Carpenters Pension Fund of Ill. v. Neidorff
| Decision Date | 15 September 2020 |
| Docket Number | No. 4:18 CV 113 CDP,4:18 CV 113 CDP |
| Parties | CARPENTERS PENSION FUND OF ILLINOIS, et al., derivatively and ON BEHALF OF the nominal defendant CENTENE CORPORATION, Plaintiffs, v. Michael F. NEIDORFF, et al., Defendants, and Centene Corporation, Nominal Defendant. |
| Court | U.S. District Court — Eastern District of Missouri |
Carol Valerie Gilden, Cohen and Milstein PLLC, Chicago, IL, Eric Steven Berelovich, Cohen and Milstein PLLC, Washington, DC, Geoffrey M. Johnson, Scott R. Jacobsen, Scott and Scott LLP, Cleveland Heights, OH, Jamie L. Reyes-Jones, Hartnett Reyes Jones LLC, St. Louis, MO, Richard A. Speirs, Pro Hac Vice, Cohen and Milstein PLLC, New York, NY, for Plaintiffs Carpenters Pension Fund of Illinois, Iron Workers Local 11 Pension Fund.
Carol Valerie Gilden, Cohen and Milstein PLLC, Greg G. Gutzler, DiCello and Levitt LLC, Chicago, IL, Eric Steven Berelovich, Cohen and Milstein PLLC, Washington, DC, Geoffrey M. Johnson, Scott R. Jacobsen, Scott and Scott LLP, Cleveland Heights, OH, Jamie L. Reyes-Jones, Hartnett Reyes Jones LLC, St. Louis, MO, for Plaintiffs Peoria Police Pension Fund, Laura Wood.
Carol Valerie Gilden, Cohen and Milstein PLLC, Chicago, IL, Eric Steven Berelovich, Cohen and Milstein PLLC, Washington, DC, Geoffrey M. Johnson, Scott R. Jacobsen, Scott and Scott LLP, Cleveland Heights, OH, Jamie L. Reyes-Jones, Hartnett Reyes Jones LLC, Joseph V. Neill, St. Louis, MO, Stephen J. Oddo, Robbins LLP, San Diego, CA, for Plaintiff Harkishan Parekh.
Christopher A. Smith, Joseph P. Conran, Husch Blackwell LLP, St. Louis, MO, Jay B. Kasner, Pro Hac Vice, Scott D. Musoff, Pro Hac Vice, Skadden Arps LLP, New York, NY, Peter B. Morrison, Pro Hac Vice, Zachary Faigen, Winston P. Hsiao, Pro Hac Vice, Skadden Arps LLP, Los Angeles, CA, for Defendants Michael F. Neidorff, Jeffrey A. Schwaneke, Robert K. Ditmore, David L. Steward, John R. Roberts, Tommy G. Thompson, Frederick H. Eppinger, Richard A. Gephardt, Orlando Ayala, Vicki B. Escarra, K. Rone Baldwin, Carol E. Goldman.
Christopher A. Smith, Joseph P. Conran, Husch Blackwell LLP, St. Louis, MO, Jay B. Kasner, Pro Hac Vice, Scott D. Musoff, Pro Hac Vice, Skadden Arps LLP, New York, NY, Peter B. Morrison, Pro Hac Vice, Winston P. Hsiao, Pro Hac Vice, Zachary Faigen, Pro Hac Vice, Skadden Arps LLP, Los Angeles, CA, for Defendant Centene Corporation.
On July 2, 2015, each of the boards of directors of Centene Corporation and Health Net, Inc., approved a merger plan whereby, upon a series of transactions, Health Net would effectively merge into and become part of Centene. On September 21, 2015, a joint proxy statement/prospectus issued to Centene and Health Net stockholders regarding their required approval of the merger. The stockholders approved the merger at special meetings held October 23, 2015, and the merger closed on March 24, 2016. Centene did not disclose in the proxy statement, however, or at any time before closing that Health Net had significant ongoing financial problems and liabilities decreasing its value to Centene. Upon public disclosure of these issues in July 2016, Centene's stock price fell by more than 8%, resulting in a loss of more than $1 billion in stockholder value.
Several Centene shareholders filed this derivative action against certain Centene directors and officers who issued and/or approved the joint proxy statement and proceeded with the merger despite Health Net's problems. Plaintiffs claim that these directors and officers made or approved false and misleading statements in the September 2015 proxy statement and thereafter continued to make or approve false and misleading statements regarding the extent of Health Net's liabilities inherited by Centene in the merger. Plaintiffs contend that, by this conduct, the directors and officers breached their fiduciary duties, caused Centene to violate federal securities laws, and were unjustly enriched. Plaintiffs also allege that, armed with nonpublic information obtained during the merger process, certain directors and officers engaged in insider trading by selling or disposing of shares of Centene stock knowing that the price per share was artificially inflated at the time.
