Welcome back to Dry Powder. I’m Bill Cohan. In the several decades I’ve spent around private equity firms—first as a banker, and then as a journalist covering them—I have never come across a legal ruling as scathing as the one issued early last month by a Delaware judge against VitalCaring Group, a private equity-backed health and hospice care provider. Of course, competition among P.E. firms has never been as ruthless as it is today, and this lawsuit, which is the subject of today’s issue, captures just how cutthroat the industry has become. But first, here’s Marion Maneker with the St. Barts N.Y.E. roll call…

Marion Maneker

St. Barts’ billionaire boat show: The holiday break always sends denizens of the art world scattering to a variety of destinations, whether humble or remote and exotic. On Instagram, I spotted some British art dealers and their families in France. Another American dealer, whose wife has her own gallery with partners, started in Paris before decamping to Morocco. Meanwhile, half the world seemed to be in Japan this year, due to the cheap yen against the dollar, including some collectors I know. But the New Year’s place to be for the absurdly rich was, as is often the case, St. Barts. Looking at the AIS data—yachting’s version of tracking the tail numbers on private jets—I could see a number of boat owners there who range from dabbling buyers to serious art collectors. There were nearly 200 yachts anchored off the 8-square mile island on December 31 to see the famous fireworks display. The usual suspects dropped anchor, including David Geffen, who may be one of the most successful collectors of the last 50 years. (If Geffen himself wasn’t there, his boat Rising Sun certainly was.) Bernard Arnault’s Symphony was anchored off Gustavia, too, not far from Koru, owned by Jeff Bezos, one of the few billionaires in Arnault’s wealth class, whose name everyone mentions after Ken Griffin’s when there’s a really big-ticket artwork on offer. Other collecting yachties worth noting: Eyal Ofer, of the Ofer family of major collectors—whose patriarch, Sammy Ofer, briefly partnered with the Mugrabi family 30 years ago—had his blunt-bowed Olivia O there. David Reuben, one of the British brothers, whose niece Lisa Reuben is an active collector, was there on his boat, Siren, as was Michael Platt, the founder of BlueCrest Capital, who used to have a unique way of collecting art by only commissioning work directly, on Arrow. A whole Las Vegas contingent including Steve Wynn’s Andrea was there, too, along with Viva, which belongs to Frank Fertitta, another casino owner with a deep interest in art, and Lonian, which belongs to his brother, Lorenzo. Cowboys owner Jerry Jones, who has a lot of contemporary art in his Dallas stadium, had his yacht, Bravo Eugenia there. Steven Spielberg's Seven Seas was also there. Of course, we shouldn’t ignore all of the Waltons—cousins Nancy and Ann—on their respective yachts, nor Lachlan Murdoch, Jan Koum, Barry Sternlicht, Michael Jordan, Eddie Lampert, Arthur Blank, James Dyson, or Yuri Milner, who also had boats in St. Barts.

A P.E. Morality Tale for the Ages

A talmudic reading of the underappreciated saga surrounding VitalCaring Group, a private equity concoction that a Delaware judge has branded a hallmark of modern duplicity.

