or i ginal - class actionsecurities.stanford.edu/filings-documents/1001/... · 12 integrity of its...
TRANSCRIPT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1 5
16
17
18
19
20
2 1
22
23
24
2 5
26 1
27
28
OR I GINA LMILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S . LERACH (68581 )
BLAKE M . HARPER (115756)
ARTHUR C . LEAHY (149135)
SANGEETA G . PATEL (194252)
600 West Broadway, Suite 1800
San Diego, CA 92101Telephone : 619/231-1058
BERGER & MONTAGUE, P .C .
TODD S . COLLINS
MICHAEL L . BLOCKJACOB A . GOLDBERG
1622 Locust Street
Philadelphia, PA 19103Telephone : 215/875-300 0
Co-Lead Counsel for Plaintiffs
XV 24 PSI 3: 2 4
l c Jft1. ~
NNJNC s?t=,' nl~~(;.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNI A
In re FPA MEDICAL MANAGEMENT,
INC . SECURITIES LITIGATION
This Document Relates T o
ALL ACTIONS .
1
Master File vo .98cv0928-L (AJB )
CLASS ACTION
CORRECTED SECOND AMENDED CLASS
ACTION COMPLAINT FOR VIOLATION
OF THE FEDERAL SECURITIES LAWS
AND SUPPLEMENTAL STATE LAW
CLAIMS
DEMAND FOR JURY TRIAL
1 Plaintiffs file this corrected second amended complaint to
2 correct typographic errors in the second amended complaint filed
3 January 20, 2000 :
4 INTRODUCTION AND OVERVIEW
5 1. This is a class action on behalf of all persons who
6 purchased or otherwise acquired the publicly traded securities of
7 FPA Medical Management, Inc . ("FPA" or the "Company"), including
8 FPA's common stock, FPA's 6 .5% convertible subordinated debentures
9 and options to purchase FPA's common stock, between 2/3/97 an d
10 5/14/98, inclusive ("Class Period") . The defendants are certain of
11 FPA's top officers and directors and FPA's former largest
12 stockholder, Foundation Health Systems, Inc . ("Foundation
13 Health") . '
14 2 . FPA's insiders made false statements about the purported
15 success of FPA's growth-by-acquisition strategy, FPA's purported
16 success in integrating its acquisitions, and FPA's purported
17 success in improving its medical loss ratio, while they falsified
18 FPA's reported earnings and receivables to create a misleading
19 appearance of growing profitability, thus driving FPA's stock price
20 to as high as $40 per share in 10/97 . They also caused FPA to use
21 its inflated stock to make several acquisitions for millions of
22 shares of its stock . Meanwhile, FPA's insiders sold off almost
23 400,000 shares of FPA stock from their personal portfolios,
24 pocketing over $9 million in illegal insider-trading proceeds .
2 5
26 FPA was a defendant in this action when it was originallyfiled but now cannot be named as a defendant as a result of its
27 declaring bankruptcy subsequent to the filing of this case . Inaddition, FPA's auditor, Deloitte & Touche, LLP, was formerly a
28 defendant but is no longer named because it has agreed to settlewith plaintiffs and the Class .
- 1 -- 98cv0928-L(AJB)
1 Foundation Health furthered the fraudulent scheme by selling
2 certain loss-ridden health clinics to FPA for over four million
3 shares of FPA stock in 12/96, as FPA's insiders and Foundation
4 Health created an inflated sales price of nearly $200 million for
5 those clinics . Defendants thus allowed Foundation Health to record
6 an artificial profit on the sale, while artificially inflating
7 FPA's profits over the next nine quarters by recognizing as
8 revenues some $55 million in "guaranteed access" payments ("GA
9 payments") by Foundation Health back to FPA . In reality, these $5 5
10 million in GA payments were not revenues but a rebate on or
11 reduction of the sales price .
12 3 . After closing on its sale of health clinics to FPA,
13 Foundation Health was FPA's largest stockholder . Foundation Health
14 knew that FPA had materially misaccounted for this transaction in
15 order to artificially inflate FPA's reported results . To help
16 boost or maintain FPA's stock price, Foundation Health represented
17 to the market that it had no intention of selling its FPA stock .
18 However, contrary to these representations, Foundation Health
19 quickly sold off all 4+ million shares of its FPA stock at
20 artificially inflated prices, pocketing $79 million in illegal
21 insider-trading proceeds, as soon as it legally could sell without
22 incurring short-term liability under §16 of the Securities Exchange
23 Act of 1934 ("1934 Act") .
24 4 . Defendants pushed FPA's stock to $40 per share in 10/97
25 by inflating reported earnings and issuing materially false
26 statements about the alleged success of FPA's growth-by-acquisition
27 strategy, FPA's alleged success in integrating acquired companies
28 (especially the former Foundation Health clinics), FPA' s
- 2 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
1 6
17
18
19
2 0
21 I
22
23
24
2 5
26
27
28
purportedly tight cost controls, and FPA's alleged success in
lowering its medical loss ratio .
5 . FPA's stock began to fall sharply in late 1997, when FPA
was forced to reveal slightly declining revenues and membership,
increased accounts receivable, and negative cash flow, With
respect to these developments, defendants continued to mislead the
market by falsely asserting that they resulted from deliberate
management decisions or from one-time events and would not prevent
FPA from achieving 1998 and 1999 "earnings per share" ("FPS") of
$1 .05-$1 .35+ and $1 .85+, respectively, and 25%-30% EPS growth going
forward . In 3/98, when FPA's CEO and CFO both left their posts,
defendants continued to assure investors that FPA was on track for
strong lstQ 1998 results, and would achieve positive cash flow and
EPS of $1 .35 in 1998 .
6 . Defendants continued to suppress the truth until 5/15/98,
when they suddenly revealed that FPA had incurred a huge 1stQ 1998
earnings shortfall due to losses at the former Foundation Health
clinics and increases in reserves for medical expenditures .
Defendants also shocked the market by revealing that FPA would
suffer a huge 2ndQ 1998 loss due to, inter alia, $200 million in
special charges . These charges included writedowns of $125 million
of goodwill from prior acquisitions, including the Foundation
Health clinics ; $40 million in uncollectible accounts receivable ;
and other unspecified charges . Belatedly, defendants revealed that
FPA's financial condition was so desperate that it had sufficient
cash to operate for only six more weeks and that FPA faced a
liquidity crisis that threatened its survival .
- 3 - 98cv0928 -L(AJB)
1 7. In reaction to the startling revelations, FPA's stock
2 fell within days to as low as $2-23/32 per share - a 93% decline
3 from its Class Period high of $40 per share . FPA filed for
4 bankruptcy on 7/19/98, and its stock is now worthless because FPA
5 canceled all prior equity interests in emerging from bankruptcy .
6 8 . On 3/31/98, FPA had reported in its annual report on Form
7 10-K, signed by Lizerbram, Dresnick and others, that FPA had assets
8 at 12/31/97 of $830 million . By 6/30/98, nearly $400 million of
9 those assets had somehow disappeared . FPA reported a $500 million
10 loss for the six months ended 6/30/98, 12 times the net income
11 (excluding extraordinary charges) that FPA had previously reported
12 during the five quarters of the class Period (4thQ 1996 - 4thQ
13 1997) . The 6/30/98 financial statements also showed that goodwill
14 on FPA's balance sheet had shrunk from $466 million at 12/31/97 to
15 $212 million at 6/30/98 . Claims payable, including incurred but
16 not reported expenses, ballooned from $160 million at 12/31/97 to
17 $340 million at 6/30/98 . FPA only revealed those figures in 10/98,
18 long after the Class Period ended, when they appeared in a
19 voluminous bankruptcy filing, without discussion or footnote
20 explanation .
21 9 . EPA's fortunes did not so abruptly turn downward . A
22 significant portion of the previously reported assets and earnings
23 had simply never existed . Rather, during the Class Period, the
24 Individual FPA Defendants, with the partial knowledge and
25 participation of Foundation Health, materially falsified FPA's
26 reported results by :
27 (1) Improperly recording huge amounts of GA paymentsfrom Foundation Health as revenue instead of as a
28 reduction of or rebate on FPA's purchase price forFoundation Health's clinics . The impact - which
- 4 - 98cv0928-L(AJB)
1 defendants carefully hid from the market throughout the
Class Period - was to make FPA's money-losing operations2 appear profitable ;
3 (2) Recording as revenue excessive amounts ofpurported "shared risk" payments that FPA allegedly had
4 "earned ." In fact, the Company had no hope of eve rreceiving payment on these receivables . Defendants
5 waited until 5/15/98 - the close of the Class Period - to
announce a writeoff of these worthless receivables ;6
(3) Falsely under-reporting medical expenses by7 manipulating FPA's "incurred but not reported" ("IBNR'")
reserves, and by burying, disguising and8 mischaracterizing operating costs as goodwill or as part
of one-time merger and acquisition charges ;9
(4) Recording excessive amounts of goodwill and by10 failing to write down the carrying value of goodwill as
its impairment became evident ;11
(5) Manipulating FPA's cash position by delaying or12 pushing out payables and claims to conceal the Company's
growing liquidity crisis .13
10 . Taking these manipulations as a whole, the Individual FPA14
Defendants, with Foundation Health's active participation and15
knowledge of at least the GA payments, simply invented the
16
financial results they wanted to report . As a result, FPA was able
17
to, and did, report the following sterling but illusory quarterly
18results (not adjusted for acquisitions under pooling of interests
19accounting) :
20
12/31/96* 3/31/97* 6/30/97 9/30/97 12/31/97*21
Revenue $151 .OM $222 .8M $244 .6M $240 .6M $323 .OM
22 Net Income $ 4 .2M $ 6 .4M $ 8 .1M $ 10 .7M $ 12 .9M
EPS $.18 $ .20 $ .24 $ .29 $ .3023
* Excluding non-recurring charges .24
11 . Although FPA never formally restated its financial
25
statements before it filed bankruptcy and ceased reporting to the
26
Securities and Exchange Commission ("SEC"), it routinely admitted
27to prospective buyers of the Company, beginning in early 1998, that
28
the financial statements it had published during the Class Perio d
- 5 - 98cv0928 -L(AJB)
1 were fraudulent . In order to show would-be buyers what FPA's true
2 financial condition was, FPA's investment advisors prepared a
3 spreadsheet that backed out the improper adjustments made during
4 the Class Period . This was necessary to arrive at far more
5 accurate numbers for 1997 than those numbers that defendants had
6 released during the Class Period . The adjustments backed out
7 included defendants' manipulations with respect to shared risk
8 payments and medical expense reserves .
9 12 . Not only did the Individual FPA Defendants falsify FPA's
10 reported financial results, they repeatedly lied to securities
11 analysts and the market as to the quality of its business and the
12 integrity of its financial reporting practices . As late as March
13 1998, Lash represented publicly that FPA was achieving strong
14 positive cash flow from its core operations and would achieve
15 overall positive cash flow in 1998 . On 3/26-27/98, both Lash and
16 Flam represented publicly that FPA's financial results were
17 tracking expectations and that they "remain encouraged" by the
18 first quarter's performance . As late as 3/31/98, Lizerbram and
19 Dresnick were publicly forecasting strong 1stQ 1998 EPS and
20 assuring securities analysts that FPA would have positive cash flow
21 from operations during 1998 and was not suffering any liquidity
22 problems .
23 13 . Public investors who invested based on defendants'
24 material misrepresentations, as described in this Complaint, paid
25 as high as $40 per share for FPA's common stock during the Class
26 Period and suffered millions in damage . However, FPA's insiders
27 and Foundation Health, who knew the truth about how FPA was
28 falsifying its financial results, fared far better . Before FPA' s
- 6 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
2 4
25
26
27
28
stock price collapsed, FPA's insiders unloaded almost 400,000
shares of their FPA stock at artificially inflated prices,
pocketing over $9 million in illegal insider-trading proceeds,
while Foundation Health sold all 4,076,087 shares of its FPA stock
for $79 million in illegal insider-trading proceeds . All told,
these defendants sold over 4 .4 million shares of FPA stock for $88+
million in illegal insider-trading proceeds . In the aggregate,
these defendants collectively unloaded 62% of the FPA stock they
beneficially owned, while FPA stock was selling at artificially
inflated levels caused by their falsifying FPA's financial results
and issuing positive but false statements about FPA's business and
financial results . This illegal insider selling during the Class
Period is summarized below :
% of Beneficial* Total ProceedsDefendants Shares Sold Ownership Sold From SalesFoundatio nHealth 4,076,087 100% $79,000,00 0
Hassman 98,000 25% $ 2,343,87 0Lash, S .M . 79,000 56% $ 1,873,16 1Lizerbram 87,900 23% $ 2,113,63 5Dresnick 36,140 2% $ 859,14 0Flam 93,000 23% $ 2,215,79 4
Totals : 4,470,127 62% $88,405,60 0
* The percentages include defendants' vested options as set fort hin FPA's 1997 Proxy Statement .
14 . The price action of FPA's stock, de fendants' illega l
insider trading during the Class Period and the later collapse o f
FPA's stock are graphically displayed below :
- 7 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
50
40
30
0 20
10
FPA Medical Management, Inc .
January 2, 1997 - May 18, 1998
Daily Stock Price s
3111-17/97FPA Insiders sell 147,000 sharesfor $3,064,023
5121197
FPA Insider sells 10 , 000 sharesfor $185,000
11111-1218197FPA Insiders sell 237,040 sharesfor $6,156,57 6
5197 - 619 7Foundation Health sells 4,076 ,087 sharesfor $79,000,000
001/02/97 03/24/97 06/12 197 09 102/97 11/19/97 02/11/98 05/04/98
02/11/97 05/02/97 07/23/97 10 110/97 12/31/97 03/24/98
15 . Defendants' conduct has left thousands of people
victimized and outraged . Many members of the Class exchanged their
medical practices for FPA stock - some as late as March and April
1998 -- trading valuable medical practices for worthless FPA stock .
JURISDICTION/VENUE
16 . The claims asserted herein arise under §§10 (b) , 20 (a) and
20A of the 1934 Act, 15 U .S .C . §§78j(b), 78t(a) and 78t-1, SEC Rule
10b-5, 17 C .F .R . §240 .10b-5, and California law . Jurisdiction is
conferred by §27 of the 1934 Act, 15 U .S .C . §78aa . Venue is proper
pursuant to §27 of the 1934 Act .
- 8 - 98cv0928 -L (AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
2 0
21
2 2
23 I
24 I
25
26
27
28
PARTIE S
17 . (a) Invesco Enterprises, Phillip Jeffrey North, Patricia
Ann North, Scott Klansky, Michael A . Caristo, George Ehlert,
Georgeanne Ehlert, James F . Wright, Fred Redmond, Donald Morando,
Bill Henning, Phillip E . Solomon, Donald Kottler, Trustee, Jason S .
Asch, Trustee, Gail Krugman Asch, Trustee, Clara C . Asch, Trustee,
Ronald E . Simmons, Trustee, Edward S . Murachver, Enette S .
Murachver, Thomas Asciutto, Nathan Itzkowitz, Scott L . Silver,
Marcia A . Gutowicz, William L . Glosser, Fred Colella, Ralph
Tomasso, Michael Giglio, Roger Rubinger, Rick Penick, Coralette
Penick, Albert D . Barnabei, Nancy M . Barnabei, Frederick M . Garson,
Steven Friedland, Trustee, Natale Longordo, Murray Lebowitz,
Khosrow Shahrooz, and Robert Boose, Lead Plaintiffs pursuant to
Court Order dated 8/14/98, each purchased or acquired publicly
traded securities of FPA at artificially inflated prices during the
Class Period and was damaged thereby . Proposed Lead Plaintiffs
Marinus W . Baak, David & Rose Bashour, Michael Blott, Robert Brice,
Cheers Investment Club, ELAJ Family Limited Partnership, Dorothy J .
Fischer, Fred Greenberg, Christian Iovin, Robert Kahn, Jack L .
Kenfield, Luis Maizel, Iris Malek, Robert Quat, Jake Rofman, Ian &
Lucille Sacks, Trustee for Sacks Yourick, Inc . PSP, Joel D . Schram,
Retirement Plan, O .H . & Ellen Schwartz, Jonathan Sedgh, John
Silverman, Fred Sklar, John Solder, Raymond D . Sussman, Moonlight
Tran, and Eric Zivitz each purchased or acquired publicly traded
securities of FPA at artificially inflated prices during the Class
Period and were damaged thereby . The Proposed Lead Plaintiffs are
additional representatives of that portion of the Class who wer e
- 9 - 98cv0928 -L (AJB)
1 contemporaneous purchasers of FPA securities pursuant to §20A o f
2 the 1934 Act .
3 (b) Appendix A hereto identifies each of the separat e
4 purchase transactions of the Lead Plaintiffs and Proposed Lea d
5 Plaintiffs . The Lead Plaintiffs and Proposed Lead Plaintiff s
6 purchased a total of 260,250 shares and in excess of 2 59 options to
7 purchase shares during the Class Period and suff ered damage s
8 exceeding $3 million .
9 18 . At all relevant times, FPA was headquartered in San
10 Diego, California . During the Class Period, FPA's publicly trade d
11 securities traded in efficient markets, including its common stock ,
12 which traded on the NASDAQ National M arket System . During the
13 Class Period, FPA announced or completed the following acquisitions
14 for FPA stock :
15 FPA Share s
Acquisition Date Issued
16Foundation Health 12/96 4,076,08 7
17 Medical Service sAHI Healthcare Systems, Inc . 3/97 5,797,96 8
18 HealthCap, Inc . 6/97 1,940,96 0Emergency Medical Care, Inc . 8/97 372,95 9
19 Axminster Medical Group, Inc . 9/97 482,37 2
Health Partners, Inc . 10/97 5,227,27 3
20 Carolina Health Care Group 10/9 7Cornerstone Physicians Corp . 11/97 1,416,80 4
21 Avanti Corporate Health
Systems, Inc . 1/98 1,402,12 322 Physicians Quality Care/ 1/98 299,16 5
Associates in Managed Care23 J .T .M .S .O ., Inc . 2/98 11,43 2
Meridian Medical Group, Inc . 2/98 1,051,77 0
24 Emergency Treatment Associates 2/98 142,28 8
Orange Coast Managed Care Service s
25 and St . Joseph Medical Corp . 3/98 2,828,68 0
26 19 . (a) Sol Lizerbram was Chairman of FPA and activel y
27 involved in the day-to-day management o f the Company . During the
28 Class Period and as part of the fraudulent scheme, Lizerbram sol d
- 10 - 98cv0928-L(AJB)
1 87,900 shares of FPA stock at prices as high as $27 .75 per share
2 based on inside information, pocketing over $2 .1 million . On
3 3/25/98 Lizerbram amended his existing employment agreement with
4 the Company, decreasing its term to one year and increasing his
5 base pay from $445,000/year to $1,112,500/year and providing that
6 $3+ million in severance payments would be paid to him even if he
7 were terminated for cause .
8 (b) Seth Flam was, until he was fired in 3/98, President
9 and Chief Executive Officer and a director of FPA . During the
10 Class Period and as part of the fraudulent scheme, Flam sold 93,000
11 shares of FPA stock at prices as high as $27 .75 per share based on
12 inside information, pocketing over $2 .2 million . On 3/25/98, Flam
13 resigned and entered into a "Consulting and Settlement Agreement"
14 with the Company, providing for his termination for "other than
15 cause" and providing that nearly $3 .6 million in severance payments
16 would be made to him . The agreement also called for him to receive
17 $1,250,000 million in consulting fees, payable within six months .
18 In addition, all the stock options he Chen held were deemed vested
19 and exercisable . In early 4/98, Flam filed notices under SEC rule
20 144 to sell 264,08S shares of FPA held by a limited partnership
21 controlled by him with a then-market value of more than $4 .2
22 million .
23 (c) Stephen J . Dresnick was Vice Chairman of FPA from
24 10/96 to 3/98 and later the President and Chief Executive Officer
25 of FPA . During the Class Period and as part of the fraudulent
26 scheme, Dresnick sold 36,140 shares of FPA stock at prices as high
27 as $26 .50 per share based on inside information, pocketing
28 $859,140 .
- 11 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
1 7
18
19
20
2 1
22
23
24
25
26
27
28
(d) Steven M . Lash was, until 3/98 when he was forced
out of the position, Executive Vice President and Chief Financial
Officer of FPA . During the Class Period and as part of the
fraudulent scheme, Lash sold 79,000 shares of FPA stock at prices
as high as $27 .63 per share based on inside information, pocketing
over $1 .8 million . On 3/25/98, Lash amended his existing
employment agreement with the Company, providing that he no longer
act as Chief Financial Officer and providing that if his employment
was terminated before 9/25/99 and he has executed a release, his
termination would be deemed for "other than cause" and he would
receive more than $2 .5 million in severance payments and $1 million
in consulting fees . In addition, all the stock options he then
held would be deemed vested and exercisable .
(e) Howard Hassman was Executive Vice President and a
director of FPA . During the Class Period and as part of the
fraudulent scheme, Hassman sold 98,000 shares of FPA stock at
prices as high as $27 .09 per share based on inside information,
pocketing over $2 .3 million . On 4/1/98, Hassman resigned and
entered into a "Consulting and Settlement Agreement" with the
Company, providing for his termination for "other than cause" and
providing that more than $2 .15 million in severance payments would
be made to him . The agreement also called for him to received
$1 .25 million in consulting fees, payable within six months . In
addition, all the stock options he then held were deemed vested and
exercisable . In 3/98, 4/98 and 6/98 certain partnerships related
to Hassman filed notices under SEC Rule 144 to sell 354,000 shares
of FPA with a then-market value of more than $2 million .
- 12 - 98cv0928-L(AJB)
1 (f) The individuals named in ¶19(a)-(e) are referred to
2 as the "Individual FPA Defendants ." Because of their positions
3 with FPA, they each knew the adverse non-public information about
4 FPA's business that was being concealed via access to internal
5 corporate documents (including the Company's operating plans,
6 budgets and forecasts and reports of actual operations compared
7 thereto), conversations with other corporate officers and
8 employees, and attendance at management and/or Board meetings and
9 thus actually knew the statements being made were false . Despite
10 their duty not to sell their FPA stock under such circumstances,
11 these defendants nonetheless did so . The Individual FPA Defendants
12 are liable for the false statements pleaded herein, including those
13 at ¶ 1100, 108-09, 115, 121-22, 124, 126, 131, 134, 138, 142, 146,
14 150, 157, 159 and 161, as those statements were each "group-
15 published" information, the result of the collective action of the
16 Individual FPA Defendants .
17 (g) Lizerbram, Flam, Lash and Dresnick, by reason of
18 their stock ownership, management positions or membership on FPA's
19 Board, were controlling persons of FPA - who would be a liable
20 defendant in this action if plaintiffs were not prohibited from
21 naming it because of its bankruptcy - and had the power and
22 influence, and exercised the same, to cause it to engage in the
23 illegal conduct complained of herein . These defendants are thus
24 liable under §20(a) of the 1934 Act . In addition, each of the
25 defendants controlled one another and thus all are liable under
26 §20(a) as control persons .
27 20 . Foundation Health is the successor by merger to
28 Foundation Health Corp . and Health Systems International, Inc .
- 13 - 98cv0928-L(AJB)
1 which merged in 1/97 . In 7/96, Foundation Health Corp . agreed to
2 sell its California and Arizona health clinics to FPA for 4,076,087
3 shares of FPA stock, and closed that sale in 11/96 . Foundation
4 Health is liable for participating in the scheme to defraud
5 purchasers of FPA stock . Foundation Health's participation
6 included making false statements about its intention not to sell
7 its FPA shares and then selling those shares with knowledge that
8 the Individual FPA Defendants were falsifying FPA's financial
9 results by improperly accounting for payments being made b y
10 Foundation Health to FPA, which, while publicly characterized as GA
11 payments, were, in fact, a reduction or rebate of the purchase
12 price FPA had paid Foundation Health . Foundation Health's false
13 statement that it was not selling its shares was intended to help
14 push FPA's stock price higher, so that Foundation Health could
15 quickly unload all its FPA shares at artificially inflated prices .
16 Despite Foundation Health's duty not to sell its FPA stock under
17 such circumstances, it nonetheless did so . In addition, Foundation
18 Health was intimately involved in structuring the Foundation
19 Health/FPA transaction in a manner that would falsify Foundation
20 Health's and FPA's financial results .
21 THE FRAUDULENT SCHEME
22 21 . In 1994, FPA was a small physician practice management
23 company, with revenues of less than $20 million per year . In order
24 to attempt to rapidly grow FPA's business, FPA went public and
25 created a trading market in its stock . Then, using its publicly
26 traded stock, FPA went on an acquisition binge, acquiring 19
27 companies during 1996 and 1997 . By the spring of 1997, FPA's
28 annual revenues had ballooned to over $1 billion, and FPA wa s
- 14 - 98cv0928-L(AJ2)
1 reporting growing earnings, consistently beating analysts'
2 expectations . Defendants sought to grow FPA by acquiring other
3 companies until it reached sufficient top-line size, or generate
4 sufficiently large amounts of revenue, that it would be an
5 attractive acquisition candidate for a large HMO or insurance
6 company .
