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.”

 

Don’t you love it when multi-millionaires argue about which one screwed the other worse?  Nursing home owner and operator Murray Forman continues his battle with his partners and investors.  Courthouse News Service reported the Complaint between the shareholders and the manager of two property holding companies about which one stole $100 million.

Defendants in Delaware Chancery Court are Rubin Schron, of Brooklyn, N.Y., SMV Property Holdings and SWC Property Holdings, both LLCs.  Schron has been sole manager of SMV since 2004 and of SWC since 2003, according to the complaint. Also sued is Cam-elm Company LLC, the majority member of the other LLCs, which Schron also allegedly controls as its sole manager.
Plaintiffs include Mich II, which owns 2.5 percent of SMV; SEEVA II, 12.5 percent owner of SMV; MICH, which owns 2.5 percent of SWC; and SEEVA, which owns 5.5 percent of SWC.
According to the 40-page complaint, SMV and SWC are real estate holding companies that collect revenue from properties leased by nursing and health care facilities. Both entities were formed in business deals that Leonard Grunstein and Murray Forman originated.

The businessmen, owners of plaintiffs MICH II Holdings LLC and SEEVA II Holdings LLC, asked Schron to act as a sole manager for SMV and SWC after completion of the two transactions in 2003 and 2004.  

The complaint states. "Schron has misappropriated more than $100 million from SMV and SWC, kept false and inaccurate books and records, and refused to provide members with audited financials for SMV and SWC as required by the SMV and SWC Operating Agreements. As part of Schron’s effort to cover up his misconduct and squeeze the minority members out of SMV and SWC, he is now refusing to recognize the membership interests of the MICH and SEEVA Companies."
The shareholders say Schron’s actions are "the culmination of a history of misconduct" which includes siphoning millions of dollars from the companies to cover a failed interest rate swap with Citibank.
According to the complaint: "(I)n 2008 and 2009, Schron took millions of dollars from SMV and SWC to cover his losses on a personal investment with Citibank. The Citibank investment was an interest rate swap investment dated September 25, 2008, between Schron individually and Citibank. As explained in greater detail below, an interest rate swap generates profits or losses depending on how interest rates change. The investment went bad for Schron almost at once. Because of the change of interest rates in the fall of 2008, Schron immediately became personally liable to Citibank for tens of millions of dollars on his interest rate swap agreement. Schron and Citibank had taken a particular care to make sure the interest rate swap agreement was with Schron personally, not with SMV or SWC or in the name of SWC. But when the margin calls and ultimately the losses on the investment came, Schron simply took the cash he needed from SMV and SWC as if it was his own. In this 2008 and 2009 period, Schron misappropriated over $65 million from SMV and SWC to cover his personal losses on his interest rate swap agreement."
The plaintiffs claim Schron also pilfered $11 million to settle litigation and pay his legal fees in defending a personal liability action in Boston. Schron was named as a defendant in that lawsuit, but SMV and SWC were not, according to the Delaware complaint.
"He also misappropriated an additional $40 million by improperly transferring at least that amount to himself or to defendant CAM-Elm, which is indirectly owned by Schron’s family and which is a 77.35 percent owner of SMV," the complaint states.
The shareholders say that Schron cooked the books at both SMV and SWC to prevent proper distributions and "enrich him or his family. His improper records include records concerning a falsely alleged capital contribution or undocumented loan of $75 million to SMV," according to the complaint.The plaintiffs say that CAM-Elm, a majority member of SWC and shareholder of SMV, "is an inseparable part of Schron’s schemes."
"CAM-Elm is the majority member of SMV and SWC and has the authority under the SMV and SWC operating agreements to remove any manager of SMV and SWC. CAM-Elm well knows what Schron is doing. But CAM-Elm has no interest in removing Schron as manager or in correcting any of Schron’s misconduct. CAM-Elm, which is beneficially owned by Schron’s family and controlled by Schron, has benefited from Schron’s misappropriations and other misconduct," the complaint states.
It continues: "On March 23, 2010, the MICH and SEEVA companies, Grunstein and Foreman, and others sued Schron and his affiliates in New York’s Supreme Court, New York County, in an action captioned MICH II Holdings LLC, et al. v. Schron, et al., No 600736/10. The MICH II lawsuit asserted derivative claims against Schron for the benefit of SMV and SWC, and also direct claims against Schron. After the suit was filed, Schron pretended to discuss settlement, but then abruptly started his own separate counter-suit. Schron moved to dismiss the suit against him claiming that it could only be brought in Delaware because of the forum selection clause in the SMV and SWC operating agreements."
The plaintiffs say the New York Supreme Court agreed and dismissed the complaint. That prompted this complaint in Delaware. The plaintiffs seek Schron’s removal from the two companies and more than $117 million in damages for breach of the operating agreements and breach of fiduciary duty.
"Schron has profited immensely from the opportunity that Grunstein and Forman brought to him," the complaint states. "But Schron is not satisfied with the half-billion dollars or more that he made from the transactions that Grunstein and Forman arranged. Schron has betrayed the plaintiffs and their owners (Grunstein and Forman) at every turn. Grunstein and Forman and the MICH and SEEVA companies relied on Schron to manage SWC and SMV properly and to deal honestly with them in all matters. But Schron and his family have other plans. Schron has resorted to theft, improper accounting manipulation, and more against those who trusted and relied on him."
The plaintiffs are represented by John Reed with DLA Piper

