National Century Ex-Chief Poulsen Convicted of Fraud

(Update2)

By Denise Trowbridge and David Voreacos

October 30 2008

Lance Poulsen, former chief executive officer of National Century Financial Enterprises Inc., was convicted of defrauding investors of $2.9 billion before his health-care financing company collapsed in 2002.

A federal jury in Columbus, Ohio, today found Poulsen guilty of fraud, conspiracy and money laundering. Poulsen, 65, cheated investors who bought National Century bonds to back the purchase of unpaid insurance bills from medical providers that needed cash, prosecutors said. The company advanced $2.2 billion to six companies in which Poulsen owned a stake, they said.

After the verdict, Poulsen looked at his wife, Barbara, and said, “I’m so sorry.” Barbara Poulsen, who testified in his defense, began to cry.

National Century’s collapse hastened the bankruptcies of 275 hospitals, clinics and other health-care providers, authorities say. Victims included Pacific Investment Management Co., the world’s largest bond fund. Pimco lost $283 million and Credit Suisse Group AG lost $257 million, prosecutors said.

“This is one of the largest frauds the FBI has ever investigated,” Leo Wise, a Justice Department trial attorney, told jurors yesterday in closing arguments. “Investors were told their money would be used to buy accounts receivable. They got a worthless IOU in many cases from a health-care provider teetering on the edge of bankruptcy.”

Witness Tampering

Poulsen, who founded the Dublin, Ohio-based company, faces from 30 years to life in prison. He already is serving 10 years after his conviction in March for trying to bribe the main witness against him. Prosecutors have now won convictions of six National Century executives at trial, as well as four who pleaded guilty.

Jurors deliberated four hours before convicting Poulsen of all 12 counts, including six of securities fraud, three of money laundering, two of conspiracy, and one of wire fraud. The panel of seven women and five men began hearing the case on Oct. 2.

“We’re obviously extremely disappointed with the verdict,” said Poulsen’s attorney, Peter Anderson. He said Poulsen plans to appeal.

U.S. District Judge Algenon Marbley didn’t set a sentencing date for Poulsen, who has been detained at the Ross County Jail. Another former National Century executive, James Happ, is set for trial for Dec. 1.

Poulsen testified in his own defense at the trial, denying the existence of a fraud and seeking to counter testimony by Sherry Gibson, a former subordinate who he tried to bribe. He also said he relied on legal documents and advisers who led him to believe that the advances and other actions were permitted.

`Nobody’s Fault’

“When something this big goes wrong, it’s kind of everybody’s fault and nobody’s fault,” Poulsen said.

“No one woke up one morning and said, `Let’s torpedo this $3 billion funding company, lose all of this investor money, and ruin these people’s lives,”’ he said. “A lot of little things went wrong. When they all went wrong at one time, it was the perfect storm of the financial world and the company collapsed.”

Gibson was one of four former National Century employees who testified against Poulsen. Gibson, who pleaded guilty to a role in the fraud, testified that Poulsen told her to create phony monthly reports for investors about cash flow and receivables. She also said National Century kept two sets of company books.

FBI Tapes

After Gibson served 30 months in prison, a friend of Poulsen’s approached her about changing her testimony. She went to the Federal Bureau of Investigation and secretly taped the friend. Jurors at this trial heard those tapes, as well as FBI recordings made of Poulsen and the friend.

Prosecutors said Poulsen lied to investors about the quality of accounts receivable that were supposed to secure payments on the bonds that kept the company going.

“They were told there was high-quality collateral, there were monthly investor reports and random audits, and there was over-collateralization to protect investors,” Justice Department attorney Kathleen McGovern told jurors.

Poulsen robbed investors of protections through money advances without receivables backing them and by manipulating reserve accounts, McGovern said in closing arguments. He also didn’t rely on third parties, as he claimed, she said.

“He needed the trustees to move the money at his direction, he needed the rating agencies to give the bonds an AAA rating, he needed the underwriters to market the bonds, and he needed investors to put money into NCFE,” McGovern said. “He lied to all of them to get their OK.”

JPMorgan Chase & Co., the largest U.S. bank by market value, agreed to pay $425 million in 2006 to settle claims by Arizona noteholders. The noteholders said JPMorgan and other banks underwrote or were trustees of the notes used to defraud investors.

The case is U.S. v. Poulsen, 06-129, U.S. District Court, Southern District of Ohio (Columbus).

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