Tenet Tribulations Done

The hospital chain is free to focus on its tenuous turnaround.
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Tenet

(THC) - Get Report

has finally finished paying for its past mistakes.

The Dallas-based hospital chain this week struck a deal with the

Securities and Exchange Commission

to settle charges that it defrauded investors for years. Without admitting or denying wrongdoing, the company has agreed to pay $10 million to a fund established for investors who lost more than $10 billion because of past accounting games.

Tenet once relied on excessive Medicare "outlier" payments, meant for especially sick patients, to supercharge its earnings. But the company saw its strategy exposed by a Wall Street analyst in late 2002 and has struggled to make money ever since.

Now, Tenet hopes to leave all of the scandals behind it and achieve the turnaround that has eluded the company for years.

"With this SEC settlement, we have now concluded all the investigations and litigation that arose after the outlier and other matters surfaced in late October 2002," said Peter Urbonawicz, a former Medicare leader who now serves as Tenet's general counsel. "Tenet today is virtually a new company. We are proud of the progress we have made in our commitment to quality care for our patients and transparency in all our operations."

Still, most experts lost faith in Tenet long ago. UBS analyst Kenneth Weakley, who uncovered Tenet's accounting games, has stuck with his reduce recommendation on the company's stock while repeatedly lowering his price target on the shares for nearly five years. The stock has plummeted from roughly $50 to $6.55 in that span.

But Sheryl Skolnick, senior vice president of CRT Capital Group, sees a bargain for investors willing to take a risk. Skolnick remained bearish on Tenet through most of its downturn but, with its government problems now settled, foresees potential upside ahead.

"We see the turnaround as only really having started when THC settled with the federal government and started spending money on its facilities -- i.e., 3Q06 and not earlier as some believe -- with the implication that it is far too early to call the turnaround either a failure or a success," Skolnick explains. Thus, "we clearly have a different view of Tenet Healthcare's prospects than most of the sell-side on Wall Street."

Skolnick has no position in Tenet's stock herself, and her firm has no business ties to the company.

Recently, Skolnick took some extra steps in an effort to determine whether her buy recommendation on Tenet's stock in fact makes sense.

She started by traveling to Tenet's corporate headquarters and meeting with CEO Trevor Fetter and a couple of his new sidekicks. She liked operating chief Dr. Stephen Newman in particular. She believes that Newman could soon bring "a more data-driven disciplined, ethical and responsible set of standard operating procedures" to Tenet for the first time in the company's history.

"His approach, we confess, is similar to the way this analyst believes that kids and corporations should be 'raised,'" Skolnick writes. "He believes in setting high standards and demanding the best from the people around him, with positive consequences for meeting those goals and negative consequences for not meeting them, while supporting the team with the resources and data that they need to actively manage the business for success."

Skolnick felt unsure what to expect from Tenet's latest CFO, Biggs Porter. Skolnick decided that she "didn't necessarily like his style," since he shared little new information with her, but that she still respected him nonetheless.

"We believe that THC finally has a professional corporate operating and financial executive in the role of CFO," she says. "And that, in our view, is a very good thing."

Meanwhile, Skolnick continues to express a level of faith in Tenet's highest-ranking executive that -- after four long years -- so many people have now lost.

"Mr. Fetter deserves credit for leading the company away from its past, including from the policies of the chief executive who mentored him during his earlier career, and steering THC through the rough and at times potentially fatal waters of the pre-settlement era," she says. "Now his task is, obviously, to lead the company into the post-turnaround era.

"His challenge -- and the Street's, we suspect -- will be patience."

In the past, Tenet executives rushed to please Wall Street instead.

Some of them face punishment as a result. Tenet's former CFO and its former accounting chief have agreed to pay about $400,000 combined to settle securities charges for misleading investors about the financial performance of the company. Meanwhile, another two executives -- portrayed as even bigger players in the outlier scheme -- remain under investigation by securities regulators.

The SEC has accused former operating chief David Mackey of serving as the "principal architect" of the company's past outlier games. Based on the SEC's complaint, Mackey ordered Tenet hospitals to jack up their list prices repeatedly so that they could collect excessive outlier payments from Medicare. Three years after starting this strategy, the complaint shows, Tenet relied on those bonus Medicare payments for 40% of its earnings.

Meanwhile, the SEC claims, Tenet's former top lawyer -- Christi Sulzbach -- fully understood the situation and, moreover, worked to keep it secret. Sulzbach's attorney, Robert Gooding, told CBS his client "acted appropriately at all times" and intends to defend herself vigorously.

The SEC hopes to force Mackey and Sulzbach to return any ill-gotten gains that resulted. Both executives profited handsomely as the company's stock, fueled by record profits, took off.

Skolnick, for one, welcomes a steadier climb this time around.

"Sometimes, we really don't understand what the market expects from THC," she says. "Does the market expect to wake up one day and find that volumes are up consistently, cash flow is miraculously positive and strong earnings beat expectations without going through a period of trial, error, turmoil and pure hard work? Turnarounds rarely, if ever, work that way."