7 22 . In order for FPA's growth-by-acquisition plan to succeed,
8 defendants needed to use FPA's common stock as currency to make its
9 acquisitions . Thus, it was of critical importance to defendants t o
10 make it appear that FPA was achieving profitable growth . In this
11 way, defendants succeeded in keeping FPA's stock price at high
12 levels so that FPA stock would appear attractive to the businesses
13 FPA was attempting to acquire, and so that FPA could make its
14 acquisitions by issuing the fewest shares possible, thus limiting
15 the dilutive impact of those acquisitions . Defendants knew that
16 the only way to keep FPA's stock price at high levels was to
17 convince investors not only that FPA's rapid expansion plan was
18 working but also that FPA was achieving strong "same store" or
19 "same market" growth, while tightly controlling operating expenses
20 and lowering its medical expense ratio . Defendants thus caused FPA
21 to thus report growing operating earnings in 1997 and credibly, if
22 falsely, forecast continued strong earnings growth in 1998, 1999
23 and beyond . Defendants falsely represented that FPA's operations
24 were profitable, that FPA was successfully integrating the acquired
25 businesses and that FPA was effectively controlling operating costs
26 and lowering its medical expense ratio . Defendants knowingly and
27 falsely forecast a 25%-30% five-year EPS growth rate, including
28 1998 and 1999 EPS of $1 .05-$1 .35+ and $1 .85+, respectively .
- 15 - 98cv0928-L(AJB)
1 23 . A key event in FPA's expansion strategy - and a
2 transaction that artificially inflated its reported profits
3 throughout the Class Period - was FPA's 11/96 acquisition of the
4 California and Arizona medical clinics operated by Foundation
5 Health . Foundation Health needed to rid itself of these clinics
6 because they were losing large amounts of money - over $70 million
7 per year - and because Foundation Health was trying to improve its
8 financial condition so as to position itself for sale to Health
9 Systems International, Inc . FPA's purchase price for those medica l
10 clinics was purportedly $197 million, including 4,076,087 shares of
11 FPA stock . Because Foundation Health and FPA both used the same
12 accounting firm (Deloitte & Touche) , this transaction gave the
13 Individual FPA Defendants and Foundation Health a unique
14 opportunity to manipulate the accounting for the transaction to
15 falsify the financial results of Foundation Health and FPA in a
16 manner that would benefit both . The Individual FPA Defendants and
17 Foundation Health inflated the purchase price of Foundation
18 Health's clinics by $55 million, enabling Foundation Health to
19 record a profit on the sale, while providing that over the next
20 nine quarters, beginning in the 4thQ 1996, Foundation Health would
21 pay the $55 million back to FPA . The Individual FPA Defendants
22 then caused FPA to improperly recognize the $55 million as revenue
23 instead of as a reduction of the purchase price, thereby materially
24 inflating FPA's reported revenues and earnings .
25 24 . Foundation Health benefitted by receiving payment of an
26 inflated price for its clinics, but this price was paid in shares
27 of FPA stock, which Foundation Health knew to be artificially
28 inflated by defendants' ongoing fraud . Accordingly, it wa s
- 16 - 98cv0928-L(AJB)
1 Foundation Health's intent from the beginning to sell its FPA stock
2 at the earliest possible juncture .
3 25 . With respect to the Foundation Health transaction, the
4 investment community was concerned that the large holding of FPA
5 stock in the hands of Foundation Health would "overhang" the market
6 in FPA stock, having a depressive effect on the price . As a
7 result, FPA stock fell from $28-3/4 per share on 2/26/97 to
8 $14-15/16 per share on 4/25/97 . This drop of almost 50% in FPA's
9 stock price alarmed Foundation Health, which desperately wanted t o
10 sell its 4+ million shares of FPA stock . The price drop also
11 halved the value of the FPA insiders' stockholdings, greatly
12 alarming the Individual FPA Defendants, as well as endangering the
13 acquisitions FPA was in the process of closing, and made it
14 impossible for FPA to continue to make the large acquisitions that
15 were indispensable to FPA's continued growth .
16 26. To halt this decline in FPA's stock, the individual FPA
17 Defendants repeatedly asserted the propriety of the accounting
18 treatment for the Foundation Health transaction . To allay investor
19 concerns about the overhang of the FPA shares owned by Foundation
20 Health, the Individual FPA Defendants and Foundation Health assured
21 investors that Foundation Health "does not currently intend" to
22 sell the 4+ million shares of FPA stock it held . In addition,
23 defendants represented that "we successfully executed our growth
24 strategy" ; that FPA's "fundamentals are very strong" ; that FPA had
25 "built a solid foundation for growth internally and through
26 acquisitions" ; that FPA "continued to show margin improvements
27 based on further integration of acquisitions" ; that "the
28 integrating and consolidation of the Foundation Health Clinics i s
- 17 - 98cv0928-L(AJB)
1 ahead of plan" ; that the former Foundation Health clinics "were
2 performing ahead of expectations" and "ahead of budget" ; that
3 despite FPA's "remarkable growth . . . there is still a tremendous
4 amount of growth available . . . [and] we believe that this growth
5 . . . will continue in a very robust manner" ; and that FPA allegedly
6 had operating earnings of $ .20 in 1stQ 1997, which was better than
7 the market had expected . These materially false and misleading
8 statements halted the decline in FPA stock and inflated it to
9 higher levels during 5/97 . As EPA's stock moved higher, FP A
10 resumed its acquisition program, the Individual FPA Defendants
11 began to sell off their FPA stock and, contrary to Foundation
12 Health's assurances, it quickly unloaded its entire position of FPA
13 stock - 4,076,087 shares - during 5/97-6/97, pocketing $79 million
14 in illegal insider trading-proceeds .
15 27 . Throughout the balance of 1997, the Individual FPA
16 Defendants caused FPA to improperly recognize millions in revenues
17 from the Foundation Health payments and otherwise falsified FPA's
18 financial statements by not properly writing down millions in
19 goodwill arising from failed or failing acquisitions ; by
20 manipulating its reported cash to present a false picture of its
21 liquidity ; and by falsifying FPA's IBNR medical cost allowance
22 through the use of acquisitions and shared-risk receivables . The
23 Individual FPA Defendants thus caused FPA to continue to report
24 strong - indeed, better-than-expected - operating earnings, while
25 continuing to increase FPA's forecasted EPS for 1998 and 1999 to
26 $1 .08-$1 .47 and $1 .85-$1 .88, respectively . As and after the
27 Individual FPA Defendants reported FPA's purported "record" 2ndQ
28 1997 EPS of $ .24, they told investors that FPA's busines s
- 18 - 98cv0928-LfAJB)
1 "continued to perform above expectations as our integration plans
2 provide positive sequential results" ; that "all integrations are
3 proceeding on or ahead of schedule" ; and that "many areas of the
4 Company are performing better than expected ." The Individual FPA
5 Defendants emphasized that these results were partly due to a
6 "better than expected ('better than budget') performance by the
7 Foundation Health centers ." As a result, FPA's stock skyrocketed
8 higher - reaching a high of $40 per share in 10/97 . This purported
9 strong financial and stock performance enabled the Individual FP A
10 Defendants to cause FPA to make several acquisitions during the
11 Class Period, including HealthCap, Inc ., Health Partners, Inc .,
12 Cornerstone Physicians Corp ., AHI Healthcare Systems, Avanti
13 Corporate Health Systems, Inc . and Meridian Medical Group, by
14 issuing over 9 .4 million shares of FPA stock at artificially
15 inflated prices and arranging needed financing, including a $275
16 million credit facility through Lehman Brothers . It also enabled
17 the Individual FPA Defendants to sell off almost 400,000 shares of
1S their FPA stock at artificially inflated prices, pocketing over $9
19 million in illegal insider-trading proceeds-
20 28 . When the Individual FPA Defendants reported FPA's
21 purported "record" 3rdQ 1997 operating EPS of $ .29, they attributed
22 these results to "the continued consolidation of acquisitions and
23 synergy achievements and improvements in production ." FPA's stock
24 began to decline, however, as FPA revealed a slight decline in
25 enrollment and doctors and a decline in revenues to $241 million in
26 the 3rdQ 1997 from $245 million in the 2ndQ 1997 . To prop up the
27 stock price, the Individual FPA Defendants falsely assured
28 investors that these declines were expected and resulted from th e
- 19 - 98cv0928--L(AJB)
1 "intentional elimination of unprofitable accounts" resulting from
2 recent acquisitions, which decreased the quarter's revenues by $11
3 million . The Individual FPA Defendants also falsely told investors
4 that a sharp increase in FPA's accounts receivable and negative
5 operating cash flow in the 3rdQ were not a cause for concern but
6 were the expected result of FPA's rapid growth and acquisition
7 program . The Individual FPA Defendants also publicly stated that
8 payors were not contesting FPA charges ; that all FPA receivables
9 were collectible ; that cash flow from FPA's core operation wa s
10 strong, positive and growing ; and that FPA still expected 25%-30%
11 "same store" patient growth and 50% EPS growth in 1998, to $1 .35+
12 per share, and 25%-30% EPS growth going forward . The Individual
13 FPA Defendants also assured investors that "we have properly
14 situated our California-based operations and continue to manage
15 this part of our network effectively," and that all California
16 acquisitions "have been fully integrated . "
17 29 . At the same time, the individual FPA Defendants were well
18 aware of the Company's liquidity problems at least as early as
19 November 1997 . FPA began in November to push payables due in
20 fiscal year 1997 to fiscal year 1998 so as to improve the Company's
21 cash position at 12/31/97 . In November 1997, FPA contacted Optimal
22 Integrated Solutions, Inc ., a supplier of computer equipment and
23 consulting services to FPA, and stated that it would defer payments
24 due Optimal until after the first of the new year to improve FPA's
25 cash position on its year end financial statements . The amounts
26 due were in the millions of dollars .
27 30 . In late 1/98, the individual FPA Defendants represented
28 that FPA's 4thQ 1997 results were due to its "ability t o
- 20 - 98cv0928-L(AJB)
I successfully integrate [its] medical management technologies ." The
2 Individual FPA Defendants continued to tell investors that FPA had
3 "successfully integrated several acquisitions, reducing their
4 medical loss ratios and improving their financial performance while
5 FPA's existing operations continued to improve . "
6 31 . In January 1998, California's Department of Corporations
7 ("DOC") conducted an examination of FPA's California operations and
8 found "certain financial irregularities ." These were brought to
9 FPA's attention by the DOC no later than 3/12/98 by a "Confidential
10 Report," which requested a response within 30 days .
11 32 . In late 3/98, when FPA's CEO and CFO both suddenly left
12 their posts at FPA, the Individual FPA Defendants said the CEO
13 "helped to grow a great company" but was now leaving for personal
14 reasons and that the CFO job had gotten "too big" for one person to
15 handle . The Individual FPA Defendants falsely assured investors
16 that FPA's "business continues to track according to expectations,'}
17 that they were "encouraged" by FPA's business performance and
18 "excited" by its prospects, that FPA had no liquidity problems, and
19 that FPA would achieve positive cash flow in 1998 with lstQ EPS of
20 $ .30-$ .31 and 1998 EPS of over $1 .35 . FPA's stock traded as high
21 as $16-1/2 per share on 4/6/98 .
22 33 . Despite these representations, according to a Cease and
23 Desist Order issued by the DOC in or about April 1998, FPA stopped
24 paying certain providers . By 5/29/98, there was a backlog of
25 unpaid, uncontested claims in excess of 45 days in the amount of $9
26 million . In the first five months of 1998, FPA's working capital
27 deteriorated from a deficit of $4 .0 million to a deficiency of
28 $32 .3 million .
I- 21 - 98cv0928-L(AJB)
1 34 . On 5/15/98, the Individual FPA Defendants finally made a
2 series of shocking revelations that contradicted their positive
3 statements during the Class Period, including their recent
4 assurances of strong 1stQ 1998 EPS and improving cash flow . First,
5 they reported disastrous 1stQ results for FPA - EPS of only $ .01
6 compared to the $ .30-$ .31 forecast - admitting that in priori
7 periods FPA had not set aside enough IBNR medical claims reserves
8 and that the former Foundation Health clinics had suffered a $5+
9 million loss . The Individual FPA Defendants admitted that if FPA
10 could not make the Foundation Health clinics profitable, it would
11 leave the Foundation Health markets . Equally serious, they
12 revealed that FPA would be forced to take $200 million in write-
13 offs - $125 million for goodwill impairment (mostly Foundation
14 Health), $40 million in uncollectible accounts receivable and $30+
15 million in other charges - thus admitting they had over-valued
16 FPA's earlier acquisitions and lied about the collectibility of its
17 receivables . The Individual FPA Defendants also revealed that FPA
18 was firing employees and closing facilities, imposing hiring and
19 capital spending freezes, and implementing procedures to control
20 overhead spending . The Individual FPA Defendants also admitted
21 that FPA was in a liquidity crisis - FPA had maxed-out, and
22 defaulted on, its existing credit lines, lacked cash to operate for
23 more than six weeks, could not afford to pay for necessary
24 improvements in its information and accounting systems, and
25 desperately needed additional financing to survive .
26 35 . As is described in detail below at $139-78, FPA's
27 reported financial results were phony . While FPA has never
28 formally restated any financial statements, EPA admitted t o
- 22 - 98cv0928 -L(AJB)
i prospective buyers of FPA beginning in 5/98, that FPA's prior
2 publicly-released accounting numbers were fraudulent . Investment
3 advisors hired by certain of the Individual FPA Defendants prepared
4 a spreadsheet backing out the adjustments that had previously been
5 made with at least Lash's knowledge, including adjustments of
6 shared risk revenue and IBNR reserves, to show would-be buyers what
7 FPA's true financial condition was .
8 36 . In response to the 5/15/98 announcement, FPA's stock
9 price plunged from $11-15/16 per share on 5/14/98 to a closing
10 price of $5-1/2 per share on 5/15 and to $2-23/32 per share three
11 days later, falling 75% - on astonishing trading volume of 44
12 million shares in just four trading days - ending up 93% lower than
13 its Class Period high of $40 per share . On 7/19/98, FPA filed for
14 bankruptcy court protection . The stock is now worthless because
15 all equity interests in FPA were canceled in FPA's bankruptcy .
16 37 . Each of the positive statements described herein about
17 FPA's business during the Class Period was materially false and
18 misleading when issued . Defendants also failed to disclose, inter
19 alia, the following adverse information that was then known only to
20 defendants due to their access to internal FPA data and disclosure
21 of which was necessary to make the statements made not misleading :
22 (a) Defendants falsified FPA's reported results for the
23 4thQ 1996, as well as all four quarters of 1997, by misaccounting
24 for the Foundation Health acquisition, by manipulating reserves for
25 medical expenses to artificially low levels, by burying and thus
26 misaccounting for operating costs in one-time special charges
27 incurred in acquisitions, by refusing to write down impaired
28 goodwill from the Foundation Health and other acquisitions, and b y
- 23 - 98cv0928 -L(AJ2)
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
engaging in the other accounting tricks and artifices, all as
detailed at ¶¶39-78 ;
(b) Defendants deceived the public regarding the rate of
FPA's internal or organic growth, which was static or declining, by
issuing public reports that combined existing operations wit h
newly-acquired operations, thereby concealing the poor growth rat e
for FPA's ongoing or core operations ;
(c) FPA's purported record financial results reported
during the Class Period were not due to allegedly efficient
management techniques, allegedly successful integration of acquired
companies and business operations, or allegedly rigorou s
micromanagement of medical costs, as represented, but rather, to
the falsification of its financial results as detailed at $$39-78 ;
(d) Defendants were falsifying FPA's reported operating
results by artificially lowering FPA's operating and medical
expenses and thus its medical loss ratio, in part by improperl y
assigning operating costs to one-time acquisition charges and by
manipulating its IBNR accrual in connection with its acquisitions,
resulting in IBNR being set at artificially low levels ;
(e) FPA was encountering serious and persistent
difficulties in integrating the acquired operations of Foundatio n
Health and AHI, incurring huge costs and expenses , including
excessive medical expenses at those operations ;
(f) Defendants were causing FPA to arbitrarily refuse
needed and/or desired medical care requested by patients or their
treating physicians, resulting in increasing customer complaints
and physician hostility, which was having an adverse impact o n
- 24 - 98cv0928 -L(AJB)
1 FPA's ability to retain existing members, to attract new members,
2 and to retain existing or obtain new treating physicians ;
3 (g) To preserve cash and to mask the Company's
4 deteriorating cash position, defendants were causing FPA to not pay
5 claims and suppliers in a timely fashion, such that doctors refused
6 to see FPA patients until their accounts were brought current ;
7 (h) FPA was encountering markedly lower productivity
8 from physicians in certain parts of its network, especially from
9 physicians whose compensation had been switched to a salary basis ,
10 resulting in those physicians refusing to work as many hours as had
11 historically been the case ;
12 (U Due to the lower quality of care it was delivering
13 to its member patients, FPA was encountering a markedly slower rate
14 of internal growth, as customers and potential customers who had a
15 choice as to whether to utilize FPA's services were increasingly
16 refusing to select or use FPA because of its arbitrary denial of
17 necessary medical treatment and its markedly reduced quality of
18 care ;
19 (j) As a result of the foregoing adverse conditions
20 regarding FPA's business, PPA's forecasts of strong "same store" or
21 internal member growth during 1998-1999 were false when made,
22 because such growth could not and would not be obtained ; and
23 (k) As a result of the foregoing negative conditions
24 regarding FPA's business, the forecasts of strong 1998 and 1999 EPS
25 growth by FPA were false when made, because those results could not
26 and would not be achieved .
27 38 . Defendants consistently lied about the Company's
28 business, and concealed its precarious financial condition by
- 25 - 98cv0928 -L(AJB)
1 deliberately manipulating its reported financial condition and
2 results of operations . The fraudulent scheme and course of
3 business : (i) deceived the investing public regarding FPA's
4 products and business ; (ii) deceived the commercial markets
5 regarding FDA's success with its business ; (iii) artificially
6 inflated the price of FPA's securities ; (iv) caused plaintiffs and
7 other members of the Class to purchase or otherwise acquire FPA
8 securities at inflated prices ; (v) deceived the owners and managers
9 of other companies to induce them to sell their businesses to FPA
10 in return for FPA stock ; (vi) permitted FPA to acquire several
11 companies by issuing millions of shares of FPA stock at artificial
12 prices ; and (vii) permitted the Individual FPA Defendants and
13 Foundation Health to dispose of 4,470,127 shares of FPA stock at
14 artificially inflated prices, pocketing over $88 million in illegal
15 insider-trading proceeds .
16 DEFENDANTS ' FRAUDULENT FINANCIAL STATEMENTS
17 39 . Defendants used several methods to misreport FPA's
18 financial results : (1) they improperly accounted for FPA's
19 acquisition of Foundation Health, especially with regard to the $55
20 million rebate that defendants caused FPA to recognize as revenue
21 over nine quarters ; (ii) they deliberately recorded excessive
22 restructuring charges in FPA's accounting for acquisitions, burying
23 in those charges ordinary operating expenses ; and (iii) they
24 understated FPA's medical cost accruals by improperly recognizing
25 shared-risk payments that were uricollectible and that were
26 deliberately overstated to meet earnings estimates . The effect of
27 these manipulations was to materially overstate revenues and
28 earnings and to conceal FPA's deteriorating cash position an d
- 26 - 98cv0928 -L(AJB)
1 worsening operating condition . At the same time, defendants
2 continually lied to securities analysts and the market,
3 misrepresenting that FPA's IBNR reserve was conservative, that the
4 Foundation Health and other acquisitions were being successfully
5 integrated, that costs were being well-managed, and that the
6 Company was positioned for long-term earnings growth . These false
7 and misleading statements are detailed in T T99-106, 108-23, 125-57
8 and 159-61 below .
9 40 . Defendants caused FPA to report the following quarterly
10 results during 1997 (not adjusted for acquisitions under pooling of
11 interests accounting) :
12 12/31/96 * 3/31/97* 6/30/97 9/30/97 12/31/97 *
13 Revenue $151 .OM $222 .8M $244 .6M $240 .6M $323 .OM
Net Income $ 4 .2M $ 6 .4M $ 8 .1M $ 10 .7M $ 12 .9M
14 EPS $.18 $ .20 $ .24 $.29 $ .30
15 Excluding non-recurring charges .
16 41 . Defendants caused FPA to report these results in press
17 releases issued after the quarter end and in Form 10-Qs filed with
18 the SEC for each of the quarters ended 3/31/97, 6/30/97 and
19 9/30/97 . The Form 10-Qs, signed by Flam and Lash, represented that
20 "in the opinion of management" the accompanying financial
21 statements included "all normal adjustments (consisting only of
22 normal recurring adjustments) necessary for a fair presentation" of
23 FPA's results .
24 42 . The 12/31/96 and 12/31/97 results were reported in press
25 releases and in addition, incorporated in FPA's financial
26 statements included in Form 10-Ks filed with the SEC . The Form
27 10-Ks, signed by defendants Dresnick and/or Lizerbram, included
28 representations that the financial statements included therein wer e
- 27 - 98cv0928 -L(AJB)
1 presented in conformity with Generally Accepted Accounting
2 Principles ("GAAP") . The 12/31/96 results were also included in
3 Joint Proxy/Registration Statements filed with the SEC in
4 connection with the acquisitions of Health Partners, Meridian
5 Medical Group, St . Joseph Medical Corp . and Orange Coast Managed
6 Care Services during 1997 and 1998 . Defendants Flam, Lizerbram ands
7 Hassman signed one or more of these Registration Statements .
8 43 . These representations were false and misleading when
9 made, as FPA's financial statements presented during the Class
10 Period were not a fair presentation of FPA's results and were
11 presented in violation of GAAP and SEC rules .
12 44 . GAAP are those principles recognized by the accounting
13 profession as the conventions, rules and procedures necessary to
14 define accepted accounting practice at a particular time . SEC
15 Regulation S-X (17 C .F .R . §210 .4-01(a)(1)), states that financial
16 statements filed with the SEC that are not prepared in compliance
17 with GAAP are presumed to be misleading and inaccurate, despite
18 footnote or other disclosure . Regulation S-X requires that interim
19 financial statements must also comply with GAAP .
20 45. Defendants caused FPA to falsify its reported financial
21 results through its improper accounting for GA payments associated
22 with its acquisition of Foundation Health, improper use of special
23 charges in connection with various acquisitions, unjustified
24 overaccrual of shared-risk payments that it used to offset
25 operating expenses, and improper accounting for goodwill .
26 The Foundation Health Deal Was Used toInflate FPA ' s Earnings and Assets
27
46 . In 7/96, FPA agreed to make its largest acquisition ever,
28consisting of medical clinics and associated physician practices o f
- 28 - 98cv0928-L(AJB)
1 Foundation Health in California and Arizona . Foundation Health's
2 clinics were losing over $70 million per year, and Foundation
3 Health desperately wanted to rid itself of these loss-ridden
4 operations to dress itself up for sale . For its part, FPA needed
5 to make acquisitions to show growth and, in addition, to have an
6 excuse to take charges to earnings with which to mask its own
7 deteriorating financial condition . Defendants' scheme involved
8 dumping ordinary operating expenses in special charges, in
9 violation of GAAP, to deceive the public with respect to its
10 operating performance .
11 47 . Because both FPA and Foundation Health used the same
12 accounting firm, this allowed the Individual FPA Defendants and
13 Foundation Health to structure the purchase of the Foundation
14 Health clinics in a contrived manner that manipulated the financial
15 results of both Foundation Health and FPA . The Individual FPA
16 Defendants caused FPA to deliberately pay an inflated purchase
17 price of almost $200 million - including 4,076,087 FPA shares of
18 stock . This inflated price enabled Foundation Health to report an
19 after-tax gain of over $20 million, thus materially assisting
20 Foundation Health in positioning itself for sale to Health Systems
21 International, Inc . Not only did the sale improve Foundation
22 Health's financial position via the $20 million gain, but also it
23 allowed Foundation Health to rid itself of loss-ridden operations .
24 48 . For the Individual FPA Defendants, the key to the
25 transaction lay in Foundation Health's rebate of $55 million of the
26 purchase price to FPA, over nine quarters, beginning in the 4thQ
27 1996 and continuing for each of the quarters in 1997 and 1998 . The
28 purported purpose of these GA payments was to compensate FPA fo r
- 29 - 98cv0928-L(AJB)
1 continuing to operate the money-losing clinics to guarantee
2 patients access to health care, but the real purpose was to permit
3 FPA to amortize as goodwill the excess purchase price over thirty
4 years, while taking the GA payments directly into revenues and
5 earnings as they were received each quarter .
6 49 . The Individual FPA Defendants caused FPA to recognize
7 these GA payments as income in each of those quarters, although, in
8 fact, as the parties to the transaction understood, the GA payments
9 were, in fact, a reduction in or rebate of the purchase price pai d
10 by FPA for the Foundation Health clinics . Because of this
11 accounting manipulation, the Individual FPA Defendants were able to
12 artificially inflate and falsely manipulate FPA's reported earnings
13 during the 4thQ 1996 and each of the quarters of 1997 . This extra
14 revenue represented pure profit for FPA . This is because FPA had
15 to report the expenses it incurred in connection with the former
16 Foundation Health medical clinics it now owned regardless of
17 whether it received GA payments . Absent the manipulated structure
18 of the Foundation Health transaction, the Individual FDA Defendants
19 would not have had the additional millions of dollars in revenue to
20 report each quarter for FPA represented by the GA payments .
