Follow the Money: Invisible Investors Seek Big Bucks in Mass Incarceration
by James Kilgore and Brian Dolinar, Truthout
When authorities booked Richard Murphy into the jail in Monterey, California on January 18, 2013, the war veteran likely never envisioned ending up being back in court months later, not to face criminal charges, but to expose the abuse he would suffer at the hands of the jail’s private health-care provider.
His saga began when he complained to guards about his injured back. Before his arrest he managed the pain with prescribed medication and regular cortisone shots, neither of which he could get in jail. Despite his repeated pleas, it took several months to get even a cane. During this time, he could not get out of bed without serious pain, and his condition worsened.
In addition, Murphy had a severe mental illness. He received no attention from jail authorities even after claiming he heard demonic voices and felt suicidal. In a sick call note, he complained, “I’m a disabled vet who served my country with honorable discharge and should not be treated like trash over an officer’s attitude.”
On at least five occasions, the guards responded by putting him in a “rubber room,” where he was stripped naked and dressed in a thin smock. There were feces on the wall and on the floor where he slept. One time he spent 38 hours in a rubber room without any food and only three drinks of water.
In May 2013, Murphy joined four other plaintiffs in a lawsuit against Monterey County, Sheriff Scott Miller and California Forensic Medical Group (CFMG), the private company contracted to provide medical and mental health care in the jail. In January 2015, a federal judge approved class-action status for the suit, which now has 21 plaintiffs. [Ed. note: the case remains pending].
Investigations of CFMG have revealed a trail of poor medical care up and down the state, throughout the network of 27 county jails where CFMG has contracts. But CFMG was not the only entity squeezing profits out of cost-cutting in county jails. In early 2013, HIG Capital, a specialist in corporate takeovers, announced it had bought out CFMG in what the private equity firm called a “strategic investment.” As it turned out, Richard Murphy and his legal team are also confronting a corporation with holdings across the globe.
California Forensic Medical Group is the brainchild of Dr. Taylor Fithian, president and medical director, who started the company in 1983 with partners Elaine Hustedt, vice president of operations and personnel, and Dan Hustedt, vice president of finance. For many years, they occupied an office in Monterey nestled among high-end boutiques, fitness centers and spas. They signed their first contract with the Monterey County Jail just months after opening.
Since then, they have come to dominate California’s carceral health-care landscape. According to the company’s website, it has 87 percent of all the private medical contracts with county jails in the state and 92 percent of juvenile facilities. Indeed, the California Sheriffs’ Association has named CFMG one of the “Corporate 100” with whom it wishes to form a “very exclusive partnership.”
Shortly after getting the financial backing of HIG, CFMG moved its headquarters to a much larger office park on the outskirts of town. The company also closed several new multimillion-dollar deals. In 2014, the company signed with Sonoma County for $32 million over five years. In Monterey, CFMG’s three-year agreement is worth around $4.8 million annually.
The class-action lawsuit by Murphy and others threatens to put a significant dent in profits. It was filed by San Francisco attorney Michael Bien. After an independent review produced a scathing report on the Santa Cruz jail, county officials still refused to act. Bien, along with the public defender and ACLU, subsequently filed the lawsuit. About a year ago, settlement talks broke down. The plaintiffs then sought class-action status, which was certified by a federal judge. The suit doesn’t petition for a cash payout, but “injunctive relief” – an order to fix the problem.
The stakes are high for CFMG as a win for Murphy and his fellow plaintiffs would affect care in the 27 counties where they currently have contracts across California. As Michael Bien told Truthout, “If we challenge the way they do tuberculosis screening, suicide prevention, detox, saying they do it wrong, it’s the same way they do it throughout the state. It raises serious implications for them.”
That a large investment firm like HIG was providing financial backing for CFMG was troubling to Bien. “HIG is in it for the big bucks,” he said, “they’re thinking we’re going to make a killing. The way they make money is less drugs, less doctors, less hospital visits.”
