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The many extracts on these pages are from copyright material. They are owned by the reference given or its owner. They are reproduced here for educational purposes and to stimulate public debate about the provision of health and aged care. I consider this to be "fair use" in the common interest. They should not be reproduced for commercial purposes. The material is selective and I have not included denials and explanations. I am not claiming that all of the allegations are true. The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made.

The Financiers and Health Care

This page speculates on the possible role which pressures generated by financial institutions, particularly bankers and analysts may have played in the various health care scandals. It goes on to describe their documented long term involvement with the fraudulent HealthSouth.



Part 1 : Looking Back

Part 2 : The Bankers and HealthSouth

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The revelations about bankers and analysts on Wall Street raises questions about their possible role in the fraud prone health sector over the years.

Would the health care frauds and the misuse of patients have occurred without the support of the bankers and analysts? Most of the executives of these companies did not think that they were doing anything wrong. They were simply applying market principles to health care. Strong market support from investors, analysts and bankers must have given companies the positive feedback they needed to affirm to themselves the acceptability of what they were doing. There were close relationships with the banks.

Tenet's Michael Ford, president of Tenet's international division had a close relationship with Chase Manhattan bank. When he left Tenet in 1997 he joined Vista Healthcare in Singapore, an international corporate health consultancy advising other companies about international oportunities and funded by Chase Manhattan.

The first part of this web page is therefore speculation about the role which the financial institutions may have played in the past, drawing on my knowledge of what actually happened.

The second part of this web page describes exactly the same close relationships in the company HealthSouth that we saw in Enron, Worldcom and a host of other companies.

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Part 1
Looking Back

The National Medical Enterprise Scandal

On a page I wrote in 1996 I examined and commented on the analysts reports about National Medical Enterprises - NME (now Tenet Healthcare) before and during the exposure of the misuse of patients for profit in 1991.

In retrospect I suspect that I was looking at a circular relationship, between advising bankers, analysts and company executives. The 1991 analysts' reports praised the company's dysfunctional money making practices. Because they made money they were seen to be legitimate and to be providing a high quality service. They did not see anything wrong with what NME was doing and as a consequence neither did senior NME staff. When the scandal broke analysts were disbelieving and sceptical of the outcry about the company. They considered it merely a media frenzy which would go away.

We can imagine investment bankers and analysts who we now know sometimes attended board meetings, urging NME to find ways to admit more patients, keep them longer and carry out more "therapies" on them? This is simple business logic. NME's executives in turn pressured its staff to do these things offering bonuses and company awards.

NME set in place procedures to measure admissions, length of stay and profits per patient day. They rewarded those who were successful. This information was fed back to bankers and analysts who responded enthusiastically. Other companies were pressed to supply the same data and the entire marketplace was soon obsessed with admitting more, keeping longer and giving more treatment.

Profits rose rapidly so confirming the correctness of the financiers advice. The more they praised, the more the industry competed sending more pressure through the system. All parties turned a blind eye to the way employees responded to these pressures.

During this period the company expanded dramatically and the bankers prospered from their dealings.

Everyone took a purely commercial view of the practices including

It was only when hospital managers started kidnapping children and patients came forward to describe their unfortunate experiences in these hospitals that the bubble burst.

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In the case of Columbia/HCA's US $1.7 billion fraud the analysts were quick to assure investors that the company could survive. Most interesting was the way the market and the press got behind the company and its new chairman Thomas Frist brother of a powerful US congressman.

The massive fraud originated from a series of Qui Tam (whistle blower) actions commenced several years before against HCA when Thomas Frist was its chairman. Most of the fraudulent practices commenced at that time and continued when HCA merged with Columbia.

Columbia's Richard Scott, a corporate acquirer became chairman. He made himself and the company unpopular with his aggressive business practices and his Pacman takeover of community hospitals. When the fraud was exposed in 1997 he was forced to retire and got all the blame.

Frist, who was more to blame than anyone for the fraud became the new chairman. He was hailed as the company's kindly saviour. His claim to making the company more like his socially responsible HCA was accepted with few questions.

Although all the information about HCA and Frist was publicly available the market and the press embraced Frist and his new image of a kindly and socially responsible HCA. They marketed it to the public. The financiers were soon back in business, trading hospitals and restructuring.

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Aged Care

It is difficult to be certain quite what role the bankers and analysts played in the aged care bubble. It reached dizzy heights of merger activity in the early 1990s then collapsed in 1998/9. It this it resembled the DotCom and technology bubble.

The marketplace raved about the opportunities providing step down care presented for nursing homes.

Sun Healthcare chairman, Andrew Turner's assertive advocacy for "cutting the fat" in nursing homes led to the perception of inefficiency. They were what the market liked to hear and Turner became more credible by making these remarks. Others followed his advice. As a consequence there was deskilling and understaffing across the entire for profit nursing home industry. The elderly were whare housed for efficient processing. There was widespread neglect. Thousands died prematurely as a consequence.