21 Likewise, GA payments served to lower the medical loss ratio,
22 defined as the "Medical Services Expenses" divided by the total
23 "Operating Revenues . "
24 50 . Although FPA disclosed obliquely the existence of the GA
25 payments, defendants did not reveal the amount being recorded in
26 any given quarter or the impact the payments had on FPA's earnings
27 and ratios when they reported FDA's operating results during the
28 Class Period . Defendants said not a single word about the G A
- 30 - 98cv0928-L(AJB)
1 payments in E'PA's quarterly or annual financial statements .
2 Accordingly, at any time before 5/15/98, an investor would have had
3 to have read page 95 of FPA's 10/4/96 Registration Statement, page
4 89 of FPA's 2/13/97 Registration Statement or one of a very few
5 specific securities analysts' reports in order even to have known
6 of the existence of the GA payments . Even then, an investor would
7 not have known how much of the GA payments were recorded in a given
8 quarter . The magnitude of the GA payments being taken and the
9 impact on FPA's financial results and medical loss ratios was h
10 revealed only after the close of the Class Period . FPA's Form 10-Q
11 for the period ended 3/31/98, filed on 5/15/98, was the first time
12 that defendants disclosed the material impact of the GA payments on
13 FPA's 1stQ 1998 and 1997 financial results . With respect to the
14 1stQ 1998, the 10-Q stated :
15 Revenue growth was adversely impacted by a decrease inadministrative support payments (primarily related to the
16 acquisition of medical groups and related health car ecenters from a predecessor to Foundation Health Systems,
17 Inc. consummated in late 1996) from $12 .7 million in the
quarter ended March 31, 1997 to $6 .5 million in the
18 quarter ended March 31, 1998 .
19 Thus, to explain partially its poor results in the first quarter of
20 1998 as compared to the first quarter of 1997, FPA revealed that it
21 had recorded $12 .7 million in GA payments in 1stQ 1997 . That
22 quarterly figure alone was nearly 25% of all the GA payments
23 supposed to have been made over the nine quarters! Absent this
24 huge GA payment, FPA would have recorded a loss for 1stQ 1997 of
25 $6 .3 million . Instead, with the $12 .7 million in GA payments, FPA
26 reported income (excluding nonrecurring charges) of $6 .4 million .
27 Similarly, in the absence of these GA payments, FPA's medical loss
28 ratio for the quarter would have increased from a reported 71% t o
- 31 - 98cv0928-L(AJB)
1 75 .2% . Defendants' failure to disclose the effect of GA payments
2 on FPA's quarterly consolidated statements of operations, and the
3 materiality of the GA payments' impact on FPA's revenues, earnings,
4 and medical loss ratios, misled investors and violated GAAP .
5 51 . Moreover, since GA payments are nonrecurring, or "unusual
6 or infrequent," the Individual FPA Defendants caused FPA to violate
7 GAAP by failing to have the GA payments classified as a line item
8 on FPA's consolidated statement of operations in FPA's FY96 and
9 FY97 Form 10-Ks . Defendants created the materially false illusion
10 that FPA's core operations were healthy and strong .
11 52 . In connection with the Foundation Health deal, defendants
12 caused FPA to inflate not only revenue, by means of GA payments,
13 but also assets, by means of inflated goodwill . Goodwill is the
14 difference between the purchase price and the value of the assets
15 acquired . Since the assets acquired were not worth anywhere near
16 $200 million, defendants caused FPA to record a large amount of
17 goodwill, which FPA sought to amortize over 30 years . Moreover,
18 amortization expense was excluded from FPA's earnings before
19 interest, tax, depreciation and amortization ("EBITDA") by
20 defendants, and thus did not reduce what they represented was FPA's
21 core operating results . During the Class Period, the Individual
22 FPA Defendants did not write down the value of FPA's goodwill to
23 its true value (which was minimal), as GAAP requires, because to do
24 so would have illuminated defendants' phony accounting for the
25 acquisition . Rather, as of 12/31/97, defendants increased the
26 amount of FPA's goodwill attributable to the assets acquired from
27 Foundation Health by more than $30 million in violation of GAAP .
28 This dramatically improved FPA's core operating results .
- 32 - 98cv0928 -L(AJB)
1 53 . The GA payments were a de facto reduction in or rebate of
2 the purchase price and should have been accounted for as such . See
3 FASB Statement of Concept No . 5, ¶83, Accounting Principles Board
4 Opinion ("APB") No . 16, ¶¶11 and 78 . FPA's obligation to keep the
5 money-losing operations open reduced the value of the acquisition,
6 which reduction should have been reflected in the purchase price .
7 However, in order to boost future revenue and earnings and current
8 assets, defendants caused FPA to overstate the purchase price by
9 not offsetting the GA payments against the purchase price, but took
10 those payments directly into earnings .
11 Manipulating and Failing
to Record Medical Expenses12
54 . FPA's interim and annual 1996 and 1997 results were also
13
false and materially misstated due to the Individual FPA14
Defendants's failure to properly record medical expenses, including
15
their manipulation of IBNR . (IBNR are costs associated with16
healthcare services that have been incurred during the financial
17reporting period but that have not been reported to FPA until after
18the financial reporting date . AICPA Statement of Position 89-5 .)
19
55 . GAAP, as set forth in SFAS No . 5, requires that losses20
which are both probable and can be reasonably estimated should be
21
accrued as a charge against income .22
56 . The Individual FPA Defendants significantly understated23
PPA's ongoing medical expenses by recording one-time restructuring
24
charges associated with mergers and acquisitions that exceeded by25
30% to 40% the actual expected merger and acquisition costs .
26Ultimately, when these costs were not used up or absorbed, FPA
27would reverse the charge and add them back into earnings . Thus,
28FPA merger charges would be "below the line" and excluded fro m
- 33 - 98cv0928-L(AJB)
1 EBITDA and the subsequent reversal of the charges would be a
2 reduction in operating expense and included in EBITDA . The
3 Individual FPA Defendants did this because securities analysts
4 typically value a company based on operating earnings and give less
5 weight to one-time charges .
6 57 . The Individual FPA Defendants also made improper
7 adjustments in connection with its merger charges . When FPA
8 acquired other companies, defendants arbitrarily assigned operating
9 expenses from FPA's poorly performing operating areas to the
10 acquisition . For example, when FPA acquired Orange Coast, debits
11 from FPA's former Foundation Health clinics in Sacramento were
12 assigned to that acquisition, which then became goodwill amortized
13 over many years . This increased operating earnings and decreased
14 cost ratios, again falsely making FPA's results appear stronger
15 than they were .
16 58 . Before FPA acquired a practice, defendants also
17 frequently took the IBNR accrual on the books of the acquired
18 company and arbitrarily increased it by 20% . Typically, the added
19 IBNR accrual was not actually necessary and would be reversed in
20 subsequent periods to decrease operating expenses and increase the
21 Company's earnings going forward . For example, when FPA acquired
22 Axminster in 3rdQ 1997, the Individual FPA Defendants manipulated
23 Axminster's results to artificially inflate FPA's earnings .
24 Axminster had historically been on a cash basis for financial
25 reporting purposes and thus had no accrual for IBNR . FPA's Finance
26 Department calculated that, to convert Axminster to an accrual
27 basis, Axminster needed to accrue $900,000 for IBNR . Lash
28 overruled this calculation and arbitrarily decreed that Axminster' s
- 34 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
9
10
11
12
13
14
15
16
17
1 8
19
20
21
2 2
23 I
24
25
26
2 7
28 1
accrual should be $2 .5 million . The increase in IBNR did not
immediately affect FPA's results because it was recorded by
Axminster pre-merger ; it only affected Axminster 's net equity . The
increase in IBNR did not matter to the persons who were selling
Axminster to FPA, because the acquisition price for Axminster was
already set . Right after the acquisition closed, Lash declared
that the Axminster IBNR accrual was higher than required and
instructed the FPA Finance Department to reduce the accrual by $1 .6
million as a credit (reduction) to medical services expense . Thisl
manipulation was thus used to increase FPA's operating income by
$1 .6 million and to reduce expense ratios .
59 . Ultimately, however, defendants could not continue to
conceal the growing medical expenses and, after Flam and Lash
departed, FPA's lstQ 1998 results were adversely affected by higher
medical expenses, which were more than 79% of revenues . FPA's
interim 1997 quarters' EPS were each overstated by at least 50% due
to the Individual FPA Defendants's failure to properly accrue
medical expenses .
Manipulation of Receivables, including Shared Risk Receivables
60 . During the Class Period, the Individual FPA Defendants
caused FPA to use unjustifiable and unreasonable estimates of
"shared risk" receivables . FPA was entitled to receive portions of
cost savings accomplished by the network . At the end of a year,
FPA would receive refunds from certain HMOs after it was determined
that the HMOs had in fact made savings on certain contracts .
Recording such receivables involved estimating the amount FPA would
ultimately receive in "shared risk" payments .
- 35 - 98cv0928-L(AJB)
1 61 . At the end of 1996, FPA's true earnings were not at the
2 levels that FPA management previously had forecast to the market .
3 To falsify and manipulate upward those earnings, Lash instructed
4 the Finance Department to use higher estimated rates per covered
5 member than the Company had in the past . The Finance Department
6 personnel told Lash that increases were not justified and they
7 amounts would ultimately not be collected . Nonetheless, in order
8 to meet the forecasts, Lash caused the per member rates to be
9 increased . This resulted in FPA decreasing its operating expense s
10 by millions of dollars and enhancing earnings by millions of
11 dollars, even though defendants knew that it was unlikely they
12 would ever collect such revenues .
13 62 . As part of preparing the 2ndQ 1997 results, FPA's Finance
14 Department noted that the number of covered lives related to AHI
15 practices had dropped precipitously . This impacted directly on the
16 shared risk accrual, because it was calculated using a per member
17 per month ("PMPM") rate multiplied by the number of members .
18 Because a decrease in the number of members would have resulted in
19 a decrease in the shared risk accrual and a decrease in earnings,
20 Lash told the Finance Department staff that the hard data showing
21 a decline in AHI covered lives "can't be right ." Lash then
22 instructed the staff to use the number of covered lives as shown at
23 the time of acquisition rather than the reduced number the
24 Company's current data showed . The use of the wrong number of
25 covered lives caused FPA's operating income to be overstated by
26 millions of dollars .
27 63 . FASB Statement of Concepts No . 5 does not permit
28 recognition of revenues and gains until they are both earned an d
- 36 - 98cv0928 -L(AJB)
1 collectible . Gains that are contingent upon other events should
2 not be recognized until the other events occur . Thus, pursuant to
3 GAAP, gain contingencies should not be recognized . See SFAS No . 5,
4 117 .
5 64 . Contrary to GAAP, and contrary to fair reporting, Lash
6 and others caused the Company to use payment accruals for shared
7 risk payments in excess of the amount the Company was realizing
8 from those investments . The inflated rates from 1996 were carried
9 over into 1997 and, despite evidence (lack of collection) tha t
10 these rates were not justified, Lash and others caused the Company
11 to continue to use these rates . This improper accrual of shared
12 risk payments resulted in FPA accumulating millions of dollars in
13 receivables on its books that defendants knew would never be
14 collected .
15 65 . When receivables began to grow increasingly delinquent,
16 the Individual FPA Defendants caused FPA to fail to properly accrue
17 losses on its shared-risk and other receivables, further causing
18 its 1997 results to be materially misstated .
19 66 . GAAP, as set forth in SFAS No . 5, requires that losses
20 from uncollectible receivables should be recorded either on an
21 individual or an aggregate basis when it is probable a loss has
22 been incurred . See SFAS No . 5, X22 . Moreover, pursuant to GAAP,
23 as set forth in SFAS No . 5, revenue should not be recognized unless
24 it is realizable or collectible .
25 67 . The Individual FPA Defendants' over-estimation of FPA's
26 shared-risk revenues from these agreements was compounded by their
27 failure to properly and timely accrue reserves for uncollectible
28 receivables . In fact, during the Class Period, FPA's receivable s
- 37 - 98cv0928 -L(AJB)
1 increased much faster than did its sales, due to (i) FPA's over-
2 accrual of revenues where ultimate collection was doubtful, and
3 (ii) its material shorting of reserves .
4 68 . Ultimately, in the 2rid4 1998, FPA wrote down these
5 receivables by $40 million . This amount exceeds 70% of all the net
6 income FPA reported during the Class Period, before special
7 charges . (And as is discussed herein, those figures were severely
8 inflated by other means, such as recording GA payments as revenue .)
9 These writedowns were the direct result of defendants' failure t o
10 record timely and adequate reserves during the Class Period and the
11 overstatement of revenue from shared-risk agreements .
12 Failure to Properly Value Goodwil l
13 69 . Goodwill was by far the largest asset on FPA's balance
14 sheet, comprising 53% and 56% of total assets in 1996 and 1997,
15 respectively . Thus, the proper measurement and valuation of
16 goodwill was crucial to FPA's determination of its assets and
17 earnings . Contrary to GAAP, the Individual FPA Defendants failed
18 to properly measure and report goodwill . Goodwill became the
19 favored place for defendants to hide FPA's expenses, as goodwill
20 could be amortized over 25-30 years and thus had a minimal impact
21 on earnings . In fact, whenever FPA had to accrue a liability,
22 Finance Department personnel would joke that the Company would
23 "credit the liability and debit either goodwill or restructuring
24 charges," neither of which would adversely affect operating
25 earnings .
26 70 . As part of the acquisition of practices from Foundation
27 Health, FPA recorded goodwill of more than $150 million, reflecting
28 the excess of the purchase price over the fair value of the ne t
- 38 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1 5
16
17
18
1 9
20
21
22
23
24
25
26
27
28
assets acquired . As described above, defendants caused FPA to
improperly overstate the acquisition price of the Foundation Health
clinics, thereby inflating the amount of goodwill associated with
the acquisition . FPA amortized the goodwill as charges against
earnings over 30 years, thus minimizing the impact of such charges .
71 . During 1997, the practices acquired from Foundation
!Health accumulated such severe losses that defendants should have
reviewed the recoverability of the goodwill associated with this
transaction and FPA should have recorded an expense for the
unrecoverable portion . Defendants claimed to undertake such a
review of recoverability, but these claims were false . In FPA's
1996 Form 10-K, the Individual FPA Defendants caused FPA to falsely
represent with regard to goodwill :
At each balance sheet date following the acquisition ofa business, the Company reviews the carrying value of thegoodwill to determine if facts and circumstances suggestthat it may be impaired or that the amortization periodmay need to be changed .
The 1997 Form 10-K falsely stated that with regard to goodwill :
At each balance sheet date, the Company reviews thecarrying value of the goodwill and intangibles todetermine if facts and circumstances suggest that they
may be impaired or that the amortization period may need
to be changed . The Company considers external factors,
as well as internal factors, relating to each acquired
business, including hospital and physician contract
changes, local market developments, changes in third
party payments, national health care trends, and otherpublicly available information . If these external and
internal factors indicate that the goodwill will not berecoverable, as determined based upon undiscounted cash
flows before interest charges of the business acquired
over the remaining amortization period, the carryingvalue of the goodwill or intangibles will be reduced .
The Company does not believe there currently are any
indicators that would require an adjustment to the
carrying value of the goodwill or intangibles or theirremaining useful lives .
- 39 - 98cv0928 -L(AJB)
1 72 . Contrary to these representations, and contrary to GAAP,
2 in order to report favorable financial results during the Class
3 Period, defendants failed to undertake serious or meaningful
4 reviews of recoverability and failed to write down the impairment
5 in goodwill attributable to Foundation Health, thereby materially
6 overstating results during the Class Period .
7 73 . The Individual FPA Defendants also overstated FPA's
8 goodwill associated with post-acquisition adjustments relating to
9 the Foundation Health transaction . As part of the acquisition o f
10 the Foundation Health clinics, FPA agreed to indemnify Foundation
11 Health for any losses on the sale of Foundation Health real estate
12 related to the practices FPA acquired . The Individual FPA
13 Defendants had not wanted FPA to acquire the real estate associated
14 with these practices, as they realized that such properties were
15 significantly overvalued . They nevertheless had FPA agree to
16 indemnify Foundation Health should it lose any money on the
17 disposal of the real estate . In 4thQ 1997, the Individual FPA
18 Defendants caused FPA to belatedly record an accrual to reflect its
19 liability with respect to this indemnification and, instead of
20 recording a charge for the expenses it had incurred (and would
21 continue to incur) , they caused FPA to post the entire amount to
22 FPA's goodwill to be amortized over 30 years, thus avoiding a
23 significant impact on earnings . This improper and belated
24 adjustment materially overstated the Company's 1997 results .
25 74 . In addition, in 3rdQ 1997, the Company accrued a loss
26 contract provision due to an unfavorable contract in Arizona . The
27 contract in Arizona was with Intergroup, and the capitation
28 payments on this contract were much lower than costs . Thus, the
- 40 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Individual FPA Defendants knew that EPA would continue to incu r
losses over the life of the contract . In 3rdQ 1997, FPA debited
goodwill by the amount of this loss contract and credited deferred
revenue, which it amortized over three years (as opposed to the 30-
year amortization period for goodwill) . The Individual FPA
Defendants thus greatly increased the positive impact on FPA' s
earnings for this adjustment by choosing amortization periods much
longer for expenses than they did for revenues ,
75 . Also in 3rdQ 1997, FPA's accounting staff informed Las h
that the Company was receiving large numbers of claims on former
AHI practices that were in excess of IBNR accruals . Instead of
recognizing the costs as expenses, Lash caused FPA to record a $5
million debit (increase) to goodwill, thereby avoiding a decrease
in operating income as a result of those expenses .
76 . Absent defendants' accounting improprieties, FPA woul d
have reported significant operating losses in each quarter during
the Class Period instead of the profits it falsely reported .
Moreover, the defendants reported cash balances which were based on
unreconciled bank statements which resulted in overstated cash
balances being reported during the Class Period .
77 . Due to these accounting improprieties by the Individual
FPA Defendants, they caused FPA to present its financial results
and statements in a manner that violated GAAP, including the
following fundamental accounting principles :
(a) The principle that interim financial reporting
should be based upon the same accounting principles and practices
used to prepare annual financial statements (APB No . 28, 1lO) ;
- 41 - 98cv0928-L(AJB)
1 (b) The principle that financial reporting should
2 provide information that is useful to present and potential
3 investors and creditors and other users in making rational
4 investment, credit and similar decisions was violated (Concepts No .
5 1, ¶34) 1
6 (c) The principle that financial reporting should
7 provide information about the economic resources of an enterprise,
8 the claims to those resources, and effects of transactions, events
9 and circumstances that change resources and claims to those
10 resources was violated (Concepts No . 1, ¶40) ;
11 (d) The principle that financial reporting should
12 provide information about how management of an enterprise has
13 discharged its stewardship responsibility to owners (stockholders)
14 for the use of enterprise resources entrusted to it was violated .
15 To the extent that management offers securities of the enterprise
16 to the public, it voluntarily accepts wider responsibilities for
17 accountability to prospective investors and to the public in
18 general (Concepts No . 1, ¶50) ;
19 (e) The principle that financial reporting should
20 provide information about an enterprise's financial performance
21 during a period was violated . Investors and creditors often use
22 information about the past to help in assessing the prospects of an
23 enterprise . Thus, although investment and credit decisions reflect
24 investors' expectations about future enterprise performance, those
25 expectations are commonly based at least partly on evaluations of
26 past enterprise performance (Concepts No . 1, ¶42) ;
27 (f) The principle that financial reporting should be
28 reliable in that it represents what it purports to represent wa s
- 42 - 98cv0928 -L (AJB)
I violated . That information should be reliable as well as relevant
2 is a notion that is central to accounting (Concepts No . 2, $158-
3 59) ;
4 (g) The principle of completeness was violated, which
5 means that nothing is left out of the information that may be
6 necessary to insure that it validly represents underlying events
7 and conditions (Concepts No . 2, X79) ; and
8 (h) The principle that conservatism be used as a prudent
9 reaction to uncertainty to try to ensure that uncertainties and
10 risks inherent in business situations are adequately considered was
11 violated . The best way to avoid injury to investors is to try to
12 ensure that what is reported represents what it purports toy
13 represent (Concepts No . 2, ¶1195, 97) .
14 78 . Further, the undisclosed adverse information concealed by
15 defendants during the Class Period is the type of information that,
16 because of SEC regulations, regulations of the national stock
17 exchanges and customary business practice, is expected by investors
18 and securities analysts to be disclosed and is known by corporate
19 officials and their legal and financial advisors to be the type of
20 information that is expected to be and must be disclosed .
21 DEFENDANTS ' SCIENTE R
22 79 . The Individual FPA Defendants had the ability to commit
23 the fraud complained of, and did, as they were the top executives
24 and/or directors of FPA . Each of the Individual FPA Defendants was
25 in a position to, and did, learn the details of FPA's business
26 condition, acquisitions, financial reporting and prospects, through
27 numerous management meetings, through conversations with other
28 executive officers and directors, and through the review o f
- 43 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
regularly prepared reports that were circulated among defendants
and others regarding the Company's revenues, acquisitions an d
financial performance . As FPA's top executives and/or directors,
the Individual FPA Defendants controlled FPA's publicly issue d
financial statements and the disclosures made in them, FPA's publi c
statements, and its SEC filings, and thus could falsify them . They
also ran FPA as "hands-on" managers dealing with the importan t
issues facing FPA's business such as directing and managing FPA's
finances and acquisitions, and issuing FPA's SEC filings, press
releases and financial statements . Moreover, because the
Individual FPA Defendants were "hands-on" managers, they were eac h
involved in the day-to-day management of FPA and learned, from
doing their jobs, of the adverse non-public information about FPA's
falsified financial statements and FPA's deteriorating revenue an d
EPS prospects . Thus, each individual FPA Defendant actually knew ,
or with deliberate recklessness disregarded, that the publi c
statements pleaded in f f99-106, 108-23, 125-57 and 159-61 were
false and/or misleading when made .
80 . Because FPA's acquisitions, and its finances (i .e ., FPA's
revenues, expenses, cash flow, EPS, profitability and financial
reporting) were key factors in FPA's attempt to expand and to meet
its internally budgeted and publicly disseminated 1998 and 1999
quarterly EPS targets, the Individual FPA Defendants constantly
monitored each of these key factors impacting FPA's business- No t
only did defendants learn of the adverse factors affecting FPA's
business, they personally directed the falsification of FPA's
financial statements as alleged herein in order to create the fals e
illusion that FPA was meeting its targets .
- 44 - 98cv0928 -L (AJB)
1 81 . Contrary to defendants' representations that FPA was
2 experiencing "record" financial results, such "record" results were
3 only achieved during the Class Period as a result of falsified
4 financial statements, which defendants deliberately manipulated
5 through their improper structuring of the Foundation Health deal
6 and their manipulation of FPA's medical expenses, shared risk
7 receivables and goodwill, as alleged herein . The details of
8 defendants' manipulation and falsification of FPA's financial
9 statements, which are described more fully in ¶f39-78, wer e
10 initiated and directed by the Individual FPA Defendants .
11 Defendants knew at all times the true nature of FPA's financial
12 condition .
13 82 . Defendant Lash was FPA's CFO . He was in charge of FPA's
14 Finance Department and FPA's financial reporting . During the Class
15 Period, members of FPA's Finance Department complained of the
16 falsification of FPA's financial statements, stating that such
17 manipulations were in violation of GAAP . FPA management responded
IS by threatening those employees with the loss of their jobs if they
19 did not go along with the manipulations . Moreover, notwithstanding
20 the complaints by the Finance Department, the Individual FPA
21 Defendants continued to falsify FPA's financial statements .
22 83 . By 1/97, FPA had implemented a new accounting system
23 called "Smartstream ." But Smartstream was implemented too quickly,
24 causing so many glitches in the accounting system that it was well-
25 known to the Individual FPA Defendants and the Finance Department
26 that it was impossible to generate accurate financial data . As a
27 result, on 4/29/97, the night before FPA was going to announce its
28 lstQ 1997 financial results, Lash met with members of the Financ e
- 45 - 98cv0928-L(AJB)
1 Department to attempt to prepare the 1stQ 1997 results . They could
2 not reconcile or balance any of the accounts . Accordingly, Lash
3 decided that they would have to make up the lstQ 1997 financial
4 results, which they did, and which were reported the next day .
5 84 . It was well--known within FPA's Finance Department, Lash
6 included, that FPA's accounting systems were so bad that FPA's
7 internal consolidated cash flow statement could not be reconciled .
8 The cash flow statement was routinely out of balance by $5-10
9 million . Finance Department personnel were directed by managemen t
10 to create fake adjustments (without any basis to justify such
11 adjustments) in order to make it appear that the cash flow
12 statement was reconciled and to make it appear to balance with the
13 rest of the Company's financial statements .
14 85 . During the Class Period, Finance Department personnel
15 were directed by management to create cash flow statements which
16 did not reflect reality but rather reflected Lash's statements in
17 presentations to the investing public . In order to create these
18 phony cash flow statements, Finance Department personnel were
19 directed to make fake "presentation adjustments" as needed to make
20 the cash flow statements match Lash's representations .
