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The many extracts on these
pages are from copyright material. They are owned by the reference
given or its owner. They are reproduced here for educational purposes
and to stimulate public debate about the provision of health and aged
care. I consider this to be "fair use" in the common interest. They
should not be reproduced for commercial purposes. The material is
selective and I have not included denials and explanations. I am not
claiming that all of the allegations are true. The intention is to
show the general thrust of corporate practices as well as the nature
and extent of any allegations made.
The Financiers and Health
Care
This page speculates on the possible role
which pressures generated by financial institutions, particularly
bankers and analysts may have played in the various health care
scandals. It goes on to describe their documented long term
involvement with the fraudulent HealthSouth.
CONTENTS
Introduction
Part 1 : Looking
Back
Part 2 : The Bankers and
HealthSouth
to
contents
Introduction
The revelations about bankers and analysts on
Wall Street raises questions about their possible role in the fraud
prone health sector over the years.
Would the health care frauds and the misuse
of patients have occurred without the support of the bankers and
analysts? Most of the executives of these companies did not think
that they were doing anything wrong. They were simply applying market
principles to health care. Strong market support from investors,
analysts and bankers must have given companies the positive feedback
they needed to affirm to themselves the acceptability of what they
were doing. There were close relationships with the banks.
Tenet's Michael
Ford, president of Tenet's
international division had a close relationship with Chase Manhattan
bank. When he left Tenet in 1997 he joined Vista
Healthcare in Singapore, an
international corporate health consultancy advising other companies
about international oportunities and funded by Chase
Manhattan.
The first part of this web page is therefore
speculation about the role which the financial institutions may have
played in the past, drawing on my knowledge of what actually
happened.
The second part of this web page describes
exactly the same close relationships in the company HealthSouth that
we saw in Enron, Worldcom and a host of other companies.
to
contents
Part 1
Looking Back
The
National
Medical Enterprise Scandal
On a page I wrote in 1996 I examined and
commented on the analysts
reports about National Medical
Enterprises - NME
(now Tenet Healthcare) before and
during the exposure of the misuse of patients for profit in
1991.
In retrospect I suspect that I was looking at
a circular relationship, between advising bankers, analysts and
company executives. The 1991 analysts' reports praised the company's
dysfunctional money making practices. Because they made money they
were seen to be legitimate and to be providing a high quality
service. They did not see anything wrong with what NME was doing and
as a consequence neither did senior NME staff. When the scandal broke
analysts were disbelieving and sceptical of the outcry about the
company. They considered it merely a media frenzy which would go
away.
We can imagine investment bankers and
analysts who we now know sometimes attended board meetings,
urging NME to
find ways to admit more patients,
keep them longer and carry out more "therapies" on them? This is
simple business logic. NME's executives in turn pressured its staff
to do these things offering bonuses
and company awards.
NME set in place procedures to measure
admissions, length of stay and profits per patient day. They rewarded
those who were successful. This information was fed back to bankers
and analysts who responded enthusiastically. Other companies were
pressed to supply the same data and the entire marketplace was soon
obsessed with admitting more, keeping longer and giving more
treatment.
Profits rose rapidly so confirming the
correctness of the financiers advice. The more they praised, the more
the industry competed sending more pressure through the system. All
parties turned a blind eye to the way employees responded to these
pressures.
During this period the company expanded
dramatically and the bankers prospered from their
dealings.
Everyone took a purely commercial view of the
practices including
- the payment of bounty for
admissions,
- the employment of bounty
hunters,
- the methods used to increase the profit
per patient per day, and
- the imprisonment of children (who paid
better) in psychiatric hospitals for months on end when this was
not only unnecessary but harmful.
It was only when hospital managers started
kidnapping children and patients came forward to describe their
unfortunate experiences in these hospitals that the bubble
burst.
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Columbia/HCA
In the case of Columbia/HCA's US $1.7 billion
fraud the analysts were quick to assure investors that the company
could survive. Most interesting was the way the market and the press
got behind the company and its new chairman Thomas Frist brother of a
powerful US congressman.
The massive fraud originated from a series of
Qui Tam (whistle blower) actions commenced several years before
against HCA when Thomas Frist was its chairman. Most of the
fraudulent practices commenced at that time and continued when HCA
merged with Columbia.
Columbia's Richard Scott, a corporate
acquirer became chairman. He made himself and the company unpopular
with his aggressive business practices and his Pacman takeover of
community hospitals. When the fraud was exposed in 1997 he was forced
to retire and got all the blame.
Frist, who was more to blame than anyone for
the fraud became the new chairman. He was hailed as the company's
kindly saviour. His claim to making the company more like his
socially responsible HCA was accepted with few questions.
Although all the information about HCA and
Frist was publicly available the market and the press embraced Frist
and his new image of a kindly and socially responsible HCA. They
marketed it to the public. The financiers were soon back in business,
trading hospitals and restructuring.
to
contents
Aged
Care
It is difficult to be certain quite what role
the bankers and analysts played in the aged care bubble. It reached
dizzy heights of merger activity in the early 1990s then collapsed in
1998/9. It this it resembled the DotCom and technology
bubble.
The marketplace raved
about the opportunities providing
step down care presented for nursing homes.
