Jackson board misled investors in advance of 2009 bond sale, SEC rules
09/13/2013 5:38 PM
09/13/2013 11:15 PM
The board that governs Miami-Dade’s public hospital system, which is asking voters to approve an $830 million bond issue in November, misled investors about the system’s deteriorating finances before another bond sale in August 2009, the U.S. Securities and Exchange Commission announced Friday after a three-year investigation.
The SEC charged the Public Health Trust that governs Jackson Health System with relying on bad financial information provided by hospital employees, which the board then passed on to investors through disclosure documents before the sale of $83.3 million in bonds for capital improvements.
But while the SEC found that Jackson’s board failed its obligation to ensure the accuracy of the financial information, the agency stopped short of accusing individual trustees or administrators of intentionally causing the deception.
Instead, the agency attributed the failure to inaccuracies in a new billing system, and accused the hospital’s budget department of using “stale cash collection numbers in the midst of known problems with the billing system.’’
In a written statement announcing the findings, Eric Bustillo, director of the SEC’s Miami office, said Jackson’s board failed to provide oversight to prevent the misstatements and errors.
“The Public Health Trust fell short in its obligation to maintain adequate accounting systems and controls that ensure truthful disclosures to investors about its financial condition,” Bustillo said. “The Public Health Trust used stale numbers to calculate its revenue figures and lacked any reasonable basis for projecting losses that were far less than reality.”
A big mess
The misstatement of losses at the taxpayer-funded system was enormous. At the time of the bond, Jackson’s board projected a budget deficit of $56 million — only to report an actual loss of $244 million about six months later. The leap in losses triggered a grand jury investigation that concluded with a report calling the situation a “colossal mess.”
In Friday’s ruling, the SEC said it did not fine Jackson due to the hospital system’s fragile financial recovery, the board’s cooperation with investigators and remedial measures taken since 2009, such as the hiring of outside consultants and a restructuring of the board.
Instead, the Public Health Trust, which did not admit or deny the investigative findings, agreed to settle the charges with the SEC, which ordered the hospital board to stop committing or causing any further fraudulent transactions involving securities.
The announcement came days before the planned Sept. 17 launch of a political campaign to persuade Miami-Dade voters to raise their property taxes to repay $830 million in bonds that will fund improvements to Jackson’s aging facilities, along with equipment and more services.
Marcos Lapciuc, a member of Jackson’s board and the only remaining trustee from 2009, said on Friday that he discovered the financial reporting errors after the bond sale and took that information to the hospital system’s executive leadership, which has since been replaced.
Lapciuc, who was board treasurer at the time, said the SEC called him twice to testify during its investigation.
“They wanted to understand what happened, and not harm Jackson if there was no willful wrongdoing,’’ Lapciuc said. “It seems the system worked on this one.’’
At issue in the SEC investigation is an $83.3 million bond sale by Miami-Dade County to raise money for capital improvements at Jackson that included upgrading fire alarms and renovating elevators. The bonds were to be repaid solely from Jackson’s revenues.
Based on the 2009 bond prospectus, Fitch Ratings gave the bonds an A+ rating with stable outlook.
Yet federal investigators who examined reams of accounting documents, financial projections and internal emails found that Jackson’s board had wildly underestimated its losses, jumping from the original $56 million to more than four times that amount, at $244 million.
According to the SEC’s findings, the hospital board was aware before the sale of the bonds that its financial condition was deteriorating — but perhaps not the extent of the crisis.
The SEC also found that a lack of communication among hospital departments led to the budget department not updating its collection rates on time, which may have revealed the problem sooner.
But the obligation to ensure that information was accurate rested squarely with Jackson’s board.
“PHT [Public Health Trust] lacked a reasonable basis to support its projected $56 million non-operating loss … contained in the official statement,’’ according to the SEC’s official order.
The federal agency also charged Jackson’s board with failing to properly account for an adverse arbitration award from 2008, and misrepresenting that the hospital system’s 2008 audited financial statements were prepared according to generally accepted accounting principles.
The SEC’s findings echo the Miami-Dade grand jury’s fall 2009 conclusion of the “colossal mess’’ at Jackson. The report said Jackson executives, the hospital board, county commissioners and administrators all knew that the system’s financial picture was catastrophic — and they did nothing to prevent the crisis.
The grand jury’s report made numerous references to the lack of planning, and willful ignorance of financial warnings by the County Commission and the board that ran Jackson.
“It was abundantly clear in June of 2008,” the report stated, “that disaster was afoot. The warning bell had rung. History refutes any claim of ignorance.’’
Lapciuc said the report led to reforms that restructured the board and helped turn around Jackson’s financial performance.
“It has been remedied beyond my wildest expectations,’’ he said.
In May, Jackson administrators declared the hospital system solvent for the first time in five years. And they are projecting a better-than-expected $37 million budget surplus for the 11 months ending Aug. 31.
Matthew Pinzur, a Jackson spokesman, issued a written statement Friday distancing the current administration from those involved in the 2009 bond issue, noting that the SEC violations were committed by prior hospital administrators. Jackson’s board unanimously accepted a settlement with the SEC Thursday.
“Jackson Health System has taken positive steps to correct problems found during the 2009 U.S. Securities & Exchange Commission (SEC) inquiry,” the statement read, in part.
“Jackson acknowledged that certain financial information furnished by former employees was not accurate or properly reported. Neither the SEC nor Jackson has found an intent to mislead.”
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