FBI RAIDS

washingtonpost.com
FBI Raids National Century Offices
Search Comes as Health-Care Lender Considers Filing for Bankruptcy
By Robert O'harrow Jr. and Bill Brubaker
Washington Post Staff Writers
Sunday, November 17, 2002; Page A12


FBI agents yesterday morning raided the Dublin, Ohio, offices of National Century Financial Enterprises Inc., whose financial implosion has threatened patient care and health industry jobs around the country and billions of dollars in bondholders' investments.

The arrival of federal agents with a search warrant was the latest blow to the company, one of the largest funders of last resort to struggling health-care providers, such as Greater Southeast Community Hospital in the District. Two customers, a provider of home health care and a firm that supplies emergency-room doctors, have filed for bankruptcy.

The FBI agents took away computer equipment and scores of books and records. James L. Turgal, chief counsel for the FBI's Cincinnati office, which covers Dublin, said the affidavit supporting the search warrant was filed under seal so the FBI could "continue on with an investigation without certain facts getting out to potential suspects."

The raid came as accountants hired by bondholders struggled through a morass of financial transactions in a search for hundreds of millions of dollars in unaccounted funds. "They walked in and took all the records," one person close to the company said of the FBI search. "They're in control now." Company officials declined to comment except to say National Century would cooperate fully with the FBI search and investigation.

Controlling owner and founder Lance K. Poulsen resigned as chief executive last week after a credit agency withdrew ratings on some of the company's bonds. National Century said it was considering filing for Chapter 11 bankruptcy protection as well.

National Century long promoted itself as the "genius" of its business, a leader in the giant market for bonds backed by the assets of borrowers. By lending money to health-care companies in exchange for control of their receipts from private and government insurers, Poulsen's creation claimed dazzling returns. He said its net income was $40 million last year on revenue of more than $300 million.

Hundreds of businesses came to rely on regular cash infusions from National Century -- paying large fees and interest, and sometimes giving up control of their stock -- to remain afloat. The company then sold bonds linked to those receivables and used the influx of cash, more than $15 billion over the years, to make more deals.

The reasons for National Century's swift tumble remain a mystery, even to the outside accountants examining its books. A person familiar with that review said the accountants have found a maze of transactions that has been nearly impenetrable so far.

Interviews and the review of hundreds of business records and court documents indicate that Poulsen and his partners have for years engaged in financial deals that have been challenged as questionable. And they have used an array of partnerships to invest personally in some of the health-care providers their company finances. In court documents, Poulsen and associates have repeatedly denied all allegations of wrongdoing.

In recent weeks, two leading bond-rating services have said that National Century may not have sufficient reserves to back about $3.35 billion worth of bonds it services. Officials at Fitch Ratings withdrew the ratings on bonds issued by subsidiaries of the company after officials at National Century "completely cut them out of the loop" about its finances, they said.

Moody's Investors Service lowered the company's ratings to junk-bond status recently, after it said National Century misused cash reserves to finance new deals. Moody's said its action reflects "concern about NCFE's financial stability."

Like many of the corporate collapses after the fall of the "bubble economy," questions about National Century's finances revolve around the role of its accountants, the credit rating agencies who once said its debt was rated AAA, and the bankers who underwrote the bond issues and collected handsome fees creating the "asset-backed securities" they sold to bond and mutual funds.

Two executive from J.P. Morgan Chase & Co. are on the National Century board of directors. Credit Suisse First Boston Corp. underwrote some of the bond sales.

Even before the FBI raid, many of the players were squaring off in court and blaming one another for the collapse. Health care companies want to know why the financial experts weren't minding the store. The financial side, in turn, pointed fingers at health-care operators for failing to disclose an array of financial ties to Poulsen and other directors of the company.

Moody's Vice President Jay Eisbruck said it isn't the rating agency's job to "conduct full due diligence." It's up to others, including auditors and banks, to do that, he said.

Since the crisis began, neither Poulsen nor his partners have returned telephone calls. "The principals aren't here at all," spokesman James M. Nickell said recently from the company's headquarters. "I have no idea where they are. They speak for themselves."

Until a few months ago, Poulsen, 59, was living the good life. He is described by associates as a driven and often charming entrepreneur who lives in a $1 million house in Port Charlotte, Fla., complete with a pool and a waterfall. In recent years he has become active in politics, too, donating $44,000 recently to the Florida Republican Party and in September letting Gov. Jeb Bush use the company jet on a campaign swing.

It was in the late 1980s that Poulsen hit upon the idea of converting leases on expensive heavy equipment into marketable securities, through a company called National Premier Financial Services. In 1991 he created National Century to expand into the health-care world, offering similar services to struggling hospitals and other providers.

It was a golden bet.

From the mid-1990s on, National Century approached 40 percent annual growth. From 1999 through 2001, company sales rose from about $67 million to about $254 million, a 280 percent increase, according to a Dun & Bradstreet report.

But behind the company's glowing claims were repeated allegations of huge hidden fees and conflicting interests. At times National Century and its affiliate overfunded some of its clients, officials said.

For example, shareholders of PhyAmerica Physician Group Inc., one of National Century's larger customers, accused Poulsen and others of conspiring with PhyAmerica owner Steven M. Scott to skim money from the company, in a lawsuit filed in North Carolina.

National Century was effectively charging 26 percent or more in fees for its loans and other services, the suit alleged. Though PhyAmerica could have substantially offset those fees, the company never did, shareholders claimed. Scott never made clear that he personally was receiving millions of dollars in loans from National Century, they charged. PhyAmerica agreed to pay shareholders about $4.6 million to settle the suit.

PhyAmerica's general counsel, Eugene F. Dauchert Jr., said National Century paid PhyAmerica more than the value of receivables it offered as collateral. "We did get overfunded. . . . We put a value on our receivables, and the money that we got in was much in excess of that value. . . . This created a humongous profit for NCFE." PhyAmerica, which supplies emergency-room services and doctors to hospitals in 30 states, filed for Chapter 11 bankruptcy protection last week.

National Century's ties to Med Diversified Inc., a home health-care provider, are even more complex. Med Diversified and its affiliates were among National Century's largest customers in recent years. At the same time, National Century officials, including Poulsen, his wife and two other directors of the Ohio company, owned 43 percent of Med Diversified's stock.

One of Med Diversified's subsidiaries, Tender Loving Care Health Care Services Inc., declared bankruptcy protection earlier this month.

A short time later, Med Diversified filed a lawsuit in U.S. District Court in Massachusetts charging that Poulsen and another director, as well as J.P. Morgan Chase and Bank One Corp., used the receivables arrangements to take advantage of the company and place it in "significant financial risk."

Poulsen and his wife, Barbara, and two other National Century investors are directors of a company that owns 48 percent of another National Century customer, Rx Medical Services Corp. of Fort Lauderdale, Fla., which said it, too, may have to file for Chapter 11 bankruptcy protection. And National Century owns 11.5 percent of Doctors Community Healthcare Corp., which since September has had trouble paying vendors and doctors at Hadley, Greater Southeast and three hospitals in Chicago and California.

Staff researcher Richard Drezen contributed to this report.




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