William D. Cohan

Private equity has become such an astoundingly lucrative business that I guess it is no surprise that the temptation of ever greater fortune sometimes leads its practitioners astray. On December 4, the Delaware Court of Chancery’s Judge Lori Will wrote a notably damning opinion involving VitalCaring Group, which had been created by two mid-market P.E. firms—The Vistria Group, based in Chicago, and Nautic Partners, based in Providence—to buy companies in the home healthcare industry. According to the judge, Vistria and Nautic aided and abetted the “egregious breaches of the duty of loyalty” owed by three executives that the firms had poached from their former employer, Encompass Health Corporation. I’ve read many corporate legal opinions over the decades, but I can’t remember one as scathing as Judge Will’s 114-page barn burner of a ruling in a lawsuit brought by Encompass against Vistria and its senior partner David Schuppan, and Nautic and its managing director, Christopher Corey, among others. “Delaware law demands that corporate officers act with the utmost loyalty to the entity they serve,” she wrote. “They must avoid advantaging themselves at the corporation’s expense. They cannot compete with the corporation or divert corporate opportunities from it without its consent. And they must undertake good faith efforts to advance the corporation’s best interests. The former officers at issue here lost sight of this enduring duty.” Of course, competition between private equity firms has never been so intense. Over the past three decades, the number of firms competing for deals has risen exponentially—along with the trillions of dollars they collectively manage. We’ve all heard of the biggies—Blackstone, Carlyle, Apollo (the subject of my new book), KKR, and TPG (an investor in Puck), among others ranking in the top 50. According to IBISWorld, however, there are now more than 11,000 private equity and hedge fund firms—alts, in the lingua franca of modern finance—operating in the United States alone. According to ProPublica, they collectively manage more than $6 trillion in assets—up from less than $600 billion in 2000. Until 2004, when I left JPMorgan Chase, I worked as a banker to private equity firms when the industry was still in its relative infancy. I’ve been reporting and writing about these firms ever since. Before reading Judge Will’s damning ruling, I’d never heard of either Vistria or Nautic, which goes to show how flooded the zone has become. The only dealmaker I recognized at either firm was Deval Patrick, the former good-guy governor of Massachusetts, who worked at Bain Capital before he joined Vistria. But the backstory of the two firms’ legal troubles—the psychodrama of building and selling companies, and the ego-fueled attempts to buy them back—will be familiar to many of my readers. The sorry saga began when April Anthony, the founder and C.E.O. of what was then called Encompass Home Health & Hospice, a home healthcare company, “became disillusioned after her business was bought by a large public healthcare company”—the Birmingham, Alabama-based HealthSouth—in 2014. After Anthony’s initial attempts to buy back Encompass failed, she recruited two of her colleagues—president Luke James and C.F.O. Chris Walker—and “secretly partnered” with Vistria and Nautic to “forge another path” that got them all in a whole heap of trouble. Together, the trio formed a new entity—what became VitalCaring—to buy companies that competed with Encompass, all while mostly still working for Encompass, in violation of their contractual obligations to the company. Per the ruling, “Anthony and her co-venturers identified three acquisition targets to form the base of their enterprise. Their scheme was kept from Encompass and its private equity investors. They took opportunities, resources, and information belonging to Encompass to set themselves up for success. After the new company was formed, Anthony induced more Encompass employees to join her. Anthony’s private equity partners were active participants in the fiduciaries’ misconduct.” According to Judge Will, this group “undertook stunning efforts to conceal their actions”—including exchanging documents through lawyers and on a golf course, and using sophomoric code names like “Voldemort,” a veiled reference to Anthony, since, you know, she could not be named. A phony employee-recruitment process was contrived to set up VitalCaring, with Anthony operating as C.E.O. despite her official ongoing obligations at Encompass, referred to as EHC in the court documents. Meanwhile, various records demonstrating her involvement were deleted or manipulated. The whole thing might have worked out just fine but for the fact that one EHC employee Anthony was trying to recruit later changed her mind and told the new C.E.O. of EHC what was going on.

