Firm Pays State $28 Million in Failed Deal Over Valley Hospitals

In what was described as the largest payout to date in a massive lawsuit filed by the state following the collapse of a financing deal involving two San Fernando Valley hospitals, Goldman, Sachs & Co. has paid the state more than $28 million and guaranteed an additional $20-million payment.

Earlier this week the state received payments of more than $31 million--$28 million plus interest--in partial settlement of lawsuits filed in 1994, after a default by Triad Healthcare Inc. left the state on the hook for $167 million in loans it had backed. The loan default, the largest ever in the state’s Cal-Mortgage program, effectively shut down the program for months and sparked considerable legislative scrutiny.

The state sued Goldman Sachs, one of the largest investment firms in the country, and others, alleging misrepresentation, conflict of interest and making false claims. The charges stemmed from the firm’s involvement when Triad used state-backed debt in 1991 to acquire two Valley hospitals: the 159-bed Sherman Oaks Hospital, home of the Grossman Burn Center, and West Valley Hospital and Health Center, a 139-bed facility in Canoga Park that closed in January 1995.

The state alleged Goldman Sachs represented both the buyer and seller of the hospitals, had failed to reveal a commission it received from the seller, and that a Goldman broker sat on a state advisory committee that urged the state to back the loans.

The settlement, reached in August 1997 but held up by legal challenges by other defendants, ends the case against New York-based Goldman Sachs, according to Raymond M. Cadei, who handled the suit on behalf of the Office of Statewide Health Planning and Development, the agency that provides loan guarantees to health-care companies.

“This is the first significant recovery,” said Cadei, who noted that the state earlier received $1 million from the firm that appraised the hospitals. “This is the first major recovery in the matter.”

Goldman Sachs, which also helped to refinance part of the debt to save the state $8 million, denies any wrongdoing. The company settled the case “in order to avoid the continued expense and distraction of continued litigation,” a spokesman said.

Also, in 1996, because of the legal dispute, the state treasurer’s office temporarily barred Goldman Sachs from acting as a financial advisor in any California treasury or authority transaction. The settlement lifts that restriction.

The company settled “to remove any impediment to our business relationship with the state of California,” the spokesman said.

The state still has lawsuits pending against Stuart Marylander, who was president of the now-defunct Triad, and the Los Angeles law firm of Musick, Peeler and Garrett, the legal advisors to Triad in the deal.

Under the settlement agreement, Goldman Sachs will pay the state $20 million if the state is unable to recover that much from the remaining defendants.

Although the Goldman settlement ensures the state will recover more than one-third of the debt, Cadei said the continuing lawsuits are designed to get the state, and ultimately taxpayers, off the hook for the outstanding balance.

“The state has a remaining liability of approximately $67 million,” said Cadei, noting that an additional $40 million of the debt is secured by the assets of the hospital. “At this point the state has recovered $60 [million] to $62 million, so there is a shortfall.

“The lawsuits are for the entire amount that remains owing.”