LR-20067 Apr. 2, 2007 Tenet Healthcare Corporation, David L. Dennis, Thomas B. Mackey, Christi R. Sulzbach, and Raymond L. Mathiasen Other Release No.: AAER-2591 See also: Complaint in this matter http://www.sec.gov/litigation/litreleases/2007/lr20067.htm
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20067 / April 2, 2007 Accounting and Auditing Enforcement Release No. 2591 / April 2, 2007 Securities and Exchange Commission v. Tenet Healthcare Corporation, David L. Dennis, Thomas B. Mackey, Christi R. Sulzbach, and Raymond L. Mathiasen, United States District Court for the Central District of California, Civil Action No. CV 07-2144 RGK (AGRx) On April 2, 2007, the Securities and Exchange Commission filed civil fraud charges in federal district court against Tenet Healthcare Corporation and its former chief financial officer and co-president, its former chief operating officer and co-president, its former general counsel and chief compliance officer, and its former chief accounting officer for failing to disclose to investors that Tenet’s strong earnings growth from 1999 to 2002 was driven largely by its exploitation of a loophole in the Medicare reimbursement system. Once Tenet finally revealed its scheme to the investing public and admitted that its strategy was not sustainable, the market value of Tenet’s stock plunged by over $11 billion.
During the relevant time, Tenet was based in Santa Barbara, Calif., and was the second largest publicly traded healthcare company in the United States.
To settle the charges, Tenet agreed to pay a civil penalty of $10 million. The SEC will seek to have these funds placed into a Fair Fund for distribution to harmed investors pursuant to the Sarbanes-Oxley Act. Without admitting or denying the allegations in the SEC’s complaint, Tenet also agreed to be permanently enjoined from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.
In addition to Tenet, the SEC’s complaint names Thomas B. Mackey, age 58, of Keswick, Va., Tenet’s former chief operating officer and co-president; Christi R. Sulzbach, age 52, of Santa Barbara, Calif., the former general counsel and chief compliance officer; David L. Dennis, age 58, of Los Angeles, the former chief financial officer and co-president; and Raymond L. Mathiasen, age 63, of Los Angeles, the former chief accounting officer. Dennis and Mathiasen have agreed to settle the Commission’s charges.
The Commission’s complaint alleges that between 1999 and 2002, Tenet engaged in an unsustainable strategy to reach its earnings targets by deliberately exploiting the Medicare reimbursement system. Tenet’s scheme involved a loophole in the Medicare reimbursement system related to “outlier payments,” which are designed to compensate hospitals for caring for extraordinarily sick Medicare patients. Tenet’s management realized that Tenet could inflate its revenue from outlier payments by simply increasing the gross charges set by its hospitals. From 1999 to 2002, Tenet’s outlier revenue more than tripled and Tenet’s earnings goals were surpassed year after year. Tenet’s outlier growth from fiscal 1999 to fiscal 2002 accounted for over 54% of its cumulative growth in earnings per share from operations. Similarly, by fiscal 2002, Tenet’s outlier revenue comprised over 40% of its earnings per share.
The complaint alleges that Tenet, acting through Dennis, Mathiasen, Mackey, and Sulzbach, misled the investing public by failing to disclose Tenet’s strategy, its impact on revenues and earnings, and its unsustainability in the portion of its public filings with the Commission known as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” commonly referred to as MD&A.
In part as a result of its outlier scheme, Tenet received enough income to set aside funds in improper general reserves. Tenet, with Mathiasen’s approval, created general reserves totaling approximately $107 million by the end of Tenet’s 2002 fiscal year. These inappropriate reserves resulted in material misstatements to Tenet’s financial statements for fiscal years 2000 through 2004.
Mathiasen and Dennis each agreed to settle the Commission’s charges without admitting or denying the allegations. Mathiasen agreed to be permanently enjoined from violating Section 17(a) of the Securities Act and Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder, to pay a civil penalty of $240,000, and to be barred from serving as an officer or director of a public company for five years. A certified public accountant, Mathiasen also agreed to be permanently denied the privilege of appearing or practicing before the Commission as an accountant under Rule 102(e) of the Commission’s rules of practice.
