Quorum Health Corp (NYSE:QHC) has launched investigations into whether adequate disclosure was provided to investors before the spin-off that occurred last year. This was according to an investor’s letter addressed to the Quorum Health board and which was obtained by Reuters. An Orrick Herington & Sutcliffe LLP attorney, Robert Varian, will serve as the independent counsel and will assist the board to look into the handling of the spin-off that took place in April last year.

Fraud allegations

In the letter written to the board of Quorum by an investor, reference is made to previous correspondence which indicated that the investor had been informed of a planned internal probe. The probe follows an allegation by Q Investments LP, a hedge fund based in Texas, that Quorum investors were duped by Community Health Systems (NYSE:CYH), which is currently highly debt-ridden.

“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,” a letter from Q Investments in which the hedge fund urged Quorum to conduct a probe read.

A spokesperson for Community Health Systems, however, said the Q Investments’ allegations were false and instead stressed that the healthcare firm did nothing wrong in the course of the spin-off process. The spokesperson also added that the necessary disclosures were made. When the spin-off process was underway, Q Investments was one of the top 10 shareholders. It has since then reduced its exposure.

Strategic spin-off

The goal of the spin-off was to allow Community Health Services to concentrate its efforts on its biggest markets. The spin-off deal saw Quorum borrow about $1.2 billion in order to pay Community Health Services a dividend. Immediately following the spin-off, the stock of Quorum lost about 80% of its value and after four months, Quorum’s earnings guidance was cut with weak sales and high costs given as the reasons.

Community Health Services’ debt now stands at $15 billion and the company has been disposing of some assets in a bid to reduce the debt.

On Monday shares of Quorum Health Corp gained 5.68% to close the day at $8.75.