Defendants move to dismiss the action under Rule 12(b)(6), Federal Rules of Civil Procedure, arguing that plaintiffs have failed to state a claim upon which relief can be granted and, further, that plaintiffs have failed to adequately demonstrate futility of demand to excuse them from making the required demand upon the board before bringing this action. Because plaintiffs have failed to set forth particularized facts excusing a pre-suit demand as the law requires, I will grant defendants’ motion to dismiss.
Centene is a diversified, multinational health care corporation incorporated in the State of Delaware. Among other things, it sells health insurance policies in the United States, including policies for Medicaid, Medicare Advantage, Medi-Cal, and other products. Through a series of mergers that ultimately closed on March 24, 2016, Centene obtained Health Net, which itself was an insurance company that sold health insurance policies to individuals, families, and businesses; offered behavioral health, substance abuse, and employee assistance programs; and provided prescription drug services. Health Net's business was concentrated in the Western United States, with a significant presence in California.
In November 2014, Michael F. Neidorff, President and CEO of Centene, reached out to Health Net's CEO, Jay Gellert, to discuss a possible combination of their two companies. These discussions continued, and executives from both companies met in March 2015 to discuss a possible transaction. After continued discussions between Neidorff and Gellert, Neidorff informed Health Net on June 8, 2015, that Centene was interested in pursuing a transaction. Neidorff thereafter met with Centene's board of directors – then composed of himself as chairman, Robert K. Ditmore, David L. Steward, John R. Roberts, Tommy G. Thompson, Frederick H. Eppinger, Richard A. Gephardt, Orlando Ayala, and Pamela A. Joseph — [Redacted] On July 1, the board unanimously approved the merger and Neidorff publicly announced the deal on July 2.
A joint proxy statement/prospectus issued to Centene's and Health Net's respective stockholders on September 21, 2015, detailing the considerations, negotiations, rationales, and risks in pursuing and approving the merger. The proxy statement, signed by Neidorff, represented that the Centene board of directors unanimously recommended that the stockholders vote for the proposed transaction. At special meetings held October 23, 2015, Centene's and Health Net's respective shareholders voted to approve the merger. Centene thereafter continued in its course of due diligence, the board continued to meet on the transaction, and the Centene/Health Net merger closed on March 24, 2016.
Plaintiffs allege that at the time the proxy statement issued in September 2015 and continuing through closing in March 2016, Centene's directors and officers knew, but concealed from its shareholders, that Health Net had significant financial problems, including that:
Plaintiffs also allege that Centene directors and officers should have learned through due diligence that, in addition to the above issues, Health Net was under investigation by the U.S. Department of Justice in a Medicare fraud scheme and could thereby be exposed to additional liabilities. In short, plaintiffs assert that Health Net was not as profitable as Centene represented to its shareholders, and that Health Net's undisclosed actual and potential liabilities assumed by Centene in the merger were substantial.
Upon closing on March 24, 2016, Vicki B. Escarra, a former Health Net director, joined Centene's board of directors.
On April 26, 2016, Centene filed its SEC Form 10-Q for the first quarter ending March 31 and reported that valuation of nearly all of Health Net's assets and liabilities had not been finalized and was incomplete. Centene reported that because of the timing of the closing, it could provide only preliminary estimates of Health Net's assets and liabilities assumed as of the date of acquisition, and that such accounting was therefore subject to change. The Form 10-Q did not contain any provision, explanation, or estimate related to premium deficiency reserves (PDRs) that may be required for any Health Net liabilities. [Redacted] The audit committee at that time was composed of directors Roberts, Eppinger, and Escarra.
During an investor conference call on April 26, Neidorff discussed the merger and reported to investors that there were "no surprises." During this same call, Centene officer K. Rone Baldwin (Executive Vice President, Insurance Group Business Unit/Markets) reported to investors that Health Net's exchange business had been profitable and that Health Net had pursued a strategy in California that worked well for them. At an investor conference held May 24, Neidorff assured Centene investors that the merger process was "fine" and was "where we expected," and that development of reserves "in the 90's" was "fine." And during investor day on June 17, Neidorff and Centene officer Jeffrey A. Schwaneke (Chief Financial Officer, Executive Vice President, and Treasurer) reported that there was "no unfavorable development" on Health Net's reserves, that the reserves issue had found a "comfortable bed" and was "behind us," and that...
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