These profit generating strategies were welcomed and praised by the market and accepted by politicians. No one looked at the consequences until a Californian house wife, alarmed at the care she witnessed took out death certificates and analysed them. When Californian authorities ignored her findings she took them to the federal government. Someone listened and looked.

The bubble burst when government changed Medicare funding to stop the rorting of Medicare by step down care in nursing homes. At the same time the families of the elderly won crushing damages in the courts. Most of the nursing home chains entered bankruptcy.

Prior to the Medicare cuts, nursing homes were compensated each time a patient received treatment from a nursing home facility, allowing companies to pad profits by expanding patient care. The payment reductions established fixed prices per patient, slashing nursing homes' revenue from Medicare between 30% and 40%, practically overnight, Texas Pacific Group partner Jonathan Coslet estimates. The companies' highly leveraged acquisitions didn't help matters.

At present, only two nursing homes trade publicly: Manor Care Inc. and Beverly Enterprises, the rest having been driven into Chapter 11 bankruptcy in the final years of the 1990s. The Refurbishing Begins: With Medicare reimbursements back, healthcare services taps capital markets Investment Dealers Digest April 16, 2001

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Healthcare Analyst Bonanza 1999

The health care marketplace was in decline following the 1997 cutbacks on Medicare funding and the massive fraud scandals. Money went to the technology companies instead.

By 1999 intense lobbying by many parties had persuaded the government to soften their regulations and provide more Medicare funding.

As significant was the election of George Bush as president. Bush was a strong supporter of the corporate point of view and of health care corporations. His early comments suggested that he favoured less oversight and more self regulation but his views were not well received in the wake of all the fraud.

Bush appointed prominent people from the corporate health care marketplace to positions of power in the government. Thomas Scully who had been president of the politically powerful Federation of American Health Systems, the body representing for profit corporate medicine and lobbying on their behalf was one of these.

With the collapse of the technology and DotCom sectors in 1999 the financiers turned back to health care for their profits and commenced the process of building it up for the next bubble - the one which imploded in 2002/3.

Health care bankers and analysts became prized possessions. All the financial institutions targeted health. Analysts were poached from those banking groups, which already operated in this area. It became a frenzy. Remuneration packages for analysts doubled.

We now know that the bankers were not paying these salaries for independent reports. They were paying for the work these people would do in building up the sector and bring in business. Knowing what we now know, we can predict the outcome.

Mr. Ray, then head of health care investment banking at BT Alex. Brown, helped negotiate the $1.2 billion sale of Mariner Health Group to Paragon Health Network. - - - - In May, he and 40 members of his department bolted for Credit Suisse First Boston, and headhunters put the value of Mr. Ray's new contract at an eye-popping $2.5 million a year.
Investment banks are engaged in a ferocious bidding war for health care specialists, convinced that the graying of America will be a boon for health-related companies.
With this in mind, Banc of America Securities, Warburg Dillon Read and other formerly second-tier players have been raiding the health care groups of more established firms such as Morgan Stanley Dean Witter & Co. and Salomon Smith Barney. With the talent pool thinning, health care bankers and analysts now have huge incentives to test the job market.

More than a dozen top health care bankers have switched firms since February, sometimes bringing their entire departments with them. Mr. Ray and Benjamin Lorello, who left Salomon Smith Barney for Warburg Dillon Read, are the best-known defectors.

Just last week, J.P. Morgan & Co. Managing Director Clifford Cramer departed for Merrill Lynch & Co., and Anne Kavanagh left Prudential Securities Inc. to become head of health care banking at PaineWebber Inc.

''I've never seen anything like this,'' says Brian Brille, who started the musical chairs when he quit Morgan Stanley Dean Witter in February to join Banc of America Securities.
The big investment banks pride themselves on providing a full array of services. ''To not be represented in a consequential way in such a big sector of the market is just politically unacceptable,'' says Mr. Kopelan. With the upstarts poaching and established firms filling holes, ''suddenly everybody was in the market at the same time.''

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Rehabilitating Healthcare 2001

There was some difficulty in rejuvenating the sector. Many companies were still heavily in debt. They did not have a good credit rating. The fallout from the bursting of the technology bubble had left investors jaundiced and unwilling to buy shares. Floats and IPOs were not being supported. The companies needed money. The analysts were strongly pushing the opportunities.

The financial institutions came to the rescue resorting to complicated arrangements that generated money in other ways -- structured finance.

Whatever the state of the market financial institutions always positively predict and encourage more consolidation with mergers and takeovers. 2001 was no exception. The money for the financiers lay in mergers. Analysts' reviews were enthusiastic about managed care where Aetna was about to dominate the market by embarking on massive takeovers. They were enthusiastic about the purchase of not for profit hospitals. Ultimately all this meant bigger profits for the banks.

What bankers don't want is a stable marketplace where companies concentrate on conducting business instead of deals. They make less money.

