National Century Financial Enterprises Securitization Fraud: The Reports Had Assets the Programs Did Not

In the National Century Financial Enterprises securitization fraud case, the Justice Department described criminal trial evidence of unsecured healthcare loans hidden by fabricated investor reports. Investors bought notes presented as backed by medical accounts receivable. The trial evidence showed executives sending money to providers without that backing and moving funds between programs to make the business appear to follow its own rules. If you worked on the receivables, transfers or reports, you may recognize the gap between the investment being sold and the accounts you handled.

This page follows National Century’s medical receivables, cash movements and investor reporting. Our broader page on securities offering fraud explains how a fundraising promise can diverge from the business it finances.

How National Century Turned Medical Receivables Into Notes

National Century financed health care providers by purchasing their accounts receivable with money raised from investors. In the model described by the agencies, those receivables supplied the assets behind the notes investors bought.

The Securities and Exchange Commission’s announcement described a privately held company in Dublin, Ohio, operating through two wholly owned subsidiaries. The subsidiaries bought medical accounts receivable and issued notes backed by them. Between 1999 and 2002, the SEC alleged, they offered and sold at least $3.25 billion in notes through private placements to institutional investors. The Justice Department’s account of the criminal trial evidence identified pension funds, insurance companies and churches among those investors.

An operations employee can see those transactions at different points. The offering describes what the money will buy, the accounting records describe the assets acquired, and the bank accounts show where the money actually went. In National Century’s case, the commission alleged that the offering documents, monthly investor reports and accounting records all helped conceal the difference.

When the Advance Had No Receivable Behind It

The Securities and Exchange Commission alleged that an executive vice president and other senior National Century officials advanced $1 billion or more of investor capital to healthcare providers without receiving the required medical accounts receivable. It described the advances as unauthorized, unsecured loans to distressed or defunct providers. Many of those providers were partly or wholly owned by NCFE or its principals.

The people directing investor money could also have interests in the businesses receiving it. The commission alleged that these unsecured advances contradicted the offering documents given to investors. For someone processing an advance, the provider’s name, the receivables supporting the payment and the decision to release the money belong in the same account of the transaction.

The Justice Department’s account of the criminal trials reported jury convictions of senior National Century executives. Witnesses described a scheme running from 1995 until the company’s collapse. Trial evidence showed that National Century used investor money for unsecured loans, including loans to healthcare providers owned in whole or in part by company owners. Former employees testified that executives concealed the conduct by lying to investors and rating agencies.

The commission also alleged that the subsidiaries recorded nonexistent or ineligible medical receivables on their books. We see the absurdity in the SEC’s allegation: the books supplied the receivables the providers did not.

The borrower-ownership problem appears in other offering cases. In its Woodbridge Group of Companies allegations, the Securities and Exchange Commission said investors were promised returns from independent borrowers, while most borrowers were entities controlled by Woodbridge’s owner and lacked the income to pay. For an employee who knows the borrowers, the relationship behind a loan balance can explain something the investment pitch leaves out.

Cash Moved Between Programs, and the Reports Followed

The Securities and Exchange Commission alleged that senior officials repeatedly transferred funds between the subsidiaries’ bank accounts to conceal cash shortfalls of as much as $400 million. It also alleged false statements about the programs’ cash accounts and collateral, accompanied by false offering documents, monthly investor reports and accounting records. Trustees, investors, potential investors and auditors received the misleading information.

The Justice Department’s account of the criminal trial evidence described money moving back and forth between programs to make National Century appear to comply with its governing documents. It also described investor reports containing fabricated data. The reports showed compliance. The money made the round trip.

For someone who handled those accounts, the date of a transfer can explain a reported balance. We look at the sending account and the receiving account together, alongside the report that described the available cash. That comparison can show whether the reported position depended on money arriving from another program and what happened to it afterward.

The Securities and Exchange Commission said National Century collapsed when investors discovered hidden cash and collateral shortfalls. The Justice Department reported that the company filed for bankruptcy. In its March 2009 account of the criminal case, the department said the executives’ conduct eventually cost investors $2 billion.

How to Catch Accounting Fraud?

Catching accounting fraud in a receivables-financing business means connecting the reported assets and balances to the receivables, payments and decisions underneath them. In National Century’s case, the agencies described unsupported advances, false receivable entries, transfers between programs and fabricated reporting. An employee who knows how those records were produced can explain the connection between them.

We examine the records behind an investor report with that connection in mind. A receivables tape can identify the assets included in the reported pool. The supporting records can show whether the business actually acquired them. An advance ledger and bank transfer show the money leaving. The useful account connects the payment to the collateral it supposedly purchased.

Custody records and reserve-account movements address a different part of the same story: where assets and cash were held, and who authorized their movement. A monthly certification can be compared with the accounts and receivables it describes. If you handled one of these records, your explanation of what it measured, when it changed and who approved it may make the discrepancy understandable.

What Is Whistleblowing in Accounting?

Whistleblowing in accounting can expose the difference between a reported number and the transactions used to produce it. The Justice Department’s account of National Century’s criminal trials described former employees testifying about the false reporting and the deception of investors and rating agencies. Their knowledge concerned what happened inside the business before outsiders received its account of events.

A study in the Journal of Forensic & Investigative Accounting, The Significance of Whistleblowing as an Anti-Fraud Measure, examined fraud-examiner survey data. The 2018 paper reported that whistleblowers detected 35.9% of the frauds with complete detection data, compared with 21.4% detected through internal controls. It also found that whistleblowing became more likely to be the detection method as more people participated in a scheme.

For a securitization employee, that finding speaks to the value of knowing one part of a business that depends on several people and systems. The person who processes an advance may understand the missing receivable, while the person producing a report may understand the adjustment that concealed it. We work from the part you know and connect it to the transaction others were asked to trust.

The Award Opportunity Follows the Conduct

For someone seeing similar securities misconduct today, the SEC whistleblower award opportunity depends on the information and the enforcement it supports. When an SEC action results in more than $1 million in monetary sanctions, eligible whistleblowers can share 10% to 30% of the qualifying money collected. We assess the evidence and the program with you and SEC whistleblower counsel.

If your information also concerns false claims on government money, we assess that conduct separately. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The starting point is the transaction you know and what your information can establish about it.

You Know Which Receivables Were Missing

If you know why a receivables tape, cash transfer or monthly certification did not match the investor report, speak with our whistleblower experts about that transaction. We build the case with you and bring in securities fraud whistleblower lawyers who understand receivables financing and false investor disclosures. We stay beside you as your knowledge of the accounts becomes evidence of how the business used investor money.