Michael Stratton of Stratton Faxon wrote a great article on their blog The Connecticut Legal Examiner on how private investment groups use corporate shells to hide from liability and accountability.  Below is a reprint of the article.

“Private investment groups are replacing ‘mom and pop’ nursing home owners. Plaintiff lawyers may need to dig through the resulting complex ownership and management structures to identify – and hold accountable-the corporate entities that have harmed their clients

Private equity enterprise and large public companies are operating more nursing homes today, replacing the more traditional operators, individuals, and faith-based enterprises that are sensitive to the plight of the elderly.

With the continuing increase in demand for elder-care resources, these entrepreneurs are often more concerned with profits than resident care. And because occupancy levels in nursing homes are already high and government reimbursement rates are capitated, some ”vulture capitalists” try to increase their bottom line by lowering costs. This usually translates into cutting staff, since labor is the largest cost-component of the nursing home budget.

Because the nursing home business is primarily service oriented, cutting staff usually means cutting service. That, in turn, translates into poor resident care. When the quality of care suffers, the nursing home operator’s liability increases in both the civil and administrative arenas, to mitigate their exposure for potential liability, nursing home operators resort to complex corporate strategies to limit their liability.

The cornerstone of the nursing home industry’s “escape and evasion” strategy is creating an amalgamation of single purpose enterprises (SPEs) to prevent litigants from obtaining judgments against people or entities other than the nursing home licensee. The licensee is typically just a shell company. Nursing home operators have found that numerous SPEs are less attractive defendants than a single company with multiple operating interests and multiple real estate holdings.

Under the SPE structure, nursing home revenues are often placed into centralized accounts under the parent company’s control. Payments are made from those accounts on behalf of the individual nursing homes without regard to the revenues a particular facility generates. Monies are used for myriad purposes unrelated to resident care, including acquiring new facilities and servicing the debts of the parent and affiliated companies. Dividends are rarely paid to the parent by its subsidiaries because the parent has unlimited access to the funds in the centralized account.

Identifying the real culprit at the root of nursing home abuse is no easy task. It requires hard work, determination, and perseverance. Focus your case on the misconduct of these corporate predators. Even with the advent of more stringent disclosure provision, the nursing home industry will continue to obfuscate when it comes to identifying the parties that are truly responsible for the management and operational decisions in nursing homes.”

 

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The Commercial Observer had an interesting article on the recent litigation involving Sava owners and operators and how expert accountants were needed to explain the complex web of corporate shell games. Two top forensic accountants were retained in a decisive battle in a legal war for control of about 170 nursing homes.

The trial in New York Supreme Court had its origins eight years ago, when real estate investor Ruby Schron teamed up with his lawyer, Leonard Grunstein, in a labyrinthine $1.3 billion leveraged buyout that created SavaSeniorCare. At issue for the two expert witnesses: the exact whereabouts of $100 million.”  In the nursing home case, the accounting helped determine that Mr. Schron could acquire the company without any further investment by simply assuming the debt. On Mr. Schron’s side was Harvey R. Kelly. Providing expert testimony for Defendants was David S. Williams. The rival accountants’ task was to sort out transactions among some 30 people and entities involved in the buyout, as well as the movement of money through an escrow account from entities on Mr. Schon’s side of the deal to Mr. Grunstein and his companies, to establish whether, and how much of, the money was lent.  The case, which hinged on how much money from a $100 million loan by Mr. Schron actually found its way to Sava. The accountants in Schron v. Grunstein were more than $110 million apart in their estimates of how much money was lent.

“In 2004, Mr. Grunstein and investment banker Murray Forman approached Mr. Schron with a proposal to buy Mariner Health Care Inc., a public company that operated more than 250 nursing homes and owned real estate associated with about 170 of them.”  “Grunstein and Forman proposed a complex transaction employing a ‘PropCo/OpCo’ structure whereby Old Mariner’s real estate would be separated from the nursing home operations.”

A newly formed company, National Senior Care Inc., bought all of the shares of Old Mariner, then sold the real estate to one of Schron’s companies, SMV. That entity then leased the properties to another newly formed company, SavaSeniorCare, controlled by Mssrs. Grunstein and Forman. National Senior Care retained the operations of about 100 nursing homes located on properties that were leased from third parties.

While neither Mr. Grunstein nor Mr. Forman put any of his own money into the deal, Mr. Schron raised about $1.1 billion in financing, acquiring real estate valued at about $800 million. According to documents signed at closing, the financing included a $100 million loan to the owner of Sava that gave him an option to acquire the company, the judge wrote.

