in re fpa medical management, inc. securities litigation...
TRANSCRIPT
1
2
3
4
5
6
7
8
9
l0
11
12
13
14
15
16
17
18
19
20
21
22
23
2 4
25
26
27
28
ORIGINAL .__ ..MILBERG WEISS BERSHAD
HYNES & LERACH LL P
WILLIAM S . LERACH (68581) 4 . -BLAKE M . HARPER (115756 )ARTHUR C . LEAHY (149135)SANGEETA G . PATEL (194252)600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone : 619/231-1058
`vjBERGER & MONTAGUE, P .C .
TODD S . COLLINS
MICHAEL L . BLOCKJACOB A . GOLDBERG
1622 Locust Street
Philadelphia, PA 19103Telephone : 215/875-300 0
ICo-Lead Counsel for Plaintiff s
UNITED STATES DISTRICT COUR T
SOUTHERN DISTRICT OF CALIFORNI A
In re FPA MEDICAL MANAGEMENT,
INC . SECURITIES LITIGATION
This Document Relates To :
ALL ACTIONS .
Master F' e Noy
98cv0 8-L(A B)
CLASS A
SECOND AMENDED CLASS ACTION
COMPLAINT FOR VIOLATION OF THE
FEDERAL SECURITIES LAWS ANDSUPPLEMENTAL STATE LAW CLAIM S
DEMAND FOR JURY TRIAL
I lb?)
1 INTRODUCTION AND OVERVIEW
2 1. This is a class action on behalf of all persons who
3 purchased or otherwise acquired the publicly traded securities of
4 FPA Medical Management, Inc . ("FPA" or the "Company") , including
5 FPA's common stock, FPA's 6 .5% convertible subordinated debentures
6 and options to purchase FPA's common stock, between 2/3/97 and
7 5/14/98, inclusive ("Class Period") . The defendants are certain of
8 FPA's top officers and directors and FPA's former largest
9 stockholder, Foundation Health Systems, Inc . ("Foundation
10 Health") . '
11 2 . FPA's insiders made false statements about the purported
12 success of FPA's growth-by-acquisition strategy, FPA's purported
13 success in integrating its acquisitions, and FPA's purported
14 success in improving its medical loss ratio, while they falsified
15 FPA's reported earnings and receivables to create a misleading
16 appearance of growing profitability, thus driving FPA's stock price
17 to as high as $40 per share in 10/97 . They also caused FPA to use
18 its inflated stock to make several acquisitions for millions of
19 shares of its stock . Meanwhile, FPA's insiders sold off almost
20 400,000 shares of FPA stock from their personal portfolios,
21 pocketing over $9 million in illegal insider-trading proceeds .
22 Foundation Health furthered the fraudulent scheme by selling
23 certain loss-ridden health clinics to FPA for over four million
24 shares of FPA stock in 12/96, as FPA's insiders and Foundation
2 5
26 1 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
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
Health created an inflated sales price of nearly $200 million for
those clinics . Defendants thus allowed Foundation Health to record
an artificial profit on the sale, while artificially inflating
FPA's profits over the next nine quarters by recognizing as
revenues some $55 million in "guaranteed access" payments ("GA
payments") by Foundation Health back to FPA . In reality, these $55
million in GA payments were not revenues but a rebate on orI
reduction of the sales price .
3 . After closing on its sale of health clinics to FPA,
Foundation Health was FPA's largest stockholder . Foundation Health
knew that FPA had materially misaccounted for this transaction i n
order to artificially inflate FPA's reported results . To help
boost or maintain FPA's stock price, Foundation Health represented
to the market that it had no intention of selling its FPA stock .
However, contrary to these representations, Foundation Health
quickly sold off all 4+ million shares of its FPA stock a t
artificially inflated prices, pocketing $79 million in illegal
insider-trading proceeds, as soon as it legally could sell without
incurring short-term liability under §16 of the Securities Exchange
Act of 1934 ("1934 Act") .
4 . Defendants pushed FPA's stock to $40 per share in 10/9 7
by inflating reported earnings and issuing materially false
statements about the alleged success of FPA's growth-by-acquisitio n
strategy, FPA's alleged success in integrating acquired companies
(especially the former Foundation Health clinics), FPA' s
purportedly tight cost controls, and FPA's alleged success in
lowering its medical loss ratio .
- 2 - 98cv0928-L (AJB)
1 S . FPA's stock began to fall sharply in late 1997, when FPA
2 was forced to reveal slightly declining revenues and membership,
3 increased accounts receivable, and negative cash flow . With
4 respect to these developments, defendants continued to mislead the
5 market by falsely asserting that they resulted from deliberate
6 management decisions or from one-time events and would not prevent
7 FPA from achieving 1998 and 1999 "earnings per share" ("EPS") of
8 $1 .05-$1 .35+ and $1 .85+, respectively, and 25%-30 06 EPS growth going
9 forward . In 3/98, when FPA's CEO and CFO both left their posts ,
10 defendants continued to assure investors that FPA was on track for,
11 strong 1stQ 1998 results, and would achieve positive cash flow and!
12 EPS of $1 .35 in 1998 .
13 6 . Defendants continued to suppress the truth until 5/15/98,
14 when they suddenly revealed that FPA had incurred a huge lstQ 1998
15 earnings shortfall due to losses at the former Foundation Health
16 clinics and increases in reserves for medical expenditures .
17 Defendants also shocked the market by revealing that FPA would
18 suffer a huge 2ndQ 1998 loss due to, inter alia, $200 million in
19 special charges . These charges included writedowns of $125 million
20 of goodwill from prior acquisitions, including the Foundation
21 Health clinics ; $40 million in uncollectible accounts receivable ;
22 and other unspecified charges . Belatedly, defendants revealed that
23 FPA's financial condition was so desperate that it had sufficient
24 cash to operate for only six more weeks and that FPA faced a
25 liquidity crisis that threatened its survival .
26 7 . In reaction to the startling revelations, FPA's stock
27 fell within days to as low as $2-23/32 per share - a 93% decline
28 from its Class Period high of $40 per share . FPA filed for
3 - 98cv0928-L(AJB)
1 bankruptcy on 7/19/98, and its stock is now worthless because FPA
2 canceled all prior equity interests in emerging from bankruptcy .
3 8 . On 3/31/98, FPA had reported in its annual report on Form
4 10-K, signed by Lizerbram, Dresnick and others, that FPA had assets
5 at 12/31/97 of $830 million . By 6/30/98, nearly $400 million of
6 those assets had somehow disappeared . FPA reported a $500 million
7 loss for the six months ended 6/30/98, 12 times the net income
8 (excluding extraordinary charges) that FPA had previously reported
9 during the five quarters of the Class Period (4thQ 1996 - 4thQ
10 1997) . The 6/30/98 financial statements also showed that goodwill
11 on FPA's balance sheet had shrunk from $466 million at 12/31/97 to
12 $212 million at 6/30/98 . Claims payable, including incurred but
13 not reported expenses, ballooned from $160 million at 12/31/97 to,
14 $340 million at 6/30/98 . FPA only revealed those figures in 10/98,
15 long after the Class Period ended, when they appeared in ai
16 voluminous bankruptcy filing, without discussion or footnotes
17 explanation .
18 9 . FPA's fortunes did not so abruptly turn downward . A
19 significant portion of the previously reported assets and earnings
20 had simply never existed . Rather, during the Class Period, the
21 Individual FPA Defendants, with the partial knowledge and
22 participation of Foundation Health, materially falsified FPA's
23 reported results by :
24 (1) Improperly recording huge amounts of GA paymentsfrom Foundation Health as revenue instead of as a
25 reduction of or rebate on FPA's purchase price fo rFoundation Health's clinics . The impact - which
26 defendants carefully hid from the market throughout theClass Period - was to make FPA's money-losing operations
27 appear profitable ;
28 (2) Recording as revenue excessive amounts ofpurported "shared risk" payments that FPA allegedly had
- 4 - 98cv0928 -L(AJB)
1 "earned ." In fact, the Company had no hope of everreceiving payment on these receivables, Defendant s
2 waited until 5/15/98 - the close of the Class Period - toannounce a writeoff of these worthless receivables ;
3(3) Falsely under-reporting medical expenses by
4 manipulating FPA's "incurred but not reported" ("IBNR")reserves, and by burying, disguising an d
5 mischaracterizing operating costs as goodwill or as partof one-time merger and acquisition charges ;
6(4) Recording excessive amounts of goodwill and by
7 failing to write down the carrying value of goodwill asits impairment became evident ;
8(5) Manipulating FPA's cash position by delaying or
9 pushing out payables and claims to conceal the Company'sgrowing liquidity crisis .
10
10, Taking these manipulations as a whole, the individual FPA11
Defendants, with Foundation Health's active participation and12
knowledge of at least the GA payments, simply invented they13 1
financial results they wanted to report . As a result, FPA was able14
to, and did, report the following sterling but illusory quarterly
15 Iresults (not adjusted for acquisitions under pooling of interests
16
accounting) :17
12/31/96* 3/31./97* 6/30/97 L .3 Q 97 12/31/97*18
Revenue $151 .OM $222 .8M $244 .6M $240 .6M $323 .OM
19 Net Income $ 4 .2M $ 6 .4M $ 8 .1M $ 10 .7M $ 12 .9MEPS $_18 $.20 $ .24 $ .29 $ .30
20* Excluding non-recurring charges .
21
11 . Although FPA never formally restated its financial22
statements before it filed bankruptcy and ceased reporting to the23
Securities and Exchange Commission ("SEC"), it routinely admitted
24to prospective buyers of the Company, beginning in early 1998, that
25
the financial statements it had published during the Class Period26
were fraudulent . In order to show would-be buyers what FPA's true27
financial condition was, FPA's investment advisors prepared a28
spreadsheet that backed out the improper adjustments made durin g
- 5 - 98cv0928 -L(AJB)
1 the Class Period . This was necessary to arrive at far more
2 accurate numbers for 1997 than those numbers that defendants had
3 released during the Class Period . The adjustments backed out
4 included defendants' manipulations with respect to shared risk
5 payments and medical expense reserves .
6 12 . Not only did the Individual FPA Defendants falsify FPA's
7 reported financial results, they repeatedly lied to securities
8 analysts and the market as to the quality of its business and the
9 integrity of its financial reporting practices . As late as March
10 1998, Lash represented publicly that FPA was achieving strong
11 positive cash flow from its core operations and would achieve
12 overall positive cash flow in 1998 . On 3/26-27/98, both Lash and
13 Flam represented publicly that FPA's financial results were
14 tracking expectations and that they "remain encouraged" by the
15 first quarter's performance . As late as 3/31/98, Lizerbram and
16 Dresnick were publicly forecasting strong lstQ 1998 earnings pert
17 share and assuring securities analysts that FPA would have positives
18 cash flow from operations during 1998 and was not suffering any
19 liquidity problems .
20 13 . Public investors who invested based on defendants'
21 material misrepresentations, as described in this Complaint, paid
22 as high as $40 per share for FPA's common stock during the Class
23 Period and suffered millions in damage . However, FPA's insiders
24 and Foundation Health, who knew the truth about how FPA was
25 falsifying its financial results, fared far better . Before FPA's
26 stock price collapsed, FPA's insiders unloaded almost 400,000
27 shares of their FPA stock at artificially inflated prices,
28 pocketing over $9 million in illegal insider-trading proceeds ,
6 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
1 5
16
1 7
18 1
19
20
21
22
2 3
24
25
26
2 7
28
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 :
Defendants Shares SoldFoundationHealth 4,076,08 7
Hassman 98,00 0Lash, S .M . 79,00 0
Lizerbram 87,90 0Dresnick 36,14 0Flam 93,00 0
Totals : 4,470, 127
% of Beneficial
Ownership Sold
100 0
25%56%23 %2%
23%
62%
Total Proceeds
From Sales
$79,000,000$ 2,343,87 0
$ 1,873,161
$ 2,113,635
$ 859,140
S 2 .215 .79 4
588,405,60 0
14 . The price action of FPA's stock, defendants' illegal
insider trading during the Class Period and the later collapse of
FPA's stock are graphically displayed below :
- 7 - 98cv0928 -L(AJB)
1
2
3 50
4
5 40
6
7L 30U)
8
90 20
10
11
1 012
1 3
14 1
15
1 6
17 1
18
19
20
21
2 2
23 1
24
25
26
27
28
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
5121197FPA Insider sells 10,000 sharesfor $185,00 0
.A ~ AN
11/11-12/8197FPA Insiders sell 237,040 sharesfor $6,156,57 6
5197 - 6/9 7Foundation Health sells 4,076,087 sharesfor $79,000,00 0
001/02/97 03/24/97 06/12/97 09/02/97 11/19/97 0211//98 05/04/98
02/11/97 05/02/97 07/23/97 10/10/97 12/31/97 03/24198
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
lOb-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 .
PARTIES
17 . (a) Invesco Enterprises, Phillip Jeffrey North, Patricia
Ann North, Scott Klansky, Michael A . Caristo, George Ehlert ,
- 8 - 98cv0928 -L(AJB)
1 Georgeanne Ehlert, James E . Wright, Fred Redmond, Donald Morando,
2 Bill Henning, Phillip E . Solomon, Donald Kottler, Trustee, Jason S .
3 Asch, Trustee, Gail Krugman Asch, Trustee, Clara C . Asch, Trustee,
4 Ronald E . Simmons, Trustee, Edward S . Murachver, Enette S .
5 Murachver, Thomas Asciutto, Nathan Itzkowitz, Scott L . Silver,
6 Marcia A . Gutowicz, William L . Glosser, Fred Colella, RalphI
7 Tomasso, Michael Giglio, Roger Rubinger, Rick Penick, Coralette
8 Penick, Albert D . Barnabei, Nancy M . Barnabei, Frederick M . Garson,
9 Steven Friedland, Trustee, Natale Longordo, Murray Lebowitz ,
10 Khosrow Shahrooz, and Robert Boose, Lead Plaintiffs pursuant to
11 Court Order dated 8/14/98, each purchased or acquired publicly
12 traded securities of FPA at artificially inflated prices during the
13 Class Period and was damaged thereby . Proposed Lead Plaintiffs
14 Marinus W . Baak, David & Rose Bashour, Michael Blott, Robert Brice,
15 Cheers Investment Club, ELAJ Family Limited Partnership, Dorothy J .
16 Fischer, Fred Greenberg, Christian Iovin, Robert Kahn, Jack L .
17 Kenfield, Luis Maizel, Iris Malek, Robert Quat, Jake Rofman, Ian &
18 Lucille Sacks, Trustee for Sacks Yourick, Inc . PSP, Joel D . Schram,
19 Retirement Plan, O .H . & Ellen Schwartz, Jonathan Sedgh, John
20 Silverman, Fred Sklar, John Solder, Raymond D . Sussman, Moonlight
21 Tran, and Eric Zivitz each purchased or acquired publicly traded
22 securities of FPA at artificially inflated prices during the Class
23 Period and were damaged thereby . The Proposed Lead Plaintiffs are
24 additional representatives of that portion of the Class who were
25 contemporaneous purchasers of FPA securities pursuant to §20A of
26 the 1934 Act .
27 (b) Appendix A hereto identifies each of the separate
28 purchase transactions of the Lead Plaintiffs and Proposed Lead
I- 9 - 98cv0928 -L(AJB)
1 Plaintiffs . The Lead Plaintiffs and Proposed Lead Plaintiff s
2 purchased a total of 260,250 shares and in excess of 259 options t o
3 purchase shares during the Class Period and suffered damage s
4 exceeding $3 million .
5 18 . At all relevant times, FPA was headquartered in Sa n
6 Diego, California . During the Class Per iod, FPA's publicly traded
7 securities traded in efficient markets, i ncluding its common stock ,
8 which traded on the NASDAQ National Market System . During the
9 Class Period, FPA announced or completed the following acquisition s
10 for FPA stock :
11 FPA Share s
Acquisition Date Issued12
Foundation Health 12/96 4,076,08713 Medical Service s
AHI Healthcare Systems, Inc . 3/97 5,797,96 814 HealthCap, Inc . 6/97 1,940,960
Emergency Medical Care, Inc . 8/97 372,95915 Axminster Medical Group, Inc . 9/97 482,372
Health Partners, Inc . 10/97 5,227,273
16 Carolina Health Care Group 10/9 7Cornerstone Physicians Corp . 11/97 1,416,804
17 Avanti Corporate Healt h
Systems, Inc, 1/98 1,402,123
18 Physicians Quality Care/ 1/98 299,165Associates in Managed Car e
19 J .T .M .S .O_, Inc . 2/98 11,432
Meridian Medical Group, Inc . 2/98 1,051,77 0
20 Emergency Treatment Associates 2/98 142,288
Orange Coast Managed Care Services21 and St . Joseph Medical Corp . 3/98 2,828,680
22 19 . (a) Sol Lizerbram was Chairman of FPA and activel y
23 involved in the day-to-day management of the Company . During the
24 Class Period and as part of the fraudulent scheme, Lizerbram sol d
25 87,900 shares of FPA stock at prices as high as $27 .75 per share
26 based on inside information, pocketing over $2 .1 million . On
27 3/25/98 Lizerbram amended his existing employment agreement wit h
28 the Company, decreasing its term to one year and increasing hi s
- 10 - 98cv0928-L(AJB)
1 base pay from $445,000/year to $1,112,500/year and providing that
2 $3+ million in severance payments would be paid to him even if he
3 were terminated for cause .
4 (b) Seth Flam was, until he was fired in 3/98, President ~
5 and Chief Executive officer and a director of FPA . During thel
6 Class Period and as part of the fraudulent scheme, Flam sold 93,000
7 shares of FPA stock at prices as high as $27 .75 per share based on
8 inside information, pocketing over $2 .2 million . on 3/25/98, Flam
9 resigned and entered into a "Consulting and Settlement Agreement "
10 with the Company, providing for his termination for "other than
11 cause" and providing that nearly $3 .6 million in severance payments
12 would be made to him . The agreement also called for him to receive
13 $1,250,000 million in consulting fees, payable within six months .
14 In addition, all the stock options he then held were deemed vested
15 and exercisable . In early 4/98, Flam filed notices under SEC rule
16 144 to sell 264,085 shares of FPA held by a limited partnership
17 controlled by him with a then-market value of more than $4 .2
18 million .
19 (c) Stephen J . Dresnick was Vice Chairman of FPA from
20 10/96 to 3/98 and later The President and Chief Executive Officer
21 of FPA . During the Class Period and as part of the fraudulent
22 scheme, Dresnick sold 36,140 shares of FPA stock at prices as high
23 as $26 .50 per share based on inside information, pocketing
24 $859,140 .
25 (d) Steven M . Lash was, until 3/98 when he was forced
26 out of the position, Executive Vice President and Chief Financial
27 Officer of FPA. During the Class Period and as part of the
28 fraudulent scheme, Lash sold 79,000 shares of FPA stock at price s
- 11 - 98cv0928-L(AJB)
1 as high as $27 .63 per share based on inside information, pocketing
2 over $1 .8 million . On 3/25/98, Lash amended his existing
3 employment agreement with the Company, providing that he no longer
4 act as Chief Financial officer and providing that if his employment
5 was terminated before 9/25/99 and he has executed a Release, his
6 termination would be deemed for "other than cause" and he would
7 receive more than $2 .5 million in severance payments and $1 million
8 in consulting fees . In addition, all the stock options he then
9 held would be deemed vested and exercisable .
10 (e) Howard Hassman was Executive Vice President and a
11 director of FPA . During the Class Period and as part of the
12 fraudulent scheme, Hassman sold 98,000 shares of FPA stock atl
13 prices as high as $27 .09 per share based on inside information,
14 pocketing over $2 .3 million . On 4/1/98, Hassman resigned and
15 entered into a "Consulting and Settlement Agreement" with the
16 Company, providing for his termination for "other than cause" and
17 providing that more than $2 .15 million in severance payments would
18 be made to him . The agreement also called for him to received
19 $1 .25 million in consulting fees, payable within six months . In
20 addition, all the stock options be then held were deemed vested and
21 exercisable . In 3, 4 and 6/98 certain partnerships related to
22 Hassman filed notices under SEC Rule 144 to sell 354,000 shares of
23 FPA with then-market value of more than $2 million .
24 (f) The individuals named in 119(a)-(e) are referred to
25 as the "Individual FPA Defendants ." Because of their positions
26 with FPA, they each knew the adverse non-public information about
27 FPA's business that was being concealed via access to internal
28 corporate documents (including the Company's operating plans ,
- 12 - 98cv0928 -L(AJB)
I budgets and forecasts and reports of actual operations compared
2 thereto), conversations with other corporate officers and
3 employees, and attendance at management and/or Board meetings and
4 thus actually knew the statements being made were false . Despite
5 their duty not to sell their FPA stock under such circumstances,I
6 these defendants nonetheless did so . The Individual FPA Defendant s
7 are liable for the false statements pleaded herein, including those
8 at $$100, 108-09, 112, 115, 120-124, 126, 131, 134, 138, 142, 146,
9 150, 157, 159-61, as those statements were each "group-published "
10 information, the result of the collective action of the Individual
11 FPA Defendants .
12 (g) Lizerbram, Flam, Lash and Dresnick, by reason of
13 their stock ownership, management positions or membership on FPA's
14 Board, were controlling persons of FPA - who would be a liable
15 defendant in this action if plaintiffs were not prohibited from
16 naming it because of its bankruptcy - and had the power and
17 influence, and exercised the same, to cause it to engage in the
18 illegal conduct complained of herein . These defendants are thus
19 liable under §20(a) of the 1934 Act . In addition, each of the
20 defendants controlled one another and thus all are liable under
21 §20(a) as control persons .
22 20 . Foundation Health is the successor by merger to
23 Foundation Health Corp . and Health Systems International, Inc .
24 which merged in 1/97 . In 7/96, Foundation Health Corp . agreed to
25 sell its California and Arizona health clinics to FPA for 4,076,087
26 shares of FPA stock, and closed that sale in 11/96 . Foundation
27 Health is liable for participating in the scheme to defraud
28 purchasers of FPA stock . Foundation Health's participatio n
- 13 - 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
included making false statements about its intention not to sell
its FPA shares and then selling those shares with knowledge that
the Individual FPA Defendants were falsifying FPA's financial
results by improperly accounting for payments being made by
Foundation Health to FPA, which, while publicly characterized as GA
payments, were, in fact, a reduction or rebate of the purchase
price FPA had paid Foundation Health . Foundation Health's false
statement that it was not selling its shares was intended to help
push FPA's stock price higher, so that Foundation Health coul d
quickly unload all its FPA shares at artificially inflated prices .
