Deal Brings Scrutiny of Hospital Loan Program : Finance: Panelist urged approval that netted his firm $2.4 million. Reforms in state agency have been instituted.
In December, 1990, an obscure state program called Cal-Mortgage faced the biggest deal of its 25-year history: a proposed $142-million loan guarantee to help clinch the purchase of two San Fernando Valley hospitals.
There was a lot about the deal, officials say, that called for scrutiny.
It was twice the size of any other loan in Cal-Mortgage’s portfolio. The hospitals for sale were heavily burdened with debt. And the applicant, Triad Healthcare, was a new company with no track record at a risky time for Southern California hospital investments.
Also of concern, state officials say, was the role of Vincent F. Forte, who was a member of Cal-Mortgage’s advisory loan committee and a vice president of the investment banking firm Goldman Sachs & Co., which brokered the Triad deal.
On the day of the loan committee’s vote on Triad, Forte abstained so he could sit with the Triad team and help argue their case.
The arguments proved persuasive.
The loan committee’s unanimous recommendation cleared the way for two successive Cal-Mortgage guaranteed bond issues that netted Forte’s firm $2.4 million in commissions.
Now the deal has gone sour, leaving state taxpayers potentially on the hook for $167 million in bad debt and clouding the future of the hospitals Triad bought--Sherman Oaks Hospital and Health Center in Sherman Oaks and West Valley Hospital and Health Center in Canoga Park.
The default has also forced Cal-Mortgage to suspend its loan guarantee program, which aided much of California’s health facilities construction during the last two decades.
“It was a bad deal,” said Dr. David Werdegar, the current director of Cal-Mortgage’s parent agency, the Office of Statewide Health Planning and Development.
Triad officials and Forte declined to comment. In a statement Friday, Goldman Sachs said that Forte’s actions in the Triad matter were proper and ethical and emphasized that he “did not receive any personal commissions.”
The Triad default has brought unprecedented scrutiny to Cal-Mortgage--and is propelling reforms. The program works as an insurance fund, enabling nonprofit health care entities to use the state’s good credit rating to get low-interest loans. If the borrower cannot make payments, Cal-Mortgage insurance obligates the state to make up the shortfall.
A Times examination of the Triad deal found that relationships between Cal-Mortgage officials and individuals representing Triad strongly influenced the decision to guarantee Triad’s loan. State officials and health industry analysts say Triad’s proposal was not the only one to involve loan committee members with a financial interest in the outcome. The program had no policy prohibiting the practice before 1991.
In the Triad decision, Cal-Mortgage’s loan committee and Larry G. Meeks, then the director of the Office of Statewide Health Planning, also:
* Overrode staff warnings about corporate links between Triad and Nu-Med Inc., the commercial company selling the two hospitals. The two companies shared three top executives.
* Ignored a staff analysis that concluded that the hospitals might not have enough money to keep up with payments on the loan.
* Departed from the program’s operating goals to support health facility construction, not the sort of hospital acquisition proposed by Triad.
“I used my best judgment at the time,” Meeks said in an interview. “Believe me, if I even had an inkling that this was not right or that this was going to default, I wouldn’t have approved it.”
Meeks’s successor, Werdegar, said that since he was appointed by the governor in 1991 he has initiated management and policy changes to safeguard the Cal-Mortgage program from future ventures like Triad.
Among the changes is a prohibition against loan committee members doing business with Cal-Mortgage. Forte resigned after the new rule was imposed, as did another loan committee member who had represented clients seeking Cal-Mortgage loan guarantees.
New policy guidelines also give priority to projects in underserved areas and discourage deals such as Triad, in which hospitals are “refinanced into nonprofit entities by for-profit entities.”
Triad Healthcare, incorporated as a nonprofit company in August, 1990, was created specifically by Nu-Med executives and others to acquire the 139-bed West Valley Hospital and the 156-bed Sherman Oaks Hospital from Nu-Med.
Sherman Oaks Hospital has particular importance to Los Angeles County’s health care system because of its burn unit--one of only three in the county. Many burn victims from the recent firestorms were treated there.
Nu-Med was a failing commercial hospital chain that had gone on a buying spree in the 1980s and by 1990 was deeply in debt. In 1990, the Encino-based company’s stock lost 64% of its value--and company executives had started selling assets for cash to pay creditors.
Two months after it was incorporated, Triad applied for a Cal-Mortgage loan guarantee that would enable it to get low interest bond financing to buy the two hospitals from Nu-Med.
As a nonprofit group, Triad was eligible for the program, whereas Nu-Med was not because it was a commercial company. But the companies had very close links.
The president of Triad was Stuart J. Marylander, who also was Nu-Med’s vice chairman and head of its hospital division, according to filings with Cal-Mortgage and the Securities and Exchange Commission.