21 86 . In 3rdQ 1997, defendant Lash was informed by the Finance
22 Department that FPA needed to book an additional $5 million in IBNR
23 expenses . Rather than book it as an expense as he had been it told
24 it should be, Lash directed that it be booked as goodwill, clearly
25 inappropriate .
26 87. In connection with the Axminster acquisition in 9/97,
27 Lash was informed by the Finance Department, after it did a
28 thorough review and investigation of Axminster, that an IBNR
- 46 - 98cv0928 -L(AJB)
1 accrual of $900,000 should be recorded . Lash summarily rejected
2 the number and arbitrarily directed that $2 .5 million be accrued .
3 Subsequently, Lash reversed $1 .6 million of the accrual and used it
4 in a manner which improperly boosted FPA's operating income .
5 88 . During the Class Period, Lash ordered the Finance
6 Department to use higher estimated rates per covered member on
7 FPA's shared risk receivables . This resulted in an increase in
8 FPA's earnings by reducing its operating expenses) .) The Finance
9 Department informed Lash that, based on the information it had, any
10 increases in the rates were unjustified . Lash ignored the Finance
11 Department, and directed that the rates be increased nonetheless,
12 which they then were . Lash also directed that the Finance
13 Department use a higher number of "covered lives" for calculating
14 shared risk receivables than the Company's data supported . This
15 resulted in an increase to FPA's operating income . FPA management
16 admitted to the Finance Department that the numbers used to
17 calculate shared risk receivables needed to be "goosed" so that FPA
18 could make its EPS estimates .
19 89 . In 3rdQ 1997, Lash was informed by the Finance Department
20 that FPA's books contained an AHI receivable, amounting to $1 .5
21 million, that was bogus . Lash informed the Finance Department to
22 leave it on the books since removing it would hurt FPA's EPS for
23 that quarter .
24 90 . In quarters after 1stQ 1997 during the Class Period, on
25 the night before FPA's quarterly and annual financial results were
26 announced (7/29/97, 10/29/97, 3/5/98), Lash and the Finance
27 Department met to review and discuss FPA's financial results and
28 decide what they would announce the next day . In each of thes e
- 47 - 98cv0928 -L(AJB)
1 meetings, Lash and the Finance Department reviewed internal
2 financial statements received from the Company's subsidiaries .
3 These internal financial statements indicated that FPA was
4 experiencing losses at its subsidiaries which contradicted Lash's
5 forecasts of EPS to the market . Accordingly, Lash instructed
6 Finance Department personnel that they had "a lot of work to do"
7 that evening and ordered them to manipulate and falsify the results
8 so that they would match Lash's forecasts . The Finance Department
9 worked late into the evening in order to falsify the results so
10 that they met FPA's public forecasts .
11 91_ At the end of the Class Period (5/98), FPA was
12 collapsing . In a last ditch effort to save FPA from financial ruin
13 (which defendants were obviously unsuccessful in doing since FPA
14 went bankrupt in 7/98), the Individual FPA Defendants hired an
15 investment banker to find a cash-flush buyer for the Company . This
16 effort to bail out FPA was called "Project Helmet II" within the
17 Company . In connection with this attempted sale, the Individual
18 FPA Defendants openly admitted to potential buyers that FPA's
19 "books were cooked ." In addition, the potential buyers were shown
20 a spreadsheet that backed out all of the fraudulent adjustments
21 made to FPA's financial statements during the Class Period so that
22 potential buyers could assess the true financial condition of the
23 Company .
24 92 . Every month, Lash routinely approved the reimbursement of
25 tens of thousands of dollars in purported "expenses" incurred by
26 friends of his that worked at FPA, even though there were no
27 receipts submitted to substantiate the claims for reimbursement .
28 In addition, Lash improperly approved for reimbursement receipt s
- 48 - 98cv0928 -L(AJB)
1 for repairs and gasoline for defendant Hassman's vehicle, even
2 though Hassman already had a car allowance from the Company .
3 Moreover, the Individual FPA Defendants' wives were provided free
4 cosmetic surgery at the Company's expense and used the Company-
5 owned pre-paid air travel for their personal use . It was well-
6 known within FPA that the Individual FPA Defendants used the
7 Company for their own personal gain .
8 93 . During the Class Period, FPA had a rebate program with
9 MCI . FPA received hundreds of thousands of dollars in rebates
10 under this program . This money was purportedly used to buy
11 equipment for a media center at FPA . In fact, there was no media
12 center, and the address of this bogus "media center" was Lash's
13 home address, where hundreds of thousands of dollars in media
14 equipment were sent for his own, personal entertainment center .
15 94 . Lash kept the other individual FPA Defendants informed
16 about the foregoing . Lash worked very closely with CEO Flam, under
17 the direction of Lizerbram and Dresnick . When Flam and Lash left
18 the Company in March 1998, Dresnick and Lizerbram more actively ran
19 the Company, with Dresnick becoming CEO . These defendants
20 nevertheless continued to mislead investors, proceeded to complete
21 additional mergers, without revealing any of the facts available to
22 them concerning EPA's phony financial statements and alarming
23 financial condition .
24 95 . For example, the Individual FPA Defendants continued to
25 conceal the "financial irregularities" reported by California's
26 Department of Corporations to them at least by 3/12/98, even though
27 FPA was continuing to acquire doctors' practices and defendants
28 were filing and signing Registration Statements . Defendants als o
- 49 - 98cvO928-L ( AJB)
1 concealed the liquidity problems that were occurring . For example,
2 FPA's SEC filings show a cash balance at 3/31/98 of only $12
3 million in cash. Yet, an internal audit reports showed that
4 defendants had under reserved for medical claims by at least $15
5 million . Finally, their scienter may be inferred from their
6 modification of their employment agreements to guarantee large
7 severance or consulting payments to themselves even if terminated
8 "for cause . "
9 96 . Foundation Health knew all aspects of the fraud, at least
10 as it related to the GA payments . The timing and amount of
11 Foundation Health's insider stock sales in May and June 1997
12 evidence this defendant's knowing or conscious misconduct .
13 Foundation Health helped to structure the health clinic transaction
14 with FPA and knew or consciously disregarded that FPA's failure to
15 disclose the amount of GA payments being recorded each quarter were
16 masking FPA's true operating results . Foundation Health knew
17 exactly how much it was paying to FPA in the form of the GA
18 payments, and that it had just made a $12 .7 million payment -
19 nearly 25% of the total amount to be paid over nine quarters - in
20 lstQ 1997 alone . This huge GA Payment had enabled FPA to announce
21 "strong revenue and earnings growth" for lstQ 1997, a net profit
22 instead of a net loss, and a reduced medical loss ratio . The short
23 time span between Foundation Health's announcement that it had no
24 current intention of selling and its sale of all its shares, also
25 supports a strong inference of its scienter . The reasonable
26 inference arising from these facts is that Foundation Health knew
27 or recklessly disregarded that FPA's reported strong financial
28 results were inflated, due in no small part to the GA payments, and
- 50 - 98cv0928-L~AJB)
1 that as those payments dwindled , the truth about FPA's financial
2 condition would become known and FPA's stock price would collapse .
3 97 . Also supporting a strong inference of all defendants'
4 scienter is their insider trading . While the defendants were
5 issuing favorable statements about FPA, knowing that suc h
6 statements were untrue, they sold their shares of FPA stock for
7 more than $ 88 million , to profit personally from the artificia l
8 inflation in FPA's stock price thei r fraudulent s cheme had created .
9 Notwithstanding their access to confidential information as a
10 result of their status as directors, officers and/or insiders o f
11 the Company, and their corresponding duty to disclose advers e
12 material facts before trading i n FPA stock, defendants sold
13 significant amounts of FPA shares at artificially inflated price s
14 in order to profit from the fraud, and did so while in possessio n
15 of material non-public information . Defendants ' insider selling
16 during the Class Period is detaile d below :
17 PRICE
DATE SHARES PER PROCEED S
18 NAME SOLD SOLD SHARE FROM SALE
19 Dresnick 05/21/97 10,000 $18 .50 $ 185,00 011/17/97 11,140 $26 .50 295,21 0
20 11/25/97 10,000 $25 .13 251,30 011/26/97 1,000 $25 .63 25,63 0
21 11/26/97 4,000 $25 .50 102,00 036,140_ $ 859,14 0
22
Flam 03/11/97 2,000 $22 .88 $ 45,760
23 03/12/97 6,200 $22 .13 137,20 603/13/97 4,100 $22 .34 91,594
24 03/14/97 12,300 $20 .72 254,85 603/17/97 14,400 $19 .44 279,93 6
25 11/19/97 2,500 $27 .50 68,75 0
11/19/97 2,500 $27 .63 69,07 5
26 11/19/97 2,500 $27 .63 69,07 5
11/20/97 16,650 $27 .25 453,71 3
27 11/21/97 1,500 $27 .50 41,25 0
11/24/97 2,500 $27 .75 69, 37 528 11/24/97 2,500 $27 .75 69,37 5
11/24/97 2,500 $27 .75 69,37 5
- 51 - 98cv0928-L(AJB)
1 12/04/97 12,000 $23 .81 285,72 0
12/04/97 1,000 $24 .00 24,00 0
2 12/04/97 2,000 $23 .88 47,76 0
12/04/97 5,000 $23 .81 119,05 03 12/05/97 850 $23 .44 1-9,92 4
93,000 $_2,2.15,7944
5
6
Foundation Qtr .7 Health ende d
6/30/97 4, 076,087 $79,000,00 0
8
Hassman 03/11/97 2,000 $22 .88 $ 45,76 0
9 03/14/97 2,500 $21 .00 52,50 003/14/97 27,500 $20 .88 574,20 0
10 03/14/97 7,000 $21 .00 147,00 011/04/97 5,000 $24 .38 121,90 0
11 11/06/97 5,000 $24 .50 122,50 011/07/97 5,000 $23 .55 117,75 0
12 11/14/97 10,000 $25 .56 255,60 0
11/17/97 10,000 $26 .38 263,80 0
13 11/17/97 10,000 $26 .38 263,80 011/18/97 11,500 $27 .09 311,53 5
14 11/18/97 2,500 $27 .01 67,52 598 ,000 $ 2,343,87 0
15Lash 03/11/97 1,600 $22 .88 $ 36,608
16 03/12/97 4,700 $22 .13 104,01 103/13/97 3,200 $22 .34 71,48 8
17 03/14/97 9,400 $20 .72 194,76 803/17/97 11,100 $19 .44 215,78 4
18 11/19/97 5,000 $27 .50 137,50 011/19/97 2,500 $27 .63 69,07 5
19 11/20/97 16,650 $27 .25 453,71 312/04/97 1,000 $24 .00 24,00 0
20 12/04/97 17,000 $23 .81 404,77 012/04/97 2,000 $23 .88 47,76 0
21 12/05/97 4,850 $23 .44 113,68 4
79,000 1 873 16 122
Lizerbram 03/11/97 2,000 $22 .88 $ 45,76 0
23 03/12/97 6,200 $22 .13 137,20 603/13/97 4,100 $22 .34 91,594
24 03/13/97 3,200 $21 .00 67,20 003/14/97 10,900 $20 .72 225,84 8
25 03/17/97 12,600 $19 .44 244,94 4
11/19/97 2,500 $27 .63 69,07 5
26 11/19/97 2,500 $27 .63 69,07 5
11/19/97 2,500 $27 .50 68,75 0
27 11/20/97 16,650 $27 .25 453,71 3
11/21/97 1,500 $27 .50 41,25 0
28 11/24/97 5,000 $27 .75 138,75 011/24/97 2,500 $27 .75 69,37 5
- 52 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
12/01/97 1,000 $26 .44 26,44 012/01/97 4,000 $26 .38 105,52 012/04/97 1,000 $24 .25 24,25 012/04/97 750 $23 .88 17,91 012/04/97 7,500 $24 .13 180,97 512/04/97 1,500 $24 .00 36,00 0
87,900 S 2,113,63 5
TOTALS : 4,470,127 $88,405,600
98 . Defendants' massive insider selling during the Clas s
IPeriod is summarized below :
% o fShares Beneficial Tota l
Defendants Sold Ownership Sold* Proceeds
FoundationHealth 4,076,087 100% $79,000,00 0
Hassman 98,000 25% $ 2,343,87 0Lash, S .M . 79,000 56% $ 1,873,16 1Lizerbram 87,900 23% $ 2,113,63 5Dresnick 36,140 2% $ 859,14 0
Flam 93,000 23% $ 2,215,79 4Totals : 4,470,127 62% $88,405,60 0
* The percentages include defendants' vested options as set fort hin FPA's 1997 Proxy Statement .
Moreover, defendants Hassman and Lash sold hundreds of
thousands of additional shares through limited partnerships,
"family foundations" and relatives which they controlled during the
period from mid-March through early June 1998, just weeks before
FPA declared bankruptcy, while fully aware of the disastrous impact
the not-yet-announced but planned bankruptcy would have o n
stockholders .
FALSE AND MISLEADING STATEMENTS
ISSUED DURING THE CLASS PERIOD
99 . On 2/3/97, Merrill Lynch issued a report on FPA after its
analyst Weakley had discussions with Lizerbram, Flam and Lash,
which was based on and repeated information provided to Weakley by
them . Lizerbram, Flam or Lash reviewed this report and assure d
- 53 -- 98cv0928 -L(AJB)
1 Weakley it was accurate . The report forecast 1998 EPS of $1 .01 and
2 a 30% five-year growth rate for FPA and stated :
3 The second major transaction for FPA, completed inthe fourth quarter, is the acquisition of the physician
4 group practices of Foundation Health . This transaction ,valued at approximately $200 million, is expected to add
5 incremental revenues of $230 million in 1997 . . . . Webelieve that . . . FPA will be able to generat e
6 significantly stronger growth rates for these clinics, asit will now be able to contract with additional HMOs and
7 insurance companies .
8 Financial Review and Projections : . . . we look forstrong revenue and earnings growth for FPA going forward .
9 . . . We believe that FPA's enrollment will increase byabout 25% per year, without acquisitions, going forward .
10These statements were false and misleading as the value of the
11
Foundation Health transaction was manipulated by defendants as12
described above in ¶ 39-78 .13
100 . On 2/27/97, FPA reported better-than-expected and record
144thQ 1996 results via a release stating :
15
FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD 1996 FOURTH
16 QUARTER AND YEAR END RESULT S
17
18 Net income for the fourth quarter was $4 .2 million or$0 .18 per share . . . .
19
Commenting on the results, Dr . Seth Flam, President20 and Chief Executive Officer stated, "1996 was a year of
significant achievement for FPA . During the year we
21 successfully executed our growth strategy . . . . We . . .have built a solid foundation for growth both internally
22 and through strategic acquisitions . "
23 These statements were false as defendants had falsified FPA's
24 financial results as described above in ¶139-78 .
25 101 . On 2/27/97, subsequent to the release of its 4thQ 1996
26 and 1996 results, FPA held a conference call for securities
27 analysts, money and portfolio managers, institutional investors and
28 large FPA shareholders . During the call, and in follow-u p
- 54 -- 98cv0928-L(AJB)
1 conversations with participants, Lizerbram, Flam and Lash
2 disseminated important information to the market, stating :
3 • FPA's core business operations were fundamentallystrong and it was achieving strong "same store" member
4 growth, due to the quality of service and medical care i twas providing and the demand for its services by both
5 third-party payors and physicians, which would enable FPAto continue strong internal growth for the foreseeable
6 future .
7 • FPA's growth-by-acquisition strategy was succeeding, asFPA was successfully integrating the companies and other
8 operations it had acquired into its business, while lowerin gthe medical loss ratios of those businesses and improving
9 their profitability .
10 • FPA was ahead of schedule in integrating the operationsof Foundation Health, which was performing ahead of budget and
11 expectations .
12 • FPA was successfully cutting the medical expenditures ofthe companies it had acquired by micromanaging hospital
13 admissions and discharges and utilizing other proven cost-reduction protocols and not by cutting the quality of care or
14 refusing medical care desired by either patients or theirtreating physicians .
15
• FPA was cutting its administrative costs as a percentage16 of revenue due to efficient management techniques .
17 • FPA's IBNR medical expense reserve was set atconservative and more than sufficient levels .
18
• As a result of the foregoing, FPA was achieving record19 financial results which were "high-quality" results due to
improved operations and lower costs .
20• As a result of the foregoing favorable factors, FPA's
21 business was performing even better than internally forecastedand, as a result, FPA was raising its 98 EPS forecast t o
22 $1 .00-$1 .15, and forecasting that FPA would obtain EPS growthof 25%-30% over the next several years .
23
These statements were false and misleading for the reasons set24
forth in ¶¶37 and 158 .25
102 . On 2/27/97, Oppenheimer issued a report on FPA, written26
by Price, which was based on and repeated information provided to
27Price in the 2/27/97 conference call and in follow-up conversations
28
- 55 - 98cv0928 -L(AJB)
1 with Lizerbram, Flam or Lash . The report forecast 1998 EPS of
2 $1 .05 for FPA and stated :
3 4096 Results Beat Expectation s
4 FPA reported high-quality 4Q96 results . . . . Suchbetter than expected EPS were generated primarily as a
5 function of continued strong same-store revenue growt hand particularly impressive performance by the company's
6 newly acquired Florida clinics .
7
8 Medical Expenses Were Under Contro l
9 FPA's consolidated medical loss ratio (MLR) was 73%during 4Q96, down 1 .3 percentage points relative to the
10 prior quarter's MLR .
11
12 FPA has made substantial progress in integrating the
clinics that it acquired from Foundation Health . . . .13 Specifically, the Foundation Health clinics are currently
running $700,000 ahead of plan . . . .14
103 . On 2/27/97, Merrill Lynch issued a report on FPA, written15
by Weakley, which was based on and repeated information provided to16
Weakley in the 2/27/97 conference call and in follow-up17
conversations with Lizerbram, Flarn or Lash . The report forecast18
1998 EPS of $1 .05 and a 30% five-year EPS growth rate for FPA and
19
stated : "Operating margins were better than expected, as the20
integration of . . . recent acquisitions is proceeding smoothly ." On
212/28/97, UBS Securities, Bear Stearns, and Furman Selz issued
22similar reports on FPA .
23104 . On 3/18/97, UBS Securities issued a report on FPA after
24
its analyst Wiberg had discussions with Lizerbram, Flam or Lash .25
The report was based on and repeated information provided to Wiberg26
by them . Lizerbram, Flam or Lash reviewed this report and assured27
Wiberg that it was accurate . The report forecasted 1998 EPS for
28
FPA of $1 .08, and stated :
- 56 - 98cv0928-L(AJB)
1 FPA is on a roll, as demonstrated by the recently
reported 4Q96 results . . . . EPS were up 64% to $0 .18 . I n2 addition to continuing top-line growth, FPA's success is
predicated on its ability to reduce both medical expenses3 and administrative costs on HMO business . Several times ,
the company has shown its ability to significantly reduce4 expense ratios on acquired businesses . . . FPA has been
able to achieve outstanding results by implementing it s5 managed care systems and policies . . . . These results are
outstanding .6
105 . On 3/27/97, Oppenheimer issued a report on FPA after its
7
analyst Price had discussions with Lizerbram, Flam or Lash which8
was based on and repeated information provided to Price by them .9
Lizerbram, Flam or Lash reviewed this report and assured Price that10
it was accurate . The report forecast 1998 EPS of $1 .15 for FPA and11
stated :
12
We believe FPA's phenomenal revenue growth . . . is13 evidence that the company's primary care model is
compelling . . . .14
15At this date, we are comfortable that FPA has proven it s
16 ability to change physician behavior and to lower thecost of care as it moves into new markets . . . .
17
106 . On 4/1/97, Furman Selz issued a report on FPA after its
18
analyst Kroll had discussions with Lizerbram, Flam or Lash . The19
report was based on and repeated information provided to Kroll by
20
them . Lizerbram, Flam or Lash reviewed this report and assured21
Kroll that it was accurate . The report forecast 1998 EPS of $1 .05,
22a 30% EPS growth rate . The report also stated : "The fundamentals
23
at FPA are very strong and we remain comfortable with our long-term24
EPS growth assumption of 30% ."
25107 . The foregoing statements by the analysts in ¶102-06
26above, which repeated information provided them by defendants, were
27
false and misleading because the financial results were falsified28
as set forth in ¶¶39-78, FPA's integration of its acquisitions wa s
- 57 - 98cv0928 -L(AJB)
1 not going smoothly, and the forecasts of EPS were unattainable, as
2 set forth in $¶37 and 158 .
3 108 . On 4/14/97, FPA and Foundation Health issued a joint
4 press release addressing rumors about what Foundation Health would
5 do with its FPA stock :
6 FPA Medical Management Inc . today announced thatFoundation Health Systems, Inc, does not currently intend
7 to dispose of the approximately 4 million shares of FPAcommon stock it holds .
8
9
Jeffrey L . Elder, Senior Vice President and Chie f
10 Financial Officer of FHS stated, "While we have the rightto sell shares . . . it is not our intention to do so under
11 the present circumstances . We may, however, reconside rour position and entertain various options for an orderly
12 disposition of the shares . "
13 These statements were false . Foundation Health currently intended
14 to sell its FPA shares as soon as Foundation Health and FPA could
15 push FPA's stock higher (and as soon as §16(b) of the 1934 Act
16 allowed sale) .
17 109 . On 4/15/97, the Individual FPA Defendants caused FPA to
18 issue its 1996 Annual Report, which reported FPA's previously
19 announced 4thQ 1996 and 1996 results . Therein, defendants
20 represented that the 4thQ 1996 financial results were "present[ed]
21 fairly ." In addition, accompanying the 1996 financial results was
22 a representation that they were "in conformity with [GAAP] . " These
23 statements were false as defendants had falsified FPA's financial
24 results in violation of GAAP, as described in 1 1 39-78 .
25 110 . On 4/16/97, FPA executives, including Lizerbram, made a
26 presentation to the Needham & Co, sales force in New York City .
27 During the presentation and in discussions with Needham brokers and
28 analysts, they stated :
- 58 - 98cv0928-L(AJB)
1 • FPA's core business operations were fundamentally strongand it was achieving strong "same store" member growth, due t o
2 the quality of service and medical care it was providing andthe demand for its services by both third-party payors and
3 physicians , which would enable FPA to continue strong internalgrowth for the foreseeable future .
4
• FPA's financial condition was very sound .5
• FPA's growth -by-acquisition strategy was succeeding, as6 FPA was successfully integrating the companies and other
operations it had acquired into its business, whil e7 successfully lowering the medical loss ratios of those
businesses and improving their profitability .8
• FPA was not only successfully integrating the companies9 and other business operations it had acquired , but, in fact,
was ahead of schedule in integrating those operations -10 specifically Foundation Health -- which was performing ahead of
budget and expectations .11
• FPA was successfully cutting the medical expenditures of12 the companies and other business operations it had acquired by
micromanaging hospital admissions and discharges and utilizing13 other proven cost -reduction protocols and not by cutting the
quality of care or refusing medical care desired by either14 patients or their treating physicians .
15 • FPA was cutting its administrative costs as a percentageof revenue , due to efficient management techniques .
16
• FPA's IBNR medical expense reserve was set at
17 conservative and more than sufficient levels .
18 • As a result of the foregoing, FPA was achieving recordfinancial results, which were "high - quality" results due to
19 improved operations and lower costs .
20 • As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecasted
21 and, as a result, FPA was raising its forecast of 1998 FPS t o
$1 .05-$1 .15 and was forecasting that FPA would achieve EPS22 growth of 25%-30% over the next several years .
23 111 . On 4 /21/97, FPA executives , including Lizerbram , appeared
24 at the Volpe Brown Whelan & Co . Healthcare Conference in New York
25 City . In a formal presentation and in break-out sessions,
26 Lizerbram told the assembled securities analysts , money and
27 portfolio managers , institutional investors , brokers and stock
28 traders :
- 59 - 98cv0928-L(AJB)
1 • FPA's business operations were strong, and it wasachieving strong "same store" member growth, due to the
2 quality of service and medical care it was providing, and thedemand for its services by both third-party payors and
3 physicians, which would enable FPA to continue strong internalgrowth for the foreseeable future .
4
• FPA's financial condition was very sound, and the Company5 had sufficient liquid assets to fund its ongoing business
operations, as well as its aggressive acquisition program .6
• FPA's growth-by-acquisition strategy was succeeding, as7 FPA was successfully integrating the companies and other
operations it had acquired, while successfully lowering the8 medical loss ratios of those businesses and improving their
profitability .9
• FPA was not only successfully integrating the companies10 and other business operations it had acquired, but, in fact,
was ahead of schedule in integrating those operations -11 specifically Foundation Health, which was performing ahead of
budget and expectations .12
• FPA was successfully cutting the medical expenditures of13 the companies and other business operations it had acquired by
micromanaging hospital admissions and discharges and utilizing14 other proven cost-reduction protocols and not by cutting the
quality of care or refusing medical care desired by either15 patients or their treating physicians .
16 • Through efficient management, FPA was cutting its
administrative costs as a percentage of revenue .
17
• FPA's IBNR medical expense reserve was set at
18 conservative and more than sufficient levels .
19 • As a result of the foregoing, FPA was achieving recordfinancial results, which were "high-quality" results due to
20 improved operations and lower costs .