Despite Foundation Health's duty not to sell its FPA stock under
such circumstances, it nonetheless did so . In addition, Foundatio n
Health was intimately involved in structuring the Foundation
Health/FPA transaction in a manner that would falsify Foundatio n
Health's and FPA's financial results .
THE FRAUDULENT SCHEME
21 . In 1994, FPA was a small physician practice management
company, with revenues of less than $20 million per year . In order
to attempt to rapidly grow FPA's business, FPA went public and
created a trading market in its stock . Then, using its publicly
traded stock, FPA went on an acquisition binge, acquiring 19
companies during 1996 and 1997 . By the spring of 1997, FPA' s
annual revenues had ballooned to over $1 billion, and FPA was
reporting growing earnings, consistently beating analysts'
expectations, Defendants sought to grow FPA by acquiring other
companies until it reached sufficient top-line size, or generate
sufficiently large amounts of revenue, that it would be a n
- 14 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
81
9
10
11
12
13
1 4
15
16
17
18
19
20
21
22
23
2 4
25
26
27
28
attractive acquisition candidate for a large HMO or insurance
company .
22 . In order for FPA's growth-by-acquisition plan to succeed ,
defendants needed to use FPA's common stock as currency to make its
acquisitions . Thus, it was of critical importance to defendants to
make it appear that FPA was achieving profitable growth . In this
way, defendants succeeded in keeping FPA's stock price at high
levels so that FPA stock would appear attractive to the businesses
FPA was attempting to acquire, and so that FPA could make its
acquisitions by issuing the fewest shares possible, thus limiting
the dilutive impact of those acquisitions . Defendants knew that
the only way to keep FPA's stock price at high levels was to
convince investors not only that FPA's rapid expansion plan was
working but also that FPA was achieving strong "same store" orl
"same market" growth, while tightly controlling operating expenses
and lowering its medical expense ratio . Defendants thus caused FPA
to thus report growing operating earnings in 1997 and credibly, if
falsely, forecast continued strong earnings growth in 1998, 1999
and beyond . Defendants falsely represented that FPA's operations
were profitable, that FPA was successfully integrating the acquired
businesses and that FPA was effectively controlling operating costs
and lowering its medical expense ratio . Defendants knowingly and
falsely forecast a 25%-30% five-year FPS growth rate, including
1998 and 1999 EPS of $1 .05-$1 .35+ and $1 .85+, respectively .
23 . A key event in FPA's expansion strategy - and a
transaction that artificially inflated its reported profits
throughout the Class Period - was FPA's 11/96 acquisition of the
California and Arizona medical clinics operated by Foundatio n
- 15 - 98cvd928 -b(AJB)
I Health . Foundation Health needed to rid itself of these clinics
2 because they were losing large amounts of money - over $70 million
3 per year - and because Foundation Health was trying to improve its
4 financial condition so as to position itself for sale to Health
5 Systems International, Inc . FPA's purchase price for those medical
6 clinics was purportedly $197 million, including 4,076,087 shares of
7 FPA stock . Because Foundation Health and FPA both used the same
8 accounting firm (Deloitte & Touche) , this transaction gave the
9 Individual FPA Defendants and Foundation Health a uniqu e
10 opportunity to manipulate the accounting for the transaction to
11 falsify the financial results of Foundation Health and FPA in a
12 manner that would benefit both . The Individual FPA Defendants and
13 Foundation Health inflated the purchase price of Foundation
14 Health's clinics by $55 million, enabling Foundation Health to
15 record a profit on the sale, while providing that over the next
16 nine quarters, beginning in the 4thQ 1996, Foundation Health would
17 pay the $55 million back to FPA . The Individual FPA Defendants
18 then caused FPA to improperly recognize the $55 million as revenue
19 instead of as a reduction of the purchase price, thereby materially
20 inflating FPA's reported revenues and earnings .
21 24 . Foundation Health benefitted by receiving payment of an
22 inflated price for its clinics, but this price was paid in shares
23 of FPA stock, which Foundation Health knew to be artificially
24 inflated by defendants' ongoing fraud- Accordingly, it was
25 Foundation Health's intent from the beginning to sell its FPA stock
26 at the earliest possible juncture .
27 25 . with respect to the Foundation Health transaction, the
28 investment community was concerned that the large holding of FP A
16 98cv0928 -L(AJB}
1 stock in The hands of Foundation Health would "overhang" The market
2 in FPA stock, having a depressive effect on The price . As a
3 result, FPA stock fell from $28-3/4 per share on 2/26/97 to
4 $14-15/16 per share on 4/25/97 . This drop of almost 50% in FPA's
5 stock price alarmed Foundation Health, which desperately wanted to
6 sell its 4+ million shares of FPA stock . The price drop also
7 halved The value of The FPA insiders' stockholdings, greatly
8 alarming The Individual FPA Defendants, as well as endangering The
9 acquisitions FPA was in The process of closing, and made i t
10 impossible for FPA to continue to make The large acquisitions that
11 were indispensable to FPA's continued growth .
12 26 . To halt this decline in FPA's stock, The Individual FPA
13 Defendants repeatedly asserted The propriety of The accounting
14 treatment for The Foundation Health transaction . To allay investor
15 concerns about The overhang of The FPA shares owned by Foundation
16 Health, The Individual FPA Defendants and Foundation Health assured
17 investors that Foundation Health "does not currently intend" to
18 sell The 4+ million shares of FPA stock it held . In addition,
19 defendants represented that "we successfully executed our growth
20 strategy" ; that FPA's "fundamentals are very strong" ; that FPA had
21 "built a solid foundation for growth internally and through
22 acquisitions" ; that FPA "continued to show margin improvements
23 based on further integration of acquisitions" ; that "The
24 integrating and consolidation of The Foundation Health Clinics is
25 ahead of plan" ; that The former Foundation Health clinics "were
26 performing ahead of expectations" and "ahead of budget" ; that
27 despite FPA's "remarkable growth . . . there is still a tremendous
28 amount of growth available . . . [and] we believe that this growt h
17 - 98cv0928 -L(AJB)
1 _ ., will continue in a very robust manner" ; and that FPA allegedly
2 had operating earnings of $ .20 in lstQ 1997, which was better than
3 The market had expected . These materially false and misleading
4 statements halted The decline in FPA stock and inflated it to
5 higher levels during 5/97 . As FPA's stock moved higher, FPA
6 resumed its acquisition program, The individual FPA Defendants
7 began to sell off their FPA stock and, contrary to Foundation
8 Health's assurances, it quickly unloaded its entire position of FPA
9 stock - 4,076,087 shares - during 5/97-6/97, pocketing $79 million
10 in illegal insider trading-proceeds .
11 27 . Throughout The balance of 1997, The Individual FPA
12 Defendants caused FPA to improperly recognize millions in revenues
13 from The Foundation Health payments and otherwise falsified FPA's
14 financial statements by not properly writing down millions in
15 goodwill arising from failed or failing acquisitions ; by
16 manipulating its reported cash to present a false picture of its
17 liquidity ; and by falsifying FPA's IBNR medical cost allowance
18 through The use of acquisitions and shared-risk receivables . The
19 Individual FPA Defendants thus caused FPA to continue to report
20 strong - indeed, better-than-expected - operating earnings, while
21 continuing to increase FPA's forecasted EPS for 1998 and 1999 to
22 $1 .08-$1 .47 and $1 .85-$1 .88, respectively . As and after The
23 Individual FPA Defendants reported FPA's purported "record" 2ndQ
24 1997 EPS of $ .24, they told investors that FPA's business
25 "continued to perform above expectations as our integration plans
26 provide positive sequential results" ; that "all integrations are
27 proceeding on or ahead of schedule" ; and that "many areas of The
28 Company are performing better than expected ." The Individual FPA
- 18 - 98cv0928 -L(AJB)
1 Defendants emphasized that these results were partly due to a
2 "better than expected ('better than budget') performance by The
3 Foundation Health centers ." As a result, FPA's stock skyrocketed
4 higher - reaching a high of $40 per share in 10/97 . This purported
5 strong financial and stock performance enabled The Individual FPA
6 Defendants to cause FPA to make several acquisitions during The
7 Class Period, including HealthCap, Inc ., Health Partners, Inc .,
8 Cornerstone Physicians Corp ., AHI Healthcare Systems, Avanti
9 Corporate Health Systems, Inc . and Meridian Medical Group, b y
10 issuing over 9 .4 million shares of FPA stock at artificially
11 inflated prices and arranging needed financing, including a $275
12 million credit facility through Lehman Brothers . It also enabled
13 The Individual FPA Defendants to sell off almost 400,000 shares of
14 their FPA stock at artificially inflated prices, pocketing over $9
15 million in illegal insider-trading proceeds .
16 28 . When The Individual FPA Defendants reported FPA's
17 purported "record" 3rdQ 1997 operating EPS of $ .29, they attributed
18 these results to "The continued consolidation of acquisitions and
19 synergy achievements and improvements in production ." FPA's stock
20 began to decline, however, as FPA revealed a slight decline in
21 enrollment and doctors and a decline in revenues to $241 million in
22 The 3rdQ 1997 from $245 million in The 2ndQ 1997 . To prop up The
23 stock price, The Individual FPA Defendants falsely assured
24 investors that these declines were expected and resulted from The
25 "intentional elimination of unprofitable accounts" resulting from
26 recent acquisitions, which decreased The quarter's revenues by $11
27 million . The Individual FPA Defendants also falsely told investors
28 that a sharp increase in FPA's accounts receivable and negativ e
- 19 -- 98cv0928-L(AJB)
I operating cash flow in The 3rdQ were not a cause for concern but
2 were The expected result of FPA's rapid growth and acquisition
3 program . The Individual FPA Defendants also publicly stated that
4 payors were not contesting FPA charges ; that all FPA receivables
5 were collectible ; that cash flow from FPA's core operation wadi
6 strong, positive and growing ; and that FPA still expected 25%-30%
7 "same store" patient growth and 50% EPS growth in 1998, to $1 .35+
8 per share, and 25%-30% EPS growth going forward . The Individual
9 FPA Defendants also assured investors that "we have properl y
10 situated our California-based operations and continue to manage
11 this part of our network effectively," and that all California
12 acquisitions "have been fully integrated . "
13 29 . At The same time, The Individual FPA Defendants were well I
14 aware of The Company's liquidity problems at least as early as
15 November 1997 . FPA began in November to push payable due in fiscal
16 year 1997 to fiscal year 1998 so as to improve The Company's cash
17 position at 12/31/97 . In November 1997, PPA contacted Optimal
18 Integrated Solutions, Inc ., a supplier of computer equipment and
19 consulting services to FPA and stated that it would defer payments
20 due to Optimal until after The first of The new year to improve
21 FPA's cash position on its year end financial statements . The
22 amounts due were in The millions of dollars .
23 30 . In late 1/98, The Individual FPA Defendants represented
24 that FPA's purported "record" 4thQ 1997 results were due to its
25 "ability to successfully integrate [its] medical management
26 technologies ." The Individual FPA Defendants continued to tell
27 investors that FPA had "successfully integrated several
28 acquisitions, reducing their medical loss ratios and improving
20 - 98cv0928 -L(AJB)
1 their financial performance while FPA's existing operations
2 continued to improve . "
3 31 . In January 1998, California's Department of Corporations
4 ("DOC") conducted an orientation examination of FPA's California
5 operations which found "certain financial irregularities ." These
6 were brought to FPA's attention by The DOC no later than 3/12/98 by
7 a Confidential Report, which requested a response within 30 days .
8 32 . In late 3/98, when FPA's CEO and CFO both suddenly left
9 their posts at FPA, The Individual FPA Defendants said The CEO
10 "helped to grow a great company" but was now leaving for personal
11 reasons and that The CFO job had gotten "too big" for one person to
12 handle . The Individual FPA Defendants falsely assured investors
13 that FPA's "business continues to track according to expectations,"
14 that they were "encouraged" by FPA's business performance and
15 "excited" by its prospects, that FPA had no liquidity problems, and
16 that FPA would achieve positive cash flow in 1998 with lstQ EPS of
17 $ .30-$ .31 and 1998 EPS of over $1 .35 . FPA's stock traded as high
18 as $16-1/2 per share on 4/6/98 .
19 33 . Despite these representations, according to a Cease and
20 Desist Order issued by The DOC, in or about April 1998, FPA stopped
21 paying certain providers . By 5/29/98, there was a backlog of
22 unpaid, uncontested claims in excess of 45 days in The amount of $9
23 million . In The first five months of 1998, FPA's working capital
24 deteriorated from a deficit of $4 .0 million to a deficiency of
25 $32 .3 million .
26 34 . On 5/15/98, The Individual FPA Defendants finally made a
27 series of shocking revelations that contradicted their positive
28 statements during The Class Period, including their recen t
- 21 - 98cv0928 -L(AJB)
1 assurances of strong 1stQ 1998 EPS and improving cash flow . First,
2 they reported disastrous lstQ results for FPA - EPS of only $ .O1
3 compared to The $ .30-$ .31 forecast - admitting that in prior
4 periods FPA had not set aside enough IBNR medical claims reserves
5 and that The former Foundation Health clinics had suffered a $5+''
6 million loss . The Individual FPA Defendants admitted that if FPA
7 could not make The Foundation Health clinics profitable, it would
8 leave The Foundation Health markets . Equally serious, they
9 revealed that FPA would be forced to take $200 million in write-
10 offs - $125 million for goodwill impairment (mostly Foundation
11 Health), $40 million in uncollectible accounts receivable and $30+
12 million in other charges - thus admitting they had over-valued
13 FPA's earlier acquisitions and lied about The collectibility of its
14 receivables . The Individual FPA Defendants also revealed that FPA
15 was firing employees and closing facilities, imposing hiring and
16 capital spending freezes, and implementing procedures to control
17 overhead spending- The Individual FPA Defendants also admitted
18 that FPA was in a liquidity crisis - FPA had maxed-out, and
19 defaulted on, its existing credit lines, lacked cash to operate for
20 more than six weeks, could not afford to pay for necessary
21 improvements in its information and accounting systems, and
22 desperately needed additional financing to survive .
23 35 . As is described in detail below at ¶¶39-78, FPA's
24 reported financial results were phony . While FPA has never
25 formally restated any financial statements, FPA admitted to
26 prospective buyers of FPA beginning in 5/98, that FPA's prior
27 publicly-released accounting numbers were fraudulent . Investment
28 advisors hired by certain of The Individual FPA Defendants prepare d
- 22 - 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
a spreadsheet backing out The adjustments that had previously been
made with at least Lash's knowledge, including adjustments of
shared risk revenue and IBNR reserves, to show would-be buyers wha t
IFPA's true financial condition was .
36 . In response to the 5/15/98 announcement, FPA's stoc k
price plunged from $11-15/16 per share on 5/14/98 to a closing
price of $5-1/2 per share on 5/15 and to $2-23/32 per share three
days later, falling 75% - on astonishing trading volume of 4 4
million shares in just four trading days - ending up 93% lower than
its Class Period high of $40 per share . On 7/19/98, FPA filed fo r
bankruptcy court protection . The stock is now worthless becaus e
all equity interests in FPA were canceled in FPA's bankruptcy .
37 . Each of The positive statements described herein abou t
FPA's business during The Class Period was materially false and
misleading when issued . Defendants also failed to disclose, inte r
alia, The following adverse information that was then known only t o
defendants due to their access to internal FPA data and disclosure
of which was necessary to make The statements made not misleading :
(a) Defendants falsified FPA's reported results for Th e
4thQ 1996 , as well as all four quarters of 1997, by misaccounting
for The Foundation Health acquisition, by manipulating reserves for
medical expenses to artificially low levels , by burying and thu s
misaccounting for operating costs in one-time special charges
incurred in acquisitions, by refusing to write down impaired
goodwill from The Foundation Health and other acquisitions, and b y
engaging in The other accounting tricks and artifices, all as
detailed at ¶ 39-78 ;
- 23 - 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
(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
I newly-acquired operations, thereby concealing The poor growth rat e
for FDA'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, toi
The falsification of its financial results as detailed at $T39-78 ;
(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 arti ficially 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 thei r
treating physicians, resulting in increasing customer complaints
and physician hostility, which was having an adverse impact o n
IFPA's ability to retain existing members, to attract new members ,
and to retain existing or obtain new treating physicians ;
- 24 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
1 0
11
12
13
1 4
15
16
17
18
19
20
21
22
2 3
24
25
26
27
28
(g) To preserve cash and to mask The Company's
deteriorating cash position, defendants were causing FPA to not pay
claims and suppliers in a timely fashion, such that doctors refused
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 had
historically been The case ;
(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 FPA'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 .
38 . Defendants consistently lied about The Company's
business, and concealed its precarious financial condition by
deliberately manipulating its reported financial condition and
results of operations . The fraudulent scheme and course o f
- 25 - 98cv0928 -L (AJB)
1 business : (i) deceived The investing public regarding FPA's
2 products and business ; (ii) deceived The commercial markets
3 regarding FDA's success with its business ; (iii) artificially
4 inflated The price of FDA's securities ; (iv) caused plaintiffs and
5 other members of The Class to purchase or otherwise acquire FPA
6 securities at inflated prices ; (v) deceived The owners and managers
7 of other companies to induce them to sell their businesses to FPA
8 in return for FPA stock ; (vi) permitted FPA to acquire several
9 companies by issuing millions of shares of FPA stock at artificia l
10 prices ; and (vii) permitted The Individual FPA Defendants and
11 Foundation Health to dispose of 4,470,127 shares of FPA stock at
12 artificially inflated prices, pocketing over $88 million in illegal
13 insider-trading proceeds .
14 DEFENDANTS ' FRAUDULENT FINANCIAL STATEMENTS
15 39 . Defendants used several methods to misreport FPA's
16 financial results : (I) they improperly accounted for FPA's
17 acquisition of Foundation Health, especially with regard to The $55
I8 million rebate that defendants caused FPA to recognize as revenues
19 over nine quarters ; (ii) they deliberately recorded excessive
20 restructuring charges in FPA's accounting for acquisitions, burying
21 in those charges ordinary operating expenses ; and (iii) theyI
22 understated FPA's medical cost accruals by improperly recognizing
23 shared-risk payments that were uncollectible and that were
24 deliberately overstated to meet earnings estimates . The effect of
25 these manipulations was to materially overstate revenues and
26 earnings and to conceal FPA's deteriorating cash position and
27 worsening operating condition . At The same time, defendants
28 continually lied to securities analysts and The market ,
26 - 98cv0928 -L(AJB)
1 misrepresenting that FPA's IBNR reserve was conservative, that The
2 Foundation Health and other acquisitions were being successfully
3 integrated, that costs were being well-managed, and that The
4 Company was positioned for long-term earnings growth . These false
5 and misleading statements are detailed in ¶$99-161 below .
6 40 . Defendants caused FPA to report The following quarterly
7 results during 1997 (not adjusted for acquisitions under pooling of
8 interests accounting) :
9 12/31/96* 3 31 97* 5]_30L97 9/30/97 . 12/31/97 *
10 Revenue $151 .OM $222 .8M $244 .6M $240 .6M $323 .OM
Net Income $ 4 .2M $ 6 .4M $ 8 .1M $ 10 .7M $ 12 .9 M
11 EPS $.18 $ .20 $.24 $.29 $ .30
12 * Excluding non-recurring charges .
13 41 . Defendants caused FPA to report these results in press
14 releases issued after The quarter end and in Form 10-Qs filed with
15 The SEC for each of The quarters ended 3/31/97, 6/30/97 and
16 9/30/97 . The Form 10-Qs, signed by Flam and Lash, represented that
17 "in The opinion of management" The accompanying financial
18 statements included "all normal adjustments (consisting only of
19 normal recurring adjustments) necessary for a fair presentation" of
20 FPA's results .
21 42 . The 12/31/96 and 12/31/97 results were reported in press
22 releases and in addition, incorporated in FPA's financial
23 statements included in Form 10-Ks filed with The SEC . The Form
24 10-Ks, signed by defendants Dresnick and/or Lizerbram, included
25 representations that The financial statements included therein were
26 presented in conformity with Generally Accepted Accounting
27 Principles ("GAAP") . The 12/31/96 results were also included in
28 Joint Proxy/Registration Statements filed with The SEC i n
27 - 98cv0928-L (AJB)
1 connection with The acquisitions of Health Partners, Meridian
2 Medical Group, St . Joseph Medical Corp . and Orange Coast Managed
3 Care Services during 1997 and 1998 . Defendants Flam, Lizerbram and
4 Hassman signed one or more of these Registration Statements .
5 43 . These representations were false and misleading when
6 made, as FPA's financial statements presented during The Class
7 Period were not a fair presentation of FPA's results and were
8 presented in violation of GAAP and SEC rules .
9 44 . GAAP are those principles recognized by The accounting
10 profession as The conventions, rules and procedures necessary to
11 define accepted accounting practice at a particular time . SEC
12 Regulation S-X (17 C .F .R . §210 .4-01(a)(1)), states that financial
13 statements filed with The SEC that are not prepared in compliance
14 with GAAP are presumed to be misleading and inaccurate, despite
15 footnote or other disclosure . Regulation S-X requires that interim
16 financial statements must also comply with GAAP .
17 45 . Defendants caused FPA to falsify its reported financial
18 results through its improper accounting for GA payments associated
19 with its acquisition of Foundation Health, improper use of special
20 charges in connection with various acquisitions, unjustified
21 overaccrual of shared-risk payments that it used to offset
22 operating expenses, and improper accounting for goodwill .
23 The Foundation Health Deal Was Used toInflate FPA's Earnings and Asset s
24
46 . In 7/96, FPA agreed to make its largest acquisition ever,25
consisting of medical clinics and associated physician practices of
26Foundation Health in California and Arizona . Foundation Health's
27clinics were losing over $70 million per year, and Foundation
28Health desperately wanted to rid itself of these loss-ridden
- 28 - 98cv0928-L(AJB)
I operations to dress itself up for sale . For its part, FPA needed
2 to make acquisitions to show growth and, in addition, to have an
3 excuse to take charges to earnings with which to mask its own
4 deteriorating financial condition . Defendants' scheme involved
5 dumping ordinary operating expenses in special charges, in
6 violation of GAAP, to deceive The public with respect to its
7 operating performance .
