CHS faces fraud allegations from investor in Quorum spin-off: 7 things to know

Q Investments LP has sent a letter to the board of Quorum Health, asking the board to conduct an independent investigation into potentially unlawful financial projections related to Quorum's spin-off from Franklin, Tenn.-based Community Health Systems.   

Here are seven things to know about the claims the Fort Worth, Texas-based hedge fund made against CHS and Quorum.

1. The letter focused on the initial guidance used to market Quorum to investors. Q Investments believes CHS knew the guidance was wrong. "The conduct of Quorum's management team also raises questions whether they were complicit in the possible fraud," the letter states.

2. According to the letter, CHS provided inflated EBITDA guidance to potential Quorum investors in late March and used the guidance to attract equity investors and market Quorum's more than $1.2 billion of primary debt financings.

3. In early August, Quorum released its earnings for the second quarter and cut its 2016 guidance by more than 30 percent to a midpoint of $187.5 million of EBITDA. This caused Quorum's stock price to drop 50 percent the day after it announced its earnings.

4. Q Investments acknowledged it is not uncommon for companies to miss guidance due to unexpected issues that are out of management's control. However, the hedge fund says that isn't what happened in Quorum's case.

"Quorum's terrible quarter was caused, in part, by higher standalone costs, which costs were very likely known by Community Health's management team since they allocated these costs to Quorum," the letter states.

5. In the letter, Q Investments blames CHS for Quorum's downturn. "We believe Community Health was desperate to raise cash, and they saw an easy path to do so by stuffing new investors in Quorum with inflated guidance and concealing costs within what they knew was a disintegrating business."

6. In a statement to the Wall Street Journal, Tomi Galin, a CHS spokesman, said, "We categorically reject the allegations by Q Investments that Community Health Systems committed fraud or any other wrongdoing in connection with the Quorum spin-off. Community Health Systems conducted itself appropriately and made all necessary disclosures throughout the process."

7. Q Investments, which is one of Quorum's top-10 investors with 1.3 million shares, asked Quorum to "take appropriate legal action" against CHS.

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