STRF/STAR MAX/IPx
In February, the Steward hospital chain was at the lowest point of a decade-long downward spiral. The Centers for Medicare & Medicaid Services was threatening to shut down its Louisiana hospital over standards of care a Republican state rep described in a hearing as “cruelty.” Boston Globe columnist Brian McGrory had spent much of the winter detailing the yachts and private jets enjoyed by founder Ralph de la Torre. Creditors were threatening to sue to force the company into Chapter 7 liquidation, and Steward’s own defense attorneys began abandoning ship. Tony investment bank Lazard Frères contacted 14 lenders hoping to get an offer for some kind of financing deal, and all 14 refused. On February 16, a credit industry reporter even broke the news that Steward was about to file for bankruptcy protection.
But at the end of the month, another bridge loan finally came through, courtesy of a hedge fund called Brigade Capital Management, best known as the recipient of Citigroup’s famous accidental $900 million 2020 wire transfer tied to their financing of Revlon, Inc. (An earlier version of this story identified Sound Point Capital Management and its subsidiary Chamberlain Commercial Funding as the lender of the bridge loan, based on an apparent misread of an inter-creditor agreement spelling out the relationship between the bridge lender and other of Steward’s secured lenders; a spokeswoman for Sound Point told the Prospect that while Sound Point participated in an earlier loan facility to Steward last year, it did not participate in the bridge facility.) A few of the more vociferous creditors were paid off. Heart valves and needles came in at some hospitals, and surgeons were allowed to schedule elective surgeries again—though so many of Steward’s admin staffers had been furloughed, they often had to call the patients themselves.
Last week, when Steward finally filed for Chapter 11 bankruptcy protection in Houston, the company was forced to disclose to its thousands of creditors how much it had paid for those seven extra weeks of life: an annualized guaranteed interest rate of 255 percent, plus a senior claim on an unspecified portfolio of real estate, in addition to all its accounts receivable.
To be sure, Steward’s monstrously large filing did not outright admit it had taken out a loan with a 255 percent interest rate; it merely stated that the outstanding value of the loan’s “principal” was $275 million if you included something called “MOIC”—multiple on invested capital—but just $147 million if you did not. Consulting a footnote on page 24 of a 659-page exhibit list, one learns the larger figure is the result of a promised “1.85x minimum MOIC due at maturity [June 2024] and upon certain defaults.” In other words, in exchange for the bridge loan Brigade had extracted a guarantee they would essentially double their money, either in cash or by selling off an unspecified portfolio of hospital buildings Steward didn’t even own.
This is not really a loan in anything resembling traditional finance. (Three hedge fund analysts told me they had never seen the phrase “MOIC” used in a loan agreement before last Tuesday.) It was a wager that a very shrewd gambler might make on a Ponzi scheme with very good lawyers, and for most of the past decade Steward has pretty much been a well-lawyered Ponzi scheme that happens to launder its money through a chain of hospitals.
On Saturday, we learned why the ailing hospital chain needed that loan so badly, when Steward’s $2,095-an-hour lead attorney Ray Schrock filed applications for the retention of the hospital chain’s various restructuring professionals. The six major firms advising the hospital chain in its “reorganization” have already billed the estate more than $55 million for their services, with Weil, Gotshal (Schrock’s law firm), AlixPartners, and Lazard having raked in $21.6 million, $12.2 million, and $7.8 million on the case, respectively. A budget contained in another filing estimated that restructuring professionals would be billing the estate another $10 million in the first week of the bankruptcy alone.
At Tuesday’s hearing, Schrock described the hospital chain as a “real success story” that founder Ralph de la Torre had “built from the ground up.” Sadly, the company had recently been beset by “financial headwinds” rooted in “reimbursement trends” and COVID-19, Schrock lamented, that had forced the company to seek bankruptcy protection because “patient care is and has always been Steward’s first priority.” At the same time, there was still “so much value”—Shrock invoked the hospital chain’s “value” a comical number of times—to be realized from the hospital chain’s reorganization, he promised.
