<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 9, 1998
FPA Medical Management, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-24276 33-0604264
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5835 Blue Lagoon Drive
Miami, FL 33126-2017
(Address of principal executive offices) (Zip Code)
(305) 477-4372
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
The Company has received notice or has been served with, several
federal and state court purported shareholder derivative action lawsuits and
individual stockholder lawsuits, some of which are described below. The
description of several federal and state court class action lawsuits is
contained in a Current Report on Form 8-K filed by the Company on June 3, 1998.
In Foltz, et al. v. Ellis, et al., Case Number 721352, filed in the
Superior Court of the State of California for the County of San Diego, on June
9, 1998, the plaintiffs, current stockholders of the Company, seek to bring a
derivative action on behalf of the Company against current and former directors
and officers of the Company. In this lawsuit, the plaintiffs allege that the
defendants knowingly, recklessly or negligently breached their fiduciary duties
by making false and misleading statements, concealing material and adverse
information and trading on the basis of this material adverse inside
information. The plaintiffs further maintain that the officers and directors of
the Company violated state securities laws and the common law by trading their
shares at artificially inflated prices with knowledge and on the basis of the
material adverse non-public information. The plaintiffs seek reimbursement for
the Company of the defendants' profits and the damages and losses suffered by
the Company, a declaration that defendants breached their fiduciary duties to
the Company, money damages, and indemnification of the Company from any
judgment, settlement or award against the Company in the pending class actions.
A copy of the complaint instituting this lawsuit is included as Exhibit 99.1 to
this Current Report on Form 8-K.
In JMS, Inc., as Custodian for the RANDALL B. COLES IRA, v. Ellis, et
al., Civil Action Number 16461NC, filed in the Court of Chancery of the State of
Delaware in and for New Castle County, on June 19, 1998, the plaintiff, a
current stockholder of the Company, seeks to bring a derivative action on behalf
of the Company against former and current directors of the Company. In this
lawsuit, the plaintiff alleges that the defendants breached their fiduciary
duties by wasting corporate assets, rewarding persons who exposed the Company to
potential damages and costs from class action suits, engaging in unlawful
insider trading for personal profit, failing to supervise the Company's
operations and financial reporting, and condoning the foregoing improper
practices. The plaintiff further maintains that as a result of such violations,
the Company has been caused to engage in illegal activities, and the value of
its securities has been adversely affected. The plaintiff seeks reimbursement
for the Company, including interest, for all damages sustained by the Company
and profits obtained by the defendants, reimbursement of the defendants'
salaries and other remuneration during the time period that they were in breach
of their fiduciary duties, and implementation of policies and procedures
designed to prevent illegal conduct by the Company's representatives. A copy of
the complaint instituting this lawsuit is included as Exhibit 99.2 to this
Current Report on Form 8-K.
In Palmer, on Behalf of Himself and Derivatively on Behalf of FPA
Medical Management, Inc. v. Lizerbram, et al., 98-CV-1254, filed in the United
States District Court
2
<PAGE> 3
Southern District of California, on July 8, 1998, the plaintiff, a current
stockholder of the Company seeks to bring a derivative action on behalf of the
Company against former and current directors and officers of the Company. In
this lawsuit, the plaintiff alleges that the defendants breached the fiduciary
duty of loyalty and due care by issuing false and misleading statements and
knowingly and/or recklessly causing the Company to engage in violations of
federal and state securities law. The plaintiff further maintains that the
defendants breached the fiduciary duty of candor by their awareness of or
reckless disregard of the facts alleged herein, rather than revealing or
correcting them. Moreover, the plaintiff alleges that the defendants' conduct
constituted abuse of control, waste of corporate assets, constructive fraud and
gross mismanagement. The plaintiff seeks reimbursement for all damages to the
Company, punitive damages and other extraordinary, equitable and/or injunctive
relief. A copy of the complaint instituting this lawsuit is included as Exhibit
99.3 to this Current Report on Form 8-K.
In Kay, on Behalf of Himself and Derivatively on Behalf of FPA Medical
Management, Inc. v. Lizerbram, et al., Civil Action Number 722213, filed in the
Superior Court of the State of California County of San Diego, on July 9, 1998,
the plaintiff, a current stockholder of the Company seeks to bring a derivative
action on behalf of the Company against former and current directors and
officers of the Company. In this lawsuit, the plaintiff alleges that the
defendants breached the fiduciary duty of loyalty and due care by issuing false
and misleading statements and knowingly and/or recklessly causing the Company to
engage in violations of federal and state securities law. The plaintiff further
maintains that the defendants breached the fiduciary duty of candor by their
awareness of or reckless disregard of the facts alleged herein, rather than
revealing or correcting them. Moreover, the plaintiff alleges that the
defendants' conduct constituted abuse of control, waste of corporate assets,
constructive fraud and gross mismanagement. The plaintiff seeks reimbursement
for all damages to the Company, punitive damages and other extraordinary,
equitable and/or injunctive relief. A copy of the complaint instituting this
lawsuit is included as Exhibit 99.4 to this Current Report on Form 8-K.
In Madden, et al. v. Deloitte & Touche LLP, et al., Civil Action Number
802244, filed in the Superior Court of the State of California in and for the
County of Orange, on November 18, 1998, and amended on November 23, 1998, the
plaintiffs, current stockholders of the Company seek to bring a lawsuit in their
individual capacities rather than as a class against the Company, former and
current officers and directors of the Company, subsidiaries of the Company, the
investment banking firm for the Company and the auditing firm of the Company. In
this lawsuit, the plaintiffs allege that the directors and officers of the
Company violated the federal and state securities laws. In this connection, the
plaintiffs allege that the directors and officers of the Company provided false
and misleading information. Further, the plaintiffs maintain that the directors
and officers engaged in intentional and negligent misrepresentation by inducing
the plaintiffs to approve a merger of Orange Coast Managed Care Services, Inc.
and St. Joseph Medical Corporation with the Company. Moreover, the plaintiffs
allege that the Company's auditing firm and its investment banking firm both
engaged in intentional and negligent misrepresentation by failing to exercise
due care in their representations to the Company. The plaintiffs seek money
damages, punitive
3
<PAGE> 4
damages and prejudgment interest. A copy of the amended complaint instituting
this lawsuit is included as Exhibit 99.5 to this Current Report on Form 8-K.
All of the foregoing complaints have been filed and most of them have
been served on the Company. The Company is reviewing and evaluating the
complaints and is currently unable to assess the merits of any of the claims
contained in the complaints, the outcome of any of the lawsuits resulting from
the filing of the complaints or the length of time it will take to resolve them.
The Company does not intend to file further Current Reports on Form 8-K
describing additional lawsuits, if any, purporting to be shareholder derivative
actions or by the stockholders as individuals, in either federal or state court,
which are based on allegations substantially similar to those contained in the
lawsuits described herein.
Item 7. Financial Statements and Exhibits
(c) Exhibits
99.1 Foltz, et al. v. Ellis, et al., Case Number 721352, filed in
the Superior Court of the State of California for the County
of San Diego, on June 9, 1998.
99.2 JMS, Inc., as Custodian for the RANDALL B. COLES IRA v. Ellis,
et al., Civil Action Number 16461NC, filed in the Court of
Chancery of the State of Delaware in and for New Castle
County, on June 19, 1998.
99.3 Palmer, on Behalf of Himself and Derivatively on Behalf of FPA
Medical Management, Inc. v. Lizerbram, et al., 98-CV-1254,
filed in the United States District Court Southern District of
California, on July 8, 1998.
99.4 Kay, on Behalf of Himself and Derivatively on Behalf of FPA
Medical Management, Inc. v. Lizerbram, et al., Civil Action
Number 722213, filed in the Superior Court of the State of
California County of San Diego, on July 9, 1998.
99.5 Madden, et al. v. Deloitte & Touche LLP, et al., Civil Action
Number 802244, filed in the Superior Court of the State of
California in and for the County of Orange, on November 18,
1998, as amended on November 23, 1998.
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
By: /s/ Stephen J. Dresnick
------------------------------------
Date: January 19, 1999 Stephen J. Dresnick
Chairman and Chief Executive Officer
5
<PAGE> 6
EXHIBIT INDEX
Number Exhibits
99.1 Foltz, et al. v. Ellis, et al., Case Number 721352, filed in the
Superior Court of the State of California for the County of San Diego,
on June 9, 1998.
99.2 JMS, Inc., as Custodian for the RANDALL B. COLES IRA v. Ellis, et al.,
Civil Action Number 16461NC, filed in the Court of Chancery of the
State of Delaware in and for New Castle County, on June 19, 1998.
99.3 Palmer, on Behalf of Himself and Derivatively on Behalf of FPA Medical
Management, Inc. v. Lizerbram, et al., 98-CV-1254, filed in the United
States District Court Southern District of California, on July 8, 1998.
99.4 Kay, on Behalf of Himself and Derivatively on Behalf of FPA Medical
Management, Inc. v. Lizerbram, et al., Civil Action Number 722213,
filed in the Superior Court of the State of California County of San
Diego, on July 9, 1998.
99.5 Madden, et al. v. Deloitte & Touche LLP, et al., Civil Action Number
802244, filed in the Superior Court of the State of California in and
for the County of Orange, on November 18, 1998, as amended on November
23, 1998.
6
<PAGE> 1
EXHIBIT 99.1
Joseph A. Hendrix (S.B. No. 131556)
SUTTON & MURPHY
26056 Acero
Mission Viejo, California 92691
(949) 206-0550
Harold B. Obstfeld
HAROLD B. OBSTFELD, P.C.
260 Madison Avenue
New York, New York 10016
(212) 696-1212
Attorneys for Derivative Plaintiffs
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF SAN DIEGO
RICHARD E. FOLTZ and
RUTH J. FOLTZ,
Plaintiffs, Case No. 721352
-v-
KEVIN ELLIS, HERBERT A. WERTHEIM, SHAREHOLDER
SHELDON DEREZIN, STEPHEN J. DERIVATIVE
DRESNICK, SOL LIZERBRAM, STEVEN M. COMPLAINT FOR
LASH, JAMES A. LEBOVITZ, SETH FLAM DAMAGES AND
AND HOWARD HASSMAN, OTHER RELIEF
Defendants,
-and-
FPA MEDICAL MANAGEMENT, INC.
Nominal Defendant.
Plaintiffs, by their attorneys, complaining of defendants, allege,
upon knowledge as to paragraph 4 and upon information and belief as to all other
matters, as follows:
<PAGE> 2
NATURE OF ACTION
1. This is a shareholder derivative action on behalf of nominal
defendant FPA Medical Management, Inc. (the "Company" or "FPA") against certain
current and former directors and officers of FPA. Plaintiffs seek, on behalf of
the Company, to recover any damages that the Company has sustained because of
defendants' mismanagement and breach of fiduciary duty, a declaration that
defendants must indemnify the Company for any damage or expense the Company may
suffer as a result of any class actions filed by purchasers of its stock for
defendants' violations of federal and state securities laws, and three times the
insider trading profits realized by the Insider Trading Defendants (hereinafter
defined) pursuant to Cal. Corp. Code Section 25502.5.
JURISDICTION AND VENUE
2. This Court has jurisdiction over the causes of action asserted in
this Complaint pursuant to California Constitution, Article VI, Section 10 and
California Corporations Code Section 800.
3. Venue is proper in this Court because (a) the defendants reside or
maintain executive offices in San Diego County; (b) a substantial portion of the
transactions and wrongs complained of herein, including the defendants' primary
participation in the wrongful acts alleged herein took place in this County,
and/or (c) defendants have each received substantial compensation in this County
by doing business in this State and by engaging in numerous activities which had
an effect in this County.
PARTIES
4. Plaintiffs own shares of the common stock of the Company. They have
been shareholders of the Company continuously since prior to the occurrence of
the events which are the subject of this complaint.
5. The Company is a Delaware corporation with its headquarters in San
Diego, California. It organizes and manages groups of physicians within
geographic areas, which, along with other health care providers such as
hospitals, enter into contracts with health maintenance organizations or other
2
<PAGE> 3
prepaid health insurance plans ("Payors") to provide health services to
enrollees of such Payors. The Company had outstanding 47,549,187 shares of
common stock (the "Shares") as of May 4, 1998, which are publicly held and
traded on the NASDAQ National Market System.
6. Defendants Kevin Ellis ("Ellis"), Stephen J. Dresnick ("Dresnick"),
Sheldon Derezin, Sol Lizerbram ("Lizerbram") Howard Hassman ("Hassman") and
Herbert A. Wertheim (the "Directors") constitute the members of the Company's
Board of Directors.
(a) Defendant Ellis has been the Executive Vice President --
Chief Medical Officer of the Company since April 1995 and served as Chief
Operating Officer of the Company from 1988 until April 1995. He has served as a
director since 1986. Defendant Ellis has received substantial grants of options
to purchase Shares as a result of his employment with the Company, as well as a
substantial salary.
(b) Defendant Lizerbram has been Chairman of the Board of
Directors of the Company since 1986 and was President from 1986 through October
31, 1996. His 1996 salary was $237,646 with a bonus of $1,133,123 and his 1997
salary was $446,978 with a bonus of $665,522. In 1996 he was granted options to
purchase 671,000 Shares and in 1997 he was granted options to purchase 200,250
Shares.
(c) Defendant Hassman served as Chief Financial Officer of the
Company from 1986 until September 1994 and as Executive Vice President,
Corporate Development of the Company from September 1994 until his resignation
on April 1, 1998. He has served as a director since 1986. His 1996 salary was
$201,604 with a bonus of $1,052,251 and his 1997 salary was $271,417 with a
bonus of $403,584. In 1996 he was granted options to purchase 303,000 Shares and
in 1997 he was granted options to purchase 250 Shares.
(d) Defendant Dresnick has been President and Chief Executive
Officer of the Company since March 1998 and was Vice Chairman of the Board of
Directors of the Company from October 1996 until March 1998. He has served as a
director since 1996. His salary for each of 1996 and 1997 was
3
<PAGE> 4
$325,000, his 1996 bonus was $1,819,180 and his 1997 bonus was $1,487,500. In
1996 and 1997 he received 722,500 and 75,000 options to buy Shares,
respectively.
7. (a) Defendant Steven M. Lash ("Lash") has been Executive Vice
President of the Company since March 1998 and was Executive Vice President and
Chief Financial Officer of the Company from September 1994 until March 1998. His
1996 salary was $215,417 with a bonus of $1,084,584 and his 1997 salary was
$361,705 with a bonus of $500,795. In 1996 and 1997 he received 437,250 and
100,000 options to buy Shares, respectively.
(b) Defendant James A. Lebovitz, ("Lebovitz") has been
Executive Vice President, General Counsel and Secretary of the Company since
March 1998 and was Senior Vice President, General Counsel and Secretary of the
Company from March 1996 until March 1998.
(c) Defendant Seth Flam ("Flam"), until his resignation
effective March 25, 1998, was President and Chief Executive Officer of the
Company, having served in those positions since 1986. His 1996 salary was
$237,646, with a bonus of $1,133,123 and his 1997 salary was $446,978, with a
bonus of $665,522. In 1996 and 1997 he received 671,000 and 200,250 options to
buy Shares, respectively.
SUBSTANTIVE ALLEGATIONS
8. FPA has stated publicly that its business strategy is to increase
enrollment by adding new Payor relationships with health care providers and by
expanding into new geographic areas. In furtherance of its strategy, the Company
has made thirteen acquisitions between March 1997 and March 1998. During that
period of time, certain of the Company's senior executives, including defendants
Dresnick, Lizerbram, Lash, Lebovitz, Flam, Ellis and Hassman (the "Insider
Trading Defendants"), as part of a conspiracy to artificially inflate the market
price of FPA's stock, made statements or caused the Company to make statements
which induced the investing public to believe that FPA was efficiently
integrating its newly acquired assets and businesses and achieving record
financial results. Defendants represented that FPA was achieving "strong revenue
and earnings growth," with "successful integration of new operations"
4
<PAGE> 5
and that its acquisitions were "immediately positive to earnings through
consolidation of corporate and marketing operating expenses."
9. In fact, and as the Insider Trading Defendants knew, FPA's business
strategy was a failure. FPA's financial strength was seriously eroded by its
acquisitions. FPA's crucial management information system and medical claims
tracking abilities required to control medical costs could not keep pace with
the acquisitions. Also, FPA was not reserving adequately for incurred but not
reported medical costs. FPA was losing millions of dollars as operating expenses
vastly exceeded income.
10. Defendants concealed FPA's deteriorating condition by issuing
financial results that were false and misleading. However, on May 15, 1998,
defendants, no longer able to conceal the Company's difficulties, revealed that
its purportedly healthy business was near collapse. FPA disclosed that its
acquisitions were overvalued by $125 million, or more than 12% of all of its
assets, that it had lacked adequate controls and infrastructure to manage its
business, that its cash position was deteriorating rapidly and that, unless it
found new cash sources, it would run out of cash by June 30, 1998. The Company
stated that it would incur about $200 million in charges in its quarter ending
June 30, 1998, including about $125 million in goodwill impairment and $40
million in write-downs of shared risk and other receivables. In addition the
Company had set aside inadequate reserves, which had the effect of inflating its
financial results. Following such disclosures, the Shares' market price dropped
nearly 50%, to $6 per Share, from $11.50 per Share on the previous day.
Thereafter, Moody's Investors Service, Inc. lowered its ratings on FPA debt,
stating that it is concerned about FPA's liquidity and noting that FPA has
almost no borrowing capacity.
11. While making or causing the Company to make the false statements
summarized in paragraph 8 above, the Insider Trading Defendants, based upon and
taking unfair advantage of their inside information regarding the true state of
the Company's financial condition sold more than 400,000 of their Shares, for
proceeds of over $10 million. In addition, as a result of the inflated earnings
reports issued by
5
<PAGE> 6
the Company, such defendants were rewarded with large salaries and cash bonuses
and substantial numbers of stock options, as described above.
THE FALSE AND MISLEADING STATEMENTS
ISSUED TO INFLATE THE PRICE OF THE SHARES
12. On February 27, 1997, FPA issued a press release announcing
"record" results for the fourth quarter and year ended December 31, 1996,
stating:
FPA Medical Management, Inc. today announced revenues and earnings for
the fourth quarter and year ended December 31, 1996.
Operating revenues for the fourth quarter ended December 31,
1996 increased 166% to $151.0 million compared to $56.8 million in the
same period last year, including the operations of Sterling Healthcare
Group, Inc., accounted for as a pooling of interests. Net income for
the fourth quarter was $4.2 million or $0.18 per share (excluding
non-recurring charges of $36.3 million related to transaction costs
associated with the acquisition of the Foundation Health affiliated
medical centers in Arizona and California, Sterling Healthcare Group,
and certain restructuring charges) compared to net income of $677,000
or $0.04 per share for the same period last year. Including the
charges, the Company reported a net loss of $23.5 million or $1.01 per
share. Weighted average shares outstanding were 23,199,195 and
16,961,698 for the fourth quarters of 1996 and 1995, respectively, with
shares outstanding including the effect of the Sterling pooling.
For the year ended December 31, 1996, operating revenue
increased 161% to $440.3 million compared to $168.4 million for the
same period last year. Excluding the non-recurring charges, net income
for the year was $13.0 million or $0.60 per share on weighted average
shares outstanding of 21,702,786, compared to net income of $3.8
million or $0.28 per share on 13,693,193 weighted shares outstanding
for the same period in the prior year. Including non-recurring charges
of $38.0 million, FPA reported a loss of $15.7 million or $0.72 per
share.
13. On March 17, 1997, FPA and AHI Healthcare Systems, Inc. announced
that they had completed their merger. Their press release quoted defendant Lash
as stating that "based on the final terms of the agreement, the transaction will
provide immediate accretion to FPA shareholders and will bring the Company's
total 1996 annualized revenue to nearly $1 billion."
14. On April 30, 1997, the Company announced sharply increased revenues
for the quarter ended March 31, 1997. The press release quoted defendant Lash as
stating that "we continue to show
6
<PAGE> 7
margin improvements based on the further integration of acquisitions as we
continue to reduce medical and administrative expenses." Defendant Flam was
quoted as stating that, in the first quarter, FPA "showed same store growth of
7% due to the successful integration of new operations into the FPA network.
Specifically, the integration and consolidation of the previously owned
Foundation Health Systems ... clinics is ahead of plan."
15. In a press release issued on July 30, 1997, FPA announced "record
revenues and earnings" for the quarter ended June 30, 1997. The press release
quoted defendant Flam as stating that "FPA continues to perform above
expectations as our integration plans provide positive sequential results. We
believe this trend will continue and remain optimistic for the balance of the
year." Following this announcement, the Shares' price increased by $1.00, to
$27.375.
16. On March 6, 1988, FPA announced "record" results for the fourth
quarter and full year ended December 31, 1997. Fourth quarter 1997 revenue was
reported to have increased 49.4% over the same period in 1996, and income,
excluding non-recurring charges, increased to $12.9 million, or $.30 per Share,
compared with a net loss of $9.4 million or $.27 per Share in the fourth quarter
of the prior year. For the year ended December 31, 1997, revenues were reported
to have increased 71.9% over 1996 revenues, and net income was $25.9 million in
1996, or $.61 per Share, compared with a net loss of $26.1 million, or $.80 per
Share in 1996. The press release quoted defendant Lash as stating that "FPA's
positive year end 1997 and fourth quarter financial results were due to our
ability to successfully implement our medical management technologies and
leverage our acquired service center operations. This has resulted in a decrease
in our general and administrative expenses when reported as a percentage of
revenue and a reduction in overall medical loss ratio."
17. On May 15, 1998, FPA announced that it would record a pre-tax
charge for up to approximately $200 million, including about $125 million
representing goodwill impairment and about $40 million of shared risk and other
receivables. In addition, the Company announced net income for the first
7
<PAGE> 8
quarter of only $449,000 or $0.01 per Share, compared to net income of $2.6
million or $0.06 per share for the same period in 1997. Also on May 15, 1998,
the Company filed its SEC report for the quarter ended March 31, 1998 which
revealed that it had "cash, cash equivalents and marketable securities of $12.4
million and a working capital deficit (current liabilities in excess of current
assets) of $33.1 million compared to cash, cash equivalents and marketable
securities of $23.9 million and working capital surplus of $1.8 million at
December 31, 1997," and that such cash was only sufficient to meet FPA's
requirements until June 30, 1998.
