Tenet's Day in Court

The old saying "no news is good news" seems particularly apt at scandal-plagued Tenet ( THC) these days.

By now, California jurors have gone more than a week without reaching a decision in a high-stakes criminal case about the company's financial contracts with physicians. They are trying to decide whether Tenet-owned Alvarado Hospital Medical Center and the facility's former CEO violated anti-kickback laws by rewarding doctors for patient referrals. A previous jury, considering the same case, could not agree on a verdict.

With the company's battered stock surging 10% last week, investors have clearly started betting on a positive outcome.

"Each passing day with no verdict could seem like a positive and appear vaguely reminiscent of the first iteration of this trial," says Raymond James analyst John Ransom, who has an underperform rating on the company's stock. And "in our view, an acquittal will likely extend some of the stock's current rally, as it would not only serve as a psychological victory for Tenet but also take the company one step closer to overcoming its litigation woes and achieving a much-awaited global settlement with the government."

Tenet has spent the past three years trying to resolve a slew of government probes but has been hampered by the criminal charges filed against Alvarado in San Diego. Tenet has defended its physician relationships as appropriate and has pointed to the previous trial -- which ended with a hung jury after four months of testimony -- as evidence that the government has no case. The current trial has now stretched on for nearly twice as long as the original one did.

Still, some experts believe that the jury will find Tenet's hospital guilty of at least some of the 18 counts it faces in the end. Notably, they point out, U.S. Attorney Carol Lam has stepped forward to handle this particular trial herself. Lam recently made headlines for bringing down former California Congressman Randall "Duke" Cunningham on bribery and tax evasion charges. She has enjoyed success in the health care arena as well.

"Lam is one of the nation's leading experts in health care fraud prosecution," the Tenet Shareholder Committee, a longstanding critic of Tenet management, recently noted on its Web site. "She literally wrote the book on chasing health care criminals," it added, referring to Prosecuting and Defending Health Care Fraud Cases, which she wrote with Michael Loucks. "Tenet has good reason to be worried."

Peter Young, a business consultant at HealthCare Strategic Issues, agrees.

"There are a lot of complex issues involved," he concedes. "But I think that Carol Lam probably did a pretty good job of defining them, more so than her assistant did in the first trial. ... So I think there will be a split decision" with some guilty verdicts in the end.

A guilty verdict could ban Alvarado from treating Medicare patients, threaten physician arrangements at other Tenet hospitals and further delay a comprehensive government settlement with the company.

For its part, Tenet portrays its physician contracts as common for the industry. The company hopes the jury will agree -- and return a favorable verdict -- but it plans to keep negotiating with the government regardless of what happens. 

"Discussions about a global settlement are independent of the Alvarado trial," says Tenet spokesman Steven Campanini. "Obviously, we hope the jury will reach a positive verdict. But we have legal strategies in place depending on the outcome." 

In the meantime, Tenet's stock -- once a $50 highflier -- continues to hover near multiyear lows. The shares, which bottomed out at $7.27 late last month, inched up a penny to $8.22 on Friday.

Young, for one, sees no good reason to touch the stock right now.

Although he remains bearish about the company's prospects, he questions whether investors can gain very much by shorting the stock at current levels. At the same time, he doubts that they can profit much by purchasing the stock here, either. Ultimately, he believes that a courtroom victory would be good for just a small and temporary rise in the troubled company's shares. He has no position in the stock himself.

Ransom feels cautious as well.

"Even in the event of a victory in San Diego, Tenet still faces a number of near-term operational challenges, including continued weakness in core patient volumes, struggles with bad debt and uninsured trends and material softness in free cash flow metrics," he says. So "as we await the verdict in San Diego, we would caution investors from assuming that the worst is behind Tenet, despite ongoing heroic efforts from its management team to restore operations to their former glory."

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