Breaking: Federal agents seize Steward Health’s CEO, international head’s mobile phones in widening US fraud investigations

November 26, 2024 | by

This fowl is coming home to roost, and it’s not going to be much of a Thanksgiving at Steward’s former CEO Ralph de la Torre and international CEO Armin Ernst’s tables as a result. Last week, reports emerged that Federal agents served search warrants and seized mobile phones belonging to both Steward executives, though neither has been formally charged with crimes in the US. Since July, rumors have prevailed that the US Attorney’s office based in Boston had opened an investigation, citing fraud and violations of the Foreign Corrupt Practices Act about its business dealings in Malta between 2018 and 2023–and perhaps more [TTA 25 July]. These rumors were confirmed when a former US Senator, John Boehner, a Steward board director, testified on 14 November to a Federal grand jury in Boston. Boehner had access to financial information that could have revealed potential fraud and corruption within the operations of Steward Health, which collapsed into bankruptcy in May. Prosecutors were reportedly zeroing in on financial transactions that could have personally benefited de la Torre and their top executives. The former senator was best known of late for his lobbying and advocacy of marijuana legalization, which makes his board appointment even more interesting. Other former Steward executives have also been questioned by Federal investigators, according to the Boston Globe‘s (paywalled) reports.  Becker’s and Becker’s, both 25 November. Also Times of Malta 26 Nov

In the US, federal search warrants are not issued lightly. Credible evidence must be presented by a federal law enforcement officer or a US attorney to a magistrate judge with authority in any district where the crimes may have occurred. There must be probable cause to search for and seize a person or property. That includes electronic storage media such as servers, computers, and phones.

The Boston Federal investigation is separate from the outgoing Congress’ Health, Education, Labor and Pensions (HELP) Committee’s subpoena and criminal/civil contempt charges referred in September to the Department of Justice [TTA 1 Oct and prior], complete with de la Torre’s immediate countersuit, nor the Malta Government’s ongoing actions against Steward (as Vitals Global) in the privatization of three hospitals in that island nation. Times of Malta 26 Nov  Steward’s business in Malta included a loony, gaudy spy operation against their critics there and elsewhere. That reported cost was $7 million, diverting much-needed funds while Steward defaulted on its bills and payrolls.  [TTA 2 July]  The Malta investigations have also been stymied by the non-appearance of both de la Torre and Ernst, on the grounds of facing US charges and an ill wife, respectively. Former Malta prime minister Joseph Muscat, under investigation, previously had his phone seized but refused to give the password, which may take a year to crack. Times of Malta 21 Nov

An extensive critique of Steward’s board of directors by the Globe’s reporters from October is available here courtesy of the Weinberg Center for Corporate Governance. It is a worthwhile dive into how Steward’s “unusual” business practices were facilitated by its tight-knit and inexpert board, drawing parallels with Theranos. Board members also enjoyed de la Torre’s considerable largesse, unlike Theranos.

Investigations by the Boston Globe’s reporters also reported that additional Steward funds were diverted to de la Torre’s personal pursuits, such as a private jet for friends, a donation to his children’s school, and a Madrid apartment. The last is interesting to this Editor as Spanish courts do not extradite easily for crimes not committed or charged in Spain, requiring review and approval of all requests by the National Court. de la Torre also has reported residences in Costa Rica where extradition via a bilateral treaty is easier. 

This Editor’s extra-legal advice to de la Torre remains that he should go on his $40 million oceangoing yacht for a trip into international waters and not even try to brazen this through. (And if anyone believes that the corporate phone hasn’t been tossed overboard or any phones seized hadn’t been thoroughly cleansed, I have a bridge over the Hudson River to sell you!)