18. Following the May 15, 1998 revelations, it became apparent that the
Insider Trading Defendants had sold their Shares while failing to disclose the
following material facts:
(a) Contrary to the defendants' representations, the
businesses FPA was acquiring would not be accretive
to the Company's earnings growth, but would in fact
decrease earnings;
(b) FPA's information systems could not keep pace with
its acquisitions and could not integrate computer
systems required to maintain control of claims and
costs;
(c) FPA's failure to control claims and expenses caused
its cash position to deteriorate rapidly, to the
point that the Company is in danger of running out of
cash;
(d) FPA failed to take adequate reserves for incurred but
not reported medical costs; and
(e) FPA's reported financial results were false, because
FPA should have amortized the goodwill it recorded in
connection with its acquisitions over substantially
fewer years than it in fact did and FPA failed to
reserve adequately to cover the level of its
anticipated costs and claims, thereby artificially
inflating its earnings.
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<PAGE> 9
19. While the market price of the Shares was inflating as a result of
the issuance of the false material statements described above, the Insider
Trading Defendants took advantage of the inflated prices of the Shares by
selling their Shares on the basis of such undisclosed inside information as
follows:
LEBOVITZ, JAMES A.
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
11/17/97 10,000 $26.0 $ 260,000.00
3/11/97 - 3/17/97 15,000 $19.437 - $22.85 $ 291,555.00
------ --------------
TOTAL 25,000 $ 551,555.00
==============
</TABLE>
LASH, STEVEN M.
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
12/04/97 - 12/05/97 24,850 $23.44 - $24.00 $ 582,484.00
11/19/97 - 11/20/97 24,150 $27.25 - $27.625 $ 658,087.50
3/11/97 - 3/17/97 30,000 $19.437 - $22.343 $ 583,110.00
------ --------------
TOTAL 79,000 $1,823,681.50
=============
</TABLE>
LIZERBRAM, SOL
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
12/01/97 - 12/04/97 15,750 $23.88 - $26.44 $ 376,110.00
11/19/97 - 11/24/97 33,150 $27.25 - $27.75 $ 903,337.50
3/11/97 - 03/17/97 39,000 19.437 - $22.875 $ 758,043.00
------
TOTAL 87,900 $2,037,490.50
</TABLE>
HASSMAN, HOWARD
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
11/04/97 - 11/18/97 49,000 $23.55 - $27.008 $1,153,950.00
3/11/97- 3/14/97 39,000 $20.871 - $22.875 $ 814,125.00
------ -------------
TOTAL 88,000 $1,968,075.00
=============
</TABLE>
ELLIS, KEVIN
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
12/08/97 3,000 $24.50 $ 73,500.00
11/13/97 - 11/18/97 15,000 $24.50 - $27.00 $ 367,500.00
3/11/97 - 3/17/97 25,000 $19.437 - $22.875 $ 485,925.00
------ -------------
TOTAL 43,000 $ 890,925.00
=============
</TABLE>
FLAM, SETH
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
12/04/97 - 12/05/97 20,850 $23.44 - $24.00 $ 488,724.00
11/19/97 - 11/24/97 33,150 $27.25 - $27.75 $ 903,337.50
3/11/97 - 3/17/97 39,000 $19.437 - $22.875 $ 758,043.00
------ --------------
TOTAL 93,000 $2,150,104.50
=============
</TABLE>
9
<PAGE> 10
DRESNICK, STEPHEN J.
<TABLE>
<CAPTION>
Dates No. of Shares Prices Proceeds
<S> <C> <C> <C>
11/17/97 - 11/26/97 26,140 $25.125 - $26.499 $ 656,767.50
5/21/97 10,000 $18.50 - $26,499 $ 185,000.00
------ -------------
TOTAL 36,140 $ 841,767.50
=============
</TABLE>
20. In addition, on the basis of such false operating results, the
Insider Trading Defendants received compensation from the Company far in excess
of the compensation they would have received had the Company's financial results
been reported accurately.
21. As officers, directors, and employees, the Insider Trading
Defendants each owed the Company a fiduciary duty of loyalty which required them
to act at all times in the best interests of the Company and not for their
personal benefit, including a duty not to profit on the basis of Company inside
information and a fiduciary duty to exercise skill, care, and judgment in the
management of the Company's business for the benefit of the Company.
22. The Insider Trading Defendants violated their fiduciary duties of
loyalty and due care by grossly mismanaging the Company and manipulating its
reporting of its financial results and acting for their own benefit and to the
detriment of the Company. By selling Shares prior to the public announcement of
the Company's financial difficulties, and with knowledge of the false and
misleading nature of the Company's public disclosures, the Insider Trading
Defendants violated their duty not to profit on the basis of the Company's
inside information.
23. In addition, as a direct and proximate result of the violations by
the Insider Trading Defendants of their fiduciary duties to the Company and its
stockholders, and the Company has suffered the following damages and losses:
(a) loss of goodwill and business reputation;
(b) attorneys' fees and costs to defend the numerous
securities fraud class actions filed by shareholders
who had purchased the Shares; and
10
<PAGE> 11
(c) significant liabilities in the pending securities
fraud class litigation.
DEMAND FUTILITY
24. Demand upon the Company's Board of Directors to commence this
action would be futile because the Company's Board of Directors cannot, in good
faith, exercise any independent business judgment as to whether to approve a
resolution authorizing the filing of a suit against the Insider Trading
Defendants on the basis of the claims asserted herein for the following reasons:
(a) Four of the members of the Company's Board of Directors, a
number sufficient to block any resolution authorizing the filing of such a suit,
directly participated in and profited from the transactions complained of herein
by selling Shares while in possession of materially adverse non-public
information in violation of their fiduciary duties and Cal. Corp. Code
Section 25502 and thereby benefitted from the dissemination of the false and
misleading statements described above; and
(b) Prosecution of this action by the Company's Board would
place control of this action in the hands of persons inimical to the Company's
rights, who could not be expected to proceed vigorously against the Insider
Trading Defendants.
FIRST CAUSE OF ACTION
(Breach of Fiduciary Duties)
(Against the Individual Defendants)
25. Plaintiffs refer to paragraphs 1 through 24 of the Complaint and
incorporates them herein by reference as though set forth in full herein.
26. The individual defendants herein knowingly, recklessly or
negligently breached their fiduciary duties by orchestrating, devising, carrying
out, participating in and/or failing to prevent, terminate, or timely correct
the wrongdoing alleged herein, which included the making of false and misleading
statements, the concealment of material and adverse information and the trading
by the Insider Trading Defendants on the basis of material adverse inside
information.
11
<PAGE> 12
27. As a result of the foregoing misleading reports and statements made
in violation of federal and state laws, the Company is a defendant in a number
of class actions brought by defrauded investors, has had its reputation
tarnished, has paid generous over-all compensation to the Insider Trading
Defendants and others which would not have been paid if the Company's true
financial condition had been reported and has been damaged in an as yet
uncertain amount.
SECOND CAUSE OF ACTION
(Liability under Cal. Corp. Code Section 25502.5
for violation of Cal. Corp. Code Section 25402 and the common law)
(Against the Insider Trading Defendants)
28. Plaintiffs refer to paragraphs 1 through 27 of the Complaint and
incorporates them herein by reference as though set forth in full herein.
29. As officers and directors of the Company, the Insider Trading
Defendants as a result of their business and fiduciary relationship with the
Company, were aware of material information about the Company which was not
available to the public and was not intended to be available generally to the
public, and which would have significantly and adversely affected the market
price of the Shares had such information been made public.
30. As a result of the dissemination of the aforementioned false and
misleading reports, releases and financial statements, and the omissions to
state material adverse facts known to the Insider Trading Defendants, the market
price of the Shares was artificially inflated until at least May 15, 1998. If
such information had been publicly disseminated prior to the insider selling
detailed herein and a reasonable time had elapsed for the market to absorb that
information, the market price of the Shares would have been significantly lower.
31. The Insider Trading Defendants' Shares were offered for sale in
this state, were sold pursuant to offers that originated from this state, and/or
acceptance of such defendants' offers to sell Shares were communicated to such
defendants in this state.
12
<PAGE> 13
32. Each of the Insider Trading Defendants sold his Shares at
artificially inflated prices with knowledge and on the basis of the material
adverse non-public information specified herein. The Company has been damaged as
a result of defendants' wrongful sales of Shares. Defendants, as corporate
fiduciaries entrusted with nonpublic information, misappropriated that
information for their own use and the Company has a claim to the proceeds
derived from its use.
33. The Insider Trading Defendants have been unjustly enriched at the
Company's and its public shareholders' expense by reason of, inter alia, the
sales of their Shares while the Shares' market price was artificially inflated.
WHEREFORE, plaintiffs pray for judgment as follows:
A. Requiring the individual defendants to account to the Company for
their profits and the damages and losses suffered by the Company as a result of
the transactions complained of herein;
B. Declaring that the individual defendants have breached and
participated in the breach of their fiduciary duties to the Company;
C. Awarding damages against the individual defendants;
D. Declaring that the individual defendants are obligated to indemnify
and hold the Company harmless from any judgment, settlement or award against the
Company in the pending class actions and from any costs and attorneys' fees
incurred by the Company in said class actions;
E. Awarding the Company the damages to which it is entitled under Cal.
Corp. Code Section 25502.5 against the Insider Trading Defendants;
F. Allowing plaintiffs the costs and expenses of this action, including
reasonable attorneys' fees; and
13
<PAGE> 14
G. Granting such other and further relief as may be just and proper.
Dated: June 8, 1998
SUTTON & MURPHY
By: /s/ Joseph A. Hendrix
-----------------------------------
Joseph A. Hendrix
Attorneys for Derivative Plaintiffs
Of Counsel:
Harold B. Obstfeld
HAROLD B. OBSTFELD, P.C.
260 Madison Avenue
New York, New York 10016
(212) 696-1212
14
<PAGE> 1
EXHIBIT 99.2
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- ----------------------------------------------
JMS, INC., as Custodian for the RANDALL B. COLES
IRA,
Plaintiff, Civil Action No.16461NC
v.
COMPLAINT
KEVIN ELLIS, HERBERT A. WERTHEIM, SHELDON
DEREZIN, STEPHEN J. DRESNICK, AND SOL
LIZERBRAM,
Defendants,
-and-
FPA MEDICAL MANAGEMENT, INC.
Nominal Defendant.
- ----------------------------------------------
Plaintiff alleges upon personal knowledge as to itself and its own
acts, and upon information and belief as to all other matters, as follows:
NATURE OF ACTION
1. This is a derivative action brought on behalf of nominal defendant
FPA Medical Management, Inc. ("FPA" or the "Company") against its directors,
namely Kevin Ellis, Herbert A. Wertheim, Sheldon Derezin, Stephen J. Dresnick
and Sol Lizerbram (collectively, the "Director Defendants") for breach of their
fiduciary duties which have resulted in substantial harm to the Company.
<PAGE> 2
2. In its most recent quarterly financial report the Company revealed
that it may not be able to continue as a going concern beyond June 30, 1998
because it did not have, and was not generating, sufficient cash to sustain its
operations. The Company also revealed that much of the public statements and
financial reports issued by the Company, its former Chief Executive Officer and
the current Chairman of the Board of Directors over the past 15 months regarding
the Company's financial condition, results of operations and success in
integrating acquisitions were materially false and misleading.
3. Following these disclosures, the market price of FPA shares declined
dramatically and numerous class actions were commenced by persons who invested
in the Company's stock which seek to hold the Company, certain former officers
and certain of the Director Defendants liable for violations of the federal
securities laws (the "Federal Class Actions"). The Company's exposure to
substantial liability in these class actions adds to the threat that the Company
may not be able to survive as a going concern. In addition, the Company has lost
credibility in the market place and its reputation in the business community has
been seriously tarnished.
4. The Director Defendants have done nothing to cause the wrongdoers to
account for the harm they have caused the Company. Instead, the Director
Defendants have wasted the Company's assets by rewarding the wrongdoers with
munificent compensation, severance and "consulting" packages at a time when the
Company's payment of substantial cash to these wrongdoers makes it more likely
that the Company will not be able to continue as a going concern. Moreover, the
Director Defendants have caused the Company to waive or surrender its legal
rights under ageements with the wrongdoers for no consideration.
2
<PAGE> 3
5. Plaintiffs seek to recover for the harm the Company has suffered as
a result of the Director Defendants' waste of corporate assets through the
payment of substantial financial rewards to the persons responsible for bringing
the Company to the brink of insolvency. Certain of the Director Defendants also
participated and/or acquiesced in violations of the federal securities laws,
thereby breaching their obligations of fidelity and good faith which they owe to
the Company.
PARTIES
6. Plaintiff owns shares of FPA common stock and has owned such shares
at all times relevant hereto.
7. Nominal defendant FPA is a Delaware corporation which maintains its
principal executive offices at 2878 Camino del Rio South, San Diego, California.
The Company acquires, organizes and manages primary care physician practice
networks and provides contract management services to hospital-based emergency
departments. The Company also provides primary and specialty care services to
capitated managed care enrollees and fee-for-service patients.
8. The following individuals are the Director Defendants:
a. Defendant Kevin Ellis is a director and has been the
Executive Vice President - Chief Medical Officer of the Company since April
1995. Mr. Ellis was the Chief Operating Officer of the Company from 1988 though
April 1995.
b. Defendant Herbert A. Wertheim has been the Vice Chairman of
the Board of Directors of the Company since 1988.
c. Defendant Sheldon Derezin is a director of the Company.
3
<PAGE> 4
d. Defendant Stephen J. Dresnick is a director of the Company
and has been the Chief Executive Officer of the Company since March 1998. He was
the Vice Chairman of the Board of Directors of the Company from 1996 until March
1998.
e. Defendant Sol Lizerbram has been Chairman of the Board of
Directors of the Company since 1986. He was President of the Company from 1986
until November 1996 and is a principal defendant in the Federal Class Actions
described above which allege that he issued numerous material and misleading
statements regarding, inter alia, the Company's success in integrating
acquisitions.
9. Defendant Lizerbram is a member of the Board of Directors of MedNet,
MPC Corporation, a publicly held managed pharmacy service company from which FPA
has purchased pharmaceuticals from time to time. In addition, he is the brother
of Samuel Lizerbram, the President of a large physician group which has been
compensated for services purportedly provided for the Company.
10. The Director Defendants comprise the entire FPA Board of Directors.
SUBSTANTIVE ALLEGATIONS
11. FPA is a national physician practice management company which
acquires, organizes and manages primary care physician practice networks and
provides contract management services to hospital-based emergency departments.
The Company provides primary and specialty care services to capitated managed
care enrollees and fee-for-service patients. The Company was started in 1986,
and after going public in 1994, grew rapidly through acquisitions
12. As of December 31, 1997, FPA affiliated with approximately 7,690
primary care physicians (including emergency department physicians), who
provided services to
4
<PAGE> 5
approximately 1,193,800 enrollees of 53 health maintenance organizations or
other prepaid health insurance plans in 29 states. FPA, through its subsidiary,
Sterling Healthcare Group, Inc. ("Sterling"), provides physician management
services pursuant to approximately 150 contracts to hospital emergency
departments, urgent care, radiology and correctional facilities.
13. FPA's claims that its relationships with its subsidiaries and
affiliated professional corporations, other providers of medical services and
payors, offer physicians the opportunity to participate more effectively in
managed care programs by organizing physician groups within geographic areas to
contract with payors. The Company claims to enhance physician practice
management operations by providing administrative functions necessary in a
managed care environment. These functions include claims adjudication,
utilization management of medical services, payor contract negotiations,
credentialing, financial reporting and the operation of integrated information
systems.
14. Commencing with the release of FPA's fourth quarter and year end
results for 1996 on February 27, 1997, certain of the Director Defendants and
members of FPA's senior management undertook a scheme to artificially inflate
FPA's stock price which enabled certain FPA officers and directors to sell their
FPA stockholdings at artificially inflated prices and also enabled the Company
to use its over-valued stock as currency to make acquisitions which further
inflated the price of its stock. In particular, the Company's then President and
Chief Executive Officer and a director, Seth Flam, together with defendant
Lizerbram, falsely represented that FPA was continuing to realize "strong
revenue and earnings growth" with "successful integration of new operations"
that were "ahead of plan." They claimed that FPA offered "enhanced financial and
management resources," that acquisitions were "immediately positive to earnings
5
<PAGE> 6
through consolidation of corporate and marketing operating expenses," that FPA
was doing "an effective job of blocking and tackling and producing quality and
value," and had the "ability to successfully integrate seven acquisitions," was
achieving "significant synergies," "record" results and was performing "above
expectations" as "integration plans provided positive sequential results."
15. The Company, primarily through Mr. Flam and defendant Lizerbram,
issued the foregoing statements and others like them in the 15 months preceding
May 15, 1998, although it should have been apparent to FPA's officers and
directors no later that February of 1997 that FPA's business model was failing;
that its financial condition was deteriorating and worsening as it acquired
other companies; that the Company did not have information systems or controls
that were adequate to keep pace with its acquisitions and was failing to
integrate the computerized management information and claims' tracking systems
which are essential to tracking claims and controlling costs in a Company like
FPA.
16. Statements similar to those set forth in paragraph 14 were issued
by Mr. Flam and/or defendant Lizerbram each time FPA made an acquisition or
released its quarterly financial results between February 27, 1997 and May l5,
1998. Thus, for example, when the Company announced its first quarter financial
results in a press release dated April 30, 1997, Mr. Flam stated "we continued
to realize strong revenue and earnings growth . . . due to the successful
integration of new operations into the FPA network."
17. As Mr. Flam and the Director Defendants well knew, because of the
serious difficulties being encountered by companies FPA was acquiring, those
acquisitions would not be accretive as represented or claimed in fiscal year
1997 or first quarter 1998 and, in
6
<PAGE> 7
certain instances, rather than contributing to earnings growth, would decrease
earnings.
18. In addition, FPA's results from operations were overstated at least
since February of 1997 as a result of defendants' failure to establish adequate
reserves and the failure to take required write-downs. Among other things,
defendants failed to establish adequate reserves for incurred but not reported
("IBNR") claims.
19. On or about May 15, 1998, FPA revealed that there was a serious
question as to whether it would be able to continue as a going concern. The
Company announced on May 15, 1998 that it would report a loss for the first
quarter of 1998 of 20 cents a share, after certain charges discussed below, and
1 cent per share before charges. Analysts had expected the Company to earn 31
cents in the quarter.
20. The Company revealed that first quarter results were adversely
impacted by a $7.9 million charge for severance payments, discussed further
below, and a $15 million increase in reserves for IBNR medical claims for which
the Company had under-reserved in prior reporting periods.
21. The Company further announced that it would take a second quarter
charge of $200 million including $125 million for goodwill impairment, a $40
million write-down of shared risk and other receivables, and about $35 million
for severance payments.
22. In its Form 10-Q for the first fiscal quarter ended March 31, 1998
filed with the Securities and Exchange Commission on May 15, 1998, the Company
disclosed that it had exhausted its $315 million line of credit and that its
cash on hand and anticipated cash flow from operations would only be enough to
meet the Company's operating needs until the end of the second quarter.
7
<PAGE> 8
23. Company officials informed analysts in a conference call on May 15,
1998 that they were scrambling to secure alternative means of financing
including bridge loans and other forms of investment and were seeking to
renegotiate some of the Company's contracts with health-care payers because its
existing agreements did not leave enough money to permit FPA to pay its
expenses.
24. Following these announcements, the market price for the Company's
shares declined almost 50 percent.
25. On May 19, 1998, Moody's Investor Services Inc., downgraded its
ratings on about $356 million of FPA debt securities and said it was keeping the
Company under review for a possible further downgrade. Moody's said it was
worried about the Company's liquidity and substantial increase in short-term
accounts and claims payable. Moody's also noted that the Company has almost no
borrowing capacity and will need to obtain additional financing before the end
of the second quarter.
26. On May 20, 1998, The Wall Street Journal reported that the Company
was in default on its debt covenants with its lenders and had been given until
June 11, 1998 to cure the default.
27. In the wake of the foregoing disclosures, the Federal Class Actions
were instituted on behalf of purchasers of FPA shares who seek millions of
dollars in damages for the violations of the federal securities laws allegedly
committed by the Company, Mr. Flam, defendants Lizerbram and Dresnick, and
others.
28. In March of 1998, the Company announced major management changes
including the departure of Mr. Flam and others from executive management. As set
forth above,
8
<PAGE> 9
Mr. Flam was one of the principal participants in the violations of the federal
securities laws alleged in the Federal Class Actions and personally profited
therefrom. Furthermore, Mr. Flam, as the leader of FPA's senior management, was
answerable for the deterioration of the Company's financial condition described
above. Nonetheless, the Director Defendants greatly exacerbated the Company's
acute liquidity crisis by entering into a Consulting and Settlement Agreement
with Mr. Flam pursuant to which they caused the Company to agree, inter alia, to
forego its right to terminate Mr. Flam for cause, thereby entitling Mr. Flam to
substantial severance payments and other benefits pursuant to his employment
agreement. The Company received no consideration whatsoever for abandoning its
contractual rights and defenses against any claims Mr. Flam might assert under
his employment agreement. Also, the Director Defendants further wasted the
Company's assets by entering into a lucrative consulting agreement with Mr. Flam
under which he would be paid more than $2 million dollars for purported
"consulting" services over a six-month period.
29. In statements reported by The Wall Street Journal on May 20, 1998,
defendant Dresnick revealed that a significant portion of the current and future
severance expenses to be incurred by the Company consisted of $8.2 million in
severance benefits payable to Mr. Flam ($4.8 million) after he announced that he
was leaving the Company on March 26, 1998, just as the Company's cash crunch was
coming to a head, and to Howard Hassman, the Company's former Executive Vice
President of corporate development, who received a package of $3.4 million. Mr.
Hassman is also a defendant in the Federal Class Actions wherein plaintiffs
allege that he sold more than $2.3 million worth of FPA stock while in
possession of material non-public information. Like Mr. Flam, Mr. Hassman was a
member of FPA's senior
9
<PAGE> 10
management and answerable for the deterioration in its financial affairs.
Nonetheless, the Director Defendants caused the Company for no consideration to
abandon its contractual right to terminate Mr. Hassman for cause, thereby
entitling him to the $3.4 million severance package.
30. Although defendant Lizerbram served solely as a director and is a
principal defendant in the Federal Class Actions where it is alleged that he
sold over $2 million of FPA stock while in the possession of material non-public
information, the Director Defendants caused the Company to agree to pay him a
base salary of $1,112,500 during the period March 25, 1998 through March 25,
1999, with extensions thereafter.
31. The Director Defendants owed and owe to the Company and its
stockholders the highest fiduciary obligations of fidelity, trust, loyalty and
due care, and were and are required to (a) preserve the Company's assets from
waste; (b) act in good faith; (c) refrain and cause the Company to refrain from
violating the law; (d) ensure that adequate procedures designed to ensure
compliance with statutory requirements, including the federal securities laws,
are in place; (e) speak truthfully about the Company's business practices; and
(f) act with the utmost integrity as to the dissemination of information about
the Company and its products.
