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AHERF It May Have Started with a Bang but Did It End in a Whimper

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Before the for-profit corporate scandals of Enron, Global Crossing and Tyco, the nonprofit health care community experienced its own corporate scandal: the demise of Allegheny Health, Education and Research Foundation (AHERF). As with most corporate scandals, AHERF had its "cast of characters"—corporate executives and professional advisers accused of wrongdoing by the public, the government or both. Articles, case studies, commentaries, papers and essays flourish on the corporate governance, operational and management lessons that can be learned from the AHERF debacle. Rather than examining the systemic breakdowns that contributed to AHERF's downfall, the focus of this article is to look at some of the people behind the organization and review what happened to those AHERF protagonists.

Prologue

AHERF's collapse was thrust into the public spotlight in the summer of 1998, when it filed the then-largest nonprofit health care bankruptcy in this nation's history. At the time of its bankruptcy filing, AHERF was losing almost $1 million a day and was $1.5 billion in debt. When it was finally concluded, AHERF's unsecured creditors received roughly 12 cents on the dollar from the bankrupt estate.

Just 13 months prior to filing for bankruptcy, AHERF's economic forecasts had been much brighter. In its fiscal year 1997, AHERF and its affiliates reported $2.05 billion in revenues and $1.18 billion in incurred debt. At that time, AHERF was comprised of 15 hospitals in the Philadelphia and Pittsburgh markets, with a total of 29,500 employees, as well as the Philadelphia-based Allegheny University of Health Sciences, which enrolled about 3,300 students a year, and a physician practice management firm with more than 500 physicians. The decline of this once-booming mini-empire captured the attention of the health care, legal and government communities, along with the residents of the greater Pittsburgh and Philadelphia areas. In addition to the publicity surrounding the bankruptcy came government and public scrutiny of the actions of certain members of and advisers to AHERF's management team.

Following AHERF's bankruptcy filing, federal and state authorities, including the Pennsylvania Attorney General's office and the U.S. Securities and Exchange Commission (SEC), continued their respective investigations of the AHERF cast. Eventually, several AHERF executives and advisers faced government charges.


Of the lessons taken from AHERF's demise, some have surmised that "justice was not served," and others have concluded that, based on the rather disproportionately modest penalties imposed on the AHERF actors...the government's "bark is worse than its bite."

Act I

The Pennsylvania attorney general brought charges against three of AHERF's former top corporate officers. Nearly 1,500 charges were initially brought by the Pennsylvania attorney general against AHERF's former Chief Executive Officer (CEO), Sherif Abdelhak. In the end, Abdelhak pleaded no contest to a single misdemeanor count of misusing charitable funds. He was sentenced to 11-23 months in an Allegheny County jail and was paroled about three months later. To date, Abdelhak is the only AHERF defendant who faced trial and was incarcerated.

The Pennsylvania attorney general's office had originally instituted similar charges against AHERF's former general counsel, Nancy Wynstra, and against AHERF's former Chief Financial Officer (CFO), David McConnell. All charges were dismissed against Wynstra, and only one charge against McConnell was set for a criminal trial. However, McConnell entered an accelerated rehabilitative disposition program that permitted non-violent first-time offenders a chance to wipe their records clean. McConnell did not stand trial.

Act II

In addition to the Pennsylvania attorney general's charges, the SEC brought and simultaneously settled fraud charges against Mr. McConnell and three AHERF finance lieutenants. Without admitting or denying guilt, Mr. McConnell paid a $40,000 fine. Underlings Steven Spargo and Albert Adamczak were barred from representing clients before the SEC for three years. The third lieutenant, the former CFO of AHERF's Philadelphia operations, agreed to pay $25,000 to settle SEC charges and agreed to a suspension of appearing or practicing before the SEC as an accountant for three years.

Not only were AHERF executives the subject of SEC charges, but certain members of AHERF's professional advisory team also faced SEC charges. In July of this year, three former auditors of AHERF settled fraud charges. All three agreed to sanctions without admitting or denying the SEC's allegations. Two of the former auditors agreed to be enjoined for two years from participating as a member of the engagement team of any independent auditing firm that issues audit reports in connection with the financial statements of any public or private company. The other former auditor agreed to a suspension of appearing or practicing before the SEC as an accountant for four years and is required to pay a civil penalty of $40,000.

