CHICAGO -
Edward Hospital was initially pressured to hire Bear Stearns on a 2001 transaction. It did hire the firm and it won state regulatory approval for its projects. Earlier this year, Hurtgen allegedly pressured the hospital to hire Jacob Kiferbaum of Deerfield, Ill.-based Kiferbaum Construction Corp., according to a report published Friday in the Chicago Sun-Times. The hospital refused to hire the construction firm but it is unclear whether the hospital would work with Bear Stearns on the proposed bond sale.
Bear Stearns was listed as the senior manager on a proposed $30 million Edward Hospital refunding that won approval from the conduit issuer the Illinois Finance Authority in April, but IFA officials said that deal was put on hold due to rising interest rates.
Edward Hospital's new project failed this spring to receive necessary approval from the Illinois Health Facilities Planning Board, which must grant a "certificate of need" before hospital construction projects can proceed. The board is expected to consider a revised application at its August meeting, according to Brian Davis, a vice president at Edward. The hospital has proposed building a $169 million, 146-bed hospital in the rapidly growing southwest suburb of Plainfield.
The lawsuit filed May 24 under the False Claims Act remains under seal while the U.S. Attorney's office decides whether to intervene, was obtained by the Sun-Times and reported in a story last Friday. It was filed in May on behalf of the federal government and plaintiffs Pamela Meyer and William G. Kottmann, two hospital administrators.
The lawsuit names as defendants Bear Stearns, Hurtgen, Kiferbaum and Stuart Levine, the former vice chairman of the facilities planning board who resigned that post earlier this month. The U.S. attorney's office has 60 days from the filing to decide whether to intervene although it can seek an extension. Otherwise the lawsuit, filed in the U.S. District Court for the Northern District of Illinois, would proceed led by the plaintiffs' attorney, according to the U.S. attorney Patrick Fitzgerald's spokesman Randall Sanborn, who refused to confirm even the existence of the suit.
Bear Stearns did not return phone calls seeking comment. Davis, speaking on behalf of Edward Hospital, declined to comment on the lawsuit, as did lawyers representing the two named plaintiffs. News of the lawsuit stunned many local market participants who said they had heard no speculation of its existence. The story surfaced just days after Illinois priced a fixed-rate piece of its taxable $750 million unemployment trust fund deal with Bear Stearns at the helm. A second auction-rate series, also to be underwritten by Bear Stearns, will price this week.
The lawsuit outlines how in 2001 Hurtgen, a senior managing director, was introduced to Edward officials through Donald Udstuen, an adviser to former Gov. George Ryan. Both Udstuen and Ryan have been named in past federal indictments on corruption charges. Udsteun, a former chief operating officer of the Illinois State Medical Society, urged the hospital to give Bear Stearns the books on a proposed $210 million bond sale to pay for hospital addition projects. Bear Stearns was hired and the hospital won its certificate of need approval. The Sun-Times report did not disclose whether the construction company named in the suit also worked on that project.
For its new project, the hospital was pressured by Hurtgen to hire the construction company in a meeting early this year. The lawsuit alleges that Hurtgen told hospital officials Kiferbaum's ties to Illinois state government administration would help secure regulatory approval. Hurtgen's own pedigree is political, not technical. He was a top-aide to then Wisconsin Gov. Tommy Thompson in the mid-1990s when former Bear Stearns managing director Peter Fox hired him as a banker in 1995.
Kiferbaum's alleged ties to the board included Levine, then the vice chairman of the facilities planning board and a Chicago attorney. Levine and Kiferbaum are friends who serve on several boards together. The facilities planning board chairman is Thomas P. Beck. Local market sources said Beck served as a former Cook County comptroller and his son, David Beck is a managing director on Bear Stearns municipal trading desk in Chicago. Thomas Beck is not a named defendant, according to the Sun-Times report.
The lawsuit alleges one other scheme involving another hospital - Janesville, Wisc.-based Mercy Health System - that allegedly has hired Bear Stearns and Kiferbaum's construction company and won certificate of need approval before the planning board at the same April meeting in which the Edward project was rejected. Mercy wants to build an $81 million 70-bed hospital called Mercy Crystal Lake Hospital and Medical Center in Crystal Lake, a far northwest suburb of Chicago.
The lawsuit claims Bear Stearns underwrote a transaction, but Illinois Finance Authority officials said it has not yet received any documents related to the transaction. The hospital released a statement Friday saying: "We have been contacted regarding an inquiry into the Illinois Certificate of Need matter. We understand that multiple other parties have been contacted as well. Because inquiries like this one are always sensitive, we must limit our comments for now, but we can tell you that we believe that we have acted properly. In addition, we have been cooperative and intend to continue to cooperate with the inquiry."
Cheryl Jackson, a spokeswoman for Gov. Rod Blagojevich, said the state has initiated a criminal investigation into the board's approval of the Mercy project but it's on hold pending a federal investigation. "We asked our inspector general to investigate but will wait for the U.S. attorney's office to finish its investigation," she said. A recent gossip column item reported that the U.S. attorneys' office had subpoenaed Thomas Beck and other board members.
Several market participants said the allegations outlined in the suit alone stand to stain Bear Stearns' reputation here in the near-term, but they did not want to speculate on its long-term impact. "That will depend on what happens with the lawsuit," said one market source. While the charges related to the Edward Hospital expansion surprised some, another alleged scheme mentioned in the lawsuit involving the state's mammoth pension sale last year did not.
Bear Stearns won the top underwriting position on Illinois' $10 billion taxable general obligation pension sale last June despite the fact that it didn't rank in the top 10 list of firms underwriting high-grade corporate deals - the market in which the state's issue was priced.
The firm stunned market participants and Illinois politicians when it eventually disclosed that it had paid more than an $800,000 consultants fee to Republican heavyweight Robert Kjellander's Springfield Consulting Group LLC for its assistance in winning the top underwriting spot on the pension issue. In a story published last year, The Bond Buyer revealed a series of political connections and campaign contributions that linked Bear Stearns and Kjellander to Blagojevich and key members of his administration.
According to a page of the lawsuit printed in the Sun-Times, the suit states that Bear Stearns won the deal through unlawful kickbacks. "Had the state of Illinois known that defendants obtained the $10 billion pension bond underwriting as part of a criminal kickback scheme, the state of Illinois would not have issued or approved Bear Stearns as an underwriter," the lawsuit reads. The lawsuit claims the state is entitled to the amount it paid Bear Stearns in underwriting fees - $8 million.
The lawsuit provides no additional details of the pension deal kickback. Jackson reiterated the state's longtime defense of its selection of the firm. "Bear Stearns was picked through an open and competitive process and they have a long history as blue chip company with high volume bond deals," she said.
