LOS ANGELES -- Triad Healthcare Inc., whose $167.4 million of refunding certificates of participation are backed by the troubled Cal-Mortgage loan insurance program, has become a target of an investigation by California's department of justice.
Shellyanne Chang, a state deputy attorney general, on Wednesday confirmed that she is supervising "a civil investigation" of Triad Healthcare for the department, an arm of Attorney General Dan Lungren's office.
Triad Healthcare, the debt-burdened Los Angeles-based owner of two hospitals, has been operating under Chapter 11 of the federal bankruptcy code since Feb. 1.
Since last August, Triad Healthcare's trustee has twice dipped into a $14 million debt service reserve fund created when the tax-exempt refunding certificates were issued in i 992.
Cal-Mortgage officials expect Triad to extinguish the reserve fund next February and begin to tap Cal-Mortgage's health facility construction loan fund to make principal and interest payments on the COPs.
The state is investigating whether Triad Healthcare violated Section 12650 of the California government code dealing with "false claims actions," Chang said. Violations are civil, not criminal, and the penalty for each false claim is a fine of up to $10,000, she said.
Triad has been accused of inflating the value of the two hospitals that it purchased with obligations backed by the Cal-Mortgage program.
Chang works for the attorney general's government law section, which provides legal opinions on bond issues in California.
Because "it is early on in the investigation," Chang said "it is premature to say" when, or if, indictments would be handed down.
"I don't want to preclude or include anything," she said. "I don't want it to sound like we are targeting individuals."
Reached for comment, Sanford B. Weiss, who resigned June I as chairman and a director of Triad Healthcare, said he has "no inkling" of "what they are looking for."
But Weiss said that if asked he will cooperate with authorities. "They don't have to subpoena me," he said. "Just call me. I would love to have the whole thing aired."
The investigation appears to have grown from a letter sent to Lungren this year by David Werdegar, director of the Office of Statewide Health Planning and Development, the parent agency of Cal-Mortgage.
The Werdegar letter suggested that Lungren "may want to look into the Triad transaction," said Dennis Fenwick, manager of the Cal-Mortgage program and a former state deputy attorney.
The letter said state investigators should take "whatever action they deemed appropriate," Fenwick said, adding that he is not privy to details of the investigation.
Since 1989, Cal-Mortgage has provided insurance backing to 216 health care providers that have issued more than $2 billion in long-term obligations.
The agency's largest loan guarantee, representing 8.27% of its portfolio, is for Triad Healthcare.
Triad Healthcare's relationship with Cal-Mortgage dates back to 1990, when the agency agreed to back $142 million of taxable certificates of participation issued by Triad.
Triad used the proceeds to buy the two hospitals from Nu-Med Inc., a commercial company.
The loan guarantee was controversial because Cat-Mortgage staff said the appraised value of the two hospitals was too high, based on the revenue the hospitals were expected to generate. And there were corporate links between Triad and Nu-Med that indicated "this does not appear to be an ann's-length transaction," a Cal-Mortgage staff report said.
The loan guarantee was brokered by a member of Cal-Mortgage's advisory loan committee, Vincent E Forte, a vice president at Goldman, Sachs & Co.
Goldman Sachs was the senior manager for the Triad Healthcare issuance of $167.4 million of refunding certificates in 1992.
Forte abstained from voting on both the 1990 and 1992 applications, and he and his firm have said that his actions were legal and ethical. He resigned from the committee in March 1993 after serving on it for nearly 10 years.
Triad Healthcare's hospitals, which remain open, are being overseen by Dennis Simon, a Price Waterhouse senior managing director. On Feb. 7, Simon was appointed trustee in charge of the bankruptcy workout by a Los Angeles bankruptcy judge.
Despite its financial travails, Triad Healthcare's outstanding obligations are rated A by Standard & Poor's Corp. The rating mirrors California's general obligation rating, downgraded from A-plus on July 15. The A rating is based on a Cal-Mortgage guarantee that the state's full faith and credit stands behind its insurance commitments.
In a separate development, the Cal-Mortgage advisory loan committee met yesterday in Sacramento to evaluate two applications for credit backing. This is the second committee meeting since May, when Cal-Mortgage lifted a moratorium on new financing applications imposed last September.