Dr. Fithian admitted as much in a 2002 deposition for a lawsuit following a suicide in the Yolo County Jail. He confirmed that he had complained in a letter to staff of “too many emergency room visits, hospitalizations and orthopedic visits.” The suit was settled for $840,000.
In addition to legal battles, CFMG is now facing street protests from activists with local prison abolitionist group Sin Barras (“Without Bars”) in Santa Cruz, who targeted the company following a succession of deaths in the county jail. In April 2013, Sin Barras held a large “No More Deaths” rally to call attention to the tragedies. Members of a grand jury, which had secretly been formed to investigate the incidents in the jail, were emboldened to come out in support of the protesters. The grand jury put forward several recommendations, none of which have been adopted.
On January 24, 2015, following a sixth death in the jail, Sin Barras held a “Cages Kill” march in downtown Santa Cruz. Tash Nguyen, one of the organizers, told Truthout the name of the rally demonstrates the wider scope of the problem. “Yes, we want better medical care, but people die in these cages,” Nguyen said. “Cages exacerbate mental health problems. We should be providing mental health care in the community.”
The crowd marched through town and converged upon the county jail where they chanted loudly to demonstrate their solidarity with those locked up inside. Speakers criticized the devastating impact of mass incarceration. Among the demands made by Sin Barras was that the jail cancel its contract with CFMG.
For its part, in the face of a legal confrontation, CFMG has clung to the coattails of its newfound benefactor.
“We are excited to work with HIG,” stated CFMG cofounder Elaine Hustedt in a press release, “given their experience investing in the health-care and corrections sectors.” As it turns out, HIG’s tentacles extend far beyond health care and corrections.
The Notorious H.I.G.
Since its inception in 1993, HIG has invested in more than 200 companies. On its website, HIG claims to be “the largest and most active private equity firm in the lower-middle market,” incorporating a staff of more than 250 professionals. With portfolio holdings valued at around $17 billion, HIG falls well short of major market players like Goldman Sachs (reporting $856 billion in asset value for the fourth quarter of 2014). Nonetheless, they are global players, operating offices in six U.S. cities as well as London, Hamburg, Madrid, Milan, Paris and Rio de Janeiro.
HIG’s core activity is buying a company, restructuring by cutting costs and paring down the workforce, then reselling at a higher price. Beyond CFMG, its investment network includes holdings in pharmaceuticals in Michigan; women’s fashion retailers in California; fast food chains and prison food service in Britain; retail grocery stores in Finland; debt recovery operations in Italy; ice cream and digital display panels in Brazil; and boilers and industrial piping in France. It has partnered with Goldman Sachs, Morgan Stanley, Deutsche Bank, Verizon Communications and Liberty Mutual.
Although corrections may not lead HIG’s portfolio, it has capitalized on the opportunities the carceral market provides. As Mohammed Aly Sergie wrote in his 2012 Wall Street Journal article, “Even in prison, private equity is king.” The outsourcing of prison services is “attractive to private equity firms due to the stable cash flow generated from contracts with counties and states, and the fragmentation of the industry.” The article went on to explain how carceral health care in particular offered a steady revenue stream “because prisoners are a rare class of people who have a constitutional right to medical care,” which was mandated in a 1976 U.S. Supreme Court decision.
HIG’s CFMG investment offers a clear-cut example of how the unique combination of a guaranteed customer base can combine with an adroit reading of the tea leaves of criminal legal policy to secure profits. In 2011, the U.S. Supreme Court issued an order for the California Department of Corrections and Rehabilitation to reduce the state prison population by 46,000. Governor Jerry Brown’s response was realignment, a plan that focused on moving people out of state prisons into county jails. HIG tracked the changes. Within 15 months, county jail populations rose by 24,000, generating more clients for CFMG. In January 2013, HIG announced its “strategic investment” in CFMG. By May, California Forensic was reporting “significant growth due to the awarding of new contracts with correctional facilities throughout California.”
HIG failed to respond to requests by Truthout for an interview. While no plans have been made public about any impending offloading of CFMG, if HIG’s handling of its buying and selling of carceral telecommunication conglomerate Securus is anything to go by, a sale at a handsome profit is on the horizon.