21 • As a result of the foregoing favorable factors, FPA's
business was performing even better than internally forecasted
22 and, as a result, FPA was forecasting 98 and 99 EPS of $1 .0 5
and $1 .15, respectively, and FPA would be able to obtain EPS23 growth of 2596-30% over the next several years .
24 112 . On 4/21/97, Lizerbram was also interviewed by the MSNBC
25 Private Financial Network, which reported the interview as follows :
26 Lizerbram: [W] e have been very successful in showin g
earnings . The last four quarters we beat27 analysts' consensus so we really stick to
what we told the street we were going to28 do and there is still a tremendous amount
of growth available . . . . [W]e believe
- 60 - 98cv0928-L(AJB)
1 that this growth factor will continue ina very robust manner .
2The foregoing statements made in New York in ¶¶110-11, and to MSNBC
3(¶112) were false and misleading for the reasons set forth in T¶37
4
and 158 .5
113 . On 4/23/97, Merrill Lynch issued a report on FPA after6
its analyst Weakley had discussions with Lizerbram, Flam and Lash .7
The report based on and repeated information provided to Weakley by8
them . Lizerbram, Flam or Lash reviewed this report and assured9
Weakley that it was accurate . The report forecast 1998 EPS of10
$1 .13 and a 30% five-year EPS growth rate for FPA . The report also
11stated :
12
• Management has demonstrated ability to smoothly13 integrate acquisitions, and we expect results to show
continued progress in this regard .14
15
Acquisition Integrations Proceed Smoothly16
Key to FPA's success in 1997 will be the degree to
17 which it can smoothly integrate the operations of severallarge acquisitions . In terms of its Foundation Healt h
18 Group acquisition, closed in December, the company is inthe process of finalizing several new payor agreements .
19 These, of course, will serve to boost volume growth ove rtime . FPA has already closed three unprofitable
20 locations in California, and is consolidating itsoperations in Arizona . For the month of December, FPA
21 was able to generate EBITDA of approximately $700,000with these groups, ahead of expectations-
22
114 . On 4/24/97, Oppenheimer issued a report on FPA after its
23
analyst Price had discussions with Lizerbram, Flam and Lash . The
24
report was based on and repeated information provided to Price by25
them . Lizerbram, Flam or Lash reviewed this report and assured26
Price that it was accurate . The report forecast 1998 EPS of $1 .15
27
for FPA and also stated :28
- 61 - 98cv0928 -L(AJB)
1 Primary Care-Strategy Is Working
2 FPA's phenomenal revenue growth . . . is evidence that thecompany's primary care model is a compelling model to
3 managed care payors . . . .
4
5 Ability To Bring Down Costs Has Been Prove n
6 Although FPA's ability to bring down the cost ofdelivering care in California . . . has long been
7 established . . . we are comfortable that FPA has prove nits ability to change physician behavior and to lower the
8 cost of care as it moves into new markets . . . .
9 The foregoing statements by analysts (TJ113-14), which repeated
10 information provided by defendants, were false because FPA's
11 acquisitions were not going smoothly as set forth in T T37 and 158,
12 and the lowering of costs were only achieved through defendants'
13 falsification of FPA's financial results and by the other
14 manipulations described in T$39-78 .
15 115 . On 4/30/97, FPA reported its lstQ 1997 results via a
16 release stating :
17 FPA MEDICAL MANAGEMENT, INC . ANNOUNCES FIRST QUARTER
RESULTS
18Fifth Consecutive Quarter Of Exceeding Analysts'
19 Estimates
20
21 Operating revenues for the first quarter ended March31, 1997 increased 114% to $223 million . . . . Net income
22 for the first quarter was $6 .4 million or $0 .20 per share
23
Commenting on the results, Steven M . Lash, Executive
24 Vice President and Chief Financial officer stated, "We
are pleased with our financial performance in the firs t
25 quarter . Strong HMO enrollment continues to drive ourgrowth . . . . In addition, we continue to show margin
26 improvements based on the further integration ofacquisitions as we continue to reduce medical and
27 administrative expenses . This operating leverage isreflected in the reduction in our overall medical los s
28 ratio of 71% for the first quarter of 1997 compared to72% for the same period last year . "
- 62 - 98cv0928 -L(AJB)
1 Dr. Seth Flam, President and Chief ExecutiveOfficer, stated, "We continue to realize strong revenu e
2 and earnings growth . During the quarter, we showed same-store growth of 7% due to the successful integration of
3 new operations into the FPA network . Specifically, theintegration and consolidation of the previously owned
4 Foundation Health Systems clinics is ahead of plan . "
5 These statements were false because defendants' had falsified FDA's
6 financial results as described in 1139--78, and FPA was not
7 successfully integrating its acquisitions as set forth in 1137 and
8 158 .
9 116 . On 4/30/97, subsequent to the release of its 1stQ 1997
10 results, FPA held a conference call for securities analysts, money
11 and portfolio managers, institutional investors and large FPA
12 shareholders . During the call - and in follow-up conversations
13 with participants - Lizerbram, Flam and Lash directly disseminated
14 important information to the market by stating :
15 • FPA's core business operations remained very strong andit was achieving strong "same store" member growth, due to the
16 quality of service and medical care it was providing and thedemand for its services by both third-party payors and
17 physicians, which would enable FPA to continue strong internal
growth for the foreseeable future .18
• FPA's growth-by-acquisition strategy was succeeding, as
19 FPA was successfully integrating the companies and otheroperations it had acquired, while successfully lowering th e
20 medical loss ratios of those businesses and improving theirprofitability .
21• FPA was not only successfully integrating the companies
22 and other business operations it had acquired, but, in fact,was ahead of schedule in integrating those operations ,
23 including Foundation Health, which was performing ahead ofbudget and expectations .
24
• FPA was successfully cutting the medical expenditures of25 the companies it had acquired by micromanaging hospital
admissions and discharges and utilizing other proven cost-26 reduction protocols and not by cutting the quality of care or
refusing medical care desired by either patients or their27 treating physicians .
28 • FPA was cutting its administrative costs as a percentageof revenue, due to efficient management techniques .
- 63 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
2 0
21
22
23
24
25
26
27
28
• FPA's IBNR medical expense reserve was set atconservative and more than sufficient levels .
• As a result of the foregoing, FPA was achieving recordfinancial results, which were "high-quality" results due toimproved operations and lower costs .
• As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecastedand, as a result, FPA was forecasting 98 FPS of $1 .05-$1 .15and FPA would be able to obtain FPS growth of 25%-30% over thenext several years .
117 . On 4/30/97, Merrill Lynch issued a report on FPA, written
by Weakley, which was based on and repeated information provided to
Weakley in the 4/30/97 conference call and in follow-up
conversations with Lizerbram, Flam or Lash . The report forecast
1998 BPS of $ 1 . 1 1 and a five-year FPS growth rate of 30% . The
report also stated :
Margins improved, reflecting progress in theintegration of acquisitions . Year over year, the medical
loss ratio declined . . . . The sequential decline was
significantly greater . . . .
The management team of FPA Medical has demonstratedthe ability to smoothly integrate acquisitions, and firstquarter results demonstrated continued progress in thisregard .
118 . On 5/1/97, Bear Stearns, Furman Selz and Needham each
issued reports on FPA, written by Frazier, Kroll and Lirola,
respectively, which were based on and repeated information provided
to them in the 4/30/97 conference call and in follow-up
conversations with Lizerbram, Flam or Lash . The Needham report
forecast 1998 FPS of $1 .08 for FPA and also stated :
We are upgrading FPA, based on [the] continuing strengthof its business fundamentals . __ .
* Strong internal growth . . . . Revenue growth isaccelerating . . . .
- 64 - 98cv0928 -L(AJB)
1 * Strong medical management : MLR has now decreased to71%, ahead of our 73% expectation . Resulting from smart
2 operational skills, not decreasing quality of care .
3 119 . On 5/6/97, First Boston issued a report on FPA after its
4 analyst France had discussions with Lizerbram, Flam or Lash . The
5 report was based on and repeated information provided to France by
6 them . Lizerbram, Flam or Lash reviewed this report before it was
7 issued and assured France that it was accurate . The report
8 forecast 1998 EPS of $1 .15, a 25%-50% five-year growth rate . The
9 report also stated :
10 We like the stock because :
11 (1) Cost containment efforts . . . favor the company'sfocus on managed care and capitation .
12
(2) It has a highly successful record of consolidating13 acquisitions . . . .
14 (3) Its "same-store" growth is strong . . . . This hasenabled the company to produce 25-30% "same market"
15 growth, which has accounted for a substantial portion ofthe company's total growth over the past few years .
16120 . On 5/11/97, the New York Times and Bloomberg published an
17
article about FAA, which quoted Lash as stating : "We think our18
stock is grossly undervalued . ' The foregoing statements by
19defendants to analysts, and the analysts' statements repeating
20information they obtained from defendants, contained in ¶¶116-20
21
above, were false and misleading for the reasons set forth in ¶¶37
22
and 158 .
23
121 . On 5/15/97, the individual FPA Defendants caused FPA to
24file with the SEC FPA's report on Form 10-Q for the quarter ended
253/31/97, signed by Flam and Lash, which contained FPA's previously
26announced 1stQ 1997 results . The Form 10-Q also contained the
27Individual FPA Defendants' representation that the financial
28results therein were "a fair presentation of the financial position
- 65 - 98cv0928-L(AJB)
1 of FPA ." These statements were false because defendants had
2 falsified FPA financial results as described in 1139-78 .
3 122 . FPA stock increased from $14-15/16 per share on 4/25/97
4 to $23-1/2 per share by 6/6/97 . On 6/6/97, FPA announced it would
5 acquire HealthCap, Inc . for millions of shares of FPA stock . On
6 6/12/97, FPA announced it had received an expanded senior credit
7 facility from Lehman Brothers for $275 million, which would "meet
8 our future working capital and acquisition needs . "
9 123 . On 6/16/97, an article about FPA appeared in the San
10 Diego Business Journal, discussing FPA's growth-by-acquisition
11 strategy :
12 Lash is not concerned that the company is growingtoo fast for its own good . "This is a rapidly
13 consolidating industry," he said- "When we make a nacquisition and integrate it into our system, we're doing
14 an effective job of blocking and tackling, and producingquality and value . "
15The statements in 1122 above and this paragraph were false because
16FPA was not effectively integrating its acquisitions and was not
17producing quality and value but rather was only creating the
18
illusion of such through defendants' falsification of FPA's19
financial statements as described in T T39-78, and for the reasons20
stated in ¶i37 and 158 .21
124 . On 7/2/97, FPA announced the acquisition of Health
22
Partners, Inc . for over 5 million shares of FPA stock .
23125 . On 7/28/97, McDonald & Co . issued a report on FPA, after
24
its analyst DeNelsky had discussions with Lizerbram, Flam and Lash .
25The report was based on and repeated information provided to
26DeNelsky by them . Lizerbram, Flam or Lash reviewed this report and
27assured DeNelsky that it was accurate . The report forecast 1998
28
EPS of $1 .25, a 35% growth rate and also stated :
- 66 - 98cv0928-L(AJB)
1 REASONS TO BUY :
2 1 . Strong Growth Prospects - FPA has made significantinvestment in its physician networks over the last
3 two years and is now poised to capture the earning sgrowth inherent in this network . Given the
4 company's industry positioning, FPA should be ableto return 30-35% growth over the next three to five
5 years .
6 2 . Success in Managing Medical Costs - FPA hasdemonstrated results that it can help physicians
7 manage medical costs . This is reinforced everyquarter with a medical loss ratios in the low 70s .
8 The expertise that FPA possess in lowering medicalcosts through proper utilization can now b e
9 leveraged across the country as the company expandsits network .
10
3 . Good Rapport With Physicians - FPA has been able to11 establish and maintain very good relationships with
its affiliated physicians . With five physician12 executive officers and seven physicians on its
Board of Directors, FPA has the reputation of being13 a very "physician-friendly's organization .
14 4 . Critical Mass - In a business where critical massis vital, FPA is the third largest PPM in
15 existence . We expect that the company will surpas s
the $1 billion revenue mark this year . This16 critical mass is not only paying off in the form of
better payor relationships, but also in leveraging17 a high fixed cost structure into higher margins and
earnings .18
*
19FPA is poised for long-term earnings growth as they
20 roll out the growth model that has worked well for themin southern California across the country .
21
The statements in this paragraph were false for the reasons set22
forth in ¶¶37 and 158 .23
126 . On 7/30/97, FPA reported its 2ndQ 1997 results via a
24release stating :
25FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD REVENUES
26 AND EARNINGS FOR THE SECOND QUARTER 199 7
27
28 Net income for the second quarter was $8 .1 million or
$0 .24 per share . . . .
- 67 - 98cv0928 -L(AJB)
1 * * *
2 Commenting on the results, Steven M . Lash, ExecutiveVice President and Chief Financial Officer stated, "Our
3 record results for the second quarter are due to bette rthan expected performance in Texas and Florida, the
4 recently acquired care centers performing above pro-forma, and all other markets performing as planned . I n
5 addition , FPA's G&A expenses continued to decrease as apercentage of sales as we further integrate operations of
6 our previously acquired networks . "
7 Dr. Seth Flam , President and Chief Executive
Officer, stated , " FPA continues to perform above8 expectations as our integration plans provide positive
sequential results . . . . "9
These statements were false because the reported " record" financial10
results were accomplished through defendants' falsification of
11
FPA's financial statements as described in ¶¶39-78, and because12
FPA's acquisitions were not succeeding as set forth in ¶¶37 and13
158 .
14127 . On 7/ 30/97, subsequent to the release of its 2ndQ 1997
15
results, FPA held a conference call for securities analysts, money16
and portfolio managers , institutional investors and large FPA
17
shareholders . During the call - and in follow-up conversations18
with participants - Lizerbram , Flam and Lash disseminated important
19information to the market by stating :
20
FPA ' s operations were very strong and it was achieving21 strong " same store " member growth, due to the quality of
service and medical care it was providing and the demand fo r22 its services by both third -party payors and physicians, which
would enable FPA to continue strong internal growth for the23 foreseeable future .
24 • FPA's financial condition was very sound and the Companyhad sufficient liquid assets to fund its ongoing business
25 operations , as well as its aggressive acquisition program .
26 • FPA's growth-by-acquisition strategy was succeeding, a sFPA was successfully integrating the companies and other
27 operations it had acquired into its business, while
successfully lowering the medical loss ratios of those
28 businesses and improving their profitability .
- 68 -- 98cv0928 -L(AJB)
1 • FPA was not only successfully integrating the companiesand other business operations it had acquired, but, in fact ,
2 was ahead of schedule in integrating those operations,specifically Foundation Health, which was performing ahead of
3 budget and expectations .
4 • FPA was successfully cutting the medical expenditures ofthe companies and other business operations it had acquired by
5 micromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting the
6 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
7
• FPA was cutting its administrative costs as a percentage8 of revenue, due to efficient management techniques .
9 • FPA's IBNR medical expense reserve was set atconservative and more than sufficient levels .
10+ As a result of the foregoing, FPA was achieving record
11 financial results which were "high- quality" results due toimproved operations and lower costs .
12
• As a result of the foregoing favorable factors, FPA's13 business was performing even better than internally forecasted
and, as a result, FPA was raising its 98 EPS forecast t o14 $1 .15-$1 .30 and forecasting that FPA would be able to obtain
EPS growth of 25%-30% over the next several years .15
128 . On 7/30/97, First Boston issued a report on FPA, written
16by France, which was based on and repeated information provided to
17
France in the 7/30/97 conference call and in follow-up18
conversations with Lizerbram, Flam or Lash . The report increased19
the forecasted 1998 EPS for FPA to $1 .30 and stated :20
This morning, FPAM announced 2Q97 results that were
21 well ahead of expectations . As a result, we are raising
our 1998 EPS estimates . . . to $1 .30 . . . _
22
23
Effective medical cost controls and the successfu l
24 integration of operations, its own and newly acquired,
resulted in decreased G&A and medical expenses as a
25 percentage of sales . For 2Q97, FPAM's MLR was 71 .4% ,
down 50 basis points from 1Q97, and G&A as a percentage
26 of revenue (excluding one-time merger costs) fell from21 .3% in 2Q96 to 18 .9% in 2Q97 .
27
28
- 69 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
19
20
21
22
23
2 4
25
26
27
28
Perhaps the most compelling feature of FPAM's
results so far in 1997, is the success it has had
integrating recent acquisitions . For instance, the
company has been able to turn the health care centers in
California and Arizona that it acquired from Foundation
Health in November 1996 from cash flow negative to cashflow positive in less than half a year .
129 . On 7/30/97, Oppenheimer issued a report on FPA, written
by Price, which was based on and repeated information provided to
Price in the 7/30/97 conference call and in follow-up conversations
with Lizerbram, Flam or Lash . The report increased the forecast
for FPA's 1998 EPS to $1 .30 and stated :
FPA's exceptionally high-quality 2Q97 resultsreaffirm our conviction that the company has madesubstantial progress toward meeting the ambitious goalsthat it had set out for itself at the time of its initialpublic offering . . . transforming the company from a "showme" story into a major player with an impressive trackrecord of having beaten investor expectations for sixconsecutive quarters .
Medical Expenses Were Under Control
FPA's consolidated medical loss ratio (MLR) was
71 .4% during 2Q97 . . . down from a comparably stated MLR
of 71 .9% in 1Q97 as the company continues to make
substantial progress in integrating acquisitions andlowering medical costs company-wide .
Integration Of The Foundation Health Clinics Is Ahead OfPlan
FPA is also realizing the fruits of itsconsolidation efforts at the Foundation Health California
and Arizona-based clinics . Specifically, the Foundation
Health clinics are presently running $4 .5 million year-
to-date ahead of plan in EBITDA (on a run-rate basis),
having closed several urgent care centers as well as
having consolidated one layer of management .
l On 7/31/ 97, Bear Stearns and UBS issued similar reports on FPA ,
based on and repeating the information provided in the 7/30/9 7
70 - 98cv0928-L(AJB)
1 conference call and in follow-up conversations with Lizerbram, Flam
2 or Lash .
3 130 . On 8/12/97, FPA executives Lizerbram, Flam and Lash
4 appeared at the 10th Annual Bear Stearns Healthcare Conference . In
5 a formal presentation and in break-out sessions, they told the
6 assembled securities analysts, money and portfolio managers,
7 institutional investors, brokers and stock traders :
8 • FPA's fundamental business operations were strong and itwas achieving strong "same store" member growth, due to the
9 quality of service and medical care it was providing and th edemand for its services by both third-party payors and
10 physicians, which would enable FPA to continue strong internalgrowth for the foreseeable future .
11
• FPA's financial condition was very sound and the Company
12 had sufficient liquid assets to fund its ongoing business
operations, as well as its aggressive acquisition program .
13
• FPA's growth-by-acquisition strategy was succeeding, as14 FPA was successfully integrating the companies and other
operations it had acquired into its business, whil e15 successfully lowering the medical loss ratios of those
businesses and improving their profitability .16
• FPA was not only successfully integrating the companies17 and other business operations it had acquired, but, in fact,
was ahead of schedule in integrating those operations ,18 specifically Foundation Health, which was performing ahead of
budget and expectations .19
• FPA was successfully cutting the medical expenditures of20 the companies and other business operations it had acquired by
micromanaging hospital admissions and discharges and utilizing
21 other proven cost-reduction protocols and not by cutting thequality of care or refusing medical care desired by either
22 patients or their treating physicians .
23 + FPA was cutting its administrative costs as a percentageof revenue, due to efficient management techniques .
24+ FPA's IBNR medical expense reserve was set at
25 conservative and more than sufficient levels .
26 • As a result of the foregoing, FPA was achieving recordfinancial results which were "high-quality" results due to
27 improved operations and lower costs .
28 • As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecasted
- 71 - 98cv0928-L(AJB)
1 and, as a result, FPA was forecasting 98 EPS of $1 .15-$1 .30and that FPA would be able to obtain EPS growth of 25%-30%
2 over the next several years .
3 The statements set forth above in ¶¶127-30 were false for all the
4 reasons set forth in 1~37 and 158 .
5 131 . On 8/14/97, the Individual FPA Defendants caused FPA to
6 file with the SEC FPA's Report on Form 10-Q for the quarter ended
7 6/30/97, signed by Flam and Lash, and which contained FPA's
8 previously announced results for the 2ndQ 1997 ended 6/30/97 . The
9 Form 10-Q also contained the Individual FPA Defendants '
10 representation that the financial results therein were "a fair
11 presentation of the financial position of FPA ." This statement was
12 false because defendants had falsified FPA's financial results as
13 described in ¶ 39-78 .
14 132 . On 9/12/97, Bear Stearns issued a report on FPA, written
15 by Frazier, which was based on and repeated information provided to
16 Frazier at the Bear Stearns Conference and in follow-up
17 conversations with Lizerbrarn, Flam or Lash . The report increased
18 the forecasted 1998 EPS for FPA to $1 .35 and stated :
19 * The company highlighted the fact that they havebeat the consensus estimates in 5 of the past 6 quarters,
20 and met consensus in the remaining quarter . The companyhas been able to lower G&A expenses sequentially for the
21 past three or four quarters, an indication that they have
been able to integrate their acquisitions .
22133 . On 10/14/97, Lizerbram appeared for FPA at the First
23
Boston Healthcare Conference in New York . Lizerbram told the24
assembled securities analysts, money and portfolio managers and25
institutional investors that :26
+ FPA's business operations were strong and it was27 achieving strong "same store" member growth, due to the
quality of service and medical care it was providing and the28 demand for its services by both third-party payors an d
- 72 - 98cv0928-L(AJB)
1 physicians, which would enable FPA to continue strong internalgrowth for the foreseeable future .
2
• FPA's financial condition was very sound and the Company3 had sufficient liquid assets to fund its ongoing business
operations, as well as its aggressive acquisition program .4
• FPA's growth-by-acquisition strategy was succeeding, as5 FPA was successfully integrating the companies and other
operations it had acquired into its business, while6 successfully lowering the medical loss ratios of those
businesses and improving their profitability .7
• FPA was not only successfully integrating the companies8 and other business operations it had acquired, but, in fact,
was ahead of schedule in integrating those operations ,9 specifically Foundation Health, which was performing ahead of
budget and expectations .10
• FPA was successfully cutting the medical expenditures of11 the companies and other business operations it had acquired by
micromanaging hospital admissions and discharges and utilizing12 other proven cost-reduction protocols and not by cutting the
quality of care or refusing medical care desired by either13 patients or their treating physicians .
14 • FPA was cutting its administrative costs as a percentages
of revenue, due to efficient management techniques .
15
• FPA's IBNR medical expense reserve was set at
16 conservative and more than sufficient levels .
17 • As a result of the foregoing, FPA was achieving recordfinancial results which were "high-quality" results due toI
18 improved operations and lower costs .
19 • As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecasted
20 and, as a result, FPA was forecasting 98 EPS of $1 .15-$1 .3 0
and that FPA would be able to obtain EPS growth of 25%-30%21 over the next several years .
22 The foregoing analyst report by Bear Stearns (!J132) , which repeated
23 defendants' statements, and defendants' statements in this
24 paragraph, were false and misleading for the reasons set forth in
25 137 and 158 .
26 134 . On 10/30/97, FPA announced its 3rdQ 1997 results via a
27 release stating :
28 FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD EARNINGS
FOR THE THIRD QUARTER 199 7
- 73 - 98cv0928 -L(AJB)
1 FPA . . . announced record earnings for the third
quarter ended September 30, 1997 . . . . fR]evenue . . .2 increased 45% to $240 .6 million . . . . Net income for the
third quarter was $10 .6 million or $0 .29 per share . . . .3
4Commenting on the results, Steven M . Lash, Executive
5 Vice President and Chief Financial officer stated, "Weare pleased to report record earnings for the thir d
6 quarter . FPA's overall medical loss ratio in the thirdquarter of 1997 was 70 .4% . This represents the fourth
7 sequential quarter of MLR improvement . In addition, ou rG&A expenses continued to decrease as a percentage of
8 revenues which can be attributed to the continuedconsolidation of acquisitions, synergy achievements and
9 improvements in productivity . "
10 These statements were false because defendants had falsified FPA's
11 financial results as described in ¶f39-78 .
12 135 . On 10/30/97, subsequent to the release of its 3rdQ 1997
13 results, FPA held a conference call for securities analysts, money
14 and portfolio managers, institutional investors and large FPA
15 shareholders . During the call - and in follow-up conversations
16 with participants - Lizerbram, Flam and Lash directly disseminated
17 important information to the market by stating :
18 • FPA's core business operations were strong and it wasachieving strong "same store" member growth, due to the
19 quality of service and medical care it was providing and thedemand for its services by both third-party payors and
20 physicians, which would enable FPA to continue strong internalgrowth for the foreseeable future .
21• FPA's financial condition was very sound and the Company
22 had sufficient liquid assets to fund its ongoing businessoperations, as well as its aggressive acquisition program .
23• FPA's growth-by-acquisition strategy was succeeding, as
24 FPA was successfully integrating the companies and otheroperations it had acquired into its business, whil e
25 successfully lowering the medical loss ratios of thosebusinesses and improving their profitability .
26• FPA was not only successfully integrating the companies
27 and other business operations it had acquired, but, in fact,was ahead of schedule in integrating those operations ,
28 specifically Foundation Health, which was performing ahead ofbudget and expectations .