Like many healthcare services companies, HealthSouth has been taking advantage of financing opportunities born of the crash in the technology sector, a change in fortune of healthcare providers now that Medicare reimbursements are being reinstated, and the sudden lowering of interest rates by the U.S. Federal Reserve.

The entire sector-namely, managed care companies, hospitals, nursing homes and pharmacy benefit managers, among other healthcare providers-is getting a new lease on life, with restructuring and refinancing engineered by healthcare investment bankers who are turning their attention to healthcare providers and away from the once high-flying biotech concerns.
People are looking for safe harbors and healthcare is one of them," says Bill McGahan, deputy head of the global healthcare group at UBS Warburg, referring primarily to the interest in healthcare high yield.

While the equity market still is off-limits to many of these companies, due to the state of the market and their own indebtedness, there are plenty of complex financing strategies around. In particular, bank/bond combinations are being designed to refinance outstanding bank debt, often offering lower interest payments on new debt offerings which are typically large enough to include some cash for future growth.
Given the upheaval still surrounding the sector, there is likely to be more consolidation. Those companies with access to the markets are now even better positioned to raise the money to buy their less-healthy rivals.
In 1999 and 2000, the government loosened up the purse strings, and Wall Street appears satisfied that Medicare reimbursements are safe for the time being, - - - .
Recovering from their financial difficulties, hospitals and managed care companies also seem to be on a roll, say bankers.
The good news is that the for-profit hospitals may have a chance to scoop up some of the not-for-profit hospitals in the future, he adds.
Over the past few years, consolidation has been a consistent trend at hospitals. But the equity markets are still a bit iffy for them.
Given the improved outlook for those companies for the next two years, managed care may even provide Wall Street with a blockbuster acquisition this year, says Rich Jacobsen, an investment banker who specializes in the managed care industry at Salomon Smith Barney.
For all the action in the debt markets, the stock market is another story. Completed deals, such as the one for LifePoint Hospitals, are few and far between. Meanwhile, the bad news keeps on coming.
The Refurbishing Begins: With Medicare reimbursements back, healthcare services taps capital markets Investment Dealers Digest April 16, 2001

It should not surprise us that within 2-3 years of all this there was another series of frauds and scandals. Tenet Healthcare and HealthSouth were the prime offenders.

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Tenet Healthcare - a replay

The first of these was Tenet Healthcare, the new name for National Medical Enterprises. After its guilty plea in 1994 it had been restrained by onerous compliance and oversight processes. It had not prospered as a result. It felt that it had been unreasonably victimised. The market certainly resented restraints like this.

When the restrictions were lifted in 1999 the company, supported no doubt by its financiers reverted to its earlier practices. It was almost a replay of what had happened but in a different context. Tenet found a loophole in the Medicare regulations which allowed it to bill much more for complex major procedures. Among a number of other unsavoury and aggressive practices it targeted complex surgery including neurosurgery, joint surgery and cardiac surgery.

It marketed its claimed expertise in these areas and encouraged this sort of surgery in its hospitals. Doctors who brought in the cases and operated on them were encouraged and supported, sometimes regardless of their qualifications. Profits soared. The analysts and the bankers were ecstatic and Tenet's share price rose to dizzy heights. It was soon aggressively acquiring not for profit hospitals.

The bubble burst very suddenly in October 2002 when almost simultaneously Medicare discovered that they were being taken for a massive ride and a medical ethicist, who had gone for screening discovered that he was being urged to have coronary bypass surgery when his arteries were normal.

An FBI investigation showed that the company was strongly supporting an unqualified cardiologist and a cardiac surgeon who were carrying out large numbers of unnecessary procedures and operations, often on people drawn to the hospital by the screening service Tenet marketed to the public. Other doctors had repeatedly complained to the company's officials that many procedures were unnecessary. They had refused to entertain the idea.

We can speculate as to whether a similar close relationship existed between Tenet and its bankers as existed with HeathSouth, Enron and WorldCom. The extent of these relationships in the marketplace makes it likely that it did.

Following the Citigroup scandals Sandy Weill was forced into a clean out of analysts at Smith Barney. Large numbers were fired. Two health care analysts were among those fired and Tenet/NME was left without an analyst to report on its activities. One can only speculate whether they were fired because they were among those issuing deceptive reports.

There are other top-flight companies that Smith Barney research analysts do not now cover, among them Motorola, Exxon Mobil, Morgan Stanley, Microsoft, Tenet Healthcare and Nike, according to Bloomberg News data.
Deborah Lawson, another highly regarded analyst, who specialized in health care, was let go one month after returning from maternity leave.
Changed Smith Barney Is Thin on Analysts The New York Times June 13, 2003

Glen J. Santangelo, a well-regarded health care analyst, would be leaving the firm. No explanation was given for his departure.
But according to Smith Barney analysts familiar with the circumstances, Mr. Santangelo had sent an advance copy of a research report to a client.
Wall Street'sHarsh New Reality The New York Times August 17, 2003

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Not only the banks

That complicty in fraud was widespread in the marketplace and that the systems "market police" were part of this is suggested by the involvement of accountants. Arthur Andersen was a multiple offender and was eventually forced out of business. KPMG has been accused of complicity in the Columbia/HCA fraud and of participating in tax fraud. Ernst and Young is accused of involvement in the HealthSouth fraud.

