Behind DVI Demise

         By JOHN WILEN

                The Intelligencer

"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 irregularities?"

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 August.

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, Neilson writes.

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 executive.

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," Neilson writes.

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 $19.9 million.

"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 situation."

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.

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 finds.

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 investigated."

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 declined comment.

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 company's operations.

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 people."

John Wilen can be contacted via e-mail at

jwilen@phillyburbs.com.

(sent to us by a reader )