THE FIXER, PART III

[Note:  This is the third in a four-part series about Charlie McCallum, a local attorney involved in the transactions that lead to the dissolution of four Grand Rapids institutions:  Autodie, Butterworth Hospital, Amway, and Old Kent Bank.]

THE PIGGY BANK

Charlie McCallum and his wife Lois Temple had a good thing going at Butterworth Hospital.  They were among the select few who had their hands on the cash that flowed through River City’s premier hospital.  Charlie was chairman of the hospital’s board of directors, and when he wasn’t doing that he was the corporate secretary.  And just to make sure that he got at least one big plum out his “public” service, he was Butterworth’s corporate legal counsel.  That gave him control over which law firm got the hospital’s legal work.  Charlie made sure the lion’s share went to his law firm Warner Norcross & Judd L.L.P., where he was managing partner.  And guess who the managing partner assigned the Butterworth account to?

But Charlie got other plums beyond a monopoly on Butterworth’s legal work.  After he assisted Amway-founder Rich DeVos to devour Butterworth in the Spectrum Health merger in the middle ‘90s, he got a big prize.  Charlie was made chairman of Spectrum’s lucrative health care insurance concern, Priority Health.  He held that post until retiring two years ago.

However, Charlie wasn’t above nickel-and-diming the hospital for personal gain either.  Wife Lois was a Butterworth executive assigned to one of its for-profit subsidiaries in the late ‘80s.  That subsidiary was Butterworth Occupational Health Inc.  While Charlie was in charge, the hospital shoveled about a million dollars in cash a year from its reserves into BOH to keep it limping along as a cush sinecure for his wife.  Although Charlie had the hospital book that transfer of funds as an investment (by reflecting BOH as an asset in the hospital reserves), the subsidiary never acquired anything with the capital flowing into it.  Lois and her crew expensed out every dime, especially on salaries.  BOH was actually a cipher as an asset, even though the hospital reserves showed it as a valuable asset worth every dollar of the total of eight million dollars transferred to it during Charlie’s tenure in Butterworth’s boardroom.

A Culture of Self-Dealing

BOH was a worthless chit in the hospital reserves.  But then it had uses other than giving Charlie’s wife a comfortable job.  As told in Part II of this series, BOH was a convenient vehicle for bailing out one of Charlie’s business clients.  It was all part of the self-dealing, especially through land transactions, by those who had power over the hospital’s purse or influence with those who did.  Butterworth Hospital was their piggy bank to fund whatever deals hospital insiders could cobble together to pass the smell test.  As Llody Zwarensteyn, president of the Alliance for Health, had once remarked laconically upon reviewing Charlie’s shenanigans with BOH:  “Butterworth has a culture of self-dealing.”

Charlie and Lois were not the only ones cashing in.  Butterworth doctors also did so.  Frequently their deals involved getting options on land they knew the hospital needed for expansion, or they might form a group to develop property that the hospital would agree to lease.  One notorious doctor who got his bankroll from Butterworth Hospital was Jeffrey Askanazi.  In a very strange deal, Butterworth’s board of director approved an undocumented loan of one million dollars from the hospital reserves to Askanazi, who would then use the funds to open a string of pain clinics north of Grand Rapids.  The idea was that the pain clinics would serve as feeders into the Butterworth health care system in a region where the hospital was not getting many patients.  Everything went south when Askanazi killed a patient in 1996 at one of Butterworth’s affiliates, United Memorial Hospital in Greenville, and the feds began investigating.  Eventually Askanazi was convicted in U.S. district court on Medicare fraud.

However, Butterworth neatly separated itself from Askanazi’s problems.  (Not too difficult when the Grand Rapids Press won’t cover the story because its publisher is serving as chairman of the hospital.)  One broken deal wasn’t going to put an end to Butterworth’s use as a piggy bank by River City’s elite.  Indeed, Charlie was going to help a new bigshot client make Butterworth into a huge piggy bank to help work out that client’s huge financial problems.

DeVos Takes the Reins

In 1993 Amway-founder Rich DeVos replaced Charlie as chairman of Butterworth Health Corporation.  First thing on DeVos’s agenda was to merge Butterworth, the area’s number one hospital, with Blodgett Memorial Medical Center, the area’s number two hospital, into a new organization – i.e., today’s Spectrum Health Corporation.  Doing so would create a combined reserve of nearly one billion dollars under DeVos’s control.  Having control over the merged reserve was crucial to DeVos’s financial well-being, and Charlie put his law firm to work to make that merger happen.

Contrary to the typically fawning local media coverage of DeVos and his late partner Jay Van Andel, their Amway multi-level marketing empire was facing grave financial problems in the early ‘90s.  In fact, Amway never fully recovered and was eventually dismantled, with Charlie’s assistance, several years later.  (See Part IV of “The Fixer”.)  Briefly, the bubble burst for Amway’s Asian affiliates, which were set up as publicly traded companies on the Tokyo stock exchange.  These entities were in many ways proxies for the privately held mother company that DeVos and Van Andel had led everyone to believe was extremely profitable.

However, that was not so.  Amway had to admit that it overstated its revenues every year by 15-25% since its founding.  Indeed, the scandal twenty years ago involving Amway's Canadian subsidiary was not a tax dodge as commonly believed.  Instead it was a scheme to inflate revenues by booking the same sale twice. Anyone familiar with the current corporate scandals that have sunk Enron, Worldcom, Aldephia, and the like understands how this inflated the value of Amway, and by proxy, its Asian affiliates.  Thus, DeVos and Van Andel were facing huge liabilities as the price of the affiliates’ stock crashed to almost nothing.  On top of that the jig was up, at least in North America, on getting new marks to push Amway products.

