Beverly Suitor Faces $10 Million Fraud Lawsuit

Nearly three years before Formation Capital LLC made a push to take over Fort Smith’s Beverly Enterprises Inc., the company bought 53 of Beverly’s nursing homes for $177.5 million.

But one investor in that 2002 deal, Peter R. Morris, president of PRM Realty Group LLC of Chicago, now is suing Formation Capital of Alpharetta, Ga., for fraud and breach of contract, saying he was misled about his $10 million investment.

Morris also has named Formation Capital CEO Arnold Whitman and co-chairman Steve Fishman as defendants in the lawsuit filed in U.S. District Court in New York.

David Schick, one of Fishman’s business associates, also is named in the lawsuit. Schick was sentenced in August 2004 to 97 months in federal prison for an unrelated scheme to defraud several banks through check kiting.

Schick funneled worthless checks through a network of shell corporations he set up, an FBI news release said. Losses attributed to the crime totaled $2.2 million.

“Formation Capital denied the allegations contained in the PRM complaint,” said Turner Broughton, Formation’s attorney in Richmond, Va.

Broughton also said Fishman and Morris are working to reach a settlement by the end of July.

“This settlement will result in the dismissal of the claims against all of the defendants,” Broughton said.

Whitman said in his affidavit filed with the case that “at no point did I engage in any negotiations between Steven Fishman and Peter Morris concerning an alleged joint venture” between the two.

Whitman also said he didn’t have any contact with Schick.

Neither Whitman nor Fishman returned a call for comment.

Meanwhile, the Formation Capital consortium — made up of Formation Capital LLC, Appaloosa Management LP, Franklin Mutual Advisers LLC and Northbrook NBV LLC — has been trying to buy Beverly Enterprises for $1.5 billion since December.

Beverly rejected the group’s offer and put the company up for auction.

A Beverly spokesman wouldn’t say what the status of the bidding process is or who the bidders are.

Beverly Chairman and CEO William Floyd said in an April 5 news release that Beverly signed confidentiality agreements with a number of potential bidders. The only known bidder is the Formation Capital group.

“I know there’s a lot of interest about potential buyers, price levels, closing dates and the like,” Floyd said at the company’s annual meeting held in April. “Unfortunately, our lawyers and financial advisers tell me I should not discuss details around the auction process, the participants or the potential timetable for the auction.”

It’s too early to tell what Beverly Enterprises might look like after the sale, said Nancy Weaver, senior research analyst for Stephens Inc. in Little Rock.

“It depends on who buys them,” she said. “I don’t even know if there’s a second bidder or not. … It’s just so up in the air it’s impossible to predict right now.”

First Meeting

Peter Morris first met Fishman in 2001 in New York.

Fishman told Morris that he had acquired a company called ZA Consulting LLC of Jenkintown, Pa., through which he was investing and acquiring and operating health care companies. Fishman wanted Morris’ involvement in a joint venture in which they would be equal partners.

Morris would contribute the money as well as his real estate experience, and Fishman would supply financing and acquisition opportunities, Morris said in his lawsuit.

In July 2001, Fishman and Morris agreed that their joint venture would act through previously formed Fishman companies, Formation Capital and Commercial Capital Formation LLC.

In January 2002, Fishman, on behalf of the joint venture with Morris and acting through his other companies, bought 53 nursing homes from Beverly Enterprises-Florida Inc. for $177.5 million. The nursing homes had a market value of approximately $250 million, Morris said in the lawsuit. The nursing homes were then leased back to the seller.

“Fishman told Morris that this transaction would generate cash flow of approximately $2 million per month,” the lawsuit said.

After the Beverly deal, Fishman made two other similar deals through his joint venture with Morris that involved the purchase of about 25 nursing homes from other companies. Those nursing homes also were leased back to the sellers and were expected to generate “substantial” cash flow, Morris said.

For years, Morris said, he tried to get financial numbers from Fishman and his related companies, but didn’t.

