The Observation Deck

I want to take a quick moment to answer the objection that the city administration had no other choices.

There was an obvious and proper path to properly reorganize the City's relationship with LHA and the City's rights with respect to that relationship. It was noted by Huron Consulting in their reports, but by then it was too late. Any experienced transactional attorney could walk us through this.

The Cleveland Clinic Foundation, The Lakewood Hospital Foundation, and the City of Lakewood were participating in what is known as a "health care collaboration". The federal government has long-standing guidelines for antitrust issues in these kinds of collaborations. The plan to close Lakewood Hospital was the wind-down of one of these types of collaborations. These guidelines are online at both the FTC and the DOJ websites. They are long and highly specialized. The restrictive covenant preventing future use of the hospital would have been reviewed in that process and would likely have been rejected as unworkable.

The city administration could have achieved its objectives, whatever they might have been, by meeting with transactional legal counsel at the earliest opportunity. That team of lawyers would have guided them through the wind-down process. CCF and LHA would have done the same. Like Huron Consulting noted, counsel for these parties would have identified a qualified national dealer/broker or investment bank to assist in appraisal and marketing of the assets. During that process, the ex officio board members would resign from LHA and the parties would have then conducted the transaction at "arms-length" and on equal footing, thus avoiding the conflicts of interest and the breaches of fiduciary duty.

Finally, I want to note another defect in the transaction that has never been satisfactorily explained. Given the size of the transactions, the subject of the transaction, and the size of the parties, I believe that LHA (or CCF) had a duty to file a disclosure with the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Act. No filing, to my knowledge, was ever made.

While the process that I describe would not have eliminated all of the legal risks now facing the city administration, it would have eliminated many and, furthermore, would likely have been a more open and transparent process.

Next, I'm going to wade into some more technical waters, just for completeness' sake.

I hadn’t really expected to carry this presentation into this kind of deep detail, but it does flow from the discussion of the Exhibit A affidavit and the City forecast spreadsheet (provided and discussed above).

The city administration didn’t just leave $32,000,000 of actual potential revenue on the negotiating table for the other private parties, but rather decided to give it to them. The Master Agreement is clear on this. Somehow, the city administration felt that it was so solvent that it could arrange for a multi-million dollar donation to a putative foundation from funds that could actually have returned to its own treasury as revenue from liquidated paper assets. Well, that’s all water under the bridge now.

When public officials come next to the taxpayers with increases in taxation or reductions in service, let's hope they don't come with more nonsense like “health-care's a changin'...”. Come to us with honest facts. Not faux “facts” that a public relations firm has been handsomely paid to fabricate; and that citizens have paid for.

There was also an easily-described, ordinary and normal way to go about the wind-down of the CCF-LHA-City contractual relationships. Simply doing this transaction the ordinary way would have eliminated the risks of antitrust or securities law violations that are now obvious from our detailed review of Disclosure Problems No. 1 through No. 8 and from other parts of this presentation.

Assume for the sake of argument that the allegations in Skindell v. Madigan are true. Assume also that the City law department is stonewalling on the production of public documents related to the deal that closed the hospital.

At this point, the city administration can’t really defend itself by stressing its own ignorance or carelessness.

But, keep in mind that I write all of this with 20/20 hindsight. But, so too would a plaintiffs-side securities lawyer developing his/her theory of a case.

Here's the Bottom Line:

The city administration chose to conduct the transaction to close the hospital in a way that would maximize losses to the City. That decision maximized actual and potential legal liability risks to the City as well.

If you have not been convinced of this by now, then a few more posts should convince you. Stay tuned.

Our “straw-man” hypothetical securities law case against the City of Lakewood only gets stronger. Trust me on this, a sophisticated plaintiffs’ attorney from a national firm would drill deep and then drill deeper.

Disclosure Problem No. 9: The City’s 2016 Annual Report

The City’s annual report (2016 CAFR) reports to the public and, of course, to the bondholders and national rating agencies that the City owned and sold Lakewood Hospital. Well, did we really sell Lakewood Hospital? Don’t we now own a nearly empty shell of a hospital that we are legally prohibited from ever using for its original purpose again? Isn’t there some kind of an emergency room there? What did we sell? Is the transaction being correctly reported. If not, why not?

