You Can't Cheat an Honest Man - James Walsh [107]
By September 1989, FHC had sold $82 million of bonds against assets worth no more than $30 million. And the $82 million couldn’t be fully accounted. FHC had spent only $54 million to purchase the 21 nursing homes. As the bankruptcy proceeded—and a criminal investigation began—the trail of the missing money emerged:
• FHC had used two separate corporations, Zandlo and Associates Inc. and Shoreline Design Inc., to certify falsely that repairs had been made to nursing homes it acquired. Both corporations were owned by Sutliffe’s girlfriend, Carol Zandlo. She received fees of between $19,000 and $30,000 for each project.
• Sutliffe’s daughter, who served on the FHC board of directors, also worked for a company called Premiere Development— which identified potential nursing homes for acquisition. Premiere Development had received fees from the bond offerings.
• Sutliffe, as “developer” of the nursing home deals and bond offerings, received fees ranging from $100,000 to $300,000 from each offering.
Like any NFP bankruptcy, FHC’s case was a tough one. NFPs don’t have owners in the traditional sense, so finding liable parties is difficult. Sutliffe, who never held an executive position with FHC, said his involvement with the company was limited to consulting on potential acquisitions and financing opportunities. Several months into the bankruptcy proceeding, Sutliffe told a local newspaper: “If I went back and billed First Humanics for all of the money and expenses and so forth that I have incurred on their behalf, I probably would be the number one unsecured creditor.”
But he didn’t stick around to collect. By the end of 1990, Sutliffe and Zandlo were living in Fort Meyers, Florida, aboard a yacht they named Vagabond II.
In the meantime, the wheels of justice ground slowly. By February 1991, after months of delays and dozens of reorganization proposals, a federal bankruptcy court judge approved a plan that gave FHC bondholders control over 15 of the company’s 21 nursing homes. (Of the remaining six homes, one had already been sold, another turned over to an institutional investor, and the rest would be sold by the FHC bankruptcy estate to pay bills.)
In March 1993, Sutliffe pleaded guilty to one count of mail fraud in connection with criminal charges brought by the Justice Department over the bond offerings. He was sentenced to serve 15 months in prison and to pay $1 million in restitution.
Under the plea agreement, Sutliffe confessed that he had “obtained money and property from investors and trustee banks by means of false and fraudulent pretenses, representations and promises, well knowing at the time that the... promises were and would be false and fraudulent when made.”
As part of the same settlement, other FHC defendants—including Deloitte & Touche and Price Waterhouse—settled for about $45 million. “The assumptions that were used to generate the feasibility studies were unrealistic and Touche knew they were,” said David Donaldson, an attorney for some FHC bondholders. “Price Waterhouse had even more reason to know there were problems because they came later on.”
Later, the trustee running what was left of FHC tried to squeeze some more money out of Deloitte & Touche and Price Waterhouse. He claimed that the accounting firms had been negligent in relying on financial information from Sutliffe.
But, in a December 1995 decision, a federal court in Kansas City ruled that FHC couldn’t seek damages against the accounting firms because “a participant in a fraud cannot also be a victim entitled to recover damages, for he cannot have relied on the truth of the fraudulent representations, and such reliance is an essential element in a case of fraud.”
The court went on to make a legally important distinction:
Sutliffe and his hand-picked company insiders did not loot FHC,