As top-shelf scandal arrives at the door of the securitization world for the first time via National Century Financial Enterprises, insiders and mainstream press are readily asking the same question: Why didn't anyone see this coming?

Of course, someone did. And that person mailed a series of three anonymous letters beginning April 26, 1999 and ending March 29, 2000 to Asset Securitization Report's editor-in-chief at that time, Adam Tempkin. Tempkin investigated the letters over a period of weeks, and on May 22, 2000, in the longest story ever published in ASR, broke the NCFE scandal under the headline "NCFE Investigated Amid Charges of Fraud."

The three letters, addressed to Jeff Orr, the analyst who covered NCFE for Duff & Phelps Credit Rating Co. at that time, are reproduced in their entirety in this issue. Considering that the Federal Bureau of Investigation, among others, has been swarming all over NCFE headquarters lately, we think you'll find the letters a fascinating read. All were unsigned, and arrived in envelopes postmarked "Irving Park RD P&DC IL 60701."

Tempkin, who is no longer at ASR, said in an interview last week that he had no idea who might have sent the letters. A spokesman for Fitch Ratings, which acquired Duff & Phelps in March 2000, declined to comment for this article. Orr, who now works at Banc One Capital Markets, also declined to comment.

The scandal at NCFE erupted in late October of this year, as both Fitch and Moody's Investors Service learned that the company had been misappropriating funds from the reserve accounts of its two outstanding issuance vehicles, National Premiere Financing (NPF) VI and XII. These two trusts combined have approximately $3.3 billion in paper outstanding. The reserves in NPF XII, for example, were about $15 million, nearly $325 million shy of what the total should have been for the September reporting period.

Prior to filing for Chapter 11 bankruptcy protection in mid-November, NCFE was in the business of purchasing insurance receivables from healthcare providers at a discount and securitizing them. Beyond the missing funds' impact on the deals' cashflows and credit enhancement, NCFE's liquidity crunch has been passed on to its borrowers, several of whom have had to file for bankruptcy protection as well.

Chastised by the market

While the reprinting of these letters is not meant to further sling mud at an industry that has suffered a fair amount of overgeneralization and what some sources have called, uninformed criticism' this year, our perspective is that - based on what we are witnessing first-hand on the media backburner - the printing of these letters by another publication would have been an eventuality.

At the time the letters were sent, the asset securitization industry was tighter lipped, less transparent and less scrutinized by the general media than it is today, being the prevailing architect of special purpose entities (SPEs) and off-balance sheet technology.

Though two years ago the industry operated further below the mainstream radar, ASR does takes issue with blanket statements from media outlets blatantly disregarding our coverage from 2000, which was widely read and commented on by the securitization industry. In fact, sending such an incendiary article out into such an insular industry brought out the talons in certain quarters.

"I think we were chastised by the market to a certain degree after I wrote this article," Tempkin said. "There was a sense that these allegations and lawsuits were a bit overblown, that accusations such as these couldn't be true in the asset-backed market. People wanted to brush the whole thing off, in a sense."

Tempkin added: "But by the same token, I think a decent portion of the ABS market shied away from NCFE for some time after my article came out."

Until recently, much of the so-called controversy associated with NCFE's securitizations consisted of rehashes of the same set of facts from ASR's coverage two years ago, which prompted an investigation into the deals by Fitch (then Fitch IBCA) in May of 2000.

In that investigation, according to a Fitch statement in 2000, the rating agency had discussions with three sets of auditors (including Deloitte & Touche), and several investments banks, such as Deutsche Bank, Ascendant Capital, Credit Suisse First Boston and PaineWebber (now part of UBS Warburg).

"These people were not part of the conspiracy, but were all fooled by it," said an insider affiliated with Fitch's review. "A lot of people looked at these guys."

Fitch, after a two-month investigation in July 2000, gave NCFE a clean bill of health, and said the allegations were unfounded. In October, NCFE managed to score its next asset-backed financing and its first rating from Moody's. CSFB and Banc One Capital Markets jointly led the transaction. Both underwriters have taken part in subsequent transactions, as well as ING Barings, which solely led a 2001 NPF VI deal. Also on the line (and part of this public relations nightmare) are the trustees in the transactions: Bank One Corporate Trust and J.P. Morgan Chase.

Last week, CSFB announced that it was writing off nearly $260 million in exposure. Contacts at CSFB declined to comment on anything related to NCFE other than what has been publicly released.

Pretty dead-on'

Though the three letters served as impetus, Tempkin's ultimate article was far more than a recap of their contents. The story reflected weeks of investigation into existing lawsuits, allegations, and affiliations between NCFE's Lance Poulsen and NCFE's obligor health providers. In the process, it uncovered new discrepancies and issues that have only now begun to take on greater meaning, such as the weakness in the NCFE trust lockbox structure and the potential for cashflows to be easily manipulated.

Interestingly, through his research, Tempkin found that the two main trust structures with exposure to Lincoln Hospital - the L.A.-based healthcare provider named in the letters - were NPF VI and NPF XII. "Given what we know today, I'd say those letters were pretty dead-on," Tempkin concluded.

In the spirit of full disclosure, ASR had a working relationship with NCFE prior to receiving the letters, and had even profiled the firm. That relationship ended with the publication of Tempkin's first story, and NCFE officials subsequently refused to talk with ASR. A dialogue resumed in late October when NCFE officials went in into crisis mode.

The latest update from the company is that it is working diligently on three fronts. It said it is seeking to secure financing for its healthcare clients so that they can avoid bankruptcy, to maintain close communication with its bondholders, and to retain its remaining 103 key employees.

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