June 30, 2004

BY DAVE MCKINNEY AND CHRIS FUSCO Staff Reporters

SPRINGFIELD -- Fallout from an alleged shakedown scheme spread Tuesday as House Speaker Michael Madigan demanded the state's hospital planning board be fired, while Gov. Blagojevich announced a state probe into whether kickbacks may have influenced last year's $10 billion pension bond deal.

The developments follow last week's Chicago Sun-Times report on a federal whistleblower lawsuit alleging that Illinois Health Facilities Planning Board member Stuart Levine participated in a scheme to steer state hospital construction work to politically connected contractor Jacob Kiferbaum. Also allegedly involved was investment banking giant Bear, Stearns & Co., which financed the construction projects and got commissions.

A criminal investigation is under way and several board members have been subpoenaed.

"I think there's a problem there," said Madigan (D-Chicago), who has introduced legislation to fire the nine-member board Blagojevich picked last year. "I think the problem ought to be addressed. I think the current group ought to exit."

The lawsuit, filed by two executives for Edward Hospital in Naperville, claims Levine influenced the board to approve Mercy Health System Corp.'s plans for a new 70-bed hospital in Crystal Lake because Mercy agreed to use Kiferbaum. After the approval, the state issued $69 million in bonds underwritten by Bear Stearns for the project, the suit alleges.

The suit names Levine, Kiferbaum, Bear Stearns and the chief of its Chicago office, Nicholas Hurtgen. The suit says Hurtgen told Edward officials in January that "he was politically connected to the Illinois state government administration and can 'get things done.' He stated he was 'responsible' for Bear Stearns being awarded the state of Illinois 2003 $10 billion pension underwriting deal," which netted the firm up to $10 million in fees.

The lawsuit suggests that Bear, Stearns may have gotten the deal "through kickbacks and illegal payments" but doesn't go into detail or spell out how that may have occurred. It accuses Bear, Stearns of having "falsely certified to the state of Illinois that they were compliant with Illinois law and that they did not obtain the work illegally."

When asked Tuesday whether he believed the bond deal was tainted, Blagojevich said he was uncertain.

"All I know is what I've read in the newspaper. We've asked the inspector general . . . to get involved in that, and she's looking at that," the governor said without elaborating.

Blagojevich spokeswoman Cheryle Jackson disputed Hurtgen's claim that he was close to the governor and his staff, saying Hurtgen was one of several Bear, Stearns employees working with the governor's budget office on the pension deal.

Hurtgen did, however, help set up a meeting in February between Blagojevich and Health and Human Services Secretary Tommy Thompson, Jackson said. Before joining Bear, Stearns, Hurtgen was a top aide to Thompson when he was Wisconsin's governor.

The meeting focused on Medicaid funding changes that the General Assembly has approved to kick an additional $130 million into the state's cash-strapped coffers. Thompson's federal department has yet to sign off on the move, though the governor is including the money in his proposed spending plan for next year.

While putting the pension borrowing deal under a microscope, Blagojevich stopped short of cutting off state business to Bear, Stearns. In fact, the company on Tuesday sold bonds on the state's behalf.

"It's a civil lawsuit, right?" Blagojevich said. "Until we know a little more, again, I just think we have to be responsible here and understand it's easy to draw conclusions. Until you have information and something to substantiate it in some capacity more than some civil lawsuit, I don't want to undermine the ability of our state to do well. Bear, Stearns did a great job on the pension bond deal. They were able to save us $860 million. That's a lot of money."

Fund-raisers and advisers to the governor have been lobbying on behalf of hospital clients. Edward, for example, enlisted a lobbying firm once headed by David Wilhelm, a top strategist for the governor. Mercy employed a lobbying firm that includes top Blagojevich fund-raiser Milan Petrovic and Chicago powerbroker Victor Reyes.

Another Blagojevich fund-raiser, Tony Rezko, helped recommend members for the board last year, Jackson said. The governor also took recommendations from House Minority Leader Tom Cross (R-Oswego), Jackson said.

The health facilities planning board is supposed to have nine members, but there are two vacancies. Levine resigned earlier this month.

Under Madigan's proposal, which Blagojevich said he supports, all members would immediately be kicked off the board. Blagojevich would be given the authority to appoint new members.

Contributing: Lori Rackl, Steve Warmbir, Tim Novak