State Suit Seeks Gift to Charity by FHP Officers : Van de Kamp Wants $80 Million Donated by Firm, Accountants

The state attorney general’s office filed a civil lawsuit Tuesday seeking to force three officers of the Fountain Valley-based FHP Inc. health maintenance organization, as well as its accounting firm, to pay more than $80 million to charity.

In the complaint, filed in Los Angeles Superior Court, Atty. Gen. John Van de Kamp charged that FHP was “grossly undervalued” by insiders when they bought the nonprofit organization in November of 1985 for $38.5 million in cash and notes.

An analysis by Van de Kamp’s office placed the value of the company at the time of sale at up to $150 million--the same figure at which the company went public in a July stock offering.

FHP, in a prepared statement issued late Tuesday, called the charges “groundless and without validity.”

Under state law, trustees of a charitable health maintenance organization can convert it to a for-profit status if they donate to charity an amount equal to the fair market value of the company.

The problem is determining the value.

Maxicare Made Offer

In FHP’s case, the value determined by management was considered so low that a competing health maintenance organization, Maxicare Health Plan, offered to pay at least $50 million for the company.

That offer was rejected by FHP’s managers, who proceeded with their own purchase of the company despite objections by consumer activists and the attorney general’s office and a lawsuit filed by Maxicare.

“It is clear that the real loser in this matter is charity,” Van de Kamp said Tuesday. “We hope through this action to recoup in excess of $80 million that properly belongs in the charitable domain.”

Jim Shultz, an official with Consumers Union in San Francisco, which also sought to block FHP’s conversion last year said, “This move is exactly what’s needed to protect the public interest.”

Named in the complaint are three members of FHP’s board of directors--Robert Gumbiner, W. W. Price and David LeSuer--and the accounting firm of Ernst & Whinney.

The attorney general is not seeking damages from FHP, only from its individual directors and Ernst & Whinney. The accounting firm was named in the complaint for its part in appraising FHP’s worth.

Insiders, including Gumbiner, FHP’s founder, chairman and chief executive officer, continue to hold a 76% stake in the company with a market value of about $102.5 million based on Tuesday’s closing price of $10.75 per share. The company’s stock is traded over the counter.

Gumbiner, in a prepared statement released Tuesday, said: “FHP’s entire conversion was conducted, reviewed and approved by the California Department of Corporations under all applicable state laws. The procedures and valuation methods were extensively reviewed and approved by the California auditor general. It seems to me that report in and of itself should be sufficient to put to rest any doubts about the conversion.”

LeSuer said he would not comment on the lawsuit. Price and Ernst & Whinney could not be reached for comment.