Didn’t we hear from our public officials that we didn’t ever really own the hospital to begin with? I’m sure you recall these kinds of statements.

One fundamental problem that other professionals have repeatedly commented on is the failure of LHA and the City to retain a professional national investment firm to conduct an appraisal of the value of the assets and handle an independent offering to the national market. After reading this far, does anyone really think that Subsidium was up to that task? Huron Consulting didn’t think it was. And they were the City’s second consultant after the damage had already been done.

There also seems to have been a failure to appraise or a failure to even understand the approximate value of the residual or reversionary rights held by the City under the 1983 and 1996 hospital agreements.

The city administration participated in the LHA wind-down without understanding the dollar value of the residual or reversionary rights that it was terminating. So, were the bondholders treated fairly by this? Didn’t the city administration have a fiduciary duty to understand what the value of the bundle of rights it was selling, terminating, transferring or abandoning actually was?

We have been repeatedly told that appraisals of the hospital were not necessary and not done.

The city administration also had a fiduciary duty to understand the value of the assets or liabilities that it was transferring in the wind-down. Documents that would reflect this, particularly, the actual wind-down costs, have never been seen by the public and likely never will be.

How can you negotiate, if you don’t understand the value of the hospital that you owned and sold? Don’t bondholders have a right to a basic duty of competence related to the duties of the municipalities they invest in?

Litigating counsel for bondholders would have a strong argument that because the City failed to understand the value of its reversionary contractual rights related to Lakewood Hospital that the financial value of this bundle of rights was liquidated below their proper fair-market value.

A hypothetical securities law case is also highly appealing in this situation from an aspect of novelty, since it seems that public employees may have used social media to propound some of the misrepresentations. Proof of this might demonstrate that misinformation had tainted the “total mix of information” available to bond-holder, as the SEC noted in its Harrisburg Release.

The city administration didn’t just leave $32,000,000 of actual potential revenue on the negotiating table for the other private parties, but rather decided to give it to them. The Master Agreement is clear on this. Somehow, the city administration felt that it was so solvent that it could arrange for a multi-million dollar donation to a putative foundation from funds that could actually have returned to its own treasury as revenue from liquidated paper assets. Well, that’s all water under the bridge now.

I've always been very curious about this part of the transaction. Brian Essi has written often about the impact the hospital closure has on needy and disadvantaged people (though to me those folks have excellent access to healthcare, its the middle class obama care bronze planners like myself that have no access to healthcare, we just get to pay a massive worthless insurance bill that covers NOTHING each month, but that's totally another discussion, and no I didn't vote Trump).

In any case, I always felt that it was nuts to start a new foundation with that money. Am I right in believing that the money originally came from Lakewood and was money to help people that couldn't pay their bills in our hospital building, not just where ever CCF thought they should sprinkle some Lakewood green? Once we don't own a hospital anymore, it seems like that money should have been returned to us. I assumed the reason it wasn't was that there were legal problems or tax problems. Am I wrong about this entire piece of the transaction?

Could you please list the agencies that you have filed complaints with. Thanks.

Mr. Vainisi: We should be very clear about this. The Lakewood Hospital Foundation is separate from the Lakewood Hospital Association and LHF in not a party to the Master Agreement. During 2014 and 2015, it is my understanding that LHA had substantial investment holdings beyond its hospital-related assets and its other real estate assets. I believe that the indigent care that Mr. Essi evaluated related to the uncompensated services rendered by Lakewood Hospital at an approximate value of $7M per year. However, I am comfortable with the analysis that I have presented here.

Ms. Allen: You can assume that during the past two years complaints were made to every relevant government body that was likely to have interest and jurisdiction. The citizens opposed to the hospital closure made a full court press. Hence, my focus in this presentation on the litigation risks associated with private civil litigants.

Thank you both for your interest!

A little more on Disclosure Problem No. 9.

I do not have time to explore accounting, reporting or audit issues here. However, privately-retained forensic accountants would go to work on all of this in the event that a securities case was brought against the City.

I just want to make the point that some of the reporting that I and others have looked at is kind of, let's just say, off.

If we sold Lakewood Hospital, why do we still own it? If we sold something, what did we actually sell?

