Content area
Full Text
Before August of 2003, DVI, Inc., and two subsidiaries in the healthcare finance business, were considered sound growing companies operating in a burgeoning industry.
DVI, and its operating subsidiaries, DVI Business Credit Corp., which provided working capital loans against healthcare receivables, and DVI Financial Services, which provided lease or loan financing to healthcare providers for sophisticated medical equipment such as MRI units, CT scanners and other diagnostic machinery, were regarded as solid operators with the expertise to tap the industry's potential.
The DVI group issued billions of dollars worth of asset-based securities that were rated triple A and its reputation appeared spotless. Suddenly, in the late summer of 2003, it plunged into bankruptcy amid reports that the books were seriously cooked.
How does a seemingly successful business suddenly go into bankruptcy? During the Chapter 11 proceedings, Chief Bankruptcy Judge Mary F. Walrath, in Wilmington, DE, had the same thought and authorized an investigation. She appointed as examiner a former FBI Agent, R. Todd Neilson, a CPA with the accounting firm of Neilson Ellgreen, to come up with some answers.
What he found, according to a 188-page report he compiled, was an assortment of fraudulent activity apparently fostered by an overambitious expansion launched in 1995 that severely strained the capital resources of the debtors. Mr. Neilson noted that assets under management increased every year since that time and as of March 31, 2003, assets under management reached $2.76 billion, but the companies' capital structure did not increase commensurately. The debtors expanded into foreign investment, venture capital companies and other areas "far removed from the healthcare market."
Among the transgressions, according to the report:
* Instead of writing off delinquent loans, the companies merely issued new loans, often to the same company under new names.
* The same collateral was pledged to more than one lender, a practice known in the trade as double dipping.
* The commercial finance company provided funds to clients who used the funds to make payments on contracts to the financial services company.
* The business was "addicted to securitizations" which were supposedly fully secured but some of the entities were not collateralized as advertised. The last securitization pool contained so many "delinquency retreads" that repurchases, substitutions and rewrites "may very...