Grand-Scale Example of Misrepresentation

By Erin Fitzgerald

On September 13, 2013, the U.S. Securities and Exchange Commission (SEC) charged the operator of Miami-Dade County’s largest hospital with misleading investors about its financial condition before the 2009 sale of $83.3 million of bonds. The bond sale was to raise money for capital improvements at Jackson Health System that included upgrading fire alarms and renovating elevators, and the bonds were to be repaid solely from Jackson’s revenues.

Based on the 2009 bond prospectus, the bonds were given an A+ rating with stable outlook. Yet, federal investigators for the SEC who examined accounting documents, financial projections, and internal emails discovered that the Public Health Trust, the governing authority for Jackson Health System, had grossly underestimated its losses. This misstatement of losses was enormous. At the time of the bond, Jackson’s board projected a budget deficit of $56 million. However, about six months later, the Board reported a non-operating loss figure that was more than four times higher, at $244 million.

How did the Board do it? According to the SEC’s findings, the Public Health Trust misstated current and future revenue due to problems with a new billing system that inaccurately recorded revenue and patient accounts receivable. In effect, the Board used stale cash collection numbers to calculate its revenue figures in the midst of known problems with the billing system. Moreover, the SEC found that a lack of communication among hospital departments led to the budget department not updating its collection rates on time. The SEC 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 accepting accounting principles (GAAP). Overall, Eric Bustillo, the head of the SEC’s Miami office, reports: “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.”

The Public Health Trust did not admit or deny the investigative findings, but agreed to settle the charges with the SEC. The Public Health Trust will not face a civil monetary penalty due to its cooperation with the federal government during the investigation and its current financial condition, however the SEC secured a promise that it would not engage in fraudulent activities tied to future bond issues.

This story suggests the importance of investors diversifying their portfolios, so that if one investment, such as the revenue bond in this case, goes terribly wrong, an investor can still rely on their other investments.

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