Millennium Health Trustee Sues Banks to Claw Back Fees

J.P. Morgan Chase & Co. and Citigroup Inc.'s Citibank unit are among the institutions being sued over $35.3 million in fees they received for arranging a $1.8 billion deal that a bankruptcy trustee alleges led to the collapse of Millennium Health LLC.

Marc Kirschner, the trustee, is attempting to claw back fees that were paid to the banks in April 2014, about eight months before the drug-testing business began facing heightened U.S. Justice Department scrutiny and about 18 months before it filed for chapter 11 bankruptcy, according to the complaint filed Thursday.

J.P. Morgan, Citi, BMO Harris Bank NA and SunTrust Banks Inc. pushed loan notes issued by Millennium Health to mutual funds, hedge funds and institutional investors despite knowing that marketing materials had been scrubbed of any mentions of the company's legal problems and that the deal would be of little value to the business itself, the complaint said.

The financing, instead, largely helped two other groups: The proceeds paid off a $304 million loan balance owed to existing lenders -- including J.P. Morgan -- and then left more than $1.2 billion for dividends and bonuses to company investors and executives, including Millennium founder James Slattery and private-equity firm TA Associates, the complaint said.

Insiders thanked the banks "profusely," not so much on behalf of Millennium as for making them and their families rich personally, according to Mr. Kirschner's complaint.

"It's more than getting the [loan] deal done; you've changed our personal lives for generations," Millennium President Howard Appel wrote to J.P. Morgan in April 2014, according to the complaint, filed in U.S. Bankruptcy Court in Wilmington, Del.

But the transaction left little if any proceeds for the privately held business itself to cover liabilities resulting from allegations that it illegally billed federal and state health programs, the complaint said.

J.P. Morgan and Citi, which received fees totaling almost $32 million, declined to comment on the allegations. SunTrust also declined to comment and BMO Harris couldn't be reached for immediate comment.

In May 2015, Millennium agreed to settle complaints over illegal billing practices for $256 million. Months later, however, the San Diego-based business realized that it wouldn't be able to pay the entire settlement because of debt from the 2014 deal. In November 2015, Millennium filed for bankruptcy.

According to the complaint, J.P. Morgan began carefully monitoring the Justice Department's inquiries into Millennium's business practices as early as 2012. J.P. Morgan also "demanded" that one presentation to potential investors not include the typical discussion of risk factors, the complaint said.

"The rise and fall of Millennium is a story" of its investors "artificially pumping up revenue and profitability by encouraging or coercing physicians to order medically unnecessary tests," the complaint said.

The investors, helped by the banks, siphoned dividends through "a false and misleading securities offering," and therefore the banks that helped them should return their fees, the complaint said.

Had the fees not been paid to the banks in what amount to a "fraudulent transfer," the transaction that essentially led to the bankruptcy would have never occurred, the complaint said.

Write to Becky Yerak at becky.yerak@wsj.com

(END) Dow Jones Newswires

November 09, 2017 16:54 ET (21:54 GMT)