PHSY: Review of Texas AG Complaint Reveals Timing of Events and Lack of Specific Disclosures - Sell
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Sheryl R. Skolnick, Ph.D.
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PacifiCare (PHSY $18.67, NASDAQ, SELL)
We have obtained a copy of and reviewed the complaint filed in the suit by the Texas Attorney General vs. PacifiCare of Texas.
We are not attorneys, but we sure can use some common sense. The complaint is written in easy-to-read English.
And what is very easy to read (and the most interesting) is that the Attorney General alleges that PHSY made false claims:
Quoting from the complaint, page 25 (Section XI)
"While PacifiCare remained under the Department's oversight, the March 2,2001 edition of the Los Angeles Times published a report of a statement that falsely claimed otherwise:
The Company also faced regulatory actions in Texas after doctors and hospitals complained of slow payments. PacifiCare problems with Texas regulators have been resolved, spokesman Dan Miller Said."
We note that PHSY remained under administrative oversight until April 2001, by its own admission.
The suit notes that it can not quantify the dollar amount of claims potentially unpaid by PHSY. Part of the reason for this is that PHSY delegated claims payments to capitated network managers who in turn failed to pay claims.
There is yet another shoe to drop: the Texas AG has not yet filed a complaint with respect to the third capitated group to declare bankruptcy, Quantum of Dallas (read the complaint on this: that group allegedly withheld checks for 60 days before sending them out to providers). The AG appears to be ready to file on these claims just as soon as the Quantum bankruptcy is approved by that court.
The fines are $1,000.00 per day per violation (that's per claim, folks) and some of these claims that are allegedly unpaid go back 2 years.
We are stunned and amazed that PHSY failed to disclose that it received two Civil Investigative Demands (CIDs) from the Texas AG's Consumer Protection Division on September 24, 2001 and failed to disclose this in the earnings conference call on October 31, 2001. The suit by the Texas AG asserts that the CIDs sought to "inspect PHSY's documents related to its delegation of HMO functions to two of its delegated networks." (complaint, page 3, section VII.) We have searched the 10-Q for the September 2001 quarter and failed to find any mention other than this:
" In 2000, Aetna U.S. Healthcare, Inc. and affiliated entities settled claims brought by the Attorney General of Texas by consenting to modify some of its business practices in Texas. The Attorney General of Texas has filed similar claims against our Texas HMO and has proposed to settle the lawsuit on the same terms as the Aetna settlement. The business practices in question relate primarily to our Texas HMO's commercial operations. Resolution of a proposed settlement is still pending. We are unable to predict whether we will ultimately reach a settlement with the Attorney General on these or other terms or the impact that the ultimate settlement could have on our operations. These changes ultimately could adversely affect the HMO industry and could have a material effect on our financial position, results of operations or cash flows of a future period. (Emphasis added by Fulcrum).
We suppose that the receipt of a CID is 1) not worth mentioning to shareholders and 2) the way that PHSY thinks issues are resolved. (CID's are essentially subpeonae. One does not usually refuse them. At least no one did when this analyst was at the US Dept of Justice, Antitrust Division and reviewed plenty of documents submitted by parties pursuant to CIDs (oh if we only had that power now).
We further question how, when PHSY says in its 10-Q that these Texas issues could be material and adverse, it can assert in its response to the lawsuit that, "While the company is confident of its legal position, PacifiCare believes it has financial capacity to cover liabilities that might arise from this litigation." (PHSY of Texas Statement, 2/11/02). What are we to believe?
Further, PHSY failed to disclose in that 10-Q that it had filed a lawsuit versus the AG on 10/12/01. (The suit, according to the AG, alleges that while the AG can sue for violations of the Deceptive Trade Act, a state law, the AG has no right to investigate violations of that state law. The AG responds by quoting various sections of Texas state law that grant him the right to investigate any suspected violation of any state law and issued a "letter of visitation" on 12/10/01 to prove the point.)
PHSY's suit vs. the AG was filed two full weeks before the earnings release and nearly a month before the 10-Q was filed on November 13, 2001.
The Letter of Visitation was dated 12/10/01 and again no disclosure. On January 3, 2002, PHSY announced significant lay-offs in a press release. Again, no mention of the goings-on in Texas
Why no disclosure? How can shareholders tolerate this? Where is the SEC? The company commits the sin of omission on numerous occasions and investors still buy the stock. Pardon our outrage, but we fail to understand how anyone managing anyone else's money can purchase these shares. We strongly recommend sale of these shares at current levels. |
