Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, September 13, 2009

SEC & Former Tenet Healthcare COO Settle Accounting Fraud Charges

On September 10, 2009, the SEC and Thomas B. Mackey, the former co-president and chief operating officer of Tenet Healthcare Corporation, settled accounting fraud charges.  Mackey was the sole remaining defendant in an action brought by the Commission on April 2, 2007. Mackey consented to the relief described below without admitting or denying the allegations in the Commission's Complaint. Mackey's consent has been submitted to the Court for its approval.

The Complaint alleges that Mackey was the principal architect of Tenet's scheme to inflate its earnings by exploiting Medicare's outlier reimbursement regulations, which provided for additional reimbursement to hospitals to cover the additional costs for treating extraordinarily sick patients. Mackey realized that additional outlier reimbursement could be triggered simply by increasing Tenet's gross charges, regardless of the actual cost incurred by Tenet to treat its Medicare patients. In 1999, and under Mackey's direction, Tenet management calculated the precise increase to Tenet's gross charges needed to boost its revenue from Medicare outlier payments to a level that would allow Tenet to reach its earnings targets. For the next three years, Mackey continued to oversee aggressive gross charge increases by Tenet. Tenet's outlier revenue more than tripled by 2002 and accounted for over 40% of Tenet's earnings per share in fiscal year 2002, as Tenet's earnings goals were surpassed year after year. Once Tenet finally revealed its scheme to the investing public and admitted that its strategy was not sustainable, the market value of Tenet's stock plunged by over $11 billion.

During the relevant time, Tenet was the second largest publicly traded healthcare company in the United States.

To settle the charges, Mackey consented to entry of a permanent injunction prohibiting him from future violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aiding and abetting violations of the issuer reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. He also agreed to disgorge $1,780,000 in ill-gotten gains resulting from his exercise of Tenet stock options during the period when its revenues were artificially inflated together with $251,541 in prejudgment interest thereon, and to pay a $500,000 civil penalty, which the Commission will seek to have placed into a Fair Fund for distribution to harmed investors pursuant to the Sarbanes-Oxley Act, together with disgorgement and penalties previously paid by other settling defendants in the case. Finally, Mackey agreed to be permanently barred from serving as an officer or director of a public company.

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