Dennis agreed to be permanently enjoined from future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, and to pay a $150,000 civil penalty. The penalties paid by Mathiasen and Dennis’s penalties personally will also be added to the Fair Fund for investors along with Tenet’s payment.
The settlements by Tenet, Dennis, and Mathiasen are subject to approval by the court.
The Commission’s complaint charges Mackey and Sulzbach with committing violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aiding and abetting Tenet’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint seeks permanent injunctions against future violations of these provisions, orders barring each of them from serving as an officer or director of a public company, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties.
On March 30, 2006, the Commission charged three of Tenet’s outside auditors with improperly changing audit work papers in connection with the audit completed during the period of the defendants’ scheme. See http://sec.gov/news/press/2006-45.htm.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20066 / April 2, 2007 SEC v. Steven E. Thorn, et. al, (U.S.D.C. S.D. Ohio, Civil Action 01-CV-290, filed April 2, 2001) The Securities and Exchange Commission (Commission) announced that on March 21, 2007, Steven E. Thorn (Thorn), one of several defendants in a $75 million offering fraud that the Commission halted in April 2001, was sentenced to 97 months incarceration, based upon his guilty plea to charges of one count of conspiracy, three counts of securities fraud, and one count of tax evasion brought by the United States Attorney's Office for the Northern District of Ohio. In addition to incarceration, the Court also ordered Thorn to pay $7.4 million in restitution to victims of the scheme.
Thorn's sentence was based upon criminal charges arising from the same misconduct that led to the Commission's action filed in April 2001. According to the indictment, from December 1997 through April 2001, Thorn, directly and through other others, raised approximately $75 million from investors through the through the offer and sale of investments in purported European bank trading programs invested in medium-term notes. Thorn and others told investors that there was little or no risk in the investment and promised monthly returns ranging from 3 to 100 percent. They also represented to investors that the Federal Reserve was involved in these trading programs when in reality it was not. Rather than using the funds to make any investment, Thorn instead used investor monies to pay for his extravagant lifestyle which included mortgage payments, luxury car leases, and lavish vacations, and to operate a massive Ponzi scheme in which investors were paid a purported return with money obtained from other investors.
On April 2, 2001, the Commission filed a Complaint against Thorn and others and obtained a temporary restraining order and asset freeze against him and his related entities. On February 28, 2007, the Commission obtained a Final Judgment against Thorn in which he was permanently enjoined from future violations of the antifraud and broker-dealer registration provisions of the securities laws and ordered to pay $5,070,395 in disgorgement, $1,802,132 in pre-judgment interest, and a $1 million civil penalty.
For additional information, see Litigation Release Nos. 16950 (April 3, 2001), 17523 (May 20, 2002), 17772 (October 7, 2002) and 18419 (October 17, 2003).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20065 / April 2, 2007 SEC v. Steven E. Thorn, et. al, (U.S.D.C. S.D. Ohio, Civil Action 01-CV-290, filed April 2, 2001) The Securities and Exchange Commission announced that on February 28, 2007, the Honorable Edmund A. Sargus, Jr. of the U.S. District Court for the Southern District of Ohio entered Final Judgments against defendants Steven E. Thorn (Thorn), Derrick McKinney (McKinney), Rick Malizia (Malizia) and his company, RMAZ, LLC (RMAZ), and Craig Morgan (Morgan) for their roles in raising approximately $75 million from investors in a series of fraudulent prime bank schemes and using investor funds to conduct a massive Ponzi scheme. The Court also entered a Final Judgment against Edgar Mojica (Mojica) in connection with his receipt of ill-gotten gains from the defendants during the fraudulent scheme.
In its Second Amended Complaint, the Commission alleged that from February 1998 through April 2001, the defendants and others raised approximately $75 million through the offer and sale of investments in a series of purported European bank trading programs. The defendants' programs exhibited many of the characteristics of the fraudulent prime bank schemes that the Commission, the Federal Reserve Board and other regulators have warned do not exist. The defendants told investors that the programs involved the trading of bank instruments issued by foreign banks; they promised investors returns ranging as high as 200 percent per month; they assured investors that the investments were risk free; and they warned investors that participation in the trading programs required total secrecy and confidentiality. In reality, the defendants dissipated much of the investors' funds to pay personal and business expenses, purported returns to earlier investors, payments to the relief defendants, and undisclosed salaries and fees for themselves.