- 74 - 98cv0928-L(AJB)
1 • FPA was successfully cutting the medical expenditures ofthe companies and other business operations it had acquired by
2 micromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting the
3 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
4
• FPA was cutting its administrative costs as a percentage5 of revenue due to efficient management techniques .
6 • FPA's IBNR medical expense reserve was set at
conservative and more than sufficient levels .
7
• As a result of the foregoing, FPA was achieving record8 financial results which were "high-quality" results due to
improved operations and lower costs .9
• While FPA's enrollment and revenues declined slightly in10 the 3rdQ from the 2ndQ, this was the result of a deliberate
decision by FPA to eliminate certain unprofitable operations11 that came with recent acquisitions and did not indicate any
problems with FPA's business .12
• While FPA's accounts receivable increased in the 3rdQ13 from the 2ndQ, this was due primarily to the strong growth in
FPA's business and the temporary withholding of certai n14 shared-risk receivables ; however, payors were not disputing
these receivables, they were all collectible and FPA was not15 having any problems with its accounting receivables .
16 • As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecasted
17 and, as a result, FPA was raising its 98 and 99 EPS forecast sto $1 .20-$1 .38 and $1 .85+, respectively, and forecasting that
18 FPA would be able to obtain EPS growth of 25%-30% over the
next several years .19
136 . On 10/30/97, Oppenheimer issued a report on FPA, written
20
by Price, which was based on and repeated information provided to21
Price in the 10/30/97 conference call and in follow-up
22
conversations with Lizerbram, Flam or Lash . The report continued
23to forecast 1998 EPS of $1 .35 for FPA and stated :
24FPA reported high-quality 3Q results, ahead of our
25 expectations . . . Such better than expected EPS weregenerated primarily as a function of remarkably strong
26 same-store revenue growth and substantial progress made
in the integration of acquisitions .27
* w
28
- 75 - 98cv0928-L(AJB)
1 On a sequential-quarter basis, enrollment declinedfrom 2Q's 965,000, reflecting the intentional eliminatio n
2 of certain unprofitable accounts that had been added toFPA's books through recent acquisitions .
33Q revenues were $241 million, down from revenues of
4 $245 million reported during 2Q but up 49% from revenuesof $161 million generated in the year-ago quarter . The
5 soft sequential-quarter revenue comparison reflects thefact that FPA culled from its books approximately $11
6 million in quarterly revenue associated with certai nunprofitable accounts that it had inherited through
7 recent acquisitions .
8
9 FPA's consolidated 3Q medical loss ratio (MLR) was70 .4%, down from 71 .3% during 2Q, reflecting lower cost s
10 related to the culling of unprofitable contracts, as wellas continued progress in lowering medical costs company-
11 wide .
12 SG&A expenses represented 18 .7% of revenue, downfrom 19 .8% during the prior quarter . . . . Such expense
13 reductions reflect the ongoing consolidation ofacquisitions and success in leveraging incremental
14 revenues over the company's existing corporate andbranch-level infrastructure .
15
137 . On 10/31/97, Merrill Lynch, Bear Stearns, Needham, TJBS
16
and First Boston issued similar reports on FPA, based on and
17
repeating information provided in the 10/30/97 conference call and18
in follow-up conversations with Lizerbram, Flam or Lash .19
138 . Notwithstanding FPA reporting record 3rdQ 1997 FPS of20
$ .29 on 10/30/97, FPA's stock fell sharply from $32-1/2 per share21
on 10/29/97 to just $22-3/8 per share on 10/31/97, due to investor
22concerns over the decline in FPA patient enrollment and its
23sequential revenue decline, as well as the decrease in its IBNR
24cost reserves and the increase in its accounts receivable . This
25sharp price decline posed a very serious danger to the Individual
26FPA Defendants and they were determined to halt the decline and
27
push FPA's stock back up higher . Thus, they insisted to analysts
28that the patient enrollment and revenue declines were entirely du e
- 76 - 98cv0928 -L(AJB)
1 to a deliberate decision to cull unprofitable accounts inherited in
2 recent acquisitions, the IBNR reserve decline was due to a shift in
3 the mix of FPA's business and the increase in its accounts
4 receivable due to the growth of its business and a temporary
5 withholding of shared-risk payments . They insisted that FPA's
6 business model and plan were intact and its ongoing EPS and profits
7 would be unaffected .
8 139 . On 10/31/97, Oppenheimer issued a report on FPA, written
9 after analyst Price had discussions with Lizerbram, Flam and Lash
10 which was based on and repeated information provided to Price by
11 them . Lizerbram, Flam or Lash reviewed this report and assured
12 Price that it was accurate . The report forecast 1998 EPS of $1 .35
13 for FPA and stated :
14 Key Point s
15 FPA's stock traded down sharply on October 31 inresponse to the stock's downgrade by another brokerage
16 house . The downgrade was based on several concerns thatwe believe are overblown, as follows :
17Incurred But Not Reported (IBNR) Reserves Decreased
18 During The Quarter :
19 IBNR reserves declined from $126 million to $111
million, reflecting a decline in revenue and consequent
20 reserves held against that revenue . More important, the
decline reflected an increase in the percentage of21 specialist physicians that are paid through capitation
(whereby payments are made at the start of each month an d22 against which reserves need not be held) rather than
through traditional fee-for-service payments (which are23 paid over time as claims are submitted) . Specifically ,
the percentage of specialist revenues that are capitated24 increased from 25% to 35% during the quarter .
Accordingly, we are comfortable that the decline i n25 reserves makes sense vis-a-vis the shift in revenue mix .
26 Accounts Receivable Increased From 20 To 30 :
27 Accounts receivable spiked up from $155 millionduring 2Q to $177 million during 3Q, reflecting two
28 issues :
- 77 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
1 7
18
19
20
21
22
23
24
25
26
27
28
• Approximately $4 million of the sequential-quarterincrease was attributable to the acquisition of a smallemergency department management company completed duringthe quarter, as well as to normal growth in fee-for-service revenues .
• The remaining $18 million related to a temporarywithhold of certain hospital payments or to a newlyestablished 30-day delay in payment of certaincapitation, stop-loss, share-risk and catastrophic-riskreceivables due in connection with new managed care payorcontracts in Nevada, Florida and New Jersey . The companymaintains that the HMOs in question are not challengingor contesting the payments, but rather, began makingpayments to FPA 30 days in arrears under the newarrangements .
All things being equal, we do not like to see suchan increase in accounts receivable, and will obviouslymonitor this going forward . Having said that, as long asthe HMOs are not contesting or denying payments, weremain comfortable that the issue is simply one oftiming .
140 . On 11/3/97, UBS issued a report on FPA, written afte r
analyst Wiberg had discussions with Lizerbram, Flam and Lash which
was based on and repeated information provided to Wiberg by them .
Lizerbram, Flam or Lash reviewed this report and assured Wiberg
that it was accurate . The report forecast 1998 EPS of $1 .32 for
FPA and stated :
• Despite reporting 80% 3Q97 EPS growth that exceededexpectations on 10/30, shares of FPAM fell by about 25%on 10/30 and 10/31 due to misperceptions regarding fouritems : a sequential revenue decrease ; the near-termimpact of a contract with Aetna ; FPA's balance sheet andcash flow ; and the number of doctors affiliated with FPA ,
• There are good reasons behind the revenue shortfall ;if these reasons had been properly communicated bymanagement during the quarter, rather than after it wascompleted, we believe there would not be cause forconcern .
• While not expected to provide a material boost to
4Q97, the Aetna contract should do so in 1998 . In
addition, the contract should be the first of many that
represent a new phase of growth for FPA and could make
our projections conservative .
- 78 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• After adjusting for acquisition-related items, FPAis generating good cash flow and we believe there are nobalance sheet issues, outside of leverage .
Cash Flow and Balance Shee t
FPA's cash flow statements and balance sheets havebeen inordinately affected by acquisitions- . . . [A]fteradjustment, FPA generated roughly $40 million in cashflow from operations for the nine months . . . .
Claims payable including incurred but not reportedclaims (IBNR) was down about $24 million in 3Q97 . Whilethis could be an indicator of poor earnings quality, byunder-recognizing the estimated provision for currentmedical expenses, after speaking with the company we donot believe this to be the case . Not only did thecompany pay down significant past-due claims related toacquired companies, as described above, but the companyhas actively been capitating more specialists ; during thecourse of the year, this percentage has climbed roughlyfrom 25% to 35% . The reason to do this is to improvemargins and reduce FPA's medical risk . The effect oncash flow is to reduce IBNR, as the company now paysthese specialists upfront and their "tail" of claimspayable fades away . These two items more than explainthe drop in the claims payable including IBNR balancesheet item .
141 . On 11/3/97, Bear Stearns issued a report on FPA, writte n
after analyst Frazier had discussions with Lizerbram, Flam and Las h
which was based on and repeated information provided to Frazier by
them . Lizerbram, Flam or Lash reviewed this report and assure d
Frazier that it was accurate The report forecast 1998 EPS o f
$1 .33 . The report also stated :
Another issue relates to accounts receivable beingup in the third quarter over the second quarter . . . .
These receivables are good and completely collectible,according to the company . . . . We are not ecstatic that
some HMOs are now paying in arrears, but it is a logicalexplanation for the A/R uptick . Additionally, there was
a reduction in IBNR (incurred but not reported) claims .
IBNR went from 126 in Q2 to 111 in Q3 .
- 79 - 98cv0928-L(AJB)
1 On 11/3-4/97, Merrill Lynch and H .C . Wainwright & Co ., Inc ., issued
2 similar reports on FPA . The foregoing statements by defendants,
3 and analyst reports (which repeated defendants statements) in
4 Jt135-41 above, were false for the reasons set forth in Q¶37 and
5 158 .
6 142 . On 11/15/ 97, the Individual Defendants caused FPA to
7 file with the SEC FPA' s Report on Form 10 -Q for the quarter ended
8 9/30 / 97, which was signed by Flam and Lash and contained its
9 previously announced 3rdQ 1997 results . The Form 10-Q also
10 contained the Individual FPA Defendants ' representation that the
11 financial results therein were "a fair presentation of the
12 financial position of FPA ." This statement was false because
13 defendants had falsified FPA's financial results as described in
14 ¶j38-79 .
15 143 . On 12 /9/97, FPA executives Lizerbram , Flam and Lash
16 appeared at an analyst conference in New York City . In a formal
17 presentation and in break -out sessions , they told the assembled
18 securities analysts , money and portfolio managers , institutional
19 investors , brokers and stock traders :
20 • FPA's fundamental business operations were strong and itwas achieving strong "same store" member growth, due to the
21 quality of service and medical care it was providing and th edemand for its services by both third- party payors and
22 physicians , which would enable FPA to continue strong internalgrowth for the foreseeable future .
23• FPA's financial condition was very sound , its core
24 business was generating strong positive cash flow and theCompany had sufficient liquid assets to fund its ongoin g
25 business operations, as well as its aggressive acquisitionprogram .
26• FPA's growth-by-acquisition strategy was succeeding, as
27 FPA was successfully integrating the companies and other
operations it had acquired into its business, whil e
28 successfully lowering the medical loss ratios of thosebusinesses and improving their profitability .
- 80 - 98cv0928 --L(AJB)
1 • FPA was not only successfully integrating the companiesand other business operations it had acquired , but, in fact ,
2 was ahead of schedule in integrating those operations,specifically Foundation Health, which was performing ahead of
3 budget and expectations .
4 • FPA was successfully cutting the medical expenditures ofthe companies and other business operations it had acquired by
5 micromanaging hospital admissions and discharges and utilizingother proven cost - reduction protocols and not by cutting the
6 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
7
• FPA was cutting its administrative costs as a percentage8 of revenue , due to efficient management techniques .
9 • FPA's IBNR medical expense reserve was set at
conservative and more than sufficient levels .10
• As a result of the foregoing , FPA was achieving record11 financial results which were "high - quality" results due to
improved operations and lower costs .12
• While FPA's enrollment and revenues declined slightly in13 the 3rdQ from the 2ndQ , this was the result of a deliberate
decision by FPA to eliminate certain unprofitable operation s14 that came with recent acquisitions and did not indicate any
problems with FPA's business .15
+ While FPA ' s accounts receivable increased in the 3rdQ16 from the 2ndQ, this was due primarily to the strong growth in
FPA's business and the temporary withholding of certai n17 shared-risk receivables ; however, payors were not disputing
these receivables , they were all collectible and FPA was not18 having any problems with its accounting receivables .
19 • As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecasted
20 and, as a result, FPA was raising its 98 and 99 EPS forecas tto $1 .30+ and $ 1 .85+, respectively, and forecasting that FPA
21 would be able to obtain EPS growth of 25% - 30% over the nextseveral years .
22
144 . On 12 / 9/97, Oppenheimer issued a report on FPA, written23
by Price, which was based on and repeated information provided to
24Price on 12 /9/97 at the FPA analyst conference . The report
25
forecast 1998 EPS of $ 1 .38 for FPA and also stated :
26
Following FPA's analyst luncheon , hosted yesterday27 (12 / 8) in New York, we are more convinced than we have
ever been that FPA has the most compelling model in th e
28 PPM industry , acting as an outsourcing agent to HMOs byorganizing primary care physicians into cost - effective
- 81 - 98cv0928 -L(AJB)
1 networks that are able to provide prepaid care to memberson a professionally or globally capitated basis .
2In our opinion, FPA did a thorough job of addressing
3 certain investor misperceptions that have put a cloudover the stock in the past month and further expect the
4 company to meet or beat investor expectations . . . .
6 Importantly, FPA management expressed comfort withanalyst expectations of EPS growth of 50% for 1998 . . . .
7
145 . On 12/9/97, Needham and UBS issued similar reports on8
FPA, based on and repeating information provided at the 12/9/979
analyst luncheon .10
146 . On 1/8/98, FPA issued a release headlined and stating :11
FPA MEDICAL MANAGEMENT, INC . COMMENTS ON OPERATIONS AND12 FOURTH QUARTER
13 FPA Medical Management, Inc . today commented on thestrength of its California-based business in response to
14 investor concerns following a recent announcement byanother physician practice management services provider,
15 related to market and industry conditions . FPA MedicalManagement stated that it has a strong 10-year history i n
16 California and its current operations are performing asexpected .
17Steven M . Lash, Executive Vice President and Chief
18 Financial Officer of FPA Medical Management, Inc .,stated, "We have properly structured our California-base d
19 operations and continue to manage this part of our
network effectively . "
20FPA reiterated the following issues regarding its
21 California operations :
22
23 + All California transactions, including the mostrecent, have been fully integrated . . . .
24
Steven Lash also stated, "We remain comfortable with25 analysts' earnings estimates for . . . 1998 as well as same
market growth assumptions .26
147 . On 1/26/98, Merrill Lynch issued a report on FPA, written27
after analyst Weakley had discussions with Lizerbram, Flam and Lash
28
which was based on and repeated information provided to Weakley by
- 82 - 98cv0928 -L(AJB)
1 them . Lizerbram, Flam or Lash reviewed this report and assured
2 Weakley that it was accurate . The report forecast 1998 EPS of
3 $1 .35, a 30% five-year EPS growth rate and stated :
4 FPAM has exceeded earnings expectations in each ofthe past four quarters, as internal growth trends have
5 surpassed investor expectations . Moreover, the company' sability to slash costs at acquired companies has been
6 amply demonstrated time and again, a further indicationof management's focus on bottom line results .
7* *
8
Margin Improvements Expected From Scale Economies9
Total Medical Expenses, as a percentage of sales,10 have shown sequential declines in each of the last 4
quarters, going from 78 .2% in the quarter ended September11 30, 1996 to 70 .4% last quarter .
12
13 These dramatic improvements in expense margins areattributable to the company's quick and efficient
14 integration of its recent acquisitions and increased
productivity .15
148 . On 2/12/98, FPA executives Lizerbram, Flam and Lash
16
appeared at the Smith Barney Health Care Conference in New York17
City . In a formal presentation and in break-out sessions, they18
told the assembled security analysts, money and portfolio managers,19
institutional investors, brokers and stock traders :20
FPA's core business fundamentals and operations were very21 strong and it was achieving strong "same store" member growth,
due to the quality of service and medical care it wa s22 providing and the demand for its services by both third-party
payors and physicians, which would enable FPA to continue
23 strong internal growth for the foreseeable future .
24 • FPA's financial condition was very sound and the Companyhad sufficient liquid assets to fund its ongoing business
25 operations, as well as its aggressive acquisition program .
26 • FPA's growth-by-acquisition strategy was succeeding, a s
FPA was successfully integrating the companies and other
27 operations it had acquired into its business, whilesuccessfully lowering the medical loss ratios of those
28 businesses and improving their profitability .
- 83 - 98cv0928-L(AJB)
1 • FPA was not only successfully integrating the companiesand other business operations it had acquired, but, in fact ,
2 was ahead of schedule in integrating those operations,specifically Foundation Health, which was performing ahead of
3 budget and expectations .
4 • FPA was successfully cutting the medical expenditures ofthe companies and other business operations it had acquired by
5 micromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting the
6 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
7
• FPA was cutting its administrative costs as a percentage8 of revenue, due to efficient management techniques .
9 • FPA's IBNR medical expense reserve was set atconservative and more than sufficient levels .
10
• As a result of the foregoing, FPA was achieving record11 financial results which were "high-quality" results due to
improved operations and lower costs .12
• While FPA's enrollment and revenues declined slightly in13 the 3rdQ from the 2ndQ, this was the result of a deliberate
decision by FPA to eliminate certain unprofitable operations14 that came with recent acquisitions and did not indicate any
problems with FPA's business .15
• While FPA's accounts receivable increased in the 3rdQ16 from the 2ndQ, this was due primarily to the strong growth in
FPA's business and the temporary withholding of certai n17 shared-risk receivables ; however, payors were not disputing
these receivables, they were all collectible and FPA was not18 having any problems with its accounting receivables .
19 • As a result of the foregoing favorable factors, FPA's
business was performing even better than internally forecasted20 and, as a result, FPA was reaffirming its 98 and 99 EP S
forecasts of $1 .40+ and $ .185+, respectively, and continued to21 believe that FPA would be able to obtain EPS growth of 25%-30%
over the next several years .
22149 . On 2/18/98, Needham issued a report on FPA, written by
23
Lirola, which was based on and repeated information provided to
24Lirola in a meeting of FPA executives with the Needham sales force
25
on 2/12/98 . The report forecast 1998 EPS of $1 .47, and stated :
26
Recap on FPA Management Presentation 2/12/9827
* Management emphasized the soundness of its
28 operations :
- 84 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
1 9
2 0
21
22
23
24
25
26
27
28
* Integration of acquisitions after 2 quarters
* No claims backlog
* Internal growth will continue to be strong in 199 8
* Full acquisition pipeline with visibility in Q298 .
* Overall, we reiterate our belief that FPA isstrategically well positioned with HMOs and doctors, andis undervalued given its internal growth and acquisitionprospects .
The foregoing statements by defendants, and in analysts' reports,
(which repeated defendants' statements), in ¶T143-49 above, were
false and misleading for the reasons set forth in 11 37 and 158 .
150 . On 3/6/98 FPA reported its 4thQ 1997 and 1997 results vi a
a release stating :
FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD 1997 FOURTH
QUARTER AND YEAR END RESULTS ; EARNS 30 CENTS PER SHARE
FOR THE QUARTER
* * *
FPA's operating . . . [n)et income for the fourthquarter was $12 .9 million or $0 .30 per share . . . .
[N)et income for the year was $25 .9 million or $0 .61 pershare .
Steven Lash, Executive Vice President and ChiefFinancial Officer, stated, "FPA's positive year end 1997and fourth quarter financial results were due to ourability to successfully implement our medical managementtechnologies and leverage our acquired service centeroperations . This has resulted in a decrease in ourgeneral and administrative expenses when reported as apercentage of revenue and a reduction in overall medicalloss ratio . "
These statements were false because defendants had falsified FPA's
financial results as described in ¶~39-78 .
151 . On 3/6/98, subsequent to the release of its 1997 results,
FPA held a conference call for securities analysts, money an d
- 85 - 98cv0928 -L (AJI3)
1 portfolio managers, institutional investors and large FDA
2 shareholders . During the call - and in follow-up conversations
3 with participants - Lizerbram, Flam and Lash disseminated important
4 information to the market by stating :
5 • FPA's fundamental business operations were strong and itwas achieving strong "same store" member growth, due to the
6 quality of service and medical care it was providing, and th edemand for its services by both third-party payors and
7 physicians, which would enable FPA to continue strong internalgrowth for the foreseeable future .
8• FPA's financial condition was very sound and the Company
9 had sufficient liquid assets to fund its ongoing businessoperations, as well as its aggressive acquisition program .
10• FPA's growth-by-acquisition strategy was succeeding, as
11 FPA was successfully integrating the companies and otheroperations it had acquired into its business, whil e
12 successfully lowering the medical loss ratios of thosebusinesses and improving their profitability .
13• FPA was not only successfully integrating the companies
14 and other business operations it had acquired, but, in fact,was ahead of schedule in integrating those operations ,
15 specifically Foundation Health, which was performing ahead ofbudget and expectations .
16• FPA was successfully cutting the medical expenditures of
17 the companies and other business operations it had acquired bymicromanaging hospital admissions and discharges and utilizing
18 other proven cost-reduction protocols and not by cutting thequality of care or refusing medical care desired by either
19 patients or their treating physicians .
20 • EPA was cutting its administrative costs as a percentageof revenue, due to efficient management techniques .
21• FPA's IBNR medical expense reserve was set at
22 conservative and more than sufficient levels .
23 • As a result of the foregoing, FPA was achieving recordfinancial results which were "high-quality" results due to
24 improved operations and lower costs .
25 • While FPA had overall negative cash flow in the 4thQ, itsoperating cash flow was positive . Overall negative cash flow
26 was a natural result of replenishing the operational needs o facquired companies . Excluding the impact of acquisitions, FPA
27 generated cash in the quarter and the Company had $16 millionin cash on hand as of 12/31/97 .
28
- 86 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• While FPA had lost some enrollment at PacifiCare and from
Foundation Health, the growth FPA was enjoying outside of
California was more than offsetting these losses and FPAcontinued to expect strong internal growth going forward .
• As a result of the foregoing favorable factors, FPA'sbusiness was performing even better than internally forecastedand, as a result, FPA was continuing to forecast 98 and 99 EPSof $1 .35+ and $1 .85+, respectively, and continued to believethat FPA would be able to obtain EPS growth of 25%-30% overthe next several years .
152 . On 3/6/98, First Boston issued a report on FPA, written
by France, which was based on and repeated information provided t o
France in the 3/6/98 conference call and in follow-up conversation s
with Lizerbram, Flam or Lash . The report forecast 1998 EPS o f
$1 .35, a 25%-30% five-year EPS growth rate, and stated :
FPAM's results continue to exceed expectations . . . .
For 1997, FPAM's medical loss ratio came in at 71 .2%versus 77 .5% in 1996 . . . . The improvement in medicaland administrative costs resulted from the implementationof new medical technologies and the integration ofregional service centers .
153 . On 3/6/98, Merrill Lynch issued a report on FPA, written
by Weakley, which was based on and repeated information provided t o
Weakley in the 3/6/98 conference call and in follow-up
conversations with Lizerbram, Flam or Lash . The report forecas t
1998 EPS of $1 .35, a 30% five-year EPS growth rate for FPA an d
stated :
Due to synergies from acquisitions, the company reduced
its medical services expense over 800 basis points . . .
[to] a bit over 71% of revenues .
154 . On 3/6/98, Oppenheimer issued a report on FPA, written by
Price, which was based on and repeated information provided to
Price in the 3/6/98 conference call and in follow-up conversations
with Lizerbram, Flam or Lash The report forecast 1998 EPS o f
$1 .38 for FPA and stated :
- 87 - 98cv0928 -L(AJB)
1 FPA's high -quality 4Q97 results reaffirm ourconviction that the company will continue to meet o r
2 exceed the ambitious goals that it has set out foritself, having established itself as one of the best-
3 positioned companies overall in the physician practic emanagement sector . . . . The better-than -expected EPS were
4 generated primarily as a function of remarkably strongsame-store revenue growth and continued progress made in
5 the integration of acquisitions .
6 * * *
7 Excluding Acquisitions , Operating Cash Flow Was Strong
8 FPA used $38 million in cash during 4Q, includingthe addition of $30 million to working capital a t
9 acquired companies and the payment of $17 million intransaction costs related to these acquisitions .
10 Excluding the impact of acquisitions , FPA generated cashduring the quarter .
11
12At the end of 4Q, FPA had $ 227 million in senior debt
13 outstanding , with total debt capacity of $285 million onits revolver . When coupled with the company's $19
14 million in cash on hand, FPA has approximately $7 5million in financing availability - giving it more
15 financial flexibility than we had expected .