Sun Healthcare chairman, Andrew Turner's
assertive advocacy for "cutting
the fat" in nursing homes led to the
perception of inefficiency. They were what the market liked to hear
and Turner became more credible by making these remarks. Others
followed his advice. As a consequence there was deskilling and
understaffing across the entire for profit nursing home industry. The
elderly were whare housed for efficient processing. There was
widespread neglect. Thousands died prematurely as a
consequence.
These profit generating strategies were
welcomed and praised by the market and accepted by politicians. No
one looked at the consequences until a Californian house wife,
alarmed at the care she witnessed took out death certificates and
analysed them. When Californian authorities ignored her findings she
took them to the federal government. Someone listened and
looked.
The bubble burst when government changed
Medicare funding to stop the rorting of Medicare by step down care in
nursing homes. At the same time the families of the elderly won
crushing damages in the courts. Most of the nursing home chains
entered bankruptcy.
Prior to the
Medicare cuts, nursing homes were compensated each time a patient
received treatment from a nursing home facility, allowing
companies to pad profits by expanding patient care. The
payment reductions established fixed prices per patient, slashing
nursing homes' revenue from Medicare between 30% and 40%,
practically overnight, Texas Pacific Group partner Jonathan Coslet
estimates. The companies' highly leveraged acquisitions didn't
help matters.
At present, only
two nursing homes trade publicly: Manor Care Inc. and Beverly
Enterprises, the rest having been driven into Chapter 11
bankruptcy in the final years of the 1990s.
The Refurbishing
Begins: With Medicare reimbursements back, healthcare services
taps capital markets Investment Dealers Digest April 16, 2001
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contents
Healthcare
Analyst Bonanza 1999
The health care marketplace was in decline
following the 1997 cutbacks on Medicare funding and the massive fraud
scandals. Money went to the technology companies instead.
By 1999 intense lobbying by many parties had
persuaded the government to soften their regulations and provide more
Medicare funding.
As significant was the election of George
Bush as president. Bush was a strong supporter of the corporate point
of view and of health care corporations. His early comments suggested
that he favoured less oversight and more self regulation but his
views were not well received in the wake of all the fraud.
Bush appointed prominent people from the
corporate health care marketplace to positions of power in the
government. Thomas Scully who had been president of the politically
powerful Federation of American Health Systems, the body representing
for profit corporate medicine and lobbying on their behalf was one of
these.
With the collapse of the technology and
DotCom sectors in 1999 the financiers turned back to health care for
their profits and commenced the process of building it up for the
next bubble - the one which imploded in 2002/3.
Health care bankers and analysts became
prized possessions. All the financial institutions targeted health.
Analysts were poached from those banking groups, which already
operated in this area. It became a frenzy. Remuneration packages for
analysts doubled.
We now know that the bankers were not paying
these salaries for independent reports. They were paying for the work
these people would do in building up the sector and bring in
business. Knowing what we now know, we can predict the
outcome.
Mr. Ray,
then head of health care investment banking at BT Alex. Brown,
helped negotiate the $1.2 billion sale of Mariner Health Group to
Paragon Health Network. - - - - In May, he and 40 members of his
department bolted for Credit Suisse First Boston, and headhunters
put the value of Mr. Ray's new contract at an eye-popping $2.5
million a year.
------------------------------
Investment banks are engaged in a ferocious bidding war for health
care specialists, convinced that the graying of America will be a
boon for health-related companies.
--------------------------
With this in mind, Banc of America Securities, Warburg Dillon Read
and other formerly second-tier players have been raiding the
health care groups of more established firms such as Morgan
Stanley Dean Witter & Co. and Salomon Smith Barney. With the
talent pool thinning, health care bankers and analysts now have
huge incentives to test the job market.
More than a
dozen top health care bankers have switched firms since February,
sometimes bringing their entire departments with them. Mr. Ray and
Benjamin Lorello, who left Salomon Smith
Barney for Warburg Dillon Read, are the best-known
defectors.
Just last week,
J.P. Morgan & Co. Managing Director Clifford Cramer departed
for Merrill Lynch & Co., and Anne Kavanagh left Prudential
Securities Inc. to become head of health care banking at
PaineWebber Inc.
''I've never
seen anything like this,'' says Brian Brille, who started the
musical chairs when he quit Morgan Stanley Dean Witter in February
to join Banc of America Securities.
-------------------------
The big investment banks pride themselves on providing a full
array of services. ''To not be represented in a consequential way
in such a big sector of the market is just politically
unacceptable,'' says Mr. Kopelan. With the upstarts poaching and
established firms filling holes, ''suddenly everybody was in the
market at the same time.'' HEALTH
CARE GETS HOT ON WALL ST.: BIDDING WAR ON FOR SPECIALISTS
Crain's New York Business August 09, 1999
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Rehabilitating
Healthcare 2001
There was some difficulty in rejuvenating the
sector. Many companies were still heavily in debt. They did not have
a good credit rating. The fallout from the bursting of the technology
bubble had left investors jaundiced and unwilling to buy shares.
Floats and IPOs were not being supported. The companies needed money.
The analysts were strongly pushing the opportunities.
The financial institutions came to the rescue
resorting to complicated arrangements that generated money in other
ways -- structured
finance.
