Creating securities backed by cash flows from accounts receivable is a common activity in financial markets. Companies that have considerable balances on their accounts receivable and find it time-consuming to collect on them, often prefer to sell the receivables to a third party. By selling accounts receivable, the firm gets immediate access to cash. The sale of the receivables transfers ownership of the receivables to the third party, indicating that the third party obtains all of the rights associated with the receivables.
Below is an example of two companies involved in buying and selling accounts receivable. Factual information is taken directly from the FBI website.
International Portfolio Inc. (IPI) and United Consulting were engaged in buying and selling accounts receivable, including medical debt portfolios since June 21, 2006. Another firm – Account Receivable Services LLC (ARS) invested in medical accounts receivable purchased from IPI using funds borrowed from investors interested in asset-based lending.
From December 2006 through June 2008, IPI paid more than $25 million to purchase over $4.1 billion in medical accounts receivable, comprising more than 3.8mm past due patient accounts that the hospitals and other entities selling the accounts had been unsuccessful in collecting. Beginning in June 2007, the two above mentioned firms began promoting an investment model to individual investors and investment fund managers.
They agreed that ARS, through IPI, would combine accounts receivable from IPI’s inventory into discrete debt portfolios with specified total outstanding account balances. These portfolios would then be offered for sale to investors. In addition, ARS and IPI would manage all the collection efforts for each debt portfolio IPI sold.
They made fraudulent representations and omissions regarding purchase prices, collection results, and resale values of IPI medical debt portfolios in order to persuade investors to invest in those portfolios. The firms negotiated and agreed upon two different purchase prices for each IPI debt portfolio that hedge funds and other investors financed on behalf of ARS. IPI agreed to kickback the loan proceeds in excess of the true purchase prices to ARS and characterized the kickbacks as a refund for any unqualified accounts in the portfolio, such as when a debtor was deceased or bankrupt. Between June 2007 and March 2009, IPI paid ARS kickbacks totaling approximately $8mm.
Finally, in order to urge investors to buy and/or maintain their investment positions in IPI debt portfolios, and to further conceal substantially lower than projected collection results, the owners fraudulently repurchased and resold investors’ IPI debt portfolios at artificially inflated prices that neither corresponded to a particular debt portfolio’s actual collection results, nor to an asking price from a purchaser in the debt-buying industry. Owners of IPI and ARS represented to investors that the IPI debt portfolios sold to them or used as collateral were comprised of medical accounts receivable that IPI had purchased directly from hospitals and medical providers after those institutions had exhausted their efforts to collect from their debtor patients.
Owners of the IPI and ARS have been indicted by a federal grand jury on charges of conspiracy and wire fraud, in connection with a scheme to defraud equity investors and asset-based lenders.
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