 It could not happen in Australia - or could it?

Heart operations on normal hearts may sound bizarre, something from another world. The Tenet administrator in charge of the region in the USA where this occurred was the same Tenet/NME administrator who was CEO of Tenet/NME's Australian subsidiary Australian Medical Enterprises (AME) between 1991 and 1995.

In 1993 retired Justice Yeldham had ruled against a complaint and considered him a fit and proper person to run hospitals in Australia. The health department in Western Australia, reviewing Tenet/NME's suitability to operate in Australia took a different view. They pointed to the possibility of something like this happening here.

Tenet/NME's ultimate departure from Australia was related to further revelations about this administrators financial dealings with a surgeon, who alleged conduct which might have put him under pressure to do unnecessary surgery.

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Part 2
The Bankers and HealthSouth

Citigroup's Salomon Smith Barney (now renamed Citigroup Global Markets)

Salomon Smith Barney was one of the groups with an older established health care division. Its leading position in this area is reflected in its strong health care banking division. Smith Barney staff like other investment bankers advises on mergers and other business transactions. It arranges loans, mergers, floats, and structured deals. We now know that its bankers and analysts attended board meetings to advise, consult and presumably sell their deals.

Smith Barney runs a widely recognised annual business conference for corporate health care providers. It is hardly surprising that it introduced and encouraged close relationships between bankers, analysts and the companies. This close relationship started as early as the 1980's.

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HealthSouth, Smith Barney and USB Warburg

The HealthSouth fraud scandal exposes the same patterns of behaviour by bankers, analysts and accountants as in Enron and WorldCom. It has not yet been established whether the bankers knew about, participated in or actively promoted the fraud. At the very least they were conveniently blind to it.

The HealthSouth fraud it is claimed started soon after the company went public in 1986. There is however a 5 year statute of limitations. The estimated US $2.7 billion fraud and the charges therefore relate to the last 5 years only.

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The Banking Team

Salomon Smith Barney, their banker Benjamin Lorello and his team of analysts helped to take the company public in 1986. They remained very close to HealthSouth over the years and Lorello did all of HealthSouth's business. Many of the subsidiary companies Lorello helped HealthSouth found made plenty of money for Smith Barney and HealthSouth directors, but large losses for share holders.

HealthSouth wasn't the only Lorello client to run into trouble. MedPartners, Integrated Health Services, and Five Star Quality Care, for instance, have all had serious financial problems. "A company would tell me they were doing a deal," says a health-care analyst at a major New York hedge fund, "and I would say to management, 'Please tell me you aren't doing it with Ben Lorello.' Everything he touched blew up." HealthSouth's Go-to Guy : The collapse of HealthSouth is putting pressure on UBS Warburg. FORTUNE April 15, 2003

During the frenzy to recruit health care bankers and analysts in 1999 USB Warburg poached Lorello and his team by offering Lorello and his team large salaries. He took the HealthSouth business with him.

Mr. Lorello made his move to Warburg in March, reportedly receiving a three-year contract worth $70 million. That allowed Mr. Brille to recruit two bankers from Warburg, Paul Donofrio and David Gottleib. The domino effect continued, reaching ING Barings Furman Selz, SG Cowen Securities Corp. and PaineWebber, among others. Prudential even bought a whole firm, acquiring health care specialists Vector Securities. HEALTH CARE GETS HOT ON WALL ST.: BIDDING WAR ON FOR SPECIALISTS Crain's New York Business August 9, 1999

Ms. Chovav was hired to replace Geoffrey E. Harris, a longtime colleague of Mr. Lorello, also from Smith Barney. Mr. Harris covered HealthSouth in the mid-1990's and moved with Mr. Lorello to UBS Warburg in early 1999, getting a contract that guaranteed him $10 million a year for three years, say bank officials. The contract was substantial for a health care services analyst at the time, just as Ms. Chovav's compensation is considered steep in today's environment. Conflict Issue Over Analyst's Deal New York Times April 8, 2003

Smith Barney and USB Warburg were both participants in the US $1.4 billion analyst fraud scandal although USB paid a smaller fine. They were all doing the same things. They had to if they wanted to be competitive.

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Time Span

Because os a statute of limitations much of the media coverage has been directed to the last 5 years of Lorello's 16 years providing services to HealthSouth. Lorello was now working for USB Warburg, something Smith Barney must have been very relieved about.