As a consequence, Amway’s bankers forced the company for the first time in its history to take on an outside director.  By 1993, Amway was in a financial work-out.  But where would the extra cash come from to finance the work-out?  What new pools of capital could DeVos get his hands on?  As it happened, DeVos was chairman of Butterworth while his banker David Wagner was chairman of Blodgett.  Between the two hospitals were $850 million in reserves.  Merge those reserves, bring them under the control of DeVos, and maybe some of that money would find its way into investing in the multitude of real estate projects belonging to RDV Corporation, DeVos’s personal holding company, which in turn could help make Amway’s work-out payments to the bank.  So Charlie had a new mission:  Merge Butterworth and Blodgett hospitals into Spectrum Health Corporation.

Slaying the Dragon … Almost

The biggest dragon Charlie and his law firm had to slay to make the merger happen was the Federal Trade Commission.  Upon receiving notice of the Butterworth-Blodgett merger the FTC threw down the gauntlet:  No more mergers of the major non-profit hospitals in a region.  The FTC had concluded that previous non-profit mergers resulted in increased prices to healthcare consumers.  So in 1995 the agency went to the U.S. district court to request an injunction against the Butterworth-Blodgett merger.  Fortunately for Charlie, a sympathetic judge was assigned to the case, and he bought into the unsubstantiated notion that because Butterworth and Blodgett were non-profit organizations they would lack the ill intent to abuse their monopoly power once merged.  So, Charlie defeated the injunction.

Undeterred, the FTC appealed to the Sixth Circuit Court of Appeals in Cincinnati.  In 1996 the Sixth Circuit ruled against the agency.  So the FTC decided that it would use its own administrative court process to challenge the Butterworth-Blodgett merger.  No more sympathetic judges.  Charlie was faced with a real problem now.  This one he could not solve.  He had no way to stop the FTC's choice to pursue the matter through its own internal process.  But DeVos did.

The FTC was slated to conclude its investigation of the merger and send the case to its administrative court in September 1997.  That led to a flurry of activity involving FTC investigators nationwide.  Eventually they learned of Charlie’s conflicts of interests, the transfer of millions of dollars of hospital reserves to BOH (the subsidiary run by his wife), and the use of BOH to bail out his client Joe Spruit.  FTC investigator Joseph Lipinski consulted with the local U.S. Attorney’s office about these dubious relationships and transactions, and Assistant U.S. Attorney Thomas Gezon reported back to Lipinski that there was “evidence of self-dealing” at Butterworth.  If Lipinski could show how non-profit Butterworth Hospital was already being abused by those entrusted with its operation, he could then show the FTC administrative court that the Butterworth-Blodgett merger would simply create a larger organization to loot.  Thus, the good intent argument that prevailed in the U.S. district court and the Sixth Circuit would be defeated once and for all.

DeVos Buys a Favor

So, DeVos decided to shop for a favor.  As a bigwig in Republican politics, he thought he knew where to go.  In April 1997 DeVos and his wife gave the Republican National Campaign Committee a $1 million contribution, the biggest ever to a political party at that time.  It was more than five times amount that the DeVoses had contributed to the Republican party in the preceding five years.  Since then the DeVoses have not made any further large contributions to the party.  It was one-time event nowhere near any important election.  So what did DeVos get for his money?  The attention of a senator from New Hampshire, Judd Gregg.

Gregg was then serving as the chairman of the U.S. Senate’s Commerce Committee and working on the appropriations bill that would fund the FTC.  In July 1997 Gregg slipped into that appropriations bill at the eleventh hour and without debate a proviso that exempted, with some very slick language, the Butterworth-Blodgett merger from scrutiny by the FTC.  If passed the FTC’s administrative court would be prohibited from hearing the agency’s challenge to the merger.  Lipinski immediately protested Gregg’s heavy-handed maneuver.  Gregg threatened Lipinski that if the FTC made a stink about the proviso he would zero out all funding for the FTC's anti-trust division on the basis that it duplicated the work of the U.S. Justice Department.

That cowed the FTC, and in September 1997 the agency announced that it was dropping all challenges to the Butterworth-Blodgett merger.  DeVos then sent Gregg for the first and only time the maximum campaign contribution allowed by law.  In November 1997 the two hospitals announced their merger as Spectrum Health Corporation with DeVos at the helm.  Charlie then collected his reward as chairman of Spectrum’s Priority Health.  It was a big success for DeVos and Charlie, but there was still a lot of work to be done.  See Part IV for the Fixer’s next assignment.

[Click here for the last installment of "The Fixer". - The Editor]

Comments

[ibofightback]

I've no idea about your other assertions but the claim that Amway's Canadian tax situation was about inflating revenues to improve the value of the Asian affiliates is absurd. The investigation in Canada actually began in the 60s and culminated in the court case of 1983. Amway Japan, the first publicly listed affiliate, didn't list until 1991!

[The Executive Director]

IBO, you need to read more carefully. Inflating revenues was a long-standing practice of Amway. The Canadian scandal and the Asian affiliates meltdown were two separate consequences of that practice.

Regards, Bill