8 47 . Because both FPA and Foundation Health used The same
9 accounting firm, this allowed The Individual FPA Defendants and
10 Foundation Health to structure The purchase of The Foundation
11 Health clinics in a contrived manner that manipulated The financial
12 results of both Foundation Health and FPA . The Individual FPAI
13 Defendants caused FPA to deliberately pay an inflated purchase
14 price of almost $200 million - including 4,076,087 FPA shares of
15 stock . This inflated price enabled Foundation health to report an
16 after-tax gain of over $20 million, thus materially assisting
17 Foundation Health in positioning itself for sale to Health Systems
18 International, Inc . Not only did The sale improve Foundation
19 Health's financial position via The $20 million gain, but also it
20 allowed Foundation Health to rid itself of loss-ridden operations .
21 48 . For The Individual FPA Defendants, The key to The
22 transaction lay in Foundation Health's rebate of $55 million of The
23 purchase price to FPA, over nine quarters, beginning in The 4thQ
24 1996 and continuing for each of The quarters in 1997 and 1998 . The
25 purported purpose of these GA payments was to compensate FPA for
26 continuing to operate The money-losing clinics to guarantee
27 patients access to health care, but The real purpose was to permit
28 FPA to amortize as goodwill The excess purchase price over thirt y
29 - 98cv0928 -L(AJB)
I years, while taking The GA payments directly into revenues and
2 earnings as they were received each quarter-
3 49. The Individual FPA Defendants caused FPA to recognize
4 these GA payments as income in each of those quarters, although, in
5 fact, as The parties to The transaction understood, The GA payments
6 were, in fact, a reduction in or rebate of The purchase price paid
7 by FPA for The Foundation Health clinics . Because of this
8 accounting manipulation, The Individual FPA Defendants were able to
9 artificially inflate and falsely manipulate FPA's reported earning s
10 during The 4thQ 1996 and each of The quarters of 1997 . This extra
11 revenue represented pure profit for FPA . This is because FPA had
12 to report The expenses it incurred in connection with The former
13 Foundation Health medical clinics it now owned regardless of
14 whether it received GA payments . Absent The manipulated structure
15 of The Foundation Health transaction, The Individual FPA Defendants
16 would not have had The additional millions of dollars in revenue to
17 report each quarter for FPA represented by The GA payments .
18 Likewise, GA payments served to lower The medical loss ratio,
19 defined as The "Medical Services Expenses" divided by The total
20 "Operating Revenues . "
21 50 . Although FPA disclosed obliquely The existence of The GAI
22 payments, defendants did not reveal The amount being recorded in
23 any given quarter or The impact The payments had on FPA's earnings
24 and ratios when they reported FPA's operating results during The
25 Class Period . Defendants said not a single word about The GA
26 payments in FPA's quarterly or annual financial statements .
27 Accordingly, at any time before 5/15/98, an investor would have had
28 to have read page 95 of FPA's 10/4/96 Registration Statement, pag e
- 30 - 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
89 of FPA's 2/13/97 Registration Statement or one of a very few
specific securities analysts' reports in order even to have known
of The existence of The GA payments . Even then an investor would
not have known how much of The GA payments were recorded in a given
quarter . The magnitude of The GA payments being taken and The
impact on FPA's financial results and medical loss ratios wa s
revealed only after The close of The Class Period . FPA's Form 10-Q
for The period ended 3/31/98, filed on 5/15/98, was The first timel
that defendants disclosed The material impact of The GA payments onl
FPA's lstQ 1998 and 1997 financial results . With respect to The
3/31/98 quarter, The 10-Q stated :
Revenue growth was adversely impacted by a decrease in
administrative support payments (primarily related to The
acquisition of medical groups and related health care
centers from a predecessor to Foundation Health Systems,
Inc . consummated in late 1996) from $12 .7 million in The
quarter ended March 31, 1997 to $6 .5 million in The
quarter ended March 31, 1998 .
Thus, to explain partially its poor results in The first quarter of
1998 as compared to The first quarter of 1997, FPA revealed that i t
had recorded $12 .7 million in GA payments in lstQ 1997 . That
quarterly figure alone was nearly 25% of all The GA payment s
I supposed to have been made over The nine quarters! Absent thi s
huge GA payment, FPA would have recorded a loss for lstQ 1997 of
$6 .3 million. Instead, with The $12 .7 million in GA payments, FPA
reported income (excluding nonrecurring charges) of $6 .4 million .
I Similarly, in The absence of these GA payments, FPA's medical los s
ratio for The quarter would have increased from a reported 71% to
75 .2% . Defendants' failure to disclose The effect of GA payment s
`on FPA's quarterly consolidated statements of operations, and The
- 31 - 98cv0928 -L(AJB)
1 materiality of The GA payments' impact on FPA's revenues, earnings,
2 and medical loss ratios, misled investors and violated GAAP .
3 51 . Moreover, since GA payments are nonrecurring, or "unusual
4 or infrequent, " The Individual FPA Defendants caused FPA to violate
5 GAAP by failing to have The GA payments classified as a line item
6 on FPA's consolidated statement of operations in FPA's FY96 and
7 FY97 Form 10-Ks . Defendants created The materially false illusion
8 that FPA's core operations were healthy and strong .
9 52 . In connection with The Foundation Health deal, defendants
10 caused FPA to inflate not only revenue, by means of GA payments,
11 but also assets, by means of inflated goodwill . Goodwill is The
12 difference between The purchase price and The value of The assets
13 acquired . Since The assets acquired were not worth anywhere near
14 $200 million, defendants caused FPA to record a large amount of
15 goodwill, which FPA sought to amortize over 30 years . Moreover,
16 amortization expense was excluded from FPA's earnings before
17 interest, tax, depreciation and amortization ("EBITDA") by
18 defendants, and thus did not reduce what they represented was FPA's
19 core operating results . During The Class Period, The Individual
20 FPA Defendants did not write down The value of FPA's goodwill to
21 its true value (which was minimal), as GAAP requires, because to do
22 so would have illuminated defendants' phony accounting for The
23 acquisition . Rather, as of 12/31/97, defendants increased The
24 amount of FPA's goodwill attributable to The assets acquired from
25 Foundation Health by more than $30 million in violation of GA-AP .
26 This dramatically improved FPA's core operating results .
27 53 . The GA payments were a de facto reduction in or rebate of
28 The purchase price and should have been accounted for as such . See
- 32 - 98cv0928 -L(AJB)
1 FASB Statement of Concept No . 5, ¶83, Accounting Principles Board
2 Opinion ("APB") No . 16, ¶911 and 78 . FPA's obligation to keep The
3 money-losing operations open reduced The value of The acquisition,
4 which reduction should have been reflected in The purchase price .
5 However, in order to boost future revenue and earnings and current
6 assets, defendants caused FPA to overstate The purchase price by
7 not offsetting The GA payments against The purchase price, but took
8 those payments directly into earnings .
9 Manipulating and Failing
to Record Medical Expenses
10
54 . FPA's interim and annual 1996 and 1997 results were also
11
false and materially misstated due to The Individual FPA12
Defendants's failure to properly record medical expenses, including13
their manipulation of IBNR . (IBNR are costs associated with
14healthcare services that have been incurred during The financial
15reporting period but that have not been reported to FPA until after
16The financial reporting date . AICPA Statement of Position 89-5 .)
17
55 . GAAP, as set forth in SFAS No . 5, requires that losses18
which are both probable and can be reasonably estimated should be19
accrued as a charge against income .20
56 . The Individual FPA Defendants significantly understated21
FPA's ongoing medical expenses by recording one-time restructuring22
charges associated with mergers and acquisitions that exceeded by23
30% to 40% The actual expected merger and acquisition costs .
24Ultimately, when these costs were not used up or absorbed, FPA
25would reverse The charge and add them back into earnings . Thus,
26FPA merger charges would be "below The line" and excluded from
27
EBITDA and The subsequent reversal of The charges would be a28
reduction in operating expense and included in EBITDA . The
- 33 - 98cv0928 -L(AJB)
1 Individual FPA Defendants did this because securities analysts
2 typically value a company based on operating earnings and give less
3 weight to one-time charges .
4 57 . The Individual FPA Defendants also made improper
5 adjustments in connection with its merger charges . When FPA
6 acquired other companies, defendants arbitrarily assigned operating
7 expenses from FPA's poorly performing operating areas to The
8 acquisition . For example, when FPA acquired Orange Coast, debits
9 from FPA's former Foundation Health clinics in Sacramento wer e
10 assigned to that acquisition, which then became goodwill amortized
11 over many years . This increased operating earnings and decreased
12 cost ratios, again falsely making FPA's results appear stronger
13 than they were .
14 58 . Before FPA acquired a practice, defendants also
15 frequently took The IBNR accrual on The books of The acquired
16 company and arbitrarily increased it by 20% . Typically, The added
17 IBNR accrual was not actually necessary and would be reversed in
18 subsequent periods to decrease operating expenses and increase The
19 Company's earnings going forward . For example, when FPA acquired
20 Axminster in 3rdQ 1997, The Individual FPA Defendants manipulated
21 Axminster's results to artificially inflate FPA's earnings-
22 Axminster had historically been on a cash basis for financial
23 reporting purposes and thus had no accrual for IBNR . FPA's finance
24 accounting department calculated that, to convert Axminster to an
25 accrual basis, Axminster needed to accrue $900,000 for IBNR . Lash
26 overruled this calculation and arbitrarily decreed that Axminster's
27 accrual should be $2 .5 million . The increase in IBNR did not
28 immediately affect FPA's results because it was recorded by
- 34 - 98cv0928 -L(AJB)
i Axminster pre-merger ; it only affected Axminster`s net equity . The
2 increase in IBNR did not matter to The persons who were selling
3 Axminster to FPA, because The acquisition price for Axminster was
4 already set . Right after The acquisition closed, Lash declared
5 that The Axminster IBNR accrual was higher than required and
6 instructed The FPA finance department to reduce The accrual by $1 .6
7 million as a credit (reduction) to medical services expense . This
S manipulation was thus used to increase FPA's operating income by
9 $1 .6 million and to reduce expense ratios .
10 59 . Ultimately, however, defendants could not continue to
11 conceal The growing medical expenses and, after Flam and Lash
12 departed, FPA's lstQ 1998 results were adversely affected by higher
13 medical expenses, which were more than 79% of revenues . FPA's
14 interim 1997 quarters' EPS were each overstated by at least 50% due
15 to The individual FPA Defendants's failure to properly accrue
16 medical expenses .
17 Manipulation of Receivables , Including Shared Risk Receivable s
18 60 . During The Class Period, The Individual FPA Defendants
19 caused FPA to use unjustifiable and unreasonable estimates of
20 "shared risk" receivables . FPA was entitled to receive portions of
21 cost savings accomplished by The network . At The end of a year,
22 FPA would receive refunds from certain HMOs after it was determined
23 that The HMOs had in fact made savings on certain contracts .
24 Recording such receivables involved estimating The amount FPA would
25 ultimately receive in "shared risk" payments .
26 61 . At The end of 1996, FPA's true earnings were not at The
27 levels that FPA management previously had forecast to The market .
28 To falsify and manipulate upward those earnings, Lash instructe d
- 35 - 98cv0928 -L(AJB)
1 The Finance Department for California to use higher estimated rates
2 per covered member than The Company had in The past . The Finance
3 Department personnel told Lash that increases were not justified
4 and The amounts would ultimately not be collected . Nonetheless, in
5 order to meet The forecasts, Lash caused The per member rates to be
6 increased . This resulted in FPA decreasing its operating expenses
7 by millions of dollars and enhancing earnings by millions of
8 dollars, even though defendants knew that it was unlikely they
9 would ever collect such revenues .
10 62 . As part of preparing The 2ndQ 1997 results, FPA's finance
11 department noted that The number of covered lives related to AHI
12 practices had dropped precipitously . This impacted directly on The
13 shared risk accrual, because it was calculated using a per member
14 per month ("PMPM") rate multiplied by The number of members .
15 Because a decrease in The number of members would have resulted in
16 a decrease in The shared risk accrual and a decrease in earnings,
17 Lash told The accounting staff that The hard data showing a decline
18 in AHI covered lives "can't be right ." Lash then instructed The
19 staff to use The number of covered lives as shown at The time of
20 acquisition rather than The reduced number The Company's current
21 data showed . The use of The wrong number of covered lives caused
22 FPA's operating income to be overstated by millions of dollars .
23 63 . FASB Statement of Concepts No . 5 does not permit
24 recognition of revenues and gains until they are both earned and
25 collectible . Gains that are contingent upon other events should
26 not be recognized until The other events occur . Thus, pursuant to
27 GAAP, gain contingencies should not be recognized . See SFAS No . 5,
28 ¶17 .
- 36 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1 6
17
18
19
20
21
2 2
23
24
25
26
27
28
64 . Contrary to GAAP, and contrary to fair reporting, Lash
and others caused The Company to use payment accruals for shared
risk payments in excess of The amount The Company was realizing
from those investments . The inflated rates from 1996 were carried
over into 1997 and, despite evidence (lack of collection) that
these rates were not justified, Lash and others caused The Company
to continue to use these rates . This improper accrual of shared
risk payments resulted in FPA accumulating millions of dollars in
receivables on its books that defendants knew would never be
collected .
65 . When receivables began to grow increasingly delinquent,
The Individual FPA Defendants caused FPA to fail to properly accrue
losses on its shared-risk and other receivables, further causing
its 1997 results to be materially misstated .
66 . GAAP, as set forth in SFAS No . 5, requires that losses
from uncollectible receivables should be recorded either on an
individual or an aggregate basis when it is probable a loss has
been incurred . See SFAS No . 5, $22 . Moreover, pursuant to GA-AP,
as set forth in SFAS No . 5, revenue should not be recognized unless
it is realizable or collectible .
67 . The Individual FPA Defendants' over-estimation of FPA's
shared-risk revenues from these agreements was compounded by their
failure to properly and timely accrue reserves for uncollectible
receivables . In fact, during The Class Period, FPA's receivables
increased much faster than did its sales, due to (i) FPA's over-
accrual of revenues where ultimate collection was doubtful, and
(ii) its material shorting of reserves .
- 37 - 98cv0928 -L(AJB)
1 68 . Ultimately, in The 2ndQ 1998, FPA wrote down these
2 receivables by $40 million . This amount exceeds 70% of all The net
3 income FPA reported during The Class Period, before special
4 charges . (Arid as is discussed herein, those figures were severely
5 inflated by other means, such as recording GA payments as revenue .)
6 These writedowns were The direct result of defendants' failure to
7 record timely and adequate reserves during The Class Period and The
8 overstatement of revenue from shared-risk agreements .
9 Failure to Properly Value Goodwill
10 69 . Goodwill was by far The largest asset on FPA's balance
11 sheet, comprising 53% and 56% of total assets in 1996 and 1997,
12 respectively . Thus, The proper measurement and valuation of
13 goodwill was crucial to FPA's determination of its assets and
14 earnings . Contrary to GAAP, The Individual FPA Defendants failed
15 to properly measure and report goodwill . Goodwill became The
16 favored place for defendants to hide FPA's expenses, as goodwill
17 could be amortized over 25-30 years and thus had a minimal impact
18 on earnings . In fact, whenever FPA had to accrue a liability,
19 finance department personnel would joke that The Company would
20 "credit The liability and debit either goodwill or restructuring
21 charges," neither of which would adversely affect operating
22 earnings .
23 70 . As part of The acquisition of practices from Foundation
24 Health, FPA recorded goodwill of more than $150 million, reflecting
25 The excess of The purchase price over The fair value of The net
26 assets acquired . As described above, defendants caused FPA to
27 improperly overstate The acquisition price of The Foundation Health
28 clinics, thereby inflating The amount of goodwill associated wit h
- 38 - 98cv0928 -L(AJB)
1 The acquisition . FPA amortized The goodwill as charges against
2 earnings over 30 years, thus minimizing The impact of such charges .
3 71 . During 1997, The practices acquired from Foundation
4 Health accumulated such severe losses that defendants should have
5 reviewed The recoverability of The goodwill associated with this
6 transaction and FPA should have recorded an expense for The
7 unrecoverable portion . Defendants claimed to undertake such a
8 review of recoverability, but these claims were false . In FPA's
9 1996 Form 10-K, The Individual FPA Defendants caused FPA to falsely
10 represent with regard to goodwill :
11 At each balance sheet date following The acquisition ofa business, The Company reviews The carrying value of The
12 goodwill to determine if facts and circumstances sugges tthat it may be impaired or that The amortization period
13 may need to be changed-
14 The 1997 Form 10-K falsely stated that with regard to goodwill :
15 At each balance sheet date, The Company reviews Thecarrying value of The goodwill and intangibles t o
16 determine if facts and circumstances suggest that theymay be impaired or that The amortization period may need
17 to be changed. The Company considers external factors ,as well as internal factors, relating to each acquired
18 business, including hospital and physician contractchanges, local market developments, changes in third
19 party payments, national health care trends, and other
publicly available information . If these external and20 internal factors indicate that The goodwill will not b e
recoverable, as determined based upon undiscounted cash21 flows before interest charges of The business acquired
over The remaining amortization period, The carrying22 value of The goodwill or intangibles will be reduced .
The Company does not believe there currently are any23 indicators that would require an adjustment to Th e
carrying value of The goodwill or intangibles or their24 remaining useful lives .
25 72 . Contrary to these representations, and contrary to GAAP,
26 in order to report favorable financial results during The Class
27 Period, defendants failed to undertake serious or meaningfu l
28 reviews of recoverability and failed to write down The impairmen t
- 39 - 98cv0928 -L(AJB)
1 in goodwill attributable to Foundation Health, thereby materially
2 overstating results during The Class Period .
3 73 . The Individual FPA Defendants also overstated FPA's
4 goodwill associated with post-acquisition adjustments relating to
5 The Foundation Health transaction . As part of The acquisition of
6 The Foundation Health clinics, FPA agreed to indemnify Foundation
7 Health for any losses on The sale of Foundation Health real estate
8 related to The practices FPA acquired . The Individual FPA
9 Defendants had not wanted FPA to acquire The real estate associate d
10 with these practices, as they realized that such properties were
11 significantly overvalued . They nevertheless had FPA agree to
12 indemnify Foundation Health should it lose any money on The
13 disposal of The real estate . In 4thQ 1997, The Individual FPA
14 Defendants caused FPA to belatedly record an accrual to reflect its
15 liability with respect to this indemnification and, instead of
16 recording a charge for The expenses it had incurred (and would
17 continue to incur) , they caused FPA to post The entire amount toy
18 FPA's goodwill to be amortized over 30 years, thus avoiding a
19 significant impact on earnings . This improper and belated
20 adjustment materially overstated The Company's 1997 results .
21 74 . In addition, in 3rdQ 1997, The Company accrued a loss
22 contract provision due to an unfavorable contract in Arizona . Thel
23 contract in Arizona was with Intergroup, and The capitation
24 payments of this contract were much lower than costs . Thus, The
25 Individual FPA Defendants knew that FPA would continue to incurs
26 losses over The life of The contract . In 3rdQ 1997, FPA debited
27 goodwill by The amount of this loss contract and credited deferred
28 revenue, which it amortized over three years (as opposed to The 30-
- 40 - 98cv0928 -L(AJB}
1 year amortization period for goodwill) . The Individual FPA
2 Defendants thus greatly increased The positive impact on FPA's
3 earnings for this adjustment by choosing amortization periods much
4 longer for expenses than they did for revenues .
5 75 . Also in 3rdQ 1997, FPA's accounting staff informed Lash
6 that The Company was receiving large numbers of claims on former
7 AHI practices that were in excess of IBNR accruals . Instead of
8 recognizing The costs as expenses, Lash caused FPA to record a $5
9 million debit (increase) to goodwill, thereby avoiding a decrease
10 in operating income as a result of those expenses .
11 76 . Absent defendants' accounting improprieties, FPA would
12 have reported significant operating losses in each quarter during
13 The Class Period instead of The profits it falsely reported .
14 Moreover, The defendants reported cash balances which were based on
15 unreconciled bank statements which resulted in overstated cash
16 balances being reported during The Class Period .
17 77 . Due to these accounting improprieties by The Individual
18 FPA Defendants, they caused FPA to present its financial results
19 and statements in a manner that violated GAAP, including The
20 following fundamental accounting principles :
21 (a) The principle that interim financial reporting
22 should be based upon The same accounting principles and practices
23 used to prepare annual financial statements (APB No . 28, ¶10) ;
24 (b) The principle that financial reporting shouldi
25 provide information that is useful to present and potential
26 investors and creditors and other users in making rational
27 investment, credit and similar decisions was violated (Concepts No .
28 1, ¶34) ;
- 41 - 98cv0928-L(AJB)
I (c) The principle that financial reporting should
2 provide information about The economic resources of an enterprise,
3 The claims to those resources, and effects of transactions, events
4 and circumstances that change resources and claims to those
5 resources was violated (Concepts No . 1, ¶40) ;
6 (d) The principle that financial reporting should
7 provide information about how management of an enterprise has
8 discharged its stewardship responsibility to owners (stockholders)
9 for The use of enterprise resources entrusted to it was violated .
10 To The extent that management offers securities of The enterprise
11 to The public, it voluntarily accepts wider responsibilities for
12 accountability to prospective investors and to The public inl
13 general (Concepts No . 1, ¶50) ;
14 (e) The principle that financial reporting should
15 provide information about an enterprise's financial performance
16 during a period was violated . Investors and creditors often use
17 information about The past to help in assessing The prospects of an
18 enterprise . Thus, although investment and credit decisions reflect
19 investors' expectations about future enterprise performance, those
20 expectations are commonly based at least partly on evaluations of
21 past enterprise performance (Concepts No . 1, 142) ;
22 (f) The principle that financial reporting should be
23 reliable in that it represents what it purports to represent was
24 violated . That information should be reliable as well as relevant
25 is a notion that is central to accounting (Concepts No . 2, ¶¶58-
26 59) ;
27 (g) The principle of completeness was violated, which
28 means that nothing is left out of The information that may be
- 42 - 98cv0928 -L(AJB)
1 necessary to insure that it validly represents underlying events
2 and conditions (Concepts No . 2, 179) ; and
3 (h) The principle that conservatism be used as a prudent
4 reaction to uncertainty to try to ensure that uncertainties and
5 risks inherent in business situations are adequately considered was
6 violated . The best way to avoid injury to investors is to try to
7 ensure that what is reported represents what it purports to
8 represent (Concepts No . 2, ¶T95, 97) .
9 78 . Further, The undisclosed adverse information concealed by
10 defendants during The Class Period is The type of information that,
11 because of SEC regulations, regulations of The national stock
12 exchanges and customary business practice, is expected by investors
13 and securities analysts to be disclosed and is known by corporate
14 officials and their legal and financial advisors to be The type of
15 information that is expected to be and must be disclosed .
