Ex-CEO of World Health Alternatives Accused of Fraud
By Len Boselovic, Pittsburgh Post-Gazette
Apr. 22–Former World Health Alternatives co-founder Richard E. McDonald enriched himself by millions of dollars at the expense of shareholders of the troubled Wilkins-based medical staffing firm, according to a lawsuit filed yesterday in federal court in Pittsburgh.
World Health’s shares tumbled last August after Mr. McDonald resigned and the company disclosed significant accounting discrepancies. The firm subsequently sought bankruptcy protection in February.
The lawsuit, filed in U.S. District Court on behalf of shareholders, says the fraud was possible because Mr. McDonald acted as both chief executive officer and the top accounting officer, eliminating the controls companies typically have on their accounting.
It alleges Mr. McDonald’s manipulation of the company’s books included obscuring the fact that the company wasn’t paying federal payroll taxes by creating a bogus loan from himself to the company. The loan balance reached as much as $3.6 million, but was subsequently reduced as the company repaid a loan that was never made, the lawsuit states.
A search of Mr. McDonald’s office after his sudden departure unearthed a personal brokerage account valued at $40 million, the lawsuit states. World Health stock accounted for about $22 million of his portfolio. Shareholders attorneys question how Mr. McDonald, 32-years-old at the time, could have accumulated such a sum. They say he had never been paid an annual salary exceeding $200,000 and had not reported sales of World Health shares.
Mr. McDonald, whose five-bedroom Murrysville home is for sale at a list price of $594,000, also inflated revenue, according to the lawsuit. In the first quarter of last year, he told then Chief operating officer John Sercu that a reality TV show was willing to pay $1 million for the right to film World Health employees on the job. No such offer was ever made, but the $1 million was included in the company’s results, the lawsuit states.
He also included the first few days of revenue a subsidiary received in the next quarter in the prior quarter’s results. That deceived investors into thinking World Health could achieve its earnings forecasts, the lawsuit states. The subsidiary’s costs during those first few days weren’t included in the results.
Mr. McDonald also manipulated the number of World Health shares outstanding by editing the official list of shareholders kept by the company’s transfer agent, Manhattan Transfer Registrar Co., the lawsuit alleges. He deleted entries from the list, thereby reducing the number of shares, which had the effect of increasing World Health’s earning per share, according to the lawsuit.
Shareholders lawyers believe shares that were deleted were sold by Mr. McDonald, possibly through family members, friends or members of his church.
Daszkal Bolton, World Health’s former auditing firm, never verified the shareholder list through Manhattan Transfer, the lawsuit states. The transfer agent noted that the number of shares in the company’s securities filings didn’t correspond to its list, but did not question the discrepancy, the lawsuit states. The lawsuit lists the accounting firm and transfer agent as defendants.
Some of the allegations are based on an interview with a former World Health officer who participated in a company investigation after Mr. McDonald left. The lawsuit indicates the FBI is investigating, as well as the Securities and Exchange Commission.
It is an amended version of class-action lawsuits that were filed against the company, its directors and other parties in the wake of last August’s disclosures.
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