32. Furthermore, the Director Defendants' fiduciary obligations require
and required them to assure that corporate insiders do not engage in illegal
conduct; to remain informed as to the true condition of the Company's financial
condition and prospects; and, upon receiving notice or information of a wrongful
or unsound decision, condition or practice, to make a reasonable investigation
in connection therewith and to take steps to correct that decision, condition or
practice.
10
<PAGE> 11
33. The Director Defendants breached their fiduciary duties by, among
other things:
(a) wasting corporate assets, including the payment of
millions of dollars in severance pay to executives answerable for the Company's
deteriorating fortunes at a time when the Company was starved for cash;
(b) rewarding handsomely the very persons responsible for
recklessly exposing FPA to huge potential damages, including costs, arising from
and associated with the Federal Class Actions;
(c) (as to certain of the Director Defendants), engaging in
unlawful insider trading for personal profit;
(d) sustained and systematic failure to supervise adequately
FPA's operations and financial reporting in a manner consistent with all
applicable laws;
(e) sustained and systematic failure to supervise or monitor
FPA's senior management to ensure that they acted with honesty and integrity;
and
(f) condoning and/or encouraging the improper practices
complained of herein, and failing to disclose or correct these practices, in
violation of law.
34. As a result of the Director Defendants' violations of the fiduciary
duties which they owed and owe to the Company, their waste of corporate assets
and their sustained and systematic failure to fulfill their oversight
responsibilities, the Company has been caused to engage in illegal activities,
its assets have been wasted, the value of its securities has been adversely
affected, the Company has been and will continue to be subjected to litigation
which threatens the viability of the Company, the Company has suffered
substantial monetary damages
11
<PAGE> 12
and will suffer even greater damage in the future, and the Company has lost
credibility, its reputation has been damaged and its ability to be competitive
and stay in business has been seriously undermined.
35. In violation of their duty of loyalty, defendants Dresnick and
Lizerbram sold millions of dollars worth of FPA stock on the basis of
confidential, material inside information which was not known to the general
investing public. Defendants Dresnick and Lizerbram must account and are liable
to FPA for any and all profits unlawfully derived from such trades.
36. FPA's alleged liability in the Federal Class Actions arises, in
whole or in part, from the intentional, knowing, reckless, disloyal and bad
faith acts or omissions of the Director Defendants as alleged above, and FPA is
entitled to contribution and indemnification from each of the Director
Defendants in connection with all such claims that have been, are or may in the
future be asserted against FPA by virtue of the Director Defendants' misconduct.
DEMAND FUTILITY
37. Plaintiff has not made demand on the Board of Directors of the
Company to pursue the claims asserted because such demand is excused and would
be futile and useless for at least the following reasons:
a. Certain of the Director Defendants personally profited from
the wrongful activities alleged herein by selling FPA stock at artificially
inflated prices while in possession of material non-public information
proprietary to the Company. Such Director Defendants, therefore, have a personal
financial interest in the claims asserted herein.
12
<PAGE> 13
b. The Director Defendants have wasted the Company's assets by
causing the Company to agree to pay munificent severance benefits and/or
compensation to the very persons who are answerable for the Company's precarious
financial condition, and who personally profited by selling millions of dollars
of FPA stock at artificially inflated prices. In causing the Company to pay out
such sums which it could ill-afford, the Director Defendants caused the Company
to surrender valuable contract rights and defenses for no consideration. The
Director Defendants' decisions are not the product of sound or prudent business
judgment and cannot be validly ratified.
c. There is a substantial likelihood that the Director
Defendants are liable for the wrongs complained of herein because they are
directly responsible for the unlawful and improper practices which have damaged
the Company. Hence the Director Defendants are not disinterested and could not
exercise independent business judgment to remedy the wrongs complained of.
WHEREFORE, plaintiff demands judgment as follows:
A. Directing defendants to account to the Company for all
damages sustained or to be sustained by the Company and all profits obtained by
defendants by reason of the wrongs alleged herein;
B. Requiring defendants to return to FPA all salaries and the
value of other remuneration of whatever kind paid to them by the Company during
the time they were in breach of the fiduciary duties they owed to FPA;
C. Ordering defendants, and those under their supervision and
control, to
13
<PAGE> 14
implement and enforce policies, practices and procedures on behalf of FPA and
its stockholders that are designed to detect and prevent illegal conduct by
FPA's employees and representatives;
D. Directing defendants to pay interest at the highest rate
allowable by law on the amount of damages sustained by the Company as a result
of the culpable conduct of defendants;
E. Awarding plaintiff the costs and disbursements of this
action, including reasonable attorneys', accountants' and experts' fees, costs
and expenses; and
F. Granting such other and further relief as the Court may
deem just and proper.
ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A.
By: /s/
--------------------------
Suite 1401, Mellon Bank Center
P.O. Box 1070
Wilmington, Delaware 19899
Attorneys for Plaintiff
OF COUNSEL:
Stanley M. Grossman
Karl J. Stoecker
POMERANTZ HAUDEK
BLOCK & GROSSMAN
100 Park Avenue, 26th Floor
New York, New York 10017-5516
Tel: (212) 661-1100
14
<PAGE> 1
EXHIBIT 99.3
JONATHAN McCUE
McCUE & McCUE
600 West Broadway, Suite 930
San Diego, CA 92101
Telephone: 619/338-8136
619/338-0322 (fax)
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
MARK PALMER, On Behalf of Himself ) No. 98-CV-1254
and Derivatively on Behalf of FPA )
Medical Management, Inc., a )
Delaware Corporation, ) VERIFIED DERIVATIVE
) COMPLAINT FOR VIOLATIONS OF
Plaintiff, ) FIDUCIARY DUTIES AND FOR
) INJUNCTIVE RELIEF AND
vs. ) DAMAGES
)
SOL LIZERBRAM, STEPHEN J. DRESNICK, )
SHELDON DEREZIN, HERBERT A. )
WERTHEIM, KEVIN ELLIS, SETH FLAM, )
MICHAEL FEINSTEIN, HOWARD HASSMAN, )
STEVEN M. LASH, JAMES A. LEBOVITZ, )
CHERYL A. MOORE, FOUNDATION HEALTH )
SYSTEMS, INC. )
)
Defendants, )
- and - )
)
FPA MEDICAL MANAGEMENT, INC., )
)
Nominal Defendant, ) Plaintiff Demands A
) Trial By Jury
<PAGE> 2
INTRODUCTION AND OVERVIEW
1. This is a stockholder's derivative action brought on behalf of FPA
Medical Management, Inc. ("FPA" or the "Company") by one of its shareholders
against its entire board of directors and several of the Company's top officers
for (i) breach of fiduciary duty in misappropriating and misusing internal,
proprietary, non-public, materially adverse, corporate information to personally
profit by illegal insider trading in the Company's stock, (ii) failing to
properly oversee or implement federal or state laws prohibiting such insider
trading, as well as FPA's own policies and rules restricting the misuse of
internal Company information for such purposes, (iii) causing FPA to be sued
for, and exposed to, enormous liability for violations of the anti-fraud
provisions of the federal and California securities laws by making or allowing
to be made a series of false and misleading statements to the securities markets
about FPA's business, finances and prospects, between at least 2/27/97 through
5/15/98, while insider trading in the Company's stock at the same time, and (iv)
paying or permitting the payment of performance and other bonuses to certain
senior officers when their earnings results were achieved only by falsifying and
manipulating the Company's financial statements. In addition, in 3/98, it became
clear to defendants that the fraudulent scheme was unravelling and could no
longer be concealed, and that certain of the defendants would be fired or
otherwise forced to leave the Company. Defendants therefore amended, or caused
or permitted the amendment of, certain of their employment agreements to
increase their base pay near-term, to permit the payments of millions of dollars
in severance payments to them (even if they were later terminated for cause,
and/or provided that they would exercise all options previously granted to them,
effectively looting the Company of millions of dollars. Rather than being
rewarded with millions of dollars that the Company desperately needed
2
<PAGE> 3
for its operations, defendants deserved to be, and should have been, terminated
for cause, should have had their benefits cut off, and should have been sued for
the harm that they perpetrated on the Company.
2. Beginning at least by late 96, FPA and its insiders made false
statements about the success of FPA's growth by acquisition strategy, FPA's
success in integrating the acquisitions it was making and in lowering its
medical loss ratio, while they falsified FPA's reported earnings per share
("EPS") to create a misleading appearance of growing profitability, driving
FPA's stock to a high of $40 per share in 10/97. FPA used the inflated value of
its stock to make several acquisitions for millions of shares of its stock,
while FPA's insiders sold off almost 500,000 shares of their FPA stock,
pocketing over $11 million in illegal insider trading proceeds. Foundation
Health Systems, Inc. furthered the fraudulent scheme by selling certain
loss-ridden health clinics to FPA for over four million shares of FPA stock in
12/96, as FPA and Foundation Health created an inflated sales price of $200
million for those clinics, thus allowing Foundation Health to record an
artificial profit on the sale -- while enabling FPA to artificially inflate its
profits over the next nine quarters by recognizing as revenues some $54 million
in payments by Foundation Health back to FPA, which, in reality, were a rebate
on or reduction of the sales price. Then Foundation Health, which was now FPA's
largest stockholder, knowing FPA was misaccounting for this transaction to
artificially inflate FPA's reported EPS and, after representing to the market it
had no intention of selling its FPA stock to help boost the stock's price,
quickly sold off all 4+ million shares of its FPA stock at artificially inflated
prices, pocketing over $79 million in illegal insider trading proceeds, selling
off the stock as soon as it could legally without incurring short-term trading
liability under Section 16 of the Securities Exchange Act of 1934. FPA's
inflated EPS and false statements about the success of FPA's growth-
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<PAGE> 4
by-acquisition strategy, its success in integrating acquired companies and
operations (especially the former Foundation Health clinics), its tight cost
controls and success in lowering its medical loss ratio and FPA's forecasts for
strong 98/99 EPS growth, pushed FPA's stock to $40 per share in 10/97. However,
FPA's stock fell sharply in late 97 when FPA revealed slightly declining
revenues and membership, increased accounts receivable and negative cash flow,
which FPA said were due to deliberate decisions on its part or one-time events
and would not prevent FPA from achieving 98-99 EPS of $1.35+ and $1.85+,
respectively, and 25-30% EPS growth going forward. In 3/98, when FPA's CEO and
CFO both left their posts, FPA assured investors that FPA was a great company,
was on track for strong 1stQ 98 results and would achieve positive cash flow and
EPS of $1.35 in 98. However, on 5/15/98, FPA revealed a huge 1stQ 98 EPS
shortfall due to losses at the former Foundation Health clinics and increases in
reserves for medical expenditures, that it would suffer a huge 2ndQ 98 loss due
to, inter alia, $200 million in special charges (including writedowns of $125
million of goodwill from prior acquisitions, including the Foundation Health
clinics, and $40 million in uncollectible accounts receivable), and that FPA's
financial condition was so desperate that it only had sufficient cash to operate
for six more weeks and was in a liquidity crisis that threatened its survival.
FPA's stock fell to as low as $2-23/32 per share -- a 93% decline from its high
of $40, and now trades near $1 per share.
3. As a result of the foregoing, FPA has been badly damaged. In the first
place, certain corporate insiders have misappropriated and misused material
non-public proprietary Company information regarding the Company's difficulties
in integrating the operations it had acquired from Foundation Health and others,
and regarding the Company's true financial condition, for their own personal
profit, selling over 500,000 shares of FPA stock at prices as high as $27-3/4
per share,
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<PAGE> 5
pocketing $11 million in illegal insider trading proceeds. In addition,
Foundation Health sold 4,076,087 shares of its FPA stock at prices as high as
$20 per share for $79 million in illegal insider trading proceeds. In the
aggregate, these defendants collectively unloaded over 4.5 million shares of the
FPA stock they actually owned for proceeds in excess of $90 million, while FPA
stock was selling at artificially inflated levels, due to their falsifying FPA's
financial results and issuing very positive but false statements about FPA's
business, financial results and prospects for continued EPS growth. This illegal
insider selling is summarized below:
<TABLE>
<CAPTION>
% of
Shares Holdings Total
Defendants Sold Sold Proceeds
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Foundation Health 4,076,087 100% $79,000,000
Hassman 98,000 24% $ 2,343,870
Lash 79,000 80% $ 1,873,161
Lebovitz 21,000 91% $ 469,771
Lizerbram 87,900 23% $ 2,113,635
Moore 7,000 100% $ 144,561
Dresnick 36,140 4% $ 859,140
Ellis 43,000 10% $ 978,495
Feinstein 15,500 4% $ 341,760
Flam 93,000 12% $ 2,215,794
----------- ----------- -----------
Totals: 4,556,627 61% $90,340,187
=========== =========== ===========
</TABLE>
The false statements made by those corporate insiders and others inside the
Company, which artificially inflated the price of the Company's common stock and
thus permitted them to profit from their insider trading activities, have
resulted in the Company being named a defendant in a series of securities fraud
class action lawsuits. These class action lawsuits, filed in recent weeks in
both state and federal court, seek huge damages and will cost the Company
millions of dollars to defend and likely millions more to settle or satisfy. The
illegal insider trading activities of certain defendants
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<PAGE> 6
will make the securities class action suits much more difficult, if not
impossible to defend and may provide a basis for FPA's directors' and officers'
liability insurance carrier to disclaim coverage under an active and deliberate
dishonesty exclusion or an insider trading exclusion and/or to negotiate a
defense expense sharing allocation with FPA that will be very unfavorable to
FPA. Moreover, these revelations of illegal insider trading and violations of
the securities laws have badly damaged FPA's corporate image and good will. For
at least the foreseeable future, FPA's stock price will suffer from what is
known as the "liar's discount, " a term applied to the stocks of companies who
have been implicated in illegal behavior and have misled securities analysts and
the investing public, such that FPA's ability to raise equity capital on
favorable terms in the future will be impaired. Finally, defendants caused or
permitted defendants Lizerbram, Flam, Lash and Hassman to amend their existing
long-term employment agreements with the Company, in 3-4/98, even as the
Company's financial condition reached the crisis stage, to greatly increase
salary and/or provide for million dollar consulting fees and/or to provide for
millions of dollars in severance payments to be declared owed and payable,
and/or to permit the exercise of all stock options granted to them. Defendants
caused or permitted this looting of the Company to close ranks with each other
and to insure that no one cooperated with regulators or private litigants that
might prosecute or sue defendants for their unlawful conduct.
4. Management of FPA is antagonistic to this lawsuit and making demand on
the Board of Directors would be futile. The FPA Board is dominated by
management. Only one Director is not management, and even that Director is not
independent, as his accounting firm performs accounting services for one or more
of the other Directors and has performed work for FPA in the past. In addition,
three of five members of the Board of Directors engaged in the illegal insider
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<PAGE> 7
selling, and the Board as a whole has close alliances with and allegiances to
present and former officer defendants who engaged in the illegal insider selling
complained of herein. Finally, in order to properly prosecute this lawsuit, it
would be necessary for the Directors to sue themselves --something they are
unwilling to do. Such a suit would require the Directors to expose themselves to
a huge multi-million dollar liability to the Company, which, due to the
particular language of currently utilized directors' and officers' liability
insurance policies (i.e., the "insured vs. insured" exclusion) would not be an
insured claim, while the claims asserted via this derivative action would be
insured. Because the insider trading activities of the insider selling
defendants and the payment to certain defendants made as a result of the
self-dealing amendments to their employment agreements are not covered by FPA's
directors' and officers' liability insurance, in order to adequately protect
FPA's interests in this situation, it is necessary for the Company to seek and
obtain preliminary injunctive relief against the Individual Defendants who sold
FPA stock based on misappropriated proprietary corporate information, or to whom
payments under the amended contracts have been made, imposing a constructive
trust on and/or freezing those insider selling proceeds and payments so that
they will be available to FPA if this suit is successful on the merits. Absent
such a freeze, these defendants who sold FPA stock based on insider information,
or to whom the payments under the amended contracts were made, will dissipate
and/or secrete their insider sales proceeds and salary and service payments,
making it much more difficult to recover those proceeds. In addition, it is
necessary for the Company to enjoin the ongoing looting of the Company via the
self-dealing amendments to certain defendants' employment agreements, which were
fraudulently procured by concealing the true state of the Company's business and
financial
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<PAGE> 8
condition. Under these circumstances, making a pre-suit demand would also
unreasonably delay the pursuit of important legal remedies.
JURISDICTION AND VENUE
5. This Court has jurisdiction over this action pursuant to 28 U. S. C.
Section 1332 (a) (2) in that plaintiff and defendants are citizens of different
states and the matter in controversy exceeds $75,000, exclusive of interest and
costs.
6. Plaintiff brings this action on behalf of FPA pursuant to Rule 23.1 of
the Federal Rules of Civil Procedure, based on principles of state law that
prohibit breach of the federal securities laws by officers and directors of
public corporations, breach of the fiduciary duty of loyalty, due care, fair
dealing and candor by corporate fiduciaries, constructive fraud, waste of
corporate assets and misappropriation of corporate information not available to
public investors when certain Individual Defendants sold their FPA stock at
artificially inflated prices while concealing the true state of business and
finances of the Company. This action is not a collusive one designed to confer
jurisdiction on a court of the United States which it would not otherwise have.
7. Venue is proper in this District pursuant to 28 U.S.C. Section 1391(a).
Many of the acts and conduct constituting the violations of law complained of
have occurred in this District. In addition, FPA has its principal executive
offices located in this District.
THE PARTIES
8. Plaintiff Mark Palmer is a citizen of the State of Virginia and is the
owner of shares of FPA common stock, which he has held during the period of the
wrongs alleged herein. Plaintiff brings this action derivatively in the right of
and for the benefit of FPA. Plaintiff will fairly and adequately represent the
interest of FPA and the shareholders of FPA in enforcing the rights of FPA.
8
<PAGE> 9
9. FPA is a national physician practice management company which acquires,
organizes and manages primary care physician practice networks and provides
contract management services to hospital-based emergency departments. FPA
provides primary and specialty care services to prepaid managed care enrollees
and fee-for-service patients through a network of independent practice
association physicians and owned primary care physician groups. FPA manages all
covered primary and specialty medical care for each enrollee in exchange for
monthly capitation payments pursuant to payor contracts.
10. (a) Sol Lizerbram ("Lizerbram") was Chairman of FPA and actively
involved in the day-to-day management of the Company. As part of the fraudulent
scheme, Lizerbram sold 87,900 shares of FPA stock at prices as high as $27.75
per share based on inside information, pocketing over $2.1 million. On 3/25/98
Lizerbram amended his existing employment agreement with the Company, decreasing
its term to one year and increasing his base pay from $445,000/year to
$1,112,500/year and providing that $3+ million in severance payments would be
paid to him even if he were terminated for cause.
(b) Stephen J. Dresnick ("Dresnick") was Vice Chairman of FPA from
10/96 to 3/96 and from then forward the President and Chief Executive Officer of
FPA. As part of the fraudulent scheme, Dresnick sold 36,140 shares of FPA stock
at prices as high as $25.63 per share based on inside information, pocketing
$859,140.
(c) Kevin Ellis ("Ellis") was, at all relevant times, Executive Vice
President and Chief Medical Officer and a Director of FPA. As part of the
fraudulent scheme, Ellis sold 43,000 shares of FPA stock at prices as high as
$26-1/2 per share based on inside information, pocketing $978,495.
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<PAGE> 10
(d) Sheldon Derezin ("Derezin") was, at all relevant times, a
Director of FPA and a member of the Board's audit and compensation committees
and the managing partner of Derezin, Breier & Company, a public accounting firm
that has performed services for FPA in the past and currently performs services
for one or more of the defendants herein.
(e) Herbert A. Wertheim ("Wertheim") was, at all relevant times, a
Director of FPA, the vice chairman since 3/98, and a member of the Board's audit
and compensation committees.
(f) Seth Flam ("Flam") was, until he was fired in 3/96, President
and Chief Executive Officer and a Director of FPA. As part of the fraudulent
scheme, Flam sold 93,000 shares of FPA stock at prices as high as $27.75 per
share based on inside information, pocketing over $2.2 million. On 3/25/98, Flam
resigned and entered into a "Consulting and Settlement Agreement" with the
Company, providing for his termination for "other than cause" and providing that
nearly $3.6 million in severance payments would be made to him. The agreement
also called for him to receive $1,250,000 million in consulting fees, payable
within six months. In addition, all the stock options he then held were deemed
vested and exercisable. In early 4/98, Flam filed notices under SEC Rule 144 to
sell 264,085 shares of FPA held by a limited partnership controlled by him with
a then-market value of more than $4.2 million.
(g) Michael Feinstein ("Feinstein") was a Director of FPA. As part
of the fraudulent scheme, Feinstein sold 15,500 shares of FPA stock at prices as
high as $22.88 per share based on inside information, pocketing over $341,760.
(h) Howard Hassman ("Hassman") was Executive Vice President and a
Director of FPA. As part of the fraudulent scheme, Hassman sold 98,000 shares of
FPA stock at prices as
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<PAGE> 11
high as $27.09 per share based on inside information, pocketing over $2.3
million. On 4/l/98, Hassman resigned and entered into a "Consulting and
Settlement Agreement" with the Company, providing for his termination for "other
than cause" and providing that more than $2.15 million in severance payments
would be made to him. The agreement also called for him to receive $1.25 million
in consulting fees, payable within six months. In addition, all the stock
options be then held were deemed vested and exercisable. In 3, 4 and 6/98
certain partnerships related to Hassman filed notices under SEC Rule 144 to sell
354,000 shares of FPA with then-market value of more than $2 million.
(i) Steven M. Lash ("Lash") was, until 3/96 when he was forced out
of the position, Executive Vice President and Chief Financial Officer of FPA. As
part of the fraudulent scheme, Lash sold 79,000 shares of FPA stock at prices as
high as $23.63 per share based on inside information, pocketing over 1.8
million. On 3/25/98, Lash amended his existing employment agreement with the
Company, providing that he no longer act as Chief Financial Officer and
providing that if his employment was terminated before 9/25/99 and he has
executed a Release, his termination would be deemed for "other than cause" and
he would receive more than $2.5 million in severance payments and $1 million in
consulting fees. In addition, all the stock options he then held would be deemed
vested and exercisable.
(j) James A. Lebovitz ("Lebovitz") was, at all relevant times,
Executive Vice President and General Counsel of FPA. As part of the fraudulent
scheme, Lebovitz sold 21,000 shares of FPA stock at prices as high as $22.88 per
share based on inside information, pocketing $469,771.