But few bankers have been so successful using research to generate investment banking business, say a number of bankers who have worked with Mr. Lorello over the years. Conflict Issue Over Analyst's Deal New York Times April 8, 2003

The Lorello team's conduct did not change when they moved to USB Warburg. I will use both the Smith Barney and UBS material to illustrate how close bankers and health care companies were and the influence which the bankers and analysts had on HealthSouth. The likely extent of similar relationships with other health care corporations can be gauged from the extent of the rest of the Wall Street scandal.

Behind every great corporate empire they say, lies a filthy-rich investment banker. For HealthSouth, that banker is Ben Lorello, a brash Wall Street kingpin. Though HealthSouth is most closely associated with its recently deposed CEO and founder, Richard Scrushy, Wall Street insiders say the long arm of Lorello held considerable sway over the company. HealthSouth's Go-to Guy : The collapse of HealthSouth is putting pressure on UBS Warburg. FORTUNE April 15, 2003

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The HealthSouth Fraud

The HealthSouth fraud is described elsewhere on this web site. I have also touched on the issues surrounding the bankers and accountants. I will expand on the bankers involvement on this page.

The HealthSouth fraud follows the pattern of WorldCom and Enron. It was an accounting scandal in which it is claimed US $2.7 billion in profit was carefully conjured into the accounts in order to maintain the stock's value and so HealthSouths meteoric expansion. When this all started to fall apart in 2002 there was a desperate but unsuccessful attempt to bury the fraud from public view by dividing up the company. Lorello advised the company on this.

The FBI raided HealthSouth in March 2003. Fifteen senior staff have now pleaded guilty. HealthSouth's founder and chairman Richard Scrushy faces 85 charges of criminal conduct.

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Analysts and Their Reports

UBS and Deutsche bank which both did business with HealthSouth maintained positive reports right to the end. Other analysts including the one from Smith Barney who no longer did business with HealthSouth were negative.

Once again emails reveal that an analyst was maintaining upbeat reports about HealthSouth while disparaging it in private. He was forced to resign.

Analyst Howard Capek waited until March 21 two days after the SEC accused HealthSouth and CEO Richard Scrushy of "massive accounting fraud" to downgrade HealthSouth from a "strong buy" to an "reduce," a signal to dump the stock.
Capek's belated downgrade and UBS's overall bullishness raise questions about whether UBS Warburg's research was influenced by its all-star healthcare banking group, lead by Ben Lorello.
But the majority of firms on the street were far more skeptical about the stock.

According to Investars, Salomon Smith Barney downgraded from "outperform" to "in-line" on Aug. 28, 2002, when the stock was at $6.43, and from neutral to underperform on Sept. 7 at $5.30. UBS' OWN GRUBMAN The New York Post April 4, 2003

In the time that Mr. Capek has been the analyst for HealthSouth, the company has done $2 billion in banking business at UBS. Conflict Issue Over Analyst's Deal New York Times April 8, 2003

A top health care analyst for UBS resigned under pressure yesterday after bank officials discovered an e-mail message in which he disparaged HealthSouth just months after he had given the stock the highest possible rating.

The stock analyst, Howard G. Capek, sent the message to an institutional investor in September 1999, saying, "I would not own a share" of HealthSouth. UBS Analyst Forced Out for Remark New York Times July 3, 2003

When a client sent Mr. Capek an e-mail message asking his opinion of the HealthSouth moves, Mr. Capek responded that he would never own the stock, which has the stock symbol HRC. The comment was part of an informal exchange with an investor who was a friend of Mr. Capek's. UBS Analyst Forced Out for Remark New York Times July 3, 2003

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The Lorello Story

Lorello and his team have guided HealthSouth in its market ventures since the 1980's. He has been a close and loyal supporter ever since. The many companies Lorello and HealthSouth directors established and floated in the marketplace proved lucrative for them both. Shareholders who held on to the shares in the belief that these were viable businesses were burnt. The deal involving one such company Capstone is described elsewhere on the HealthSouth pages. In marketing his services to companies Lorello cited his analysts reports as a reason for choosing him as banker.

The New York Times describes this early period.

Dating back to 1986, when Mr. Lorello was an up-and-coming banker at Smith Barney, his research analysts have served as a crucial component of the investment banking machine that made him one of the best paid health care bankers on Wall Street.

By the mid-1990's, Mr. Lorello was one of the most aggressive and successful health care bankers. - - - - Instead of focusing on established companies, he went after smaller ones, like HealthSouth, that lacked a Wall Street pedigree. These companies were eager to grow and expand but needed the help of Mr. Lorello and Mr. Harris, Smith Barney's top health care analyst.

Mr. Harris joined Smith Barney in 1991 as a health care services analyst. By 1995, he was covering a broad range of companies, including HealthSouth. Like most analysts then he had a buy rating on the majority of the stocks in his universe. He also tracked MedPartners and FPA Medical Management, which are management companies for doctors, and Integrated Health Services, a nursing home chain.

All three were substantial banking clients of Smith Barney and Mr. Lorello. Integrated Health Services has sought bankruptcy protection and FPA has been liquidated, while Medpartners collapsed after a failed merger attempt and its stock has been delisted.