Too Much Is Never Enough

It’s a little late for a holiday season morality tale, but it’s worth noting that no one in this saga was at risk of going hungry. According to a lavish 2020 Forbes profile, Anthony drives around town in a plum-colored Bentley, a black Rolls-Royce Wraith, and a white McLaren, and has ranked as high as No. 45 on the magazine’s list of America’s Richest Self-Made Women, tied with fellow Houston native Beyoncé. Her entrepreneurial career began in the 1990s with Liberty Health Services, a home healthcare business with about 25 employees and 50 in-home patients. She sold that company for $40 million in 1996, and in 1998 she took the $3 million she received in proceeds—and the lessons that she had learned in the salt mines of entrepreneurship—to form Encompass Home Health & Hospice by rolling up some 17 struggling Texas home healthcare providers. In 2004, she sold two-thirds of Encompass to the buyout firm Cressey & Company at a valuation of $280 million. She also created Homecare Homebase, a medical records software company. In 2014, Anthony demonstrated that she had mastered the dark arts of the private equity business. Along with Cressey, she sold Encompass for $750 million to the HealthSouth Corporation, which later changed its name to Encompass Health Corporation. Anthony received $70 million in proceeds from that sale, $53 million of which she rolled into the equity of the new company. She remained C.E.O. of the home health and hospice division of Encompass Health Corporation. With Anthony at the helm and James as president, Encompass’s home health and hospice division grew its revenue from $400 million in 2014 to $1.1 billion in 2021, receiving a big boost from the demand for its services during the pandemic. It also made some 36 acquisitions, totaling $750 million. In the spring of 2020, Anthony and James sold the rest of the equity they’d rolled over into Encompass, for $370 million and $45 million, respectively. That year, they told Forbes they were “ready to move on” from Encompass Health and wanted to focus on end-of-life care. About a month later, however, Christopher Corey, at Nautic, approached Anthony, whom he had known for more than a decade, and suggested they work together again. According to Judge Will’s ruling, Anthony told Corey that she wanted to leave EHC and start a new company. But first, according to the document, she wanted to see if she could buy her old company—the home and hospice care division—back from Encompass. Anthony and Corey worked together to model how the acquisition might work. In September 2020, Anthony also contacted David Schuppan, a former Bear Stearns banker whom she knew from when he worked at Cressey & Company, and who was now a senior partner at Vistria and co-head of its healthcare business. Anthony introduced Corey to Schuppan, and the two buyout firms agreed to work together with her on the project. Later that month, Anthony approached the C.E.O. of Encompass Health with her proposal.

What Could Possibly Go Wrong?

In the midst of those discussions, Anthony also made a bid on behalf of Encompass to acquire a new entity, the home health and hospice services business of a company called Brookdale, for between $350 and $400 million. She also told Nautic and Vistria about the Brookdale bid without telling her bosses at Encompass that she had shared that information with her two buyout firm partners. Meanwhile, Nautic and Vistria began studying Brookdale’s business. In December 2020, Nautic submitted its own bid for the Brookdale division, while Vistria approached Encompass about bidding jointly for the same property. “Corey sent a Nautic deck to Anthony’s husband’s personal email modeling a combined leveraged buyout of Encompass Home Health and an acquisition of Brookdale’s home health business,” the judge wrote. “The deck was then forwarded to Walker’s personal email, with the subject line changed to ‘From Mark Anthony’ (Anthony’s husband). Anthony sought input from Walker and James to refine the projections using Encompass’s information.” Encompass ended up passing on the Brookdale property. That’s when Anthony, Nautic, and Vistria submitted a non-binding bid to buy Anthony’s old business back from Encompass for $3.6 billion. “The proposal cautioned that ‘April [was] not likely to support an alternative transaction involving the sale of [Encompass Home Health] to another third party or a public offering of the [Encompass Home Health] business in a spin-out transaction,’” Judge Will wrote. “Anthony planned to resign if EHC rejected it. EHC was surprised. Before receiving the proposal, EHC had no idea that Anthony was partnering with private equity firms on a transaction involving Encompass Home Health.” EHC never responded to the buyout proposal, and it expired after 30 days. In January 2021, Anthony, Nautic, and Vistria tried another tack. They decided to set up a new company, in which they would all invest, to buy other home and hospice care companies to compete with Encompass—even though Anthony remained the C.E.O. of a division of Encompass. That’s a Wall Street no-no. They hired legal advisors at Ropes & Gray, the august Boston firm, and engaged Harris Williams, the middle-market investment bank, to help find acquisition targets for the new company. The group quickly identified three prospects: Homecare Holdings, which Harris Williams was selling; Vital Health Care; and Kare-In-Home. Anthony was heavily involved in the creation of the new company, according to Judge Will, and the negotiation of the acquisition targets while still at EHC. “She had frequent Zoom meetings, phone calls, and in-person meetings with Nautic, Vistria, and representatives from the target companies,” the judge wrote. “References to her involvement were scrubbed or replaced with sly codenames.” Anthony mentioned none of this to her bosses at Encompass. “It was not lost on Nautic and Vistria that Anthony’s fiduciary duties to Encompass created risks to their plans,” the judge wrote. “They were also concerned about contractual restrictive covenants that would continue to bind Anthony after her employment ended. They asked Ropes for advice on navigating these issues.” Ropes provided the advice, which, according to Judge Will, the defendants ignored.

