CEO SUMMARY: It will certainly rank as one of the major executive frauds in the clinical laboratory industry. In the wake of MEDex Laboratories’ Chapter 11 Bankruptcy filing in April, an amazing tale of deceit and deception began unfolding. At the center of the story is ex-MEDex CEO Michael E. Ladd, now cooling his heels in a Greeneville, Tennessee jail and facing eight federal criminal charges.
EVERY NOW AND THEN, life reminds us to take nothing and no one for granted. That’s certainly the case in Kingsport, Tennessee, where the Chapter 11 Bankruptcy of MEDex Laboratories is one consequence of the fraudulent deeds of its ex-CEO, Michael E. Ladd.
Hired originally in August 2000 to be the Chief Financial Officer of MEDex, Ladd was promoted to CEO in November 2001. In his brief time at MEDex, Ladd managed to hoodwink just about everyone around him.
It started at the time he was hired. Background checks failed to turn up the fact that Ladd had one felony conviction (charge not known publicly) in 1992. It was also not discovered that Ladd was under indictment as a check forger, a felony charge to which he pled guilty in December 2001.
As a bookkeeper for a homebuilder, he admitted to embezzling between $10,000 and $60,000 from the company in 1999. During his tenure as MEDex CEO, Ladd was on probation (through 2005) for this crime.
Next to be fooled by Ladd was the MEDex Board of Directors. MEDex was jointly owned by the four-hospital Wellmont Health System and six Kingsport pathologists (who founded the laboratory in 1973). Ladd manipulated accounting records to keep MEDex’s true financial condition hidden from the board.
For three years, Ladd managed to avoid an accounting audit of MEDex Laboratories. That changed in November 2002 when board members initiated a full audit after learning that payments to some vendors were late. The audit results were reported to the full board on March 27, 2003. Instead of the profit Ladd had reported, the audit revealed that MEDex had lost about $2 million per year in each of the preceding three years! Ladd resigned that day.
Ladd was equally successful at fooling MEDex’s bankers. In all, it is believed that he managed to extract $8.5 million in loans from banks, although the MEDex board had only authorized $2 million in bank debt. To successfully accomplish this, Ladd promised the bankers that the additional debt would be secured by the personal guarantees of the six pathologists and Wellmont Health System.
Eight Forged Signatures
This decision will cost Ladd dearly. On December 19, 2002, Ladd delivered to the bank what he represented to be the signatures of two Wellmont officials and the six pathologists. These signatures were forged. They are the basis of an eight-count federal criminal indictment for “making false statements and reports for the purpose of influencing the actions of a federally-insured bank.” Ladd faces up to 30 years of jail on each count and a fine of as much as $1 million.
On Wednesday, May 7, Ladd was arrested by FBI agents and booked into jail at Greeneville, Tennessee. He was held without bond because he is in violation of his probation from the 2001 conviction. At a detention hearing last Wednesday, he waived his rights. His case now goes to the grand jury, which may review his case as early as this week.
Michael Ladd aptly fits the description of a rogue and con man. He was charismatic enough to gain the job of Chief Executive Officer at MEDex. But his lifetime pattern of fraud demonstrates that this position was an opportunity to continue scamming people around him. As of press time, there has been no public discussion that either MEDex funds or proceeds of the bank loans are believed to have been siphoned off for his personal use. But then again, that may prove to be the next revelation in this amazing story.
What Is The Lesson?
If there is a moral to the tale of Michael Ladd and MEDex Laboratories, it is that every business benefits from appropriate internal controls and outside audits. Had proper financial controls been in place, including audits by outside accountants, it is likely that MEDex’s board would have uncovered his fraud in its earliest stages.
THE DARK REPORT recommends that laboratory directors and pathologists use this story of chicanery and deceit as an opportunity to remind their management teams that nothing is ever as it appears. Healthy skepticism and good management practices are always in the best interest of every laboratory organization.
Picking Up the Pieces At MEDex Laboratories
TO COPE WITH ITS UNEXPECTED FINANCIAL problems, MEDex Laboratories is concentrating on its core markets.
Ex-CEO Michael Ladd had embarked on an unauthorized lab expansion program. In Tennessee, he had opened facilities in Chattanooga, and Knoxville. These will be closed. Ladd’s plans to open labs in Nashville. and Birmingham, Alabama have been cancelled. Edward Bush is now running MEDex. In closing these facilities, he acknowledges as many as 80 jobs will be lost.
MEDex will continue to operate its laboratories in four hospitals and five other locations. Its core revenue base is estimated to be around $40 million.
Another consequence of Ladd’s scam is that, as a result of the lab’s sizeable losses and the Chapter 11 Bankruptcy filing, the six Kingsport pathologists have transferred their 50% stake in MEDex to Wellmont Health Systems.