Two follow ups: Steward Health CEO resigns–and sues the Senate HELP committee, Wojcicki will take 23andMe private

October 1, 2024 | by

Ralph de la Torre MD hasn’t sailed the $40 million boat south yet–but he doesn’t have to go into his office anymore, only the lawyers’. Yesterday (30 September), Dr. de la Torre stepped down from his CEO and board positions of the bankrupt Steward Health. He had submitted his resignation on 19 September, the day that the Senate Health, Education, Labor and Pensions (HELP) Committee voted to hold him in criminal and civil contempt due to his failure to appear before the committee on 12 September. The full Senate voted to refer the contempt charges to the Department of Justice (DOJ) on 25 September. [TTA 26 Sept]

de la Torre filed his own lawsuit on 30 September in the District of Columbia US District Court against each member of the HELP Committee, charging them with violating his Constitutional rights, specifically the Fifth Amendment on self-incrimination, in seeking to subpoena him for a hearing which “was simply a device…to attack Dr. de la Torre and publicly humiliate and condemn him” as part of a “coordinated campaign to villainize and scapegoat him.” The lawsuit seeks to have the subpoena and the contempt referral invalidated and declared unenforceable as a result, seeking declaratory and injunctive relief. He had previously asserted his Fifth Amendment rights before the Committee in view of the company’s Chapter 11 proceedings. Given the threatening and extreme language of several of the committee Members and the actions that de la Torre’s filing singles out, the DC District Court hopefully will give this a fair hearing.

It is unknown if anyone will replace de la Torre as CEO even on an interim basis, as the company is selling its assets via the US Bankruptcy Court for the Southern District of Texas.

“While Dr. de la Torre has amicably separated from Steward on mutually agreeable terms, he will continue to be a tireless advocate for the improvement of reimbursement rates for the underprivileged patient population,” a Steward spokesperson said to Becker’s in a 28 September statement. “Dr. de la Torre urges continued focus on this mission and believes Steward’s financial challenges put a much-needed spotlight on Massachusetts’ ongoing failure to fix its healthcare structure and the inequities in its state system.” (Our Readers will not be blamed for being slightly amazed at this last statement, as most of Steward’s troubled hospitals, including two hospitals that no one would buy, were in that state–and Steward’s interests ranged all the way to London and Malta.) FierceHealthcare, Healthcare Dive 

She’ll do it herself, because nearly 50% of voting shares says she can–No Third-Parties Need Apply. Per an SEC regulatory filing yesterday (30 September), beleaguered 23andMe CEO Anne Wojcicki declared that she is no longer seeking proposals from third parties and is moving forward to acquire the company. “It has become even clearer to me that the best path forward for the (company) is for me to take the company private.” Since the board of directors is vacant–except for her–and she holds effective voting control, it is hard to contradict her. While the company is public via a SPAC that cracked hard, with shares hovering around $0.37, her $0.40 bid per share was rejected by the board in no uncertain terms. However, Wojcicki is the only one who counts here, as she has sole voting power over 9.7 million shares and shared voting power over 101.1 million shares of the company equaling 24.8% of the company’s shares. Replacements have not been made for the seven departed independent directors–and this Editor doesn’t expect any until (and if) Wojcicki buys the company [TTA 17 Sept].

In the SEC filing, Wojcicki said “Importantly, I remain committed to our customers’ privacy and pledge to maintain the (company’s) current privacy policy in effect for the foreseeable future, including following completion of the acquisition I am currently pursuing.” This Editor ironically notes that had that position on site and database security prevailed a year or so ago, none of this would have happened.

Wojcicki may be buying a near-empty shell of a company that preferred to blame users versus clean up its security act, but it will be All Hers. There you go. Reuters, The Business Journals, Yahoo News

What’s next for: Steward CEO now in criminal contempt of Congress; Walgreens’ Pessina’s fortune vanishes by 97%; Masimo’s Kiani now a man without a company

September 26, 2024 | by

Senate unanimously votes to hold Steward Health CEO in contempt. The resolution passed on Wednesday 25 September refers the contempt charges against Dr. Ralph de la Torre, the CEO of Steward Health, to the Department of Justice (DOJ). The Senate Committee on Health, Education, Labor and Pensions (HELP) voted on 19 September to recommend two contempt charges–criminal and civil–to the full Senate. It is the first time since 1971 that a criminal contempt charge has been passed. The DOJ’s actions can include prosecution by the District of Columbia’s US Attorney which can mean arrest and possible incarceration, with a fine that doesn’t exceed $100,000, or civil contempt which usually involves a fine and another subpoena to appear. FierceHealthcare, Becker’s