16 155 . On 3 / 9/98, Bear Stearns i ssued a report on FPA, written
17 by Frazier , which was based on and repeated information provided to
18 Frazier in the 3 / 6/98 conference call and in follow-up
19 conversations with Lizerbram , Flam or Lash . The report forecast
20 1998 and 1999 EPS of $ 1 .33 and $1 .85, respectively , and stated :
21 While negative cash flow is never a cause fo r
celebration , given the phase that FPA is in its growth,22 one would expect negative cash flow in 1997 inclusive of
transaction costs and capital needs for thes e23 transactions . On a positive note, operational cash flow
in the quarter exclusive of non - recurring transactional24 costs and capital needs was positive . The company ha s
not made it a secret that at the core of its strategy is25 to acquire distressed companies that offer a unique
opportunity for an operational turnaround . The company' s26 management has proven itself to be quite adept at turning
around operations at such acquired properties . In our27 judgement , negative cash flow and an uptick in deb t
levels is a natural consequence of FPAM acquiring the
28 number of companies that it has in 1997 . . . . We see the
cash flow situation stabilizing over time as the compan y
- 88 - 98cv0928 -L(AJB)
1 continues to deliver operational synergies andenhancements across its acquisitions . . . .
2
FPA Medical reported a solid on-consensus fourth3 quarter . . . . Margin performance was quite impressive in
the quarter with sequential improvements in both the SG&A4 and medical loss ratios evident in the quarter .
6 Accounts receivable in the third quarter were $181million . The increase in accounts receivables is due to
7 an increase in capitation receivables and normal busines sgrowth . The growth in capitation receivables is due to
8 conformance of accounting policies with companies in afull transaction to achieve consistent account s
9 receivables recognition, an increase in enrollment wherethe HMO pays the claim, and an increase in enrollment
10 where the HMO pays in arrears . Incurred But Not Reporte d(IBNR) and claims payable increased $30 million to $150
11 million . . . . Days of IBNR and claims payable at December31, 1996 was 64, at September 30, 1997 they were 61 days ,
12 and at December 31, 1997 they were 70 . This is a ratherdramatic and favorable turn in the IBNR picture .
13
156 . On 3/9/98, Needham issued a report on FPA, written by14
Lirola, which was based on and repeated information provided to15
Lirola in the 3/6/98 conference call and in follow-up conversations16
with Lizerbram, Flam or Lash . The report forecast 1998 and 199917
EPS of $1 .47 and $1 .88, respectively, and stated :
18
* FPA reported a strong 4Q 97 . . . . Medical Loss Ratio19 (MLR) declined sequentially by 2 .4% to 71 .2% .
20
21 * We believe that on an on-going basis, FPA generates$10-15 million quarter excess cash from core operations .
22
157 . FPA's stock fell after the release of FPA's 4thQ 1997
23
results when a few analysts criticized FPA's cash flow situation .24
However, Lash stated that such criticism was based on incomplete
25information and that the analysts "misunderstood some information
26provided by the Company," while insisting that FPA was achieving
27
strong positive cash flow from its core operations and would28
achieve overall positive cash flow in 1998, as well as 1998 an d
- 89 - 98cv0928 -L(AJB)
1 1999 EPS of $1 .35+ and $1 .85+, respectively . Thus, FPA's stock
2 stabilized and continued to trade at artificially inflated levels .
3 Each of the statements in ¶ 1151-57 above were false for the reasons
4 set forth in ¶137 and 158 .
5 158 . Each of the positive statements about FPA's business
6 during the Class Period between 2/3/97-3/9/98, as set forth in
7 ¶¶99-106, 108-23, 125-57 and 159-61, was materially false and
8 misleading when issued, and failed to disclose, inter alia, the
9 following adverse information which was then known only to
10 defendants due to their access to internal FPA data :
11 (a) Defendants falsified FPA's reported results for the
12 4thQ 1996, as well as all four quarters of 1997, by misaccounting
13 for the Foundation Health acquisition, by manipulating reserves for
14 medical expenses to artificially low levels, by burying and thus
15 misaccounting for operating costs in one-time special charges
16 incurred in acquisitions, by refusing to write down impaired
17 goodwill from the Foundation Health and other acquisitions, and by
18 engaging in the other accounting tricks and artifices as detailed
19 at ¶J39-78 ;
20 (b) Defendants deceived the public regarding the rate of
21 FPA's internal or organic growth, which was static or declining, by
22 issuing public reports that combined existing operations with
23 newly-acquired operations, thereby concealing the poor growth rate
24 for FPA's ongoing or core operations ;
25 (c) FPA's purported record financial results reported
26 during the Class Period were not due to allegedly efficient
27 management techniques, allegedly successful integration of acquired
28 companies and business operations, or allegedly rigorous
- 90 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
micromanagement of medical costs, as represented, but rather, to
the falsification of its financial results as detailed at 939-78 ;
(d) Defendants were falsifying FPA's reported operating
results by artificially lowering FPA's operating and medical
expenses and thus its medical loss ratio, in part by improperly
assigning operating costs to one-time acquisition charges and by
manipulating its IBNR accrual in connection with its acquisitions,
resulting in IBNR being set at artificially low levels ;
(e) FPA was encountering serious and persistent
difficulties in integrating the acquired operations of Foundation
Health and AHI, incurring huge costs and expenses, including
excessive medical expenses at those operations ;
(f) Defendants were causing FPA to arbitrarily refuse
needed and/or desired medical care requested by patients or their
treating physicians, resulting in increasing customer complaints
and physician hostility, which was having an adverse impact on
FPA's ability to retain existing members, to attract new members ,
and to retain existing or obtain new treating physicians ;
(g) To preserve cash and to mask the Company' s
deteriorating cash position, defendants were causing FPA to not pa y
claims and suppliers in a timely fashion, such that doctors refuse d
to see FPA patients until their accounts were brought current ;
(h) FPA was encountering markedly lower productivity
from physicians in certain parts of its network, especially from
physicians whose compensation had been switched to a salary basis,
resulting in those physicians refusing to work as many hours as ha d
historically been the case ;
- 91 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
(i) Due to the lower quality of care it was delivering
to its member patients, FPA was encountering a markedly slower rate
of internal growth, as customers and potential customers who had a
choice as to whether to utilize EPA's services were increasingly
refusing to select or use FPA because of its arbitrary denial of
necessary medical treatment and its markedly reduced quality o f
care ;
(j) As a result of the foregoing adverse conditions
regarding FPA's business, FPA's forecasts of strong "same store" or
internal member growth during 1998-1999 were false when made,
because such growth could not and would not be obtained ; and
(k) As a result of the foregoing negative conditions
regarding FPA's business, the forecasts of strong 1998 and 1999 EPS
growth by FPA were false when made, because those results could not
and would not be achieved .
159 . On 3/26/98, FPA announced it was replacing its CEO (Flam)
and CFO (Lash) . FPA's release stated :
Steven Lash also stated, "Our business continues totrack according to expectations and we remain encouragedby the first quarter's operating and financialperformance . "
Dr . Sol Lizerbram, who remains as Chairman stated,
"I am excited about the prospects for the Company in thecoming years . . . . "
160 . On 3/27/98, the Wall Street Journal reported that Flam
said he was leaving because "I'm an entrepreneur who has helped to
grow a great company, " and stated, " [f] inancial results continue to
track expectations" and "we remain encouraged by the first
quarter's performance ." Flam told analysts "I feel very
comfortable about the first quarter . "
- 92 - 98cv0928-L (AJB)
1 161 . On 4/1/98, the Individual FPA Defendants caused FPA to
2 file its 1997 Form 10-K with the SEC, which was signed by Dresnick
3 and Lizerbram . The Form 10-K included FPA's 1997 financial results
4 with the representation that such results were "in conformity with
5 [GAAPJ . " FPA also held a conference call for analysts during which
6 Lizerbram and Dresnick forecast that FPA would achieve 1stQ 1998
7 EPS of $ .30-$ .31 and 1998 EPS of $1 .37 and assured them that FPA
8 was not suffering any liquidity problems and would have positive
9 cash flow from operations during 1998 .
10 162, The statements made on 3/26/98 and 3/31/98 were false,
11 and were made to conceal FPA's severe cash problems so defendants
12 Lizerbram, Flam, Lash and Hassman could justify amending their
13 employment agreements, or entering into consulting agreements, to
14 pay themselves millions of dollars of salary, consulting fees
15 and/or severance payments, even in the event their fraudulent
16 conduct was uncovered and they were fired for cause . In truth,
17 FPA's business was collapsing, and was in a serious liquidity/cash
18 flow crisis . FPA was preparing to take writedowns of $200 million,
19 which would create huge losses and put it into default under its
20 lending agreements . Flam had been pushed out for his gross
21 mismanagement, while Lash had been relieved of his duties by
22 Lizerbram and the other FPA directors so that Lash could be blamed
23 for the falsification of FPA's financial results, which the FPA
24 Board knew would shortly be exposed .
25 163 . On 5/15/98, FPA made a series of shocking revelations
26 that contradicted the Individual FPA Defendants' positive
27 statements during the Class Period, including the recent assurances
28 of strong lstQ 1998 EPS and improving cash flow . First, defendant s
- 93 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
1 5
16
17
18
1 9
20
21
22
23
24
25
26
27
28
reported disastrous 1stQ results - EPS of only $ .01, compared to
the $,30-$ .31 forecast, admitting that in prior periods they had
not set aside enough IBNR medical claims reserves and that the
former Foundation Health clinics had suffered a $5+ million loss .
Defendants admitted that if FPA could not make the Foundation
Health clinics profitable, it would leave the Foundation Health
markets . Equally serious, they revealed FPA was forced to take
$200 million in write-offs - $125 million for goodwill impairment
(mostly Foundation Health), $40 million in uncollectible accounts
receivables and $35 million in other charges - thus admitting they
had grossly over-valued FPA's earlier acquisitions and lied about
the collectibility of FPA's receivables . Defendants also revealed
that FPA was firing employees and closing facilities, imposing
hiring and capital spending freezes, and implementing procedures to
control overhead spending . Defendants also admitted FPA was in a
liquidity crisis . FPA had maxed-out, and defaulted on, its
existing credit lines, lacked cash to operate for more than six
weeks, could not afford to pay for medical improvements in its
information and accounting systems, and desperately needed
additional financing to survive .
164 . In response to the 5/15/98 announcement, FPA's stock
plunged from $11-15/16 on 5/14/98 to a closing price of $5-1/2 on
5/15 and to $2-23/32 three days later, falling 75% - on astonishing
trading volume of 44 million shares in just four trading days -
ending up 93% lower than its Class Period high of $40 . FPA filed
for bankruptcy court protection on 7/19/98 and has canceled all
existing equity interests as part of its plan to reorganize .
- 94 - 98cv0928-L(AJB)
1 CLASS ACTION ALLEGATIONS
2 165 . Plaintiffs bring this action as a class action pursuant
3 to Federal Rule of Civil Procedure 23 on behalf of all persons who
4 purchased or otherwise acquired the publicly traded securities of
5 FPA (the "Class"), including FPA`s common stock, its 6-1/2%
6 convertible debentures and options to purchase FPA common stock,
7 during the Class Period . Excluded from the Class are defendants,
8 related entities controlled by them, and members of their families .
9 166 . The members of the Class are so numerous that joinder of
10 all members is impracticable . The disposition of their claims in
11 a class action will provide substantial benefits to the parties and
12 the Court . During the Class Period, FPA had more than 43 million
13 shares of stock outstanding, owned by hundreds of shareholders .
14 167 . There is a well-defined commonality of interest in the
15 questions of law and fact involved in this case . Common questions
16 of law and fact predominate, including the following :
17 (a) Whether the federal securities laws were violated by
18 defendants ;
19 (b) Whether defendants omitted and/or misrepresented
20 material facts ;
21 (c) Whether defendants' statements omitted material
22 facts necessary to make the statements made, in light of the
23 circumstances under which they were made, not misleading ;
24 (d) Whether defendants acted with scienter ;
25 (e) Whether the price of FPA's securities were
26 artificially inflated during the Class Period ; an d
27 (f) The extent of damage sustained by Class members and
28 the appropriate measure of damages .
- 95 - 98cv0928-L(AJB)
1
2
3
4
6
7
8
9
10
1 1
12
13
14
1 5
16
1 7
18
19
20
2 1
22
23
24
2 5
26
27
28
168 . Plaintiffs' claims are typical of those of the Class .
Plaintiffs and the Class sustained damages from defendants'
wrongful conduct .
169 . Plaintiffs will adequately protect the interests of the
Class and have retained competent counsel . Plaintiffs have no
interests which conflict with those of the Class .
170 . A class action is superior to other available methods for
the fair and efficient adjudication of this controversy .
171 . The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications .
STATUTORY SAFE HARBOR
172 . The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the
allegedly false forward-looking statements pleaded in this
Complaint because the statutory safe harbor does not apply to FPA's
financial statements and because none of the particular oral
forward-looking statements pleaded herein were identified as a
"forward-looking statement" when made . None of the written
forward-looking statements made were identified as forward-looking
statements . Nor was it stated as to either type of forward-looking
statement that actual results "could differ materially from those
projected ." Nor did meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the forward-looking statements accompany
those forward-looking statements . In any event, each of the
forward-looking statements alleged herein was authorized by a n
-- 96 - 98cv0928 -L(AJB)
1 executive officer of FPA, and was actually known by each of the
2 Individual FPA Defendants to be false when made .
3 FIRST CLAIM FOR RELIEF
4 Violation of H 10 (b), 20(a ) and Rule 20b-5
5 173 . Plaintiffs incorporate ¶T1-172 by reference .
6 174 . Each defendant : knew the adverse, non-public information
7 about FPA's financial results and then-existing business
8 conditions, which was not disclosed ; and participated in drafting,
9 reviewing, and/or approving the misleading statements, releases,
10 reports, and other public representations about FPA .
11 175 . During the Class Period, defendants disseminated or
12 approved the false statements specified above, which they knew were
13 false in that they contained misrepresentations and failed to
14 disclose material facts necessary in order to make the statements
15 made, in light of the circumstances under which they were made, not
16 misleading .
17 176 . Defendants violated §10(b) and Rule 10b-5 in that they :
18 (a) Employed devices, schemes, and artifices to defraud ;
19 (b) Made untrue statements of material facts or omitted
20 to state material facts necessary in order to make statements made,
21 in light of the circumstances under which they were made, not
22 misleading ; o r
23 (c) Engaged in acts, practices, and a course of business
24 that operated as a fraud or deceit upon plaintiffs and others
25 similarly situated in connection with their purchases of FPA common
26 stock during the Class Period .
27 177 . Plaintiffs and the Class have suffered damages in that,
28 in reliance on the integrity of the market, they paid artificiall y
- 97 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
inflated prices for FPA stock . Plaintiffs and the Class would not
have purchased or otherwise acquired FPA stock at the prices they
paid, or at all, if they had been aware that the market price had
been artificially inflated .
178 . Lizerbram, Flam, Lash and Dresnick, by reason of their
stock ownership, management positions or membership on FPA's Board,
were controlling persons of FPA and had the power and influence ,
and exercised the same, to cause it to engage in the illegal
conduct complained of herein . These defendants are thus liable
under §20(a) . In addition, each defendant is liable under §20(a )
because each defendant controlled each of the other defendants .
SECOND CLAIM FOR RELIEF
Violation of §20A of the Exchange ActAgainst Defendants Dresnick ,
Flam, Hassman, Lash and Lizerbram
179 . Plaintiffs repeat and reallege ¶¶1-178 .
180 . By virtue of their positions as the top officers of FPA
and their role in the fraud described herein, defendants Dresnick ,
Flam, Hassman, Lash and Lizerbram, possessed material non-public
information about FPA when they sold millions of shares of thei r
FPA common stock to plaintiffs and the other members of the Class .
181 . By virtue of either their participation in the scheme t o
defraud investors or of their sales of stock while in possession of
material non-public information about FPA, the defendants named in
this claim for relief violated §10(b) of the 1934 Act and
applicable rules and regulations thereunder .
182 . These defendants' sales of FPA common stock during the
Class Period were made contemporaneously with FPA stock purchases
-- 98 - 98cv0928-L(AJB)
1 by at least one or more of the plaintiffs, which are set forth in
2 Appendix B attached hereto .
3 183 . Plaintiffs and all the other members of the Class who
4 purchased shares of FPA common stock contemporaneously with the
5 these defendants' sales of FPA common stock : (1) have suffered
6 substantial damages because they relied upon the integrity of the
7 market, paid artificially inflated prices for FPA common stock as
8 a result of the violations of §10 (b) and Rule 10b-5 alleged herein ;
9 and (2) would not have purchased FPA stock at the prices they paid ,
10 or at all, if they had been aware that the market prices had been
11 artificially and falsely inflated by defendants, misleading
12 statements and concealment . At the time of the purchases by
13 plaintiffs and the members of the Class, the fair and true market
14 price of FPA common stock was substantially less than the prices
15 paid by them .
16 THIRD CLAIM FOR RELIEF
17 Violation of Cal . Corp . Code § 525400 and 25500
18 184 . Plaintiffs repeat and reallege ¶j1-183 .
19 185 . At a time when they were selling or offering for sale FPA
20 securities, defendants made or participated in making false or
21 misleading statements for the purpose of inducing the purchase of
22 FPA securities by others . Defendants either knew or had reasonable
23 grounds for believing that these statements were false or
24 misleading . Defendants' statements had the effect of inflating the
25 price of FPA securities above the market value they would have
26 traded at had defendants' statements been accurate . Plaintiffs and
27 the members of the Class were damaged when they purchased FPA
28 securities at artificially inflated prices . As a result ,
- 99 - 98cv0928 -L(AJB)
1 defendants violated §25400(d) of the California Corporations Code,
2 entitling members of the Class to recover damages as provided for
3 in §25500 .
4 FOURTH CLAIM FOR RELIEF
5 Violation of Cal . Corp . Code §§25401 & 25501
6 186 . Plaintiffs repeat and reallege ¶¶1-185 .
7 187 . FPA offered and sold securities to members of the Class,
8 in particular those plaintiff doctors who sold their medical
9 practices to FPA, by means of registration statements and other
10 communications that included false or misleading statements of
11 material fact, resulting in a violation of Corporations Code
12 §25401 . Defendants controlled FPA within the meaning of
13 Corporations Code §25504 and knew or had reasonable ground to
14 believe that FPA's statements were false or misleading . In
15 addition, defendants materially assisted in FPA's wrongful conduct
16 within the meaning of §25504 .1 with the intent to deceive or
17 defraud plaintiffs .
18 188 . As a result, defendants are liable to those members of
19 the Class who purchased securities from FPA for damages as provided
20 for in Corporations Code §25501 .
21 FIFTH CLAIM FOR RELIEF
22 Violation of Cal . Civ . Code §§ 1709-10
23 189. Plaintiffs repeat and reallege
24 190 . For the purpose of inducing plaintiffs and the class
25 members to acquire FPA securities, and with the intent to deceive
26 plaintiffs and the Class members, defendants employed a scheme and
27 conspiracy to defraud . As set forth above, defendants made,
28 participated in the making of, or aided and abetted the making o f
- 100 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
misrepresentations of fact, suppressed the true facts, and omitted
to state material facts . Said representations and statements were
not true, and defendants did not believe them to be true or had no
reasonable ground for believing them to be true . Defendants' acts
were fraudulent, oppressive and malicious .
191 . Defendants' fraudulent scheme and course of conduct (a)
deceived plaintiffs and the Class members regarding FPA's business
and financial condition ; (b) artificially inflated the price of FPA
securities which plaintiffs and the Class members acquired ; and (c)
caused plaintiffs and the Class members to acquire FPA securities
at prices which plaintiffs and the Class members did not know were
inflated . Absent defendants' fraud and deceit, plaintiffs and the
Class members would not have purchased FPA securities at the prices
they paid, or would not have purchased FPA securities at all .
Moreover, absent defendants, fraud and deceit, the plaintiff
doctors would not have agreed to sell their practices in exchange
for FPA stock .
192 . Plaintiffs and the Class members reasonably relied on the
statements and omissions made or endorsed by defendants, as set
forth herein, were ignorant of the falsity of these statements,
believed them to be true, and, as a result, suffered damages . In
addition to compensatory damages for defendants' fraud and deceit,
plaintiffs and the Class members also request punitive damages .
SIXTH CLAIM FOR RELIEF
Negligent Misrepresentation
193 . Plaintiffs repeat and reallege ¶¶1-192, above, except
those paragraphs alleging knowing or reckless conduct .
- 101 - 98cv0928 -L(AJB)
1 194 . Among the direct and proximate causes of the
2 misrepresentations and omissions to state material facts set forth
3 above in ¶J99-106, 108-23, 125-57 and 159-61 was the negligence and
4 carelessness of the defendants .
5 195 . Plaintiffs reasonably relied on the statements and
6 omissions made or endorsed by defendants, as set forth above, were
7 ignorant of the falsity of these statements, believed them to be
8 true, and, as a result, suffered damages .
9 PRAYER FOR RELIEF
10 WHEREFORE, plaintiffs pray for judgment as follows :
11 A. Declaring this action to be a proper class action ;
12 B. Awarding plaintiffs and the members of the Class damages
13 and pre-judgment and post-judgment interest and costs ;
14 C. Awarding equitable and/or injunctive relief, including
15 the imposition of a constructive trust upon the proceeds of
16 defendants' insider trading, pursuant to Rules 64, 65, and any
17 appropriate state law remedies ;
18 D. Awarding punitive damages ; and
19 E. Awarding such other relief as this Court may deem just
20 and proper .
21 JURY DEMAND
22 Plaintiffs demand a trial by jury .
23 DATED this 21st day of January, 2000 .
24 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
25 WILLIAM S. LERACH
BLAKE M . HARPER26 ARTHUR C. LEAHY
SANGEETA G . PATE
2 7
28BLAKE M . PER
102 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 N : \CASES\FPAP"\DBX 8220 cpt
600 West Broadway, Suite 1800
San Diego, CA 92101Telephone : 619/231-1058
BERGER & MONTAGUE, P .C .