The Securus Deal
HIG purchased prison phone provider T-Netix for $70 million, then added another firm in the sector, Evercom, to its portfolio. HIG subsequently combined the two into Securus Technologies, which it unloaded to Harlan Capital in 2011 for a reported $440 million.
HIG’s carceral holdings do not end there. Its appetite extended to the 2012 purchase of Trinity Services and its subsidiary, Swanson. Both of these firms specialize in providing food products to incarcerated populations. With annual revenue of $47 million, Trinity focuses on the provision of “care packages.” Tightened security in the era of mass incarceration has eliminated the ability of people on the outside to send personal packages to their loved ones behind bars. Now, instead of homemade cookies or hand-knitted socks, parcels come from corporate providers like Trinity Services. Family members go online, put the items in their shopping cart, pay through online prison banking system JPay, and send off some combination of overpriced items like Top Ramen, candy bars, instant coffee and deodorant. Like prison phone calls, these packages provide an opportunity for people to remain connected to their incarcerated loved ones while depositing millions into the coffers of the service provider.
Trinity also supplies special incentive foods that are sold inside facilities. If a person has a loved one willing to purchase them a meal, the menu of “Trinity Take-out” can provide an Angus burger, a chili cheese dog, boneless buffalo wings, beef Teriyaki rice bowl, even an “ultimate” chef salad for those watching their waistlines. Trinity boasts that their products “keep inmates happy.” Trinity subsidiary Swanson serves 600 correctional institutions, marketing products from a “Chuckwagon Café,” through which it aims to encourage “high-profit, impulse buying.” Swanson promotes its products with animal icons on its website, including “Bail Jumper Bill,” “Penitentiary Penguin,” “Hoodlum Hippo” and “Gangster Gator.”
The Bain Capital Link
Like most private equity firms, HIG tries to avoid the limelight. Since it is not listed on any stock exchange, its annual reports and financial data, including CEO salaries, generally remain off the radar. However, its connections to Bain Capital, where Mitt Romney was once CEO, raised some eyebrows during the 2012 presidential campaign.
In 2011, HIG bought voting machine vendor Hart InterCivic. Deeper investigations into the deal unearthed two suspicious strands. First, HIG was the sixth-largest corporate contributor to Mitt Romney’s campaign, having donated $436,550. HIG cofounder Anthony Tamer and his wife donated $175,000 of their own money to the Romney effort. Tamer worked at Bain before he founded HIG in 1993 with Sami Mnamyeh. This raised concerns over political bias influencing the operation of the voting machines. Second, three of Hart InterCivic’s five board members turned out to be HIG executives: Neil Tuch, Jeff Bohl and Amanda Kalin.
The founder of nonprofit election watchdog Black Box Voting, Bev Harris, said the HIG purchase of InterCivic was “just not passing the smell test at all.” While no wrongdoing ever surfaced, Harris noted a fundamental tension relating to ballot integrity. “There is no way to secure a system from its administrator,” she said.
Speculation and the Criminal Legal System
HIG’s links to Bain, along with the sheer scale and clandestine nature of its dealings, demonstrate the almost invisible power that speculative investors exercise over the criminal legal system. In addition, the role of HIG highlights how the direct service deliverers – firms like Securus, Sentinel Services and CFMG, which are often the target of campaigners – may not wield as much influence as behind-the-scenes investors. The “big bucks,” as Michael Bien noted, rest at the heart of the matter.
Whether it be health care, food services or telecommunications, private equity firms rake in those big bucks by cutting corners on services, slashing jobs and wages, and taking advantage of pro-incarceration policy measures, from realignment to the war on drugs. Such an approach drives up asset value for investors, but does so at the cost of expanding mass incarceration and driving down the quality of life for those behind bars and their loved ones.
This article was originally published by Truthout (www.truth-out.org) on April 8, 2015. Copyright, Truthout.org. Reprinted with permission.
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