11
<PAGE> 12
(k) Cheryl A. Moore ("Moore") was, at all relevant times, Vice
President-Finance of FPA. As part of the fraudulent scheme, Moore sold 7,000
shares of FPA stock at prices as high as $22.88 per share based on inside
information, pocketing $144,561.
11. Foundation Health is the successor by merger to Foundation Health
Corp. and Health Systems International, Inc. which agreed to merge in 10/96 and
closed their merger in 1/97. In 7/96, FPA agreed to make its largest acquisition
ever -- the former staff model HMO of Foundation Health, consisting of medical
clinics and associated physician practices in California and Arizona. Foundation
Health's California and Arizona medical clinics were losing over $70 million per
year and Foundation Health desperately wanted to rid itself of these loss-ridden
operations as part of dressing itself up for sale. FPA was willing to purchase
these medical clinics and then try to turn them around by lowering their
operating costs, especially their medical expenditures, as this was part of the
FPA business plan. However, because Deloitte & Touche served as the outside
auditor for both FPA and Foundation Health, this situation presented a unique
opportunity to FPA, Foundation Health and Deloitte & Touche to structure the
transaction in a contrived manner that manipulated the financial results of both
Foundation Health and FPA. Thus, Deloitte & Touche helped structure the
transaction so as to enable Foundation Health to actually recognize a profit on
the sale of these losing operations and yet enable FPA to avoid recognizing the
losses from these operations after it acquired them and instead actually
immediately boost FPA's reported profits. This was accomplished by having FPA
deliberately pay an inflated purchase price for the Foundation Health clinics of
almost $200 million -- including 4,076,087 FPA shares of stock when the sale
closed in 11/96. This inflated price enabled Foundation Health, with Deloitte &
Touche's blessing, to report an after-tax gain on this transaction of over $20
million, thus materially assisting Foundation Health
12
<PAGE> 13
in selling itself to Health Systems International, Inc. by not only improving
financial position via the $20 million gain, but also by ridding itself of these
loss-ridden operations. However, the transaction was also structured such that
beginning in the 4thQ 96 and continuing for each of the quarters in the next two
years, i.e., 97 and 98, Foundation Health would make payments back to FPA
according to the following schedule:
<TABLE>
<CAPTION>
96 97 98
------------------------------------------
<S> <C> <C> <C>
1stQ n/a $ 9.6M $ 4.5M
2ndQ n/a $ 8.1M $ 3.6M
3rdQ n/a $ 6.7M $ 2.7M
4thQ $11.2M $ 5.5M $ 1.8M
------ ------- -------
Year $11.2M $ 29.9M $ 12.6M
</TABLE>
12. FPA would recognize these payments as income in each of those
quarters, although, in fact, as all the parties to the transaction understood,
they were intended to be and were, in fact, a reduction in the purchase price
paid by FPA for the Foundation Health clinics. Because of this accounting
manipulation, FPA was able to artificially inflate and falsely manipulate its
reported EPS during the 4thQ of 96 and each of the quarters of 97. This extra
revenue represented pure profit for FPA because, while FPA had to report the
expenses of operations of the former Foundation Health medical clinics it now
owned whether it received the payments or not, absent the manipulated structure
of the Foundation Health transaction, they would not have had these additional
millions of dollars in revenue to report each quarter.
13. The structuring of this transaction also resulted in FPA recognizing a
much higher amount of goodwill on the acquisition, since goodwill is the
difference between the purchase price and the value of the assets acquired.
Since the assets acquired were not worth anywhere near $200 million, FPA had a
large amount of goodwill it amortized over 30 years. After the acquisition, FPA,
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<PAGE> 14
with Deloitte's consent, did not write down the value of the goodwill to its
true value (which was minimal) because to do so would have further illuminated
FPA's phony accounting for the acquisition.
14. This Foundation Health transaction was so important to FPA that,
without it, instead of reporting the better 4thQ 97 EPS FPA reported early in
the last period, FPA would have actually lost money from its operations during
the 4thQ 96, and its 97 results would have, at a minimum, been much lower than
those reported, meaning that not only would FPA not have achieved the
better-than-expected and "record" results it reported during 97 but, in fact,
its 97 results would have declined from its 96 results! Had this occurred, FPA's
stock would have sold at much lower levels, Foundation Health and the FPA
insiders would not have been able to pocket over $90 million in insider trading
proceeds and FPA would not have been able to make any of the several
acquisitions it did make during 97.
15. The Individual Defendants had primary responsibility for the
day-to-day operations of FPA and operated as a collective entity through
periodic meetings held either in person or telephonically, where the Individual
Defendants discussed matters affecting FHP business and reached collective and
consensual decisions as to what action to take. The Individual Defendants also
received similar, if not identical, information in the form of written reports
from FPA employees and management relating to the Company's business, including
internal, periodic (including monthly) financial statements and official data
and reports in advance of, at, and subsequent to, Board meetings in connection
therewith.
16. By reason of their positions and their close associations with the
Company, the defendants had access to material inside information about FPA and
were able to control, directly
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<PAGE> 15
or indirectly, the acts of FPA and the contents of the representations
disseminated by or in the name of FPA. Because of their executive, managerial
and directorial positions with FPA, each of the defendants had access to adverse
non-public information about the financial condition, operations and future
business prospects of FPA, including, without limitation, the fraud that the
defendants caused or permitted FPA to engage in. Defendants had a duty to
promptly disseminate accurate and truthful information with respect to FPA's
operations, financial condition and future business prospects or to cause and
direct that such information be disseminated so that the market price of FPA
stock would be based on truthful and accurate information.
17. By reason of their positions and because of their ability to control
the business and corporate affairs of FPA, the defendants owed FPA and FPA's
shareholders fiduciary obligations of fidelity, trust, loyalty and due care, and
were and are required to use their utmost ability to control and manage FPA in a
fair, just, honest and equitable manner, and were and are required to act in
furtherance of the best interests of FPA and its shareholders so as to benefit
all shareholders equally and not in furtherance of their personal interest or
benefit. Each Director of FPA owes to FPA the fiduciary duty to exercise due
care and diligence in the administration of the affairs of FPA and in the use
and preservation of its property and assets, and the highest obligations of good
faith and fair dealing. In addition, as officers and/or Directors of a
publicly-held company, the Individual Defendants had a duty to promptly
disseminate accurate and truthful information with respect to the Company's
operations, finances and future prospects so that the market price of the
Company's common stock would be based on truthful and accurate information.
18. To discharge their duties, the officers and Directors of FPA were
required to exercise reasonable and prudent supervision over the management,
policies, practices and controls over the
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<PAGE> 16
financial affairs of FPA. By virtue of such duties the officers and Directors of
FPA were required, among other things, to:
(a) Manage, conduct, supervise and direct the business affairs of
FPA in accordance with the laws of the State of California, federal law, state
and federal rules and regulations and the charter and bylaws of FPA;
(b) Neither violate nor knowingly permit any officer, Director or
employee of FPA to violate applicable federal laws, rules and regulations and
state law;
(c) Establish and maintain systematic and accurate books and records
of the business and affairs of FPA and procedures for the reporting of the
business and affairs to the Board of Directors and to periodically investigate,
or cause independent investigation to be made of, said books and records;
(d) Maintain and implement an adequate and functioning system of
internal financial and accounting controls and management information systems,
such that FPA's financial statements and information would be accurately
recorded and reported and corporate managers would be given prompt notice of
serious problems or divergences so that risk to FPA would be minimized;
(e) Exercise reasonable control and supervision over the public
statements to the securities markets and trading in FPA stock by the officers
and employees of FPA;
(f) Remain informed as to the status of FPA's operations, and upon
receipt of notice or information of imprudent, unsound or illegal practices, to
make a reasonable inquiry in connection therewith, and to take steps to correct
such conditions or practices and make such disclosures as are necessary to
comply with state and federal securities laws;
16
<PAGE> 17
(g) Supervise the preparation and filing of any audits, reports or
other information required by law from FPA and to examine and evaluate any
reports of examination, audits or other financial information concerning the
financial affairs of FPA and to make full accurate disclosure of all material
facts concerning, inter alia, each of the subjects and duties set forth above;
and
(h) Maintain and implement an adequate system of controls and
information systems, such that no officer, Director or employee of the Company
would make false statements about FPA to the securities markets or would be able
to misappropriate internal confidential information for his own benefit and
profit, by insider stock sales or otherwise.
19. During all relevant times hereto, each of the defendants occupied
positions with FPA or were associated with the Company in such a manner as to
make them privy to confidential and proprietary information concerning FPA, its
operations, finances, financial condition and future business prospects. Because
of these positions and such access, each of the defendants knew or intentionally
disregarded that the adverse facts specified herein had not been disclosed to
and were concealed from the public.
20. Notwithstanding their duty to refrain from trading FPA common stock
while in the possession of material, adverse, non-public information concerning
FPA and its operations, certain of the Individual Defendants and Foundation
Health collectively sold over 4.5 million shares of the Company's common stock
for proceeds of over $90 million during 97-98, resulting in many millions of
dollars in profits to these defendants.
CONSPIRACY. AIDING AND ABETTING AND CONCERTED ACTION
21. In committing the wrongful acts alleged herein, the defendants have
pursued, or joined in the pursuit of, a common course of conduct and acted in
concert with and conspired with
17
<PAGE> 18
one another, in furtherance of their common plan, scheme or design. In addition
to the wrongful conduct herein alleged as giving rise to primary liability, the
defendants further aided and abetted and knowingly assisted each other in breach
of their respective duties as herein alleged.
22. The defendants initiated a course of conduct which was designed to and
did (i) maintain the Individual Defendants' executive and directorial positions
at FPA, and the profits, power and prestige which the defendants enjoyed as a
result of those positions, in spite of these defendants' violations of law and
other fiduciary breaches; (ii) deceive the investing public and the minority
public shareholders of FPA regarding defendants' management of FPA, FPA's
financial condition, and FPA's future business prospects; (iii) artificially
inflate the market price of FPA's securities thereby allowing certain of the
defendants to usurp corporate assets (internal corporate information) and profit
by selling over 4.5 million shares of their FPA common stock; and (iv) conceal
the Company's desperate financial condition so that no objections would be
raised to the outrageous amendments of certain defendants' employment agreements
to obligate the Company for millions of dollars to defendants. The defendants
engaged in such a scheme so that they could inflate the price of the Company's
common stock in order to: (i) in the case of the Individual Defendants --
protect and enhance their executive positions and the substantial compensation
and prestige they obtained thereby; (ii) enhance the value of their employment
agreements and holdings of FPA stock and/or options to purchase FPA stock; and
(iii) keep FPA's stock price at high levels so that they could sell vast
quantities of stock at inflated prices.
23. Each of the defendants herein aided and abetted and rendered
substantial assistance in the wrongs complained of herein. In taking the
actions, as particularized herein, to substantially assist the commission of the
wrongdoing complained of, each defendant acted with knowledge of
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<PAGE> 19
the primary wrongdoing, substantially assisted the accomplishment of that
wrongdoing, and was aware of its overall contribution to, and furtherance of,
the wrongdoing. The defendants' acts of aiding and abetting include, inter alia,
the acts each of them are alleged to have committed in furtherance of the
conspiracy, common enterprise and common course of conduct complained of herein,
except those relating to the reaching of agreements or understandings sufficient
to categorize their conduct as conspiratorial.
DERIVATIVE ACTION AND DEMAND FUTILITY ALLEGATIONS
24. Plaintiff brings this action derivatively in the right and for the
benefit of FPA to redress injuries suffered and to be suffered by FPA as a
direct result of the breaches of fiduciary duty, violations of law, abuse of
control, gross mismanagement, unjust enrichment, waste of assets, and
constructive fraud by the defendants. This is not a collusive action to confer
jurisdiction on this Court which it would not otherwise have.
25. Plaintiff will adequately and fairly represent the interests of FPA
and its shareholders in enforcing and prosecuting its rights.
26. Plaintiff is currently and has been an owner of FPA stock during the
course of conduct by defendants alleged herein.
27. As a result of the facts set forth throughout this Complaint, and
additionally pursuant to California Corporations Code Section 800(b)(2), demand
on the FPA Board of Directors to institute this action against the officers and
Directors of FPA is not necessary because such a demand would be a futile and
useless act, for the following reasons:
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<PAGE> 20
(a) The majority of the Directors directly benefitted from the
wrongdoing complained of, with some reaping profits to themselves of many tens
of millions of dollars, benefits not obtained by other stockholders;
(b) All FPA Directors are defendants in this action and three of
five are alleged to have directly benefitted from the wrongful conduct;
(c) The Directors of FPA, as more fully detailed herein,
participated in, approved and permitted the wrongs alleged herein to occur and
participated in efforts to conceal or disguise those wrongs from FPA's
stockholders;
(d) In order to bring this suit the Directors of FPA would be forced
to sue themselves and persons with whom they have extensive business and
personal entanglements, which they will not do;
(e) The Director Defendants have already prejudged the allegations
and absolved themselves of any wrongdoing; they have repeatedly denied any and
all allegations of their wrongdoing; and have repeatedly issued releases stating
that such allegations are wholly without merit and unsubstantiated. Defendants
who have so thoroughly denied any allegation of wrongdoing by them cannot
objectively and independently consider a demand upon them to sue themselves;
(f) The majority of the FPA Directors have for many years received
lucrative payments, benefits and other emoluments by virtue of their membership
on the Board, amounting to millions of dollars. The Board members have
benefitted from the wrongdoing, especially the defendants' insider selling and
conversion or waste of corporate assets, and have engaged in such conduct to
preserve their positions of control and the perquisites thereof. Since the Board
members
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had a personal economic interest in the wrongdoing and benefitted thereby, they
are incapable of exercising independent objective judgment in deciding whether
to bring this action;
(g) The Board members also have close personal and business ties
with each other, and cannot in good faith exercise independent judgment to
determine whether to bring this action against each other. Additionally, various
of the Individual Defendants served on the following committees of FPA which
oversaw or were directly responsible for the operations of the Company and some
of the conduct complained of herein:
(i) The FPA Board of Directors' Audit Committee makes
recommendations to the Board regarding the engagement of the Company's
independent auditors, reviews the plan, scope and results of the audit, reviews
with the auditors and management the Company's policies and procedures with
respect to internal accounting and financial controls and reviews changes in
accounting policy and the scope of the non-audit services which may be performed
by the Company's independent auditors. The Audit Committee also was supposed to
monitor policies to prohibit unethical, questionable or illegal activities by
the Company's employees. Defendants Derezin and Wertheim were, at all material
times, on the Company's Audit Committee as was defendant Hassman until his
resignation in 1998; and
(ii) FPA's Compensation Committee reviews and approves the
compensation, benefits and incentive arrangements for the Company's executive
officers and administers the Company's Amended Omnibus Stock Option Plan.
Defendants Derezin and Wertheim were, at all relevant times, members of the
Compensation Committee;
(h) The acts complained of constitute violations of state law and
the fiduciary duties owed by FPA's officers and Directors and these acts are
incapable of ratification;
21
<PAGE> 22
(i) The Directors of FPA signed the reports on Form 10-K for 96 and
97, and authorized the issuance of various of the false and misleading
statements, have already denied any culpability on any of their parts, have
fought against recovery for the Company from the wrongdoers charged herein, are
principal beneficiaries of the wrongdoing alleged herein, are necessary
defendants to this action and have been named as defendants herein, and thus
could not fairly and fully prosecute such a suit even if such suit was
instituted by them;
(j) FPA has been and will continue to be exposed to significant
losses due to the wrongdoing complained of herein, yet the defendants have not
filed any lawsuits against themselves or others who were responsible for that
wrongful conduct to attempt to recover for FPA any part of the damages FPA
suffered and will suffer thereby;
(k) Each Director is, directly or indirectly, the recipient of
remuneration paid by the Company, the continuation of which is dependent upon
their continued cooperation with the other members of the Board of Directors,
and their participation and acquiescence in the wrongdoing set forth herein; and
(l) FPA's current and past officers and Directors are protected
against certain liability for acts of mismanagement, waste and breach of
fiduciary duty by directors' and officers' liability insurance which they caused
the Company to purchase that insurance for their protection with corporate
funds, i.e., monies belonging to the stockholders of FPA. However, due to
certain changes in the language of directors' and officers' liability insurance
policies in recent years, the directors' and officers' liability insurance
policies covering the defendants in this case contain provisions which eliminate
coverage for any action brought directly by FPA against these defendants, known
as, inter alia, the "insured vs. insured" exclusion. As a result, if these
Directors
22
<PAGE> 23
were to sue themselves or certain of the officers of FPA, there would be no
directors' and officers' insurance protection and thus, a further reason why
they will not bring such a suit. On the other hand, if the suit is brought
derivatively, as this action is brought, such insurance coverage exists and will
provide a basis for the Company to effectuate a recovery. If there is no
directors' and officers' liability insurance at all then the Director Defendants
will not cause FPA to sue them, since they will face a huge uninsured liability.
28. The Directors also receive substantial compensation for serving on the
Board of Directors, the various committees thereof, and as chair of those
committees. That compensation is, at a minimum, options to purchase 15,000
shares per year of FPA stock, plus $1,000 for each meeting attended. All travel
expenses and other out-of-pocket costs incurred in attending meetings are
reimbursed.
29. Plaintiff's counsel delivered a copy of their original Complaint to
FPA's executive offices prior to the commencement of this action. Despite the
Individual Defendants having knowledge of the claims and causes of action raised
by plaintiff, the Individual Defendants have failed and refused to seek to
recover for FPA for any of the wrongdoing alleged by plaintiff.
30. Plaintiff has not made any demand on shareholders of FPA to institute
this action since such demand would be a futile and useless act for the
following reasons:
(a) FPA stock is a publicly traded company with approximately 587
holders of record (and many thousands of beneficial owners) as of 3/17/98;
(b) Making demand on such a number of shareholders would be
impossible for plaintiff who has no way of finding out the names, addresses or
phone number of shareholders; and
23
<PAGE> 24
(c) Making demand on all shareholders would force plaintiff to incur
huge expenses, assuming all shareholders could be individually identified.
ALLEGATIONS OF WRONGDOING
31. In 94, 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 96 and 97. By the spring of 97, FPA's annual revenues had
ballooned to over $1 billion and FPA was reporting growing EPS which
consistently exceeded analysts' expectations. In order for its
growth-by-acquisition plan to succeed, FPA needed to use its common stock as
currency to make its acquisitions. Thus, it was of critical importance to FPA to
make it appear it was achieving profitable growth to keep its stock price at
high levels so that FPA stock would appear attractive to the businesses FPA was
attempting to acquire in exchange for FPA stock and so that FPA could make its
acquisitions by issuing the fewest number of shares possible to limit the
dilutive impact of those acquisitions on FPA's earning power. FPA knew that the
only way to keep its stock price trading at high levels was to convince
investors that not only was FPA's rapid expansion plan working and was
successfully integrating the large number of acquisitions it was making, it was
also achieving strong "same store" or "same market" growth, while tightly
controlling its operating expenses -- and lowering its medical expense ratio --
allowing FPA to report growing operating EPS in 97 and credibly forecast
continued strong EPS growth in 98, 99 and beyond. Thus, FPA represented that its
operations were profitable, that its acquisition program was succeeding and it
was successfully integrating the acquired businesses into its operations, that
it was effectively controlling its operating costs and lowering it medical
expense
24
<PAGE> 25
ratio while forecasting a 25%-30% 5-year EPS growth rate -- including 98 and 99
EPS of $1.05- $1.35+ and $1.85+, respectively.
32. A key event in FPA's expansion strategy and a transaction that
artificially inflated its reported profits throughout late 96 and 97 was FPA's
11/96 acquisition of the California and Arizona medical clinics operated by
Foundation Health. Foundation Health needed to get rid of these clinics because
they were losing large amounts of money -- over $70 million per year -- and it
was trying to improve its financial condition and sell itself to Health Systems
International, Inc. The purchase price for those medical clinics was purportedly
$197 million including 4,076,087 shares of FPA stock. Because Foundation Health
and FPA were both audited by Deloitte & Touche, this transaction gave FPA,
Foundation Health and Deloitte & Touche a unique opportunity to manipulate the
accounting for the transaction to falsify the financial results of both
Foundation Health and FPA. Deloitte & Touche helped FPA and Foundation Health to
inflate the purchase price of Foundation Health's clinics by $54 million,
enabling Foundation Health to record a profit on the sale, while providing that
over the next nine quarters, beginning in the 4thQ 96, Foundation Health would
pay the $54 million back to FPA which payments FPA then improperly recognized as
revenue instead of as a reduction of its purchase price of Foundation Health's
medical clinics, materially inflating FPA's reported EPS.
33. When the accounting for the Foundation Health transaction became known
in early 97, it was criticized by certain observers, resulting in weakness in
FPA's stock. The investment community was also concerned that the large holding
of FPA stock in the hands of Foundation Health would "overhang" the market in
FPA stock. As a result, FPA stock fell from $28-3/4 on 2/26/97 to $14-15/16 on
4/25/97. This drop of almost 50% in FPA's stock price alarmed Foundation
25
<PAGE> 26
Health, which desperately wanted to sell its 4+ million shares of FPA stock, and
FPA and FPA's top insiders as it halved the value of their FPA stockholdings,
endangered the acquisitions FPA was in the process of closing and made it
impossible for FPA to continue to make the large acquisitions which were
indispensable to FPA's continued growth.
34. To halt this decline in FPA's stock, FPA repeatedly asserted the
propriety of the accounting treatment for the Foundation Health transaction,
stressing it had been approved by Deloitte & Touche, which had certified FPA's
financial results as in accordance with Generally Accepted Accounting Principles
("GAAP") . To allay investor concerns about the overhang of the FPA shares owned
by Foundation Health, FPA and Foundation Health assured investors that
Foundation Health "does not currently intend" to sell the over 4 million shares
of FPA stock it held. These assurances, combined with other representations that
"we successfully executed our growth strategy," FPA's "fundamentals are very
strong," FPA had "built a solid foundation for growth internally and through
acquisitions," that FPA "continued to show margin improvements based on further
integration of acquisitions," "the integrating and consolidation of the
Foundation Health Clinics is ahead of plan," that the former Foundation Health
clinics "were performing ahead of expectations" and "ahead of budget," that
despite FPA's "remarkable growth . . . there is still a tremendous amount of
growth available . . . [and] we believe that this growth . . . will continue in
a very robust manner," and FPA's reporting of better-than-expected lstQ 97
operating EPS of $.20, halted the decline in FPA stock and inflated it to higher
levels during 5/97. As FPA's stock moved higher, FPA resumed its acquisition
program, FPA's insiders began to sell off their FPA stock and, contrary to
Foundation Health's assurances, it quickly unloaded its entire position of FPA
stock -- 4,076,087 shares -- during 5/97-6/97, pocketing $79 million in illegal
insider trading-proceeds.