TODD S . COLLINS
MICHAEL L . BLOCK
JACOB A . GOLDBERG
1622 Locust Street
Philadelphia, PA 19103
Telephone : 215/875-300 0
Co-Lead Counsel for Plaintiff s
- 103 - 98cv0928 -L(AJB)
Appendix A
Shares SharePurchased Price
Asch, Clara C . Trustee 11/26/97 665 $33.500665
Asch, Jason S . Trustee 11/26/97 665 $33 .500665
Asch, Krugman Gail 11/26/97 665 $33 .500665
Asciuttio, Thomas 03/06/98 500 $19 .687500
Baak, Marinus W . 03/24/97 100 $21 .500Baak, Marinus W . 04/25/97 100 $15.375Baak, Marinus W . 11/17/97 100 $26.125Baak, Marinus W . 12/11/97 100 $19.563Baak, Marinus W . 01/09/98 200 $16.81 3
Baak, Marinus W . 05/04/98 200 $11 .500800
Barnabei, Albe rt & Nancy 10/31/97 500 $23.250500
Bashour, David & Rose 11/06/97 300 $24.990300
Blott, Michael 11/24/97 370 $27.000Blott, Michael 12/23/97 500 $19.000
870
Boose, Robert 01/08/98 300 $16 .625Boose, Robert 01/12/98 300 $16 .125
Boose, Robert 01/13/98 300 $16 .250900
Brice, Robert 03/17/97 37,543 $23 .00037,543
Caristo, Michael A . 05/12/98 1,000 $11 .31 31,000
Shares SharePurchased Price
Cheers Investment Club 11/06/97 300 $24.955Cheers Investment Club 01/05/98 300 $20.354
600
Colefla, Fred 05/27/97 200 $19.75020 0
Ehlert, George & Georgeanne 03/04/98 2,000 $23.500Ehlert, George & Georgeanne 05/08/98 2,000 $11 .750
4,000
ELAJ Family Limited Partnership 11/20/97 700 $27 .625700
Fischer, Dorothy J . 04/11/97 1,000 $17 .197Fischer, Dorothy J . 11/07/97 1,000 $23 .91 4Fischer, Dorothy J . 03/27/98 1,000 $16 .680Fischer, Dorothy J . 03/30/98 1,000 $15 .930Fischer, Dorothy J . 04/16/98 1,000 $14 .055Fischer, Dorothy J . 05/07/98 1 .000 $11 .744
6,000
Friedland, Steven 03/27/98 400 $16 .188Friedland, Steven 04/24/98 300 $13 .500Friedland, Steven 05/15/98 500 $7 .429
1,200
Garson, Frederick M . 02/27/98 800 $24 .560800
Giglio, Michael J . 10/18/97 500 $35 .000
Giglio, Michael J . 10/31/97 500 $25.000Giglio, Michael J . 03/09/98 1,000 $18.500Giglio, Michael J . 03/10/98 1 .000 $17.000
3,000
Glosser, William 03/04/98 200 $24.750200
Greenberg, Fred 12/04/97 1,000 $24.000Greenberg, Fred 03/09/98 500 $18 .750
1,500
Shares SharePurchased Price
Gutowicz, Marcia A . 03/12/97 300 $18.750300
Henning, Bill 12/01/97 4,600 $18.3004,600
Invesco Enterprises 03/27/98 1,000 $16.31 31,00 0
Itzkowitz, Nathan 04/03/98 500 $15.875500
Kahn, Robert 11/21/97 1,000 $27.61 1Kahn, Robert 04/01/98 1,000 $16.171
2,000
Kenfield, Jack L . 11/07/97 200 $23 .81 3Kenfield, Jack L . 12/03/97 100 $23 .438Kenfield, Jack L . 12/09/97 100 $22 .688Kenfield, Jack L . 12/10/97 100 $19 .188Kenfield, Jack L . 01/06/98 100 $18 .563Kenfield, Jack L . 01/08/98 100 $16 .063Kenfield, Jack L . 04/28/98 200 $12 .000
900
Klansky, Scott 02/26/98 10.1000 $23 .12510,000
Kottler, Donald 11/26/97 1,479 $33 .5001,479
Lebowitz, Murray 03/12/98 100 $1 9 .000Lebowitz, Murray 05/04/98 100 $11 .250
200
Longordo, Natale 03/02/98 2,000 $23 .188Longordo, Natale 03/03/98 1,000 $22 .625Longordo, Natale 03/03/98 1,000 $23 .438Longordo, Natale 03/06/98 2,000 $18 .438
6,000
Maizel, Luis 11/26/97 200 $27 .750Maizel, Luis 01/16/98 5,000 $16 .875
Shares SharePurchased Price
Maizel, Luis 04/08/98 1,000 $15 .37 5Maizel, Luis 04/29/98 1,000 $11 .688Maizel, Luis 05/05/98 1,000 $11 .750Maizel, Luis 05/15/98 1,000 $7.875Maizel, Luis 05/15/98 1,000 $7.875Maize], Luis 05/15198 1,000 $7.875Maizel, Luis 05/15/98 1,000 $7.875Maizel, Luis 05/15/98 500 $7.875Maizel, Luis 05/15/98 1,000 $8 .063Maizel, Luis 05/15/98 2.000 $7 .500
15,700
Malek, Iris 11/04/97 100 $24 .875100
Morando, Donald 12/01/97 4 .600 $18 .3004,600
Murachver, Edwards 11/26197 1,749 $33 .5001,749
Murachver, Enette S . 11/26/97 1,749 $33 .5001,749
North, Ann Patricia 04/01/98 300 $16 .000North, Ann Patricia 04/02/98 700 $16 .438North, Ann Patricia 04/08/98 300 $16 .050
1,300
North, Phillip Jefferey 12/31/97 500 $19 .500North, Phillip Jefferey 01/05/98 400 $19 .125North, Phillip Jefferey 03/09/98 500 $19 .750
1,400
Penick, Rick & Coralette 04/03/98 500 $16 .250Penick, Rick & Coralette 04/16/98 1,000 $13 .750
1,500
Quat, Robert 11/17/97 500 $23 .500500
Shares SharePurchased Price
Redmond, Fred 03/02/98 200 $22 .938Redmond, Fred 03/09/98 200 $18 .750
400
Rofman, Jake 11/18/97 19 $27 .000Rofman, Jake 04/21/98 81 $13 .500
100
Rubinger, Roger 12/04/97 3,000 $17 .875Rubinger, Roger 01/12/98 2,000 $15 .875Rubinger, Roger 01/20/98 2,000 $17.437
7,000
Sacks, Ian & Lucille Trustee for 11/06/97 500 $24.864500
Schram, Joel D . Retirement Plan 08/27/97 500 $27.060Schram, Joel D . Retirement Plan 08/27/97 1,000 $27.480Schram, Joel D . Retirement Plan 11/17/97 500 $26.625Schram, Joel D . Retirement Plan 02/09/98 500 $20.875Schram, Joel D . Retirement Plan 02/24/98 500 $22.875
3,000
Schwartz, O .H . & Ellen 10/23/97 300 $33.250Schwartz, O .H . & Ellen 10/31/97 300 $23.31 3Schwartz, O .H. & Ellen 11103/97 700 $25.125Schwartz, O .H . & Ellen 11/03/97 300 $25.12 5Schwartz, O .H . & Ellen 11/07/97 150 $23.00 0Schwartz, O .H . & Ellen 11/07/97 300 $23.000Schwartz, O .H . & Ellen 11/18/97 200 $27.125Schwartz, O .H . & Ellen 12/31/97 150 $19.37 5Schwartz, O .H . & Ellen 12/31/97 200 $19.37 5Schwartz, O .H . & Ellen 03/13/98 600 $18.87 5
3,200
Sedgh, Jonathan 05/08/97 500 $17.750Sedgh, Jonathan 05/12/97 500 $19.50 0Sedgh, Jonathan 05/16/97 500 $16.62 5Sedgh, Jonathan 05/19/97 500 $18.000Sedgh, Jonathan 06/09/97 500 $20.87 5Sedgh, Jonathan 06/10/97 500 $21 .625Sedgh, Jonathan 06/27/97 500 $22.25 0Sed h, Jonathan 07/01/97 500 $23.375
Shares SharePurchased Price
Sedgh, Jonathan 07/29/97 1,000 $24.375Sedgh, Jonathan 08/18/97 500 $26.500Sedgh, Jonathan 10/02/97 300 $33.500Sedgh, Jonathan 10/08/97 500 $36.875Sedgh, Jonathan 10/23/97 500 $34 .500Sedgh, Jonathan 11/03/97 500 $31 .438Sedgh, Jonathan 11/05/97 500 $23 .750Sedgh, Jonathan 11/17/97 1,000 $23 .875Sedgh, Jonathan 11/18/97 500 $24 .125Sedgh, Jonathan 11/19/97 500 $25 .125Sedgh, Jonathan 12/15/97 200 $20 .250Sedgh, Jonathan 12/16/97 300 $19.250Sedgh, Jonathan 12/17/97 200 $18.750Sedgh, Jonathan 01/13/98 1,000 $16 .31 3Sedgh, Jonathan 01/26/98 1,300 $17 .938Sedgh, Jonathan 01/27/98 1,000 $19.250Sedgh, Jonathan 01/28/98 500 $19.000Sedgh, Jonathan 01/29/98 500 $19.250Sedgh, Jonathan 02/03/98 400 $17.500Sedgh, Jonathan 02/04/98 500 $17.000Sedgh, Jonathan 02/05/98 500 $17 .000Sedgh, Jonathan 02/19/98 500 $21 .250Sedgh, Jonathan 03/13/98 1,000 $17 .250Sedgh, Jonathan 03/13/98 500 $19 .000Sedgh, Jonathan 03/13/98 500 $21 .250Sedgh, Jonathan 03/13/98 500 $17 .81 3Sedgh, Jonathan 03/13/98 500 $17 .875Sedgh, Jonathan 03/13/98 500 $18 .063Sedgh, Jonathan 03/16/98 1,000 $19.875Sedgh, Jonathan 05/01/98 500 $12.250Sedgh, Jonathan 05/01/98 1,000 $12.500Sedgh, Jonathan 05/04/98 500 $11 .750Sedgh, Jonathan 05/04/98 1,000 $11 .250Sedgh, Jonathan 05/06/98 500 $11 .688
24,700
Shahroozi, Khosrow 03/27/98 1,000 $16 .688Shahroozi, Khosrow 03/27/98 1,000 $16 .188Shahroozi, Khosrow 03/27/98 2,000 $16 .125Shahroozi, Khosrow 03/27/98 1,000 $16 .250Shahroozi, Khosrow 03/30/98 2,000 $15 .750Shahroozi, Khosrow 04/03/98 2,000 $16 .000Shahroozi, Khosrow 04/15/98 2,000 $13 .188
Shares SharePurchased Price
Shahroozi, Khosrow 04/15198 18,000 $13.250Shahroozi, Khosrow 04/29/98 10,000 $11 .375Shahroozi, Khosrow 05115/98 20,000 $8 .000Shahroozi, Khosrow 05/15/98 20,000 $7.250Shahroozi, Khosrow 05/15/98 5.000 $6.625
84,000
Silverman, Jon 03/11/97 500 $19 .375Silverman, Jon 03/11/97 500 $19.375Silverman, Jon 04/14/97 200 $14.000Silverman, Jon 04/14/97 200 $14 .000
1,400
Silver, Scott L . 02/06/98 700 $20.000700
Simmons, Ronald E . 11/26/97 665 $33.500665
Sklar, Fred 11/14/97 1 .000 $25.5001,000
Solder, John 11/14/97 300 $25.500Solder, John 01/16/98 700 $17.188
1,000
Solomon, Phillip E . 11/26/97 1 Q 700 $33.50010,700
Sussman, Raymond D . 11/04/97 100 $25.000Sussman, Raymond D. 01/14/98 100 $16.750
Sussman, Raymond D . 03/09/98 100 $18 .750300
Tomasso, Ralph 09/24/97 300 $31 .875300
Tran, Moonlight 11/25/97 200 $26 .070
Tran, Moonlight 01/16/98 200 $16 .81 0Tran, Moonlight 03/18/98 200 $19 .000Tran, Moonlight 03/20/98 200 $18.250Tran, Moonlight 04/03/98 400 $15.81 0Tran, Moonlight 04/17/98 200 $13 .690
Shares SharePurchased Price
Tran, Moonlight 05/01/98 200 $12 .000Tran, Moonlight 05/05/98 200 $12 .000
1,800
Wright, James E . 03/04/98 11000 $23.5001,000
Zivitz, Eric 11/07/97 300 $23 .500300
Totals 260,250
N 1CASES1Fpam\DBX80221 .mis
APPENDIX B
DATE DEFENDANTS PLAINTIFFS WHOWHO SOLD PURCHASED
03/11/97 Flam Jon Silverma nLas hLizerbraraHassman
03/12/97 Flam Marcia A . Gutowic z
LashLizerbram
03/17/97 Lash Robert Bric eLizerbramFlam
11/04/97 Hassman Iris Malek
Raymond D . Sussman
11/06/97 Hassman David & Rose BashourCheers Investment ClubIan & Lucille SacksTrustee for SacksYourick, Inc . PS P
11/07/97 Hassman Dorothy J . Fischer
Jack L . Kenfiel dO .H . & Ellen Schwart zEric Zivit z
11/14/97 Hassman Fred Skla rJohn Solde r
11/17/97 Dresnick Marinus W . Baak
Hassman Robert Qua tJoel D . Schram Retiremen t
PlanJonathan Sedg h
11/18/97 Hassman Jake RofmanO .H . & Ellen Schwart z
Jonathan Sedgh
11/19/97 Flam Jonathan Sedgh
Lizerbra mLas h
11/20/97 Flam ELAJ Family Limited
Lash Partnership
DATE DEFENDANTS PLAINTIFFS WHOWHO SOLD PURCHASE D
11/21/97 Lizerbram Robert Kahn
Flam
11/24/97 Flam Michael Blot t
Lizerbram
11/25/97 Dresnick Moonlight Tra n
11/26/97 Dresnick Clara C . Asch Truste e
Jason S . Asch Truste eGail Krugman Asc hLuis Maize l
Edward Murachve rEnette S . Murachve r
Philip E . Solomon
12/01/97 Lizerbram Bill HenningDonald Morand o
12/04/97 Flam Fred Greenberg
Lizerbram Roger Rubinge rLash
Fpa.\ Ar8c C cht
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
2 1
22
23
24
25
2 6
27
28
DECLARATION OF SERVICE BY MAI L
I, the undersigned, declare :
1 . That declarant is and was, at all times herein mentioned,
a citizen of the United States and a resident of the County of San
Diego, over the age of 18 years, and not a party to or interest in
the within action ; that declarant Is business address is 600 West
Broadway, Suite 1800, San Diego, California 92101 .
2 . That on January 21, 2000 declarant served the CORRECTED
SECOND AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL
SECURITIES LAWS AND SUPPLEMENTAL STATE LAW CLAIMS by depositing a
true copy thereof in a United States mailbox at San Diego,
California in a sealed envelope with postage thereon fully prepaid
and addressed to the parties listed on the attached Service List .
3 . That there is a regular communication by mail between the
place of mailing and the places so addressed .
I declare under penalty of perjury that the foregoing is true
and correct . Executed this 21th day of January, 2000, at San
Diego, California-
LORI STARMER
98cv0928-L(AJB)
FPA MEDICAL (FEDERAL - SOUTHERN DIST .)
Service List - 10/01/9 9
page 1
COUNSEL FOR PLAINTIFF(S )
Kevin J . YourmanJames E . TullmanMatthew J . ZevinWEISS & YOURMAN10940 Wilshire Blvd ., 24th FloorLos Angeles, CA 90024
310/208-280 0310/209-2348 (fax )
Andrew L . BarrowaySCHIFFRIN & BARROWAY, LLPThree Bala Plaza East, Suite 400
Bala Cynwyd, PA 19004
610/667-770 6
610/667-7056 (fax )
Alfred G . Yates, Jr .
LAW OFFICES OF ALFRED
YATES, JR .519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 1521 9
412/391-5164412/471-1033 (fax )
Marc EdelsonROFFMAN & EDELSON
45 W . Court Street
Doylestown, PA 1890 1
215/230-8043215/230-8735 (fax )
Robert J . Dyer III
DYER DONNELLY801 East 17th Avenue
Denver, CO 80218-1417
303/861-3003
303/830-6920 (fax )
Allan Steyer
Jeffrey H . Lowenthal
D . Scott Macrae
Stuart H . Savett
Robert P . Frutkin
Barbara A . Podel l
SAVETT, FRUTKIN, PODELL &RYAN, P .C .
325 Chestnut Street, Suite 700Philadelphia, PA 19106215/923-540 0215/923-9353 (fax)
Kenneth A . ElanLAW OFFICES OF KENNETH A . ELAN217 Broadway, Suite 40 4New York, NY 10007
212/619-0261
212/385-2707 (fax )
Charles J . Pive nG . LAW OFFICES OF CHARLES
PIVEN, P .A .
The World Trade center
401 East Pratt Street,
Baltimore, MD 2120 2
410/332-0030410/685-1300 (fax )
STEYER LOWENTHAL BOODROOKAS &WALKER LLP
One California, Suite 2200
San Francisco, CA 94111
415/421-3400
415/421-2234 (fax)
J .
Suite 252 5
Ann D . White
LIEBENBERG & WHITE
The Pavilion
261 Old York Road, Suite 810Jenkintown, PA 19046
215/481-027 2
215/481-0271 (fax )
James V . BashianLAW OFFICES OF JAMES V . BASHIAN
500 Fifth Avenue, Suite 2700
New York, NY 10110
212/921-411 0212/921-4249 (fax )
Mel E . Lifshit zBERNSTEIN LIEBHARD & LIFSHITZ,
LLP10 East 40th Street
New York, NY 10016
212/779-141 4212/779-3218 (fax)
FPA MEDICAL (FEDERAL - SOUTHERN DIST .)Service List - 10/01/9 9Page 2
COUNSEL FOR PLAINTIFF(S )
Martin D . ChitwoodCHITWOOD & HARLEY2900 Promenade II1230 Peachtree Street ,Atlanta, GA 30309
404/873-3900404/876-4476 (fax )
Randall H . Steinmeyer
REINHARDT & ANDERSON
E-1000 First National332 Minnesota Street
St . Paul, MN 5510 1
651/227-9990651/297-6543 (fax)
Ellen Gusikoff StewartSPECTOR & ROSEMAN, P .C .600 West Broadway, Suite 1600
N .E . San Diego, CA 92101
619/338-4514
619/231-7423 (fax )
Francis M . Gregore kWOLF HALDENSTEIN ADLER FREEMAN
Bank Bldg . & HERZ, LLP
750 B Street, Suite 2770
San Diego, CA 92101
619/239-4599
619/234-4599 (fax )
Steven E . Caule yLAW OFFICES OF STEVEN E .
CAULEY, P .A .
Suite 218, Cypress Plaza2200 N . Rodney Parham Road
Little Rock, AR 7220 1
501/312-8500501/312-8505 (fax )
Paul J . ScarlatoWEINSTEIN, KITCHENOFF ,
SCARLATO & GOLDMAN, LTD .
1608 Walnut Street, Suite 1400Philadelphia, PA 19103
215/545-720 0
215/545-6535 (fax )
Burton H . FinkelsteinShannon P . KineryFINKELSTEIN THOMPSON & LOUGHRAN
The Foundry Building, Suite 6011055 Thomas Jefferson Street, N .W .
Washington, DC 20007
202/337-800 0
202/337-8090 (fax )
Steven J . Toll
Matthew J . Ide
Kristopher A . Kinkade
COHEN, MILSTEIN, HAUSFELD &TOLL, P .L .L .C .
999 Third Avenue, Suite 3600
Seattle, WA 98104
206/521-008 0
206/521-0166 (fax)
James C . KrausePatrick N . KeeganKRAUSE & KALFAYAN1010 Second Avenue, Suite 1750
San Diego, CA 92101
619/232-033 1619/232-4019 (fax )
Michael D . BraunSTULL, STULL & BRODY10940 Wilshire Blvd ., Suite 2300
Los Angeles, CA 90024310/209-246 8310/209-2087 (fax )
Robert Scott Dreher
JEFFREY & DREHER, LLP225 Broadway, 19th Floor
San Diego, CA 9210 1
619/230-8828
619/687-0136 (fax )
Jack G . Fruchter
FRUCHTER & TWERSKY
60 East 42nd Street,
New York, NY 1016 5212/687-6655212/557-6151 (fax)
47th Floor
FPA MEDICAL (FEDERAL - SOUTHERN DIST,)Service List - 10/01/9 9Page 3
COUNSEL FOR PLAINTIFF(S )
Jeffrey S . AbrahamLAW OFFICES OF JEFFREY S .ABRAHAM
60 East 42nd Street, Suite 4700New York, NY 10165
212/692-055 5212/557-6151 (fax)
Neil RothsteinSCOTT & SCOTT, LLC108 Norwich Avenue, P .O . Box 192Colchester, CT 06415
860/537-381 8860/537-4432 (fax )
Bruce G_ MurphyLAW OFFICES OF BRUCE G . MURPHY
265 Llwyds Lane
Vero Beach, FL 32963561/231-4202561/231-4042 (fax )
Arthur TobackHORWITZ TOBACK & HYMAN500 Fifth Avenue, 16th FloorNew York, NY 10110-0095212/869-230 0212/869-2303 (fax )
Myron Harri sLAW OFFICE CF MYRON HARRI S5106 Park Town Place Apartments
22nd & Den Franklin ParkwayPhiladelphia, PA 19130
215/567-533 3
William S . Lerach
Blake M . Harper
Arthur C . Leahy
MILBERG WEISS BERSHAD HYNES &
LERACH LLP
600 West Broadway, Suite 1800San Diego, CA 92101-5050
619/231-105 8
619/231-7423 (fax)
Kurt Olsen
THE OLSEN LAW FIRM2121 "K" Street, N .W ., Suite 800
Washington, DC 20037
202/261-355 3
703/351-5911 (fax )
Michael S . EtkinRAVIN, SARASOHN, COOK ,
BAUMGARTEN, FISCH & ROSEN, P .C .230 Park Avenue, Suite 240 0New York, NY 10169-0146
212/687-3435212/687-3513 (fax )
Daniel A . OsbornEduard KorsinskyBEATIE AND OSBORN599 Lexington AvenueNew York, NY 10022
212/888-9000212/888-9664 (fax )
Edward D . Schmit tLAW OFFICES OF EDWARD D_
SCHMITT
396 North Highway 101Encinitas, CA 92024
760/942-288 9
760/942-9679 (fax )
Vincent R . CappucciENTWHISTLE & CAPPUCCI LLP
330 Madison Avenue
New York, NY 10017
212/867-1030
212/697-8747 (fax )
Jules BrodyAaron BrodySTULL, STULL & BRODY
6 East 45th Street, 4th Floor
New York, NY 10017
212/687-723 0
212/490-2022 (fax)
FPA MEDICALService List
Page 4
(FEDERAL - SOUTHERN DIST .)- 10/01/9 9
COUNSEL FOR PLAINTIFF(S )
Mark C . GardyJames J . Seirmarc oABBEY, GARDY & SQUITIERI, LLP
212 East 39th Street
New York, NY 10016
212/889-3700212/684-5191 (fax )
Max W . Berge rBERNSTEIN LITOWITZ BERGER &GROSSMANN LLP
1285 Avenue of the Americas33rd FloorNew York, NY 10019
212/554-1400212/554-1444 (fax )
Robert N . KaplanChristine Coma sKAPLAN, KILSHEIMER & FOX, LLP
805 Third Avenue, 22nd Floor
New York, NY 10022
212/687-198 0
212/687-7714 (fax )
Michael J . FreedMUCH SHELIST FREED DENENBERG
AMENT & RUBENSTEIN, P .C .
200 N, LaSalle St ., Suite 2100
Chicago, IL 60601-1095312/346-310 0
312/621-1750 (fax )
David JaroslawiczJAROSLAWICZ & JARO S150 William Street, 19th FloorNew York, NY 10038
212/227-278 0212/732-6746 (fax)
Norman BermanBERMAN, DEVALERIO & PEASE LLPOne Liberty Squar eBoston, MA 02109
617/542-8300
617/542-1194 (fax )
Bernard M . GrossDeborah R . Gros sLAW OFFICES OF BERNARD M .
GROSS, P .C .
1500 Walnut Street, Sixth Floor
Philadelphia, PA 19102
215/561-360 0215/561-3000 (fax )
Arnold LevinLaurence BermanLEVIN, FISHBEIN, SEDRAN &
BERMAN510 Walnut Street, Suite 500
Philadelphia, PA 19106-3875
215/592-150 0
215/592-4663 (fax )
Todd S . Collins
Jacob A. GoldbergBERGER & MONTAGUE, P .C .
1622 Locust Street
Philadelphia, PA 1910 3
215/875-3000215/875-3053 (fax )
BEMPORAD &
N . Lexington Ave .
1060 1
914/997-0035 (fax )
Neil L . SelingerSherrie BrownLOWEY DANNENBERG
SELINGER, P .C .
The Gateway, OneWhite Plains, NY
914/997-0500
FPA MEDICAL (FEDERAL - SOUTHERN DIST .)Service List - 10/01/9 9
Page 5
COUNSEL FOR PLAINTIFF (S )
Marvin MillerMILLER FAUCHER CAFFERTY AND
WEXLER LL P30 N . LaSalle Street, Suite 3200
Chicago, IL 6060 2
312/782-4880312/782-4485 (fax )
Curtis V . TrinkoLAW OFFICES OF CURTIS
TRINKO LLP
16 West 46th StreetSeventh FloorNew York, NY 10036
212/490-9550
212/986-0158 (fax)
Marian P . RosnerPaul 0 . Paradis
WOLF POPPER LLP
845 Third Avenue
New York, NY 1002 2
212/759-4600212/486-2093 (fax )
Richard A . SpeirsV . ZWERLING, SCHACHTER &
ZWERLING, LL P
767 Third AvenueNew York, NY 10017-2023
212/223-3900
212/371-5969 (fax )
Jeffrey H . SquireIra M . Pres sKIRBY, MCINERNEY & SQUIRE, LLP
830 Third Avenue, 10th FloorNew York, NY 10022
212/317-230 0
212/751-2540 (fax )
Richard ApplebyLAW OFFICES OF RICHARD APPLEBY
39 Broadway
New York, NY 10006212/344-1800
212/809-61'74 (fax )
Lionel Z . Glancy
LAW OFFICES OF LIONEL Z .
1801 Avenue of the Stars
Suite 31 1
Los Angeles, CA 90067310/201-9150
310/201-9160 (fax )
Robert C . Schubert
Juden Justice Reed
SCHUBERT & REED LLPTwo Embarcadero Cente r
Suite 105 0
San Francisco, CA 94111
415/788-4220
415/788-0161 (fax)
Stephen R . GasserBlair A . NicholasMatthew P . MontgomeryBARRACK, RODOS & BACINE600 West Broadway, Suite 1700
San Diego, CA 92101
619/230-080 0
619/230-1874 (fax )
Donald G . Rez
SULLIVAN, HILL, LEWIN, REZ,
ENGEL & LABAZZ O
550 West C Street, Suite 1500
San Diego, CA 92101-3540
619/233-410 0
619/231-4372 (fax )
Jeffrey R . Krinsk
GLANCY FINKELSTEIN & KRINS K
501 West Broadway, Suite 1250
San Diego, CA 92101619/238-133 3
619/238-5425 (fax)
FPA MEDICAL (FEDERAL - SOUTHERN DIST .)Service List - 10/01/9 9
Page 6
COUNSEL FOR DEFENDANT S
*Richard M . Sega lPILLSBURY MADISON & SUTRO LLP
101 West Broadway, Suite 1800
San Diego, CA 92101
619/234-500 0
619/236-1995 (fax)
Darryl SniderSusan S . GonickHELLER EHRMAN WHITE & MCAULIFFE
4250 Executive Square, 7th Floor
La Jolla, CA 92037-9103
619/450-840 0
619/450-8499 (fax )
* Jerry L . MarksKirstin M . WatsonHELLER, EHRMAN, WHITE &
McAULIFFE
601 S . Figueroa Street
40th Floor
Los Angeles, CA 90017-5758
213/689-0200
213/614-1868 (fax)
Walter J . Robinson III
PILLSBURY MADISON & SUTRO LLP
2550 Hanover Stree t
Palo Alto, CA 94304
650/233-4500
650/233-4545 (fax )
* Hugh Steven WilsonKenneth M . FitzgeraldLATHAM & WATKINS701 B Street, Suite 2000
San Diego, CA 92101
619/236-1234
619/696-7419 (fax )
VIA PERSONAL SERVICE
* VIA FEDERAL EXPRESS