MSNBC Business reported the fascinating story from Reuters about a house in Cheyenne, Wyoming that is used to protect corporations from paying their fair share of taxes.  More than 2,000 companies are registered at a 1,700-square-foot brick house at 2710 Thomes Ave. The story exemplifies the problem with American tax policy and how corporations including national nursing home chains evade liability.  Excerpts below:

A Reuters investigation found the house is the headquarters for Wyoming Corporate Services, a business-incorporation specialist that establishes firms which can be used as "shell" companies, paper entities able to hide assets.

Wyoming Corporate Services will help clients create a company, and more: set up a bank account for it; add a lawyer as a corporate director to invoke attorney-client privilege; even appoint stand-in directors and officers as high as CEO. Among its offerings is a variety of shell known as a "shelf" company, which comes with years of regulatory filings behind it, lending a greater feeling of solidity.

"A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy," the company’s website boasts. "A person you control… yet cannot be held accountable for its actions. Imagine the possibilities!"

All the activity at 2710 Thomes is part of a little-noticed industry in the U.S.: the mass production of paper businesses. Scores of mass incorporators like Wyoming Corporate Services have set up shop. The hotbeds of the industry are three states with a light regulatory touch-Delaware, Wyoming and Nevada.  The incorporation industry, overseen by officials in the 50 states, has few rules. Convicted felons can operate firms which create companies, and buy them with no background checks.

No states license mass incorporators, and only a few require them to formally register with state authorities. None collect the names and addresses of "beneficial owners," the individuals with a controlling interest in corporations, according to a 2009 report by the National Association of Secretaries of State, a group for state officials overseeing incorporation. Wyoming and Nevada allow the real owners of corporations to hide behind "nominee" officers and directors with no direct role in the business, often executives of the mass incorporator.

"In the U.S., (business incorporation) is completely unregulated," says Jason Sharman, a professor at Griffith University in Nathan, Australia, who is preparing a study for the World Bank on corporate formation worldwide. "Somalia has slightly higher standards than Wyoming and Nevada."

An estimated 2 million corporations and limited liability companies are created each year in the U.S., according to Senate investigators. The Treasury Department has singled out LLCs as particularly vulnerable to being used as shell companies, as they can be owned by anyone and managed anonymously. Delaware, Nevada and Wyoming had 688,000 LLCs on file in 2009, up from 624,000 in 2007.

Treasury and state banking regulators say banks have flagged billions of dollars in suspicious transactions involving U.S. shell companies in recent years. On June 10, a federal judge in Oregon ordered a company registered there to pay $60 million for defrauding a Ukrainian government agency through sham transactions involving shell companies. The civil lawsuit described a network of U.S.-registered shells connected to fraud in Eastern Europe and Afghanistan.

A growing niche in the shell business is shelf corporations. Like paper-only shells, which enable the secrecy-minded to hide real ownership of assets, shelf companies are set up by firms like Wyoming Corporate Services, then left "on the shelf" to season for years. They’re then sold later to owners looking for a quick way to secure bank loans, bid on contracts, and project financial stability. To speed up business activity, shelf corporations can often be purchased with established bank accounts, credit histories and tax returns filed with the Internal Revenue Service.

"They just slot in your names, and you walk away with the company. Presto!" says Daniel E. Karson executive managing director at investigative firm Kroll Inc. "The purpose is to conceal ownership."

On its website, Wyoming Corporate Services currently lists more than 700 shelf companies for sale in 37 states.  "If they’re signing a large contract, they may not want it to look like they’ve just formed a company," said Brett Melson, director of U.S. sales at Harvard Business Services. But he added: "Unsavory characters can do a lot of bad things with the companies."