26
<PAGE> 27
35. Throughout the balance of 97, while improperly recognizing millions in
revenues from the Foundation Health payments and otherwise falsifying its
financial statements by not properly writing down millions in goodwill on its
books arising from failed or failing acquisitions and by manipulating its
"incurred but not reported" ("IBNR") medical cost allowance to artificially low
levels, FPA continued to report strong -- indeed, better-than-expected --
operating EPS, while continuing to increase its forecasted EPS for 98 and 99 to
$1.08-$1.47 and $1.85-$1.88, respectively. As and after FPA reported record 2ndQ
97 EPS of $.24, FPA told investors its business "continued to perform above
expectations as our integration plans provide positive sequential results," "all
integrations are proceeding on or ahead of schedule" and "many areas of the
Company are performing better than expected," and that these results were due to
a "better than expected ('better than budget') performance by the Foundation
Health centers." As a result, FPA's stock skyrocketed higher -- reaching a high
of $40 per share in 10/97. This strong financial and stock performance enabled
FPA to make several acquisitions during the 97-98, including HealthCap, Inc.,
Health Partners, Inc., Cornerstone Physicians Corp., AHI Healthcare Systems,
Avanti Corporate Health Systems, Inc. and Meridian Medical Group, by issuing
over 9.4 million share of FPA stock at artificially inflated prices and arrange
needed financing, including a $275 million credit facility through Lehman
Brothers. It also enabled FPA's top insiders to sell off almost 500,000 shares
of their FPA stock at artificially inflated prices, pocketing over $11 million
in illegal insider-trading proceeds.
36. When FPA reported record 3rdQ 97 operating EPS of $.29 it attributed
these results to "the continued consolidation of acquisitions and synergy
achievements and improvements in production." However, FPA's stock began to
decline as FPA revealed a slight decline in enrollment
27
<PAGE> 28
and doctors and that its revenues declined sequentially in the 3rdQ 97 to $241
million from $245 million in the 2ndQ 97. However, FPA assured investors that
these declines were expected and resulted from the "intentional elimination of
unprofitable accounts" resulting from recent acquisitions and that it had culled
from its books $11 million in quarterly revenue from unprofitable accounts. FPA
also told investors that a sharp increase in its accounts receivable and
negative operating cash flow in the 3rdQ were not a cause for concern but were
the expected result of FPA's rapid growth and acquisition program, that payors
were not contesting FPA charges, that all FPA receivables were collectible, that
cash flow from FPA's core operation was strong, positive and growing and that
FPA still expected 25%-30% "same store" patient growth, 50% EPS growth in 98 to
$1.35+ per share and 25%-30% EPS growth going forward. FPA also assured
investors that "we have properly situated our California based operations and
continue to manage this part of our network effectively," that all California
acquisitions "have been fully integrated" and that it was "comfortable" with
analysts' EPS assumptions of $1.35+ for 98. FPA continued to tell investors it
had "successfully integrated several acquisitions, reducing their medical loss
ratios and improving their financial performance while FPA's existing operations
continued to improve" and that its record 4thQ 97 results were due to "our
ability to successfully integrate our medical management technologies" while
continuing to forecast 98 and 99 EPS of $1.35+ and $1.85+.
37. In late 3/98, when FPA's CEO and CFO both suddenly left their posts at
FPA, FPA said that the CEO "helped to grow a great company" but was now leaving
for personal reasons and that the CFO job had gotten "too big" for one person to
handle, assuring investors that FPA's "business continues to track according to
expectations," it was "encouraged" by its business performance and "excited" by
its prospects, that FPA had no liquidity problems and would achieve
28
<PAGE> 29
positive cash flow in 98 with lstQ EPS of $.30-$.31 and 98 EPS of over $1.35.
FPA's stock traded as high as $16-1/2 on 4/6/98.
38. On 5/15/98, FPA made a series of shocking revelations which
contradicted FPA's prior positive statements including its recent assurances of
strong lstQ 98 EPS and improving cash flow. First, FPA reported horrible 1stQ
results -- EPS of only $.01 compared to the $.30-$.31 forecast -- admitting it
had not earlier set aside enough IBNR medical claims reserves and that the
former Foundation Health clinics had suffered a $5+ million loss and if FPA
could not make them profitable it would leave those markets. Worse yet, FPA
revealed it would take $200 million in write-offs -- $125 million for goodwill
impairment (mostly Foundation Health), $40 million in uncollectible accounts
receivable and $30+ million in other charges -- thus admitting that FPA had
over-valued its earlier acquisitions and lied about the collectability of its
receivables. FPA also disclosed that it was firing employees and closing
facilities, imposing hiring and capital spending freezes and implementing
procedures to control overhead spending. FPA also admitted that it was in a
liquidity crisis as it had maxed-out (and was in default on) its existing credit
lines, had sufficient cash to operate for only six more weeks, could not afford
to pay for necessary improvements in its information and accounting systems and
desperately needed additional financing to survive. A Standard & Poor's analyst
stated: "The acquisitions were made at such a frantic pace and the company did
not have adequate controls and infrastructure to manage the operations." Another
analyst stated, "there is a lack of operating controls and inadequate
accounting." FPA's stock collapsed from $11-15/16 on 5/14/98 to $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
10/97 high of $40. The stock now trades near $1 per share.
29
<PAGE> 30
39. Each of the positive statements defendants made about FPA's business
throughout 97 and until 5/15/98 (when these revelations were made) was
materially false and misleading when issued. Defendants also failed to disclose,
inter alia, the following adverse information which was then known only to
defendants due to their access to internal FPA data and disclosure of which was
required to be made to make the statements made not misleading:
(a) FPA was encountering serious and persistent difficulties in
integrating the acquired operations of Foundation Health and AHI Healthcare
Systems, such that FPA was encountering excessive costs and expenses, including
excessive medical expenses at those operations;
(b) FPA was concealing the problems it was having integrating
acquired operations by manipulating the financial results of those operations
and its other operations to artificially lower FPA's operating and medical
expenses and thus its medical loss ratio, in part by setting its IBNR allowance
at artificially low levels;
(c) FPA was attempting to lower medical costs at its operations by
arbitrarily refusing needed and/or desired medical care requested by patients or
their treating physicians, resulting in increasing customer complaints and
physician hostility which was having an adverse impact on FPA's ability to
retain existing members or attract new members and on its ability to retain
existing or obtain new treating physicians;
(d) 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, resulting in lower
productivity and increased costs to FPA;
30
<PAGE> 31
(e) FPA was falsifying its reported results for the 4thQ 96, as well
as all four quarters of 97, by misaccounting for the Foundation Health
acquisition, by manipulating its reserves for medical expenses to artificially
low levels, by burying and thus 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 by engaging in
the other accounting tricks and artifices;
(f) 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 or not to
utilize FPA's services were increasingly refusing to select or use FPA because
of its arbitrary denial of necessary medical treatment and other steps taken to
lower medical costs, which resulted in markedly reduced quality of care;
(g) FPA's purported record financial results reported during late 96
and. throughout 97 were not due to its efficient management techniques, the
successful integration of acquired companies and business operations, or
rigorous micro management of medical costs, as represented, but rather, to the
falsification of its financial results;
(h) As a result of the foregoing adverse conditions inside FPA's
business, FPA's forecasts of strong "same store" or internal member growth
during 98-99 were false when made because such growth could not and would not be
obtained; and
(i) As a result of the foregoing negative conditions inside FPA's
business, the forecasts of strong 98 and 99 EPS growth by FPA were false when
made because those results could not and would not be achieved.
31
<PAGE> 32
40. Public investors who invested based on FPA's representations about the
success of FPA's growth-by-acquisition strategy, FPA's successful integration of
its acquired businesses, FPA's tight control of its operating expenses and the
lowering of its medical loss ratio and FPA's forecasts of strong EPS growth
during 98-99 paid as high as $40 per share for FPA's stock during this time
frame and have suffered millions in damage for which they have now brought
numerous suits in state and federal courts. However, FPA's insiders and largest
shareholder, who knew the truth about how FPA was falsifying its financial
results, did not fare nearly so poorly. Before FPA's stock price collapsed to
less than $2 per share, FPA's insiders unloaded almost 500,000 shares of their
FPA stock at artificially inflated prices as high as $27-3/4 per share,
pocketing over $11 million in illegal insider-trading proceeds, while Foundation
Health sold all 4,076,087 shares of its FPA stock at as high as $20 per share
for $79 million in illegal insider-trading proceeds. All told, these defendants
sold over 4.5 million shares of the FPA stock they owned for $90+ million in
illegal insider-trading proceeds. In the aggregate, these defendants
collectively unloaded 61% of the FPA stock they actually owned, while FPA stock
was selling at artificially inflated levels caused by their falsifying FPA's
financial results and issuing very positive but false statements about FPA's
business, financial results and its prospects for continued EPS growth.
Defendants' insider selling during 97 is detailed below:
<TABLE>
<CAPTION>
PRICE
DATE SHARES PER PROCEEDS
NAME SOLD SOLD SHARE FROM SALE
- ---- ---- ---- ----- ---------
<S> <C> <C> <C> <C>
Dresnick 05/21/97 10,000 $18.50 $ 185,000
11/17/97 11,140 $26.50 295,210
11/25/97 10,000 $25.13 251,300
11/26/97 1,000 $25.63 25,630
11/26/97 4,000 $25.50 102,000
--------- -----------
36,140 $ 859,140
========= ===========
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C> <C> <C>
Ellis 03/11/97 1,100 $22.88 $ 25,168
03/12/97 3,100 $22.13 68,603
03/13/97 2,100 $22.34 46,914
03/14/97 9,400 $20.72 194,768
03/17/97 9,300 $19.44 180,792
11/13/97 2,500 $24.50 61,250
11/14/97 5,000 $25.50 127,500
11/17/97 5,000 $26.50 132,500
11/18/97 2,500 $27.00 67,500
12/08/97 3,000 $24.50 73,500
--------- -----------
43,000 $ 978,495
========= ===========
Feinstein 03/11/97 2,000 $22.88 $45,760
03/12/97 6,200 $22.13 137,206
03/13/97 4,100 $22.34 91,594
03/13/97 3,200 $21.00 67,200
--------- ===========
15,500 $ 341,760
========= ===========
Flam 03/11/97 2,000 $22.88 $45,760
03/12/97 6,200 $22.13 137,206
03/13/97 4,100 $22.34 91,594
03/14/97 12,300 $20.72 254,856
03/17/97 14,400 $19.44 279,936
11/19/97 2,500 $27.50 68,750
11/19/97 2,500 $27.63 69,075
11/19/97 2,500 $27.63 69,075
11/20/97 16,650 $27.25 453,713
11/21/97 1,500 $27.50 41,250
11/24/97 2,500 $27.75 69,375
11/24/97 2,500 $27.75 69,375
11/24/97 2,500 $27.75 69,375
12/04/97 12,000 $23.81 285,720
12/04/97 1,000 $24.00 24,000
12/04/97 2,000 $23.88 47,760
12/04/97 5,000 $23.81 119,050
12/05/97 850 $23.44 19,924
--------- -----------
93,000 2,215,794
========= ===========
Foundation Qtr.
Health ended
6/30/97 4,076,087 $79,000,000
========= ===========
Hassman 03/11/97 2,000 $22.88 $45,760
03/14/97 2,500 $21.00 52,500
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C> <C> <C>
03/14/97 27,500 $20.88 574,200
03/14/97 7,000 $21.00 147,000
11/04/97 5,000 $24.38 121,900
11/06/97 5,000 $24.50 122,500
11/07/97 5,000 $23.55 117,750
11/14/97 10,000 $25.56 255,600
11/17/97 10,000 $26.38 263,800
11/17/97 10,000 $26.38 263,800
11/18/97 11,500 $27.09 311,535
11/18/97 2,500 $27.01 67,525
--------- -----------
98,000 $ 2,343,870
========= ===========
Lash 03/11/97 1,600 $22.88 $ 36,608
03/12/97 4,700 $22.12 104,011
03/13/97 3,200 $22.34 71,488
03/14/97 9,400 $20.72 194,768
03/17/97 11,100 $19.44 215,784
11/19/97 5,000 $27.50 137,500
11/19/97 2,500 $27.63 69,075
11/20/97 16,650 $27.25 453,713
12/04/97 1,000 $24.00 24,000
12/04/97 17,000 $23.81 404,770
12/04/97 2,000 $23.88 47,760
12/05/97 4,850 $23.44 113,684
--------- -----------
79,000 $ 1,873,161
========= ===========
Lebovitz 03/11/97 900 $22.88 $ 20,592
03/12/97 2,500 $22.13 55,325
03/13/97 1,600 $21.00 33,600
03/13/97 1,500 $22.34 33,510
03/14/97 4,300 $20.72 89,096
03/17/97 4,200 $19.44 81,648
11/17/97 6,000 $26.00 156,000
--------- -----------
21,000 $ 469,771
========= ===========
Lizerbram 03/11/97 2,000 $22.88 $ 45,760
03/12/97 6,200 $22.13 137,206
03/13/97 4,100 $22.34 91,594
03/13/97 3,200 $21.00 67,200
03/14/97 10,900 $20.72 225,848
03/17/97 12,600 $19.44 244,944
11/19/97 2,500 $27.63 69,075
11/19/97 2,500 $27.63 69,075
11/19/97 2,500 $27.50 68,750
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C> <C> <C> <C>
11/20/97 16,650 $27.25 453,713
11/21/97 1,500 $27.50 41,250
11/24/97 5,000 $27.75 138,750
11/24/97 2,500 $27.75 69,375
12/01/97 1,000 $26.44 26,440
12/01/97 4,000 $26.38 105,520
12/04/97 1,000 $24.25 24,250
12/04/97 750 $23.88 17,910
12/04/97 7,500 $24.13 180,975
12/04/97 1,500 $24.00 36,000
--------- -----------
87,900 $ 2,113,635
========= ===========
Moore 03/11/97 400 $22.88 $ 9,152
03/12/97 1,100 $22.13 24,343
03/13/97 900 $22.34 20,106
03/14/97 1,200 $20.72 24,864
03/17/97 3,400 $19.44 $ 66,096
--------- -----------
7,000 $ 144,561
========= ===========
TOTALS: 4,556,627 $90,340,187
========= ===========
</TABLE>
41. The price action of FPA's stock, defendants' illegal insider trading
during 97-98 and the later collapse of FPA's stock are graphically displayed
below:
35
<PAGE> 36
42. Adding insult to injury, defendants Lizerbram, Flam, Lash and Hassman
amended their existing employment agreements with the Company which were signed
either by defendant Dresnick or defendant Lebovitz, and with the approval of
defendants Derezin and Wertheim, permitting these defendants to, in effect, loot
the Company of millions of dollars as these defendants were fired from the
Company or were relieved of certain of their management responsibilities. The
terms of these agreements are summarized in paragraph 10 above. These defendants
participated in amending the agreements even though they knew that the Company
was in dire financial condition but nevertheless did so to enrich themselves, to
give themselves financial incentive not to cooperate with regulator's or private
litigants taking action against the Company, and to ensure that these defendants
would receive their severance benefits notwithstanding the adverse facts
concerning their unlawful and lawful conduct and breaches of fiduciary duty to
the Company's shareholders. To amend these agreements and/or to permit the
amendment of these agreements was a blatant waste of corporate assets, and a
brazen and deliberate breach of defendants' fiduciary obligations to the Company
and its shareholders.
FIRST CAUSE OF ACTION
Derivative Claim Against All Defendants
For Fiduciary Duty Of Loyalty And Due Care And
Aiding And Abetting Such Breach
43. Plaintiff incorporates by reference and realleges paragraphs 1-42
above, as though fully set forth herein.
44. Defendants are fiduciaries of FPA and of all of its public
shareholders and owed to them the duty to conduct the business of the Company
loyally, faithfully, carefully, diligently and prudently. This Count is asserted
based upon the defendants' acts in violation of California common
36
<PAGE> 37
law, which acts constitute breaches of fiduciary duty, fraud, self-dealing and
waste of the Company's corporate assets.
45. The defendants knowingly, recklessly or without exercising the
reasonable or ordinary care that investors (as fiduciaries), owe to the
corporation, directed or permitted FPA's officers and directors to engage in a
scheme to defraud investors by issuing false financial statements and other
public statements about the Company's business and finances, and by permitting
certain of them to loot the Company of millions of dollars through
unconscionable amendments to certain defendant's employment agreements.
46. As a result of defendants' unlawful conduct, FPA is the subject of
numerous class action lawsuits in state and federal courts, has had its
reputation in the business and financial communities tarnished, and has been
damaged in an as yet uncertain amount, but certainly in the many millions of
dollars.
47. The defendants, in their roles as executives and directors of FPA,
participated in the acts of mismanagement alleged herein, or acted with gross
recklessness in disregarding adverse facts known to them. The defendants were
aware of, or recklessly disregarded the facts alleged herein but did nothing to
correct them. They thereby breached their fiduciary duty of care, loyalty, and
accountability to FPA and its shareholders and have exposed FPA to multi-million
dollar liability.
48. The defendants have been responsible for the gross unlawful conduct
alleged herein, in at least the following ways:
(a) They knowingly and/or recklessly caused FPA to engage in a
massive scheme to defraud investors in violation of federal and state securities
law;
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(b) They failed to properly preserve the Company's assets by
permitting certain defendants to take millions of dollars out of the Company in
unwarranted salaries, bonuses and severance payments; and
(c) They misused or permitted the misuse of FPA's internal
proprietary business information in violation of federal and state law and
corporate policies to the personal profit of certain corporate insider
fiduciaries.
49. The defendants each further owed a fiduciary duty to the Company and
to its stockholders to seek redress from those whose conduct has and will cost
FPA millions of dollars and whose conduct has otherwise precipitated the
aforementioned actions. The defendants have not done so.
50. The conduct outlined was not due to an honest error of judgment, but
rather was due to defendants' bad faith and was done intentionally or with gross
disregard of the rights and interests of FPA and its shareholders.
51. By reason of the foregoing, defendants have breached and/or aided and
abetted breaches of fiduciary duties owed to FPA and its shareholders.
52. As a direct result of the defendants' conduct, FPA has suffered and
will continue to suffer millions of dollars of damage in the form of liability
to investors, unconscionable contractual obligations and damage to FPA's
reputation.
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SECOND CAUSE OF ACTION
Derivative Claim Against All
Defendants For Fiduciary Duty Of Candor
And Aiding And Abetting Such Breach
53. Plaintiff incorporates by reference and realleges paragraphs 1-52
above, as though fully set forth herein.
54. Defendants are fiduciaries of the Company and of all of its public
shareholders and owed to them the duty to conduct the business of the Company
loyally, faithfully, carefully, diligently and prudently. This Count is asserted
based upon the defendants' acts in violation of California common law, which
acts constitute breaches of fiduciary duty, fraud, self-dealing and waste of the
Company's corporate assets.
55. After learning of the improper practices being conducted by Company's
officers and directors, defendants concealed from their shareholders the truth
regarding the scheme to defraud. Rather than "come clean" to the Company's
shareholders, defendants concealed the wrongdoing so certain of them could
profit by selling portions of their stockholdings and so they could revise their
employment agreements without attracting the fury and objections of
shareholders.
56. As a result of defendants' unlawful conduct, FPA is now the subject of
numerous class action lawsuits by investors, has become obligated for millions
of dollars in consulting fees and severance payments, has had its reputation in
the business, financial and political communities tarnished, and has been
damaged in an as yet uncertain amount, but certainly in the many millions of
dollars, while certain defendants continue to be elected as Directors and/or
officers and to receive the benefits and perquisites of their positions.
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<PAGE> 40
57. The defendants, in their roles as executives and directors of FPA,
participated in the acts of mismanagement alleged herein, or acted with gross
recklessness in disregarding adverse facts known to them. The defendants were
aware of, or recklessly disregarded the facts alleged herein but did nothing to
reveal or correct them. Alternatively, they acted without exercising the
reasonable care owed by Directors to the corporation and its shareholders. They
thereby breached their fiduciary duty of candor and accountability to FPA and
its shareholders and have exposed FPA to multi-million dollars of expenses and
liability from lawsuits and contractual obligations.
58. The conduct outlined was not due to an honest error of judgment, but
rather was due to defendants' bad faith and was done intentionally or with gross
disregard of the rights and interests of FPA and its shareholders.
59. By reason of the foregoing, defendants have breached and/or aided and
abetted breaches of fiduciary duties owed to FPA and its shareholders.
60. As a direct result of the defendants' conduct, FPA has suffered and
will continue to suffer millions of dollars of damage in the form of liability
to investors, contractual obligations, and damage to FPA's reputation.
THIRD CAUSE OF ACTION
Derivative Claim Against All
Defendants For Breach Of Fiduciary Duty
61. Except to the extent plaintiff alleges intentional or reckless
misconduct, plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-60 above as though fully set forth herein.
62. Defendants engaged in the aforesaid conduct without exercising the
reasonable and ordinary care which directors (as fiduciaries) owe to a
corporation, and have thereby negligently
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<PAGE> 41
breached and/or aided and abetted breaches of fiduciary duties of loyalty, due
care, candor and good faith to FPA.
63. As a result of defendants' negligent breach of fiduciary duty, FPA has
sustained and will continue to sustain irreparable harm and has been damaged.
FOURTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Abuse Of Control
64. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-63 as though fully set forth herein.
65. Defendants' conduct constituted an abuse of their ability to control
and influence FPA for which all defendants are legally responsible.
66. By reason of the foregoing, FPA has been damaged and has sustained,
and will continue to sustain, irreparable injury for which it has no adequate
remedy at law.
FIFTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Waste Of Corporate Assets
67. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-66, as though fully set forth herein.
68. As a result of the foregoing conduct, defendants have caused FPA to
waste valuable assets.
69. By reason of the foregoing, FPA has been damaged and has sustained,
and will continue to sustain, irreparable injury for which it has no adequate
remedy at law.
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SIXTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Constructive Fraud
70. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs l-69, as though fully set forth herein.
71. As a result of the tortious conduct described above, the defendants
have committed, or aided and abetted the commission of, numerous
misrepresentations to and concealed material facts from FPA and its shareholders
despite defendants' fiduciary duties to, inter alia, disclose the true facts
regarding their stewardship of FPA and defendants' true intentions, and thus
have committed and/or aided and abetted constructive fraud.
72. For the purpose of maintaining and further entrenching themselves in
their positions of power and control at FPA, and to attempt to conceal their
wrongdoing and continue to receive the substantial benefits and salaries
associated with their positions, and with the intent to deceive FPA's
shareholders, the defendants employed the above-detailed scheme and conspiracy
to defraud.