16 DEFENDANTS ' SCIENTER
17 79 . The Individual FPA Defendants had The ability to commit
18 The fraud complained of, and did, as they were The top executives
19 and/or directors of FPA . Each of The Individual FPA Defendants was
20 in a position to, and did, learn The details of FPA's business
21 condition, acquisitions, financial reporting and prospects, through
22 numerous management meetings, through conversations with other
23 executive officers and directors, and through The review of
24 regularly prepared reports that were circulated among defendants
25 and others regarding The Company's revenues, acquisitions and
26 financial performance . As FPA's top executives and/or directors,
27 The Individual FPA Defendants controlled FPA's publicly issued
28 financial statements and The disclosures made in them, FPA's publi c
- 43 - 98cvO928-L(AJB)
1 statements, and its SEC filings, and thus could falsify them . They
2 also ran FPA as "hands-on" managers dealing with The important
3 issues facing FPA's business such as directing and managing FPA's
4 finances and acquisitions, and issuing FPA's SEC filings, press
5 releases and financial statements . Moreover, because The
6 Individual FPA Defendants were "hands-on" managers, they were each
7 involved in The day-to-day management of FPA and learned, from
8 doing their jobs, of The adverse non-public information about FPA's
9 falsified financial statements and FPA's deteriorating revenue and l
10 EPS prospects . Thus, each individual FPA Defendant actually knew,
11 or with deliberate recklessness disregarded, that The public
12 statements pleaded in ¶¶99-161 were false and/or misleading when
13 made .
14 80 . Because FPA's acquisitions, and its finances (i .e ., FPA's
15 revenues, expenses, cash flow, EPS, profitability and financial
16 reporting) were key factors in FPA's attempt to expand and to meet
17 its internally budgeted and publicly disseminated 1998 and 1999
18 quarterly EPS targets, The Individual FPA Defendants constantly
19 monitored each of these key factors impacting FPA's business . Not
20 only did defendants learn of The adverse factors affecting FPA'sI
21 business, they personally directed The falsification of FPA's
22 financial statements as alleged herein in order to create The false
23 illusion that FPA was meeting its targets .
24 81 . Contrary to defendants' representations that FPA was
25 experiencing "record" financial results, such "record" results were
26 only achieved during The Class Period as a result of falsified
27 financial statements, which defendants deliberately manipulated
28 through their improper structuring of The Foundation Health dea l
- 44 - 98cv0928 -L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
2 6
17
18
19
2 0
21
22
23
24
2 5
26
27
28
and their manipulation of FPA's medical expenses, shared risk
receivables and goodwill, as alleged herein . The details of
defendants' manipulation and falsification of FPA's financial
statements, which are described more fully in ¶¶39-78, were
initiated and directed by The Individual FPA Defendants .
Defendants knew at all times The true nature of FPA's financial
condition .
82 . Defendant Lash was FPA's CFO . He was in charge of FPA's
iFinance Department and FPA's financial reporting . During The Class
Period, members of FPA's Finance Department complained of The
falsification of FPA's financial statements, stating that such
manipulations were in violation of GAAP . FPA management responded
by threatening those employees with The loss of their jobs if they
did not go along with The manipulations . Moreover, notwithstanding
The complaints by The Finance Department, The Individual FPA
Defendants continued to falsify FPA's financial statements .
83 . By 1/97, FPA had implemented a new accounting system
called "Smartstream ." But Smartstream was implemented too quickly,
causing so many glitches in The accounting system that it was well-
known to The Individual FPA Defendants and The Finance Department
that it was impossible to generate accurate financial data . As al
result, on 4/29/97, The night before FPA was going to announce its
1stQ 1997 financial results, Lash met with members of The Finance
Department to attempt to prepare The 1stQ 1997 results . They could
not reconcile or balance any of The accounts . Accordingly, Lash
decided that they would have to make up The 1stQ 1997 financial
results, which they did, and which were reported The next day .
- 45 - 98cv0928-L(AJB)
1 84 . It was well-known within FPA's Finance Department, Lash
2 included, that FPA's accounting systems were so bad that FPA's
3 internal consolidated cash flow statement could not be reconciled .
4 The cash flow statement was routinely out of balance by $5-10
5 million . Finance Department personnel were directed by management
6 to create fake adjustments (without any basis to justify such
7 adjustments) in order to make it appear that The cash flow
8 statement was reconciled and to make it appear to balance with The
9 rest of The Company's financial statements .
10 85 . During The Class Period, Finance personnel were directed
11 by management to create cash flow statements which did not reflect
12 reality but rather reflected Lash's statements in presentations to
13 The investing public . In order to create these phony cash flow
14 statements, Finance Department personnel were directed to make fake
15 "presentation adjustments" as needed to make The cash flow
16 statements match Lash's representations .
17 86. In 3rdQ 1997, defendant Lash was informed by The Finance
18 Department that FPA needed to book an additional $5 million in IBNR
19 expenses . Rather than book it as an expense as he had been it told
20 it should be, Lash directed that it be booked as goodwill, clearly
21 inappropriate .
22 87 . In connection with The Axminster acquisition in 9/97,
23 Lash was informed by The Finance Department, after it did a
24 thorough review and investigation of Axminster, that an IBNR
25 accrual of $900,000 should be recorded . Lash summarily rejected
26 The number and arbitrarily directed that $2 .5 million be accrued .
27 Subsequently, Lash reversed $1 .6 million of The accrual and used it
28 in a manner which improperly boosted FPA's operating income .
- 46 - 98cv0928 -L(AJB)
1 88 . During The Class Period, Lash ordered The Finance
2 Department to use higher estimated rates per covered member on
3 FPA's shared risk receivables . (This resulted in an increase in
4 FPA's earnings (by reducing its operating expenses) .) The Finance
5 Department informed Lash that, based on The information they had,
6 any increases in the rates were unjustified . Lash ignored Thel
7 Finance Department, and directed that the rates be increased
8 nonetheless, which they then were . Lash also directed that the
9 Finance Department use a higher number of "covered lives" fo r
10 calculating shared risk receivables than The Company's data
11 supported . This resulted in an increase to FPA's operating income .
12 FPA management admitted to The Finance Department that The numbers
13 used to calculate shared risk receivables needed to be "goosed" so
14 that FPA could make its EPS estimates .
15 89 . In 3rdQ 1997, Lash was informed by the Finance Department
16 that FPA's books contained an AHT receivable, amounting to $1 .511
17 million, that was bogus . Lash informed The Finance Department tol
18 leave it on The books since removing it would hurt FPA's EPS fora
19 that quarter .
20 90 . In quarters after lstQ 1997 during The Class Period, on
21 The night before FPA's quarterly and annual financial results were
22 announced (7/29/97, 10/29/97, 3/5/98), Lash and The Finance
23 Department met to review and discuss FPA's financial results and
24 decide what they would announce The next day . In each of these
25 meetings, Lash and The Finance Department reviewed internal
26 financial statements received from The Company's subsidiaries .
27 These internal financial statements indicated that FPA was
28 experiencing losses at its subsidiaries which contradicted Lash' s
47 - 98cv0928-L(AJB)
1 forecasts of EPS to The market . Accordingly, Lash instructed
2 Finance personnel that they had "a lot of work to do" that evening
3 and ordered them to manipulate and falsify The results so that they
4 would match Lash's forecasts . The Finance Department worked late
5 into The evening in order to falsify The results so that they met
6 FPA's public forecasts .
7 91 . At The end of The Class Period (5/98), FPA was
8 collapsing . In a last ditch effort to save FPA from financial ruin
9 (which defendants were obviously unsuccessful in doing since FPA
10 went bankrupt in 7/98), The Individual FPA Defendants hired an
11 investment banker to find a cash-flush buyer for The Company . This
12 effort to bail out FPA was called "Project Helmet II" within The
13 Company . In connection with this attempted sale, The Individual
14 FPA Defendants openly admitted to potential buyers that FPA's
15 "books were cooked ." In addition, The potential buyers were shown
16 a spreadsheet that backed out all of The fraudulent adjustments
17 made to FPA's financial statements during The Class Period so that
18 potential buyers could assess The true financial condition of The
19 Company .
20 92 . Every month, Lash routinely approved The reimbursement of
21 tens of thousands of dollars in purported "expenses" incurred bye
22 friends of his that worked at FPA, even though there were no
23 receipts submitted to substantiate The claims for reimbursement .
24 In addition, Lash improperly approved for reimbursement receipts
25 for repairs and gasoline for defendant Hassman's vehicle, even
26 though Hassman already had a car allowance from The Company .
27 Moreover, The Individual FPA Defendants' wives were provided free
28 cosmetic surgery at The Company's expense and used The Company-
I-- 48 - 98cv0928-L (AJB)
1 owned pre-paid air travel for their personal use . It was well-
2 known within FPA that The Individual FPA Defendants used The
3 Company for their own personal gain .
4 93 . During The Class Period, FPA had a rebate program with
5 MCI . FPA received hundreds of thousands of dollars in rebates
6 under this program . This money was purportedly used to buy
7 equipment for a media center at FPA . In fact, there was no media
8 center, and The address of this bogus "media center" was Lash's
9 home address, where hundreds of thousands of dollars in medi a
10 equipment were sent for his own, personal entertainment center .
11 94 . Lash kept The other Individual FPA Defendants informed
12 about The foregoing . Lash worked very closely with CEO Flam, under
13 The direction of Lizerbram and Dresnick . When Flam and Lash left
14 The Company in March 1998, Dresnick and Lizerbram more actively ran
15 The Company, with Dresnick becoming CEO . These defendants
16 nevertheless continued to mislead investors, proceeded to complete
1 7 additional mergers, without revealing any of The facts available tol
18 them concerning FPA's phony financial statements and alarming
19 financial condition .
20 95 . For example, The Individual FPA Defendants continued to
21 conceal The "financial irregularities" reported by California's
22 Department of Corporations at least by 3/12/98, even though FPA was
23 continuing to acquire doctors' practices and defendants were filing
24 and signing registration statement . Defendants also concealed The
25 liquidity problems that were occurring . For example, FPA's SEC
26 filings show a cash balance at 3/31/98 of only $12 million in cash .
27 Yet, an internal audit reports showed that defendants had under
28 reserved for medical claims by at least $15 million . Finally,
I- 49 - 98cv0928-L(AJB)
1 their scienter may be inferred from their modification of their
2 employment agreements to guarantee large severance or consulting
3 payments to themselves even if terminated "for cause . "
4 96 . Foundation Health knew all aspects of The fraud, at least
5 as it related to The GA payments . The timing and amount of
6 Foundation Health's insider stock sales in May and June 1997
7 evidence this defendant's knowing or conscious misconduct .
8 Foundation Health helped to structure the health clinic transaction
9 with FPA and knew or consciously disregarded that FPA's failure t o
10 disclose the amount of GA payments being recorded each quarter were
11 masking FPA's true operating results . Foundation Health knew
12 exactly how much it was paying to FPA in The form of The GA
13 payments, and that it had just made a $12 .7 million payment -
14 nearly 25% of The total amount to be paid over nine quarters - in
15 1stQ 1997 alone . This huge GA Payment had enabled FPA to announce
16 "strong revenue and earnings growth" for 1stQ 1997, a net profit
17 instead of a net loss, and a reduced medical loss ratio . The short
18 time span between Foundation Health's announcement that it had no
19 current intention of selling and its sale of all its shares, also
20 supports a strong inference of its scienter . The reasonable
21 inference arising from these facts is that Foundation Health knew
22 or recklessly disregarded that FPA's reported strong financial
23 results were inflated, due in no small part to the GA payments, and
24 that as those payments dwindled, The truth about FPA's financial
25 condition would become known and FPA's stock price would collapse-
26 97 . Also supporting a strong inference of all defendants'
27 scienter is their insider trading . While The defendants were
28 issuing favorable statements about FPA, knowing that suc h
- 50 - 98cv0928-L(AJB)
1 statements were untrue, they sold their shares of FPA stock for
2 more than $88 million , to profit personally from The artificia l
3 inflation in FPA's stock price thei r fraudulent scheme had created .
4 Notwithstanding their access to confidential information as a
5 result of their status as directors, officers a nd/or insiders o f
6 The Company, and their corresponding duty to disclose advers e
7 material facts before trading i n FPA stock, defendants sol d
8 significant amounts of FPA shares at artificially inflated price s
9 in order to profit from The fraud, and did so while in possession
10 of material non-public information . Defendants ' insider selling
11 during The Class Period is detailed below :
12 PRICEDATE SHARES PER PROCEED S
13 NAME SOLD SOLD SHARE FROM SALE
14 Dresnick 05/21/97 10,000 $18 .50 $ 185,00 0
11/17/97 11,140 $26 .50 295,21 0
15 11/25/97 10,000 $25 .13 251,30 0
11/26/97 1, 000 $25 .63 25,63 016 11/26/97 4,000 $25 .50 102,00 0
36, 140 $ 859,14 017
Flam 03/11/97 2,000 $22 .88 $ 45,76 0
18 03/12/97 6,200 $22 .13 137,20 603/13/97 4,100 $22 .34 91,59 4
19 03/14/97 12,300 $20 .72 254,85 6
03/17/97 14,400 $19 .44 279,93 6
20 11/19/97 2,500 $27 .50 68,75 011/19/97 2,500 $27 .63 69,07 5
21 11/19/97 2,500 $27 .63 69,07 511/20/97 16,650 $27 .25 453,71 3
22 11/21/97 1,500 $27 .50 41,25 0
11/24/97 2,500 $27 .75 69,37 523 11/24/97 2,500 $27 .75 69,37 5
11/24/97 2,500 $27 .75 69,37 5
24 12/04/97 12,000 $23 .81 285,72 0
12/04/97 1,000 $24 .00 24,00 0
25 12/04/97 2,000 $23 .88 47,76 012/04/97 5,000 $23 .81 119,05 0
26 12/05/97 850 $23 .44 19,92 493 .000 $ 2,215,79 4
27
28
- 51 - 98cv0928-L(AJB)
1 Foundation Qtr .Health ended
2 6/30/97 4,076,087 $79,000,00 0
3 Hassman 03/11/97 2,000 $22 .88 $ 45,76003/14/97 2,500 $21 .00 52,50 0
4 03/14/97 27,500 $20 .88 574,20 003/14/97 7,000 $21 .00 147,00 0
5 11/04/97 5,000 $24 .38 121,90 011/06/97 5,000 $24 .50 122,50 0
6 11/07/97 5,000 $23 .55 117,75 011/14/97 10 ,000 $25 .56 255,60 0
7 11/17/97 10,000 $26 .38 263,80 011/17/97 10 ,000 $26 .38 263,80 0
8 11/18/97 11,500 $27 .09 311,53 511/18/97 2,500 $27 .01 67,52 5
9 98_,000 $ 2,343,87 0
10 Lash 03/11/97 1,600 $22 .88 $ 36,60 803/12/97 4,700 $22 .13 104,01 1
11 03/13/97 3,200 $22 .34 71,48 803/14/97 9,400 $20 .72 194,76 8
12 03/17/97 11,100 $19 .44 215,78 4
11/19/97 5,000 $27 .50 137,50 0
13 11/19/97 2,500 $27 .63 69,07 511/20/97 16,650 $27 .25 453,71 3
14 12/04/97 1, 000 $24 .00 24,00 0
12/04/97 17,000 $23 .81 404,77 015 12/04/97 2,000 $23 .88 47,76 0
12/05/97 4,850 $23 .44 113,68 4
16 79,000 $ 1,873,16 1
17 Lizerbram 03/11/97 2,000 $22 .88 $ 45,76 0
03/12/97 6,200 $22 .13 137,20 618 03/13/97 4,100 $22 .34 91,59 4
03/13/97 3,200 $21 .00 67,20 0
19 03/14/97 10,900 $20 .72 225,84 803/17/97 12,600 $19 .44 244,94 4
20 11/19/97 2,500 $27 .63 69,07 511/19/97 2,500 $27 .63 69,07 5
21 11/19/97 2,500 $27 .50 68,75 0
11/20/97 16,650 $27 .25 453,71 322 11/21/97 1,500 $27 .50 41,25 0
11/24/97 5,000 $27 .75 138,75 023 11/24/97 2,500 $27 .75 69,37 5
12/01/97 1,000 $26 .44 26,44 024 12/01/97 4,000 $26 .38 105,52 0
12/04/97 1,000 $24 .25 24,25 0
25 12/04/97 750 $23 .88 17,91 0
12/04/97 7,500 $24 .13 180,97 5
26 12/04/97 1,500 $24 .00 36,00 0
87,900 $ 2,113,63 527
TOTALS : 4,470,127 88,40560 028
- 52 - 98cv0928-L(AJB)
1 98_ Defendants, massive insider selling during The Class
2 Period is summarized below :
3 % ofShares Beneficial Total
4 Defendants Sold Ownership Sold Proceeds
5 FoundationHealth 4,076,087 100% $79,000,000
6 Hassman 98,000 25% $ 2,343,870Lash, S .M . 79,000 5696 $ 1,873,16 1
7 Lizerbram 87,900 23% $ 2,113,635
Dresnick 36,140 2% $ 859,140
8 Flam 93,000 23% $ 2,215,794
Totals : 4,470,127 62% $88,405,6009
10 Moreover, defendants Hassman and Lash sold hundreds of
11 thousands of additional shares through limited partnerships,
12 "family foundations" and relatives which they controlled during The
13 period of mid-March through early June 1998, just weeks before FPA
14 declared bankruptcy, while fully aware of The disastrous impact The
15 not-yet-announced but planned bankruptcy would have on
16 stockholders .
17 FALSE AND MISLEADING STATEMENTS
ISSUED DURING THE CLASS PERIOD
18
99 . On 2/3/97, Merrill Lynch issued a report on FPA after its19
analyst Weakley had discussions with Lizerbram, Flam and Lash,
20which was based on and repeated information provided to Weakley by
21
them. Lizerbram, Flam or Lash reviewed this report and assured22
Weakley it was accurate . The report forecast 1998 EPS of $1 .01 and23
a 30% five-year growth rate for FPA and stated :
24The second major transaction for FPA, completed in
25 The fourth quarter, is The acquisition of The physiciangroup practices of Foundation Health . This transaction ,
26 valued at approximately $200 million, is expected to addincremental revenues of $230 million in 1997 . . . . We
27 believe that . . . FPA will be able to generat esignificantly stronger growth rates for these clinics, as
28 it will now be able to contract with additional HMOs andinsurance companies .
- 53 - 98cv0928-L(AJB)
Financial Review and Projections : . . . we look forstrong revenue and earnings growth for FPA going forward .
2 . . . We believe that FPA's enrollment will increase byabout 25% per year, without acquisitions, going forward .
3
These statements were false and misleading as The value of The4
Foundation Health transaction was manipulated by defendants as5
described in ¶1139-78 .6
100 . On 2/27/97, FPA reported better-than-expected and record7
4thQ 1996 results via a release stating :8
FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD 1996 FOURTH9 QUARTER AND YEAR END RESULT S
10
11 Net income for The fourth quarter was $4 .2 million or
$0 .18 per share . . . .12
Commenting on The results, Dr . Seth Flam, President13 and Chief Executive Officer stated, "1996 was a year of
significant achievement for FPA . During The year we14 successfully executed our growth strategy . . . . We . . .
have built a solid foundation for growth both internally15 and through strategic acquisitions . "
16 These statements were false as defendants had falsified FPA's
17 financial results as described above in ¶¶39-78 .
18 101 . On 2/27/97, subsequent to The release of its 4thQ 1996
19 and 1996 results, FPA held a conference call for securities
20 analysts, money and portfolio managers, institutional investors and
21 large FPA shareholders . During The call, and in follow-up
22 conversations with participants, Lizerbram, Flam and Lash
23 disseminated important information to The market, stating :
24 • FPA's core business operations were fundamentallystrong and it was achieving strong "same store" member
25 growth, due to The quality of service and medical care i twas providing and The demand for its services by both
26 third-party payors and physicians, which would enable FPAto continue strong internal growth for The foreseeable
27 future .
28 • FPA's growth-by-acquisition strategy was succeeding, asFPA was successfully integrating The companies and othe r
- 54 - 98cv0928 -L(AJB)
1 operations it had acquired into its business, while loweringThe medical loss ratios of those businesses and improving
2 their profitability .
3 • FPA was ahead of schedule in integrating The operationsof Foundation Health, which was performing ahead of budget and
4 expectations-
5 • FPA was successfully cutting The medical expenditures ofThe companies it had acquired by micromanaging hospital
6 admissions and discharges and utilizing other proven cost-reduction protocols and not by cutting The quality of care or
7 refusing medical care desired by either patients or theirtreating physicians .
8
• FPA was cutting its administrative costs as a percentage9 of revenue due to efficient management techniques .
10 • FPA's IBNR medical expense reserve was set at
conservative and more than sufficient levels .
11• As a result of The foregoing, FPA was achieving record
12 financial results which were "high-quality" results due toimproved operations and lower costs .
13• As a result of The foregoing favorable factors, FDA's
14 business was performing even better than internally forecastedand, as a result, FPA was raising its 98 EPS forecast t o
15 $1 .00-$1 .15, and forecasting that FPA would obtain EPS growth
of 25%-30% over The next several years .
16These statements were false and misleading for The reasons set
17
forth in ¶37 (a) - (k) and 158(a)-(k) .18
102 . On 2/27/97, Oppenheimer issued a report on FPA, written
19by Price, which was based on and repeated information provided to
20Price in The 2/27/97 conference call and in follow-up conversations
21with Lizerbram, Flam or Lash . The report forecast 1998 EPS of
22$1 .05 for FPA and stated :
234Q96 Results Beat Expectations
24FPA reported high-quality 4Q96 results . . . . Such
25 better than expected EPS were generated primarily as afunction of continued strong same-store revenue growt h
26 and particularly impressive performance by The company's
newly acquired Florida clinics .27
28
- 55 - 98cv0928 -L(AJB)
1 * * *
2 Medical Expenses Were Under Contro l
3 FPA's consolidated medical loss ratio (MLR) was 73%
during 4Q96, down 1 .3 percentage points relative to The
4 prior quarter's MLR .