Wyoming Corporate Services is run by Gerald Pitts, its 54-year-old founder and president. On paper, he is a prolific businessman. Incorporation data provided by Westlaw, a unit of Thomson Reuters, show that Pitts is listed as a director, president or principal for at least 41 companies registered at 2710 Thomes Avenue.  Another 248 firms name Edge Financial Inc., another incorporation service, as their "manager." Gerald Pitts is the president of Edge Financial, according to records on file with the Wyoming secretary of state’s office.

Companies registered at 2710 Thomes Avenue have been named in a dozen civil lawsuits alleging unpaid taxes, securities fraud and trademark infringement since 2007, a review of Westlaw data shows. State and federal tax authorities have filed liens against companies registered at the address seeking to collect more than $300,000 in unpaid taxes, according to Westlaw.

Among those registered at the little house in Cheyenne are two small companies formed through Wyoming Corporate Services that sold knock-off truck parts to the U.S. Department of Defense, according to a Reuters review of two federal contracting databases and findings from an investigation by the Pentagon’s Defense Logistics Agency. The owner of those firms, Atilla Kan, awaits sentencing on a 2007 conviction for wire fraud in a related matter.

Also linked to 2710 Thomes is former Ukrainian Prime Minister Pavlo Lazarenko who was once ranked the eighth-most corrupt official in the world by watchdog group Transparency International. He is now serving an eight-year jail term in California for a 2004 conviction on money-laundering and extortion charges. According to court records, that scheme used shell companies and offshore bank accounts to hide stolen Ukrainian government funds.

Court records submitted in Lazarenko’s criminal case and documents from a separate civil lawsuit, as well as interviews with lawyers familiar with the matter, indicate Lazarenko controls a shelf company incorporated in Cheyenne that owns an estimated $72 million in real estate in Ukraine through other companies including Capital Investments Group, registered at 2710 Thomes Avenue.  The dossier on Capital Investments Group claims that other directors of the alleged front companies include Lazarenko’s wife, son and mother-in-law.

Why use a shelf company? "To hide who they are and what they are doing.

The loopholes in U.S. disclosure of bank-account and shell-company ownership have drawn fire.

The U.S. was declared "non-compliant" in four out of 40 categories monitored by the Financial Action Task Force, an international group fighting money laundering and terrorism finance, in a 2006 evaluation report, its most recent. Two of those ratings relate to scant information collected on the owners of corporations. The task force named Wyoming, Nevada and Delaware as secrecy havens. Only three states – Alaska, Arizona and Montana – require regular disclosure of corporate shareholders in some form, according to the 2009 report by the National Association of Secretaries of State.

Shell companies remain a headache for law-enforcement authorities. An attorney can provide an extra shield. Cheyenne attorney Graham Norris Jr. tells prospective clients sent to him by WCS that he will create a company on their behalf. That way, he says, he can invoke attorney-client privilege-adding a layer of privacy anytime there is an inquiry about their identities.

The 2006 U.S. Money Laundering Threat Assessment, prepared by 16 federal agencies, devotes a chapter to the ways U.S. shell companies can be attractive vehicles to hide ill-gotten funds. It includes a chart to show why money launderers might like to create shells in Wyoming, Nevada or Delaware, which offer the highest levels of corporate anonymity.

 

Aboutlawsuits.com had a good summary of the recent Pennsylvania case that held that nursing homes can be held corporately liable for injuries caused by substandard care.  The Pennsylvania Superior Court overturned a lower court verdict, ruling that Grane Healthcare, which owns Highland Park Care Center, can be held liable for the 2004 death of one of their residents. The case stems from a lawsuit filed by the son of Madeline Scampone, who died from a heart attack after suffering from a urinary tract infection,untreated bedsores, malnutrition, and dehydration while in the nursing home home.

Key to the case was the fact that the nursing home was chronically understaffed, which the panel of judges said expressly showed failing on the part of the management company.   Witnesses testified on Scampone’s behalf that the nursing home was chronically understaffed, and said that the company would temporarily boost staffing levels when an inspection was scheduled and then immediately return to its understaffed state after the inspection was over. They also testified that nursing home staff altered medical records to hide substandard care.

 

The panel unanimously ruled that a nursing home has the same responsibility and liability for its residents as a hospital has for its patients, indicating that the evidence suggested the management company and nursing home staff acted with reckless disregard for residents and made nursing home abuse and neglect more likely.

Corporate negligence as a basis for liability is supported as a cause of action against Grane because it was the entity that managed all aspects of the operation of the nursing facility,” Supreme Court Judge Mary Jane Bowes wrote in the opinion. “Grane had assumed the responsibility of a comprehensive health center, arranging and coordinating the total health care of the nursing facility residents.”

The Superior Court determined that not only could the company be held responsible for compensation, but that a jury could determine it should suffer punitive damages as well. The lower court had ruled that there was insufficient evidence for punitive damages.