Health Net 2005 Annual Report Download - page 39

denying our summary judgment motion. The other defendants in the consolidated actions settled with plaintiffs
before the pre-trial proceedings were completed in early June 2005.
Following the Court’s reversal of its ruling on our summary judgment motion, the Court scheduled a trial
date of June 16, 2005, despite our repeated requests for a continuance to allow us to complete trial preparations
and despite our argument that the Louisiana Court lacked jurisdiction to adjudicate the claims of the Texas and
Oklahoma receivers due to the pendency of our appeal from the Louisiana court’s earlier order denying our
venue objection. Prior to the commencement of trial, the Court severed and stayed our claims against certain of
the settling defendants.
As noted above, there is substantially identical litigation against us pending in Texas. On January 9, 2006,
the Texas court ordered that the Texas action be stayed. The court ordered the parties to submit quarterly reports
regarding the status of the appeal in the Louisiana litigation. The Texas court will review those quarterly reports
and determine whether the stay should remain in place pending the appeal in the Louisiana case.
We have vigorously contested all of the claims asserted against us by the AmCare-TX receiver and the other
plaintiffs in the consolidated Louisiana actions since they were first filed. We intend to vigorously pursue all
avenues of redress in these cases, including post-trial motions and appeals and the prosecution of our pending but
stayed cross-claims against other parties.
These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome,
including the outcome of any appeal, cannot be predicted at this time. It is possible that in a particular quarter or
annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable
resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period.
However, at this time, management believes that the ultimate outcome of these proceedings should not have a
material adverse effect on our financial condition and liquidity.
Superior National and Capital Z Financial Services
On April 28, 2000, we and our former wholly-owned subsidiary, Foundation Health Corporation (FHC),
which merged into Health Net, Inc., in January 2001, were sued by Superior National Insurance Group, Inc.
(Superior) in an action filed in the United States Bankruptcy Court for the Central District of California, which
was then transferred to the United States District Court for the Central District of California. The lawsuit
(Superior Lawsuit) related to the 1998 sale by FHC to Superior of the stock of Business Insurance Group, Inc.
(BIG), a holding company of workers’ compensation insurance companies operating primarily in California. In
the Superior Lawsuit, Superior alleged that FHC made certain misrepresentations and/or omissions in connection
with the sale of BIG and breached the stock purchase agreement governing the sale.
In October 2003, we entered into a settlement agreement with the SNTL Litigation Trust,
successor-in-interest to Superior, of the claims alleged in the Superior Lawsuit. As part of the settlement, we
ultimately agreed to pay the SNTL Litigation Trust $132 million and received a release of the SNTL Litigation
Trust’s claims against us. Shortly after announcing the settlement, Capital Z Financial Services Fund II, L.P., and
certain of its affiliates (collectively, Cap Z) sued us (Cap Z Action) in New York state court asserting claims
arising out of the same BIG transaction that is the subject of the settlement agreement with the SNTL Litigation
Trust. Cap Z had previously participated as a creditor in the Superior Lawsuit and is a beneficiary of the SNTL
Litigation Trust. In its complaint, Cap Z alleges that we made certain misrepresentations and/or omissions that
caused Cap Z to vote its shares of Superior in favor of the acquisition of BIG and to provide approximately $100
million in financing to Superior for that transaction. Cap Z’s complaint primarily alleges that we misrepresented
and/or concealed material facts relating to the sufficiency of the BIG companies’ reserves and about the BIG
companies’ internal financial condition, including accounts receivables and the status of certain “captive”
insurance programs. Cap Z alleges that it seeks compensatory damages in excess of $100 million, unspecified
punitive damages, costs, and attorneys’ fees.
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