Morris said by refusing to hand over the information, Fishman was able to — and did — conceal that he and others misappropriated Morris’ money.

Morris also said large amounts of cash were transferred in and out of ZA Consulting by David Schick, Fishman’s business associate who later pleaded guilty to a check-kiting scheme.

Morris accused Fishman of allowing Schick to move money out of ZA’s account.

“There are an unusual number of large dollar receipts and disbursements made between” ZA Consulting and August Associates LLC, which is controlled by Schick but has no business relationship with ZA Consulting, Morris said.

“Fishman’s records reveal that, during the month of January 2003 alone, there were more than 25 transfers between ZAC and August, totaling more than $2 million,” Morris said. “These transfers between ZAC and Schick are recorded in ZAC’s ledger under the category ‘general’ — that is, they are not even attributed or attributable to any particular deal, transaction or investment.”

Between January and June 2003, more than $10 million was transferred to Schick or August by Fishman and his companies.

Morris said he didn’t know about Schick’s criminal background for financial crimes, which dated back to 1997.

Morris is suing for fraud, breach of contract and fiduciary duty and is seeking an unspecified amount of damages.

Broughton, Formation Capital’s attorney, has asked that the case be dismissed, but that motion is still pending.

The Bid

In December 2004, Formation Capital CEO Arnold Whitman led the charge to take over Beverly.

In a Dec. 22 letter to Floyd, Whitman said he was willing to pay $11.50 a share for the issued and outstanding shares of Beverly.

“However, if our due diligence suggests that there is more value in the company, we are prepared to raise the offer price accordingly,” Whitman said in the letter.

By the end of January, Beverly had rejected the offer and scolded the investor group for acting in bad faith in an attempt to take control of Beverly.

Beverly then adopted a shareholder rights plan to block against company takeovers.

“In short we believe your motives are to stampede us into some form of transaction that will enable your group to make a quick profit from your newly acquired stock,” Floyd said a Feb. 3 letter. “We are not interested in playing a game that some would describe as ‘greenmail.'”

Formation then sent a letter to Beverly’s investors asking that they elect the six candidates it picked to be on Beverly’s board of directors.

The fight over control of the company hit a new level in March, when the Long Term Care Resident Protection Act of 2005 was introduced in the Arkansas Legislature. The bill said its purpose was to protect the health and safety of residents in nursing homes.

Formation then named Arkansas Department of Human Services Director Kurt Knickrehm in a lawsuit in an attempt to block the bill.

The “Beverly Act purports to bar (Formation) from even offering the proposed transaction to Beverly’s shareholders, much less consummating it, without the prior approval of the director of DHS,” Formation said in its lawsuit against Knickrehm. “The director’s approval may be provided only after a lengthy process in which the incumbent Beverly management is given every opportunity to block and otherwise delay the transaction.”

Whitman accused Beverly’s board of using money that would have been better spent on its residences to fight the sale by lobbying for the bill.

“Beverly’s board and senior management also have agreed to pay Wall Street investment banks, Lehman Brothers Inc. and J.P. Morgan Securities Inc. fees of over $16.5 million to assist senior management in resisting the proposed transaction,” Whitman said. “The money is in addition to the $2.7 million Beverly expects to pay two proxy solicitation firms, lawyers and other advisers working to block the proposed transaction.”

The bill was never passed, and Formation’s lawsuit was dismissed.

Beverly announced on March 22 that it would be sold through an auction.

In Beverly’s latest statement in May, Floyd said there were several groups of potential buyers, but he wouldn’t say how many.

“The process we’re going through is fairly typical of any sales process of this type — an initial round to determine preliminary interest — followed by a second round with a smaller group of the more serious parties,” Floyd said in statement.

Floyd said that under the new owners, he expected some positions would be eliminated but most employees will stay on.

“It simply makes good sense,” Floyd said. “The new owner wanted to buy a successful, ongoing business — and who knew that business better than the people who were already running it?”