5 * *
6 FPA has made substantial progress in integrating Theclinics that it acquired from Foundation Health . . . .
7 Specifically, The Foundation Health clinics are currentlyrunning $700,000 ahead of plan . . . .
8103 . On 2/27/97, Merrill Lynch issued a report on FPA, written
9by Weakley, which was based on and repeated information provided to
10Weakley in The 2/27/97 conference call and in follow-up
11conversations with Lizerbram, Flam or Lash . The report forecast
121998 EPS of $1 .05 and a 30% five-year BPS growth rate for FPA and
13stated : "Operating margins were better than expected, as The
14integration of . . . recent acquisitions is proceeding smoothly ." On
152/28/97, UBS Securities, Bear Stearns, and Furman Selz issued
16similar reports on FPA .
17
104 . On 3/18/97, UBS Securities issued a report on FPA after
18its analyst Wiberg had discussions with Lizerbram, Flam or Lash .
19The report was based on and repeated information provided to Wiberg
20by them . Lizerbram, Flam or Lash reviewed this report and assured
21
Wiberg that it was accurate . The report forecasted 1998 EPS for
22FPA of $1 .08, and stated :
23FPA is on a roll, as demonstrated by The recently
24 reported 4Q96 results . . . . EPS were up 64% to $0 .18 . Inaddition to continuing top-line growth, FPA's success i s
25 predicated on its ability to reduce both medical expensesand administrative costs on HMO business . Several times,
26 The company has shown its ability to significantly reduc eexpense ratios on acquired businesses . . . FPA has been
27 able to achieve outstanding results by implementing itsmanaged care systems and policies . . . . These results are
28 outstanding .
I- 56 - 98cv0928-L(AJB)
1 105 . On 3/27/97, Oppenheimer issued a report on FPA after its
2 analyst Price had discussions with Lizerbram, Flam or Lash which
3 was based on and repeated information provided to Price by them .
4 Lizerbram, Flam or Lash reviewed this report and assured Price that
5 it was accurate . The report forecast 1998 EPS of $1 .15 for FPA and
6 stated :
7 We believe FPA's phenomenal revenue growth . . . isevidence that The company's primary care model is
8 compelling . . . .
9
10 At this date, we are comfortable that FPA has proven itsability to change physician behavior and to lower Th e
11 cost of care as it moves into new markets . . . .
12 106 . On 4/1/97, Furman Selz issued a report on FPA after its
13 analyst Kroll had discussions with Lizerbram, Flam or Lash . The
14 report was based on and repeated information provided to Kroll by
15 them . Lizerbram, Flam or Lash reviewed this report and assured
16 Kroll that it was accurate . The report forecast 1998 EPS of $1 .05,
17 a 30% EPS growth rate . The report also stated : "The fundamentals
18 at FPA are very strong and we remain comfortable with our long-term
19 EPS growth assumption of 30% . "
20 107 . The foregoing statements by The analysts in ¶102-06
21 above, which repeated information provided them by defendants, were
22 false and misleading because The financial results were falsified
23 as set forth in ¶¶39-78, FPA's integration of its acquisitions was
24 not going smoothly, and The forecasts of EPS were unattainable, as
25 set forth in 1¶37(a)-(k) and 158(a)-(k) .
26 108 . On 4/14/97, FPA and Foundation Health issued a joint
27 press release addressing rumors about what Foundation Health would
28 do with its FPA stock :
- 57 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
FPA Medical Management Inc . today announced thatFoundation Health Systems, Inc . does not currently intendto dispose of The approximately 4 million shares of FPAcommon stock it holds .
Jeffrey L . Elder, Senior Vice President and ChiefFinancial Officer of FHS stated, "While we have The rightto sell shares . . . it is not our intention to do so underThe present circumstances . We may, however, reconsiderour position and entertain various options for an orderlydisposition of The shares . "
These statements were false . Foundation Health currently intended
to sell its FPA shares as soon as Foundation Health and FPA could
push FPA's stock higher (and as soon as §16(b) of The 1934 Act
allowed sale) .
109 . On 4 /15/97, The Individual FPA Defendants caused FPA t o
issue its 1996 Annual Report, which reported FPA's previously
announced 4thQ 1996 and 1996 results . Therein, defendants
represented that The 4thQ 1996 financial results were "present[ed]
fairly ." In addition, accompanying The 1996 financial results was
a representation that they were "in conformity with [GAAP] ." These
statements were false as defendants had falsified FPA's financial
results in violation of GAAP, as described in ¶¶39-78 .
110 . On 4/16/97, FPA executives, including Lizerbram, made a
presentation to The Needham & Co . sales force in New York City .
During The presentation and in discussions with Needham brokers and
analysts, they stated :
• FPA's core business operations were fundamentally strongand it was achieving strong "same store" member growth, due toThe quality of service and medical care it was providing andThe demand for its services by both third-party payors andphysicians, which would enable FPA to continue strong internalgrowth for The foreseeable future .
• FPA's financial condition was very sound .
- 58 - 98cv0928 -L(AJB)
1 • FPA's growth-by-acquisition strategy was succeeding, asFPA was successfully integrating The companies and other
2 operations it had acquired into its business, whilesuccessfully lowering The medical loss ratios of those
3 businesses and improving their profitability .
4 • FPA was not only successfully integrating The companiesand other business operations it had acquired, but, in fact,
5 was ahead of schedule in integrating those operations -specifically Foundation Health -- which was performing ahead of
6 budget and expectations .
7 • FPA was successfully cutting The medical expenditures ofThe companies and other business operations it had acquired by
8 micromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting The
9 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
10• FPA was cutting its administrative costs as a percentage
11 of revenue, due to efficient management techniques .
12 • FPA's IBNR medical expense reserve was set atconservative and more than sufficient levels .
13• As a result of The foregoing, FPA was achieving record
14 financial results, which were "high-quality" results due toimproved operations and lower costs .
15• As a result of The foregoing favorable factors, FPA's
16 business was performing even better than internally forecastedand, as a result, FPA was raising its forecast of 1998 EPS t o
17 $1 .05-$1 .15 and was forecasting that FPA would achieve EPS
growth of 25%-30% over The next several years .
18111 . On 4/21/97, FPA executives, including Lizerbram, appeared
19at The Volpe Brown Whelan & Co . Healthcare Conference in New York
20
City . In a formal presentation and in break-out sessions,21
Lizerbram told The assembled securities analysts, money and22
portfolio managers, institutional investors, brokers and stock23
traders :
24• FPA's business operations were strong, and it was
25 achieving strong "same store" member growth, due to Thequality of service and medical care it was providing, and The
26 demand for its services by both third-party payors andphysicians, which would enable FPA to continue strong internal
27 growth for The foreseeable future .
28
- 59 - 98cv0928 -L(AJB)
1 • FPA's financial condition was very sound, and The Companyhad sufficient liquid assets to fund its ongoing busines s
2 operations, as well as its aggressive acquisition program .
3 • FPA's growth-by-acquisition strategy was succeeding, asFPA was successfully integrating The companies and other
4 operations it had acquired, while successfully lowering Th emedical loss ratios of those businesses and improving their
5 profitability .
6 • FPA was not only successfully integrating The companiesand other business operations it had acquired, but, in fact,
7 was ahead of schedule in integrating those operations -specifically Foundation Health, which was performing ahead of
8 budget and expectations .
9 • FPA was successfully cutting The medical expenditures ofThe companies and other business operations it had acquired by
10 micromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting The
11 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
12• Through efficient management, FPA was cutting its
13 administrative costs as a percentage of revenue .
14 • FPA's IBNR medical expense reserve was set at
conservative and more than sufficient levels .
15• As a result of The foregoing, FPA was achieving record
16 financial results, which were "high-quality" results due toimproved operations and lower costs .
17• As a result of The foregoing favorable factors, FPA's
18 business was performing even better than internally forecastedand, as a result, FPA was forecasting 98 and 99 EPS of $1 .0 5
19 and $1 .15, respectively, and FPA would be able to obtain EPS
growth of 25%-30% over The next several years .
20112 . On 4/21/97, Lizerbram was also interviewed by The MSNBC
21Private Financial Network, which reported The interview as follows :
22Lizerbram : [W] e have been very successful in showing
23 earnings . The last four quarters we beat
analysts ' consensus so we really stick to
24 what we told The street we were going todo and there is still a tremendous amount
25 of growth available . . . . [W]e believethat this growth factor will continue in
26 a very robust manner .
27
28
- 60 - 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
The foregoing statements made in New York in 11110-11, and to MSNBC
(11l2) were false and misleading for The reasons set forth in T¶3 7
Iand 158 .
113 . On 4/23/97, Merrill Lynch issued a report on FPA afte r
its analyst Weakley had discussions with Lizerbram, Flam and Lash_
The report based on and repeated information provided to Weakley by
them. Lizerbram, Flam or Lash reviewed this report and assured
Weakley that it was accurate . The report forecast 1998 EPS of
$1 .13 and a 30% five-year EPS growth rate for FPA . The report also
stated :
• Management has demonstrated ability to smoothlyintegrate acquisitions , and we expect results to showcontinued progress in this regard .
Acquisition Inteqrations Proceed Smoothl
Key to FPA's success in 1997 will be The degree to
which it can smoothly integrate The operations of several
large acquisitions . In terms of its Foundation Health
Group acquisition, closed in December, The company is in
The process of finalizing several new payor agreements .
These, of course, will serve to boost volume growth overtime . FPA has already closed three unprofitable
locations in California, and is consolidating itsoperations in Arizona . For The month of December, FPA
was able to generate EBITDA of approximately $700,000with these groups, ahead of expectations .
114 . On 4/24/97, Oppenheimer issued a report on FPA after its
analyst Price had discussions with Lizerbram, Flam and Lash . The
report was based on and repeated information provided to Price by
them . Lizerbram, Flam or Lash reviewed this report and assure d
(Price that it was accurate . The report forecast 1998 EPS of $1 .1 5
for FPA and also stated :
- 61 - 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
Primary Care Strategy Is Working
FPA's phenomenal revenue growth . . . is evidence that Thecompany's primary care model is a compelling model tomanaged care payors . . . .
Ability To Bring Down Costs Has Been Prove n
Although FPA's ability to bring down The cost ofdelivering care in California . . . has long beenestablished . ._ we are comfortable that FPA has provenits ability to change physician behavior and to lower Thecost of care as it moves into new markets . . . .
The foregoing statements by analysts ($$113-14), which repeated
information provided by defendants were false because FPA's
acquisitions were not going smoothly and The lowering of costs were
only achieved through defendants' falsification of FPA's financial
results and by other manipulations described in ¶¶39-78 .
115 . On 4/30/97, FPA reported its 1stQ 1997 results via a
release stating :
FPA MEDICAL MANAGEMENT, INC . ANNOUNCES FIRST QUARTER
RESULTS
Fifth Consecutive Quarter Of Exceeding Analysts'Estimate s
Operating revenues for The first quarter ended March31, 1997 increased 114% to $223 million . . . . Net incomefor The first quarter was $6 .4 million or $0 .20 per share
Commenting on The results, Steven M . Lash, ExecutiveVice President and Chief Financial Officer stated, "Weare pleased with our financial performance in The firstquarter . Strong HMO enrollment continues to drive ourgrowth . . . . In addition, we continue to show marginimprovements based on The further integration ofacquisitions as we continue to reduce medical andadministrative expenses . This operating leverage isreflected in The reduction in our overall medical lossratio 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 revenue
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 FPA's
6 financial results as described in ¶139-78 .
7 116 . On 4/30/97, subsequent to The release of its lstQ 1997
8 results, FPA held a conference call for securities analysts, money
9 and portfolio managers, institutional investors and large FPA
10 shareholders . During The call - and in follow-up conversations
11 with participants - Lizerbram, Flam and Lash directly disseminated
12 important information to The market by stating :
13 • FPA's core business operations remained very strong andit was achieving strong "same store" member growth, due to The
14 quality of service and medical care it was providing and Thedemand for its services by both third-party payors and
15 physicians, which would enable FPA to continue strong internalgrowth for The foreseeable future .
16• FPA's growth-by-acquisition strategy was succeeding, as
17 FPA was successfully integrating The companies and otheroperations it had acquired, while successfully lowering Th e
18 medical loss ratios of those businesses and improving theirprofitability .
19• FPA was not only successfully integrating The companies
20 and other business operations it had acquired, but, in fact,was ahead of schedule in integrating those operations ,
21 including Foundation Health, which was performing ahead ofbudget and expectations .
22• FPA was successfully cutting The medical expenditures of
23 The companies it had acquired by micromanaging hospitaladmissions and discharges and utilizing other proven cost-
24 reduction protocols and not by cutting The quality of care orrefusing medical care desired by either patients or their
25 treating physicians .
26 • FPA was cutting its administrative costs as a percentage
of revenue, due to efficient management techniques .
27
• FPA's IBNR medical expense reserve was set at28 conservative and more than sufficient levels .
- 63 - 98cv0928 -L(AJB)
1 • As a result of The foregoing, FPA was achieving recordfinancial results, which were "high-quality" results due to
2 improved operations and lower costs .
3 • As a result of The foregoing favorable factors, FPA'sbusiness was performing even better than internally forecasted
4 and, as a result, FPA was forecasting 98 EPS of $1 .05-$1 . 1 5and FPA would be able to obtain EPS growth of 25%-30% over The
5 next several years-
6 117 . On 4/30/97, Merrill Lynch issued a report on FPA, written
7 by Weakley, which was based on and repeated information provided to
8 Weakley in The 4/30/97 conference call and in follow-up
9 conversations with Lizerbram, Flam or Lash, The report forecas t
10 1998 EPS of $1 .11 and a five-year EPS growth rate of 30% . TheI
11 report also stated :
12 Margins improved, reflecting progress in Theintegration of acquisitions . Year , over year, The medica l
13 loss ratio declined . . . . The sequential decline wassignificantly greater . . . .
14
15The management team of FPA Medical has demonstrated
16 The ability to smoothly integrate acquisitions, and firstquarter results demonstrated continued progress in this
17 regard .
18 118 . On 5/1/97, Bear Stearns, Furman Selz and Needham each
19 issued reports on FPA, written by Frazier, Kroll and Lirola,
20 respectively, which were based on and repeated information provided
21 to them in The 4/30/97 conference call and in follow-up
22 conversations with Lizerbram, Flam or Lash . The Needham report
23 forecast 1998 EPS of $1 .08 for FPA and also stated :
24 We are upgrading FPA, based on [The] continuing strengthof its business fundamentals .
25
* Strong internal growth . . . . Revenue growth is26 accelerating . . . .
27 * Strong medical management : MLR has now decreased to71%, ahead of our 73% expectation . Resulting from smart
28 operational skills, not decreasing quality of care-
- 64 - 98cv0928-L(AJB)
1 119 . On 5/6/97, First Boston issued a report on FPA after its
2 analyst France had discussions with Lizerbram, Flam or Lash . The
3 report was based on and repeated information provided to France by
4 them . Lizerbram, Flam or Lash reviewed this report before it was
5 issued and assured France that it was accurate- The report
6 forecast 1998 EPS of $1 .15, a 25%-50% five-year growth rate . The
7 report also stated :
8 We like The stock because :
9 (1) Cost containment efforts . . . favor The company'sfocus on managed care and capitation .
10
(2) it has a highly successful record of consolidating11 acquisitions . . . .
12 (3) Its "same-store" growth is strong . . . . This hasenabled The company to produce 25-30% "same market"
13 growth, which has accounted for a substantial portion ofThe company's total growth over The past few years .
14
120 . On 5/11/97, The New York Times and Bloomberg published an15
article about FPA, which quoted Lash as stating : "We think our
16stock is grossly undervalued ." The foregoing statements by
17defendants to analysts, and The analysts' statements repeating
18information they obtained from defendants, contained in ¶¶116-20
19above, were false and misleading for The reasons set forth in 1137
20
and 158 .21
121 . On 5/15/97, The Individual FPA Defendants caused FPA to
22
file with The SEC FPA's report on Form 10-Q for The quarter ended23
3/31/97, signed by Flam and Lash, which contained FPA's previously
24announced 1stQ 1997 results . The Form 10-Q also contained The
25
Individual FPA Defendants' representation that The financial26
results therein were "a fair presentation of The financial position27
of FPA ." These statements were false because defendants had28
falsified FPA financial results as described in $$39-78 .
- 65 - 98cv0928 -L(AJB)
1 122 . FPA stock increased from $14-15/16 per share on 4/25/97
2 to $23-1/2 per share by 6/6/97 . On 6/6/97, FPA announced it would
3 acquire HealthCap, Inc . for millions of shares of FPA stock . On
4 6/12/97, FPA announced it had received an expanded senior credit
5 facility from Lehman Brothers for $275 million, which would "meet
6 our future working capital and acquisition needs . "
7 123 . On 6/16/97, an article about FPA appeared in The San
8 Diego Business Journal, discussing FPA's growth-by-acquisition
9 strategy :
10 Lash is not concerned that The company is growingtoo fast for its own good . "This is a rapidly
11 consolidating industry," he said . "When we make anacquisition and integrate it into our system, we're doing
12 an effective job of blocking and tackling, and producingquality and value . "
13This statement was false because FPA was not effectively
14integrating its acquisitions and was not producing quality and
15value but rather was only creating The illusion of such through
16defendants' falsification of FPA's financial statements as
17described in ¶¶39-78 .
18124 . On 7/2/97, FPA announced The acquisition of Health
19Partners, Inc . for over 5 million shares of FPA stock .
20125 . On 7/28/97, McDonald & Co . issued a report on FPA, after
21its analyst DeNelsky had discussions with Lizerbram, Flam and Lash .
22The report was based on and repeated information provided to
23DeNelsky by them . Lizerbram, Flam or Lash reviewed this report and
24
assured DeNelsky that it was accurate . The report forecast 199825
EPS of $1 .25, a 35% growth rate and also stated :
26
REASONS TO BUY :27
1 . Strong Growth Prospects - FPA has made significant28 investment in its physician networks over The last
two years and is now poised to capture The earning s
- 66 - 98cv0928 -L(AJB)
1 growth inherent in this network . Given Thecompany's industry positioning, FPA should be abl e
2 to return 30-35% growth over The next three to fiveyears .
32 . Success in Managing Medical Costs - FPA has
4 demonstrated results that it can help physicians
manage medical costs . This is reinforced every
5 quarter with a medical loss ratios in The low 70s .The expertise that FPA possess in lowering medical
6 costs through proper utilization can now beleveraged across The country as The company expands
7 its network .
8 3 . Good Rapport With Physicians - FPA has been able toestablish and maintain very good relationships with
9 its affiliated physicians . With five physicianexecutive officers and seven physicians on its
10 Board of Directors, FPA has The reputation of beinga very "physician-friendly" organization .
114 . Critical Mass - In a business where critical mass
12 is vital, FPA is The third largest PPM in
existence . We expect that The company will surpas s13 The $1 billion revenue mark this year . This
critical mass is not only paying off in The form of14 better payor relationships, but also in leveragin g
a high fixed cost structure into higher margins and15 earnings .
16
17 FPA is poised for long-term earnings growth as they
roll out The growth model that has worked well for the m18 in southern California across The country .
19 These statements were false for The reasons set forth in ~T37 and
20 158 .
21 126 . On 7/30/97, FPA reported its 2ndQ 1997 results via a
22 release stating :
23 FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD REVENUES
AND EARNINGS FOR THE SECOND QUARTER 199 7
24* * *
25Net income for The second quarter was $8 .1 million or
26 $0 .24 per share
27
28 Commenting on The results, Steven M . Lash, ExecutiveVice President and Chief Financial Officer stated, "Ou r
- 67 - 98cv0928 -L(AJB)
1 record results for The second quarter are due to betterthan expected performance in Texas and Florida, The
2 recently acquired care centers performing above pro-forma, and all other markets performing as planned . In
3 addition, FPA's G&A expenses continued to decrease as apercentage of sales as we further integrate operations of
4 our previously acquired networks . "
5 Dr. Seth Flam, President and Chief ExecutiveOfficer, stated, "FPA continues to perform above
6 expectations as our integration plans provide positivesequential results . . . . "
7
These statements were false because The reported "record" financial8
results were accomplished through defendants' falsification of9
FPA's financial statements as described in ¶J39-78, and because10
FPA's acquisitions were not succeeding as set forth in 137 and 155 .11
127 . On 7/30/97, subsequent to The release of its 2ndQ 199712
results, FPA held a conference call for securities analysts, money13
and portfolio managers, institutional investors and large FPA14
shareholders . During The call - and in follow-up conversations15
with participants - Lizerbram, Flam and Lash disseminated important16
information to The market by stating :
17
• FPA's operations were very strong and it was achieving18 strong "same store" member growth, due to The quality of
service and medical care it was providing and The demand fo r19 its services by both third-party payors and physicians, which
would enable FPA to continue strong internal growth for The
20 foreseeable future .
21 • FPA's financial condition was very sound and The Companyhad sufficient liquid assets to fund its ongoing business
22 operations, as well as its aggressive acquisition program .
23 • FPA's growth-by-acquisition strategy was succeeding, a sFPA was successfully integrating The companies and other
24 operations it had acquired into its business, whilesuccessfully lowering The medical loss ratios of those
25 businesses and improving their profitability .
26 • FPA was not only successfully integrating The companiesand other business operations it had acquired, but, in fact,
27 was ahead of schedule in integrating those operations ,specifically Foundation Health, which was performing ahead of
28 budget and expectations .
- 68 - 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 atconservative 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
• As a result of The foregoing favorable factors, FPA's10 business was performing even better than internally forecasted
and, as a result, FPA was raising its 98 EPS forecast t o11 $1 .15-$1 .30 and forecasting that FPA would be able to obtain
EPS growth of 25%-30% over The next several years .
12128, On 7/30/97, First Boston issued a report on FPA, written
13
by France, which was based on and repeated information provided to14
France in The 7/30/97 conference call and in follow-up
15
conversations with Lizerbram, Flam or Lash . The report increased
16
The forecasted 1998 EPS for FPA to $1 .30 and stated :
17
This morning, FPAM announced 2Q97 results that were18 well ahead of expectations . As a result, we are raising
our 1998 EPS estimates . . . to $1 .3 019
20Effective medical cost controls and The successfu l
21 integration of operations, its own and newly acquired,resulted in decreased Gs_A and medical expenses as a
22 percentage of sales . For 2Q97, FPAM's MLR was 71 .4% ,down 50 basis points from 1Q97, and G&A as a percentage
23 of revenue (excluding one-time merger costs) fell from
21 .3% in 2Q96 to 18 .9% in 2Q97 .