The Court entered Final Judgments against Thorn, McKinney, Malizia, RMAZ and Morgan permanently enjoining them from future violations of the antifraud and broker-dealer registration provisions of the securities laws and ordering the following amounts of disgorgement, pre-judgment interest and civil penalties against the defendants: 1) defendant Thorn was ordered to disgorge $5,070,395 of ill-gotten gains plus $1,802,132 of pre-judgment interest and to pay a $1 million civil penalty; 2) defendant McKinney was ordered to disgorge $54,200 plus $16,499 of pre-judgment interest and to pay a $250,000 civil penalty in addition to being held jointly and severally liable for $1,434,757 of disgorgement and $294,632 of pre-judgment interest imposed against his company, International Trading Partners, Ltd., pursuant to a previous Court order; and 3) defendants Malizia and RMAZ were ordered to disgorge $375,700 plus $188,166.39 of pre-judgment interest and Malizia was ordered to pay a $375,700 civil penalty. The Court also entered a Final Judgment against Mojica ordering him to disgorge $416,512 plus $179,701.09 in pre-judgment interest.
The Court previously entered judgments against the following defendants and relief defendants: Global Investors Group, LLC; First Financial Ventures, LLC; Second Financial Ventures, LLC; Third Financial Ventures, LLC; International Trading Partners; Allen George; Leon Heard and his company, Alice's International Salon & Spa; Rene Sorra and his company, RLS International Investors, LLC; Roger Weizenegger; Frederick Harris and his companies, Blue Chip Investments, Inc. and Solo Ventures, LLC; Carl Jackson and his company, Redmill Holdings, LLC; and Durietha Dziorney. On March 29, 2007, the Court entered a Final Judgment against the last remaining defendants in this matter, Karen Estrada and her two companies, Fund Global, LLC and Global Equity Group, LLC.
For additional information, see Litigation Release Nos. 16950 (April 3, 2001), 17523 (May 20, 2002), 17772 (October 7, 2002) and 18419 (October 17, 2003).
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20064 /April 2, 2007 Accounting and Auditing Enforcement Release No. 2589 /April 2, 2007 Securities and Exchange Commission v. Martin E. Kenney, Jr., Civil Action No. 05-Civ-7944 (S.D.N.Y. filed September 13, 2005, amended March 23, 2007) (SAS) Former CEO of WRC Media, Inc. Settles SEC Action The Securities and Exchange Commission ("Commission") announced today that, on March 30, 2007, the United States District Court for the Southern District of New York entered final judgment against Martin E. Kenney, Jr. in the federal civil enforcement action filed by the Commission in September 2005. Kenney was the former Chief Executive Officer and a former Director of WRC Media, Inc. ("WRC"), a provider of educational materials for the kindergarten through high school market.
The Judgment permanently enjoins Kenney from aiding and abetting violations of Section 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 12b-20, 15d-1, 15d-11, and 15d-13 promulgated thereunder. The Judgment also requires Kenney to pay a $60,000 civil penalty. Kenney consented to the Judgment without admitting or denying the allegations in the Commission's amended complaint.
The Commission's amended complaint alleged that Kenney aided and abetted WRC's improper recognition of $1.2 million in revenue from a purported sale of educational software to the Monroe City, Louisiana School District ("Monroe transaction"). Specifically, the amended complaint alleged that, in December 2002, Kenney and a sales team returned to Louisiana to obtain a replacement contract from the district superintendent after learning that a previous version of the contract could not be used to recognize revenue in 2002. While the replacement contract did not mention any requirement of Monroe City School Board approval, school board approval was still required. Because the replacement contract was contingent upon school board approval, the Commission alleged that the Monroe transaction did not meet the criteria under generally accepted accounting principles (GAAP) for revenue recognition. As a result, WRC filed financial reports with the Commission that materially misstated WRC's fourth quarter 2002 results. Kenney was substantially involved in the negotiation of the Monroe transaction and therefore aided and abetted WRC in violating Section 15(d) of the Exchange Act and Exchange Act Rules 12b-20, 15d-1, 15d-11, and 15d-13.
For additional information concerning this matter, see Litigation Release No. LR-19373 (September 13, 2005).
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