F.B.I. Raids Headquarters of Health Services Lender

56 percent of the receivables come from affiliated companies, giving National Century an economic interest in both sides of a bond transaction -- a clear conflict of interest

MICHAEL ONEAL
Published: November 18, 2002
F.B.I. agents raided the headquarters of National Century Financial Enterprises Inc. in Dublin, Ohio, on Saturday, seizing the books and computer records of the troubled health care finance company.

The raid came as the company has been struggling with financial problems that began in late October and that may force it to file for bankruptcy as early as today.

Documents from court actions against the company have accused National Century of gross mismanagement and of hiding information. What is becoming clear is that for clients and investors, millions of health care receivables supposedly backing $3.35 billion in bonds, once AAA rated, may have never existed.

The former chairman and chief executive of National Century, Lance K. Poulsen, resigned both posts under pressure on Nov. 8 and could not be reached for comment.

Lawyers for the company's board, which is led by two bankers from J. P. Morgan Chase, said National Century and Alvarez & Marsal, a turnaround firm the board has hired, would cooperate with the F.B.I.

One of the lawyers, Paul E. Harner, said F.B.I. agents seized a number of records and computers on Saturday from National Century.

National Century is one of the largest health care finance companies in the country. It lends money to cash-short health care companies in return for taking over rights to their receivables -- payments expected from insurers and government programs like Medicare and Medicaid. It then packages those receivables into bonds and sells them to investors, who receive interest derived from the insurance payments. National Century gets a part of each transaction.

But last spring, new investors started to shy away from National Century bonds, depriving it of new capital. In response, the company took money from reserve accounts backing two bond trusts worth $3.35 billion. When investors discovered that almost $350 million was missing from a trust called NPF XII, they protested and National Century's finances began to fall apart.

Facing a liquidity crisis, National Century stopped making payments to hundreds of hospital and home health care clients. That, in turn, led two large clients -- PhyAmerica Physician Group in Durham, N.C., and Tender Loving Care, a unit of Med Diversified in Andover, Mass. -- to seek bankruptcy protection.

Now, National Century's clients and its bondholders, including Pacific Investment Management Company or Pimco, are battling for control of the remaining receivables.

But millions of those receivables may not exist. Instead, the company appears to have been using its bonds to prop up troubled companies like Med Diversified in which National Century or its officers -- including Mr. Poulsen and his wife, Barbara, -- either have an ownership interest or own outright. The bonds were underwritten by Credit Suisse First Boston and rated AAA until Oct. 25 by Moody's Investors Service.

One window to the company's operations is an affidavit filed on Friday in the Franklin County Court of Common Pleas in Columbus, Ohio. In the filing, Kenneth J. Phelan, a managing director of Bank One, which served as trustee for the NPF XII transaction, described a discussion with Sherry Gibson, an executive vice president at National Century. According to the affidavit, Ms. Gibson said that National Century lent more money to clients than it could support with patient receivables.

Rather, the company accepted real estate and even artwork as collateral, which violated the bond indenture. NPF XII is supposed to have about $2 billion in collateral. Of that, according to the affidavit, Ms. Gibson told Mr. Phelan that $800 million was in ''nonpatient specific receivables.'' In other words, 40 percent of the bonds are backed by collateral that has nothing to do with insurance payments.

According to the affidavit, Ms. Gibson also said that National Century failed to write off receivables that were more than 180 days past due, as required by the bond indentures. She explained that executives often reclassified the bonds as collateral in a category called ''150+ day.'' Likewise, Ms. Gibson said executives advanced monies to companies that provided receivables for services that had yet to be performed. If the service was never performed, this was not reflected in the books. And National Century kept lending the client money anyway, according to the affidavit.

As for the reserve funds securing the bond transactions, Ms. Gibson told Mr. Phelan that executives routinely moved money in and out of the accounts. They staggered the reporting days of the reserves so that they could make sure one was full on a given day, even if the other was not. As trustee, Bank One was supposed to monitor the activity, as was J. P. Morgan, which acted as trustee for a sister transaction called NPF VI.

Both banks have been sued by Med Diversified, which has accused trustees of not monitoring the bonds. But according to the affidavit, Ms. Gibson said that National Century had provided false information to Bank One ''to get it past the trustees or the trustees would not move the cash.''

Mr. Harner, the company's lawyer, said, ''We expect that all of these types of allegations will be fully investigated by independent parties.''

Until now, the extent of National Century's ownership in its clients was not known. But other papers in the bondholder suit outline that the company and its affiliates have major stakes in 10 of its biggest customers. As much as 56 percent of the receivables come from affiliated companies, giving National Century an economic interest in both sides of a bond transaction -- a clear conflict of interest.