By Patrick Fitzgerald And Peg Brickley
Nearly three years ago, James Slattery took the stage in San
Diego and addressed the sales staff of Millennium Health LLC, the
company he had founded and built into the nation's largest
drug-testing lab.
With Mr. Slattery was Millennium's general counsel, who then
presented a series of "execution slides" complete with photos of
body bags to the 250 or so people in attendance. He told of how the
company boasted of besting everyone--competitors and employees--who
had ever sued it, according to a sales rep who witnessed the
presentation.
"Don't be a weasel," Millennium's general counsel told the
audience, according to the sales rep. "I don't want to be on the
other side of litigation from any of you. I hope you don't want to
be on the other side of litigation with Millennium."
Now Millennium is in bankruptcy protection, felled by a number
of whistleblower lawsuits filed by former employees and doctors who
claim the company's growth was fueled by unnecessary tests and
illegal kickbacks to physicians, as a Justice Department
investigation concluded was the case.
Before last week's bankruptcy filing, Mr. Slattery and minority
owner TA Associates struck a deal with most of their bondholders to
turn over ownership of the company and pay $325 million to settle
the federal probe. In return, the owners get to walk away from any
potential lawsuits tied to claims related to the federal probe.
That plan is facing pushback in court, where at least one
investor, Voya Investment Management Co., claims Millennium's
owners are getting off too lightly. The bankruptcy settlement is
just a fraction of the cash the two owners took out of the company
in the past three years as dividends, Sharon Levine, lawyer for
Voya, said last week in bankruptcy court.
Members of Millennium's lending group told The Wall Street
Journal that the two owners took out more than $1.6 billion from
the company, most of it in the past year.
"They were aware they were being vigorously investigated" but
said nothing to lenders about the brewing trouble with the Justice
Department, Ms. Levine said in court.
The drug-testing company's owners last year took a "special
dividend" of about $1.3 billion, according to members of
Millennium's lending group. That was on top of another $300 million
dividend paid to the owners in 2012. Mr. Slattery, a former police
officer with no medical background, and his family received about
55% of the dividends, the people said, while TA Associates, a
Boston-based private-equity firm, took the rest.
TA Associates declined to comment. In court, Mr. Slattery's
lawyer, Joshua Sussberg, said Millennium's owners don't believe
there are viable legal claims against them. The exiting owners are
making a "significant contribution" toward the company's future, he
said.
For the institutional investors that bought into Millennium's
$1.8 billion loan last year and then were forced to cut a deal with
Mr. Slattery that shields him from litigation, the drug-tester's
rapid fall into bankruptcy protection illustrates the dangers of
investing in the opaque leveraged-loan market, where banks lend
billions to highly indebted companies to fund corporate buyouts and
debt restructurings. The banks that arrange the risky loans sell
them to institutional investors looking for higher returns than
safer investment-grade loans.
Leveraged loans don't generally carry the same type of detailed
warnings that accompany securities investments. Instead, they're
considered private transactions between borrowers and banks, which
are assumed to be able to evaluate risks for themselves. That
distinction is a key element if the loan sours and why investors
who might have a reason to sue over the failure to disclose a
government probe would consider a negotiated settlement with a
leveraged loan borrower.
Indeed, most of Millennium's syndicated lenders--more than two
dozen hedge funds and institutional investors, including Brigade
Capital Management LP, Blackstone Group's GSO Capital and
Oppenheimer Funds--have voted to accept Millennium's chapter 11
plan, opting to try to salvage their investments by taking a stake
in the still-viable drug-testing business
The lenders will, subject to bankruptcy-court approval, swap
their debt for 100% of the equity in the reorganized Millennium
plus $600 million in new debt. Those investors will surrender any
potential claims against TA Associates, Mr. Slattery and others.
But they can pursue lawsuits against the bank and the lawyers that
arranged the financing.
J.P. Morgan Chase & Co. arranged the $1.8 billion leveraged
loan that funded the 2014 dividend. The bank sold the loan to
dozens of sophisticated investors, mainly other banks, mutual funds
and hedge funds. According to members within the lending group,
J.P. Morgan didn't disclose the probe at the time it was marketing
the 2104 Millennium loan to investors. According to these lenders,
Millennium's lawyers at Skadden, Arps, Slate, Meagher & Flom
said the probe wasn't material.
Millennium, Skadden and J.P. Morgan declined to comment.
"It's interesting in my eyes that [investors] didn't do their
due diligence up front. Or maybe they did, and, you're looking at
the No. 1 company in drug monitoring, maybe the lure of making
money overshadowed what they found," said Edward Zicari, a former
Millennium regional manager in Texas, who outlined his suspicions
about the company's practices in a lawsuit before the 2014
financing.
Mr. Zicari's image was used for simulated target practice at the
San Diego sales meeting, according to the suit. One of the body
bags at the 2012 sales meeting was labeled with his name. His legal
fight with the company over alleged defamation was resolved, on
terms Mr. Zicari can't discuss.
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com and
Peg Brickley at peg.brickley@wsj.com
(END) Dow Jones Newswires
November 17, 2015 18:44 ET (23:44 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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