In re Physician Corp. of America Securities Litig.

• Decision Date: 18 February 1999
• Docket Number: No. 97-3678-Civ.,97-3678-Civ.
• Parties: In re PHYSICIAN CORPORATION OF AMERICA SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of Florida

50 F.Supp.2d 1304

In re PHYSICIAN CORPORATION OF AMERICA SECURITIES LITIGATION.

No. 97-3678-Civ.

United States District Court, S.D. Florida, Miami Division.

February 18, 1999.

COPYRIGHT MATERIAL OMITTED

Atlee Wampler, III, Wampler, Buchanan & Breen, P.A., Miami, FL, Jules Brody, Stull, Stull & Brody, New York City, Joseph M. Weiss, Weiss & Yourman, New York City, Stuart Savett, Savett, Fortkin, Podell & Ryan, PC, Philadelphia, PA, Robert Gilbert, Coral Gables, FL, Steven Toll, Cohen, Milstein, Mansfeld & Toll, Washington, DC, James M. Orman, Philadelphia, PA, Michael Pucillo, West Palm Beach, FL, for plaintiff.

Alexander Sussman, John Dellaportas, Fried, Frank, Harris, Shriver & Jacobson, New York City, Andrew S. Berman, Young, Berman, Karpf, PA, North Miami Beach, FL, for defendant.

ORDER DENYING MOTION TO DISMISS

MIDDLEBROOKS, District Judge.

THIS CAUSE comes before the Court on Defendants' Joint Motion to Dismiss the Consolidated and Amended Complaint (DE# 31). The Court has reviewed the responsive pleadings and the other pertinent portions of the file and heard argument of counsel on this Motion on February 2, 1999. For the reasons set forth below, the Defendants' Motion to Dismiss is denied.

I Facts

Plaintiffs bring this action against Defendants Physician Corporation of America (PCA) and four individual Defendants, Stanley Kardatzke, Peter Kilissanly, Clifford Donnelly, and Jay Grobowsky for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) and Rule 10b-5 promulgated thereunder.¹ Plaintiffs assert this claim as a class action, on behalf of a class of all purchasers of PCA common stock during the period beginning March 31, 1996 through and including March 31, 1997.²

A Background

For the purposes of this Motion to Dismiss, the Court takes the facts as alleged by Plaintiff in the Amended and Consolidated Complaint.³ The background facts of the Section 10(b) and Rule 10b-5 claims are as follows. Until its acquisition by Humana, Inc., on September 8, 1997, Defendant PCA was a managed health care company which also provided workers' compensation coverage to employer groups. PCA's wholly owned subsidiary, PCA Solutions, participated in the workers' compensation market by providing third party administrative services to self-insured employee workers' compensation funds. PCA also participated in this market by directly underwriting workers' compensation policies and offering excess of loss reinsurance coverage. Workers' compensation policies were underwritten by PCA through its wholly owned subsidiary, PCA Property and Casualty Insurance Company, Inc. ("PCA P & C"). ¶ 3.

As a result of changes in the Florida workers' compensation market, in 1994 and 1995. PCA entered into negotiations with several self-insured funds⁴ to structure an agreement in which PCA P & C would assume the assets and liabilities of those funds, in exchange for the employers purchasing workers' compensation insurance from PCA P & C. In July 1995, PCA commissioned a reinsurance risk management assessment to determine the capital necessary to support workers' compensation insurance policies that PCA would write for the two self-insured funds that PCA intended to acquire, Florida Business Mutual ("FBM") and Florida Builders and Employers Mutual Insurance Company ("FBE") [hereinafter "the Funds"]. The report indicated that approximately $50 million of additional capital would be necessary to support the future business written for employers insured by these funds. ¶ 27. This figure did not include the capital that would be necessary to support claims already incurred by the Funds. As to the prior claims, at the time the parties entered into the 1995 Consent Order discussed below, FBE financial statements for the year ended December 31, 1994, and interim quarterly statements for 1994 showed an $8.9 million surplus.⁵ ¶ 31.