But HealthSouth was always at the top of his list, say bankers who worked with Mr. Harris, and it was that company's success that made his reputation as an analyst. In the mid-1990's Mr. Harris began to draw a salary of more than $4 million a year, say bankers who worked with him during that period, substantially more than health care services analysts were making at the time.

HealthSouth's stock soared, more than 250 percent from 1995 through 1998.
During Mr. Harris's time covering HealthSouth, Smith Barney did more than $8 billion in deals with the company.

Bankers who have worked with Mr. Lorello say that Mr. Harris's positive coverage was in many respects a crucial factor in landing investment banking business for Smith Barney.

In some cases, these bankers say, when Mr. Lorello was proposing to a company that it go public, he would present mock research reports, with a buy rating, written and prepared by Mr. Harris.

In 1999, when Mr. Lorello moved his team from Smith Barney to UBS, - - - - Mr. Harris received a three-year $30 million package.
By April 2002, when Mr. Harris left the firm, UBS was eager to rise from its fourth place in equity underwriting and to attract more advisory work. Mr. Harris and Mr. Lorello, who for years had enjoyed a close business relationship, began to drift apart, say bankers who know the two men. In early 2002, UBS Warburg declined to renew Mr. Harris's contract and hired Ms. Chovav to replace him.
Conflict Issue Over Analyst's Deal New York Times April 8, 2003

Lorello's team managed more than $6.5 billion in mergers and acquisitions, $1.2 billion in equity offerings and $3 billion in debt for HealthSouth since 1990, according to CommScan Dealogic.
Lorello's group, and banker William McGahan in particular, was very close to Scrushy and HealthSouth.

"When HealthSouth made a request for information," says one person that has worked with the team, "everyone dropped everything." UBS' OWN GRUBMAN The New York Post April 4, 2003

In letters to banking clients, Mr. Lorello cited Mr. Capek's analytical work as a reason for his firm to get banking business. UBS Analyst Forced Out for Remark New York Times July 3, 2003

Click Here for more information about Lorello and William McGahan

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The Right Hand Man

The person who had the closest dealings with HealthSouth was William McGahan, a banker on Lorello's team. He was a close friend of Michael Martin one of those who has pleaded guilty to the fraud. HealthSouth supplied McGahan with an office. After the exposure of the fraud McGahan resigned claiming this was unrelated to the fraud.

Mr. Lorello, who leads UBS's health care investment banking business, and Mr. McGahan have come under increased scrutiny because of their close banking ties with HealthSouth, which is being investigated by the Securities and Exchange Commission over its accounting.
Mr. McGahan had a particularly close relationship with Michael D. Martin, HealthSouth's chief financial officer from 1997 to 2000, who has agreed to plead guilty to fraud charges, say bankers who knew both men. Mr. McGahan's brother, Martin, is the chief financial officer for HealthTronics Surgical Services Inc., where Mr. Martin served on the board from April 2001 to January.
Banker Resigns From Warburg The New York Times 11 Apr 2003

William McGahan, a member of Mr. Lorello's team, was the primary banker to HealthSouth, a person close to UBS said. - - - - UBS also helped HealthSouth when it tried to spin off its surgical centers last August. That deal was called off. HealthSouth Advisers Said to Be Under Scrutiny The New York Times March 26, 2003

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Investigating the Bankers and Analysts

Lorello's relationship with HealthSouth was not investigated during the earlier US $1.4 billion fraud scandal. That concentrated on the technology companies. Congressional committees and the US Securities and Exchange Commisson (SEC) examining HealthSouth fraud have also targeting HealthSouth's bankers and auditors.

The question is whether Lorello & Co., who were said to be deeply involved in HealthSouth's operations, knew about the hanky-panky. Lorello and UBS declined to comment on the matter "because HealthSouth is currently subject to a number of investigations." HealthSouth's Go-to Guy : The collapse of HealthSouth is putting pressure on UBS Warburg. FORTUNE April 15, 2003

Among the most prominent new names being discussed by Securities and Exchange Commissioners during deliberations last week was Benjamin D. Lorello, the influential health care banker at UBS Warburg, said lawyers involved in the settlement talks. Analysts to Pay Millions in Fines New York Times April 28, 2003

Congressional investigators are to examine the role of a prominent Wall Street banker's dealings with HealthSouth, the beleaguered healthcare company.
"We're interested in some of his [Mr Lorello's] business dealings, and he will have a lot of questions to answer," said Ken Johnson for the House Energy and Commerce Committee.