The raw numbers contained in Steward’s first-day motions did little to bolster this claim. Against liabilities the lawyers estimated at more than $9.2 billion, Schrock listed essentially one core asset: a network of affiliated physicians. The “Operations and Key Assets” section of the filing only stretches to two and a half pages through the deployment of sentences like “This collaborative approach between the Company’s hospitals and specialists allows the Company to better serve its communities by providing a comprehensive suite of health care options to deliver best-in-class care.” But this lone asset consists largely of physicians who have routinely accused Steward of stealing from them; later in the hearing, an attorney representing one of Steward’s managed-care clients, Brighton Marine, accused the hospital of absconding with its own capitated payment while refusing to pay medical providers.
If all goes as Schrock and company have planned, the vast majority of creditors will get just about nothing from the bankruptcy. Doctors who’ve been stiffed out of payments, nurses and techs whose retirement funds have been raided, hundreds of relatives of patients who have been killed and maimed by care standards Louisiana Republicans describe as “Third World,” and dozens if not hundreds of small businesses that have been devastated by Steward’s long-standing policy of not paying its bills—they’ll likely get wiped out almost completely.
IT DOESN’T HAVE TO GO LIKE THAT. Over in Delaware bankruptcy court last week, the top-shelf attorneys representing the estate of the cryptocurrency exchange FTX made the astonishing announcement that account holders will receive as much as 143 percent of the value of their balances when FTX filed for Chapter 11 18 months ago.
Pundits raced to dismiss the significance of this, in part because Sam Bankman-Fried has seized on the news to insist that his crime was essentially victimless, and anyway, not deserving of the three decades in prison to which he was sentenced earlier this year. Former FTX customers insisted they had still been screwed because they could have quadrupled their money had they been able to actually invest it in Bitcoin—an asset of which FTX turned out to hold very little—or that the whole thing was an anomaly driven by SBF’s fluke investment in the AI startup Anthropic.
But that line of reasoning elides the fact that FTX was also a Ponzi scheme, with all the telltale signs. Just as Steward’s 255 percent bridge loan was a tell, the 8 percent interest FTX offered cash depositors in the months before its collapse was a surefire sign the company was desperate, insolvent, and doing irrational things to stave off the inevitable. At the end of the day, the company owned just one-tenth of 1 percent of the Bitcoin it claimed to hold, according to bankruptcy lawyers. And while the awesome appreciation of crypto assets enabled the FTX estate to rake in more than $5 billion selling off FTX’s various tokens—in this case the slow wheels of the justice system helped fortuitously time the sale—what really saved FTX’s customers was the Justice Department prosecution of Sam Bankman-Fried, which in turn forced bankruptcy lawyers to treat it as the Ponzi scheme it was.
If law enforcement were treating Steward like FTX, lawyers would be gearing up to sue its landlord-enabler Medical Properties Trust.
As the FTX disclosure statement details, that meant filing fraudulent conveyance lawsuits against insiders, like Bankman-Fried’s shameless grifter parents over the $26 million in real estate and “gifts” with which their son showered them; the founder of a worthless stock trading platform FTX bought for $292 million; and VIP customers like Bybit Fintech, whose founder Ben Zhou attacked FTX short sellers even as he withdrew nearly a billion of his company’s dollars from the exchange, including $327 million the day before FTX suspended withdrawals.
If law enforcement were treating Steward like FTX, Shrock would be gearing up to sue its landlord-enabler Medical Properties Trust, whose $440 million rent bill is largely responsible for plunging Steward into the abyss to begin with, and its former private equity owner Cerberus, which pocketed close to a billion dollars selling Steward’s assets and then de facto control over its operations to MPT between 2015 and 2021. But because no one in this country has charged any Steward insiders with committing any crimes, insiders are instead running the show. MPT is both the provider of the debtor-in-possession financing that is paying the lawyers, and by far the hospital chain’s biggest creditor, claiming to be owed $7 billion, mostly in outstanding lease obligations stemming from that $440 million-a-year rent bill.