PCA P & C met with DOI in order to gain DOI approval for the assumption of FBE's insurance business; on November 14, 1995, DOI entered a Consent Order ("1995 Consent Order") establishing the terms on which this arrangement would go forward. The terms included PCA making a $60 million capital infusion to PCA P & C; PCA P & C making a 50% Quota Share Reinsurance Treaty for all Florida primary workers' compensation coverage written on or after October 1, 1995 for the period October 1, 1995 through December 31, 1995; and PCA P & C renewing all policies of FBM and FBE that would expire on or after December 31, 1995, effective January 1, 1996. 1995 Consent Order at 2; ¶ 30. As to FBM, PCA P & C "will assume all liabilities of FBM, via a loss portfolio transfer agreement, in accordance with the terms of the specimen agreement attached to this order as Exhibit 1. The effective date of the assumption is January 1, 1996, for all unpaid losses occurring through December 31, 1995." In addition, FBM "will obtain an independent actuarial opinion on loss reserves to be ceded to PCA under the terms of the loss portfolio transfer agreement, that shall be filed on or before April 1, 1996." 1995 Consent Order at 3-4. As to FBE, PCA P & C "will issue an aggregate stop loss reinsurance policy to FBE, the effective date of which policy is January 1, 1996, and which is attached as Exhibit 3. The attachment point of this reinsurance shall be when all assets of FBE have been liquidated, any and all remaining losses and loss adjustment expenses shall be the responsibility of [PCA P & C]." Furthermore, PCA P & C agreed to renew all policies that expire December 31, 1995 and to assume all policies with expiration dates after January 1, 1996, effective January 1, 1996. 1995 Consent Order at 8-9.

B Summary of Cause of Action

In summary, plaintiffs allege that by March 31, 1996, the start of the class period, defendants knew or recklessly disregarded that the workers' compensation businesses of the Funds (particularly FBE, a self-insured fund for which PCA P & C was financially responsible), was materially underreserved. PCA acknowledged a portion of the shortfall in confidential merger negotiations with Sierra Health Services, Inc. ("Sierra"), and in discussions with DOI. During the class period, however, Defendants did not report these adverse financial developments to the public, but rather issued numerous positive press releases and submitted SEC filings that did not disclose, and attempted to mask, this adverse information and its significance given the substantial liabilities assumed pursuant to the 1995 Consent Order. Specifically, PCA did not disclose to investors the material fact of FBE's underreserve, but instead issued public statements which misrepresented the financial condition of the workers' compensation business stating that it was having a positive impact on PCA's overall financial status; failed to disclose the serious problems PCA P & C was experiencing because of the assumption of the liabilities of materially underreserved funds; and misrepresented that PCA was in the process of turnaround and probable merger with Sierra on terms favorable to PCA. In actuality, PCA's workers' compensation business suffered a $284.4 million loss for fiscal year 1996.

As a result of the misrepresentations by Defendants, the price of PCA common stock was artificially inflated during the Class Period, and analysts continued to issue "buy" ratings. On March 31, 1997, the last day of the class period, when the full financial results for 1996 were disclosed, the price of PCA common stock, which had traded as high as $14.75 per share during the class period, closed at $4.625. Plaintiffs and other members of the Class purchased PCA common stock relying on the integrity of the market price and market information relating to PCA, or in the alternative, by relying directly upon defendants' materially false and misleading statements (that were made with knowledge of, or recklessness as to, their false and misleading nature), and have been damaged thereby.

C Facts Pled Specifying Fraudulent Misrepresentations and Scienter

Plaintiff alleges the following materially false and misleading statements or omissions, including with each the explanation of why such statements were misleading and why the inference should be drawn that Defendants acted with scienter as to the specific statements.

(1) A November 30, 1995 press release stated that PCA P & C "will be responsible for satisfying existing policy claims" and that "the initial conversion is not expected to impact earnings."

(2) A February 20, 1996 press release stated PCA Solutions enjoyed an "exceptionally good year" and the workers' compensation company was an "excellent diversification strategy." These statements were false because PCA knew or should have known the liability assumed in the 1995 Consent Order would be large.

(3) In late March 1996, Defendants received FBE's audited financial statements for year ending December 31, 1995 showed $51.1 million deficit for that year, the first statement of deficit by FBE. Pursuant to GAAP and SEC regulations, upon learning of this deficit, defendants were required to disclose that PCA P & C's reserves were subject to an uncertainty of $51.1 million, record the liability and take a charge against earnings, and disclose the inadequacy of existing reinsurance for FBE.

(4) PCA filed a Form 10-K for fiscal year ending December 31, 1995, filed on April 1, 1996: Pursuant to GAAP, specifically Statement 5 of the Financial Accounting Standard Board ("FASB 5"), which provides that an estimated loss from a loss contingency shall be accrued by a charge to income if the loss is probable and the amount of the loss can be reasonably estimated, upon learning of FBE's $51.1 million deficit, defendants were required by the terms of the to record and take a charge against earnings.⁶ ¶ 39. Also, based on FBE's audited statements showing the $51.1 million deficit, PCA did not make disclosures as required by ...