More Executives Sued over National Century Fraud Scheme

December 22, 2005 ( - The Securities and Exchange Commission (SEC) has filed suit against top executives of National Century Financial Enterprises, Inc. (NCFE), alleging that they participated in a scheme to defraud investors in securities issued by the subsidiaries of the failed company.

According to  an SEC announcement , NCFE suddenly collapsed along with its subsidiaries in October 2002 when investors discovered that the companies had hidden massive cash and collateral shortfalls from investors and auditors.   The collapse caused investor losses exceeding $2.6 billion, and approximately 275 health care providers were forced to file for bankruptcy protection.

Named in the suit were Lance Poulsen, principal and former Chief Executive Officer of NCFE; Donald Ayers, principal and former Chief Operating Officer; Rebecca Parrett, principal and former Director of NCFE’s Accounts Receivable Servicer Department; and Randolph Speer, former Chief Financial Officer of NCFE.

The SEC complaint , filed in the US District Court for the Southern District of Ohio, alleges that NCFE, through two wholly owned subsidiaries, NPF VI and NPF XII (“the Programs”), purchased medical accounts receivable from health care providers and issued notes that securitized those receivables.   From at least February 1999 to October 2002, the Programs offered and sold at least $3.25 billion in notes, through 15 private placements, to institutional investors.

According to the representations in the offering documents and the Program agreements, the Programs were required to maintain certain reserve account balances and medical accounts receivable as collateral to secure the notes.   The complaint alleges that Poulsen, Parrett, Ayers and Speer depleted the Programs’ reserve accounts and collateral base by “advancing” at least $1.2 billion from the Programs’ funds to health care providers without receiving eligible receivables in return.   These advances were essentially unsecured loans by the Programs to distressed or defunct health-care providers, many of which were wholly or partly owned by NCFE, Poulsen, Parrett and/or Ayers.

According to the announcement, the complaint says Poulsen, Parrett, Ayers and Speer concealed their fraud from investors and others by:

  • repeatedly transferring funds between the subsidiaries’ bank accounts to mask cash shortfalls of as much as $350 million;
  • recording $1 billion or more in non-existent or ineligible medical accounts receivable on the subsidiaries’ books;
  • creating and distributing false offering documents, false monthly investor reports, and false accounting records to trustees, investors, potential investors, and auditors; and
  • misrepresenting the status of the Programs’ cash accounts and collateral base to investors and others.

Three other former NCFE executives: Sherry Gibson, a former Executive Vice President of Compliance of NCFE; John Snoble, a former Vice President and Controller; and Brian Stucke, a former Associate Vice-President for Business Services, have already pleaded guilty to criminal charges related to the fraud (See  Former National Century Executive Pleads Guilty To Fraud ).

A number of pension plans filed suit in May 2003 an effort to recoup what they said were $1.3 billion in losses from their investments in the National Century debacle. (See  Finance Firms Slapped With $1.3 Billion National Century Suit ).