Bad Blood Boils Over in Tenet Dispute

Tenet Healthcare Corp.’s long-running battle with an outspoken shareholder sank to a new low this week.

After playing out behind the scenes for weeks, the feud spilled into public view when the Tenet Shareholder Committee, chaired by Dr. M. Lee Pearce, ran an ad in the Wall Street Journal. The ad called on the Department of Justice to stop an “endless cycle of scandal” at the hospital chain, which is under myriad federal investigations.

According to Santa Barbara-based Tenet, Pearce had threatened to launch a negative publicity campaign unless Tenet agreed to either lease a medical building he owns at an inflated price or sell him an adjacent Tenet-owned hospital in Fort Lauderdale, Fla., at a discounted price.

Tenet executives acknowledged that the Fort Lauderdale hospital could use the extra space, but said Pearce demanded too high a price for the lease and offered too little for the hospital.

Pearce’s lawyers and advisors countered that it was Tenet Chief Executive Trevor Fetter, not Pearce, who initiated the talks and visited the doctor’s home to discuss a possible deal. When the talks fell apart, the lawyers said, Tenet threatened to sue him if the shareholder committee went ahead with a plan to run ads blasting certain company directors.

Tenet denied threatening to sue Pearce.

Since late 2002, Tenet, the nation’s second-largest hospital chain, has been under investigation and hit with lawsuits related to its business practices, including allegedly unnecessary heart surgeries performed at its hospital in Redding, and its aggressive Medicare billing policy. Tenet has resolved at least six fraud and patient care cases brought by the government, without acknowledging any wrongdoing, and agreed to pay more than $140 million in fines.

Shareholder group spokesman Paul Brickman said it owned 25,000 shares, significantly less than 1% of Tenet’s total. He said the committee placed the ad in the Wall Street Journal because it was tired of what he called “checkbook justice” -- probes that end with Tenet paying a settlement but admitting no wrongdoing.

“We feel that the executives and board members at Tenet who were responsible for these scandals should be held more accountable,” he said.

Tenet dismissed the ad as alleged payback by Pearce for its refusal to accede to his demands on the real estate deal. According to Tenet, shortly before the company’s annual shareholder meeting, Pearce showed Tenet representatives drafts of four ads disparaging the company and threatened to run them if the company refused to deal.

Lawyers for Pearce said the doctor never made such a threat. Pearce’s representatives accused Tenet of trying to bully him into pulling the ads.

When he took over as CEO last September, Fetter pledged to reform Tenet and restore profitability. And both sides agree that Fetter sought to mend fences with Pearce, who had carried out a proxy battle at the company’s 2003 board meeting. Under Fetter, the company dropped a lawsuit it had filed against Pearce over that fight. And in January, Fetter sent a letter to Pearce, apologizing for the suit and its “untrue statements” about Pearce.

Pearce’s lawyers said that later, during a meeting at the doctor’s Florida home, “it was Mr. Fetter, not Dr. Pearce, who raised the possibility of a business transaction.”

Jeff Villwock, a financial analyst who represented Pearce in the negotiations, said Pearce was interested and that the two sides agreed that Fetter would take a proposal to the Tenet board that it either lease Pearce’s building or sell him the hospital, Villwock said.

But Tenet said before the annual meeting that Pearce threatened to “run a new series of attack advertisements” and “made it clear that the ads would not run and the Tenet Shareholder Committee would cease its activities if Tenet agreed to his demands.”

An e-mail from Villwock to Fetter confirms its version of events, Tenant claimed. The e-mail says: “Lee has submitted an ad that can be pulled.... A signature on the letter he faxed to you obligates you to take the purchase/lease proposal to the board. The board can then decide to take the purchase, lease or neither. If neither, there is no further obligation on either party.... There might be a way to delay the timing, but my guess is that you would find the quid pro quo unacceptable.”

Villwock said the e-mail couldn’t be interpreted as a threat.

“They’ve tried very hard to cast this like this is some sort of extortion,” he said. “But it simply ignores the fact that ... they came to us, and we’ve been delaying being public [with criticism] at their request for a couple of months. At some point you have to say let’s decide if you really want to do this. If not, great.”