Ares Increases Stake in Dental Firm Fined $1.7 Million by State ...

September 2017

A report by UNITE HERE Marcos Feldman

mfeldman@ 872-444-0022

Ares Increases Stake in Dental Firm Fined $1.7 Million by State Attorneys General for Deceptive Practices

On June 13, 2017 Ares increased its stake in Aspen Dental Management, Inc. ? a dental business support firm that has been investigated by state attorneys general for misleading practices and the unauthorized practice of dentistry.

Key Points

? Since 2010 Aspen paid $1.7 million in settlements with state attorneys general in New York, Indiana, Pennsylvania and Massachusetts related to deceptive advertising and terms of financing.

? After Aspen told U.S. Senator Chuck Grassley that "dentists are in complete control" of their clinics, New York Attorney General Eric Schneiderman found "that Aspen Dental Management exercised undue control over the clinic's finances."

? Aspen patients may be vulnerable: CEO Bob Fontana described the typical patient as "probably 45 to 65 and struggling to make ends meet." In 2012 Fontana has acknowledged that 30% of Aspen's revenue came from third-party debt financing.

This is not Ares' first investment in Aspen Dental. Ares made its initial investment in Aspen in 20061 and sold it to Leonard Green in 2010.2 In May 2015, Ares announced its agreement with Leonard Green and an affiliate of American Securities LLC to recapitalize Aspen.3 Ares increased its stake in June 2017,4 nearly two years after Aspen had been investigated and fined by several state attorneys general. While it is unclear which Ares vehicle made the most recent investment in Aspen, Ares appears to have invested in Aspen previously through one of its Corporate Opportunities Funds (ACOF),5 and Ares stated that its June 2017 investment was made by "private equity funds" to "increase their equity ownership."6

Why would Ares increase its investment in a company found by state attorneys general to have misled patients and operated in violation of state laws?

ACOF investors, particularly those in New York and Indiana where state attorneys general have fined Aspen, should ask whether their ACOF commitment is supporting Aspen Dental.

Attorney General Probes and Penalties

Aspen has paid at least $1.7 million in settlements with state attorneys general since 2010.

Aspen Dental Settlements with State Attorneys General

State

Date

Settlement Amount

In 2015 Aspen reached a settlement with New York Attorney General Eric Schneiderman to pay $450,000

Indiana New York Massachusetts

October 2015 June 2015

December 2014

$95,000 $450,000 $990,000

in civil penalties after finding that

Pennsylvania

October 2010

$175,000

Aspen engaged in "the unauthorized

practice of dentistry and dental

hygiene."7 Schneiderman's investigation followed over 300 consumer complaints regarding, among

other issues, "misleading advertising, upselling of medical services and products the consumers

felt were unnecessary, and unclear or incomplete terms for the financing." The New York Attorney

General found "that Aspen Dental Management exercised undue control over the clinic's finances"

and "created a financial incentive for Aspen Dental Management to pressure staff in the dental

offices to generate revenue."8

Four months after New York's penalty was announced, Indiana Attorney General Greg Zoeller announced a settlement requiring Aspen to, among other things, "stop advertising products or services as `free' that are not."9 The New York and Indiana investigations followed a similar $990,000 settlement with the Massachusetts Attorney General in 201410 and a $175,000 settlement with the Pennsylvania Attorney General in 2010.11

Aspen's primary third-party financing partner, CareCredit, has also been investigated and fined for deceptive tactics. As then-New York Attorney General Andrew Cuomo expanded a 2010 investigation into "predatory health care lending," including CareCredit, he stated that "doctors are supposed to represent patients, not credit card companies, no matter what kind of kickbacks they are offered."12 CareCredit reached a settlement with New York Attorney General Schneiderman in 2013 requiring the medical credit provider to prominently disclose its more than 26% interest rate and establish an appeals fund for up to $2 million in consumer refunds, among other protections.13 Later that year the federal Consumer Financial Protection Bureau ordered GE Capital Retail Bank and its subsidiary CareCredit "to refund up to $34.1 million to potentially more than 1 million consumers who were victims of deceptive credit card enrollment tactics."14

Misleading Statements

In 2012, in response to a letter from U.S. Senator Chuck Grassley inquiring and raising concerns about Aspen's practices,15 CEO Bob Fontana stated that "Aspen in no way sets standards of care, clinical policy, or production goals" and that "dentists are in complete control."16

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Not true, according to New York Attorney General Schneiderman. The AG's 2015 investigation found "that Aspen Dental Management exercised undue control over the clinic's finances" and created a financial incentive "to pressure staff in the dental offices to generate revenue."17

Vulnerable Patients

"Aspen Dental Management has developed what amounts to a chain of dental practices technically owned by individual dentists but which, in violation of New York law, were subject to extensive control by Aspen Dental Management."

