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.