Suit Accuses Health Net of Fraud in Sale of Company

Health Net Inc., one of California’s biggest health insurers, was sued by an investor group that claims a 1998 sale of a workers’ compensation company was fraudulent.

Health Net knew that Business Insurance Group was on the verge of filing for bankruptcy protection and concealed that information when it sold the company to Superior National Insurance Group Inc., Capital Z Financial Services Funds said in the suit filed in state court in New York.

Capital Z, which helped finance the $285-million transaction, is seeking more than $200 million in damages.

The lawsuit revives a dispute that Woodland Hills-based Health Net tried to resolve last month when it agreed to pay $137 million to trustees of Superior National.

Health Net said in a filing with the Securities and Exchange Commission that it didn’t expect the suit to have a material adverse effect on earnings or the company’s financial condition.

“We intend to oppose Superior’s so-called settlement in court as well as seek to replace the trust’s oversight committee with truly independent fiduciaries while vigorously prosecuting our separate, independent claims against Health Net,” said David Rosner, a lawyer for New York-based Capital Z.

The lawsuit was filed Oct. 28 and disclosed Friday in Health Net’s quarterly filing with the SEC. Health Net shares Monday fell 20 cents to $32.43 on the New York Stock Exchange.

California regulators seized Business Insurance in March 2000 and Superior filed for bankruptcy protection a month later. Capital Z, which put up as much as 70% of the purchase price for Business Insurance, claimed Health Net possessed reserve assessments and other data demonstrating that Business Insurance’s reserves were “grossly inadequate.”

Health Net on Monday referred inquiries to its SEC disclosure and declined to comment further.