-- NY Attorney General Eric Schneiderman,

June 2015

CEO Bob Fontana said in 2012 that about 30% of Aspen's revenue was linked to third-party financing which is "key to providing the solution for these patients" who are "struggling to get through life."18 Fontana described Aspen's market to PBS Frontline:

"A typical patient is probably 45 to 65 and struggling to make ends meet. They're taking this week's paycheck to pay last month's mortgage, making their car payment, trying to put their kids through school, and unfortunately, dentistry can become discretionary. And they will push things off and push things off until they can't put them off any longer. And they find themselves really probably in an emergency situation, and hopefully, if we're doing our jobs, we've located in the right market, we're creating awareness in those markets, and those people are choosing to come into our offices."19

Former Aspen Dental patient Carl Dorsey, a 74-year old used-car salesman interviewed by the New York Times in 2013, "was urged to take out a medical credit card" to cover his $2,634 bill for dentures.20 Falling behind on his payments reportedly set off a penalty interest rate of nearly 30 percent and he was pursued by debt collectors. "This whole ordeal has been devastating," said Dorsey, who filed a class action complaint against Aspen in New York.21 22 Medical credit cards "prey on seniors' trust," Lisa Landau, head of the New York Attorney General's health care division told the New York Times in 2013.23

Uncertain Regulatory Future

It is not clear if additional state settlements may follow in the other 32 states where Aspen operates24 and where state attorneys general have not announced investigations. The issues uncovered in the Pennsylvania AG's 2010 investigation mirrored those uncovered by the New York AG in 2015.

Similar issues were raised by consumers who filed complaints with the Attorney General of Ohio, which is home to the second-largest concentration of Aspen Dental practices (47 practices) after Florida (70).25 At least nineteen Ohio consumers have filed complaints since October, 2015, when

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the last state AG settlement was announced. Several of the consumers alleged misleading or confusing terms of services or financing, according to the Ohio AG's records.26

What sorts of internal controls does Aspen have to ensure no further liability in the other 32 states?

Other Questions for Investors

? Are ACOF limited partners' commitments supporting Aspen Dental? ? Why did Ares increase its investment in 2017, two years after the NY AG found Aspen to \

have misled patients and operated in violation of state laws? ? Have ACOF investors' returns been affected by new restrictions imposed on Aspen and

their credit card provider by state attorneys general and federal regulators?

Endnotes

1 Jessica Hall and Megan Davis. May 27, 2010. "Ares puts Aspen Dental on the blocks: sources." Reuters . article/us-aspendental-idUSTRE64Q3VX20100527; June 1, 2006. "Ares Private Equity Group Acquires Aspen Dental Management." Mergr database

2 Luisa Beltran. August 18, 2010. "Leonard Green Sinks Teeth into Aspen Dental." PE Hub Network. . 2010/08/leonard-green-sinks-teeth-into-aspen-dental/

3 American Securities. May 23, 2015. "American Securities Leads Recapitalization of Aspen Dental." PR Newswire. . html

4 Ares Management. June 13, 2017. Press Release: "Ares Management & Leonard Green Increase Ownership in Aspen Dental Management, Inc."

5 According to PE Hub, "ACOF Funds have also made successful investments in a number of public and private portfolio companies, including Aspen Dental." PE Hub Staff Report, August 22, 2012, "Ares Management Closes $4.7B Fund."

6 Ares Management. June 13, 2017. Press Release: "Ares Management & Leonard Green Increase Ownership in Aspen Dental Management, Inc."

7 New York Attorney General Eric T. Schneiderman, June 18, 2015, Press Release. "A.G. Schneiderman Announces Settlement With Aspen Dental Management That Bars Company From Making Decisions About Patient Care In New York Clinics."