This week, the committee took delivery of 60 boxes of evidence it had requested from HealthSouth and its auditor, Ernst & Young. Congress examines banker's role in HealthSouth The Financial Times (Yahoo! News) May 7, 2003

In a statement, Rep. James Greenwood said: 'The cozy financial relationship that UBS Warburg appears to have had with HealthSouth and other related entities raises serious questions about whether investors were misled by these guys to further their own financial gain.'
We have questions about the extent to which investment banking firms, including UBS Warburg LLC, were diligent in their review and assessment of HealthSouth's financial health and the interwoven financial relationships of many officers and directors at HealthSouth,' the committee's letter said.
'Based on our interviews with a key whistle-blower, there was an incestuous-like relationship between top HealthSouth officials and a small group of investment bankers and analysts. We intend to haul them all in for a matter of weeks,' committee spokesman Ken Johnson told Reuters.
Congress Seeks UBS Records on HealthSouth The New York Times

The letter seeks information about UBS' role in several side companies in which former CEO Richard Scrushy had an interest, Congress Looking at HealthSouth Bankers May 9, 2003

Mr Tauzin and other committee members are questioning how Mr Lorello and his team could have worked so closely with UBS and Mr Scrushy without detecting the long-running fraud.
They are investigating claims that one UBS banker, William McGahan, actually maintained an office and computer at HealthSouth.
Call For UBS HealthSouth Papers by Joshua Chaffin ? source May 9, 2003

"Clearly a lot of people walked away with million of dollars based on HealthSouth's inflated value," said committee spokesman Ken Johnson. "Were investors defrauded by analysts who were more concerned about getting rich than getting the facts right?" FEDS DEMAND UBS FILES IN HEALTHSOUTH CASE New York Post May 9, 2003

Investment bankers at UBS Warburg played a greater role in the inner operations of HealthSouth Corp than previously known, the Wall Street Journal reported on Wednesday, citing newly released court documents in the case against the troubled health care company.
The co-heads of UBS's healthcare investment banking team were at least eight HealthSouth board meetings between late 1999 and late 2002, and advised the company on financing, investor sentiment, and strategic alternatives, the Journal reported.

In August 2002, the Journal said court documents show, Scrushy invited a UBS banker to present to the board an analysis of a plan to ``spin or split'' the surgery division of the company.

The Journal said the plan, which was later expanded to include a possible sale of diagnostic facilities, might have helped the company avoid disclosing the alleged accounting fraud if it had been carried out. Records Show UBS, HealthSouth Ties REUTERS May 14, 2003

The minutes, which were released in a court proceeding in Alabama, show bankers Benjamin Lorello and William McGahan helped guide the company on financing and investor relations, and gave a "detailed overview of strategic alternatives" for HealthSouth's "long-term objectives," The Wall Street Journal reported. They also had a role in a September 2002 plan to split the company into separate parts and sell off divisions. Some have labeled that plan an effort to cover up the surgical rehabilitation company's accounting problems. UBS Bankers Had Bigger Role at HealthSouth May 14, 2003

Benjamin D. Lorello, UBS's top health care banker; William McGahan, his former deputy, who left the firm for personal reasons; and Mr. Capek are expected to testify before the House Committee on Energy and Commerce in September about UBS's banking relationship with HealthSouth. Mr. Lorello arranged more than $8 billion worth of investment banking deals with HealthSouth during his time at UBS and previously at Salomon Smith Barney.
But Mr. Capek's having made negative comments while publicly supporting HealthSouth is likely to pique the interest of regulators, arbitration lawyers and Congressional investigators.
"Clearly, Mr. Capek had an amazing change of heart," said Representative James C. Greenwood, Republican of Pennsylvania and the chairman of the House Energy and Commerce Subcommittee on Oversight and Investigations. "One day he said it's a dog and then he said it was a darling. The question is what or who changed his mind. Frankly, we can't wait to interview him." A spokesman for the committee added that it was eager to talk with Mr. Lorello and HealthSouth officials to see if they had played a role in Mr. Capek's change of mind.
While there is no explicit evidence that connects Mr. Capek's cheerleading coverage of HealthSouth to the banking work that Mr. Lorello did with the company, UBS bankers arranged over $2 billion in deals with HealthSouth while Mr. Capek covered the stock. Mr. Lorello was not shy in promoting Mr. Capek's work when he solicited business. In March 2001, Mr. Lorello sent a letter to Mark L. Wagar, then the chief executive of Radiologix, a medical imaging company, in an effort to win underwriting business.

In the letter, Mr. Lorello said, "Howard Capek is one of our best research analysts and he is prepared to initiate equity research coverage on Radiologix." Mr. Lorello also pointed out how important Mr. Capek's coverage had been in past banking deals: "Howard has been critical in our success in selling stories such as AmSurg and other under-followed companies that have doubled or tripled since Howard initiated coverage." UBS Analyst Forced Out for Remark New York Times July 3, 2003

A former UBS analyst, Howard Capek, who touted the HealthSouth Corporation's stock after he called the company a "pig," is scheduled to appear at a Congressional hearing investigating $2.75 billion in fraud at the hospital owner. Former HealthSouth Chief Indicted by U.S. The New York Times November 5, 2003

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Its still happening!