Whatever the state of the market financial
institutions always positively predict and encourage more
consolidation with mergers and takeovers. 2001 was no exception. The
money for the financiers lay in mergers. Analysts' reviews were
enthusiastic about managed care where Aetna was about to dominate the
market by embarking on massive
takeovers. They were enthusiastic
about the purchase of not for profit hospitals. Ultimately all this
meant bigger profits for the banks.
What bankers don't want is a stable
marketplace where companies concentrate on conducting business
instead of deals. They make less money.
Like many
healthcare services companies, HealthSouth has been taking
advantage of financing opportunities born of the crash in the
technology sector, a change in fortune of healthcare providers now
that Medicare reimbursements are being reinstated, and the sudden
lowering of interest rates by the U.S. Federal Reserve.
The entire
sector-namely, managed care companies, hospitals, nursing homes
and pharmacy benefit managers, among other healthcare providers-is
getting a new lease on life, with restructuring and refinancing
engineered by healthcare investment bankers who are turning their
attention to healthcare providers and away from the once
high-flying biotech concerns.
-------------------------
People are looking for safe harbors and healthcare is one of
them," says Bill McGahan, deputy head of the global healthcare
group at UBS Warburg, referring primarily to the interest in
healthcare high yield.
While the equity
market still is off-limits to many of these companies, due to the
state of the market and their own indebtedness, there are
plenty of complex financing strategies around. In particular,
bank/bond combinations are being designed to refinance outstanding
bank debt, often offering lower interest payments on new debt
offerings which are typically large enough to include some cash
for future growth.
----------------------------
Given the upheaval still surrounding the sector, there is likely
to be more consolidation. Those companies with access to the
markets are now even better positioned to raise the money to buy
their less-healthy rivals.
----------------------------
In 1999 and 2000, the government loosened up the purse strings,
and Wall Street appears satisfied that Medicare reimbursements are
safe for the time being, - - - .
---------------------------
Recovering from their financial difficulties, hospitals and
managed care companies also seem to be on a roll, say bankers.
-------------------------------
The good news is that the for-profit hospitals may have a chance
to scoop up some of the not-for-profit hospitals in the future, he
adds.
------------------------------
Over the past few years, consolidation has been a consistent trend
at hospitals. But the equity markets are still a bit iffy for
them.
-----------------------------
Given the improved outlook for those companies for the next two
years, managed care may even provide Wall Street with a
blockbuster acquisition this year, says Rich Jacobsen, an
investment banker who specializes in the managed care industry at
Salomon Smith Barney.
-------------------------------
For all the action in the debt markets, the stock market is
another story. Completed deals, such as the one for LifePoint
Hospitals, are few and far between. Meanwhile, the bad news keeps
on coming.
The Refurbishing
Begins: With Medicare reimbursements back, healthcare services
taps capital markets Investment Dealers Digest April 16, 2001
It should not surprise us that within 2-3
years of all this there was another series of frauds and scandals.
Tenet Healthcare and HealthSouth were the prime offenders.
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Tenet
Healthcare - a
replay
The first of these was Tenet Healthcare, the
new name for National Medical Enterprises. After its guilty plea in
1994 it had been restrained by onerous compliance and oversight
processes. It had not prospered as a result. It felt that it had been
unreasonably victimised. The market certainly resented restraints
like this.
When the restrictions were lifted in 1999 the
company, supported no doubt by its financiers reverted to its earlier
practices. It was almost a replay of what had happened but in a
different context. Tenet found a loophole in the Medicare regulations
which allowed it to bill much more for complex major procedures.
Among a number of other unsavoury and aggressive practices it
targeted complex surgery including neurosurgery, joint surgery and
cardiac surgery.
It marketed its claimed expertise in these
areas and encouraged this sort of surgery in its hospitals. Doctors
who brought in the cases and operated on them were encouraged and
supported, sometimes regardless of their qualifications. Profits
soared. The analysts and the bankers were ecstatic and Tenet's share
price rose to dizzy heights. It was soon aggressively acquiring not
for profit hospitals.
The bubble burst very suddenly in October
2002 when almost simultaneously Medicare discovered that they were
being taken for a massive ride and a medical ethicist, who had gone
for screening discovered that he was being urged to have coronary
bypass surgery when his arteries were normal.
An FBI investigation showed that the company
was strongly supporting an unqualified cardiologist and a cardiac
surgeon who were carrying out large numbers of unnecessary procedures
and operations, often on people drawn to the hospital by the
screening service Tenet marketed to the public. Other doctors had
repeatedly complained to the company's officials that many procedures
were unnecessary. They had refused to entertain the idea.
We can speculate as to whether a similar
close relationship existed between Tenet and its bankers as existed
with HeathSouth, Enron and WorldCom. The extent of these
relationships in the marketplace makes it likely that it
did.
Following the Citigroup scandals Sandy Weill
was forced into a clean out of analysts at Smith Barney. Large
numbers were fired. Two health care analysts were among those fired
and Tenet/NME was left without an analyst to report on its
activities. One can only speculate whether they were fired because
they were among those issuing deceptive reports.
There are
other top-flight companies that Smith Barney research analysts do
not now cover, among them Motorola, Exxon Mobil, Morgan Stanley,
Microsoft, Tenet Healthcare and Nike, according to
Bloomberg News data.
---------------------------------------
Deborah Lawson, another highly regarded analyst, who specialized
in health care, was let go one month after returning from
maternity leave.
Changed Smith Barney
Is Thin on Analysts The New York Times June 13, 2003
Glen J.