24
25Perhaps The most compelling feature of FPAM's
26 results so far in 1997, is The success it has hadintegrating recent acquisitions . For instance, The
27 company has been able to turn The health care centers inCalifornia and Arizona that it acquired from Foundation
28 Health in November 1996 from cash flow negative to cashflow positive in less than half a year .
- 69 - 98cv0928 -L(AJB)
1 129 . On 7/30/97, Oppenheimer issued a report on FPA, written
2 by Price, which was based on and repeated information provided to
3 Price in The 7/30/97 conference call and in follow-up conversations
4 with Lizerbram, Flam or Lash . The report increased The forecast
5 for FPA's 1998 EPS to $1 .30 and stated :
6 FPA's exceptionally high-quality 2Q97 resultsreaffirm our conviction that The company has made
7 substantial progress toward meeting The ambitious goal sthat it had set out for itself at The time of its initial
8 public offering . . . transforming The company from a "showme" story into a major player with an impressive track
9 record of having beaten investor expectations for sixconsecutive quarters .
10
11
Medical_Expenses Were Under Contro l12
FPA's consolidated medical loss ratio (MLR) was13 71 .4% during 2Q97 . . . down from a comparably stated MLR
of 71 .9% in 1Q97 as The company continues to mak e14 substantial progress in integrating acquisitions and
lowering medical costs company-wide .15
16
Integration Of The Foundation Health Clinics Is Ahead Of
17 Plan
18 FPA is also realizing The fruits of its
consolidation efforts at The Foundation Health California19 and Arizona-based clinics . Specifically, The Foundation
Health clinics are presently running $4 .5 million year-20 to-date ahead of plan in EBITDA on a run-rate basis),
having closed several urgent care centers as well as21 having consolidated one layer of management .
22 On 7/31/97, Bear Stearns and UBS issued similar reports on FPA,
23 based on and repeating The information provided in The 7/30/97
24 conference call and in follow-up conversations with Lizerbram, Flam
25 or Lash .
26 130 . On 8/12/97, FPA executives Lizerbram, Flam and Lash
27 appeared at The 10th Annual Bear Stearns Healthcare Conference . In
28 a formal presentation and in break-out sessions, they told Th e
- 70 - 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
assembled securities analysts, money and portfolio managers,
institutional investors, brokers and stock traders :
• FPA's fundamental business operations were strong and itwas achieving strong "same store" member growth, due to Thequality of service and medical care it was providing and Thedemand for its services by both third-party payors andphysicians, which would enable FPA to continue strong internalgrowth for The foreseeable future-
0 FPA's financial condition was very sound and The Companyhad sufficient liquid assets to fund its ongoing businessoperations, as well as its aggressive acquisition program .
• FPA's growth-by-acquisition strategy was succeeding, asFPA was successfully integrating The companies and otheroperations it had acquired into its business, whilesuccessfully lowering The medical loss ratios of thosebusinesses and improving their profitability .
• FPA was not only successfully integrating The companiesand other business operations it had acquired, but, in fact,was ahead of schedule in integrating those operations,specifically Foundation Health, which was performing ahead ofbudget and expectations .
• FPA was successfully cutting The medical expenditures ofThe companies and other business operations it had acquired bymicromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting Thequality of care or refusing medical care desired by eitherpatients or their treating physicians .
• FPA was cutting its administrative costs as a percentageof revenue, due to efficient management techniques .
• 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 EPS of $1 .15-$1 .30and that FPA would be able to obtain EPS growth of 25%-30%over The next several years .
The statements set forth above in ¶¶127-30 were false for all The
reasons set forth in ¶37 and 158 .
- 71 - 98cv0928 -L(AJB)
1 131 . On 8/14/97, The Individual FPA Defendants caused FPA to
2 file with The SEC FPA's Report on Form l0-Q for The quarter ended
3 6/30/97, signed by Flam and Lash, and which contained FPA's
4 previously announced results for The 2ndQ 1997 ended 6/30/97 . The
5 Form 10-Q also contained The Individual FPA Defendants'
6 representation that The financial results therein were "a fair
7 presentation of The financial position of FPA ." This statement was
8 false because defendants had falsified FPA's financial results as
9 described in T139-78 .
10 132 . On 9/12/97, Bear Stearns issued a report on FPA, written
11 by Frazier, which was based on and repeated information provided to
12 Frazier at The Bear Stearns Conference and in follow-up
13 conversations with Lizerbram, Flam or Lash . The report increased
14 The forecasted 1998 EPS for FPA to $1 .35 and stated :
15 * The company highlighted The fact that they havebeat The consensus estimates in 5 of The past 6 quarters,
16 and met consensus in The remaining quarter . The companyhas been able to lower G&A expenses sequentially for The
17 past three or four quarters, an indication that they havebeen able to integrate their acquisitions .
18133 . On 10/14/97, Lizerbram appeared for FPA at The First
19
Boston Healthcare Conference in New York . Lizerbram told The20
assembled securities analysts, money and portfolio managers and21
institutional investors that :22
• FPA's business operations were strong and it was23 achieving strong "same store" member growth, due to The
quality of service and medical care it was providing and The24 demand for its services by both third-party payors and
physicians, which would enable FPA to continue strong internal25 growth for The foreseeable future .
26 • FPA's financial condition was very sound and The CompanyIhad sufficient liquid assets to fund its ongoing business
27 operations, as well as its aggressive acquisition program .
28 • FPA's growth--by-acquisition strategy was succeeding, ashFPA was successfully integrating The companies and othe r
- 72 - 98cv0928-L(AJB)
1 operations it had acquired into its business, whilesuccessfully lowering The medical loss ratios of those
2 businesses and improving their profitability .
3 • FPA was not only successfully integrating The companiesand other business operations it had acquired, but, in fact,
4 was ahead of schedule in integrating those operations ,specifically Foundation Health, which was performing ahead of
5 budget and expectations .
6 • FPA was successfully cutting The medical expenditures ofThe companies and other business operations it had acquired by
7 micromanaging hospital admissions and discharges and utilizingother proven cost-reduction protocols and not by cutting The
8 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
9• FPA was cutting its administrative costs as a percentage
10 of revenue, due to efficient management techniques .
11 • FPA's IBNR medical expense reserve was set atconservative and more than sufficient levels .
12• As a result of The foregoing, FPA was achieving record
13 financial results which were "high-quality" results due toimproved operations and lower costs .
14• As a result of The foregoing favorable factors, FPA's
15 business was performing even better than internally forecastedand, as a result, FPA was forecasting 98 EPS of $1 .15-$1 .3 0
16 and that FPA would be able to obtain EPS growth of 25%-30%over The next several years .
17The foregoing analyst report by Bear Stearns, which repeated
18defendants' statements, and defendants' statements in this
19
paragraph were false and misleading for The reasons set forth in20
$$37 and 158 .21
134 . On 10/30/97, FPA announced its 3rdQ 1997 results via a22
release stating :23
FPA MEDICAL MANAGEMENT, INC . ANNOUNCES RECORD EARNINGS
24 FOR THE THIRD QUARTER 199 7
25 FPA . . . announced record earnings for The thirdquarter ended September 30, 1997 . . . . [R}evenue . . .
26 increased 45% to $240 .6 million . . . . Net income for Thethird quarter was $10 .6 million or $0 .29 per share . . . .
2 7
28
- 73 - 98cv0928-L(AJB)
1 Commenting on The results, Steven M . Lash, ExecutiveVice President and Chief Financial Officer stated, "W e
2 are pleased to report record earnings for The thirdquarter . FDA's overall medical loss ratio in The third
3 quarter of 1997 was 70 .4% . This represents The fourt hsequential quarter of MLR improvement . In addition, our
4 G&A expenses continued to decrease as a percentage ofrevenues which can be attributed to The continue d
5 consolidation of acquisitions, synergy achievements andimprovements in productivity . "
6These statements were false because defendants had falsified FPA's
7financial results as described in ¶139-78 .
8
135 . On 10/30/97, subsequent to The release of its 3rdQ 19979
results, FPA held a conference call for securities analysts, money10
and portfolio managers, institutional investors and large FPA11
shareholders . During The call - and in follow-up conversations12
with participants - Lizerbram, Flam and Lash directly disseminated13
important information to The market by stating :
14
• FPA's core business operations were strong and it was15 achieving strong "same store" member growth, due to The
quality of service and medical care it was providing and The16 demand for its services by both third-party payors and
physicians, which would enable FPA to continue strong internal17 growth for The foreseeable future .
18 • FPA's financial condition was very sound and The Companyhad sufficient liquid assets to fund its ongoing business
19 operations, as well as its aggressive acquisition program .
20 • FPA's growth-by-acquisition strategy was succeeding, a sFPA was successfully integrating The companies and other
21 operations it had acquired into its business, whilesuccessfully lowering The medical loss ratios of those
22 businesses and improving their profitability .
23 • FPA was not only successfully integrating The companiesand other business operations it had acquired, but, in fact,
24 was ahead of schedule in integrating those operations ,specifically Foundation Health, which was performing ahead of
25 budget and expectations .
26 • FPA was successfully cutting The medical expenditures ofThe companies and other business operations it had acquired by
27 micromanaging hospital admissions and discharges and utilizin gother proven cost-reduction protocols and not by cutting The
28 quality of care or refusing medical care desired by eitherpatients or their treating physicians .
- 74 - 98cv0928-L(AJB)
1 • FPA was cutting its administrative costs as a percentage
of revenue due to efficient management techniques .2
• FPA's IBNR medical expense reserve was set at3 conservative and more than sufficient levels .
4 • As a result of The foregoing, FPA was achieving recordfinancial results which were "high-quality" results due to
5 improved operations and lower costs .
6 • While FPA's enrollment and revenues declined slightly inThe 3rdQ from The 2ndQ, this was The result of a deliberate
7 decision by FPA to eliminate certain unprofitable operation sthat came with recent acquisitions and did not indicate any
8 problems with FPA's business .
9 • While FPA's accounts receivable increased in The 3rdQfrom The 2ndQ, this was due primarily to The strong growth in
10 FPA's business and The temporary withholding of certai nshared-risk receivables ; however, payors were not disputing
11 these receivables, they were all collectible and FPA was nothaving any problems with its accounting receivables .
12• As a result of The foregoing favorable factors, FPA's
13 business was performing even better than internally forecastedand, as a result, FPA was raising its 98 and 99 EPS forecast s
14 to $1 .20-$1 .38 and $1 .85+, respectively, and forecasting thatFPA would be able to obtain EPS growth of 25%-30% over The
15 next several years .
16 136 . On 10/30/97, Oppenheimer issued a report on FPA, written
17 by Price, which was based on and repeated information provided to
18 Price in The 10/30/97 conference call and in follow-up
19 conversations with Lizerbram, Flam or Lash . The report continued
20 to forecast 1998 EPS of $1 .35 for FPA and stated :
21 FPA reported high-quality 3Q results, ahead of ourexpectations . . . Such better than expected EPS were
22 generated primarily as a function of remarkably stron gsame-store revenue growth and substantial progress made
23 in The integration of acquisitions .
24
25 On a sequential-quarter basis, enrollment declined
from 2Q's 965,000, reflecting The intentional elimination
26 of certain unprofitable accounts that had been added toFPA's books through recent acquisitions .
273Q revenues were $241 million, down from revenues of
28 $245 million reported during 2Q but up 49% from revenuesof $161 million generated in The year-ago quarter . The
- 75 - 98cv0928-L(AJ9)
1 soft sequential-quarter revenue comparison reflects Thefact that FPA culled from its books approximately $1 1
2 million in quarterly revenue associated with certainunprofitable accounts that it had inherited through
3 recent acquisitions .
4
5 FPA's consolidated 3Q medical loss ratio (MLR) was
70 .4%, down from 71 .3% during 2Q, reflecting lower cost s6 related to The culling of unprofitable contracts, as well
as continued progress in lowering medical costs company-7 wide .
8 SG&A expenses represented 18 .7% of revenue, downfrom 19 .8% during The prior quarter . . . . Such expense
9 reductions reflect The ongoing consolidation o facquisitions and success in leveraging incremental
10 revenues over The company's existing corporate andbranch-level infrastructure .
11137 . On 10/31/97, Merrill Lynch, Bear Stearns, Needham, UBS
12and First Boston issued similar reports on FPA, based on and
13repeating information provided in The 10/30/97 conference call and
14
in follow-up conversations with Lizerbram, Flam or Lash .
15
138 . Notwithstanding FPA reporting record 3rdQ 1997 EPS of
16
$ .29 on 10/30/97, FPA's stock fell sharply from $32-1/2 per share17
on 10/29/97 to just $22-3/8 per share on 10/31/97, due to investor
18
concerns over The decline in FPA patient enrollment and its19
sequential revenue decline, as well as The decrease in its IBNR20
cost reserves and The increase in its accounts receivable . This21
sharp price decline posed a very serious danger to The Individual
22
FPA Defendants and they were determined to halt The decline andl23
push FPA's stock back up higher . Thus, they insisted to analysts
24
that The patient enrollment and revenue declines were entirely due25
to a deliberate decision to cull unprofitable accounts inherited in26
recent acquisitions, The IBNR reserve decline was due to a shift in27
The mix of FPA's business and The increase in its accounts
28receivable due to The growth of its business and a temporar y
- 76 - 98cv0928-L(AJB)
1 withholding of shared-risk payments . They insisted that FPA's
2 business model and plan were intact and its ongoing EPS and profits
3 would be unaffected .
4 139 . On 10/31/97, Oppenheimer issued a report on FPA, written
5 after analyst Price had discussions with Lizerbram, Flam and Lash
6 which was based on and repeated information provided to Price by
7 them. Lizerbram, Flam or Lash reviewed this report and assured
8 Price that it was accurate . The report forecast 1998 EPS of $1 .35
9 for FPA and stated :
10 Key Point s
11 FPA's stock traded down sharply on October 31 inresponse to The stock's downgrade by another brokerage
12 house . The downgrade was based on several concerns thatwe believe are overblown, as follows :
13Incurred But Not Reported (IBNR) Reserves Decreased
14 During The Quarter :
15 IBNR reserves declined from $126 million to $111million, reflecting a decline in revenue and consequent
16 reserves held against that revenue . More important, Th edecline reflected an increase in The percentage of
17 specialist physicians that are paid through capitation(whereby payments are made at The start of each month an d
18 against which reserves need not be held) rather thanthrough traditional fee-for-service payments (which are
19 paid over time as claims are submitted) . Specifically ,The percentage of specialist revenues that are capitated
20 increased from 25% to 35% during The quarter .Accordingly, we are comfortable that The decline i n
21 reserves makes sense vis-a-vis The shift in revenue mix .
22 Accounts Receivable Increased From 20 To 3Q :
23 Accounts receivable spiked up from $155 millionduring 2Q to $177 million during 3Q, reflecting two
24 issues :
25 + Approximately $4 million of The sequential-quarterincrease was attributable to The acquisition of a small
26 emergency department management company completed duringThe quarter, as well as to normal growth in fee-for-
27 service revenues .
28 • The remaining $18 million related to a temporarywithhold of certain hospital payments or to a newl y
- 77 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
11
12
1 3
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
established 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 exceeded
expectations 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-term
imp= .t of a contract with Aetna ; FPA's balance sheet and
cas .~ flow ; and The number of doctors affiliated with FPA .
+ There are good reasons behind The revenue shortfall ;it 'Lese reasons had been properly communicated byman~_3ement during The quarter, rather than after it wascompleted, we believe there would not be cause forconcern .
• While not expected to provide a material boost to4Q97, The Aetna contract should do so in 1998 . Inaddition, The contract should be The first of many thatrepresent a new phase of growth for FPA and could makeour projections conservative .
• 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
- 78 - 98cv0928 -L(AJB)
1 FPA's cash flow statements and balance sheets havebeen inordinately affected by acquisitions . . . . [A]fter
2 adjustment, FPA generated roughly $40 million in cashflow from operations for The nine months . . . .
3
4
Claims payable including incurred but not reported5 claims (IBNR) was down about $24 million in 3Q97 . While
this could be an indicator of poor earnings quality, b y6 under-recognizing The estimated provision for current
medical expenses, after speaking with The company we do7 not believe this to be The case . Not only did The
company pay down significant past-due claims related to8 acquired companies, as described above, but The company
has actively been capitating more specialists ; during The9 course of The year, this percentage has climbed roughly
from 25% to 35% . The reason to do this is to improve10 margins and reduce FPA's medical risk . The effect on
cash flow is to reduce IBNR, as The company now pays11 these specialists upfront and their "tail" of claims
payable fades away . These two items more than explain12 The drop in The claims payable including IBNR balance
sheet item .13
141 . On 11/3/97, Bear Stearns issued a report on FPA, written
14
after analyst Frazier had discussions with Lizerbram, Flam and Lash
15
which was based on and repeated information provided to Frazier by16
them . Lizerbram, Flam or Lash reviewed this report and assured17
Frazier that it was accurate . The report forecast 1998 EPS of18
$1 .33 . The report also stated :19
Another issue relates to accounts receivable being20 up in The third quarter over The second quarter . . . .
These receivables are good and completely collectible ,21 according to The company . . . . We are not ecstatic that
some HMOs are now paying in arrears, but it is a logical22 explanation for The A/R uptick . Additionally, there wa s
a reduction in IBNR (incurred but not reported) claims .23 IBNR went from 126 in Q2 to 111 in Q3 .
24 On 11/3-4/97, Merrill Lynch and H .C . Wainwright & Co ., Inc ., issued
25 similar reports on FPA . The foregoing statements by defendants,
26 and analyst reports (which repeated defendants statements) in
27 11135-41 above, were false for The reasons set forth in ¶1137 and
28 158 .
- 79 - 98cv0928-L (AJB)
1 142 . On 11/15/97, The Individual Defendants caused FPA to
2 file with The SEC FPA's Report on Form 10-Q for The quarter ended
3 9/30/97, which was signed by Flam and Lash and contained its
4 previously announced 3rdQ 1997 results . The Form 10-Q also
5 contained The Individual FPA Defendants' representation that The
6 financial results therein were "a fair presentation of The
7 financial position of FPA ." This statement was false because
8 defendants had falsified FPA's financial results as described in
9 1138-78 .
10 143 . On 12/9/97, FPA executives Lizerbram, Flam and Lash
11 appeared at an analyst conference in New York City . In a formal
12 presentation and in break-out sessions, they told The assembled
13 securities analysts, money and portfolio managers, institutional
14 investors, brokers and stock traders :
15 FPA's fundamental business operations were strong and itwas achieving strong "same store" member growth, due to The
16 quality of service and medical care it was providing and Th edemand for its services by both third-party payors and
17 physicians, which would enable FPA to continue strong internalgrowth for The foreseeable future .
18• FPA's financial condition was very sound, its core
19 business was generating strong positive cash flow and The
Company had sufficient liquid assets to fund its ongoin g
20 business operations, as well as its aggressive acquisitionprogram .
21
• FPA's growth-by-acquisition strategy was succeeding, as22 FPA was successfully integrating The companies and other
operations it had acquired into its business, while23 successfully lowering The medical loss ratios of those
businesses and improving their profitability .24
• FPA was not only successfully integrating The companies25 and other business operations it had acquired, but, in fact,
was ahead of schedule in integrating those operations ,26 specifically Foundation Health, which was performing ahead of
budget and expectations .27
• FPA was successfully cutting The medical expenditures of28 The companies and other business operations it had acquired by
micromanaging hospital admissions and discharges and utilizing
- 80 - 98cv0928 -L(AJB)
1 other proven cost-reduction protocols and not by cutting Thequality of care or refusing medical care desired by either
2 patients or their treating physicians .
3 • FPA was cutting its administrative costs as a percentageof revenue, due to efficient management techniques .
4
• FPA's 1BNR medical expense reserve was set at5 conservative and more than sufficient levels .
6 • As a result of The foregoing, FPA was achieving recordfinancial results which were "high-quality" results due to
7 improved operations and lower costs .
8 • While FPA's enrollment and revenues declined slightly inThe 3rdQ from The 2ndQ, this was The result of a deliberate
9 decision by FPA to eliminate certain unprofitable operation sthat came with recent acquisitions and did not indicate any
10 problems with FPA's business .
11 • While FPA's accounts receivable increased in The 3rdQ
from The 2ndQ, this was due primarily to The strong growth in
12 FPA's business and The temporary withholding of certainshared-risk receivables ; however, payors were not disputing
13 these receivables, they were all collectible and FPA was nothaving any problems with its accounting receivables .
14• As a result of The foregoing favorable factors, FPA's
15 business was performing even better than internally forecastedand, as a result, FPA was raising its 98 and 99 EPS forecas t
16 to $1 .30+ and $1 .85+, respectively, and forecasting that FPA
would be able to obtain EPS growth of 25%-30% over The next17 several years .
18 144 . On 12/9/97, Oppenheimer issued a report on FPA, written
19 by Price, which was based on and repeated information provided to
20 Price on 12/9/97 at The FPA analyst conference . The report
21 forecast 1998 EPS of $1 .38 for FPA and also stated :
22 Following FPA's analyst luncheon, hosted yesterday(12/8) in New York, we are more convinced than we have
23 ever been that FPA has The most compelling model in Th e
PPM industry, acting as an outsourcing agent to HMOs by24 organizing primary care physicians into cost-effective
networks that are able to provide prepaid care to member s25 on a professionally or globally capitated basis . . . .
26 In our opinion, FPA did a thorough job of addressingcertain investor misperceptions that have put a cloud
27 over The stock in The past month and further expect Thecompany to meet or beat investor expectations . . . .
28
- 81 - 98cv0928-L(AJB)
1 Importantly, FPA management expressed comfort withanalyst expectations of EPS growth of 50% for 1998 . . . .
2145 . On 12/9/97, Needham and UBS issued similar reports on
3FPA, based on and repeating information provided at The 12/9/97
4analyst luncheon .
