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and a slew of its former executives may, at long last, pay for their mistakes.


Securities and Exchange Commission

has indicated it may file civil charges against Tenet and the executives who once led the company when it profited handsomely from an aggressive pricing scheme. Until 2002, Tenet relied on outsized outlier reimbursements from Medicare and stop-loss payments from commercial insurance to achieve the profitability that made it a Wall Street darling. After UBS analyst Kenneth Weakley exposed the scheme late that year, however, the company saw its stock collapse.

Now, the SEC has issued so-called Wells Notices indicating that it plans to hold the company and half a dozen of its former leaders -- including one-time CEO Jeffrey Barbakow -- accountable for those losses. The SEC's latest move comes exactly two years after the agency first began questioning the company's disclosure practices.

The Tenet Shareholder Committee, a group long critical of management, was sounding alarms even before then.

"As you know, in January of 2003, we had expressed our concerns about possible SEC violations, and it appears our concerns were well-founded," said Robert Potts, a spokesman for the group. "If the SEC is now prepared to take action against Barbakow and the others, who failed the patients and shareholders alike, we applaud their action. ... Lack of accountability at the top has been one of our primary concerns."

In addition to Barbakow, the agency is targeting the two executives who immediately stepped down when the scandal broke. The first, former operating chief Thomas Mackey, is widely viewed as the architect of Tenet's old pricing scheme. The second, David Dennis, used to be the company's CFO and, before then, an investment banking colleague of Barkbakow's.

Former legal counsel Christi Sulzbach also faces possible charges.


closely detailed her conflicted role at the company before she was finally ousted in the fall of 2003. Two other former executives, who filled the posts of chief accounting officer and senior vice president of government programs, could be charged as well.

"The number of individuals clearly indicates the SEC's perspective of how broad and well-coordinated this scheme was," said Peter Young, a business consultant at HealthCare Strategic Issues. "It's another several-hundred-million-dollar disappointment for investors ... it's been a long time coming."

Jeff Villwock, a Caymus Partners analyst who has conducted research on behalf of the Tenet Shareholder Committee for years, suggests that the Justice Department could end up getting involved as well.

"If the SEC finds something in its civil case, we believe they should refer it on," Villwock said. "And we are sure that they will do so."

Game Theory

In the meantime, the Tenet Shareholder Committee has already traced the pricing game that fueled the rise and fall of the company.

The group was, in fact, headed toward a heated proxy showdown when that game began to pay off. Before then, the group noted, Tenet had trailed its peers for years on most financial measures. By the time the proxy fight took place in the summer of 2000, however, the company's performance had taken a dramatic turn for the better.

Notably, in the first quarter of 2000, the company's earnings had suddenly rocketed by 20%.

After the committee lost its proxy fight -- despite support from heavyweights like Institutional Shareholder Services -- the gains just kept on coming. The following year, the group notes, quarterly earnings grew by at least 25%. And by 2002, profits were rocketing by 40% or more before the company's scheme was finally exposed.

Press releases dating back through those years credit "pricing trends" and "reimbursement gains," which are never fully explained, for that success. Interestingly, Tenet adopted its new pricing strategy just as an old corporate integrity agreement -- inked when the company was still National Medical Enterprises -- happened to run out.

"Was it a coincidence that the plan was kicked off in June of 1999, the very month the corporate CIA, invoked as part of the settlement agreement with the United States Justice Department and signed by Sulzbach on behalf of NME, expired?" the shareholder committee asks. "We think not."

Fulcrum analyst Sheryl Skolnick felt relieved that current management, at least, will escape charges. CEO Trevor Fetter once served as finance chief of Tenet but left the company around the time its pricing games first began.

Other than the SEC's apparent clearance of Fetter, however, Skolnick saw only bad news. She has long felt that the company could wind up facing SEC charges over its lack of disclosures in the past.

"The contribution of outliers and stop-loss payments to earnings was clearly so meaningful that, without them, the economics of the company would have collapsed even without all of the other issues that flowed from the October 2002 events," wrote Skolnick, who has a neutral rating on Tenet's stock. "Just look at what happened to the company's revenue and profits once it stopped getting $750 million per year in profits from outliers and $500 million per year in profits from stop-loss payments that no longer exist."

By now, Tenet has been operating in the red for some time. And the company has lost billions of dollars in market value as a result.

Skolnick, for one, believes that Tenet will eventually pay a high price -- perhaps $300 million -- for that damage.

"Whatever the amount will be," she said, "we can't imagine that it won't be among the largest fines THC has had to pay."

Rich Rewards

Whatever the case, Tenet's top executives -- especially Barbakow -- cashed in handsomely as a result of that pricing strategy.

Sulzbach, charged with both keeping the company in line and defending it when it wasn't, raked in $7.25 million on options transactions in 2001. Mackey pocketed twice that much during his final year at the company. Several directors also carried out especially timely and lucrative stock sales.

By then, however, Barbakow himself had already executed the biggest deal of all. He sold $111 million worth of stock in an early 2001 transaction that made him the best-paid CEO in the country.

But Villwock believes that, due to the SEC's current plans, some of those riches could disappear.

"Any fine to the company, though it's hard to specify, would be a significant number," Villwock acknowledged. "But fines to individuals, relative to their wealth, would typically be far more significant."

Still, Villwock believes, Tenet itself remains on the hook for plenty more. He points out that the SEC appears to be going after Tenet only for inadequate disclosures about its pricing strategy instead of the payments the company may have improperly collected as a result of that scheme. Thus, he warns that Tenet -- which has long tried to reach a "global settlement" with the government -- could face more problems ahead.

"The SEC has been slow in this investigation, but the important point is that they're finally acting," Villwock said. "So I get the sense that the government is clearly not done with Tenet Healthcare yet."