The threatening language of the HELP committee members such as Bernie Sanders and Ed Markey surely did not encourage de la Torre or his legal counsel to appear on 12 September, with the anger across the board among all members regardless of party. All that it promised to be was, in street language, the worst kind of beatdown. Formally, the appearance was rejected because of Steward’s bankruptcy in adjudication in the US Bankruptcy Court for the Southern District of Texas supervising the sale of Steward assets. There is also a court order that prevents de la Torre from commenting during the sale process. To the press, his legal counsel depicted the HELP committee hearing as “a pseudo-criminal proceeding in which they use the time, not to gather facts, but to convict Dr. de la Torre in the eyes of public opinion.” TTA 14 Sept

Steward Health’s spectacular collapse opens even more Pandora’s Boxes for de la Torre. He possibly faces additional lawsuits attempting to ‘pierce the corporate veil’ to claw back his bank and personal, sizeable maritime and aviation assets–or hold him criminally liable, far more complicated, long-term, and damaging. A cynical view would be that de la Torre would be well advised to get on his $40 million yacht or one of his private aircraft–and depart for a destination that is reluctant to extradite to the US. 

Walgreens Boots Alliance’s troubles drastically shrink executive chairman Stefano Pessina’s personal fortune. Chairman Pessina, who holds 17% of WBA stock and is the single largest shareholder, has seen his holdings shrink in value by 97%, from $12 billion in 2015 to a current $1.3 billion, according to Bloomberg data. The 83-year-old WBA head has seen hard times before. He pulled a rabbit out of the proverbial hat in 2007 by going private with Boots and then merging it with Walgreens in 2015, but time and Mr. Market are not on his side with taking on the debt load necessary.

Is WBA or Walgreens attractive to an acquirer? With stock trading at a record low of around $8 and a market capitalization of about $7.5 billion, it may be a bargain if an investor ignores or doesn’t blanch at the debt load. But those who understand the business cannot buy due to US antitrust regulations, which rules out any retail competitor or PBM. Or the company could be parted out to healthcare providers or a health insurer, but that ignores their miseries, such as reduced Medicare Advantage reimbursements. Their mistakes such as VillageMD and unprofitable locations are in the middle of being worked out and the company is shrinking. Meanwhile, their 15 October full-year earnings report will be dripping with red ink, as their Q1-3 lost $314 million versus prior year earnings of $1.2 billion. Crain’s Chicago Business

Vanishing for Joe Kiani is his day job at Masimo after a dramatic proxy fight. The founder of the audio and health monitor company was voted out of his board seat by shareholders. He followed by resigning as CEO after founding the company 35 years ago. Michelle Brennan, a board member (from Politan) has been appointed as interim CEO. Previously, she was a senior executive at Johnson & Johnson’s companies, including international experience in business development, for over 30 years. She also is on the board of Cardinal Health. Korn Ferry is coordinating the search for a permanent CEO.

The proxy battle wasn’t even close, according a CNBC report reported by Strata-gee. Quoting an inside source, the Politan slate of two directors, Darlene Solomon and William Jellison, received twice as many votes as Joe Kiani and Christopher Chavez on the Masimo slate. 

The company is continuing ‘strategic alternatives’ (read: sale) of its consumer health and audio businesses, the latter mostly acquired in the utterly snakebit 2022 acquisition of Sound United’s consumer audio brands. Masimo is using Centerview Partners and Morgan Stanley as financial advisors and Sullivan & Cromwell as a legal advisor. Presumably, the Kiani-arranged sales to or joint ventures of these units with unnamed investors is off. Masimo will be retaining their professional healthcare and pulse oximetry products. For Q3 2024, Masimo reiterated its financials from early August, with earlier guidance here.

Whether others will depart with Kiani is too soon to tell. During the proxy fight in July, Masimo’s chief operating officer, Bilal Muhsin, promised to resign if Kiani was forced out, specifically citing that he would refuse to work with Quentin Koffey, a Masimo director and chief investment officer of Politan Capital. Other managers signed similar letters around the same time.  However, in the Masimo release on the Kiani resignation, financials, and management changes, CFO Micah Young and Muhsin stated that would provide more details on an earnings call in October.