8 New York Attorney General Eric T. Schneiderman, June 18, 2015, Press Release. "A.G. Schneiderman Announces Settlement With Aspen Dental Management That Bars Company From Making Decisions About Patient Care In New York Clinics."

9 Indiana Attorney General Greg Zoeller, October 23, 2015, Press Release,"AG Zoeller settles with Aspen Dental Management, Inc. over allegations of deceptive advertising, unfair tactics." EventList.aspx?fromdate=11/6/2014&todate=11/5/2015&display=Month&type=public&eventidn= 238268&view=EventDetails&information_id=232997

10 Massachusetts Attorney General Martha Coakley, December 22, 2014, Press Release, "Aspen Dental to Pay Close to $1 Million to Settle Allegations of Deceptive Advertising, Charging for Services not Provided." . gov/ago/news-and-updates/press-releases/2014/2014-12-22-aspen-dental-aod.html

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11 Pennsylvania Attorney General Tom Corbett, October 13, 2010, Press Release, "Attorney General Corbett announces $175,000 consumer settlement with Aspen Dental," archived at The Way Back Machine web/20111224055554/; Matt Miller, October 14, 2010, "Aspen Dental pays $175,000 to settle customer complaints." The Patriot News. aspen_dental_pays_175000_to_se.html

12 New York Attorney General Andrew Cuomo, August 9, 2010, Press Release: "Attorney General Cuomo Announces Expansion Of Industry-wide Investigation Into Predatory Health Care Lending That Is Pushing Consumers Nationwide Into Debt."

13 New York Attorney General Eric Schneiderman. June 3, 2013. Press Release: "A.G. Schneiderman Announces Agreement With GE Capital Retail Bank And CareCredit LLC, Stopping High-pressure Tactics In Health Credit Card Sales To Consumers."

14 Consumer Financial Protection Bureau December 10, 2013 Press Release: "CFPB Orders GE CareCredit to Refund $34.1 Million for Deceptive Health-Care Credit Card Enrollment." cfpb-orders-ge-carecredit-to-refund-34-1-million-for-deceptive-health-care-credit-card-enrollment/

15 U.S. Senator Chuck Grassley, June 27, 2012, Press Release: "Grassley investigates allegations against dental clinics."

16 Aspen Dental CEO Bob Fontana. February 13, 2012. Letter to U.S. Senator Charles E. Grassley. . sites/default/files/about/upload/Aspen-1.pdf

17 New York Attorney General Eric T. Schneiderman, June 18, 2015, Press Release. "A.G. Schneiderman Announces Settlement With Aspen Dental Management That Bars Company From Making Decisions About Patient Care In New York Clinics."

18 Jason M. Breslow. June 26, 2012. "Aspen Dental CEO Bob Fontana: `We're Big Advocates for the Patient.'" PBS Frontline: Dollars and Dentists.

19 Jason M. Breslow. June 26, 2012. "Aspen Dental CEO Bob Fontana: `We're Big Advocates for the Patient.'" PBS Frontline: Dollars and Dentists.

20 Jessica Silver-Greenberg, October 13, 2013, "Patients Mired in Costly Credit From Doctors," The New York Times. http:// 2013/10/14/business/economy/patients-mired-in-costly-credit-from-doctors.html?pagewanted=all

21 Jessica Silver-Greenberg, October 13, 2013, "Patients Mired in Costly Credit From Doctors," The New York Times. http:// 2013/10/14/business/economy/patients-mired-in-costly-credit-from-doctors.html?pagewanted=all

22 The lawsuit was dismissed on procedural grounds in 2015 and ultimately resolved through the AG's investigation and settlement. ;

23 Jessica Silver-Greenberg, October 13, 2013, "Patients Mired in Costly Credit From Doctors," The New York Times. http:// 2013/10/14/business/economy/patients-mired-in-costly-credit-from-doctors.html?pagewanted=all

24 Aspen Dental operates in 36 states, according to Ares Management's June 13, 2017 Press Release: "Ares Management & Leonard Green Increase Ownership in Aspen Dental Management, Inc." ares-management-leonard-green-increase-ownership-in-aspen-dental-management,-inc

25 Aspen Dental list of offices by state, accessed 8/17/2017. 26 Summaries of consumer complaints filed with Ohio State Attorney's Office since October, 2015. Records received 8/18/17

in response to UNITE HERE's request for public records.

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