Some time ago, I came across short filler-article in the business section of the San Francisco Chronicle. The title of the article indicated that five executives had been found guilty and would soon be sentenced. Aha! White collar crime, I thought. And since I find white collar crime to be simultaneously fascinating and ludicrous, I read the article. I am fascinated by what drives people to embezzlement, how they commit the crime and how it's usually arrogance that trips them up.
The article named the five executives who had been convicted. Then it went on and compared the fall of their company, NCFE, to the fall of Enron. That’s quite a comparison, since Enron was the epitome of corporate greed, fraudulent business practices and financial collapse. The shockwaves from the disintegration of Enron are still being felt today. If it was comparable to Enron, why hadn’t I heard about it? I was intrigued, so I did some digging. My excavations turned up the following interesting information.
There’s a small town in Ohio, named Dublin, after the famous city in Ireland. Commonly depicted as ‘gentrified modern,’ which is a quaint way of describing gold courses, strip malls and multi-plex theaters, Dublin – the one in Ohio, not the other one – is headquarters for Wendy’s International. Most people have heard of the hamburger chain. What they haven’t heard of is another big firm in the same city.
National Century Financial Enterprises. Started in 1991, this outfit soon became the nation’s largest purchaser of hospital, physician and other health care receivables. The buying up of receivables works like this. NCFE buys the accounts receivable of small hospitals, medical clinics and nursing homes. Because of their small sizes, all of these health-care providers are having money problems. They are desperate because they have no money with which to operate, because they have to wait for payment from insurance companies.
National Century steps in, giving them cash to cover their expenses so they can stay in business. The health-care providers win because they don’t have to wait for insurance companies to pay them. They get most of their money now, and don’t have to mess with the frustrating job of dealing with stingy insurance companies.
National Century wins because they keep a fee or percentage of any money they collect from the insurance companies. Then NCFE puts all the accounts they bought into a kitty and sells them in the form of asset-backed securities to huge institutional investors like money market funds, or retirement funds.
Over the course of 11 years, National Century purchased $15 billion in account receivables. They securitized them, which means they sold bonds to raise more capital so they could buy even more receivables and their partner in turning receivables into securities on Wall Street was Credit Suisse First Boston.
As one imagines, this is a risky business because it is complicated and because there is always the hazard that payment will not be made. If the insurance company doesn’t reimburse the cost of care for a patient, then the bond that was sold is pretty much worthless. NCFE and the securities investor both lose money.
The reality of the situation is this: the bond is only a good investment if NCFE is good at what they do – manage risk. So what it comes down to is trust between NCFE, the bond traders and the investors.
Luckily, it turned out that National Century was very, very good at financial speculation. When it came to risk management, they were like wizards – they had the magic touch.
In fiscal year 2001, the company boasted a profit of $307 million. Lance Poulsen, the company’s co-founder and chief executive, took home $40 million. And he expected to make more in the following years.
Poulsen said, “We view this industry as a little risky, but the risks are predictable and something we can manage. We provide a very much-needed sector of finance.” He credited success to an ability to keep track of and predict the payment on every receivable, patient by patient.
National Century was privately owned, which meant that Poulsen and his partners sometimes made personal investments in the company’s business ventures. We’re not talking about stock options, which most CEOs have. And the NCFE executives had plenty of those. In this case, we’re talking about executives tossing their own money into the big pot of money, which was then loaned.
It’s unethical and illegal, but they did it anyway.
In the end, it turned out many of these loans were not formalized. In other words, they were off the books. To cover these activities up, false financial reports were given to auditors, investors and rating agencies. NCFE doctored the books. Everything looked wonderful – on paper. In fact, it looked so good that investors lined up to hand over their money.
This fraud went on for years.
It turned into one giant Ponzi scheme. On the one hand, the executives were cooking the books and moving money around from bank to bank to pay their investors. On the other hand, the executives were pocketing the money they made from the personal loans. And they were pocketing the money from the bond investors. Spending it on vacations, multi-million dollar homes, art, cars, clothing – anything and everything that defines the word lavish. They snorted cocaine, threw orgies, and got drunk. In the end, they betrayed each other.
In 2002 it all came crashing down. Lawsuits were filed in civil court. Then the Attorney General of Ohio started looking into the problem. Facts were gathered, complaints were written and presented to a grand jury. Finally charges were filed. A 27-count superseding indictment stemming from a scheme to deceive investors about the financial health of NCFE.
Fraud, conspiracy to commit fraud, wire fraud, money laundering and securities fraud made up the bulk of the criminal charges.
The trial took place in February 2008. It lasted for 6 weeks. In the end, a Columbus, Ohio jury returned a guilty verdict on all 27 charges.
Sentencing guidelines call for a minimum of 20 years and a maximum of 55 years for each count. Ayers faced 55 years in prison. Parrett faced 75 years in prison. Speer faced 140 years in prison. Faulkenberry faced 85 years in prison. Dierker faced 65 years in prison.
Lance Poulsen is considered “guilty by association.” His trial recently took place. Prosecutors said Poulsen orchestrated the entire scheme. He was sentenced to 30 years in prison.