Health Net 2005 Annual Report Download - page 127

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
charge of $15.9 million representing total estimated legal defense costs for this litigation and related matters in
Louisiana and Oklahoma.
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.
In January 2004, we removed the Cap Z Action from New York state court to the United States District
Court for the Southern District of New York. We then filed a motion to dismiss all of Cap Z’s claims, and Cap Z
filed a motion to remand the action back to New York state court. On November 2, 2005, the District Court
remanded this action to the New York state court in New York City, without addressing our motion to dismiss.
The action has now been assigned to the Commercial Division of the New York state court. The Commercial
Division is staffed by judges who have more experience in handling complex commercial litigation.
On December 21, 2005, we filed a motion to dismiss all of Cap Z’s claims. Cap Z filed an opposition to the
motion on January 20, 2006. Our reply was filed on February 7, 2006. The court has set the hearing on the
motion for February 16, 2006. In addition, the court held a “preliminary conference” on January 24, 2006. At that
conference, the court allowed Cap Z to begin document discovery, but otherwise held discovery in abeyance
through the hearing on our motion to dismiss. No pretrial or trial dates have yet been set in the action.
F-39