Sherry Gibson – pleading guilty to conspiracy to commit securities fraud – admitted in US District Court that beginning in 1995 she either prepared or directed others to prepare investor reports that contained false financial information. This culminated in NCFE maintaining separate sets of bookkeeping records labeled “actual” and “reported,” according to an Associated Press report.
“Gibson was part of a financial shell game that moved hundreds of millions of dollars back and forth to hide the fact that the company’s accounts were at least $511 million below what they were telling investors, trustees and auditors,” said Gregory Lockhart, US attorney for the Southern District of Ohio, according to the AP.
Following her admission, the US Securities and Exchange Commission (SEC) filed a complaint demanding Gibson pay financial penalties and return any money she wrongfully received as a result of the scheme. She also was barred from ever serving as an officer or director of a public company again.
The amount of the penalties was to be determined at a later hearing, expected to occur in approximately three months. She faces up to five years in prison and a $250,000 fine.
The investigation now turns to identifying other NCFE officials believed to have joined in the conspiracy. “Gibson and the other insiders at NCFE bilked investors by building a financial house of cards with deception, sleight-of-hand financing and accounting misdeeds,” Lockhart said.
The privately held Dublin, Ohio-based health-care finance firm and its subsidiaries first landed in hot water last October when investors discovered that the companies had hidden cash and collateral shortfalls from investors and auditors. That calumniated in the firm filing for protection under Chapter 11 of the US Bankruptcy Code in November with creditors claims totaling more than $5 billion (See Troubled Health Financing Company Files for Bankruptcy ). As a result of its problems, more than 15 health-care providers that relied on the company for operating funds were also forced to file for Chapter 11 bankruptcy (See Hard Hit Health Financing Agency Schedules Shutdown).
Before filing for bankruptcy protection, NCFE was the nation’s largest provider of financing to health-care providers, with 100 clients. This was done through lending capital to its clients in exchange for unpaid medical bills to be reimbursed by insurers and government programs like Medicare or Medicaid. Between January 2001 and October 2002, it advanced $1.1 billion to clients that it may never get back.
To pay for its purchases of the unpaid bills, National Century sold bonds, called asset-backed securities. It has about $3.35 billion of these bonds outstanding. Once triple-A rated, these bonds were reduced to junk status by Moody’s Investors Service late last year.
In the wake of the collapse, a plethora of lawsuits erupted. Med Diversified, one of the health-care providers from which NCFE bought receivables, accused JP Morgan Chase and Bank One of knowing about the deliberate misuse of funds (See Lawsuit Against Banks Expected over National Century Woes ).
Then in May, a $1.3-billion lawsuit was filed by a number of pension funds for losses suffered in NCFE investments. Included in the plaintiffs of the suit, filed in Arizona Superior Court, are various entities in Arizona. The state, along with various city and county agencies reportedly lost more than $131 million in National Century investments. Further public losses were experienced in the City of New York’s quintet of pension funds, which suffered an $80-million hit in a securities lending imbroglio between the city and Citibank, the custodian and securities lending agent of the plans (See Securities Lending Loss Not NYC’s To Take, Comptroller Says ).