Santangelo, a well-regarded health care analyst, would be leaving
the firm. No explanation was given for his departure.
------------------------
But according to Smith Barney analysts familiar with the
circumstances, Mr. Santangelo had sent an advance copy of a
research report to a client. Wall
Street'sHarsh New Reality The New York Times August 17, 2003
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Not only
the banks
That complicty in fraud was widespread in the
marketplace and that the systems "market police" were part of this is
suggested by the involvement of accountants.
Arthur Andersen was a multiple
offender and was eventually forced out of business.
KPMG has been accused of complicity
in the Columbia/HCA fraud and of participating
in tax fraud. Ernst
and Young is accused of involvement
in the HealthSouth
fraud.
It could
not happen in Australia - or could
it?
Heart operations on normal hearts may sound
bizarre, something from another world. The Tenet administrator in
charge of the region in the USA where this occurred was the same
Tenet/NME administrator who was CEO of Tenet/NME's Australian
subsidiary Australian Medical
Enterprises (AME) between 1991 and 1995.
In 1993 retired Justice
Yeldham had ruled against a complaint
and considered him a fit and proper person to run hospitals in
Australia. The health department in Western
Australia, reviewing Tenet/NME's
suitability to operate in Australia took a different view. They
pointed to the possibility of something like this happening
here.
Tenet/NME's ultimate departure from Australia
was related to further revelations about this administrators
financial
dealings with a surgeon, who alleged
conduct which might have put him under pressure to do unnecessary
surgery.
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contents
Part 2
The Bankers and HealthSouth
Citigroup's
Salomon Smith Barney (now renamed
Citigroup Global Markets)
Salomon Smith Barney was one of the groups
with an older established health care division. Its leading position
in this area is reflected in its strong health care banking division.
Smith Barney staff like other investment bankers advises on mergers
and other business transactions. It arranges loans, mergers, floats,
and structured deals. We now know that its bankers and analysts
attended board meetings to advise, consult and presumably sell their
deals.
Smith Barney runs a widely recognised annual
business conference for corporate health care providers. It is hardly
surprising that it introduced and encouraged close relationships
between bankers, analysts and the companies. This close relationship
started as early as the 1980's.
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contents
HealthSouth, Smith
Barney and USB Warburg
The HealthSouth fraud scandal exposes the
same patterns of behaviour by bankers, analysts and accountants as in
Enron and WorldCom. It has not yet been established whether the
bankers knew about, participated in or actively promoted the fraud.
At the very least they were conveniently blind to it.
The HealthSouth fraud it is claimed started
soon after the company went public in 1986. There is however a 5 year
statute of limitations. The estimated US $2.7 billion fraud and the
charges therefore relate to the last 5 years only.
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The Banking
Team
Salomon Smith Barney, their banker Benjamin
Lorello and his team of analysts helped to take the company public in
1986. They remained very close to HealthSouth over the years and
Lorello did all of HealthSouth's business. Many of the subsidiary
companies Lorello helped HealthSouth found made plenty of money for
Smith Barney and HealthSouth directors, but large losses for share
holders.
HealthSouth
wasn't the only Lorello client to run into trouble. MedPartners,
Integrated Health Services, and Five Star Quality Care, for
instance, have all had serious financial problems. "A company
would tell me they were doing a deal," says a health-care analyst
at a major New York hedge fund, "and I would say to management,
'Please tell me you aren't doing it with Ben Lorello.' Everything
he touched blew up." HealthSouth's
Go-to Guy : The collapse of HealthSouth is putting pressure on UBS
Warburg. FORTUNE April 15, 2003
During the frenzy to recruit health care
bankers and analysts in 1999 USB Warburg poached Lorello and his team
by offering Lorello and his team large salaries. He took the
HealthSouth business with him.
Mr. Lorello
made his move to Warburg in March, reportedly receiving a
three-year contract worth $70 million. That allowed Mr. Brille to
recruit two bankers from Warburg, Paul Donofrio and David
Gottleib. The domino effect continued, reaching ING Barings Furman
Selz, SG Cowen Securities Corp. and PaineWebber, among others.
Prudential even bought a whole firm, acquiring health care
specialists Vector Securities.
HEALTH CARE GETS HOT
ON WALL ST.: BIDDING WAR ON FOR SPECIALISTS Crain's New York
Business August 9, 1999
Ms. Chovav
was hired to replace Geoffrey E. Harris, a longtime colleague of
Mr. Lorello, also from Smith Barney. Mr. Harris covered
HealthSouth in the mid-1990's and moved with Mr. Lorello to UBS
Warburg in early 1999, getting a contract that guaranteed him $10
million a year for three years, say bank officials. The contract
was substantial for a health care services analyst at the time,
just as Ms. Chovav's compensation is considered steep in today's
environment. Conflict
Issue Over Analyst's Deal New York Times April 8, 2003
Smith Barney and USB Warburg were both
participants in the US $1.4 billion analyst fraud scandal although
USB paid a smaller fine. They were all doing the same things. They
had to if they wanted to be competitive.
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Time
Span
Because os a statute of limitations much of
the media coverage has been directed to the last 5 years of Lorello's
16 years providing services to HealthSouth. Lorello was now working
for USB Warburg, something Smith Barney must have been very relieved
about.
