By Michael Flaherty
NEW YORK (Reuters) - Hospital operator Quorum Health Corp <QHC.N> is investigating whether it provided adequate disclosure to investors prior to its spin-off last year, according to a letter seen by Reuters and a person familiar with the matter.
Quorum has retained attorney Robert Varian from Orrick Herrington & Sutcliffe LLP as independent counsel to be part of its board's probe into how its separation from Community Health Systems Inc <CYH.N> was handled in April 2016, according to the letter and the person familiar with the matter.
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The letter was sent to Quorum's board by one of its investors earlier this month. It included a reference to earlier correspondence in which Quorum indicated to the investor that it was starting an internal probe and requested more information.
The investigation comes after the investor, Texas-based hedge fund Q Investments LP, wrote to Quorum's board last October, alleging that debt-laden Community Health Systems duped Quorum investors.
Quorum's stock fell as much as 80 percent in the months after the spin-off, and have since bounced back slightly, giving it a market value of $240 million. The company also had total debt of $1.24 billion as of the end of September.
"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," according to the letter from last October, which was also seen by Reuters.
Q Investments called on the company to launch an investigation in the October letter.
Brentwood, Tennessee-based Quorum owns or leases 36 hospitals. The company's Chief Financial Officer Michael Culotta did not return calls on Thursday seeking comment.
Community Health Systems spokeswoman Tomi Galin said: "We categorically reject the allegations by Q Investments that Community Health Systems committed fraud or any other wrongdoing in connection with the Quorum spin-off. Community Health Systems conducted itself appropriately and made all necessary disclosures throughout the process."
The spin-off allowed Community Healthto focus on its largest markets. As part of the separation, Quorum borrowed $1.2 billion to pay a dividend to its former parent.
Four months later, Quorum cut its earnings guidance, citing high costs and weak sales, sending its stock into free-fall.
Q Investments, which was a top 10 Quorum shareholder at the time of the spin-off and has since reduced its position, has said that Community Health likely knew about the costs and failed to properly disclose them. The hedge fund is also a Quorum bond holder.
Community Health has been looking to turn its business around by selling some of its assets in the past few months to ease its debt load of more than $15 billion.
(Editing by Greg Roumeliotis and Bill Rigby)