It is of interest that in April 2002 after the conduct of analysts on Wall Street had sparked a wide ranging investigation UBS and Lorello employed another analyst paying a massive salary - a salary that could only be justified by the work she would bring in for Lorello and UBS from her reporting.

Meirav Chovav, a biotechnology stock analyst at Credit Suisse First Boston, agreed last April to join UBS Warburg, whose health care banking group is led by Benjamin Lorello. Her compensation: a guaranteed $10 million over three years, say bankers with a knowledge of her contract.
But even if she is not giving all favorable reviews to companies under her purview, her rich contract has caused a number of bankers to suggest that the only way UBS Warburg could justify paying her over $3 million a year is if she brings in a substantial amount of investment banking business.

It was a boatload of money in a bad business environment," said an investment banker who knows Mr. Lorello. "But the reason Ben hired her was to get banking business from the companies that she covers."

As Wall Street firms prepare to pay $1.4 billion in an agreement with regulators over investment banking-research conflicts, the fact that outsize pay packages have persisted even in the spotlight has some people fretting that the old ways of the Street will be hard to change. Conflict Issue Over Analyst's Deal New York Times April 8, 2003

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Possible Prosecution

Investors have commenced lawsuits against UBS Warburg which poached Lorello in 1999. Auditors Ernst and Young are also named.

The investors allege complicity in the HealthSouth fraud which the parties deny. It may be that evidence is accumulating and that Mr Spitzer and the SEC are waiting for the other HealthSouth actions to unfold before they act as they are not party to this.

The detail of the allegations indicate they have a witness. One of the HealthSouth executives pleading guilty has implicated Lorello in the fraud by describing a phone conversation. While these are denied they closely follow what happened elsewhere.

HealthSouth directors, outside lawyers, auditors and the company's longtime lead investment banker said at the hearing, of a House Energy and Commerce subcommittee, that they were shocked and outraged as 15 senior HealthSouth executives began pleading guilty to deceiving shareholders by manipulating the books to inflate profits.

Ben Lorello, a managing director of UBS Securities and head of its health care banking group, said, "Until the announcements of criminal prosecutions against HealthSouth officers in the spring of this year, I was not aware of and did not suspect that anyone at HealthSouth was engaged in improprieties." He added that his team's decision-making process on whether to proceed with deals for the company "started with and relied upon HealthSouth's audited financial statements." Associates of Former HealthSouth Chief Deny Knowledge of Fraud The New York Times November 6, 2003

Emery Harris, a former assistant controller for the health care giant, faces a maximum penalty of 15 years imprisonment and $1.5 million in fines. He already has agreed to forfeit $106,500 in bonuses.
To explain the pressure being exerted on top management to create earnings that matched Wall Street estimates, then-CFO Michael Martin let him and others listen to a phone message he received from an analyst named ``Ben'' believed to be from UBS Warburg, Harris testified.

In the message, Ben told Martin ``it was important for him to lay down for the family'' or else he could ``get whacked,'' according to Harris. Harris said ``the family'' referred to HealthSouth executives who were in on the fraud.

Harris did not further identify ``Ben'' in court. But Harris' attorney, Steve Salter, said later Thursday in an interview that his client was referring to Benjamin D. Lorello, head of health care banking at UBS Warburg. Lorello has arranged billions of dollars worth of investment banking deals for HealthSouth.Judge Delays HealthSouth Case Sentencing THE ASSOCIATED PRESS November 13, 2003

A group of HealthSouth investors led by the Retirement Systems of Alabama has filed a lawsuit in U.S. District Court in Birmingham, Ala., alleging that the company's investment bankers and auditors "knew that fraud existed at the health care company or that they ignored clear signs of wrongdoing," the Wall Street Journal reports (Wall Street Journal, 1/9).
Specifically, the suit alleges that between 1999 and 2002, UBS banker William McGahan had "regular" conversations about the fraud at HealthSouth with a former company executive (Wall Street Journal, 1/9). The discussions addressed such topics as the likelihood of criminal prosecution and the penalties that could result from conviction, according to the Times. The suit also alleges that Ernst & Young knew as early as 1994 that HealthSouth had overstated its earnings (New York Times, 1/9).
Group of HealthSouth Investors Files Suit Against Auditors, Investment Bank from a website Jan 2004

In an amended complaint in U.S. District Court in Birmingham, shareholders and bondholders accused HealthSouth's former auditor Ernst & Young, two investment bankers who handled HealthSouth's account at Salomon Smith Barney (now owned by Citigroup) and later at UBS, and a former UBS stock analyst with helping the company fraudulently inflate profits by $2.8 billion since 1997.
The lawsuit contends that Ernst & Young knew HealthSouth's accounts were being manipulated as far back as 1993. The suit also contends that the investment bankers, Benjamin Lorello and William McGahan, and the analyst, Howard Capek, helped HealthSouth finance a series of acquisitions that covered up its bad results.
Suit: Auditors, bankers aided HealthSouth fraud Modern Healthcare January 9, 20

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