But few
bankers have been so successful using research to generate
investment banking business, say a number of bankers who have
worked with Mr. Lorello over the years.
Conflict Issue Over
Analyst's Deal New York Times April 8, 2003
The Lorello team's conduct did not change
when they moved to USB Warburg. I will use both the Smith Barney and
UBS material to illustrate how close bankers and health care
companies were and the influence which the bankers and analysts had
on HealthSouth. The likely extent of similar relationships with other
health care corporations can be gauged from the extent of the rest of
the Wall Street scandal.
Behind every
great corporate empire they say, lies a filthy-rich investment
banker. For HealthSouth, that banker is Ben Lorello, a brash Wall
Street kingpin. Though HealthSouth is most closely associated with
its recently deposed CEO and founder, Richard Scrushy, Wall Street
insiders say the long arm of Lorello held considerable sway over
the company. HealthSouth's
Go-to Guy : The collapse of HealthSouth is putting pressure on UBS
Warburg. FORTUNE April 15, 2003
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The
HealthSouth Fraud
The HealthSouth fraud is described
elsewhere
on this web site. I have also touched
on the issues surrounding the bankers
and accountants. I will expand on the
bankers involvement on this page.
The HealthSouth fraud follows the pattern of
WorldCom and Enron. It was an accounting scandal in which it is
claimed US $2.7 billion in profit was carefully conjured into the
accounts in order to maintain the stock's value and so HealthSouths
meteoric expansion. When this all started to fall apart in 2002 there
was a desperate but unsuccessful attempt to bury the fraud from
public view by dividing up the company. Lorello advised the company
on this.
The FBI raided HealthSouth in March 2003.
Fifteen senior staff have now pleaded guilty. HealthSouth's founder
and chairman Richard Scrushy faces 85 charges of criminal
conduct.
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contents
Analysts and Their
Reports
UBS and Deutsche bank which both did business
with HealthSouth maintained positive reports right to the end. Other
analysts including the one from Smith Barney who no longer did
business with HealthSouth were negative.
Once again emails reveal that an analyst was
maintaining upbeat reports about HealthSouth while disparaging it in
private. He was forced to resign.
Analyst
Howard Capek waited until March 21 two days after the SEC accused
HealthSouth and CEO Richard Scrushy of "massive accounting fraud"
to downgrade HealthSouth from a "strong buy" to an "reduce," a
signal to dump the stock.
----------------------------
Capek's belated downgrade and UBS's overall bullishness raise
questions about whether UBS Warburg's research was influenced by
its all-star healthcare banking group, lead by Ben Lorello.
-----------------------------
But the majority of firms on the street were far more skeptical
about the stock.
According to
Investars, Salomon Smith Barney downgraded from "outperform" to
"in-line" on Aug. 28, 2002, when the stock was at $6.43, and from
neutral to underperform on Sept. 7 at $5.30.
UBS' OWN GRUBMAN The
New York Post April 4, 2003
In the time
that Mr. Capek has been the analyst for HealthSouth, the company
has done $2 billion in banking business at UBS.
Conflict Issue Over
Analyst's Deal New York Times April 8, 2003
A top health
care analyst for UBS resigned under pressure yesterday after bank
officials discovered an e-mail message in which he disparaged
HealthSouth just months after he had given the stock the highest
possible rating.
The stock
analyst, Howard G. Capek, sent the message to an institutional
investor in September 1999, saying, "I would not own a share" of
HealthSouth.
UBS Analyst Forced Out
for Remark New York Times July 3, 2003
When a
client sent Mr. Capek an e-mail message asking his opinion of the
HealthSouth moves, Mr. Capek responded that he would never own the
stock, which has the stock symbol HRC. The comment was part of an
informal exchange with an investor who was a friend of Mr.
Capek's.
UBS Analyst Forced Out
for Remark New York Times July 3, 2003
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contents
The Lorello
Story
Lorello and his team have guided HealthSouth
in its market ventures since the 1980's. He has been a close and
loyal supporter ever since. The many companies Lorello and
HealthSouth directors established and floated in the marketplace
proved lucrative for them both. Shareholders who held on to the
shares in the belief that these were viable businesses were burnt.
The deal involving one such company Capstone is described
elsewhere on the HealthSouth pages.
In marketing his services to companies Lorello cited his analysts
reports as a reason for choosing him as banker.
The New York Times describes this early
period.
Dating back
to 1986, when Mr. Lorello was an up-and-coming banker at Smith
Barney, his research analysts have served as a crucial component
of the investment banking machine that made him one of the best
paid health care bankers on Wall Street.
By the
mid-1990's, Mr. Lorello was one of the most aggressive and
successful health care bankers. - - - - Instead of focusing on
established companies, he went after smaller ones, like
HealthSouth, that lacked a Wall Street pedigree. These companies
were eager to grow and expand but needed the help of Mr. Lorello
and Mr. Harris, Smith Barney's top health care analyst.
Mr. Harris
joined Smith Barney in 1991 as a health care services analyst. By
1995, he was covering a broad range of companies, including
HealthSouth. Like most analysts then he had a buy rating on the
majority of the stocks in his universe. He also tracked
MedPartners
and FPA
Medical Management, which are management companies for doctors,
and
Integrated
Health Services,
a nursing home chain.
All three were
substantial banking clients of Smith Barney and Mr. Lorello.
