Investors gobbling up

Tenet

(THC) - Get Report

shares are risking indigestion.

While a new settlement makes the stock seem more appetizing, the company continues to face a dizzying array of regulatory, legal and fundamental business challenges. Indeed, the company has just revealed a

new regulatory probe -- while still celebrating the end of another one -- that has left some people feeling unsettled. News of the fresh investigation, announced just after Tenet paid $54 million to end an unrelated medical fraud probe, comes as lawyers prepare to serve the company with massive lawsuits at a time when its business is suffering.

Just a day ago, Tenet investors had no reason to believe that the company would already be testing their iron stomachs. Specifically asked for investigation updates in a conference call on Thursday, Tenet lead counsel Christi Sulzbach rehashed some public information and then concluded that "there was really nothing too significant to report."

But in its quarterly report, filed hours later with the

Securities and Exchange Commission

, Tenet revealed that it had become the target of a brand-new probe by Florida Medicaid fraud investigators a full two months earlier.

Tenet shares, which rallied hard on Thursday, were down 11 cents to $14.41 in Friday afternoon trading.

Lessons Learned

Fulcrum analyst Sheryl Skolnick speculates that Tenet viewed the Medicaid investigation -- which puts only a fraction of corporate revenue at risk -- as immaterial. But she nevertheless insists that Tenet should have disclosed the probe long ago.

"You would have thought they had learned that lesson already," says Skolnick, who has a hold rating on the stock. "And they should have answered the question on the call. There's no question about it."

Instead, Tenet listed the new Medicaid probe near the end of the growing litigation section in its regulatory filing. The filing states that the Florida Medicaid Fraud Control Unit subpoenaed the company -- back in early June -- for 11 years worth of personnel and financial contracts at all of its Florida hospitals. And Skolnick was quick to note that it was an "investigative" subpoena that Tenet received.

"It's more than a document subpoena," she said. "So they're clearly under investigation."

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Skolnick estimates that Tenet relies on Florida Medicaid payments for between 2% and 5% of its revenue, some of which could disappear if investigators find evidence of fraud. In the meantime, Fulcrum says she "wouldn't be surprised at some point to see every state agency" where Tenet operates take a closer look at the company's practices.

For now, Tenet has put at least one big probe behind it. The ailing hospital chain agreed this week to pay $54 million to settle allegations that its hospital in Redding, Calif., had participated in unnecessary heart procedures. The fine, hailed as "record-setting" by federal prosecutors, more than doubles the old record paid by a single hospital for allegedly fraudulent activities.

Tipping the Scales

Tenet admitted no wrongdoing and continues to maintain its innocence. But for some, the government deal was unsettling.

"Why is there this sizable settlement for a single hospital?" Banc of America's Gary Taylor asked during Thursday's conference call. "Should

we be expecting the possibility of future settlements for things for which, at this point, we haven't seen charges filed?"

Tenet said it made a "strategic decision" to settle the Redding case so that the hospital, and the company itself, could move forward and rebuild.

"What we have said historically was that the criminal investigation was targeted at two physicians -- which we still believe is true -- but that, clearly, the hospital was involved," Sulzbach said, adding that the settlement allows Redding "to draw a line in the sand and move forward from what has been a huge black cloud."

The company, faced with massive investigations and lawsuits, also indicated that more settlements could follow.

"Where we can settle matters, we will settle them," said acting CEO Trevor Fetter. "And where we can't settle them, we will litigate them."

Jim Moriarty, a Houston attorney representing dozens of Redding patients and survivors, says Tenet should brace itself. He predicts that the company will be served with nearly 500 Redding lawsuits, some of them already filed, in the coming weeks. He estimates that some of the lawsuits "are worth millions of dollars apiece" and that Tenet's legal bills for Redding alone will top $1 billion in the end.

For now, he says he's pleased with the Redding settlement. By agreeing to pay $54 million, he says, Tenet has made a "tacit admission" that Redding engaged in up to 1,700 unnecessary surgeries. And by shifting the heat to individual players, he says, the government can both punish the true culprits and strengthen its corporatewide investigation.

"I believe the government knows exactly what it's doing," Moriarty said. "They're going to put the criminals in jail, and they're going to put Tenet out of the Medicare business. ... For that, I salute them."

Fundamental Questions

What ever transpires, Tenet faces immediate business challenges. Skolnick, for one, is less concerned about Tenet's headline risk than its deteriorating condition. She actually believes Tenet is likely to generate more good news than bad in coming weeks. But she points out that positive headlines cannot change the underlying company.

Since toning down its aggressive Medicare billing, Tenet has gone from a hugely profitable company to a money loser. Its cash flow, while up from first quarter's dreary level, is still only half of what it was a year ago. Its margins "stink," Skolnick says. And the company has laid out no real strategy, beyond cost-cutting, for competing with its peers.

"After the positive news flow, you're just left with the fundamentals," Skolnick said. "Right now is probably the worst time to consider investing in the stock. ... I would just leave it alone."