Steward’s Top Execs Under Investigation by Several Parties

YOUNGSTOWN, Ohio – The top executives at bankrupt Steward Health Care System LLC are the subject of a “comprehensive investigation into prepetition transactions” being conducted by the bankrupt company’s transition committee, as well as by governmental entities, state regulators and the Official Unsecured Creditors Committee.

The disclosures came during a hearing Monday at U.S. Bankruptcy Court in Houston. At issue was Steward’s emergency motion, which U.S. Judge Christopher Lopez approved, to pay a commitment fee of $6.75 million plus expenses and grant prime position to a third-party lender that would provide $225 million in new debtor-in-possession (DIP) financing by June 14.

In briefly mentioning the transition committee’s investigation of how Steward’s top executives may have enriched themselves, the company’s lead bankruptcy attorney, Ray C. Schrock, assured Lopez that members of the committee have “no relation to insiders.”

Schrock said “confidential investigations” also are being conducted by government entities that he did not specify. “We’re communicating with state regulators on an ongoing basis,” he added.

Also examining the conduct of top Steward executives is the Official Unsecured Creditors Committee, its attorney, Brad M. Kahn, told Lopez. And the committee is paying close attention to Steward’s leases with Medical Properties Trust, he said.

To date, Lopez has not signaled the possibility of appointing a federal examiner to uncover possible wrongdoing by the hospital system’s management team.

Meanwhile, U.S. Sens. Sherrod Brown, D-Ohio, Elizabeth Warren, D-Mass., and Ed Markey, D-Mass., have called for the U.S. Trustee Program to appoint a trustee to operate Steward in place of current management.

In a letter dated Monday to Tara Twomey, director of the Executive Office for United States Trustees, the senators outline how years of “greed and mismanagement by Steward executives, Medical Properties Trust [its landlord and lender], and private equity investors [Cerberus Capital Management] … created unsustainable debts and led to Steward’s bankruptcy, putting patients and communities at risk.”

In particular, the chairman and CEO of Steward Health, Dr. Ralph de la Torre, is cited by the senators for what’s described as his lavish lifestyle that reportedly includes “access to two private luxurious jets and owning two luxury yachts.”

De la Torre also is under scrutiny for a deal with Medical Properties Trust, which purchased the company’s real estate in 2016 and has a 10% equity stake in Steward. Cerberus Capital Management, the private equity firm that funded Steward’s growth, and Steward executives acquired 10 million shares of MPT in 2016. Then, in 2020, “MPT invested $200 million in a joint venture with [de la Torre] acting in a personal capacity separate from his role at Steward, to pursue international opportunities,” according to the Boston Globe.

The senators’ letter notes that a Chapter 11 trustee can be appointed to operate a company in bankruptcy when there is evidence of “fraud, dishonesty, incompetence, or gross mismanagement. The trustee has the power to “claw back funds by challenging past fraudulent transactions by executives of the company,” they state.

At the court hearing Monday, the brief mentions of the Steward transition committee and unsecured creditors’ investigations into executives’ conduct came at the start of the proceedings, when attorneys were providing Lopez a general update on the status of the Chapter 11 case.

“We have stabilized operations with our vendors and hospitals,” Schrock said. “The amount of work that’s being done cannot be overstated. … There are 31 complex hospital sale processes going on at the same time. … We’re meeting multiple times a day with multiple buyers and updating stakeholders and we continue to make progress in every market.”

Steward Health Care Services operates 31 hospitals in eight states and a network of 6,000 physicians.

Local hospitals include Trumbull Regional Medical Center in Warren, Hillside Rehabilitation Hospital in Howland and Sharon Regional Medical Center in Sharon, Pa. The bid deadline for these hospitals is June 24. A hearing on any sale proposals received is scheduled for July 11.

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