I'm sure it is just carelessness. But a skilled and aggressive lawyer can drive a bus through carelessness, given all of the other problems that I have reviewed with you.

My point here is that Disclosure Problems No. 1 through No. 9 open the door to a tremendous amount of additional areas of review. Others have described many of these areas; like, the undervalued appraisal of the Columbia Road property; or the contractual obligations to maintain the debt ratio.

I don't want to rehash everything that everybody else has already reported on or based other cases upon.

Again, here is my Bottom Line:

1. The city administration chose to conduct the transaction to close the hospital in a way that would maximize losses to the City.

2. That decision maximized actual and potential legal liability risks to the City.

3. The taxpayers of the City of Lakewood paid for a Family Health Center.

Let’s take the argument one step further, because this is where I think a new taxpayer lawsuit against the City might lie.

Perhaps the reason that no H-S-R filing was ever made with the FTC was because the transactions under the Master Agreement were always mostly a “wash” sale. What I mean by this is that nothing much was ever really going to be paid to the City in the deal, and, therefore, the size of transaction test under H-S-R would never be met. This now seems the best explanation of the H-S-R failure to file issue.

From the CCF standpoint, it was doing nothing more than just reorganizing what it considered (wrongly) to be its own assets. The City would get control of its property back. (a wash). The City would get paid approximately what it would lose in lost future LHA lease revenues and related income tax receipts (another wash). While lots of numbers are being thrown about, there’s really not all that much going on. Some of this numerical noise is due to intentional obfuscation by the parties and their expensive public relations efforts to promote the closure.

Beyond this, I now suggest to you that it is the taxpayers of Lakewood that are, in principle, paying for the to-be-built Family Health Center, not CCF. Not the other way around, as we were told.

Under the Master Agreement, the City in effect, permits $32M of the value of its residual contractual rights related to the hospital lease to remain with CCF. With these funds and the other so-called “wind-down” funds left to CCF, CCF then builds its new Family Health Center, more or less, out of the liquidated cash assets of Lakewood Hospital.

So, then across time and from other liquidated cash assets, CCF meets its obligations under the Master Agreement to periodically make contractually-mandated payments to the new foundation, but, always retains control of the use of these funds once paid. (see, Master Agreement, Section 6.)

As I have argued previously, the taxpayers lost the benefit of that actual potential cash value in the deal due to the City’s apparent abandonment or neglect of its residual contract rights. And, taxpayers are left with the burden of any other post-deal revenue shortfalls by future tax increases.

The promised economic development bonanza was always an illusion generated by the highly-paid public relations spin-meisters. It’s illusory, since it was always being funded with what should have remained public dollars or public real estate.

I remain fully convinced that there are multiple viable legal actions against the City that have yet to be brought. Each rests on a sound basis in fact, in law and public policy.

I fully understand that public officials must make difficult decisions.

However, those decisions must be made within the confines of the legal, ethical and procedural process.

To the extent that difficult decisions are made outside of the law or ethics or the proper processes, such decisions are no longer difficult decisions, but, by those very acts, are now wrong decisions.

This concludes this series. I will answer questions in this thread, but this concludes my presentation and argument.

In "Civic Accountability -- Honesty In Government II", we will explore why the City of Lakewood needs a robust compliance program for ethics-in-government.

Thank you for reading this series.

To the extent that difficult decisions are made outside of the law or ethics or the proper processes, such decisions are no longer difficult decisions, but, by those very acts, are now wrong decisions.

Wrong is such a mild word. It's much more than just wrong, it's immoral, unethical, and illegal.

What legal and financial liability has CCF created for themselves due to the execution of this bad deal.

Mr. Fitzgibbons: This is not a question that I am prepared to answer. Other lawyers are working on this issue and it is the focus of the taxpayer lawsuit filed in the spring of 2015. All of the pleadings are on-line via the Cuyahoga Clerk of Courts docket system. I purposefully limited my discussion here to avoid having to circumscribe the entire galaxy of legal claims. It took me long enough just to walk through the material that I had. Best!

To any reader that might think that I have been treating our public officials unfairly in this series, please understand that I raised many of these issues with each city council member privately via a letter sent in February 2016. And, also that the proposed Third Charter for the City dated August 8, 2014, identified many of these same categories of issues as problematic.