Lawsuit Against Banks Expected over National Century Woes

November 12, 2002 ( - JP Morgan Chase and Bank One are to be hit with a $1 billion lawsuit alleging they may have breached their fiduciary duties at National Century Financial Enterprises, a troubled healthcare receivables buyer

Med Diversified, one of the healthcare providers from which National Century buys receivables, said that JP Morgan and Bank One may have known of the misuse of funds, the Financial Times reported.

Med Diversified plans to file a lawsuit Tuesday against JP Morgan, Bank One, the independent directors of the subsidiaries concerned and auditor Deloitte & Touche, the Financial Times said. JP Morgan and Bank One act as bondholder trustees, according to Med Diversified.

Allegations of financial mismanagement at National Century surfaced after it missed payments to healthcare providers last month and the company’s chairman and chief executive officer, Lance Poulsen, resigned on Friday. (See  National Century Founder and CEO Resigns).

Moody’s Investors Service downgraded the company’s credit ratings last week after the ratings agency said it had discovered the company had been misusing the funds in the accounts of some of its subsidiaries.

Purchaser of Health Care Receivables

National Century, a private Ohio company is one of the biggest US purchasers of healthcare receivables, or expected billing payments. It has securitized billions of dollars in payments, issuing bonds through various subsidiaries backed by the receivables. It uses the proceeds to fund its business operations, according to the Times story.

Med Diversified also said that it believed National Century may have allowed measures that enabled it to collect extra fees and improve its income statement in an attempt to secure a future initial public offering and obtain new private investors, the Financial Times said.

Med Diversified said that it believed JP Morgan and Bank One, as well as their auditors and independent directors, should have known about these “income statement enhancements” through required periodic audits.