FHP Shareholders Sue, Alleging They Were Misled : Litigation: Actions filed in Santa Ana, L.A. cite the health maintenance firm’s Senior Plan and a government investigation.
FHP International Corp., California’s largest operator of health maintenance organizations, said Monday that two shareholders have filed lawsuits claiming that it misled investors about the membership potential of its Senior Plan program and about the seriousness of a government investigation of the Medicare substitute program this summer.
Both lawsuits were filed last week in U.S. District Court--one in Los Angeles, the other in Santa Ana. The lawsuit in Santa Ana, by investor Albert Zucker, seeks class-action status for shareholders who bought FHP stock between May 3 and Oct. 17. The other suit, by investor Alan Shore, seeks similar status for those who bought the stock between Feb. 1 and Oct. 17. The suits say hundreds of shareholders may be affected.
FHP said Monday that it has not had an opportunity to study the complaints in detail but intends to defend itself vigorously against the charges. The suits seek unspecified compensatory and punitive damages and legal costs under federal securities laws.
Zucker and Shore claim that FHP knew and failed to disclose that the federal government was unhappy with its sales practices when the company issued 4.5 million common shares for sale May 3. The common stock, issued to fund an expansion of the company’s Senior Plan, was sold for $23.25 per share for total proceeds of $104.6 million, according to the Zucker suit.
FHP stock closed down 12 cents to $11.375 Monday on the National Assn. of
Securities Dealers Automated Quotation System. Last Thursday FHP stock plunged 28% to $12.75 after the company announced that its earnings for the first quarter ended Sept. 30 would be sharply lower than analysts’ forecasts. It cited several factors for the decline, including slower enrollment in its California Senior Plan and the program’s lower-than-desired reimbursement rate.
Officials with the federal Health Care Financing Administration, which regulates Medicare programs, announced earlier this year that the agency was reviewing complaints that FHP had duped some Medicare patients into becoming Senior Plan members.
The federal agency conducting the investigation said in July that it will not process FHP’s applications to expand its Senior Plan service area while the investigation is pending.
On Aug. 23, the government sent FHP a letter listing the changes it wants but refused to release the letter to the public, saying its investigation was still open. On Oct. 1, according to sources inside the company, FHP changed its compensation package for sales representatives, raising the base pay and lowering commissions and quotas. The government blamed the incentives for the shoddy sales methods, sources said. FHP has declined to release the new compensation rules.
The Shore suit further alleges that several company officers knew about the potential stock decline and sold their shares between Feb. 6 and May 21 for prices ranging from $17.25 to $23.25. The suit names company founder Robert Gumbiner and officers Westcott W. Price III, Burke F. Gumbiner, David H. Engleberg, Warner Heineman and Gunther Klaus.
The Shore suit also names the three lead underwriters of the May stock issue, Kidder Peabody & Company, Merrill Lynch & Co. and Smith Barney, Harris Upham & Co.
Shore said he bought 500 FHP shares; Zucker did not disclose his investment.
