SEC Settles With Tenet Corp And Ex-Officers

by Glen Shapiro, Lawandtax-News.com, New York

05 April 2007

The Securities and Exchange Commission has this week filed civil fraud charges in federal district court against Tenet Healthcare Corporation and some of its former officers for misleading investors over the reasons for the company's reported earnings growth.

Tenet and its former chief financial officer and co-president, its former chief operating officer and co-president, its former general counsel and chief compliance officer, and its former chief accounting officer are accused of failing to disclose to investors that Tenet's strong earnings growth from 1999 to 2002 was driven largely by its exploitation of a loophole in the Medicare reimbursement system. Once Tenet finally revealed its scheme to the investing public and admitted that its strategy was not sustainable, the market value of Tenet's stock plunged by over $11 billion.

During the relevant time, Tenet was based in Santa Barbara, Calif., and was the second largest publicly traded healthcare company in the United States.

To settle the charges, Tenet agreed to pay a civil penalty of $10 million. The SEC will seek to have these funds placed into a Fair Fund for distribution to harmed investors pursuant to the Sarbanes-Oxley Act. Without admitting or denying the allegations in the SEC's complaint, Tenet also agreed to be permanently enjoined from violating the antifraud, reporting, and recordkeeping provisions of the federal securities laws. Penalties are also being paid by some of the accused persons.

Linda Chatman Thomsen, Director of the SEC's Enforcement Division, said, "Companies must explain their financial performance in a manner that enables investors to see the company as management does. Today's action shows our commitment to holding companies and their executives accountable when they fail to communicate with investors in a clear and straightforward manner or fail to provide them with honest information."

Randall R. Lee, Director of the SEC's Los Angeles Regional Office, said, "By exploiting a loophole in Medicare regulations, Tenet embarked on an unsustainable strategy to turbocharge its earnings. Yet even as Tenet's strategy produced nearly half of its earnings per share, Tenet's management kept investors in the dark about the central business strategy underlying its earnings growth."

In part as a result of its outlier scheme, Tenet received enough income to set aside funds in improper general reserves. Tenet, created general reserves totaling approximately $107 million by the end of Tenet's 2002 fiscal year. These inappropriate reserves resulted in material misstatements to Tenet's financial statements for fiscal years 2000 through 2004, said the SEC.

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