Loan Buyers Say JPMorgan Misled Them About Billing ProbeBy and
Suit filed by trustee for holders of Millennium Health debt
Bank spokeswoman says lender ‘acted appropriately’ in role
A leveraged loan that proved to be toxic for investors is coming back to haunt JPMorgan Chase & Co. and a handful of other banks that helped to sell debt for a company that was once the nation’s largest drug-testing lab.
The trustee handling claims for former lenders to Millennium Health LLC filed suit this week against JPMorgan, the agent for the loan, and three other firms. The suit alleges the banks failed to inform investors about a Department of Justice probe into Millennium’s "flagrantly illegal" billing practices.
In December 2014, just eight months after JPMorgan helped San Diego-based Millennium sell a $1.8 billion loan, U.S. officials told Millennium managers they were joining lawsuits filed by whistle-blowers relating to the company’s billing, according to the complaint filed this week in New York state court. About three months later, federal officials threatened to revoke Millennium’s ability to send claims to Medicare based on allegations it falsely charged the program, the trustee claims.
JPMorgan was incentivized to make the loan said, the trustee said, because it wanted to refinance an earlier $300 million loan to the company. The bank also reaped "tens of millions" in fees for underwriting the loan, the trustee said.
JPMorgan "failed to notify" investors about the problems, according to the complaint. When the investors found out in May 2015, the loan’s value started plummeting. By June, the loan had tumbled to just over half of its face value as investors grappled with the implications of the probe on a company that received much of its revenue from the government.
"We do not believe the trustee’s claims have any merit," Tasha Pelio, a spokeswoman for New York-based JPMorgan, said in an email. "It is certainly unfortunate if any hedge fund, financial institution or other lender lost money as a result of what happened at Millennium, but we believe JPMorgan acted appropriately at all times."
The suit underscores the difficulties investors face in the little-regulated $800 billion market for leveraged loans. Since Millennium emerged from bankruptcy in late 2015, lenders that took over have dealt with operational problems that have helped drag down the value of the company’s post-protection debt. The $600 million loan the firm negotiated to exit bankruptcy was quoted Tuesday at 61 cents on the dollar, according to prices compiled by Bloomberg.
In 2015, the Millennium situation spiraled as revenue plunged and the company’s cash dwindled. The company, which had been owned by its management team and private-equity firm TA Associates Management, was in bankruptcy talks with lenders by September, Bloomberg News reported. The company, which isn’t named as a defendant in the complaint, didn’t immediately respond to a request for comment.
JPMorgan knew federal authorities were investigating Millennium when it sold the loan, but didn’t tell investors who were about to buy the debt, Bloomberg News reported in 2015. The bank didn’t tell investors about the issue because it wasn’t material information.
Bankers at JPMorgan actively tried to keep information about the federal investigation from potential investors, sending out documents to market the debt that "misrepresented" Millennium’s litigation exposure and the "legality of its business practices," according to the complaint. The lender told Millennium managers to discuss with investors the probe and related litigation with a competitor firm "only if a prospective investor directly raised a question" about either issue and told managers what to say if they did.
One of the offering documents prepared by JPMorgan and Citigroup Inc., another bank that helped sell Millennium debt, omitted risk factors or warnings about investing in the firm, despite attempts by lawyers for Millennium suggesting they be included, the trustee said.
The trustee alleges the investors didn’t find out about the probe until May 2015, when Millennium informed them it had reached a $265 million settlement in principle with the federal government and state Medicaid programs to resolve the billing probe. The company finalized the settlement in October 2015 of that year and filed for bankruptcy protection a month later, according to the suit.
The trustee is representing what’s left of lenders’ claims against the firm, which filed for Chapter 11 protection in November 2015 and exited from bankruptcy less than 40 days later. The trustee said its beneficiaries include about 400 investors that bought the loan, including mutual and pension funds, universities and other large investors.
In addition to JPMorgan and Citigroup, the suit also names the other banks that gave a revolving loan to Millennium. The revolving lenders include units of Citigroup, Bank of Montreal and SunTrust Banks Inc. Citigroup spokesman Mark Costiglio declined to comment, as did Marcia O’Carroll, a spokeswoman for TA Associates.
Spokeswomen for Bank of Montreal and SunTrust didn’t have immediate comments.
The banks "willfully turned a blind eye" to what they learned about the company before selling the loan, the complaint said. One of the JPMorgan bankers who helped lead part of due diligence efforts on Millennium before the loan sale had never before worked on an underwriting deal, the trustee said.
The case is Marc S. Kirschner v. J.P. Morgan Chase Bank, 655124/2017, New York State Supreme Court, New York County (Manhattan).
— With assistance by Hugh Son, and Michael Tsang