption from registration because Wall Street was selling the bonds to large institutional investors, such as banks, pension funds or insurance companies, which are supposed to be more financially sophisticated.

Even if a bond sale is not subject to registration and disclosure requirements, "companies are not allowed to lie in their offering documents," said Paula Dubberly, chief counsel of the SEC's corporate finance division. Dubberly said her office "doesn't have the staff or resources" to review every registered offering, much less every unregistered one.

When any bond offering is made, the interest rate paid to the buyers is determined, in part, by the perceived risk of the transaction and the letter grade assigned by one of the three major credit agencies recognized by the SEC.

National Century received its first AAA rating for a bond issue in 1992, from Standard & Poor's, not long after Poulsen started the company. Three years later, however, S&P stopped rating National Century bonds altogether. Ted Berbage, a managing director of the rating agency's structured-finance group, said analysts had a difficult time assessing which receivables were valid. "We just felt over the course of that time we weren't completely satisfied with the accuracy of their reporting," Berbage said.

The other two companies that dominate the credit-rating industry, Moody's and Fitch, continued to rate National Century bonds. Officials said they were comfortable with the performance of the bonds and the financial reports issued by the company.

Signs of trouble cropped up again in 1995, when National Century's accountant at the time, Hausser & Taylor LLP of Columbus, Ohio, was months late in issuing its audit for the previous year. The auditor and National Century were wrangling over the auditor's conclusion that the company was violating its agreements with bondholders, according to participants. National Century had provided funding to some borrowers with only the promise of future -- not actual -- billings as collateral. Eventually the auditors issued two reports, a draft Poulsen requested that blessed the company's bookkeeping and a final report that said National Century wasn't in compliance with bond agreements.

There were other warning signs in the mid-1990s. One of National Century's largest customers was Rx Medical Services Corp. of Florida. The publicly traded company filed papers with the SEC in 1995 saying its auditors questioned whether it was a viable company. The auditors also warned it was too dependent on National Century for funding. But a short time later, National Century gave Rx Medical still more money to acquire another health care provider -- money that, if it came from bondholders, may have been used inappropriately.

Over the next few years, Poulsen expanded his business rapidly, increasing the size of its bond offerings and its profits.

In 1999, an anonymous writer warned in two letters to Fitch bond raters that National Century was a fraud, estimating that half the company's portfolio of receivables "is either worthless or nonexistent." In March 2000, a third anonymous letter to Fitch, also sent to a trade journal and published, gave even more explicit suggestions about where to look, including the names of a client hospital with a questionable financial history.

Fitch officials acknowledged receiving the letters, and in July 2000, after getting "extensive information" from the company, it said that "no rating actions were warranted."

Current and former National Century employees say Fitch executives did little to check on the allegations in the letters. They visited headquarters, spoke at length with Poulsen and "kicked the tires," they said, and did not aggressively investigate the company's complex finances.

Kevin Duignan, a managing director at Fitch, said his firm did take the allegations seriously and found Poulsen's explanations convincing. "It's fair to say that either more detailed or more reliable information should have been provided to Fitch by either the company or its agents," he added.

It was also in 2000 that National Century terminated PricewaterhouseCoopers, the national auditing firm that had replaced Hausser & Taylor four years earlier. Securities industry specialists say firing an outside accounting firm is a classic sign of trouble. A publicly traded firm would have had to explain the reason to the SEC; Poulsen had to explain nothing.

The Blame Game

Last year, the National Century audit was late again. The audit firm this time, Deloitte & Touche, wouldn't sign off. People with access to the company's books now are looking closely, sources said, at the PricewaterhouseCoopers and Deloitte audits and asking why the accountants didn't draw more attention to questionable business practices.

PricewaterhouseCoopers was fired, one knowledgeable source said, because it wanted National Century to change some of its methods, but it declined. Deloitte declined to discuss its work.

Wall Street players began asking harder questions. Last July, Fitch lowered the ratings on one set of the company's bonds, saying it was not receiving enough financial information.

Poulsen offered no hints at the Paradise Island conference on Oct. 3 that his company was ready to implode. "All Lance Poulsen did on the panel was smile and try to charm everybody," said a fellow panelist, John W. Everets, who heads HPSC Inc., a large Boston health care financing firm.

Another panelist, Moody's Senior Vice President Jay Eisbruck, said Poulsen only discussed "basic information" about his company. But a few weeks later, Poulsen called another senior Moody's executive with some ominous news: National Century had begun dipping into special reserve accounts set up to ensure that bondholders would get paid in the event of a lapse by health insurers.

On Oct. 28, some large note-holders, including Daniel Ivascyn, of Pacific Investment Management Co., which manages bond funds, traveled to Poulsen's headquarters to demand an explanation. But instead of meeting as promised, Poulsen kept them waiting for two hours and then ushered them out of the building, Ivascyn said in a sworn statement filed in an Ohio court.

The next day, court papers say, Poulsen acknowledged to Ivascyn and other bondholders that National Century had moved money between two reserve accounts, a violation of bond agreements, and that he and his partners had advanced millions to companies in which they held a personal interest. Investigators have since determined that the transfer of money between reserve accounts to cover a lack of cash had been going on for years, sources familiar with the matter said.

After the fact, National Century's financial backers and overseers pointed fingers at one another.

When asked about the role Moody's played, Eisbruck said his company typically conducts only a narrow "operational review" that includes an examination of the legal and financial structure of the bond pools. Moody's also assesses the creditworthiness of the insurers paying the bills, or receivables, he said.

But Moody's does not conduct "due diligence" in the commonly accepted sense, Eisbruck said. It also relies on companies like National Century "to provide us with relevant information," Eisbruck said. He said the bonds were backed by the cash flow of receivables from hundreds of National Century clients, and "we certainly don't have the resources to research all of them."

If a company "goes to great lengths to violate" bond agreements, Eisbruck said, "it's very difficult to try to pick these things up."

Eisbruck said it was up to underwriters, such as Credit Suisse, their lawyers and their accountants to dig deeply into National Century's activity.

Officials at Credit Suisse blamed Moody's and the other players. They said the companies that rate the bonds and the banks that manage the bond accounts are crucial to ensuring the validity and safety of the transactions.

Credit Suisse said in a statement that it "conducted all appropriate due diligence for a placement agent for this type of transaction and relied on the company and its officials, the accountants, the ratings agencies and the trustees." Credit Suisse has already written off $214 million worth of National Century bonds that it owned, saying it "suffered losses as a result of what appears to be massive fraud" at National Century.

Officials at Bank One and J.P. Morgan Chase who oversaw specific bond pools as trustees said they're obligated to do only what the bond agreements require -- in effect, to follow National Century's direction. "Our role here is administerial," said an official at one bank who asked not to be named.

In one recent lawsuit, a National Century customer named Med Diversified Inc. took aim at the trustees, saying Bank One and J.P. Morgan "knew or should have known" that National Century's instructions to move reserve funds around was "a radical and risky departure from the structure of those funds and would result in the loss of significant investor security."

Bank One, of Chicago, helped precipitate the fall of National Century when it told Moody's about the manipulation of the reserve accounts, the rating agency said. But the bank did not raise those questions with Moody's until hundreds of millions of dollars in reserves apparently had disappeared.

Poulsen, at home in Florida, denies doing anything deceptive or illegal, according to his attorney Albert Lucas.

Lucas also indicated it would be hard for his client's Wall Street partners to argue that they were unfamiliar with the details of the business. "There were lots of people looking at this every day," he said.

Lance K. Poulsen, the company's founder.