Tenet, Execs Charged in Earnings Scheme

Failed to disclose that earnings growth from 1999 to 2002 was due largely to a Medicare reimbursement loophole, SEC alleges.

The Securities and Exchange Commission charged Tenet Healthcare and four former senior executives for failing to disclose that the company’s earnings growth from 1999 to 2002 was due largely to a Medicare reimbursement loophole.

When Tenet finally revealed to investors that its strategy was not sustainable, its market value plunged by more than $11 billion, according to the complaint.

Tenet, former chief financial officer and co-president David L. Dennis, and former chief accounting officer Raymond L. Mathiasen agreed to settle without admitting or denying the SEC allegations. Two others, former chief operating officer and co-president Thomas B. Mackey and former general counsel and chief compliance officer Christi R. Sulzbach, chose not to settle.

“Companies must explain their financial performance in a manner that enables investors to see the company as management does,” said Linda Chatman Thomsen, Director of the SEC’s Enforcement Division, in a statement.

The commission alleged that between 1999 and 2002, Tenet exploited 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 management realized that the company could inflate its revenue from outlier payments, the SEC asserted, simply by increasing the gross charges set by its hospitals. During the period in question, according to the commission, Tenet’s outlier growth accounted for more than 54 percent of cumulative growth in earnings per share from operations; by fiscal 2002, outlier revenue accounted for more than 40 percent of earnings per share.

The complaint alleged that Tenet, acting through Dennis, Mathiasen, Mackey, and Sulzbach, misled investors by failing to disclose Tenet’s strategy, its impact on revenues and earnings, and its unsustainability in the “management’s discussion and analysis” section of its financial filings. “Tenet’s management kept investors in the dark about the central business strategy underlying its earnings growth,” said Randall R. Lee, director of the SEC’s Los Angeles Regional Office, in a statement.

To settle the charges, Tenet agreed to pay a civil penalty of $10 million and to be permanently enjoined from violating the relevant sections of the federal securities laws. Dennis, the former CFO, agreed to pay a $150,000 civil penalty. Mathiasen, the former chief accounting officer, agreed to pay a civil penalty of $240,000, to a five-year officer-and-director bar, and to a permanent bar from appearing or practicing before the commission as an accountant.

The SEC will distribute the civil penalties under the “fair fund” provisions of Sarbanes-Oxley.

Mackey and Sulzbach are charged with violations of the antifraud and reporting provisions of the federal securities laws. The SEC is seeking permanent injunctions against future violations of these provisions, officer-and-director bars, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.

Attorneys for Mackey and Sulzbach could not immediately be reached for comment.

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