43 Percent

On March 18, 2021, Anthony informed Encompass that she would be resigning, effective June 18. She said that she planned to spend time at her homes in Cabo and Idaho, and playing golf. “That was false,” the judge wrote. “Anthony instead continued her efforts to form a home healthcare company with Nautic and Vistria. Anthony’s efforts included recruiting certain Encompass employees for the venture.” On July 30, 2021, the new company bought Homecare Holdings for $192 million. In August 2021, it bought Vital for $106 million. In December 2021, it bought Kare for $110 million. Anthony, Nautic, and Vistria each invested $87 million for a one-third stake in VitalCaring Group. In September 2021, after an EHC employee told the new EHC C.E.O. about Anthony’s recruitment efforts, EHC sent cease and desist letters to Anthony, Nautic, and Vistria, among others. The next month, EHC sued Anthony in Texas state court for breaching the restrictive covenants in her EHC contract. While the Texas court ruled that Anthony had breached some of the covenants, it awarded no damages to EHC but required Anthony to comply with her contractual covenants until her contract expired. The court found that Nautic and Vistria “had tried to conceal Anthony’s involvement.” Each side paid their own legal fees. Anthony became the C.E.O. of VitalCaring in August 2022, after the covenant restrictions lapsed. A month later, EHC and several affiliates sued Nautic, Vistria, Corey, Schuppan, and Walker in Delaware court, alleging six counts of aiding and abetting Anthony in breaches of her fiduciary duty to EHC, among other charges. A seven-day trial was held in December 2023. In her ruling a year later, Judge Will has thrown pretty much the whole book at Nautic and Vistria. According to the Encompass press release, “After considering ‘the damning record presented at trial,’ the Court found that, while employed by Encompass Health, Anthony, James, and Walker usurped acquisition opportunities falling within Encompass Health’s line of business, used Encompass Health’s confidential information, and swayed key Encompass Health employees to join them with the promise of equity in the home health and hospice competitor that Anthony now heads.” Judge Will was more than a little peeved. “The evidence establishes that Anthony and James strove to benefit themselves at Encompass’s expense,” she wrote. “They did so willfully, using code names and secretly exchanging diligence materials to hide their misconduct. This deception is unexcused by the defendants’ post hoc justifications.” She added, “Disillusioned with EHC, Anthony set out to ‘get [her] baby back.’ She partnered with Nautic and Vistria and brought along James and Walker. When her plan failed, she turned her focus to creating a competitor. As she told Nautic’s investment committee, there was value in getting started while she remained at Encompass and could ‘access people and relationships.’ So they did.” The judge also forged a creative remedy for EHC, against VitalCaring. First, she awarded EHC $1.62 million in “mitigation damages” and an unspecified amount of attorneys fees “based on the defendants’ bad faith efforts to conceal their misdeeds, which included falsifying records, deleting evidence, and ‘manipulating communications through lawyers.’” She also created a “constructive trust” that would award EHC 43 percent of VitalCaring’s future profits as well as 43 percent of any future sale proceeds when, and if, VitalCaring is sold by the three partners. The problem Judge Will faced in crafting a remedy was that VitalCaring has basically flopped since the end of the pandemic, widely missing its earnings projections and remaining unprofitable. So, she resolved to reward EHC out of the future profits of VitalCaring while also incentivizing the three partners to generate those profits and/or sale proceeds by letting them keep the other 57 percent. She also directed that a trustee be appointed to oversee the “constructive trust” to make sure that everyone behaves, and that Anthony, Nautic, and Vistria don’t figure out how to game the court’s judgment. EHC lauded the court ruling. It was a clever solution to a complex problem, but also one, potentially, with real teeth. The judge, in effect, gave the plaintiff 43 percent of the equity of the defendant’s company. I’ve never heard of such a thing before. It’s an outcome that could probably only occur in an industry with so much money sloshing around, and one with a pervasive promiscuity for pushing boundaries—one where the line between deception and creativity can be extremely blurry. EHC and its affiliates “launched the litigation to protect the interests of their stockholders in the wake of the illegal and outrageous conduct of Anthony and the other former officers,” it wrote in a press release that has received little public attention, just like this entire sorry saga. (Neither Nautic nor Vistria responded to my requests for comment on Judge Will’s ruling.)

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