Recovering all of FTX’s money also involved hunting down and patiently selling off all of SBF and company’s toys: the $70 million in business jets, the $300 million Caribbean luxury real estate portfolio, and the vanity investments in everything from Semafor to Stanford to naming rights to the Miami Heat’s stadium. While never “billionaires,” the Steward brass is older and far more decadent in lifestyle than SBF ever was: The hospital chain maintains two luxury business jets that a certain executive has flown recently to Rome, Croatia, Corfu, Santorini, St. Maarten, St. Kitts, Athens, and countless other ruling-class vacation hot spots over the past year. Somehow, neither of the jets are mentioned in any of the filings I reviewed. The same of course goes for de la Torre’s famous yachts, though the funds to purchase all of them were obviously siphoned out of a desperately insolvent company.
Theoretically, MPT should be pushing to claw back some of these extravagances for the sake of its own balance sheet, but its founder Ed Aldag is unlikely to risk highlighting his own famous weakness for private jets and lavish vacations bankrolled by fictitious earnings.
It’s worth pointing out here that the bankruptcy judge and lead attorneys in the FTX bankruptcy were likely every bit as greedy as in any of the sordid private equity bankruptcies we’ve covered in these pages. Not long ago, Judge John Dorsey presided over the shamefully abusive bankruptcy of a private equity–controlled nursing home chain that left hundreds of wrongful-death plaintiffs with “less than a penny” on the dollar. The lead debtor’s counsel Sullivan & Cromwell, meanwhile, was mired in enough conflicts of interest that the judge ended up appointing an examiner, a step so rare that the big bankruptcy law firms have been known to informally boycott a court if one of its judges has the temerity to do it. But SullCrom did not mount a strenuous objection to the appointment, because FTX was unambiguously a criminal enterprise. In any case, the billable hours involved in hunting down assets are just as abundant as those required to obfuscate their existence; the final tally for the fraudulent crypto exchange’s restructuring professionals will probably clock in at a half-billion dollars.
The system worked because FTX was a Ponzi scheme, and no one tried to obfuscate away that fact. In fact, the victims of pure criminal Ponzi schemes seem to often fare better in bankruptcy court than the victims of decriminalized private equity heists, which typically leave victims like workers, equity shareholders, and personal injury plaintiffs with nothing. Bernie Madoff’s victims received an average of 75 cents on the dollar; those of the $1 billion Florida Ponzi schemer Scott Rothstein got all their money back, and victims of a $58 million Cleveland Ponzi received 110 percent after eight years. Cold comfort to their victims, I’m sure, but it’s something to keep in mind next time you consider doing business with a private equity portfolio company.
The real question is, why won’t the feds do the same favor for the workers, patients, and communities defrauded by Steward’s shell game? A nurse staffing agency alleged de la Torre committed fraudulent conveyance in a lawsuit earlier this year, and the DOJ itself accused MPT of the same in a civil lawsuit last year. And just days ago, a Steward executive and lawyer were indicted alongside the former prime minister of Malta over their roles in a sprawling corruption and money-laundering scandal in which Steward funneled millions of dollars from a bogus 400 million euro contract it won to privatize the small country’s hospitals into a shady Swiss shell company. One of the scam’s conspirators has accused de la Torre of promising “brown bags of cash” to anyone who helped him secure lucrative privatization contracts in small European and North African countries; at least 60,000 euros went to the prime minister, according to the indictment. Wasn’t the Foreign Corrupt Practices Act designed to prohibit behavior like that?
As a publicly traded company, MPT could theoretically also be prosecuted over its sustained campaign of misleading investors over the financial health of its hospital tenants, a theme it continued on its quarterly earnings call on Thursday when its chief financial officer claimed no hospital assets had been pledged to secure Steward’s 255 percent emergency bridge loan, even though the filings repeatedly said the opposite.
Alas, what all these guys seem to understand is that most fraudsters don’t end up like Sam Bankman-Fried, which is why he and his smattering of supporters like his admiring biographer Michael Lewis have always insisted he didn’t deserve to have the book thrown at him. Looking at the Steward case, it’s hard to blame SBF for feeling wrongly singled out, if only because FTX never killed anyone.