Mr. Kelly said a promissory note signed by both sides at the time of closing—and amended and restated in 2006 when a second, $20 million loan was made—was the best evidence that the loan existed. And he said documents showed that the nursing home company had made use of the money, including making a $65 million loan to the “New Mariner” entity on the day of the transaction.

Documents included “audited financial statements of SavaSeniorCare that an outside independent audit firm rendered the opinion that [an entity controlled by Mr. Grunstein] had contributed $100 million,” he said. “So, you’ve got years’ worth of very consistent documents demonstrating that. I find that the most credible evidence.”

The biggest problem Murray Forman and Leonard Grunstein had was their obvious lack of credibility.  “Apart from the fact that all of the documentary and non-party witness evidence contradict their testimony, their evasive answers and manner on the witness stand left the court with a firm belief that both gave testimony that was less than candid,” the judge wrote. He ordered the defendants to proceed with the transfer of control of the company “without further delay.”

 

Former House Majority Leader Tom DeLay (R-TX) has been sentenced to three years in prison for conspiring to launder money from corporate donors, including nursing home chains, to illegally influence the outcome of Texas legislative races in 2002.  DeLay was convicted by a Texas jury last November of violating state campaign contribution laws when his political action committee redirected funds from several corporate entities, including $100,000 from the Alliance for Quality Nursing Home Care, to the Republican National Committee (RNC). Prosecutors charged that the RNC then illegally channeled the funds to the campaigns of seven Republican state House candidates.

Republicans gained a majority in the Texas House as a result of the election and passed a tort reform law that has virtually ended litigation against Texas nursing homes for abuse and neglect. The Alliance represents 17 of the largest nursing home chains.

Source: Compiled by Janet Wells, Consumer Voice director of public policy
 

Extendicare Real Estate Investment Trust ("Extendicare REIT" or the "REIT") (TSX: EXE.UN) reported improved 2009 first quarter results.

Highlights:

– EBITDA of $64.8 million in Q1 2009 increased 18.4%, relative to $46.2 million in Q1 2008.

– EBITDA margins improved to 11.1% in Q1 2009 from 9.7% in Q1 2008 from "cost saving initiatives" and the back-to-basics plan. No details as to what initiatives they mean but it wa sprobably cutting budgets for staff and food!

– Medicare Part A and Managed Care rates grew 8.5% and 13.4%, respectively, from Q1 2008; and 2.1% and 2.6%, respectively, from Q4 2008.

Cash on hand of $120.1 million with no significant debt maturities until 2011 and beyond.

Adjusted funds from continuing operations improved $6.0 million, or 33.0%, to $24.2 million ($0.332 per basic unit) in the 2009 first quarter from $18.2 million ($0.258 per basic unit) in the 2008 first quarter.  Distributions declared in the 2009 first quarter of $15.3 million, or $0.07 per unit per month, represented 63.2% of adjusted funds from continuing operations.

EHSI SKILLED NURSING FACILITY REVENUE RATES

The average daily Medicare Part A rate for our wholly owned U.S. subsidiary, Extendicare Health Services, Inc. (EHSI), grew 8.5% to US$445.71 in the 2009 first quarter from US$410.69 in the 2008 first quarter. The October 1, 2008, market basket inflationary increase accounted for approximately 3.4% of the rate increase, with the remainder primarily related to higher average acuity levels among Medicare patients served. In comparison to the 2008 fourth quarter, our average daily Medicare Part A grew 2.1% due to a continued improvement in the mix of Medicare residents.

Our percentage of Medicare residents in the nine highest Resource Utilization Groupings (RUGs) classifications increased to 41.0% this quarter from 37.2% in the 2008 first quarter, as well as increasing from 38.9% in the 2008 fourth quarter. In addition, we experienced an increase in the percentage of Medicare residents receiving therapy services to 89.4% this quarter from 87.5% in the 2008 first quarter, as well as from the 2008 fourth quarter of 88.0%.

The average revenue rate for Managed Care clients increased 13.4% to US$379.58 this quarter from US$334.86 in the 2008 first quarter, and increased 2.6% from the 2008 fourth quarter. This is an important revenue growth opportunity as it represents the second highest rate component of our quality mix of residents.

EHSI’S TOTAL AND SKILLED CENSUS

While our same-facility average daily census (ADC) remained relatively unchanged from the 2008 fourth quarter level of 14,984, we did see an improvement in our skilled mix of 188, or 5.6%, to 3,544. We experienced a similar trend last year from the 2007 fourth quarter to the 2008 first quarter. Our same-facility ADC from EHSI’s skilled nursing centers declined 217, or 1.4%, to 14,981 in the 2009 first quarter from 15,198 in the 2008 first quarter.