Integrated Health Services has sought bankruptcy protection and
FPA has been liquidated, while Medpartners collapsed after a
failed merger attempt and its stock has been delisted.
But HealthSouth
was always at the top of his list, say bankers who worked with Mr.
Harris, and it was that company's success that made his reputation
as an analyst. In the mid-1990's Mr. Harris began to draw a salary
of more than $4 million a year, say bankers who worked with him
during that period, substantially more than health care services
analysts were making at the time.
HealthSouth's
stock soared, more than 250 percent from 1995 through 1998.
----------------------------------
During Mr. Harris's time covering HealthSouth, Smith Barney did
more than $8 billion in deals with the company.
Bankers who have
worked with Mr. Lorello say that Mr. Harris's positive coverage
was in many respects a crucial factor in landing investment
banking business for Smith Barney.
In some cases,
these bankers say, when Mr. Lorello was proposing to a company
that it go public, he would present mock research reports, with a
buy rating, written and prepared by Mr. Harris.
In 1999, when
Mr. Lorello moved his team from Smith Barney to UBS, - - - - Mr.
Harris received a three-year $30 million package.
-----------------------------------
By April 2002, when Mr. Harris left the firm, UBS was eager to
rise from its fourth place in equity underwriting and to
attract more advisory work. Mr. Harris and Mr. Lorello, who
for years had enjoyed a close business relationship, began to
drift apart, say bankers who know the two men. In early 2002, UBS
Warburg declined to renew Mr. Harris's contract and hired Ms.
Chovav to replace him.
Conflict Issue Over
Analyst's Deal New York Times April 8, 2003
Lorello's
team managed more than $6.5 billion in mergers and acquisitions,
$1.2 billion in equity offerings and $3 billion in debt for
HealthSouth since 1990, according to CommScan Dealogic.
----------------------------
Lorello's group, and banker William McGahan in particular, was
very close to Scrushy and HealthSouth.
"When
HealthSouth made a request for information," says one person that
has worked with the team, "everyone dropped everything."
UBS' OWN GRUBMAN
The New York Post April 4, 2003
In letters
to banking clients, Mr. Lorello cited Mr. Capek's analytical work
as a reason for his firm to get banking business.
UBS Analyst Forced Out
for Remark New York Times July 3, 2003
Click
Here for more information about
Lorello and William McGahan
to
contents
The Right
Hand Man
The person who had the closest dealings with
HealthSouth was William McGahan, a banker on Lorello's team. He was a
close friend of Michael Martin one of those who has pleaded guilty to
the fraud. HealthSouth supplied McGahan with an office. After the
exposure of the fraud McGahan resigned claiming this was unrelated to
the fraud.
Mr. Lorello,
who leads UBS's health care investment banking business, and Mr.
McGahan have come under increased scrutiny because of their close
banking ties with HealthSouth, which is being investigated by the
Securities and Exchange Commission over its accounting.
------------------------------
Mr. McGahan had a particularly close relationship with Michael D.
Martin, HealthSouth's chief financial officer from 1997 to 2000,
who has agreed to plead guilty to fraud charges, say bankers who
knew both men. Mr. McGahan's brother, Martin, is the chief
financial officer for HealthTronics Surgical Services Inc., where
Mr. Martin served on the board from April 2001 to
January.
Banker Resigns From
Warburg The New York Times 11 Apr 2003
William
McGahan, a member of Mr. Lorello's team, was the primary banker to
HealthSouth, a person close to UBS said. - - - - UBS also helped
HealthSouth when it tried to spin off its surgical centers last
August. That deal was called off.
HealthSouth Advisers
Said to Be Under Scrutiny The New York Times March 26, 2003
to
contents
Investigating the
Bankers and
Analysts
Lorello's relationship with HealthSouth was
not investigated during the earlier US $1.4 billion fraud scandal.
That concentrated on the technology companies. Congressional
committees and the US Securities and Exchange Commisson (SEC)
examining HealthSouth fraud have also targeting HealthSouth's bankers
and auditors.
The question
is whether Lorello & Co., who were said to be deeply involved
in HealthSouth's operations, knew about the hanky-panky. Lorello
and UBS declined to comment on the matter "because HealthSouth is
currently subject to a number of investigations."
HealthSouth's Go-to Guy :
The collapse of HealthSouth is putting pressure on UBS
Warburg. FORTUNE April 15, 2003
Among the
most prominent new names being discussed by Securities and
Exchange Commissioners during deliberations last week was Benjamin
D. Lorello, the influential health care banker at UBS Warburg,
said lawyers involved in the settlement talks.
Analysts to Pay Millions
in Fines New York Times April 28, 2003
Congressional
investigators are to examine the role of a prominent Wall Street
banker's dealings with HealthSouth, the beleaguered healthcare
company.
----------------------------
"We're interested in some of his [Mr Lorello's] business
dealings, and he will have a lot of questions to answer," said Ken
Johnson for the House Energy and Commerce Committee.
This week, the
committee took delivery of 60 boxes of evidence it had requested
from HealthSouth and its auditor, Ernst & Young.
Congress examines
banker's role in HealthSouth The Financial Times
(Yahoo! News) May 7, 2003
In a
statement, Rep. James Greenwood said: 'The cozy financial
relationship that UBS Warburg appears to have had with HealthSouth
and other related entities raises serious questions about whether
investors were misled by these guys to further their own financial
gain.'
