Behind DVI Demise
By JOHN WILEN
"What caused (DVI,) a company with an established
position in the health-care marketplace and with an
almost mathematical certainty of moderate, if
unspectacular income, to descend into bankruptcy
amidst allegations of fraud and accounting
Court-appointed examiner R. Todd Neilson poses the
question, then spends nearly 200 pages trying to
answer it in a report filed in U.S. Bankruptcy Court
in Wilmington on April 8.
As The Intelligencer reported last week, that report
is packed with details from Neilson's nearly six-month
investigation. But, as Neilson makes abundantly clear,
even his opus - and its 1,700 pages of supporting
materials - may only begin to scratch the surface of
what he calls the "massive fraud" that took place at
the Warwick company from the late 1990s until last
DVI was a finance company with a specialty in health
care. It loaned health clinics money to buy expensive
medical equipment or make capital improvements. DVI
borrowed money from banks to finance those loans. When
the volume of its loans reached a certain level, it
packaged them into a separate company, and sold that
company off to investors in the open market.
DVI got itself into trouble in the first place by
expanding overseas in the mid-1990s, Neilson writes.
The $110 million outlay required for that move - made
by chief executive officer Michael O'Hanlon over the
objections of his executives and directors, Neilson
concludes - caused the initial cash shortage that led,
ultimately, to many of DVI's other alleged
shenanigans, Neilson writes.
Neilson spreads criticism widely in his report but
directs most at O'Hanlon, "a strong, 'hard-nosed'
executive who was raised in a tough area of
Philadelphia and brought that 'bare knuckle'
philosophy to DVI."
"There is a business axiom that states 'success has
many fathers but failure is always an orphan,'" writes
Neilson in one of his report's most poignant passages.
"The failure of DVI is not an 'orphan' searching for a
'father' - that 'father' is Michael A. O'Hanlon."
Calls for comment to O'Hanlon's homes in West Palm
Beach, Fla., and Ocean City, N.J., were not returned.
Neilson blames O'Hanlon for the company's overseas
adventures, which he says DVI underfunded by at least
$110 million. But he also sees the CEO as the prime
mover behind a number of practices that ultimately led
to DVI's downfall.
DVI's investment in the Corpus Christi Community
Cancer Care Center is offered by Neilson as an example
of the way DVI's failure to cut its losses early led
to greater losses - and allegedly fraudulent attempts
to hide those losses - later.
DVI loaned $1 million to the Corpus Christi center in
1994. The money was ostensibly intended to fund the
creation of a radiation oncology facility. But DVI
quickly discovered it had been defrauded of $800,000,
Instead of writing off that loss, a move that would
have hurt DVI's bottom line, the company loaned as
much as $6 million over the next 10 years to three
different operators in a futile attempt to recoup its
initial investment, Neilson concludes.
The center's contracts were in "a nearly continual
state of delinquency," and its outstanding debt stood
at $5.5 million on Jan. 31, 2004, he writes.
Other than a single write-down of about $60,800 in
2001, writes Neilson, "DVI never recognized any other
loss or recorded any other reserve with regard to the
Corpus Christi center, a center that apparently had
never operated at a profit throughout its history."
In 1999, DVI, at O'Hanlon's direction, loaned at least
$10 million to the Hit Factory, a New York recording
studio run by a longtime friend of O'Hanlon's, Edward
Germano, Neilson writes.
"O'Hanlon made the decision to fund this acquisition
despite the possible disapproval of the DVI credit
committee, because he had already promised Germano the
funds," Neilson writes, citing an interview with a DVI
The loan was to help the Hit Factory expand into
Miami. That expansion didn't go well, Germano became
ill and eventually died, and O'Hanlon let the company
suspend payments. In March 2000, DVI extended the Hit
Factory $4.5 million in working capital loans "for the
purpose of meeting DVI ... monthly lease payments,"
But the Hit Factory continued to struggle, and rarely
made its payments. By June 2003, DVI told the studio
it was in default, with a past due balance of $4.5
million, and a total balance for all financing of
"It was clear to DVI, as early as December 2000, that
there was significant exposure that should have been
recognized as a reserve against loan losses," writes
Neilson. "Rather than accept that likelihood, DVI,
under Michael O'Hanlon's direction, continued to pour
millions of dollars into this financially hopeless
In the cases of the Corpus Christi center and the Hit
Factory, and in many other instances, DVI refused to
write off losses, Neilson found. Instead, the company
rewrote loan contracts for no reason other than to
hide the fact that the original loans had become
uncollectable, he alleges.
DVI would take a bad loan - one whose borrowers were
not making payments - and pay it off with a brand new
loan, Neilson alleges.
Rewriting, Neilson found, let the company continue to
recognize as revenue money due from the contracts, and
it let DVI avoid having to take a loss against its
bottom line. That made the company's financial health
look much better on paper than it actually was,
boosting its value in the eyes of investors.
As he puts it in his examination of DVI's treatment of
loans extended to Health Integrated Services, a
provider of various health-care services that
ultimately may have cost the company more than $22
million in bad loans:
"It is difficult to conceive an explanation that would
justify the accounting subterfuge demonstrated in
these transactions. The examiner believes the actions
of those responsible were a deliberate attempt to
conceal and misstate the financial operations of DVI."
Rewriting bad loans could make DVI look better on
paper, Neilson wrote, but the company still had to
come up with cash to operate.
In August 1999, a DVI lender pulled a short-term line
of credit as the company was preparing to repurchase
several bad loans. The confluence of events created a
"$35 million issue that 'would sink the company,'"
writes Neilson, citing chief financial officer Steven
Garfinkel told Neilson that O'Hanlon told him to find
a way to fund the loan buyout. At that point,
Garfinkel tells Neilson, he "blinked" and suggested
pledging collateral to a Fleet credit line that was
either barred from use as collateral under the
company's borrowing agreements or was already pledged
to another line of credit. That move opened up more
room to borrow.
Garfinkel's attorney declined comment.
That decision began a process of pledging ineligible
collateral that continued through the time of the
company's bankruptcy filing last summer, Neilson
alleges. At one point, there was as much $102 million
in collateral improperly pledged to lenders, Neilson
Neilson clearly feels there's plenty more to be found
on DVI, concluding: "While this report, in the
examiner's view, addresses in detail many of the key
pieces in the 'story' of DVI, this story is a long and
complex one that may still have more pieces to be
Neilson writes that he cooperated with many other
investigative agencies in his investigation, including
the Securities and Exchange Commission and U.S.
attorneys in Delaware and Pennsylvania. All have
While the examiner did not accuse the people in his
report of specific crimes, he describes the actions of
DVI and its executives as "massive fraud," and accuses
them of "illegal and unethical conduct."
DVI continues to operate under bankruptcy court
protection, with Mark Toney, a distressed-company
specialist with the New York turnaround firm Alix
Partners, as its chief executive. But it doesn't
appear that Toney's goal with DVI is a turnaround.
Toney has said his purpose is to wind down the
Toney declined extensive comment on Neilson's report,
other than to say that it "speaks for itself."
Neilson credits help from Toney and many DVI employees
in his report, a sentiment Toney echoes:
"Personally, I thank the employees who have cooperated
and assisted both the examiner and Alix Partners over
the past eight months," Toney said via e-mail. "Many
parties were impacted by the failure of DVI, including
a group of employees that worked hard and were honest
John Wilen can be contacted via e-mail at
(sent to us by a reader )