Monday, September 4, 2000

By Josh Goldstein

INQUIRER STAFF WRITER

For most Philadelphians, the Allegheny health system's bankruptcy saga is only a

bad memory.

For the health system's many creditors, who are owed $1.5 billion, it is a nightmare slowly drawing to

an unsatisfactory conclusion.

For the defunct system's former executives, it has spawned civil lawsuits and criminal charges that have

only just begun to work their way through the courts.

And for the lawyers, it means potentially years of more legal wrangling, and the accompanying fees, for

the scraps.

Now, with Allegheny's hospitals sold or merged into other systems, and its name removed from

buildings and billboards, the only remnants of what was once the largest hospital system in Pennsylvania

are the lawsuits and criminal proceedings.

Next Monday in Pittsburgh, a preliminary hearing on criminal charges against Sherif S. Abdelhak, the

system's former chief executive officer, and his deputies, David McConnell, formerly chief financial

officer, and Nancy Wynstra, the former general counsel, is scheduled to resume. The three are accused

of diverting $52.4 million in charitable funds to prop up the system's failing Philadelphia operations in

1998.

The three executives were indicted on state felony and misdemeanor charges of theft, illegal campaign

contributions, and conspiracy in March.

Abdelhak, McConnell and Wynstra could be sentenced to 10 to 20 years in prison if convicted on all

charges.

"We filed criminal charges against these three defendants because we feel they are directly responsible

for raiding charitable assets," said Sean Connolly, a spokesman for Pennsylvania Attorney General

Mike Fisher. "Meanwhile, we are also seeking to recoup as many of these raided endowments as

possible through a claim in Bankruptcy Court and a lawsuit against those three defendants and five

[former Allegheny] board members."

The efforts to recover money taken from the endowments and restricted funds and owed to thousands

of Allegheny's creditors have generated many suits in bankruptcy court and other federal and state

courts.

U.S. Bankruptcy Judge M. Bruce McCullough, who has overseen the case since Allegheny filed for

Chapter 11 protection in July 1998, has scheduled a hearing Nov. 1 on a plan developed by the

court-appointed trustee for the system to disburse recovered funds to the creditors.

Most would get five cents for each dollar they are owed. Some bondholders and companies that

insured the health system's debt are considered "secured" creditors; they will get larger lump-sum

settlements.

Allegheny's creditors have until Oct. 18 to approve or reject the plan.

The trustee's plan also sets aside a $30 million fund to pay legal and administrative fees incurred trying

to recover more money for later distribution to the creditors.

"Hopefully, the Chapter 11 [bankruptcy case] will be concluded in November, but the litigation will

continue, and that is why this trust was set up," David G. Heiman, a lawyer for the unsecured creditors,

said.

That fund will be tapped as the trustee and the creditors seek to recover millions more from a variety of

sources, including:

Mellon Bank, which, along with three other lenders, received repayment from Allegheny for an $89.5

million loan as the health system fell into bankruptcy.

Insurance policies, known as directors and officers insurance, that cover Allegheny board members and

executives against charges of mismanagement and misconduct. Allegheny had $200 million worth of

such coverage.

PricewaterhouseCoopers L.L.P., Allegheny's independent accounting firm, which the trustee charges

failed to warn of the financial troubles in time to stave off the disastrous losses of the bankruptcy.

The trustee also is seeking to recover $3.9 million in Allegheny-backed personal loans to Abdelhak,

McConnell and Wynstra.

Suits also have been filed outside the bankruptcy proceedings by lawyers representing a number of

people and institutions affected by Allegheny's collapse.

Fisher's office and Tenet Healthcare Corp., the for-profit company that acquired eight of Allegheny's

Philadelphia-area hospitals in November 1998, filed suit in February seeking $78.5 million in

compensation plus punitive damages from Abdelhak, McConnell, Wynstra and five Allegheny board

members for diverting charitable funds from their intended uses.

Allegheny donors, doctors and researchers filed two federal racketeering suits in 1998 against

Abdelhak and other executives and directors, charging them with conspiring to drain endowments and

restricted funds to repay the Mellon loan.

Last month, U.S. District Judge Clarence C. Newcomer dismissed one of those suits. The other is

pending.

"The proceedings are slower then normal due to the existence of the bankruptcy case," said Michael D.

Gottsch, one of the lawyers representing the plaintiffs in the remaining racketeering suit.

Lawyers representing bondholders of the Graduate Health System have filed state and federal suits

against the executives who sold the system's five Philadelphia-area hospitals to Allegheny in 1996.

The suits seek compensation and damages for contributing to the Allegheny bankruptcy by stripping

$27 million from the hospitals and weakening them financially. Among the defendants is a $100 million

foundation established with the proceeds of the Graduate sale.

In May, the U.S. Securities and Exchange Commission accused McConnell, the former financial

officer, and another executive, Charles P. Morrison, of defrauding investors by overstating the system's

earnings by more than $154 million over two years. McConnell agreed to pay a $40,000 fine without

admitting guilt; Morrison is contesting the charges.

In addition, federal prosecutors in Pittsburgh and Philadelphia have been investigating Allegheny for

months, but have declined requests to discuss the case or say whether federal criminal charges will be

filed.

After more than two years, many creditors and others affected by the collapse of Allegheny remain

angry and confused.

"Some people have been able to put it behind them and move on to different or better things," said Julia

E. Gabis, a health-care lawyer in Conshohocken who represents Allegheny physicians and faculty

members who are creditors. "For others, this process resurfaces the pain and anxiety of the bankruptcy

two years ago, and it is really hard."