73. As a direct and proximate result of the foregoing, FPA and its
shareholders reasonably relied and were induced to act upon the honesty and
integrity of the defendants, and have been damaged, entitling FPA and its
shareholders to both compensatory and punitive damages.
74. By reason of the foregoing, FPA and its shareholders have sustained,
and will continue to sustain, irreparable injury for which they have no adequate
remedy at law, and are also entitled to an award of punitive damages against
defendants.
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SEVENTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Gross Mismanagement
75. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-74 as though fully set forth herein.
76. As detailed more fully herein, defendants each possess a duty to FPA
and its shareholders to prudently supervise, manage and control FPA's
operations.
77. Defendants by their actions, either directly or through aiding and
abetting, abandoned and abdicated their responsibilities and duties with regard
to prudently managing the assets of FPA in a manner consistent with the
operations of a publicly-held corporation.
78. By subjecting FPA to the unreasonable risk of substantial writeoffs,
losses and liability by engaging in a massive fraud, and by concealing this
fraud and its effect on FPA's reputation and finances, defendants breached their
duties of due care and diligence in the management and administration of FPA's
affairs and in the use and preservation of FPA's assets.
79. Defendants caused the Company to engage in this fraud and were aware
of the problems and probable losses associated with such fraud. During the
course of the discharge of their duties, defendants knew or should have known of
the unreasonable risks and losses associated with the fraud, yet defendants
caused FPA to engage in this scheme which defendants knew had an unreasonable
risk of material loss to FPA, thus breaching their duties to both FPA and its
shareholders. As a result, defendants grossly mismanaged or aided and abetted
the gross mismanagement of FPA and its assets by causing FPA to perpetrate an
enormous fraud on governmental customers, which defendants knew would likely
lead to material and substantial losses.
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<PAGE> 44
80. As a proximate result thereof, FPA has been damaged and will continue
to suffer damages, and has sustained and will continue to sustain irreparable
injury for which it has no adequate remedy at law, and is also entitled to an
award of punitive damages against defendants.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment as follows:
1. Declaring that the defendants, and each of them, have committed
breaches of their fiduciary duties to FPA, have abused their control, have
grossly mismanaged FPA, have wasted FPA's assets and have committed constructive
fraud;
2. Requiring the defendants to pay FPA the amounts by which the
corporation has been damaged by reason of the conduct complained of herein;
3. Awarding FPA punitive damages for defendants' oppressive, fraudulent
and malicious acts;
4. Awarding plaintiff the costs and disbursements of this action,
including reasonable attorneys' and experts' fees;
5. Awarding extraordinary, equitable and/or injunctive relief as permitted
by law, equity and federal and state statutory provision sued hereunder,
including attaching, impounding, imposing a constructive trust upon or otherwise
restricting the payment or proceeds of defendants' trading activities and
improper bonuses and severance payments or their other assets so as to assure
that plaintiff has an effective remedy; and
6. Granting such other and further relief as this Court may deem just and
proper.
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JURY DEMAND
Plaintiff demands a trial by jury.
DATED: July 8, 1998
------------
McCUE & McCUE
JONATHAN McCUE
/s/ Jonathan McCue
------------------------------
JONATHAN McCUE
600 West Broadway, Suite 930
San Diego, CA 92101
Telephone: 619/338-8136
Attorneys for Plaintiff
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VERIFICATION
I, JONATHAN McCUE, hereby declare as follows:
1. I am a member of the law firm of McCue & McCue, counsel for plaintiff
in the above-entitled action. I have read the foregoing complaint and know the
contents thereof. I am informed and believe the matters therein are true and on
that ground allege that the matters stated therein are true.
2. I make this Verification because plaintiff is absent from the County of
San Diego where I maintain my office.
Executed this 8th day of July 1998, at San Diego, California.
/s/ Jonathan McCue
----------------------------
JONATHAN McCUE
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<PAGE> 1
EXHIBIT 99.4
MCCUE & MCCUE
JONATHAN D. MCCUE (128896)
CHARLES T. MCCUE (155417)
600 WEST BROADWAY, SUITE 930
SAN DIEGO, CA 92101
TELEPHONE: 619/338-8136
ATTORNEYS FOR PLAINTIFF
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SAN DIEGO
GERALD KAY, On Behalf of Himself ) Case No. 722213
and Derivatively on Behalf of FPA )
MEDICAL MANAGEMENT, INC., a ) (Derivative Action)
Delaware corporation, )
)
Plaintiff,)
)
vs. ) DERIVATIVE COMPLAINT FOR
) VIOLATIONS OF FIDUCIARY
SOL LIZERBRAM, STEPHEN J. ) DUTIES AND FOR INJUNCTIVE
DRESNICK, SHELDON DEREZIN, ) RELIEF AND DAMAGES
HERBERT A. WERTHEIM, KEVIN )
ELLIS, SETH FLAM, MICHAEL )
FEINSTEIN, HOWARD HASSMAN, )
STEVEN M. LASH, JAMES A. )
LEBOVITZ, CHERYL A. MOORE, )
FOUNDATION HEALTH SYSTEMS, )
INC., and DOES 1-20, )
)
Defendants, )
)
FPA MEDICAL MANAGEMENT, INC., )
)
Nominal Defendant. ) Plaintiff Demands A
) Trial By Jury
- ----------------------------------------------
<PAGE> 2
JURISDICTION AND VENUE
1. The acts and transactions complained of herein occurred in
substantial part in San Diego County. Plaintiff is a resident of the city of San
Diego. The headquarters and executive offices of FPA are located in San Diego,
California. While FPA is technically incorporated in San Diego, it conducts
most, if not all, of its operations in or from San Diego. FPA has enjoyed and
invoked, and continues to enjoin and invoke the privileges and benefits of
California law. Most of the wrongs complained of herein took place in San Diego.
The false and misleading statements issued as part of defendants' unlawful
conduct were disseminated from San Diego. Most of the Individual Defendants live
and work in San Diego. Most of the prospective witnesses to the acts alleged
herein reside in San Diego County. A substantial number of FPA's minority
shareholders reside in California, the precise number of which can only be
determined via discovery of FPA's shareholders records. The amount in
controversy is in excess of the jurisdictional minimum of this Court.
INTRODUCTION AND OVERVIEW
2. This is a stockholder's derivative action brought pursuant to
Section 800 of the California Corporations Code and/or applicable Delaware law
on behalf of FPA Medical Management, Inc. ("FPA" or the "Company") by one of its
shareholders against its entire board of directors and several of the Company's
top officers for (i) breach of fiduciary duty in misappropriating and misusing
internal, proprietary, non-public, materially adverse, corporate information to
personally profit by illegal insider trading in the Company's stock, (ii)
failing to properly oversee or implement federal or state laws prohibiting such
insider trading, as well as FPA's own policies and rules restricting the misuse
of internal Company information for such purposes, (iii) causing
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<PAGE> 3
FPA to be sued for, and exposed to, enormous liability for violations of the
anti-fraud provisions of the federal and California securities laws by making or
allowing to be made a series of false and misleading statements to the
securities markets about FPA's business, finances and prospects, between at
least 2/27/97 through 5/15/98, while insider trading in the Company's stock at
the same time, and (iv) paying or permitting the payment of performance and
other bonuses to certain senior officers when their earnings results were
achieved only by falsifying and manipulating the Company's financial statements.
In addition, in 3/98, it became clear to defendants that the fraudulent scheme
was unravelling and could no longer be concealed, and that certain of the
defendants would be fired or otherwise forced to leave the Company. Defendants
therefore amended, or caused or permitted the amendment of, certain of their
employment agreements to increase their base pay near-term, to permit the
payments of millions of dollars in severance payments to them (even if they were
later terminated for cause), and/or provided that they would exercise all
options previously granted to them, effectively looting the Company of millions
of dollars. Rather than being rewarded with millions of dollars that the Company
desperately needed for its operations, defendants deserved to be, and should
have been, terminated for cause, should have had their benefits cut off, and
should have been sued for the harm that they perpetrated on the Company.
3. Beginning at least by late 96, FPA and its insiders made false
statements about the success of FPA's growth by acquisition strategy, FPA's
success in integrating the acquisitions it was making and in lowering its
medical loss ratio, while they falsified FPA's reported earnings per share
("EPS") to create a misleading appearance of growing profitability, driving
FPA's stock to a high of $40 per share in 10/97. FPA used the inflated value of
its stock to make several
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<PAGE> 4
acquisitions for millions of shares of its stock, while FPA's insiders sold off
almost 500,000 shares of their FPA stock, pocketing over $11 million in illegal
insider trading proceeds. Foundation Health Systems, Inc. furthered the
fraudulent scheme by selling certain loss-ridden health clinics to FPA for over
four million shares of FPA stock in 12/96, as FPA and Foundation Health created
an inflated sales price of $200 million for those clinics, thus allowing
Foundation Health to record an artificial profit on the sale -- while enabling
FPA to artificially inflate its profits over the next nine quarters by
recognizing as revenues some $54 million in payments by Foundation Health back
to FPA, which, in reality, were a rebate on or reduction of the sales price.
Then Foundation Health, which was now FPA's largest stockholder, knowing FPA was
misaccounting for this transaction to artificially inflate FPA's reported EPS
and, after representing to the market it had no intention of selling its FPA
stock to help boost the stock's price, quickly sold off all 4+ million shares of
its FPA stock at artificially inflated prices, pocketing over $79 million in
illegal insider trading proceeds, selling off the stock as soon as it could
legally without incurring short-term trading liability under Section 16 of the
U.S. Securities Exchange Act of 1934. FPA' s inflated EPS and false statements
about the success of FPA's growth-by-acquisition strategy, its success in
integrating acquired companies and operations (especially the former Foundation
Health clinics) , its tight cost controls and success in lowering its medical
loss ratio and FPA's forecasts for strong 98/99 EPS growth, pushed FPA's stock
to $40 per share in 10/97. However, FPA's stock fell sharply in late 97 when FPA
revealed slightly declining revenues and membership, increased accounts
receivable and negative cash flow, which FPA said were due to deliberate
decisions on its part or one-time events and would not prevent FPA from
achieving 98-99 EPS of $1.35+ and $1.85+, respectively, and 25-30% EPS
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<PAGE> 5
growth going forward. In 3/98, when FPA's CEO and CFO both left their posts, FPA
assured investors that FPA was a great company, was on track for strong lstQ 98
results and would achieve positive cash flow and EPS of $1.35 in 98. However, on
5/15/98, FPA revealed a huge lstQ 98 EPS shortfall due to losses at the former
Foundation Health clinics and increases in reserves for medical expenditures,
that it would suffer a huge 2ndQ 98 loss due to, inter alia, $200 million in
special charges (including writedowns of $125 million of goodwill from prior
acquisitions, including the Foundation Health clinics, and $40 million in
uncollectible accounts receivable) , and that FPA's financial condition was so
desperate that it only had sufficient cash to operate for six more weeks and was
in a liquidity crisis that threatened its survival. FPA's stock fell to as low
as $2-23/32 per share -- a 93% decline from its high of $40 and now trades near
$1 per share.
4. As a result of the foregoing, FPA has been badly damaged. In the
first place, certain corporate insiders have misappropriated and misused
material non-public proprietary Company information regarding the Company's
difficulties in integrating the operations it had acquired from Foundation
Health and others, and regarding the Company's true financial condition, for
their own personal profit, selling over 500,000 shares of FPA stock at prices as
high as $27-3/4 per share, pocketing $11 million in illegal insider trading
proceeds. In addition, Foundation Health sold 4,076,087 shares of its FPA stock
at prices as high as $20 per share for $79 million in illegal insider trading
proceeds. In the aggregate, these defendants collectively unloaded over 4.5
million shares of the FPA stock they actually owned for proceeds in excess of
$90 million, while FPA stock was selling at artificially inflated levels, due to
their falsifying FPA's financial results and issuing very positive but false
statements about FPA's business,
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<PAGE> 6
financial results and prospects for continued EPS growth. This illegal insider
selling is summarized below:
<TABLE>
<CAPTION>
Defendants Share Sold % of Holdings Sold Total Proceeds
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foundation Health 4,076,087 100% $79,000,000
Hassman 98,000 24% $ 2,343,870
Lash 79,000 80% $ 1,873,161
Lebovitz 21,000 91% $ 469,771
Lizerbram 87,900 23% $ 2,113,635
Moore 7,000 100% $ 144,561
Dresnick 36,140 4% $ 859,140
Ellis 43,000 10% $ 978,495
Feinstein 15,500 4% $ 341,760
Flam 93,000 12% $ 2,215,794
========== ==== ===========
Totals: 4,556,627 61% $90,340,187
========== ==== -----------
</TABLE>
The false statements made by those corporate insiders and others inside the
Company, which artificially inflated the price of the Company's common stock and
thus permitted them to profit from their insider trading activities, have
resulted in the Company being named a defendant in a series of securities fraud
class action lawsuits. These class action lawsuits, filed in recent weeks in
both state and federal court, seek huge damages and will cost the Company
millions of dollars to defend and likely millions more to settle or satisfy. The
illegal insider trading activities of certain defendants will make the
securities class action suits much more difficult, if not impossible to defend
and may provide a basis for FPA's directors' and officers' liability insurance
carrier to disclaim coverage under an active and deliberate dishonesty exclusion
or an insider trading exclusion and/or to negotiate a defense expense sharing
allocation with FPA that
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<PAGE> 7
will be very unfavorable to FPA. Moreover, these revelations of illegal insider
trading and violations of the securities laws have badly damaged FPA's corporate
image and good will. For at least the foreseeable future, FPA's stock price will
suffer from what is known as the "liar's discount," a term applied to the stocks
of companies who have been implicated in illegal behavior and have misled
securities analysts and the investing public, such that FPA's ability to raise
equity capital on favorable terms in the future will be impaired. Finally,
defendants caused or permitted defendants Lizerbram, Flam, Lash and Hassman to
amend their existing long-term employment agreements with the Company, in
3-4/98, even as the Company's financial condition reached the crisis stage, to
greatly increase salary and/or provide for million dollar consulting fees and/or
to provide for millions of dollars in severance payments to be declared owed and
payable, and/or to permit the exercise of all stock options granted to them.
Defendants caused or permitted this looting of the Company to close ranks with
each other and to insure that no one cooperated with regulators or private
litigants that might prosecute or sue defendants for their unlawful conduct.
5. Management of FPA is antagonistic to this lawsuit and making demand
on the Board of Directors would be futile. The FPA Board is dominated by
management. Only one Director is not management, and even that Director is not
independent, as his accounting firm performs accounting services for one or more
of the other Directors and has performed work for FPA in the past. In addition,
three of five members of the Board of Directors engaged in the illegal insider
selling, and the Board as a whole has close alliances with and allegiances to
present and former officer defendants who engaged in the illegal insider selling
complained of herein. Finally, in order to properly prosecute this lawsuit, it
would be necessary for the
7
<PAGE> 8
Directors to sue themselves -- something they are unwilling to do. Such a suit
would require the Directors to expose themselves to a huge multi-million dollar
liability to the Company, which, due to the particular language of currently
utilized directors' and officers' liability insurance policies (i.e., the
"insured vs. insured" exclusion) would not be an insured claim, while the claims
asserted via this derivative action would be insured. Because the insider
trading activities of the insider selling defendants and the payment to certain
defendants made as a result of the self-dealing amendments to their employment
agreements are not covered by FPA's directors' and officers' liability
insurance, in order to adequately protect FPA's interests in this situation, it
is necessary for the Company to seek and obtain preliminary injunctive relief
against the Individual Defendants who sold FPA stock based on misappropriated
proprietary corporate information, or to whom payments under the amended
contracts have been made, imposing a constructive trust on and/or freezing those
insider selling proceeds and payments so that they will be available to FPA if
this suit is successful on the merits. Absent such a freeze, these defendants
who sold FPA stock based on insider information, or to whom the payments under
the amended contracts were made, will dissipate and/or secrete their insider
sales proceeds and salary and service payments, making it much more difficult to
recover those proceeds. In addition, it is necessary for the Company to enjoin
the ongoing looting of the Company via the self-dealing amendments to certain
defendants' employment agreements, which were fraudulently procured by
concealing the true state of the Company's business and financial condition.
Under these circumstances, making a pre-suit demand would also unreasonably
delay the pursuit of important legal remedies.
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<PAGE> 9
THE PARTIES
6. Plaintiff Gerald Kay is a citizen of the State of California and is
the owner of shares of FPA common stock, which he has held during the period of
the wrongs alleged herein. Plaintiff brings this action derivatively in the
right of and for the benefit of FPA. Plaintiff will fairly and adequately
represent the interest of FPA and the shareholders of FPA in enforcing the
rights of FPA.
7. FPA is a national physician practice management company which
acquires, organizes and manages primary care physician practice networks and
provides contract management services to hospital-based emergency departments.
FPA provides primary and specialty care services to prepaid managed care
enrollees and fee-for-service patients through a network of independent practice
association physicians and owned primary care physician groups. FPA manages all
covered primary and specialty medical care for each enrollee in exchange for
monthly capitation payments pursuant to payor contracts.
8. (a) Sol Lizerbram ("Lizerbram") was Chairman of FPA and actively
involved in the day-to-day management of the Company. As part of the fraudulent
scheme, Lizerbram sold 87,900 shares of FPA stock at prices as high as $27.75
per share based on inside information, pocketing over $2.1 million. On 3/25/98
Lizerbram amended his existing employment agreement with the Company, decreasing
its term to one year and increasing his base pay from $445,000/year to
$1,112,500/year and providing that $3+ million in severance payments would be
paid to him even if he were terminated for cause.
(b) Stephen J. Dresnick ("Dresnick") was Vice Chairman of FPA
from 10/96 to 3/96 and from then forward the President and Chief Executive
Officer of FPA. As part of the
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<PAGE> 10
fraudulent scheme, Dresnick sold 36,140 shares of FPA stock at prices as high as
$25.63 per share based on inside information, pocketing $859,140.
(c) Kevin Ellis ("Ellis") was, at all relevant times,
Executive Vice President and Chief Medical Officer and a Director of FPA. As
part of the fraudulent scheme, Ellis sold 43,000 shares of FPA stock at prices
as high as $26-1/2 per share based on inside information, pocketing $978,495.
(d) Sheldon Derezin ("Derezin") was, at all relevant times, a
Director of FPA and a member of the Board's audit and compensation committees
and the managing partner of Derezin, Breier & Company, a public accounting firm
that has performed services for FPA in the past and currently performs services
for one or more of the defendants herein.
(e) Herbert A. Wertheim ("Wertheim") was, at all relevant
times, a Director of FPA, the vice chairman since 3/98, and a member of the
Board's audit and compensation committees.
(f) Seth Flam ("Flam") was, until he was fired in 3/96,
President and Chief Executive Officer and a Director of FPA. As part of the
fraudulent scheme, Flam sold 93,000 shares of FPA stock at prices as high as
$27.75 per share based on inside information, pocketing over $2.2 million. On
3/25/98, Flam resigned and entered into a "Consulting and Settlement Agreement"
with the Company, providing for his termination for "other than cause" and
providing that nearly $3.6 million in severance payments would be made to him.
The agreement also called for him to receive $1,250,000 million in consulting
fees, payable within six months. In addition, all the stock options he then held
were deemed vested and exercisable. In early 4/98,
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Flam filed notices under SEC Rule 144 to sell 264,085 shares of FPA held by a
limited partnership controlled by him with a then-market value of more than $4.2
million.
(g) Michael Feinstein ("Feinstein") was a Director of FPA. As
part of the fraudulent scheme, Feinstein sold 15,500 shares of FPA stock at
prices as high as $22.88 per share based on inside information, pocketing over
$341,760.
(h) Howard Hassman ("Hassman") was Executive Vice President
and a Director of FPA. As part of the fraudulent scheme, Hassman sold 98,000
shares of FPA stock at prices as high as $27.09 per share based on inside
information, pocketing over $2.3 million. On 4/l/98, Hassman resigned and
entered into a "Consulting and Settlement Agreement" with the Company, providing
for his termination for "other than cause" and providing that more than $2.15
million in severance payments would be made to him. The agreement also called
for him to receive $1.25 million in consulting fees, payable within six months.
In addition, all the stock options be then held were deemed vested and
exercisable. In 3, 4 and 6/98 certain partnerships related to Hassman filed
notices under SEC Rule 144 to sell 354,000 shares of FPA with then-market value
of more than $2 million.
(i) Steven M. Lash ("Lash") was, until 3/96 when he was forced
out of the position, Executive Vice President and Chief Financial Officer of
FPA. As part of the fraudulent scheme, Lash sold 79,000 shares of FPA stock at
prices as high as $23.63 per share based on inside information, pocketing over
1.8 million. On 3/25/98, Lash amended his existing employment agreement with the
Company, providing that he no longer act as Chief Financial Officer and
providing that if his employment was terminated before 9/25/99 and he has
executed a Release, his termination would be deemed for "other than cause" and
he would receive more
11
<PAGE> 12
than $2.5 million in severance payments and $1 million in consulting fees. In
addition, all the stock options he then held would be deemed vested and
exercisable.
(j) James A. Lebovitz ("Lebovitz") was, at all relevant times,
Executive Vice President and General Counsel of FPA. As part of the fraudulent
scheme, Lebovitz sold 21,000 shares of FPA stock at prices as high as $22.88 per
share based on inside information, pocketing $469,771.
(k) Cheryl A. Moore ("Moore") was, at all relevant times, Vice
President-Finance of FPA. As part of the fraudulent scheme, Moore sold 7,000
shares of FPA stock at prices as high as $22.88 per share based on inside
information, pocketing $144,561.
9. Except as described herein, plaintiff is ignorant of the true names
of defendants sued as Does 1 through 20, inclusive, and, therefore, sues these
defendants by such fictitious names. Plaintiff will seek leave of this Court to
further amend this Complaint to allege their true names and capacities when
ascertained. These fictitiously named defendants are the Company's officers,
other members of management, employees and/or consultants who were involved in
the wrongdoing described herein. These defendants aided and abetted, or
participated with the named defendants in the wrongful acts and course of
conduct, otherwise caused the damages claimed herein and are responsible in some
manner for the acts, occurrences and events alleged in this Complaint. Many of
the Doe Defendants are residents and citizens of California.
