Tenet Healthcare to Pay $10 million Settlement in SEC Suit

The Securities and Exchange Commission today 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 the antifraud, reporting, and recordkeeping provisions of the federal securities laws.

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.

Linda Chatman Thomsen, Director of the SEC’s Enforcement Division, said, “Companies must explain their financial performance in a manner that enables investors to see the company as management does. Today’s action shows our commitment to holding companies and their executives accountable when they fail to communicate with investors in a clear and straightforward manner or fail to provide them with honest information.”

Randall R. Lee, Director of the SEC’s Los Angeles Regional Office, said, “By exploiting a loophole in Medicare regulations, Tenet embarked on an unsustainable strategy to turbocharge its earnings. Yet even as Tenet’s strategy produced nearly half of its earnings per share, Tenet’s management kept investors in the dark about the central business strategy underlying its earnings growth.”

<!–PAGEBREAK–>

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 the antifraud, reporting, and recordkeeping provisions of the federal securities laws, 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 the antifraud and reporting provisions of the federal securities laws and to pay a $150,000 civil penalty. The penalties paid by Mathiasen and Dennis personally will also be added to the Fair Fund for investors along with Tenet’s payment.

The Commission’s complaint charges Mackey and Sulzbach with violations of the antifraud and reporting provisions of the federal securities laws. 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