5146 . On 1/8/98, FPA issued a release headlined and stating :
6FPA MEDICAL MANAGEMENT, INC, COMMENTS ON OPERATIONS AND
7 FOURTH QUARTER
8 FPA Medical Management, Inc . today commented on The
strength of its California-based business in response to
9 investor concerns following a recent announcement by
another physician practice management services provider,10 related to market and industry conditions . FPA Medical
Management stated that it has a strong 10-year history i n11 California and its current operations are performing as
expected .12
Steven M . Lash, Executive Vice President and Chief
13 Financial Officer of FPA Medical Management, Inc .,stated, We have properly structured our California-based
14 operations and continue to manage this part of ournetwork effectively . "
15FPA reiterated The following issues regarding its
16 California operations :
17
18 • All California transactions, including The most
recent, have been fully integrated . . . .19
Steven Lash also stated, "We remain comfortable with20 analysts' earnings estimates for . . . 1998 as well as same
market growth assumptions .21
147 . On 1/26/98, Merrill Lynch issued a report on FPA, written22
after analyst Weakley had discussions with Lizerbram, Flam and Lash23
which was based on and repeated information provided to Weakley by24
them . Lizerbram, Flam or Lash reviewed this report and assured
25
Weakley that it was accurate . The report forecast 1998 EPS of
26
$1 .35, a 30% five-year EPS growth rate and stated :27
FPAM has exceeded earnings expectations in each of28 The past four quarters, as internal growth trends have
surpassed investor expectations . Moreover, The company' s
- 82 - 98cv0928 -L(AJB)
1 ability to slash costs at acquired companies has beenamply demonstrated time and again, a further indication
2 of management's focus on bottom line results .
3
4 Margin Improvements Expected From Scale Economie s
5 Total Medical Expenses, as a percentage of sales,have shown sequential declines in each of The last 4
6 quarters, going from 78 .2% in The quarter ended September30, 1996 to 70 .4% last quarter .
7*
8
These dramatic improvements in expense margins are9 attributable to The company's quick and efficient
integration of its recent acquisitions and increased10 productivity .
11 148 . On 2/12/98, FPA executives Lizerbram, Flam and Lash
12 appeared at The Smith Barney Health Care Conference in New York
13 City . In a formal presentation and in break-out sessions, they
14 told The assembled security analysts, money and portfolio managers,
15 institutional investors, brokers and stock traders :
16 • FPA's core business fundamentals and operations were verystrong and it was achieving strong "same store" member growth,
17 due to The quality of service and medical care it wa sproviding and The demand for its services by both third-party
18 payors and physicians, which would enable FPA to continuestrong internal growth for The foreseeable future .
19• FPA's financial condition was very sound and The Company
20 had sufficient liquid assets to fund its ongoing business
operations, as well as its aggressive acquisition program .21
• FPA's growth-by-acquisition strategy was succeeding, as22 FPA was successfully integrating The companies and other
operations it had acquired into its business, while23 successfully lowering The medical loss ratios of those
businesses and improving their profitability .24
• FPA was not only successfully integrating The companies25 and other business operations it had acquired, but, in fact,
was ahead of schedule in integrating those operations ,26 specifically Foundation Health, which was performing ahead of
budget and expectations .27
• FPA was successfully cutting The medical expenditures of28 The companies and other business operations it had acquired by
micromanaging hospital admissions and discharges and utilizing
- 83 - 98cv0928 -L(AJB)
1 other proven cost-reduction protocols and not by cutting Thequality of care or refusing medical care desired by either
2 patients or their treating physicians .
3 • FPA was cutting its administrative costs as a percentageof revenue, due to efficient management techniques .
4• FPA's IBNR medical expense reserve was set at
5 conservative and more than sufficient levels .
6 As a result of The foregoing, FPA was achieving recordfinancial results which were "high-quality" results due to
7 improved operations and lower costs .
8 • While FPA's enrollment and revenues declined slightly inThe 3rdQ from The 2ndQ, this was The result of a deliberate
9 decision by FPA to eliminate certain unprofitable operationsthat came with recent acquisitions and did not indicate any
10 problems with FPA's business .
11 • While FPA's accounts receivable increased in The 3rdQfrom The 2ndQ, this was due primarily to The strong growth in
12 FPA's business and The temporary withholding of certai nshared-risk receivables ; however, payors were not disputing
13 these receivables, they were all collectible and FPA was nothaving any problems with its accounting receivables .
14• As a result of The foregoing favorable factors, FPA's
15 business was performing even better than internally forecastedand, as a result, FPA was reaffirming its 98 and 99 EP S
16 forecasts of $1 .40+ and $ .185+, respectively, and continued tobelieve that FPA would be able to obtain EPS growth of 25%-30%
17 over The next several years .
18 149 . On 2/18/98, Needham issued a report on FPA, written by
19 Lirola, which was based on and repeated information provided to
20 Lirola in a meeting of FPA executives with The Needham sales force
21 on 2/12/98 . The report forecast 1998 EPS of $1 .47, and stated :
22 Recap on FPA Management Presentation 2/12/9 8
23 * Management emphasized The soundness of itsoperations :
24* Integration of acquisitions after 2 quarters
25* No claims backlog
26* Internal growth will continue to be strong in 1998
27 . . .
28 * Full acquisition pipeline with visibility in Q298 .
- 84 - 98cv0928-L(AJB)
1
2
3
4
5
6
7
8
9
10
1 1
12
13
14
1 5
16
1 7
18
19
2 0
21
22
2 3
2 4
25
26
27
28
* 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 11143-49 above, were
false and misleading for The reasons set forth in T T37 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 FOURTHQUARTER AND YEAR END RESULTS ; EARNS 30 CENTS PER SHAREFOR THE QUARTE R
FPA's operating . . . [njet 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 T 1 39-78 .
151 . On 3/6/98, subsequent to The release of its 1997 results,
FPA held a conference call for securities analysts, money and
portfolio managers, institutional investors and large FPA
shareholders . During The call - and in follow-up conversations
with participants - Lizerbram, Flam and Lash disseminated important
information to The market by stating :
85 98cv0928 -L(AJB)
1 • FPA's fundamental business operations were strong and itwas achieving 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 into its business, while8 successfully lowering The 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 • FPA was cutting its administrative costs as a percentage
of revenue, due to efficient management techniques .
17
• FPA's IBNR medical expense reserve was set at18 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 • While FPA had overall negative cash flow in The 4thQ, itsoperating cash flow was positive . Overall negative cash flow
22 was a natural result of replenishing The operational needs ofacquired companies . Excluding The impact of acquisitions, FPA
23 generated cash in The quarter and The Company had $16 millionin cash on hand as of 12/31/97 .
24• While FPA had lost some enrollment at PacifiCare and from
25 Foundation Health, The growth FPA was enjoying outside ofCalifornia was more than offsetting these losses and FP A
26 continued to expect strong internal growth going forward .
27 • As a result of The foregoing favorable factors, FPA's
business was performing even better than internally forecasted
28 and, as a result, FPA was continuing to forecast 98 and 99 EPS
of $1 .35+ and $1 .85+, respectively, and continued to believe
- 86 - 98cv0928 -L(AJB)
1 that FPA would be able to obtain EPS growth of 25%-30% overThe next several years .
2
152 . On 3 /6/98, First Boston issued a report on FPA, written3
by France , which was based on and repeated information provided to4
France in The 3 /6/98 conference call and in follow-up conversations5
with Lizerbram , Flam or Lash . The report forecast 1998 EPS of
6
$1 .35, a 25%-30 % five-year EPS growth rate, and stated :7
FPAM ' s results continue to exceed expectations . . . .8
For 1997, FPAM ' s medical loss ratio came in at 71 .2%9 versus 77 .5% in 1996 . . . . The improvement in medical
and administrative costs resulted from The implementation10 of new medical technologies and The integration of
regional service centers .11
153 . On 3 / 6/98, Merrill Lynch issued a report on FPA, written
12
by Weakley , which was based on and repeated information provided to13
Weakley in The 3/6/98 conference call and in follow-up14
conversations with Lizerbram, Flam or Lash . The report forecast15
1998 EPS of $ 1 .35, a 30% five -year EPS growth rate for FPA and16
stated :
17Due to synergies from acquisitions , The company reduced
18 its medical services expense over 800 basis points . . .
[to} a bit over 71% of revenues .
19154 . On 3/6/98, Oppenheimer issued a report on FPA , written by
20Price, which was based on and repeated information provided tol
21Price in The 3/6/98 conference call and in follow-up conversations
22with Lizerbram , Flam or Lash . The report forecast 1998 EPS of
23$1 .38 for FPA and stated :
24FPA's high -quality 4Q97 results reaffirm our
25 conviction that The company will continue to meet orexceed The ambitious goals that it has set out fo r
26 itself , having established itself as one of The best-positioned companies overall in The physician practice
27 management sector . . . . The better-than -expected EPS weregenerated primarily as a function of remarkably strong
28 same-store revenue growth and continued progress made inThe integration of acquisitions .
- 87 - 98cv0928 - L(AJB)
I * *
2 Excluding Acquisitions, operating Cash Flow Was Strong
3 FPA used $38 million in cash during 4Q, includingThe addition of $30 million to working capital a t
4 acquired companies and The payment of $17 million intransaction costs related to these acquisitions .
5 Excluding The impact of acquisitions , FPA generated cashduring The quarter .
6* * *
7At The end of 4Q, FPA had $227 million in senior debt
8 outstanding , with total debt capacity of $285 million onits revolver . When coupled with The company's $1 9
9 million in cash on hand, FPA has approximately $75million in financing availability - giving it more
10 financial flexibility than we had expected .
11 155 . On 3 / 9/98, Bear Stearns issued a report on FPA, written
12 by Frazier , which was based on and repeated information provided to
13 Frazier in The 3 /6/98 conference call and in follow-up
14 conversations with Lizerbram , Flam or Lash . The report forecast
15 1998 and 1999 EPS of $ 1 .33 and $1 .85 , respectively, and stated :
16 While negative cash flow is never a cause fo rcelebration , given The phase that FPA is in its growth,
17 one would expect negative cash flow in 1997 inclusive oftransaction costs and capital needs for thes e
18 transactions . On a positive note, operational cash flow
in The quarter exclusive of non-recurring transactional19 costs and capital needs was positive . The company ha s
not made it a secret that at The care of its strategy is20 to acquire distressed companies that offer a unique
opportunity for an operational turnaround . The company' s21 management has proven itself to be quite adept at turning
around operations at such acquired properties . In our22 judgement , negative cash flow and an uptick in debt
levels is a natural consequence of FPAM acquiring The23 number of companies that it has in 1997 . . . . We see The
cash flow situation stabilizing over time as The compan y24 continues to deliver operational synergies and
enhancements across its acquisitions . . . .25
FPA Medical reported a solid on - consensus fourth26 quarter . . . . Margin performance was quite impressive in
The quarter with sequential improvements in both The SG&A
27 and medical loss ratios evident in The quarter .
28
- 88 - 98cv0928 -L(AJB)
1 Accounts receivable in The third quarter were $181million . The increase in accounts receivables is due t o
2 an increase in capitation receivables and normal businessgrowth. The growth in capitation receivables is due to
3 conformance of accounting policies with companies in afull transaction to achieve consistent accounts
4 receivables recognition, an increase in enrollment whereThe HMO pays The claim, and an increase in enrollmen t
5 where The HMO pays in arrears . Incurred But Not Reported(IBNR) and claims payable increased $30 million to $150
6 million . . . . Days of IBNR and claims payable at Decembe r31, 1996 was 64, at September 30, 1997 they were 61 days,
7 and at December 31, 1997 they were 70 . This is a ratherdramatic and favorable turn in The IBNR picture .
8156 . On 3/9/98, Needham issued a report on FPA, written by
9
Lirola, which was based on and repeated information provided to10
Lirola in The 3/6/98 conference call and in follow-up conversations11
with Lizerbram, Flam or Lash . The report forecast 1998 and 199912
EPS of $1 .47 and $1 .88, respectively, and stated :13
* FPA reported a strong 4Q 97 . . . . Medical Loss Ratio14 (MLR) declined sequentially by 2 .4% to 71 .2% .
15
16 * We believe that on an on-going basis, FPA generates$10-15 million quarter excess cash from core operations .
17157 . FPA's stock fell after The release of FPA's 4thQ 1997
18
results when a few analysts criticized FPA's cash flow situation .19
However, Lash stated that such criticism was based on incomplete20
information and that The analysts "misunderstood some information21
provided by The Company," while insisting that FPA was achieving22
strong positive cash flow from its core operations and would23
achieve overall positive cash flow in 1998, as well as 1998 and24
1999 EPS of $1 .35+ and $1 .85+, respectively . Thus, FPA's stock25
stabilized and continued to trade at artificially inflated levels .26
Each of The statements in ¶¶151-57 above were false for The reasons
27
set forth in 137 and 158 .28
- 89 - 98cv0928 -L(AJB)
1 158 . Each of The positive statements about FPA's business
2 during The Class Period between 2/3/97-3/9/98, as set forth in
3 1199-161, was materially false and misleading when issued, and
4 failed to disclose, inter alia, The following adverse information
5 which was then known only to defendants due to their access to
6 internal FPA data :
7 (a) Defendants falsified FPA's reported results for The
8 4thQ 1996, as well as all four quarters of 1997, by misaccounting
9 for The Foundation Health acquisition, by manipulating reserves fo r
10 medical expenses to artificially low levels, by burying and thus
11 misaccounting for operating costs in one-time special charges
12 incurred in acquisitions, by refusing to write down impaired
13 goodwill from The Foundation Health and other acquisitions, and by
14 engaging in The other accounting tricks and artifices as detailed
15 at ¶j39-78 ;
16 (b) Defendants deceived The public regarding The rate of
17 FPA's internal or organic growth, which was static or declining, by
18 issuing public reports that combined existing operations with
19 newly-acquired operations, thereby concealing The poor growth rate
20 for FPA's ongoing or core operations ;
21 (c) FPA's purported record financial results reported
22 during The Class Period were not due to allegedly efficient
23 management techniques, allegedly successful integration of acquired
24 companies and business operations, or allegedly rigorous
25 micromanagement of medical costs, as represented, but rather, to
26 The falsification of its financial results as detailed at 1139-78 ;
27 ( d) Defendants were falsifying FPA's reported operating
28 results by artificially lowering FPA's operating and medical
I-- 90 - 98cv0928 -L(AJB)
1 expenses and thus its medical loss ratio, in part by improperly
2 assigning operating costs to one-time acquisition charges and by
3 manipulating its IBNR accrual in connection with its acquisitions,
4 resulting in IBNR being set at artificially low levels ;
5 (e) FPA was encountering serious and persistent
6 difficulties in integrating The acquired operations of Foundation
7 Health and AHI, incurring huge costs and expenses, including
8 excessive medical expenses at those operations ;
9 (f) Defendants were causing FPA to arbitrarily refuse
10 needed and/or desired medical care requested by patients or their
11 treating physicians, resulting in increasing customer complaints
12 and physician hostility, which was having an adverse impact on
13 FPA's ability to retain existing members, to attract new members,
14 and to retain existing or obtain new treating physicians ;
15 (g) To preserve cash and to mask The Company's
16 deteriorating cash position, defendants were causing FPA to not pay
17 claims and suppliers in a timely fashion, such that doctors refused
18 to see FPA patients until their accounts were brought current ;
19 (h) FPA was encountering markedly lower productivity
20 from physicians in certain parts of its network, especially from
21 physicians whose compensation had been switched to a salary basis,
22 resulting in those physicians refusing to work as many hours as had
23 historically been The case ;
24 (i) Due to The lower quality of care it was delivering
25 to its member patients, FPA was encountering a markedly slower rate
26 of internal growth, as customers and potential customers who had al
27 choice as to whether to utilize FPA's services were increasingly
28 refusing to select or use FPA because of its arbitrary denial o f
- 91 - 98cv0928-L(AJB)
1 necessary medical treatment and its markedly reduced quality of
2 care ;
3 (j) As a result of The foregoing adverse conditions
4 regarding FPA's business, FPA's forecasts of strong "same store" or
5 internal member growth during 1998-1999 were false when made,
6 because such growth could not and would not be obtained ; and
7 (k) As a result of The foregoing negative conditions
8 regarding FPA's business, The forecasts of strong 1998 and 1999 EPS
9 growth by FPA were false when made, because those results could not
10 and would not be achieved .
11 159 . On 3/26/98, FPA announced it was replacing its CEO (Flam)
12 and CFO (Lash) . FPA's release stated :
13 Steven Lash also stated, "Our business continues totrack according to expectations and we remain encouraged
14 by The first quarter's operating and financialperformance . "
15Dr . Sol Lizerbram, who remains as Chairman stated,
16 "I am excited about The prospects for The Company in Thecoming years .
17160 . On 3/27/98, The Wall Street Journal reported that Flam
18said he was leaving because "I'm an entrepreneur who has helped to
19grow a great company, " and stated, " [f] inancial results continue to
20track expectations" and "we remain encouraged by The first
21quarter's performance ." Flam told analysts "I feel very
22comfortable about The first quarter ."
23161 . On 4/1/98, The Individual FPA Defendants caused FPA to
24file its 1997 Form 10-K with The SEC, which was signed by Dresnick
25
and Lizerbram . The Form 10-K included FPA's 1997 financial results26
with The representation that such results were "in conformity with27
[GAAP) . " FPA also held a conference call for analysts during which28
Lizerbram and Dresnick forecast that FPA would achieve 1stQ 199 8
- 92 - 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
EPS of $ .30-$ .31 and 1998 EPS of $1 .37 and assured them that FPA
was not suffering any liquidity problems and would have positive
cash flow from operations during 1998 .
162 . The statements made on 3/26/98 and 3/31/98 were false,
and were made to conceal FPA's severe cash problems so defendants
Lizerbram, Flam, Lash and Hassman could justify amending thei r
employment agreements, or entering into consulting agreements, to
pay themselves millions of dollars of salary, consulting fees
and/or severance payments, even in The event their fraudulen t
conduct was uncovered and they were fired for cause . In truth ,
FPA's business was collapsing, and was in a serious liquidity/cash
flow crisis . FPA was preparing to take writedowns of $200 million,
which would create huge losses and put it into default under it s
lending agreements . Flam had been pushed out for his gros s
mismanagement, while Lash had been relieved of his duties by
Lizerbram and The other FPA directors so that Lash could be blame d
for The falsification of FPA's financial results, which The FPA i
Board knew would shortly be exposed .
163 . On 5/15/98, FPA made a series of shocking revelations
that contradicted The Individual FPA Defendants' positive
statements during The Class Period, including The recent assurances
of strong lstQ 1998 EPS and improving cash flow . First, defendants
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 Healt h
- 93 - 98cv0928-L(AJB)
1 1
2
3
4
5
6
7
8
9
1 0
11
12
13
14
15
16
17
18
1 9
20
21
22
2 3
24 1
25
26
27
28
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 .
CLASS ACTION ALLEGATIONS
165 . Plaintiffs bring this action as a class action pursuant
to Federal Rule of Civil Procedure 23 on behalf of all persons who
purchased or otherwise acquired The publicly traded securities of
FPA (The "Class"), including FPA's common stock, its 6-1/2%
convertible debentures and options to purchase FPA common stock ,
- 94 - 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
during The Class Period . Excluded from The Class are defendants,
related entities controlled by them, and members of their families .
166 . The members of The Class are so numerous that joinder of
all members is impracticable . The disposition of their claims in
a class action will provide substantial benefits to The parties and
The Court . During The Class Period, FPA had more than 43 million
shares of stock outstanding, owned by hundreds of shareholders .
167 . There is a well-defined commonality of interest in The
questions of law and fact involved in this case . Common questions
of law and fact predominate, including The following :
(a) Whether The federal securities laws were violated b y
defendants ;
(b) Whether defendants omitted and/or misrepresented
material facts ;
(c) Whether defendants' statements omitted material
facts necessary to make The statements made, in light of The
circumstances under which they were made, not misleading ;
(d) Whether defendants acted with scienter ;
(e) Whether The price of FPA's securities were
artificially inflated during The Class Period ; and
(f) The extent of damage sustained by Class members and
The appropriate measure of damages .
168 . Plaintiffs' claims are typical of those of The Class .
Plaintiffs and The Class sustained damages from defendants'
:wrongful conduct-
1 169 . 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 .
- 95 - 98cv0928 -L(AJB)
1 170. A class action is superior to other available methods for
2 The fair and efficient adjudication of this controversy .
3 171 . The prosecution of separate actions by individual Class
4 members would create a risk of inconsistent and varying
5 adjudications .
6 STATUTORY SAFE HARBOR
7 172 . The statutory safe harbor provided for forward-looking
8 statements under certain circumstances does not apply to any of The
9 allegedly false forward-looking statements pleaded in thi s
10 Complaint because The statutory safe harbor does not apply to FPA's
11 financial statements and because none of The particular oral
12 forward-looking statements pleaded herein were identified as a
13 "forward-looking statement" when made . None of The written
14 forward-looking statements made were identified as forward-looking
15 statements . Nor was it stated as to either type of forward-looking
16 statement that actual results "could differ materially from those
17 projected ." Nor did meaningful cautionary statements identifying
18 important factors that could cause actual results to differ
19 materially from those in The forward-looking statements accompany
20 those forward-looking statements . In any event, each of The
21 forward-looking statements alleged herein was authorized by an
22 executive officer of FPA, and was actually known by each of The
23 Individual FPA Defendants to be false when made .
24 FIRST CLAIM FOR RELIE F
25 Violation of §§10 (b), 20(a ) and Rule 10b-5
26 173 . Plaintiffs incorporate ¶$1-172 by reference .
27 174 . Each defendant : knew The adverse, non-public information
28 about FPA's financial results and then-existing busines s
- 96 - 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
(conditions, which was not disclosed ; and participated in drafting ,
previewing, and/or approving The misleading statements, releases ,
reports, and other public representations about FPA .
175 . During The Class Period, defendants disseminated or
approved The false statements specified above, which they knew were
false in that they contained misrepresentations and failed to
disclose material facts necessary in order to make The statement s
made, in light of The circumstances under which they were made, no t
misleading .
176 . Defendants violated §10(b) and Rule 10b-5 in that they :
(a) Employed devices, schemes, and artifices to defraud ;
(b) Made untrue statements of material facts or omitte d
to state material facts necessary in order to make statements made,
in light of The circumstances under which they were made, notl
misleading ; or I
(c) Engaged in acts, practices, and a course of business
that operated as a fraud or deceit upon plaintiffs and others
similarly situated in connection with their purchases of FPA commons
stock during The Class Period .
177 . Plaintiffs and The Class have suffered damages in that ,
in reliance on The integrity of The market, they paid artificially
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 thei r
stock ownership, management positions or membership on FPA's Board,
were controlling persons of FPA and had The power and influence ,
- 97 - 98cv0928 -L(AJB)
1 and exercised The same, to cause it to engage in The illegal
2 conduct complained of herein . These defendants are thus liable
3 under §20(a) . In addition, each defendant is liable under §20(a)
4 because each defendant controlled each of The other defendants .
5 SECOND CLAIM FOR RELIEF
6 Violation of §20A of The Exchange ActAgainst Defendants Dresnick ,
7 Flam , Hassman, Lash and Lizerbra.m
8 179 . Plaintiffs repeat and reallege X91-178 .