10. Foundation Health is the successor by merger to Foundation Health
Corp. and Health Systems International, Inc. which agreed to merge in 10/96 and
closed their merger in 1/97. In 7/96, FPA agreed to make its largest acquisition
ever -- the former staff model HMO of
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<PAGE> 13
Foundation Health, consisting of medical clinics and associated physician
practices in California and Arizona. Foundation Health's California and Arizona
medical clinics were losing over $70 million per year and Foundation Health
desperately wanted to rid itself of these loss-ridden operations as part of
dressing itself up for sale. FPA was willing to purchase these medical clinics
and then try to turn them around by lowering their operating costs, especially
their medical expenditures, as this was part of the FPA business plan. However,
because Deloitte & Touche served as the outside auditor for both FPA and
Foundation Health, this situation presented a unique opportunity to FPA,
Foundation Health and Deloitte & Touche to structure the transaction in a
contrived manner that manipulated the financial results of both Foundation
Health and FPA. Thus, Deloitte & Touche helped structure the transaction so as
to enable Foundation Health to actually recognize a profit on the sale of these
losing operations and yet enable FPA to avoid recognizing the losses from these
operations after it acquired them and instead actually immediately boost FPA's
reported profits. This was accomplished by having FPA deliberately pay an
inflated purchase price for the Foundation Health clinics of almost $200 million
- -- including 4,076,087 FPA shares of stock when the sale closed in 11/96. This
inflated price enabled Foundation Health, with Deloitte & Touche's blessing, to
report an after-tax gain on this transaction of over $20 million, thus
materially assisting Foundation Health in selling itself to Health Systems
International, Inc. by not only improving its financial position via the $20
million gain, but also by ridding itself of these loss-ridden operations.
However, the transaction was also structured such that beginning in the 4thQ 96
and continuing for each of the quarters in the next two years, i.e., 97 and 98,
Foundation Health would make payments back to FPA according to the following
schedule:
13
<PAGE> 14
<TABLE>
<CAPTION>
96 97 98
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1stQ n/a $ 9.6M $ 4.5M
2ndQ n/a $ 8.1M $ 3.6M
3rdQ n/a $ 6.7M $ 2.7M
4thQ $11.2M $ 5.5M $ 1.8M
------ ------ ------
Year $11.2M $29.9M $12.6M
</TABLE>
11. FPA would recognize these payments as income in each of those
quarters, although, in fact, as all the parties to the transaction understood,
they were intended to be and were, in fact, a reduction in the purchase price
paid by FPA for the Foundation Health clinics. Because of this accounting
manipulation, FPA was able to artificially inflate and falsely manipulate its
reported EPS during the 4thQ of 96 and each of the quarters of 97. This extra
revenue represented pure profit for FPA because, while FPA had to report the
expenses of operations of the former Foundation Health medical clinics it now
owned whether it received the payments or not, absent the manipulated structure
of the Foundation Health transaction, they would not have had these additional
millions of dollars in revenue to report each quarter.
12. The structuring of this transaction also resulted in FPA
recognizing a much higher amount of goodwill on the acquisition, since goodwill
is the difference between the purchase price and the value of the assets
acquired. Since the assets acquired were not worth anywhere near $200 million,
FPA had a large amount of goodwill it amortized over 30 years. After the
acquisition, FPA, with Deloitte's consent, did not write down the value of the
goodwill to its true value (which was minimal) because to do so would have
further illuminated FPA's phony accounting for the acquisition.
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<PAGE> 15
13. This Foundation Health transaction was so important to FPA that,
without it, instead of reporting the better 4thQ 97 EPS FPA reported early in
the last period, FPA would have actually lost money from its operations during
the 4thQ 96, and its 97 results would have, at a minimum, been much lower than
those reported, meaning that not only would FPA not have achieved the
better-than-expected and "record" results it reported during 97 but, in fact,
its 97 results would have declined from its 96 results! Had this occurred, FPA's
stock would have sold at much lower levels, Foundation Health and the FPA
insiders would not have been able to pocket over $90 million in insider trading
proceeds and FPA would not have been able to make any of the several
acquisitions it did make during 97.
14. The Individual Defendants had primary responsibility for the
day-to-day operations of FPA and operated as a collective entity through
periodic meetings held either in person or telephonically, where the Individual
Defendants discussed matters affecting FHP business and reached collective and
consensual decisions as to what action to take. The Individual Defendants also
received similar, if not identical, information in the form of written reports
from FPA employees and management relating to the Company's business, including
internal, periodic (including monthly) financial statements and official data
and reports in advance of, at, and subsequent to, Board meetings in connection
therewith.
15. By reason of their positions and their close associations with the
Company, the defendants had access to material inside information about FPA and
were able to control, directly or indirectly, the acts of FPA and the contents
of the representations disseminated by or in the name of FPA. Because of their
executive, managerial and directorial positions with FPA, each of the defendants
had access to adverse non-public information about the financial condition,
15
<PAGE> 16
operations and future business prospects of FPA, including, without limitation,
the fraud that the defendants caused or permitted FPA to engage in. Defendants
had a duty to promptly disseminate accurate and truthful information with
respect to FPA's operations, financial condition and future business prospects
or to cause and direct that such information be disseminated so that the market
price of FPA stock would be based on truthful and accurate information.
16. By reason of their positions and because of their ability to
control the business and corporate affairs of FPA, the defendants owed FPA and
FPA's shareholders fiduciary obligations of fidelity, trust, loyalty and due
care, and were and are required to use their utmost ability to control. and
manage FPA in a fair, just, honest and equitable manner, and were and are
required to act in furtherance of the best interests of FPA and its shareholders
so as to benefit all shareholders equally and not in furtherance of their
personal interest or benefit. Each Director of FPA owes to FPA the fiduciary
duty to exercise due care and diligence in the administration of the affairs of
FPA and in the use and preservation of its property and assets, and the highest
obligations of good faith and fair dealing. In addition, as officers and/or
Directors of a publicly-held company, the Individual Defendants had a duty to
promptly disseminate accurate and truthful information with respect to the
Company's operations, finances and future prospects so that the market price of
the Company's common stock would be based on truthful and accurate information.
17. To discharge their duties, the officers and Directors of FPA were
required to exercise reasonable and prudent supervision over the management,
policies, practices and
16
<PAGE> 17
controls over the financial affairs of FPA. By virtue of such duties the
officers and Directors of FPA were required, among other things, to:
(a) Manage, conduct, supervise and direct the business affairs
of FPA in accordance with the laws of the State of California, federal law,
state and federal rules and regulations and the charter and bylaws of FPA;
(b) Neither violate nor knowingly permit any officer, Director
or employee of FPA to violate applicable federal laws, rules and regulations and
state law;
(c) Establish and maintain systematic and accurate books and
records of the business and affairs of FPA and procedures for the reporting of
the business and affairs to the Board of Directors and to periodically
investigate, or cause independent investigation to be made of, said books and
records;
(d) Maintain and implement an adequate and functioning system
of internal financial and accounting controls and management information
systems, such that FPA's financial statements and information would be
accurately recorded and reported and corporate managers would be given prompt
notice of serious problems or divergences so that risk to FPA would be
minimized;
(e) Exercise reasonable control and supervision over the
public statements to the securities markets and trading in FPA stock by the
officers and employees of FPA;
(f) Remain informed as to the status of FPA's operations, and
upon receipt of notice or information of imprudent, unsound or illegal
practices, to make a reasonable inquiry in connection therewith, and to take
steps to correct such conditions or practices and make such disclosures as are
necessary to comply with state and federal securities laws;
17
<PAGE> 18
(g) Supervise the preparation and filing of any audits,
reports or other information required by law from FPA and to examine and
evaluate any reports of examination, audits or other financial information
concerning the financial affairs of FPA and to make full accurate disclosure of
all material facts concerning, inter alia, each of the subjects and duties set
forth above; and
(h) Maintain and implement an adequate system of controls and
information systems, such that no officer, Director or employee of the Company
would make false statements about FPA to the securities markets or would be able
to misappropriate internal confidential information for his own benefit and
profit, by insider stock sales or otherwise.
18. During all relevant times hereto, each of the defendants occupied
positions with FPA or were associated with the Company in such a manner as to
make them privy to confidential and proprietary information concerning FPA, its
operations, finances, financial condition and future business prospects. Because
of these positions and such access, each of the defendants knew or intentionally
disregarded that the adverse facts specified herein had not been disclosed to
and were concealed from the public.
19. Notwithstanding their duty to refrain from trading FPA common stock
while in the possession of material, adverse, non-public information concerning
FPA and its operations, certain of the Individual Defendants and Foundation
Health collectively sold over 4.5 million shares of the Company's common stock
for proceeds of over $90 million during 97-98, resulting in many millions of
dollars in profits to these defendants.
18
<PAGE> 19
CONSPIRACY, AIDING AND ABETTING AND CONCERTED ACTION
20. In committing the wrongful acts alleged herein, the defendants have
pursued, or joined in the pursuit of, a common course of conduct and acted in
concert with and conspired with one another, in furtherance of their common
plan, scheme or design. In addition to the wrongful conduct herein alleged as
giving rise to primary liability, the defendants further aided and abetted and
knowingly assisted each other in breach of their respective duties as herein
alleged.
21. The defendants initiated a course of conduct which was designed to
and did (i) maintain the Individual Defendants' executive and directorial
positions at FPA, and the profits, power and prestige which the defendant
enjoyed as a result of those positions, in spite of these defendants' violations
of law and other fiduciary breaches; (ii) deceive the investing public and the
minority public shareholders of FPA regarding defendants' management of FPA,
FPA's financial condition, and FPA's future business prospects; (iii)
artificially inflate the market price of FPA's securities thereby allowing
certain of the defendants to usurp corporate assets (internal corporate
information) and profit by selling over 4.5 million shares of their FPA common
stock; and (iv) conceal the Company's desperate financial condition so that no
objections would be raised to the outrageous amendments of certain defendants'
employment agreements to obligate the Company for millions of dollars to
defendants. The defendants engaged in such a scheme so that they could inflate
the price of the Company's common stock in order to: (i) in the case of the
Individual Defendants -- protect and enhance their executive positions and the
substantial compensation and prestige they obtained thereby; (ii) enhance the
value of their employment
19
<PAGE> 20
agreements and holdings of FPA stock and/or options to purchase FPA stock; and
(iii) keep FPA's stock price at high levels so that they could sell vast
quantities of stock at inflated prices.
22. Each of the defendants herein aided and abetted and rendered
substantial assistance in the wrongs complained of herein. In taking the
actions, as particularized herein, to substantially assist the commission of the
wrongdoing complained of, each defendant acted with knowledge of the primary
wrongdoing, substantially assisted the accomplishment of that wrongdoing, and
was aware of its overall contribution to, and furtherance of, the wrongdoing.
The defendants' acts of aiding and abetting include, inter alia, the acts each
of them are alleged to have committed in furtherance of the conspiracy, common
enterprise and common course of conduct complained of herein, except those
relating to the reaching of agreements or understandings sufficient to
categorize their conduct as conspiratorial.
DERIVATIVE ACTION AND DEMAND FUTILITY ALLEGATIONS
23. Plaintiff brings this action derivatively in the right and for the
benefit of FPA to redress injuries suffered and to be suffered by FPA as a
direct result of the breaches of fiduciary duty, violations of law, abuse of
control, gross mismanagement, unjust enrichment, waste of assets, and
constructive fraud by the defendants. This is not a collusive action to confer
jurisdiction on this Court which it would not otherwise have.
24. Plaintiff will adequately and fairly represent the interests of FPA
and its shareholders in enforcing and prosecuting its rights.
25. Plaintiff is currently and has been an owner of FPA stock during
the course of conduct by defendants alleged herein.
20
<PAGE> 21
26. As a result of the facts set forth throughout this Complaint, and
additionally pursuant to California Corporations Code Section 800(b) (2), demand
on the FPA Board of Directors to institute this action against the officers and
Directors of FPA is not necessary because such a demand would be a futile and
useless act, for the following reasons:
(a) The majority of the Directors directly benefitted from the
wrongdoing complained of, with some reaping profits to themselves of many tens
of millions of dollars, benefits not obtained by other stockholders;
(b) All FPA Directors are defendants in this action and three
of five are alleged to have directly benefitted from the wrongful conduct;
(c) The Directors of FPA, as more fully detailed herein,
participated in, approved and permitted the wrongs alleged herein to occur and
participated in efforts to conceal or disguise those wrongs from FPA's
stockholders;
(d) In order to bring this suit the Directors of FPA would be
forced to sue themselves and persons with whom they have extensive business and
personal entanglements, which they will not do;
(e) The Director Defendants have already prejudged the
allegations and absolved themselves of any wrongdoing; they have repeatedly
denied any and all allegations of their wrongdoing; and have repeatedly issued
releases stating that such allegations are wholly without merit and
unsubstantiated. Defendants who have so thoroughly denied any allegation of
wrongdoing by them cannot objectively and independently consider a demand upon
them to sue themselves;
21
<PAGE> 22
(f) The majority of the FPA Directors have for many years
received lucrative payments, benefits and other emoluments by virtue of their
membership on the Board, amounting to millions of dollars. The Board members
have benefitted from the wrongdoing, especially the defendants' insider selling
and conversion or waste of corporate assets, and have engaged in such conduct to
preserve their positions of control and the perquisites thereof. Since the Board
members had a personal economic interest in the wrongdoing and benefitted
thereby, they are incapable of exercising independent objective judgment in
deciding whether to bring this action;
(g) The Board members also have close personal and business
ties with each other, and cannot in good faith exercise independent judgment to
determine whether to bring this action against each other. Additionally, various
of the Individual Defendants served on the following committees of FPA which
oversaw or were directly responsible for the operations of the Company and some
of the conduct complained of herein:
(i) The FPA Board of Directors' Audit Committee makes
recommendations to the Board regarding the engagement of the Company's
independent auditors, reviews the plan, scope and results of the audit, reviews
with the auditors and management the Company's policies and procedures with
respect to internal accounting and financial controls and reviews changes in
accounting policy and the scope of the non-audit services which may be performed
by the Company's independent auditors. The Audit Committee also was supposed to
monitor policies to prohibit unethical, questionable or illegal activities by
the Company's employees. Defendants Derezin and Wertheim were, at all material
times, on the Company's Audit Committee as was defendant Hassman until his
resignation in 1998; and
22
<PAGE> 23
(ii) FPA's Compensation Committee reviews and
approves the compensation, benefits and incentive arrangements for the Company's
executive officers and administers the Company's Amended Omnibus Stock Option
Plan. Defendants Derezin and Wertheim were, at all relevant times, members of
the Compensation Committee;
(h) The acts complained of constitute violations of state law
and the fiduciary duties owed by FPA's officers and Directors and these acts are
incapable of ratification;
(i) The Directors of FPA signed the reports on Form 10-K for
96 and 97, and authorized the issuance of various of the false and misleading
statements, have already denied any culpability on any of their parts, have
fought against recovery for the Company from the wrongdoers charged herein, are
principal beneficiaries of the wrongdoing alleged herein, are necessary
defendants to this action and have been named as defendants herein, and thus
could not fairly and fully prosecute such a suit even if such suit was
instituted by them;
(j) FPA has been and will continue to be exposed to
significant losses due to the wrongdoing complained of herein, yet the
defendants have not filed any lawsuits against themselves or others who were
responsible for that wrongful conduct to attempt to recover for FPA any part of
the damages FPA suffered and will suffer thereby;
(k) Each Director is, directly or indirectly, the recipient of
remuneration paid by the Company, the continuation of which is dependent upon
their continued cooperation with the other members of the Board of Directors,
and their participation and acquiescence in the wrongdoing set forth herein; and
(l) FPA's current and past officers and Directors are
protected against certain liability for acts of mismanagement, waste and breach
of fiduciary duty by directors' and officers'
23
<PAGE> 24
liability insurance which they caused the Company to purchase that insurance for
their protection with corporate funds, i.e., monies belonging to the
stockholders of FPA. However, due to certain changes in the language of
directors' and officers' liability insurance policies in recent years, the
directors' and officers' liability insurance policies covering the defendants in
this case contain provisions which eliminate coverage for any action brought
directly by FPA against these defendants, known as, inter alia, the "insured vs.
insured" exclusion. As a result, if these Directors were to sue themselves or
certain of the officers of FPA, there would be no directors' and officers'
insurance protection and thus, a further reason why they will not bring such a
suit. On the other hand, if the suit is brought derivatively, as this action is
brought, such insurance coverage exists and will provide a basis for the Company
to effectuate a recovery. If there is no directors' and officers' liability
insurance at all then the Director Defendants will not cause FPA to sue them,
since they will face a huge uninsured liability.
27. The Directors also receive substantial compensation for serving on
the Board of Directors, the various committees thereof, and as chair of those
committees. That compensation is, at a minimum, options to purchase 15,000
shares per year of FPA stock, plus $1,000 for each meeting attended. All travel
expenses and other out-of-pocket costs incurred in attending meetings are
reimbursed.
28. Plaintiff's counsel delivered a copy of their original Complaint to
FPA's executive offices prior to the commencement of this action. Despite the
Individual Defendants having knowledge of the claims and causes of action raised
by plaintiff, the Individual Defendants have failed and refused to seek to
recover for FPA for any of the wrongdoing alleged by plaintiff.
24
<PAGE> 25
29. Plaintiff has not made any demand on shareholders of FPA to
institute this action since such demand would be a futile and useless act for
the following reasons;
(a) FPA stock is a publicly traded company with approximately
587 holders of record (and many thousands of beneficial owners) as of 3/17/98;
(b) Making demand on such a number of shareholders would be
impossible for plaintiff who has no way of finding out the names, addresses or
phone numbers of shareholders; and
(c) Making demand on all shareholders would force plaintiff to
incur huge expenses, assuming all shareholders could be individually identified.
ALLEGATIONS OF WRONGDOING
30. In 94, 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 96 and 97. By the spring of 97, FPA's annual revenues had
ballooned to over $1 billion and FPA was reporting growing EPS which
consistently exceeded analysts' expectations. In order for its
growth-by-acquisition plan to succeed, FPA needed to use its common stock as
currency to make its acquisitions. Thus, it was of critical importance to FPA to
make it appear it was achieving profitable growth to keep its stock price at
high levels so that FPA stock would appear attractive to the businesses FPA was
attempting to acquire in exchange for FPA stock and so that FPA could make its
acquisitions by issuing the fewest number of shares possible to limit the
dilutive impact of those acquisitions on FPA's earning power. FPA knew that the
only way to keep its stock price trading at high levels
25
<PAGE> 26
was to convince investors that not only was FPA's rapid expansion plan working
and was successfully integrating the large number of acquisitions it was making,
it was also achieving strong "same store" or "same market" growth, while tightly
controlling its operating expenses -- and lowering its medical expense ratio --
allowing FPA to report growing operating EPS in 97 and credibly forecast
continued strong EPS growth in 98, 99 and beyond. Thus, FPA represented that its
operations were profitable, that its acquisition program was succeeding and it
was successfully integrating the acquired businesses into its operations, that
it was effectively controlling its operating costs and lowering it medical
expense ratio while forecasting a 25%-30% 5-13 year EPS growth rate -- including
98 and 99 EPS of $1.05-$1.35+ and $1.85+, respectively.
31. A key event in FPA's expansion strategy and a transaction that
artificially inflated its reported profits throughout late 96 and 97 was FPA's
11/96 acquisition of the California and Arizona medical clinics operated by
Foundation Health. Foundation Health needed to get rid of these clinics because
they were losing large amounts of money -- over $70 million per year -- and it
was trying to improve its financial condition and sell itself to Health Systems
International, Inc. The purchase price for those medical clinics was purportedly
$197 million including 4,076,087 shares of FPA stock. Because Foundation Health
and FPA were both audited by Deloitte & Touche, this transaction gave FPA,
Foundation Health and Deloitte & Touche a unique opportunity to manipulate the
accounting for the transaction to falsify the financial results of both
Foundation Health and FPA. Deloitte & Touche helped FPA and Foundation Health to
inflate the purchase price of Foundation Health's clinics by $54 million,
enabling Foundation Health to record a profit on the sale, while providing that
over the next nine quarters, beginning
26
<PAGE> 27
in the 4thQ 96, Foundation Health would pay the $54 million back to FPA which
payments FPA then improperly recognized as revenue instead of as a reduction of
its purchase price of Foundation Health's medical clinics, materially inflating
FPA's reported EPS.
32. When the accounting for the Foundation Health transaction became
known in early 97, it was criticized by certain observers, resulting in weakness
in FPA's stock. The investment community was also concerned that the large
holding of FPA stock in the hands of Foundation Health would "overhang" the
market in FPA stock. As a result, FPA stock fell from $28-3/4 on 2/26/97 to
$14-15/16 on 4/25/97. This drop of almost 50% in FPA's stock price alarmed
Foundation Health, which desperately wanted to sell its 4+ million shares of FPA
stock, and FPA and FPA's top insiders as it halved the value of their FPA
stockholdings, endangered the acquisitions FPA was in the process of closing and
made it impossible for FPA to continue to make the large acquisitions which were
indispensable to FPA's continued growth.
33. To halt this decline in FPA's stock, FPA repeatedly asserted the
propriety of the accounting treatment for the Foundation Health transaction,
stressing it had been approved by Deloitte & Touche, which had certified FPA's
financial results as in accordance with Generally Accepted Accounting Principles
("GAAP"). To allay investor concerns about the overhang of the FPA shares owned
by Foundation Health, FPA and Foundation Health assured investors that
Foundation Health "does not currently intend" to sell the over 4 million shares
of FPA stock it held. These assurances, combined with other representations that
"we successfully executed our growth strategy," FPA's "fundamentals are very
strong," FPA had "built a solid foundation for growth internally and through
acquisitions," that FPA "continued to show margin improvements based on further
integration of acquisitions," "the integrating and consolidation of the
Foundation
27
<PAGE> 28
Health Clinics is ahead of plan," that the former Foundation Health clinics
"were performing ahead of expectations" and "ahead of budget," that despite
FPA's "remarkable growth . . . there is still a tremendous amount of growth
available . . . [and] we believe that this growth . . . will continue in a very
robust manner," and FPA's reporting of better-than-expected lstQ 97 operating
EPS of $.20, halted the decline in FPA stock and inflated it to higher levels
during 5/97. As FPA's stock moved higher, FPA resumed its acquisition program,
FPA's insiders began to sell off their FPA stock and, contrary to Foundation
Health's assurances, it quickly unloaded its entire position of FPA stock --
4,076,087 shares -- during 5/97-6/97, pocketing $79 million in illegal insider
trading-proceeds.