Triad’s chief financial officer, Dennis G. Solari, was Nu-Med’s senior vice president for financial services, and Triad’s administrative vice president, Charlotte McGuire, was a Nu-Med vice president, records show.
Marylander, who is no longer an official of either company, did not return telephone calls from The Times. Solari, who works only for Triad now, and McGuire, who left the company in July, declined through a Triad spokeswoman to comment.
Triad’s application for a loan guarantee underwent several reviews by Cal-Mortgage staff. The final recommendation by staff analyst Kathleen E. Staub was to refuse the loan guarantee. She gave several reasons, including concerns about the executives Triad and Nu-Med had in common.
“This does not appear to be an arm’s length transaction,” Staub wrote in her Nov. 30, 1990, report to the loan committee.
In an interview, Staub said she also was concerned that the appraised value of the two hospitals, represented by Triad consultants as $150.8 million, was too high based on the revenue the hospitals were expected to generate. “It appears the actual value of the asset has not been determined,” her report stated.
Dennis Fenwick, current Cal-Mortgage manager, said that after evaluating the Triad loan, he came to the conclusion that the relationship between Triad and Nu-Med was troubling.
“You can serve only one master,” Fenwick said. He explained that the Triad executives “should have . . . been trying to acquire the hospitals for the cheapest possible price,” but as Nu-Med officials, their incentives were just the opposite: making Triad “pay the highest amount possible.”
Staub’s report also raised concerns about whether these hospitals would be profitable enough to pay off a $142-million loan, especially because Triad also owed Nu-Med an additional $25 million. In 1990, Southern California already had a glut of hospitals, and bed occupancy rates averaged only 50% at private hospitals in Los Angeles County.
But the seven-member loan committee overrode Staub’s recommendation and voted unanimously in favor of giving Triad a loan guarantee.
Two members of the loan committee abstained. Investment banker Joan M. Annett said she became ill and left the meeting early. Forte of Goldman Sachs abstained because he was appearing on behalf of Triad, minutes show.
It was not the first or last time Forte represented clients before the loan committee, according to Cal-Mortgage officials, nor was he the only loan committee member to do so.
Fenwick said he observed the practice later in 1991, when Forte and Annett joined applicants as advocates for their loan guarantees.
“It surprised me and I felt uncomfortable,” said Fenwick, who was then a deputy attorney general newly assigned as legal counsel to Cal-Mortgage. But he was told by Cal-Mortgage staff that this was not unusual and he could find nothing in state conflict-of-interest law specifically prohibiting the practice.
In interviews, loan committee members and Meeks, who as director of the Office of Statewide Health Planning approved the Triad loan guarantee, said their decisions were influenced by the reputations of Forte and Marylander, a widely respected figure in California hospital circles. Marylander had risen to prominence, having headed Los Angeles’ Cedars-Sinai Medical Center for more than a decade.
Meeks described Forte as one of California’s top experts in hospital bond financing, and said he had such respect for Forte’s financial acumen that he appointed him as the loan committee’s first member in 1984.
Meeks said he had admired Marylander for years, having met him in the late 1970s during negotiations for a Cal-Mortgage loan guarantee to build the new Cedars-Sinai facility on Beverly Boulevard. Until Triad, that $95-million loan guarantee was the largest granted by Cal-Mortgage.
Loan committee member Niall Quinn said the size of Triad’s requested loan guarantee made him uneasy, as did several other aspects of the financing proposal.
But Quinn said he was assured by hospital executives on the loan committee that Marylander “had a heck of a good background.” Among them were John R. Cochran III and Joseph Luevanos, both of whom had worked for Marylander at Cedars-Sinai. Luevanos is vice president for finance at Cedars-Sinai, and Cochran is president of Martin Luther Hospital in Anaheim.
Luevanos declined through a Cedars-Sinai spokesman to answer questions about his vote on Triad.
Cochran also declined to discuss his vote, referring a reporter to records of the loan committee meetings. But he emphasized that he and fellow committee members did not actually approve the loan, only recommended that the agency director do so.
But Meeks said the loan committee’s unanimous recommendation was key to his decision to approve Triad’s application. He noted that he assembled this group of advisers because he had felt overmatched in the Cedars-Sinai deal and believed that the agency needed expertise.
“I’m so thankful that I didn’t make this decision just in my little closed office,” said Meeks, who is on medical leave from the state agency. “There was the loan committee telling me unanimously to do it.”
Meeks said he discounted the staff report recommending against approval because analyst Staub was “new and inexperienced.”
Staub disputed that in an interview, saying she had served as a Cal-Mortgage project officer since 1983 and had analyzed nearly 30 deals before the 1990 Triad assignment.
With the Cal-Mortgage loan guarantee in place, Triad was able to sell $142 million in bonds to private investors and bought Sherman Oaks and West Valley hospitals.