Act III

Of the lessons taken from AHERF's demise, some have surmised that "justice was not served," and others have concluded that, based on the rather disproportionately modest penalties imposed on the AHERF actors when compared to threatened penalties, the government's "bark is worse than its bite." Beyond those visceral reactions, it is interesting to compare what befell the AHERF "cast" to the sentences of certain "characters" associated with some of the more recent highly publicized corporate scandals.

In the ImClone scandal, Martha Stewart was sentenced to five months in prison, five months of home confinement and two years of probation, plus a $30,000 fine. Though the sentence was virtually the same as that of AHERF's former CEO, Sherif Abdelhak, Abdelhak's wrongdoings have had much greater detrimental financial impacts. His counterpart at ImClone, Dr. Samuel Waksal, received a much stiffer sentence than Abdelhak. Waksal was sentenced to 87 months in prison after pleading guilty to charges that included securities fraud. In addition, Waksal must pay more than $4 million in fines and back taxes and was banned for life from leading a public company.

The former CFO of WorldCom recently pleaded guilty to fraud and faces up to 25 years in prison, though he is likely to get a lighter sentence for his cooperation. Contrast the WorldCom CFO's fate to AHERF's former CFO, who never had to serve any time in prison.

Finally, consider the fallout surrounding Enron. An accounting firm was convicted of destroying documents and later dissolved. Enron's former treasurer, Ben Glisan, pleaded guilty to conspiracy, was sentenced to five years in prison and was ordered to surrender $938,000. Enron's former CFO, Andrew Fastow, pleaded guilty to fraud and admitted to conspiracy to inflate profits in return for a 10-year sentence, and his wife Lea, under the terms of a revised deal, pleaded guilty to filing a false tax return and will spend no more than 12 months in jail. Both agreed to cooperate with the government.

How can the seemingly light sentences of the AHERF players be reconciled with the outcomes for those at the helm of the more recent, publicized corporate scandals? One possible explanation is the changing climate for regulatory scrutiny of corporate misdeeds. One can only surmise that if the charges against the AHERF characters had followed rather than preceded the latest round of corporate scandals, the outcomes could have been very different.

One indicator of this change in climate is the federal government's enactment of the Sarbanes-Oxley Act in 2002. Sarbanes-Oxley was conceived in response to the aforementioned corporate collapses resulting from accounting irregularities and perceived irregularities in corporate ethics and internal controls; Sarbanes-Oxley was enacted in large part to protect investors and enhance corporate oversight and accountability. While Sarbanes-Oxley is currently applicable only to public companies, some government officials, including the New York state attorney general, have suggested that Sarbanes-Oxley should apply to nonprofits. In fact, some have cited AHERF as a "poster child" of why Sarbanes-Oxley should apply to nonprofit organizations—to protect charitable donors, tax-exempt bondholders and the communities served by nonprofits. One can only wonder whether, in a post-Sarbanes-Oxley corporate environment, the AHERF defendants would have received stiffer penalties or sentences for their misdeeds.

While the impact that Sarbanes-Oxley will have on nonprofit organizations remains unclear, the impact on a defunct organization's "bad actors" may be greater than ever. With the increased publicity surrounding criminal and civil penalties placed on executives and their advisers, the corporate insiders of a troubled organization have and will become increasingly aware of their potential individual liability. As a result, lawyers representing such organizations will need to consider when management and other employees within the organization, as well as outside professionals, may need to seek separate legal counsel to advise them on their potential individual liability in such matters.

The world ended for AHERF, and that world ended, as T.S. Elliot wrote, "not with a bang, but a whimper." While AHERF did not survive its bankruptcy, the ever-evolving understanding and lessons to be taken from AHERF's fall live on.


Footnotes

1 Arthur L. Cobb is a partner and Herbert G. Hotchkiss is an associate with the Cleveland office of the law firm of Hahn Loeser + Parks LLP, which represented AHERF during its bankruptcy filing. Return to article

Journal Date: 
Friday, October 1, 2004
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