-----------------------------
We have questions about the extent to which investment banking
firms, including UBS Warburg LLC, were diligent in their review
and assessment of HealthSouth's financial health and the
interwoven financial relationships of many officers and directors
at HealthSouth,' the committee's letter said.
-------------------------------
'Based on our interviews with a key whistle-blower, there was an
incestuous-like relationship between top HealthSouth officials and
a small group of investment bankers and analysts. We intend to
haul them all in for interviews...in a matter of weeks,' committee
spokesman Ken Johnson told Reuters.
Congress Seeks UBS
Records on HealthSouth The New York Times
The letter
seeks information about UBS' role in several side companies in
which former CEO Richard Scrushy had an
interest,
Congress Looking
at HealthSouth Bankers TheStreet.com May 9, 2003
Mr Tauzin
and other committee members are questioning how Mr Lorello and his
team could have worked so closely with UBS and Mr Scrushy without
detecting the long-running fraud.
----------------------------
They are investigating claims that one UBS banker, William
McGahan, actually maintained an office and computer at
HealthSouth. Call
For UBS HealthSouth Papers by Joshua Chaffin ? source May 9,
2003
"Clearly a
lot of people walked away with million of dollars based on
HealthSouth's inflated value," said committee spokesman Ken
Johnson. "Were investors defrauded by analysts who were more
concerned about getting rich than getting the facts right?"
FEDS DEMAND UBS FILES IN
HEALTHSOUTH CASE New York Post May 9, 2003
Investment
bankers at UBS Warburg played a greater role in the inner
operations of HealthSouth Corp than previously known, the Wall
Street Journal reported on Wednesday, citing newly released court
documents in the case against the troubled health care
company.
---------------------------
The co-heads of UBS's healthcare investment banking team were at
least eight HealthSouth board meetings between late 1999 and late
2002, and advised the company on financing, investor sentiment,
and strategic alternatives, the Journal reported.
In August 2002,
the Journal said court documents show, Scrushy invited a UBS
banker to present to the board an analysis of a plan to ``spin or
split'' the surgery division of the company.
The Journal said
the plan, which was later expanded to include a possible sale of
diagnostic facilities, might have helped the company avoid
disclosing the alleged accounting fraud if it had been carried
out. Records Show
UBS, HealthSouth Ties REUTERS May 14,
2003
The minutes,
which were released in a court proceeding in Alabama, show bankers
Benjamin Lorello and William McGahan helped guide the company on
financing and investor relations, and gave a "detailed overview of
strategic alternatives" for HealthSouth's "long-term objectives,"
The Wall Street Journal reported. They also had a role in a
September 2002 plan to split the company into separate parts and
sell off divisions. Some have labeled that plan an effort to cover
up the surgical rehabilitation company's accounting problems.
UBS Bankers Had Bigger
Role at HealthSouth www.thestreet.com May 14, 2003
Benjamin D.
Lorello, UBS's top health care banker; William McGahan, his former
deputy, who left the firm for personal reasons; and Mr. Capek are
expected to testify before the House Committee on Energy and
Commerce in September about UBS's banking relationship with
HealthSouth. Mr. Lorello arranged more than $8 billion worth of
investment banking deals with HealthSouth during his time at UBS
and previously at Salomon Smith Barney.
-------------------------------
But Mr. Capek's having made negative comments while publicly
supporting HealthSouth is likely to pique the interest of
regulators, arbitration lawyers and Congressional
investigators.
--------------------------------
"Clearly, Mr. Capek had an amazing change of heart," said
Representative James C. Greenwood, Republican of Pennsylvania and
the chairman of the House Energy and Commerce Subcommittee on
Oversight and Investigations. "One day he said it's a dog and then
he said it was a darling. The question is what or who changed his
mind. Frankly, we can't wait to interview him." A spokesman for
the committee added that it was eager to talk with Mr. Lorello and
HealthSouth officials to see if they had played a role in Mr.
Capek's change of mind.
---------------------------
While there is no explicit evidence that connects Mr. Capek's
cheerleading coverage of HealthSouth to the banking work that Mr.
Lorello did with the company, UBS bankers arranged over $2 billion
in deals with HealthSouth while Mr. Capek covered the stock. Mr.
Lorello was not shy in promoting Mr. Capek's work when he
solicited business. In March 2001, Mr. Lorello sent a letter to
Mark L. Wagar, then the chief executive of Radiologix, a medical
imaging company, in an effort to win underwriting
business.
In the letter,
Mr. Lorello said, "Howard Capek is one of our best research
analysts and he is prepared to initiate equity research coverage
on Radiologix." Mr. Lorello also pointed out how important Mr.
Capek's coverage had been in past banking deals: "Howard has been
critical in our success in selling stories such as AmSurg and
other under-followed companies that have doubled or tripled since
Howard initiated coverage."
UBS Analyst Forced
Out for Remark New York Times July 3, 2003
A former UBS
analyst, Howard Capek, who touted the HealthSouth Corporation's
stock after he called the company a "pig," is scheduled to appear
at a Congressional hearing investigating $2.75 billion in fraud at
the hospital owner.
Former HealthSouth Chief
Indicted by U.S. The New York Times November 5, 2003
to
contents
Its
still happening!
