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United States v. Poulsen

September 12, 2006


The opinion of the court was delivered by: Judge Marbley



This matter comes before the Court on the government's Notice to the Court Regarding Apparent Conflict of Interest and Motion for a Hearing on Disqualification of Counsel for Defendant Poulsen. Despite Defendant, Lance K. Poulsen's ("Poulsen") objections, the Court GRANTED the government's request for a hearing on the conflict of interest issue. For the reasons set forth herein, the Court DENIES the government's motion to disqualify, and allows Attorney Dale Crawford and his firm, Shumaker, Looper & Kendrick, LLP, to continue to serve as Poulsen's counsel in this case.


A. Background

1. National Century Financial Enterprises, Inc. ("NCFE")

In 1991, Poulsen, along with co-Defendants Parrett and Ayers, founded NCFE, an Ohio corporation headquartered in Dublin, Ohio. Until filing for bankruptcy in November 2002, NCFE was one of the largest healthcare finance companies in the United States. NCFE provided accounts receivable financing to a wide variety of healthcare providers, including hospitals, clinics, nursing homes, and other businesses and professionals (collectively, "providers"). NCFE purchased providers' accounts receivable, and held back a portion of the purchase amount for program purposes. This arrangement gave the providers cash earlier than the time they otherwise would have collected on those accounts receivable. Following these purchases, NCFE was then entitled to receive the cash collections on the purchased accounts receivable from the insurance companies and government payors, such as Medicare and Medicaid.

NCFE raised the funds to purchase accounts receivable through the offer and sale of healthcare securitization program notes issued by two of its wholly-owned subsidiaries, NPF VI, Inc. ("NPF VI") and NPF XII, Inc. ("NPF XII"), both of which had their principal places of business in the Southern District of Ohio. Through entities such as NPF VI and NPF XII, NCFE would represent to potential investors and others that the funds raised through its note offerings were to be used for a specific purchase, that is, the purchase of the portion of healthcare accounts receivable arising from healthcare services provided by private medical facilities to specific patients and payable by government-funded programs or insurance companies. Such accounts receivable, required to be fewer than 180 days old, were known as "eligible receivables," and were to be pledged as collateral to secure what NCFE promoted as a safe and conservative investment.

NCFE offered notes under the NPF VI and NPF XII programs to qualified institutional buyers based upon terms and conditions set forth in documents such as a master indenture and supplemental indentures, and private placement memoranda and supplements ("PPMs"), which were known collectively as "program documents." The program documents and other related documents informed investors about how the NPF VI and NPF XII programs were set to operate and how investors' funds would be used by NCFE. Based on representations made both in program documents and in statements by NCFE principals and others, the NPF VI and NPF XII program notes were promoted as safe and conservative investments.

2. The Indictment

On May 19, 2006, the federal grand jury sitting in Columbus, Ohio returned the sixty-count indictment in this case, charging Poulsen and six other individuals*fn1 (collectively, "Defendants") with multiple fraud, money laundering, and forfeiture offenses against the United States. According to the indictment, from on or about August 14, 1992 to on or about November 18, 2002, Defendants conspired to defraud the public by preparing materially false and fraudulent documents and records and making materially false and fraudulent representations to banks, rating agencies, investors, auditors and others about NCFE and the asset-backed securities programs offered and operated by the company's wholly-owned subsidiaries.

The government asserts that contrary to the provisions of the program documents, and the representations made to banks, investors, rating agencies, auditors and others, Defendants and others misappropriated, misused, and diverted financing the acquisition of healthcare providers by NCFE and providing unsecured "advances" and loans both to clients and entities in which various Defendants had an ownership interest. Accordingly, the government contends that from May 1998 through May 2002, NPF VI and NPF XII issued program notes having an aggregate value of approximately $1.5 billion and $2.9 billion, respectively. Further, as of November 2002, immediately prior to NCFE's filing for bankruptcy, NPF VI and NPF XII owed investors approximately $840 million and $2.2 billion, respectively, on the outstanding notes.

3. Counsel for Poulsen

Soon after the grand jury handed down the indictment, Attorney Thomas Tyack of Columbus, Ohio entered his appearance as lead counsel for Poulsen. Later, in July 2006, Poulsen requested that Attorney Dale Crawford ("Mr. Crawford") of Columbus, Ohio firm, Shumaker, Looper & Kendrick, LLP (the "Shumaker firm"), also enter an appearance to serve as co-counsel to Mr. Tyack. On July 18, 2006, Mr. Crawford advised the Court of Defendant's request that he enter his appearance, also noting that the government had suggested that the Shumaker firm had a potential conflict because one of its members, Attorney John E. Haller ("Mr. Haller"), was a potential witness in the government's case.

4. Mr. Haller's Past Representation of NCFE

a. The "Fresenius litigation"

Mr. Haller, currently a partner and a principal at the Shumaker firm, has worked as counsel for NCFE, various NCFE subsidiaries, Poulsen, and the Poulsen family on and off since 1997, and is very knowledgeable about all facets of NCFE's business. See Mr. Haller Aff. ¶ 2. Though he was only tangentially involved in NCFE-related matters from 1997 through 1999, beginning in April 2000, while working at Purcell & Scott, Co., L.P.A. ("Purcell & Scott"), Mr. Haller became a principal attorney for NCFE in what is commonly referred to as the "Fresenius litigation."*fn2*fn3 At all times during the Fresenius litigation, Mr. Haller's representation of the NCFE Parties was "subject to a joint defense agreement with other defendants in the case, including [HMA], Homecare Concepts of America, Inc., Chartwell Caregivers of New York, Inc. and Craig Porter" (collectively, the "Home Medical Parties"). See Mr. Haller Aff. ¶ 6.

One of the principal issues in the Fresenius litigation was whether, when purchasing receivables from NMC, NCFE and HMA had performed adequate due diligence regarding those receivables. The plaintiffs contended that a reasonable due diligence review would have revealed that the receivables at issue did not have the value that NMC had represented in its financial statements. Thus, the plaintiffs claimed that the fact that the receivables were overvalued was the fault of NCFE and HMA.

To gather data regarding the defendants' due diligence efforts, Mr. Haller "conducted extensive investigation and interviews of NCFE employees [and] conducted extensive reviews." See Mr. Haller Aff. ¶ 5. On April 16, 2001, "Mr. Haller met with the following individuals: Chuck Jennings, Jim Happ, Dan Davison of Fulbright & Jaworksi, counsel for HMA, and Mike Miller, Tom Malone, and Mike Rahe, part of the NCFE "trend team" that had evaluated the receivables HMA had purchased from NMC and sold to NCFE. See Mr. Haller Aff. ¶¶ 7-9. During the hearing, Mr. Haller testified that at that April 16 meeting, he heard Tom Malone comment that NCFE was "aging receivables" in order to "fool" investors and the rating companies into thinking that NCFE shares were a safer investment than they actually were.

On April 18, 2001, Mr. Haller drafted a memorandum regarding the "aged" receivables on NCFE's books (the "April 18 Memo") and contacted various NCFE principals to discuss the issue with them. The April 18 Memo raises a number of questionable aspects of NCFE's bookkeeping, specifically:

* Why were the 181 day and above receivables moved into the 31-60 day category? Was it because they were rebilled by NMC prior to closing? If so, (a) were they rebilled prior to closing and (b) why does the caption of the report state that the aging is by date of service? Why were they not moved into the 0-30 day bucket? Why was it concluded that ...

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