Nov. 18–An investor group has sued Health Net Inc. for more than $200 million in damages, alleging the Woodland Hills-based managed care company concealed financial information about its formersubsidiary.
The lawsuit, announced Monday, claims that Health Net did not reveal financially relevant information before the company sold its ill-fated subsidiary Business Insurance Group to Superior National Insurance Group Inc. Capital Z Financial Services Fund raised about $160 million to help Superior purchase BIG in 1998. The deal proved fruitless after Superior filed for bankruptcy in 2000.
“BIG was not going to survive, and Health Net knew it,” said David Rosner, attorney representing New York-based Capital Z. “Health Net hid the information that would have shown the material inaccuracy of BIG’s financial condition.”
Rosner said if Capital Z knew of BIG’s financial state, the company would have never invested in Superior. Capital Z’s lawsuit was filed Oct. 28 in New York Supreme Court, six days after Health Net announced it would pay $137 million to settle a dispute with Superior.
No court date has been set.
Similar to Capital Z’s claims, Superior said the BIG transaction was a “fraudulent transfer under federal and California bankruptcy laws,” according to a filing with the Securities and Exchange Commission. The lawsuit alleged that Health Net “defrauded Superior by making misstatements as to the adequacy of BIG’s reserves,” and that Superior was “entitled to rescind its purchase of BIG.”
Superior originally sought $300 million in damages.
Health Net referred all comments to a recent SEC filing. “In the event Cap Z decides to pursue its lawsuit against us, we intend to defend ourselves vigorously,” the company said in the filing.
Steven M. Gluckstern co-founded Capital Z in 1998, with a primary objective to invest in private equity funds and hedge funds. The company typically requires an ownership stake of 20 to 50 percent in most of its investments.
Gluckstern could not be reached for comment.
Health Net posted a third-quarter net loss two weeks ago, attributing the decline to the Superior settlement. The company reported a net loss of $2.4 million, or 2 cents a share, compared with a net income of $69 million, or 55 cents a share, in the same quarter a year ago. Excluding the one-time charges, earnings would have been 62 cents per share.
Aside from the litigation surrounding Superior, Health Net said the company is showing signs of strength in its commercial health plan enrollment, which increased by 4.9 percent during the period. Health Net’s revenues also rose 9.3 percent in the third quarter to $2.8 billion, versus sales of $2.6 billion a year ago.
Health Net’s commercial enrollment in California increased by 148,000 members during the third quarter. Health Net said the majority of overall growth is coming from the small group and individual markets, which increased by 14.5 percent in the third quarter, versus the same period a year ago.
Health Net shares declined 20 cents to close at $32.43 Monday on the New York Stock Exchange.
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