Health Net 2000 Annual Report Download - page 50

48 HEALTH NET 2000 Annual Report
California (“BIG”), by FHC to Superior National
Insurance Group, Inc. (“Superior”). On March 3, 2000,
the California Department of Insurance seized BIG and
Superior’s other California insurance subsidiaries. On
April 26, 2000, Superior filed for Bankruptcy.Two days
later, Superior filed its lawsuit against the Company, FHC
and M&R. Superior alleges that the BIG transaction was
a fraudulent transfer under federal and California bank-
ruptcy laws in that Superior did not receive reasonably
equivalent value for the $285 million in consideration
paid for BIG; that the Company, FHC and M&R
defrauded Superior by making misstatements as to the
adequacy of BIG’s reserves; that Superior is entitled to
rescind its purchase of BIG; that Superior is entitled to
indemnification for losses it allegedly incurred in connec-
tion with the BIG transaction; that FHC breached the
Stock Purchase Agreement; and that FHC and the
Company were guilty of California securities laws viola-
tions in connection with the sale of BIG. Superior seeks
$300 million in compensatory damages, unspecified puni-
tive damages and the costs of the action, including attor-
neys’fees. On August 1, 2000, a motion filed by the
Company and FHC to remove the lawsuit from the
jurisdiction of the Bankruptcy Court to the United
States District Court for the Central District of
California was granted, and the lawsuit is now pending in
the District Court.The parties are currently engaged in
discovery. On January 1, 2001, FHC was merged into the
Company.The Company intends to defend itself vigor-
ously in this litigation.
Since May 1998, several complaints (the “FPA
Complaints”) have been filed in federal and state courts
seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of com-
mon stock, convertible subordinated debentures and
options to purchase common stock of FPA Medical
Management, Inc. (“FPA”) at various times between
February 3, 1997 and May 15, 1998.The FPA
Complaints name as defendants FPA, certain of FPA’s
auditors, the Company and certain of the Company’s for-
mer officers.The FPA Complaints allege that the
Company and such former officers violated federal and
state securities laws by misrepresenting and failing to dis-
close certain information about a 1996 transaction
between the Company and FPA, about FPA’s business
and about the Company’s 1997 sale of FPA common
stock held by the Company. All claims against the
Company’s former officers were voluntarily dismissed
from the consolidated class actions in both federal and
state court.The Company has filed a motion to dismiss
all claims asserted against it in the consolidated federal
class actions but has not formally responded to the other
complaints.The Company intends to vigorously defend
the actions.
In September 1983, a lawsuit was filed in Los
Angeles Superior Court by Baja Inc. (“Baja”) against East
Los Angeles Doctors Hospital Foundation, Inc.
(“Hospital”) and Century Medicorp (“Century”) arising
out of a multi-phase written contract for operation of a
pharmacy at the Hospital during the period September
1978 through September 1983. In October 1992,
Foundation Health Corporation, which became a sub-
sidiary of the Company, acquired the Hospital and
Century, and thereafter continued the vigorous defense of
this action. In August 1993, the Court awarded Baja
$549,532 on a portion of its claim. In December 1994,
the Court concluded that Baja also could seek certain
additional damages subject to proof. On July 5, 1995, the
Court awarded Baja an additional $1,015,173 (plus inter-
est) in lost profits damages. In October 1995, both of the
parties appealed.The Court of Appeal reversed portions of
the judgment, directing the trial court to conduct addi-
tional hearings on Baja’s damages. In January 2000, after
further proceedings on the issue of Baja’s lost profits, the
Court awarded Baja $4,996,019 in addition to the previ-
ous amounts, plus prejudgment interest.The Company has
satisfied substantially all of the judgment with the excep-
tion of the amounts related to the interest awarded on the
judgment, which the Company is appealing.
On November 22, 1999, a complaint was filed in the
United States District Court for the Southern District of
Mississippi in a lawsuit entitled Pay v. Foundation Health
Systems, Inc.The complaint seeks certification of a
nationwide class action and alleges that cost containment
measures used by the Company’s health maintenance
organizations, preferred provider organizations and point-
of-service health plans violate provisions of the federal
Racketeer Influenced and Corrupt Organizations Act
(“RICO”) and the federal Employee Retirement Income
Security Act (“ERISA”).The action seeks unspecified
damages and injunctive relief.The case was stayed on
January 25, 2000, pending the resolution of various pro-
cedural issues involving similar actions filed against
Humana, Inc. On June 23, 2000, the plaintiffs filed
amended complaints in a Humana action that had been
consolidated pursuant to the multi-district litigation
statute in the Southern District of Florida to add claims
against other managed care organizations, including the
Company. On October 23, 2000, the court allowed the
plaintiffs to further amend the complaint against the
Company to add two new named plaintiffs and withdraw
the originally named plaintiff, Kerrie Pay, from the
action. Consequently, this case is now entitled Romero v.
Foundation Health Systems, Inc. On October 23, 2000, the
Judicial Panel on Multi-District Litigation ruled that the
action originally filed against the Company in the
Southern District of Mississippi should be consolidated,
for purposes of pre-trial proceedings only, with other
cases pending against managed care organizations in the