Sale of the hospitals garnered Nu-Med $110 million in cash, enabling the company in 1991 to report its first profit in four years. But the deal proved a short-term answer to Nu-Med’s debt problems. In January, the company filed for protection from creditors under Chapter 11 of the federal bankruptcy laws.
Goldman Sachs got $850,000 in underwriting commissions in the initial Triad deal, and $1.5 million more for a $167-million refinancing in 1992. Cal-Mortgage backed the refinancing, state officials said, because the agency was committed by the first transaction to do so.
Forte declined all comment, referring questions to Goldman Sachs corporate headquarters in New York. Asked whether Forte’s dual role as loan committee member and sometime client advocate complied with Goldman Sachs ethical standards, the firm said in a statement released Friday:
“We believe all of Vincent Forte’s efforts for the Advisory Loan Committee to the Cal-Mortgage Program and Triad Healthcare were proper and ethical, and that he performed to the highest standards.”
The firm emphasized that Forte “did not participate in votes involving Goldman Sachs or its clients, and did not receive any personal commissions for Goldman Sachs transactions.”
Goldman Sachs did not respond to specific questions from The Times, including a request for the total amount of commissions collected by Goldman Sachs as a result of Cal-Mortgage transactions brokered by Forte over the nine years he served on the program’s loan committee.
Triad officials involved in the company’s Cal-Mortgage loan guarantee applications did not return telephone calls placed over several weeks by The Times, and refused through a spokeswoman all requests for interviews.
Worried about the stability of Triad and Cal-Mortgage’s operating style, new state managers in 1991 began tightening program standards.
One of their first actions was to inform loan committee members that they no longer could represent applicants for loan guarantees.
“I spoke with Mr. Forte about it as soon as I came on board,” said Vincent Brown, Cal-Mortgage manager from December, 1991, to September, 1993. “From a policy standpoint and from my own position as a manager, I did not think it was appropriate.”
Annett, a vice president with Ziegler Securities, said she resigned as soon as she became aware of Brown’s position. Her March, 1992, letter of resignation cites the “perception of conflict of interest.”
In an interview, Annett said she had long felt uneasy with her dual role, offering to resign several times under the Meeks administration. But each time, she was assured by Cal-Mortgage officials that representing clients was permissible, and that her expertise was needed on the loan committee.
Tougher standards may not be sufficient to guarantee Cal-Mortgage’s future.
Triad’s default has effectively closed Cal-Mortgage’s loan guarantee program to new applicants, at least through January, and officials involved in trying to turn Triad’s fortunes around are guarded about predicting success.
Cal-Mortgage imposed the moratorium after calculating that Triad and several other troubled projects put Cal-Mortgage’s reserve fund $96 million short of what the program needs to cover its $2.1-billion portfolio.
The moratorium has forced many small, community-based health care providers to put capital projects on hold.
Werdegar said the state is working closely with Triad’s board of directors on a turnaround plan for the hospitals. If they can pull in more patients, income could improve sufficiently to resume loan payments.
“Our goal is to preserve the viability of these institutions and in that way reduce the risk to the Cal-Mortgage program,” said Gregory Roth, Werdegar’s chief deputy.
Part of the turnaround plan involves new management at Triad. Marylander is no longer president. A Triad spokeswoman said he resigned last month, although he remains a paid consultant.
Triad’s new president is Douglas L. Drumwright, who specializes in rescuing financially distressed health care companies. Drumwright said it will be three to six months before he will know whether Triad and the hospitals can be saved from bankruptcy.
A Close Relationship
A Cal-Mortgage staff report warned members of the advisory loan committee that Triad Healthcare’s proposal to buy two San Fernando Valley hospitals “was not an arm’s-length transaction” with the seller, Nu-Med Inc. The loan committee nevertheless voted unanimously to recommend giving Triad a $142-million loan guarantee from the state of California. Triad has since defaulted on the loan, jeopardizing both hospitals and the future of Cal-Mortgage.
On the day of the loan committee’s vote, Dec. 12, 1990, the following people held executive positions at both Triad and Nu-Med:
TRIAD HEALTHCARE INC.
* Stuart J. Marylander, president, chief executive officer and director
* Dennis G. Solari, vice president, chief financial officer
* Charlotte A. McGuire, vice president for administrative services
NU-MED INC.
* Stuart J. Marylander, vice chairman of the board, president and chief operating officer, and chief operating officer of the subsidiary selling the hospitals to Triad, Nu-Med Hospitals Inc.
* Dennis G. Solari, senior vice president, financial services
* Charlotte A. McGuire, vice president and assistant to the chief operating officer of Nu-Med Hospitals, Stuart Marylander
SOURCES: Nu-Med Inc. and documents on file with Cal-Mortgage and the Securities and Exchange Commission.