9 180 . By virtue of their positions as The top officers of FPA
10 and their role in The fraud described herein, defendants Dresnick,
11 Flam, Hassman, Lash and Lizerbram, possessed material non-public
12 information about FPA when they sold millions of shares of their
13 FPA common stock to plaintiffs and The other members of The Class .
14 181 . By virtue of either their participation in The scheme to
15 defraud investors or of their sales of stock while in possession of
16 material non-public information about FPA, The defendants named in
17 this claim for relief violated §10(b) of the 1934 Act and
18 applicable rules and regulations thereunder .
19 182 . These defendants' sales of FPA common stock during The
20 Class Period were made contemporaneously with FPA stock purchases
21 by at least one or more of The plaintiffs, which are set forth in
22 Appendix B attached hereto .
23 183 . Plaintiffs and all The other members of The Class who
24 purchased shares of FPA common stock contemporaneously with The
25 these defendants' sales of FPA common stock : (1) have suffered
26 substantial damages because they relied upon The integrity of Thel
27 market, paid artificially inflated prices for FPA common stock as
28 a result of The violations of §10(b) and Rule lob-5 alleged herein ;
- 98 -- 98cv0928 -L(AJB)
1 and (2) would not have purchased FPA stock at The prices they paid,
2 or at all, if they had been aware that The market prices had been
3 artificially and falsely inflated by defendants' misleading
4 statements and concealment . At The time of The purchases by
5 plaintiffs and The members of The Class, The fair and true market
6 price of FPA common stock was substantially less than The prices
7 paid by them .
8 THIRD CLAIM FOR RELIEF
9 Violation of Cal . Corp . Code §§25400 and 25500
10 184 . Plaintiffs repeat and reallege ¶111-183 .
11 185 . At a time when they were selling or offering for sale FPA
12 securities, defendants made or participated in making false or
13 misleading statements for The purpose of inducing The purchase of
14 FPA securities by others . Defendants either knew or had reasonable
15 grounds for believing that these statements were false or
16 misleading . Defendants' statements had The effect of inflating The
17 price of FPA securities above The market value they would have
18 traded at had defendants' statements been accurate . Plaintiffs and
19 The members of The Class were damaged when they purchased FPA
20 securities at artificially inflated prices . As a result,
21 defendants violated §25400(d) of The California Corporations Code,
22 entitling members of The class to recover damages as provided for
23 in §25500 .
24 FOURTH CLAIM FOR RELIEF
25 Violation of Cal . Corp . Code 5525401 & 25501
26 186 . Plaintiffs repeat and reallege ¶111-185 .
27 187 . FPA offered and sold securities to members of The Class,
28 in particular those plaintiff doctors who sold their medica l
- 99 - 98cv0928-L(AJB)
1 j
2
3
4
5
6
7
9
10
11
12
13
14
35
16
1 7
18
19
20
21
22
2 3
24
25
26
2 7
28 1
practices to FPA, by means of registration statements and other
communications that included false or misleading statements of
material fact, resulting in a violation of Corporations Code
§25401 . Defendants controlled FPA within The meaning of
Corporations Code §25504 and knew or had reasonable ground to
believe that FPA's statements were false or misleading . In
addition, defendants materially assisted in FPA's wrongful conduct
within The meaning of §25504 .1 with The intent to deceive or
defraud plaintiffs .
188 . As a result, defendants are liable to those members of
The Class who purchased securities from FPA for damages as provided
for in Corporations Code §25501 .
FIFTH CLAIM FOR RELIEF
Violation of Cal . Civ . Code §§1709-10
189 . Plaintiffs repeat and reallege ¶{t1-188 .
190 . For The purpose of inducing plaintiffs and The Class
members to acquire FPA securities, and with The intent to deceive
plaintiffs and The Class members, defendants employed a scheme and
conspiracy to defraud . As set forth above, defendants made,
participated in The making of, or aided and abetted The making of
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)
I deceived Plaintiffs and The Class members regarding FPA's business
and financial condition ; (b) artificially inflated The price of FP A
- 100 - 98cv0928 -L(AJB)
1
2
3
4
5
6
8
9
10
1 1
12
13
14
15
16
1 7
18
19
2 0
21
22
23
24
2 5
26
27
28
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 Misrepresentatio n
193 . Plaintiffs repeat and reallege ¶~1-192, above, except
those paragraphs alleging knowing or reckless conduct .
194 . Among the direct and proximate causes of the
misrepresentations and omissions to state material facts set forth
above in 1199-161 was the negligence and carelessness of The
defendants .
195 . Plaintiffs reasonably relied on The statements and
omissions made or endorsed by defendants, as set forth above, were
ignorant of The falsity of these statements, believed them to be
true, and, as a result, suffered damages .
- 101 - 98cv0928 -L(AJB)
1
2
3
4 1
5
6
7
8
9
10
11
1 2
13
14
15
16
17
18
1 9
20
2 1
22
23
24
2 5
26
27
28
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows :
A . Declaring this action to be a proper class action ;
B . Awarding plaintiffs and The members of The Class damages
and pre-judgment and post-judgment interest and costs ;
C . Awarding equitable and/or injunctive relief, including
The imposition of a constructive trust upon The proceeds of
defendants' insider trading, pursuant to Rules 64, 65, and any
appropriate state law remedies ;
D . Awarding punitive damages ; and
E_ Awarding such other relief as this Court may deem just
and proper .
JURY DEMAND
Plaintiffs demand a trial by jury .
DATED this 20th day of January, 2000 .
MILBERG WEISS BERSHADHYNES & LERACH LLP
WILLIAM S . LERACHBLAKE M . HARPERARTHUR C . LEAHYSANGEETA G . PATEL
BLAK . HARPER
600 West Broadway, Suite 1800San Diego, CA 92101Telephone : 619/231-1058
BERGER & MONTAGUE, P .C .TODD S . COLLINSMICHAEL L . BLOCKJACOB A . GOLDBERG1622 Locust StreetPhiladelphia, PA 19103Telephone : 215/875-3000
Co-Lead Counsel for Plaintiff sN :\CASES\FPAM\CBX80220 .Cpt
- 102 - 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 $33.50 0665
Asch, Krugman Gail 11/26/97 665 $33 .500665
Asciutt io, 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 3Baak , Marinus W . 05/04/98 200 $11 .500
800
Barnabei , Albert & 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, Robe rt 01/08/98 300 $16.625Boose , Robert 01/12/98 300 $16.125Boose, Robert 01/13/98 300 $16.250
900
Brice, Robert 03/17/97 37 .543 $23.00037,543
Caristo, Michael A . 05/12/98 0000 $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
Colella, Fred 05/27/97 200 $19 .750200
Ehlert, George & Georgeanne 03/04/98 2,000 $23.500Ehlert, George & Georgeanne 05/08/98 2.400 $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, Do rothy 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 04124/98 300 $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 .000Giglio, 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 . 03/12197 300 $18 .750300
Henning, Bill 12/01/97 4,600 $18 .3004,600
Invesco Enterprises 03/27/98 1 .000 $16.31 31,000
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 . 12/03197 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 10 000 $23 .12510,000
Kottler, Donald 11/26/97 1 .479 $33 .5001,479
Lebowitz, Murray 03/12/98 100 $19 .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
Maize! , Luis 04/08/98 1,000 $15.37 5Maizel , Luis 04/29/98 1,000 $11 .688Maize[ , Luis 05/05/98 1,000 $11 .750Maize[ , 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 $7.875Maize !, Luis 05/15/98 1,000 $8.063Maize) , 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 04/16/98 000 $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 11/03/97 700 $25 .125Schwartz, O .H . & Ellen 11/03/97 300 $25 .125Schwartz, O.H . & Ellen 11/07/97 150 $23 .000Schwartz, 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 .375Schwa rtz, O.H . & Ellen 12/31/97 200 $19 .375Schwartz, O .H . & Ellen 03/13/98 600 $18 .875
3,200
Sedgh, Jonathan 05/08/97 500 $17 .750Sedgh, Jonathan 05/12/97 500 $19 .500Sedgh, Jonathan 05/16/97 500 $16 .625Sedgh, Jonathan 05/19/97 500 $18 .000Sedgh, Jonathan 06/09/97 500 $20 .875Sedgh, Jonathan 06/10/97 500 $21 .625Sedgh, Jonathan 06/27/97 500 $22.250Sedgh, 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 .125Shah roozi, 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 04/15/98 18,000 $13 .250Shahroozi, Khosrow 04129/98 10,000 $11 .375Shahroozi, Khosrow 05/15/98 20,000 $8 .000Shahroozi, Khosrow 05/15/98 20,000 $7 .250Shahroozi, Khosrow . 05/15/98 55 000 $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, Philip E . 11/26/97 10,700 $33.50010,700
Sussman, Raymond D . 11/04/97 100 $25.000Sussman, Raymond D. 01/14/98 100 $16 .750Sussman, Raymond D . 03/09/98 100 $18.750
300
Tomasso, Ralph 09/24/97 300 $31 .875300
Tran, Moonlight 11/25/97 200 $26 .070Tran, 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 1 .000 $23.5001,000
Zivitz, Eric 11/07/97 300 $23 .500300
Totals 260,250
N 1CASESVFpam1DBX80221 mis
APPENDIX B
DATE DEFENDANTS PLAINTIFFS WHOWHO SOLD PURCHASED
03/11/97 Flam Jon Silverma nLashLizerbramHassman
03/12/97 Flam Marcia A . Gutowic zLashLizerbram
03/17/97 Lash Robert Bric eLizerbramFlam
11/04/97 Hassman Iris Malek
Raymond D . Sussman
11/06/97 Hassman David & Rose Bashour
Cheers Investment Clu bIan & Lucille SacksTrustee for SacksYourick, Inc . PS P
11/07/97 Hassman Dorothy J . Fischer
Jack L . Kenfiel dO .H . & Ellen Schwart z
Eric Zivit z
11/14/97 Hassman Fred SklarJohn Solde r
11/17/97 Dresnick Marinus W . Baa k
Hassman Robert Qua t
Joel D . Schram Retirement
PlanJonathan Sedgh
11/18/97 Hassman Jake RofmanO .H . & Ellen Schwart zJonathan Sedgh
11/19/97 Flam Jonathan Sedgh
Lizerbram
Las h
11/20/97 Flam ELAJ Family Limite d
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 Tran
11/26/97 Dresnick Clara C_ Asch Truste e
Jason S . Asch Truste eGail Krugman AschLuis Maize lEdward Murachve rEnette S . Murachve r
Philip E . Solomon
12/01/97 Lizerbram Bill Henning
Donald Morando
12/04/97 Flam Fred Greenberg
Lizerbram Roger Rubinge r
Las h
FPA .M\ :.A :80305 . chr.
1 DECLARATION OF SERVICE BY MAIL
2
3 I, the undersigned, declare :
4 1 . That declarant is and was, at all times herein mentioned,
5 a citizen of the United States and a resident of the County of San
6 Diego, over the age of 18 years, and not a party to or interest in
7 the within action ; that declarant's business address is 600 West
8 Broadway, Suite 1800, San Diego, California 92101 .
9 2. That on January 20, 2000 declarant served the SECOND
10 AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL
11 SECURITIES LAWS AND SUPPLEMENTAL STATE LAW CLAIMS by depositing a
12 true copy thereof in a United States mailbox at San Diego,
13 California in a sealed envelope with postage thereon fully prepaid
14 and addressed to the parties listed on the attached Service List .
15 3 . That there is a regular communication by mail between the
16 place of mailing and the places so addressed .
17 I declare under penalty of perjury that the foregoing is true
18 and correct . Executed this 20th day of January, 2000, at San
19 Diego, California .
20
21L SA INSUNZA
22
23
24
25
26
27
28
98cv0928 -L(AJB)
FPA MEDICAL (FEDERAL - bUUTHERN 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 90024310/208-280 0310/209-2348 (fax )
Andrew L . Barroway
SCHIFFRIN & BARROWAY, LLP
Three Bala Plaza East, Suite 400Bala Cynwyd, PA 19004
610/667-770 6610/667-7056 (fax )
Alfred G . Yates, Jr .LAW OFFICES OF ALFRED G .YATES, JR .
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 1521 9
412/391-5164412/471-1033 (fax )
Marc Edelson
HOFFMAN & EDELSON
45 W . Court Street
Doylestown, PA 1890 1
215/230-8043
215/230-8735 (fax )
Robert J . Dyer III
DYER DONNELLY
801 East 17th Avenue
Denver, CO 80218-1417
303/861-3003
303/830-6920 (fax )
Allan Steyer
Jeffrey H . LowenthalD . Scott Macrae
STEYER LOWENTHAL BOODROOKAS &
WALKER LLP
One California, Suite 2200
San Francisco, CA 94111
415/421-3400415/421-2234 (fax)
Stuart H . SavettRobert P . FrutkinBarbara A . Podel lSAVETT, FRUTKIN, PODELL &
RYAN, P .C .
325 Chestnut Street, Suite 700
Philadelphia, PA 19106215/923-540 0
215/923-9353 (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 . Piven
LAW OFFICES OF CHARLES J .PIVEN, P .A .
The World Trade Cente r401 East Pratt Street, Suite 2525Baltimore, MD 21202
410/332-003 0
410/685-1300 (fax )
Ann D . WhiteLIEBENBERG & WHITEThe Pavilion261 Old York Road, Suite 810
Jenkintown, PA 19046
215/481-027 2215/481-0271 (fax )
James V . BashianLAW OFFICES OF JAMES V . BASHIAN500 Fifth Avenue, Suite 2700New York, NY 10110
212/921-411 0212/921-4249 (fax )
Mel E . Lifshit zBERNSTEIN LIEBHARD & LIFSHITZ,
LL P10 East 40th Street
New York, NY 10016
212/779-141 4
212/779-3218 (fax)
FPA MEDICAL (FEDERAL - L-mjUTHERN DIST .)
Service List - 10/01/9 9
Page 2
COUNSEL FOR PLAINTIFF(S )
Martin D . Chitwood
CHITWOOD & HARLEY
2900 Promenade I I
1230 Peachtree Street, N .E .Atlanta, GA 30309404/873-3900404/876-4476 (fax )
Randall H . SteinmeyerREINHARDT & ANDERSON
E-1000 First National
332 Minnesota Street
St . Paul, MN 5510 1
651/227-9990651/297-6543 (fax)
Ellen Gusikoff StewartSPECTOR & ROSEMAN, P .C .600 West Broadway, Suite 1600San Diego, CA 92101
619/338-451 4
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 . CauleyLAW OFFICES OF STEVEN E .
CAULEY, P .A .
Suite 218, Cypress Plaza
2200 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 1400
Philadelphia, PA 19103
215/545-720 0
215/545-6535 (fax )
Burton H . FinkelsteinShannon P . KineryFINKELSTEIN THOMPSON & LOUGHRANThe Foundry Building, Suite 601
1055 Thomas Jefferson Street, N .W .
Washington, DC 20007
202/337-800 0
202/337-8090 (fax )
Steven J . TollMatthew J . IdeKristopher A . KinkadeCOHEN, 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 1
619/232-4019 (fax )
Michael D . BraunSTULL, STULL & BRODY10940 Wilshire Blvd ., Suite 2300
Los Angeles, CA 90024
310/209-246 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 5212/687-6655
212/557-6151 (fax)
47th Floor
FPA MEDICAL (FEDERAL - SbUTHERN 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 192
Colchester, CT 06415
860/537-381 8
860/537-4432 (fax )
Bruce G . MurphyLAW OFFICES OF BRUCE G . MURPHY265 Llwyds LaneVero Beach, FL 32963
561/231-4202
561/231-4042 (fax )
Arthur TobackHORWITZ TOBACK & HYMAN
500 Fifth Avenue, 16th Floor
New York, NY 10110-0095
212/869-230 0
212/869-2303 (fax )
Myron Harri s
LAW OFFICE OF MYRON HARRI S5106 Park Town Place Apartments22nd & Ben Franklin Parkway
Philadelphia, PA 19130
215/567-533 3
William S . LerachBlake M . HarperArthur C . LeahyMILBERG WEISS BERSHAD HYNES &
LERACH LLP
600 West Broadway , Suite 1800
San Diego, CA 92101-5050619/231-105 8
619/231-7423 (fax)
Kurt OlsenTHE OLSEN LAW FIRM2121 "K" Street, N .W ., Suite 800Washington, 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 0
New York, NY 10169-0146212/687-3435212/587-3513 (fax )
Daniel A . OsbornEduard Korsinsky
BEATIE AND OSBORN
599 Lexington Avenue
New York, NY 10022
212/888-9000
212/888-9664 (fax )
Edward D . Schmit tLAW OFFICES OF EDWARD D .
SCHMIT T
396 North Highway 101
Encinitas, CA 92024
760/942-288 9760/942-9679 (fax )
Vincent R . CappucciENTWHISTLE & CAPPUCCI LLP
330 Madison Avenu eNew York, NY 10017
212/867-1030
212/697-8747 (fax )
Jules BrodyAaron BrodySTULL, STULL & BRODY6 East 45th Street, 4th Floor
New York, NY 10017
212/687-723 0
212/490-2022 (fax)
FPA MEDICAL (FEDERAL - ;wUTHERN DIST .)Service List - 10/01/9 9
Page 4
COUNSEL FOR PLAINTIFF(S )
Mark C . GardyJames J . SeirmarcoABBEY, GARDY & SQUITIERI, LLP212 East 39th StreetNew York, NY 10016
212/889-3700212/684-5191 (fax )
Max W . Berge rBERNSTEIN LITOWITZ BERGER &GROSSMANN LL P
1285 Avenue of the Americas33rd Floo rNew York, NY 10019
212/554-1400212/554-1444 (fax )
Robert N .ChristineKAPLAN, K805 ThirdNew York ,
212/687212/687
KaplanComasILSHEIMER & FOX, LLPAvenue, 22nd FloorNY 1002 2
-1980-7714 (fax)
Michael J . Free dMUCH SHELIST FREED DENENBERGAMENT & RUBENSTEIN, P .C .
200 N . LaSalle St ., Suite 2100
Chicago, IL 50601-1095312/346-310 0
312/621-1750 (fax )
David JaroslawiczJAROSLAWICZ & JARO S150 William Street, 19th FloorNew York, NY 10038
212/227-278 0
212/732-6746 (fax)
Norman BermanBERMAN, DEVALERIO & PEASE LLPOne Liberty SquareBoston, MA 02109
617/542-8300617/542-1194 (fax )
Bernard M . GrossDeborah R . Gros sLAW OFFICES OF BERNARD M .GROSS, P .C .
1500 Walnut Street, Sixth Floor
Philadelphia, PA 19102
215/56 1 -360 0215/561-3000 (fax )
Arnold LevinLaurence BermanLEVIN, FISHBEIN, SEDRAN &
BERMAN510 Walnut Street, Suite 500Philadelphia, PA 19106-3875215/592-150 0215/592-4663 (fax)
* Todd S . CollinsJacob A. GoldbergBERGER & MONTAGUE, P .C .1622 Locust StreetPhiladelphia, PA 1910 3215/875-3000
215/875-3053 (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 - SvUTHERN DIST .)Service List - 10/01/9 9
Page 5
COUNSEL FOR PLAINTIFF(S )
Marvin Mille rMILLER FAUCHER CAFFERTY ANDWEXLER LLP
30 N . LaSalle Street, Suite 3200
Chicago, IL 6060 2
312/782-4880312/782-4485 (fax )
Curtis V . TrinkoLAW OFFICES OF CURTIS V,
TRINKO LLP16 West 46th Street
Seventh Floor
New York, NY 10036
212/490-9550
212/986-0158 (fax )
Jeffrey H . Squire
Ira M . Pres s
KIRBY, MCINERNEY & SQUIRE, LLP830 Third Avenue, 10th Floor
New York, NY 10022
212/317-230 0
212/751-2540 (fax )
Richard ApplebyLAW OFFICES OF RICHARD APPLEBY39 Broadwa yNew York, NY 10006
212/344-1800
212/809-6174 (fax )
Lionel Z . GlancyLAW OFFICES OF LIONEL Z . GLANCY
1801 Avenue of the Star s
Suite 31 1
Los Angeles, CA 90067
310/201-9150310/201-9160 (fax )
Robert C . Schubert
Juden Justice Reed
SCHUBERT & REED LLP
Two Embarcadero Cente rSuite 105 0
San Francisco, CA 94111
415/788-4220
415/788-0161 (fax)
Marian P . Rosner
Paul O . Paradis
WOLF POPPER LLP
845 Third Avenue
New York, NY 1002 2212/759-4600
212/486-2093 (fax )
Richard A . SpeirsZWERLING , SCHACHTER &
ZWERLING, LLP
767 Third Avenue
New York, NY 10017-2023212/223-3900212/371- 5969 (fax )
Stephen R . Basser
Blair A . Nicholas
Matthew P . Montgomery
BARRACK, RODOS & BACINE600 West Broadway, Suite 1700
San Diego, CA 92101
619/230-080 0
619/230-1874 (fax)
Donald G . Re zSULLIVAN, HILL, LEWIN, REZ,ENGEL & LABAZZO
550 West C Street, Suite 1500San Diego, CA 92101-3540
619/233-410 0
619/231-4372 (fax )
Jeffrey R . KrinskFINKELSTEIN & KRINS K501 West Broadway, Suite 1250
San Diego, CA 92101
619/238-133 3
619/238-5425 (fax)
FPA MEDICAL (FEDERAL - SzJUTHERN DIST .)
Service List - 10/01/9 9
Page 6
COUNSEL FOR DEFENDANT S
*Richard M . SegalPILLSBURY MADISON & SUTRO LLP
101 West Broadway, Suite 1800San Diego, CA 92101
619/234-500 0
619/236-1995 (fax )
* Darryl SniderSusan S . Gonic kHELLER EHRMAN WHITE & MCAULIFFE4250 Executive Square, 7th FloorLa Jolla, CA 92037-9103
619/450-840 0619/450-8499 (fax )
* Jerry L . Marks
Kirstin M . Watson
HELLER, EHRMAN, WHITE &
McAULIFFE601 S . Figueroa Street40th FloorLos 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 94304650/233-4500650/233-4545 (fax )
* Hugh Steven Wilson
Kenneth M . Fitzgerald
LATHAM & WATKINS
701 B Street, Suite 2000San Diego, CA 92101
619/236-1234619/696-7419 (fax )
VIA PERSONAL SERVICE
** VIA FEDERAL EXPRESS