It is of interest that in April 2002 after
the conduct of analysts on Wall Street had sparked a wide ranging
investigation UBS and Lorello employed another analyst paying a
massive salary - a salary that could only be justified by the work
she would bring in for Lorello and UBS from her reporting.
Meirav
Chovav, a biotechnology stock analyst at Credit Suisse First
Boston, agreed last April to join UBS Warburg, whose health care
banking group is led by Benjamin Lorello. Her compensation: a
guaranteed $10 million over three years, say bankers with a
knowledge of her contract.
-----------------------------
But even if she is not giving all favorable reviews to companies
under her purview, her rich contract has caused a number of
bankers to suggest that the only way UBS Warburg could justify
paying her over $3 million a year is if she brings in a
substantial amount of investment banking business.
It was a
boatload of money in a bad business environment," said an
investment banker who knows Mr. Lorello. "But the reason Ben hired
her was to get banking business from the companies that she
covers."
As Wall Street
firms prepare to pay $1.4 billion in an agreement with regulators
over investment banking-research conflicts, the fact that outsize
pay packages have persisted even in the spotlight has some people
fretting that the old ways of the Street will be hard to
change. Conflict
Issue Over Analyst's Deal New York Times April 8, 2003
to
contents
Possible
Prosecution
Investors have commenced lawsuits against UBS
Warburg which poached Lorello in 1999. Auditors Ernst and Young are
also named.
The investors allege complicity in the
HealthSouth fraud which the parties deny. It may be that evidence is
accumulating and that Mr Spitzer and the SEC are waiting for the
other HealthSouth actions to unfold before they act as they are not
party to this.
The detail of the allegations indicate they
have a witness. One of the HealthSouth executives pleading guilty has
implicated Lorello in the fraud by describing a phone conversation.
While these are denied they closely follow what happened
elsewhere.
HealthSouth
directors, outside lawyers, auditors and the company's longtime
lead investment banker said at the hearing, of a House Energy and
Commerce subcommittee, that they were shocked and outraged as 15
senior HealthSouth executives began pleading guilty to deceiving
shareholders by manipulating the books to inflate profits.
Ben Lorello, a
managing director of UBS Securities and head of its health care
banking group, said, "Until the announcements of criminal
prosecutions against HealthSouth officers in the spring of this
year, I was not aware of and did not suspect that anyone at
HealthSouth was engaged in improprieties." He added that his
team's decision-making process on whether to proceed with deals
for the company "started with and relied upon HealthSouth's
audited financial statements."
Associates of Former
HealthSouth Chief Deny Knowledge of Fraud The New York Times
November 6, 2003
Emery
Harris, a former assistant controller for the health care giant,
faces a maximum penalty of 15 years imprisonment and $1.5 million
in fines. He already has agreed to forfeit $106,500 in
bonuses.
----------------------------------
To explain the pressure being exerted on top management to create
earnings that matched Wall Street estimates, then-CFO Michael
Martin let him and others listen to a phone message he received
from an analyst named ``Ben'' believed to be from UBS Warburg,
Harris testified.
In the message,
Ben told Martin ``it was important for him to lay down for the
family'' or else he could ``get whacked,'' according to Harris.
Harris said ``the family'' referred to HealthSouth executives who
were in on the fraud.
Harris did not
further identify ``Ben'' in court. But Harris' attorney, Steve
Salter, said later Thursday in an interview that his client was
referring to Benjamin D. Lorello, head of health care banking at
UBS Warburg. Lorello has arranged billions of dollars worth of
investment banking deals for HealthSouth.Judge
Delays HealthSouth Case Sentencing THE ASSOCIATED PRESS
November 13, 2003
A group of
HealthSouth investors led by the Retirement Systems of Alabama has
filed a lawsuit in U.S. District Court in Birmingham, Ala.,
alleging that the company's investment bankers and auditors "knew
that fraud existed at the health care company or that they ignored
clear signs of wrongdoing," the Wall Street Journal reports (Wall
Street Journal, 1/9).
-----------------------------------
Specifically, the suit alleges that between 1999 and 2002, UBS
banker William McGahan had "regular" conversations about the fraud
at HealthSouth with a former company executive (Wall Street
Journal, 1/9). The discussions addressed such topics as the
likelihood of criminal prosecution and the penalties that could
result from conviction, according to the Times. The suit also
alleges that Ernst & Young knew as early as 1994 that
HealthSouth had overstated its earnings (New York Times, 1/9).
Group of HealthSouth Investors
Files Suit Against Auditors, Investment Bank from a website
Jan 2004
In an
amended complaint in U.S. District Court in Birmingham,
shareholders and bondholders accused HealthSouth's former auditor
Ernst & Young, two investment bankers who handled
HealthSouth's account at Salomon Smith Barney (now owned by
Citigroup) and later at UBS, and a former UBS stock analyst with
helping the company fraudulently inflate profits by $2.8 billion
since 1997.
-------------------------------------
The lawsuit contends that Ernst & Young knew HealthSouth's
accounts were being manipulated as far back as 1993. The suit also
contends that the investment bankers, Benjamin Lorello and William
McGahan, and the analyst, Howard Capek, helped HealthSouth finance
a series of acquisitions that covered up its bad
results.
Suit: Auditors, bankers
aided HealthSouth fraud Modern Healthcare January 9,
20
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