The Strate-gee view was that shareholders got tired of hearing promises about Sound United and that Kiani was high-handed with them–treating it as his personal company and not theirs. Healthcare Dive

Rounding up follow ups: Walgreens shareholder suit on pharmacy performance, Steward CEO no-shows Senate committee, Masimo-Politan proxy fight has court win for Politan–vote on for 19 September

September 14, 2024 | by

Another shovelful topping Walgreens’ Mound of Misery. Filed in the US District Court for the Northern District of Illinois, this shareholder lawsuit points to the poor performance of Walgreens’ pharmacy division. The fault is assigned to Walgreens management, specifically CEO Tim Wentworth and CFO Manmohan Mahajan plus 10 other executives including chairman Stefano Pessina, in overstating the division’s performance between 12 October 2023 to 26 June 2024 . It charges that they “falsely and materially claimed confidence in the brand inflation, volume growth, cost execution, discipline, and overall contributions of [Walgreens’] pharmacy division”, leading to an overvaluation of Walgreens’ share price. In addition, Walgreens “veiled the reality: that (Walgreens’) pharmacy division was not actually equipped to adapt to ongoing hurdles within the industry”.

The shareholder is Mark Tobias, a shareholder since late 2022. Key to the suit is the 12 October 2023 earnings conference call that contained positive comments about the pharmacy operation made by Wentworth, new at that time to Walgreens, and Mahajan. Their tune changed by the 27 June 2024 conference call where they admitted that the pharmacy model was “not sustainable”. Walgreens’ share price on 12 October 2023 was $24.19.  As of 4pm New York time today, 13 September, Walgreens closed at $9.21.

From the Crains Chicago Business article, the lawsuit demands restitution and reforms:

  • Walgreens should be awarded damages and restitution from the individual defendants
  • The company and defendants take steps to reform and improve corporate governance and internal procedures
  • Those reforms may include
    • Strengthening the board’s supervision of operations
    • Permitting Walgreens shareholders to nominate at least five candidates for election to the board
    • Ensure the establishment of effective oversight of compliance with applicable laws, rules and regulations

The Crains article also includes a Scribd copy of the filing.  Also Healthcare Dive

Another very large Mound of Misery buried Steward Health…but CEO Ralph de la Torre doesn’t plan to comply with a Senate committee subpoena. His testimony before the Senate’s Health, Education, Labor and Pensions committee was scheduled for 12 September but last week on 4 September, his attorneys informed the committee that Dr. de la Torre would not appear. They cited the ongoing US Bankruptcy Court for the Southern District of Texas sale of Steward assets (Healthcare Dive update) and a court order that silences him from comment during the sale process. The committee, chaired by Senator Bernie Sanders, is also accused by the CEO’s attorneys of using the bankruptcy and de la Torre’s marine possessions (a $40 million yacht and $15 million fishing boat) and private jets as “a pseudo-criminal proceeding in which they use the time, not to gather facts, but to convict Dr. de la Torre in the eyes of public opinion.”

The committee plans to decide on 19 September among two options: whether Dr. de la Torre will be brought up on criminal contempt charges that would be referred to the District of Columbia US Attorney, or civil contempt which usually involves a fine and another subpoena to appear. Several Senators on the committee–Sanders, Elizabeth Warren, and Edward Markey–have called de la Torre’s no-show “outrageous”. Sanders has issued threats of de la Torre being held accountable for his greed, but exactly how much of this is for the press and what the committee will do is unclear.  More of concern to the CEO would be whether further lawsuits would attempt to ‘pierce the corporate veil’ and claw back his bank and personal assets–or hold him criminally liable. Healthcare Dive, AP

The ugly Masimo-Politan Capital proxy fight continues–with a win for Politan. The attempt by Masimo, a consumer audio company that branched out into professional healthcare and pulse oximetry products–and last year won a big patent infringement decision against Apple on pulse oximetry—to further postpone a shareholder vote on giving control to activist shareholder Politan Capital ended in a loss yesterday. The US District Court, Central District of California denied Masimo’s request for a preliminary injunction to block Politan’s nominees for the Masimo board. Unless Masimo’s motion asking the same court to find Politan in contempt due to breaking the court’s sealing order on the decision, and the court grants a further delay, the shareholder vote will be held next Thursday 19 September. The likely outcome, according to Strata-gee which is covering this from the consumer audio perspective, is that shareholders will turn the board over to Politan by electing their representatives to the two open seats, booting CEO Joe Kiani–and total corporate chaos will ensue. Strata-gee has all the gory details. Background in TTA 8 August and prior.