34. Throughout the balance of 97, while improperly recognizing millions
in revenues from the Foundation Health payments and otherwise falsifying its
financial statements by not properly writing down millions in goodwill on its
books arising from failed or failing acquisitions and by manipulating its
"incurred but not reported" ("IBNR") medical cost allowance to artificially low
levels, FPA continued to report strong -- indeed, better-than- expected --
operating EPS, while continuing to increase its forecasted EPS for 98 and 99 to
$1.08-$1.47 and $1.85-$1.88, respectively. As and after FPA reported record 2ndQ
97 EPS of $.24, FPA told investors its business "continued to perform above
expectations as our integration plans provide positive sequential results," "all
integrations are proceeding on or ahead of schedule" and "many areas of the
Company are performing better than expected," and that these results were due to
a "better than expected ('better than budget') performance by the Foundation
Health centers." As a result, FPA's stock skyrocketed higher -- reaching a high
of $40 per share in 10/97. This strong financial and stock performance enabled
FPA to make several acquisitions
28
<PAGE> 29
during the 97-98, including HealthCap, Inc., Health Partners, Inc., Cornerstone
Physicians Corp., AHI Healthcare Systems, Avanti Corporate Health Systems, Inc.
and Meridian Medical Group, by issuing over 9.4 million shares of FPA stock at
artificially inflated prices and arrange needed financing, including a $275
million credit facility through Lehman Brothers. It also enabled FPA's top
insiders to sell off almost 500,000 shares of their FPA stock at artificially
inflated prices, pocketing over $11 million in illegal insider-trading proceeds.
35. When FPA reported record 3rdQ 97 operating EPS of $.29 it
attributed these results to "the continued consolidation of acquisitions and
synergy achievements and improvements in production." However, FPA's stock began
to decline as FPA revealed a slight decline in enrollment and doctors and that
its revenues declined sequentially in the 3rdQ 97 to $241 million from $245
million in the 2ndQ 97. However, FPA assured investors that these declines were
expected and resulted from the "intentional elimination of unprofitable
accounts" resulting from recent acquisitions and that it had culled from its
books $11 million in quarterly revenue from unprofitable accounts. FPA also told
investors that a sharp increase in its accounts receivable and negative
operating cash flow in the 3rdQ were not a cause for concern but were the
expected result of FPA's rapid growth and acquisition program, that payors were
not contesting FPA charges, that all FPA receivables were collectible, that cash
flow from FPA's core operation was strong, positive and growing and that FPA
still expected 25%-30% "same store" patient growth, 50% EPS growth in 98 to
$1.35+ per share and 25%-30% EPS growth going forward. FPA also assured
investors that "we have properly situated our California based operations and
continue to manage this part of our network effectively," that all California
acquisitions "have been fully integrated" and that it was "comfortable" with
analysts' EPS
29
<PAGE> 30
assumptions of $1.35+ for 98. FPA continued to tell investors it had
"successfully integrated several acquisitions, reducing their medical loss
ratios and improving their financial performance while FPA's existing operations
continued to improve" and that its record 4thQ 97 results were due to "our
ability to successfully integrate our medical management technologies" while
continuing to forecast 98 and 99 EPS of $1.35+ and $1.85+.
36. In late 3/98, when FPA'S CEO and CFO both suddenly left their posts
at FPA, FPA said that the CEO "helped to grow a great company" but was now
leaving for personal reasons and that the CFO job had gotten "too big" for one
person to handle, assuring investors that FPA's "business continues to track
according to expectations," it was "encouraged" by its business performance and
"excited" by its prospects, that FPA had no liquidity problems and would achieve
positive cash flow in 98 with 1stQ EPS of $.30-$.31 and 98 EPS of over $1.35.
FPA's stock traded as high as $16-1/2 on 4/6/98.
37. On 5/15/98, FPA made a series of shocking revelations which
contradicted FPA's prior positive statements including its recent assurances of
strong lstQ 98 EPS and improving cash flow. First, FPA reported horrible 1stQ
results -- EPS of only $.0l compared to the $.30- $.31 forecast -- admitting it
had not earlier set aside enough IBNR medical claims reserves and that the
former Foundation Health clinics had suffered a $5+ million loss and if FPA
could not make them profitable it would leave those markets. Worse yet, FPA
revealed it would take $200 million in write-offs -- $125 million for goodwill
impairment (mostly Foundation Health), $40 million in uncollectible accounts
receivable and $30+ million in other charges -- thus admitting that FPA had
over-valued its earlier acquisitions and lied about the collectability of its
receivables. FPA also disclosed that it was firing employees and closing
facilities, imposing
30
<PAGE> 31
hiring and capital spending freezes and implementing procedures to control
overhead spending. FPA also admitted that it was in a liquidity crisis as it had
maxed-out (and was in default on) its existing credit lines, had sufficient cash
to operate for only six more weeks, could not afford to pay for necessary
improvements in its information and accounting systems and desperately needed
additional financing to survive. A Standard & Poor's analyst stated: "The
acquisitions were made at such a frantic pace and the company did not have
adequate controls and infrastructure to manage the operations." Another analyst
stated, "there is a lack of operating controls and inadequate accounting." FPA's
stock collapsed from $11-15/16 on 5/14/98 to $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 10/97 high of
$40. The stock now trades near $1 per share.
38. Each of the positive statements defendants made about FPA's
business throughout 97 and until 5/15/98 (when these revelations were made) was
materially false and misleading when issued. Defendants also failed to disclose,
inter alia, the following adverse information which was then known only to
defendants due to their access to internal FPA data and disclosure of which was
required to be made to make the statements made not misleading:
(a) FPA was encountering serious and persistent difficulties
in integrating the acquired operations of Foundation Health and AHI Healthcare
Systems, such that FPA was encountering excessive costs and expenses, including
excessive medical expenses at those operations;
(b) FPA was concealing the problems it was having integrating
acquired operations by manipulating the financial results of those operations
and its other operations to
31
<PAGE> 32
artificially lower FPA's operating and medical expenses and thus its medical
loss ratio, in part by setting its IBNR allowance at artificially low levels;
(c) FPA was attempting to lower medical costs at its
operations by arbitrarily refusing needed and/or desired medical care requested
by patients or their treating physicians, resulting in increasing customer
complaints and physician hostility which was having an adverse impact on FPA's
ability to retain existing members or attract new members and on its ability to
retain existing or obtain new treating physicians;
(d) 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, resulting in
lower productivity and increased costs to FPA;
(e) FPA was falsifying its reported results for the 4thQ 96,
as well as all four quarters of 97, by misaccounting for the Foundation Health
acquisition, by manipulating its reserves for medical expenses to artificially
low levels, by burying and thus 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 by engaging in
the other accounting tricks and artifices;
(f) 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 or not to
utilize FPA's services were increasingly refusing to select or use FPA because
of its arbitrary denial of necessary medical treatment and other steps taken to
lower medical costs, which resulted in markedly reduced quality of care;
32
<PAGE> 33
(g) FPA's purported record financial results reported during
late 96 and throughout 97 were not due to its efficient management techniques,
the successful integration of acquired companies and business operations, or
rigorous micromanagement of medical costs, as represented, but rather, to the
falsification of its financial results;
(h) As a result of the foregoing adverse conditions inside
FPA's business, FPA's forecasts of strong "same store" or internal member growth
during 98-99 were false when made because such growth could not and would not be
obtained; and
(i) As a result of the foregoing negative conditions inside
FPA's business, the forecasts of strong 98 and 99 EPS growth by FPA were false
when made because those results could not and would not be achieved.
39. Public investors who invested based on FPA's representations about
the success of FPA's growth-by-acquisition strategy, FPA's successful
integration of its acquired businesses, FPA's tight control of its operating
expenses and the lowering of its medical loss ratio and FPA's forecasts of
strong EPS growth during 98-99 paid as high as $40 per share for FPA's stock
during this time frame and have suffered millions in damage for which they have
now brought numerous suits in state and federal courts. However, FPA's insiders
and largest shareholder, who knew the truth about how FPA was falsifying its
financial results, did not fare nearly so poorly. Before FPA's stock price
collapsed to less than $2 per share, FPA's insiders unloaded almost 500,000
shares of their FPA stock at artificially inflated prices as high as $27-3/4 per
share, pocketing over $11 million in illegal insider-trading proceeds, while
Foundation Health sold all 4,076,087 shares of its FPA stock at as high as $20
per share for $79 million in illegal insider- trading proceeds. All told, these
defendants sold over 4.5 million shares of the FPA stock they
33
<PAGE> 34
owned for $90+ million in illegal insider-trading proceeds. In the aggregate,
these defendants collectively unloaded 61% of the FPA stock they actually owned,
while FPA stock was selling at artificially inflated levels caused by their
falsifying FPA's financial results and issuing very positive but false
statements about FPA's business, financial results and its prospects for
continued EPS growth. Defendants' insider selling during 97 is detailed below:
<TABLE>
<CAPTION>
PRICE
DATE SHARES PER PROCEEDS
NAME SOLD SOLD SHARE FROM SALE
- ---- ---- ---- ----- ---------
<S> <C> <C> <C> <C>
Dresnick 05/21/97 10,000 $18.50 $ 185,000
11/17/97 11,140 $26.50 295,210
11/25/97 10,000 $25.13 251,300
11/26/97 1,000 $25.63 25,630
11/26/97 4,000 $25.50 102,000
--------- ------------
36,140 $ 859,140
========= ============
Ellis 03/11/97 1,100 $22.88 $ 25,168
03/12/97 3,100 $22.13 68,603
03/13/97 2,100 $22.34 46,914
03/14/97 9,400 $20.72 194,768
03/17/97 9,300 $19.44 180,792
11/13/97 2,500 $24.50 61,250
11/14/97 5,000 $25.50 127,500
11/17/97 5,000 $26.50 132,500
11/18/97 2,500 $27.00 67,500
12/08/97 3,000 $24.50 73,500
--------- ------------
43,000 $ 978,495
========= ============
Feinstein 03/11/97 2,000 $22.88 $45,760
03/12/97 6,200 $22.13 137,206
03/13/97 4,100 $22.34 91,594
03/13/97 3,200 $21.00 67,200
--------- ------------
15,500 $ 341,760
========= ============
Flam 03/11/97 2,000 $22.88 $45,760
03/12/97 6,200 $22.13 137,206
03/13/97 4,100 $22.34 91,594
03/14/97 12,300 $20.72 254,856
03/17/97 14,400 $19.44 279,936
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
11/19/97 2,500 $27.50 68,750
11/19/97 2,500 $27.63 69,075
11/19/97 2,500 $27.63 69,075
11/20/97 16,650 $27.25 453,713
11/21/97 1,500 $27.50 41,250
11/24/97 2,500 $27.75 69,375
11/24/97 2,500 $27.75 69,375
11/24/97 2,500 $27.75 69,375
12/04/97 12,000 $23.81 285,720
12/04/97 1,000 $24.00 24,000
12/04/97 2,000 $23.88 47,760
12/04/97 5,000 $23.81 119,050
12/05/97 850 $23.44 19,924
--------- ------------
93,000 2,215,794
========= ============
Foundation Qtr.
Health ended
6/30/97 4,076,087 $79,000,000
========= ============
Hassman 03/11/97 2,000 $22.88 $45,760
03/14/97 2,500 $21.00 52,500
03/14/97 27,500 $20.88 574,200
03/14/97 7,000 $21.00 147,000
11/04/97 5,000 $24.38 121,900
11/06/97 5,000 $24.50 122,500
11/07/97 5,000 $23.55 117,750
11/14/97 10,000 $25.56 255,600
11/17/97 10,000 $26.38 263,800
11/17/97 10,000 $26.38 263,800
11/18/97 11,500 $27.09 311,535
11/18/97 2,500 $27.01 67,525
--------- ------------
98,000 $ 2,343,870
========= ============
Lash 03/11/97 1,600 $22.88 $ 36,608
03/12/97 4,700 $22.13 104,011
03/13/97 3,200 $22.34 71,488
03/14/97 9,400 $20.72 194,768
03/17/97 11,100 $19.44 215,784
11/19/97 5,000 $27.50 137,500
11/19/97 2,500 $27.63 69,075
11/20/97 16,650 $27.25 453,713
12/04/97 1,000 $24.00 24,000
12/04/97 17,000 $23.81 404,770
12/04/97 2,000 $23.88 47,760
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
12/05/97 4,850 $23.44 113,684
--------- ------------
79,000 $ 1,873,161
========= ============
Lebovitz 03/11/97 900 $22.88 $ 20,592
03/12/97 2,500 $22.13 55,325
03/13/97 1,600 $21.00 33,600
03/13/97 1,500 $22.34 33,510
03/14/97 4,300 $20.72 89,096
03/17/97 4,200 $19.44 81,648
11/17/97 6,000 $26.00 156,000
--------- ------------
21,000 $ 469,771
========= ============
Lizerbram 03/11/97 2,000 $22.88 $ 45,760
03/12/97 6,200 $22.13 137,206
03/13/97 4,100 $22.34 91,594
03/13/97 3,200 $21.00 67,200
03/14/97 10,900 $20.72 225,848
03/17/97 12,600 $19.44 244,944
11/19/97 2,500 $27.63 69,075
11/19/97 2,500 $27.63 69,075
11/19/97 2,500 $27.50 68,750
11/20/97 16,650 $27.25 453,713
11/21/97 1,500 $27.50 41,250
11/24/97 5,000 $27.75 138,750
11/24/97 2,500 $27.75 69,375
12/01/97 1,000 $26.44 26,440
12/01/97 4,000 $26.38 105,520
12/04/97 1,000 $24.25 24,250
12/04/97 750 $23.88 17,910
12/04/97 7,500 $24.13 180,975
12/04/97 1,500 $24.00 36,000
--------- ------------
87,900 $ 2,113,635
========= ============
Moore 03/11/97 400 $22.88 $ 9,152
03/12/97 1,100 $22.13 24,343
03/13/97 900 $22.34 20,106
03/14/97 1,200 $20.72 24,864
03/17/97 3,400 $19.44 $ 66,096
--------- ------------
7,000 $ 144,561
========= ============
TOTALS: 4,556,627 $90,340,187
========= ============
</TABLE>
36
<PAGE> 37
40. The price action of FPA's stock, defendants' illegal insider
trading during 97-98 and the later collapse of FPA's stock are graphically
displayed below:
[Graphic chart]
41. Adding insult to injury, defendants Lizerbram, Flam, Lash and
Hassman amended their existing employment agreements with the Company which were
signed either by defendant Dresnick or defendant Lebovitz, and with the approval
of defendants Derezin and Wertheim, permitting these defendants to, in effect,
loot the Company of millions of dollars as these defendants were fired from the
Company or were relieved of certain of their management responsibilities. The
terms of these agreements are summarized in paragraph 10 above. These defendants
participated in amending the agreements even though they knew that the Company
was in dire financial condition but nevertheless did so to enrich themselves, to
give themselves financial incentive not to cooperate with regulator's or private
litigants taking action against the Company, and to ensure that these defendants
would receive their severance benefits notwithstanding the adverse facts
concerning their unlawful and lawful conduct and breaches of fiduciary duty to
the Company's shareholders. To amend these agreements and/or to permit the
amendment of these agreements was a blatant waste of corporate assets, and a
brazen and deliberate breach of defendants' fiduciary obligations to the Company
and its shareholders.
37
<PAGE> 38
FIRST CAUSE OF ACTION
Derivative Claim Against All Defendants
For Fiduciary Duty Of Loyalty And Due Care And
Aiding And Abetting Such Breach
42. Plaintiff incorporates by reference and realleges paragraphs 1-41
above, as though fully set forth herein.
43. Defendants are fiduciaries of FPA and of all of its public
shareholders and owed to them the duty to conduct the business of the Company
loyally, faithfully, carefully, diligently and prudently. This Count is asserted
based upon the defendants' acts in violation of California common law, which
acts constitute breaches of fiduciary duty, fraud, self-dealing and waste of the
Company's corporate assets.
44. The defendants knowingly, recklessly or without exercising the
reasonable or ordinary care that investors (as fiduciaries), owe to the
corporation, directed or permitted FPA's officers and directors to engage in a
scheme to defraud investors by issuing false financial statements and other
public statements about the Company's business and finances, and by permitting
certain of them to loot the Company of millions of dollars through
unconscionable amendments to certain defendant's employment agreements.
45. As a result of defendants' unlawful conduct, FPA is the subject of
numerous class action lawsuits in state and federal courts, has had its
reputation in the business and financial communities tarnished, and has been
damaged in an as yet uncertain amount, but certainly in the many millions of
dollars.
46. The defendants, in their roles as executives and directors of FPA,
participated in the acts of mismanagement alleged herein, or acted with gross
recklessness in disregarding
38
<PAGE> 39
adverse facts known to them. The defendants were aware of, or recklessly
disregarded the facts alleged herein but did nothing to correct them. They
thereby breached their fiduciary duty of care, loyalty, and accountability to
FPA and its shareholders and have exposed FPA to multi-million dollar liability.
47. The defendants have been responsible for the gross unlawful conduct
alleged herein, in at least the following ways:
(a) They knowingly and/or recklessly caused FPA to engage in a
massive scheme to defraud investors in violation of federal and state securities
laws;
(b) They failed to property preserve the Company's assets by
permitting certain defendants to take millions of dollars out of the Company in
unwarranted salaries, bonuses and severance payments; and
(c) They misused or permitted the misuse of FPA's internal
proprietary business information in violation of federal and state law and
corporate policies to the personal profit of certain corporate insider
fiduciaries.
48. The defendants each further owed a fiduciary duty to the Company
and to its stockholders to seek redress from those whose conduct has and will
cost FPA millions of dollars and whose conduct has otherwise precipitated the
aforementioned actions. The defendants have not done so.
49. The conduct outlined was not due to an honest error of judgment,
but rather was due to defendants' bad faith and was done intentionally or with
gross disregard of the rights and interests of FPA and its shareholders.
39
<PAGE> 40
50. By reason of the foregoing, defendants have breached and/or aided
and abetted breaches of fiduciary duties owed to FPA and its shareholders.
51. As a direct result of the defendants' conduct, FPA has suffered and
will continue to suffer millions of dollars of damage in the form of liability
to investors, unconscionable contractual obligations and damage to FPA's
reputation.
SECOND CAUSE OF ACTION
Derivative Claim Against All
Defendants For Fiduciary Duty Of Candor
And Aiding And Abetting Such Breach
52. Plaintiff incorporates by reference and realleges paragraphs 1-51
above, as though fully set forth herein.
53. Defendants are fiduciaries of the Company and of all of its public
shareholders and owed to them the duty to conduct the business of the Company
loyally, faithfully, carefully, diligently and prudently. This Count is asserted
based upon the defendants' acts in violation of California common law, which
acts constitute breaches of fiduciary duty, fraud, self-dealing and waste of the
Company's corporate assets.
54. After learning of the improper practices being conducted by
Company's officers and directors, defendants concealed from their shareholders
the truth regarding the scheme to defraud. Rather than "come clean" to the
Company's shareholders, defendants concealed the wrongdoing so certain of them
could profit by selling portions of their stockholdings and so they could revise
their employment agreements without attracting the fury and objections of
shareholders.
40
<PAGE> 41
55. As a result of defendants' unlawful conduct, FPA is now the subject
of numerous class action lawsuits by investors, has become obligated for
millions of dollars in consulting fees and severance payments, has had its
reputation in the business, financial and political communities tarnished, and
has been damaged in an as yet uncertain amount, but certainly in the many
millions of dollars, while certain defendants continue to be elected as
Directors and/or officers and to receive the benefits and perquisites of their
positions.
56. The defendants, in their roles as executives and directors of FPA,
participated in the acts of mismanagement alleged herein, or acted with gross
recklessness in disregarding adverse facts known to them. The defendants were
aware of, or recklessly disregarded the facts alleged herein but did nothing to
reveal or correct them. Alternatively, they acted without exercising the
reasonable care owed by Directors to the corporation and its shareholders. They
thereby breached their fiduciary duty of candor and accountability to FPA and
its shareholders and have exposed FPA to multi-million dollars of expenses and
liability from lawsuits and contractual obligations.
57. The conduct outlined was not due to an honest error of judgment,
but rather was due to defendants' bad faith and was done intentionally or with
gross disregard of the rights and interests of FPA and its shareholders.
58. By reason of the foregoing, defendants have breached and/or aided
and abetted breaches of fiduciary duties owed to FPA and its shareholders.
59. As a direct result of the defendants' conduct, FPA has suffered and
will continue to suffer millions of dollars of damage in the form of liability
to investors, contractual obligations, and damage to FPA's reputation.
41
<PAGE> 42
THIRD CAUSE OF ACTION
Derivative Claim Against All
Defendants For Breach of Fiduciary Duty
60. Except to the extent plaintiff alleges intentional or reckless
misconduct, plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-59 above as though fully set forth herein.
61. Defendants engaged in the aforesaid conduct without exercising the
reasonable and ordinary care which directors (as fiduciaries) owe to a
corporation, and have thereby negligently breached and/or aided and abetted
breaches of fiduciary duties of loyalty, due care, candor and good faith to FPA.
62. As a result of defendants' negligent breach of fiduciary duty, FPA
has sustained and will continue to sustain irreparable harm and has been damaged
FOURTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Abuse Of Control
63. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-62 as though fully set forth herein.
64. Defendants' conduct constituted an abuse of their ability to
control and influence FPA for which all defendants are legally responsible.
65. By reason of the foregoing, FPA has been damaged and has sustained,
and will continue to sustain, irreparable injury for which it has no adequate
remedy at law.
42
<PAGE> 43
FIFTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Waste Of Corporate Assets
66. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-65, as though fully set forth herein.
67. As a result of the foregoing conduct, defendants have caused FPA to
waste valuable assets.
68. By reason of the foregoing, FPA has been damaged and has sustained,
and will continue to sustain, irreparable injury for which it has no adequate
remedy at law.
SIXTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Constructive Fraud
69. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1 -68, as though fully set forth herein.
70. As a result of the tortious conduct described above, the defendants
have committed, or aided and abetted the commission of, numerous
misrepresentations to and concealed material facts from FPA and its shareholders
despite defendants' fiduciary duties to, inter alia, disclose the true facts
regarding their stewardship of FPA and defendants' true intentions, and thus
have committed and/or aided and abetted constructive fraud.
71. For the purpose of maintaining and further entrenching themselves
in their positions of power and control at FPA, and to attempt to conceal their
wrongdoing and continue to receive the substantial benefits and salaries
associated with their positions, and with the intent to deceive
43
<PAGE> 44
FPA's shareholders, the defendants employed the above-detailed scheme and
conspiracy to defraud.
72. As a direct and proximate result of the foregoing, FPA and its
shareholders reasonably relied and were induced to act upon the honesty and
integrity of the defendants, and have been damaged, entitling FPA and its
shareholders to both compensatory and punitive damages.
73. By reason of the foregoing, FPA and its shareholders have
sustained, and will continue to sustain, irreparable injury for which they have
no adequate remedy at law, and are also entitled to an award of punitive damages
against defendants.
SEVENTH CAUSE OF ACTION
Derivative Claim Against All
Defendants For Gross Mismanagement
74. Plaintiff incorporates by reference and realleges each and every
allegation contained in paragraphs 1-73 as though fully set forth herein.
75. As detailed more fully herein, defendants each possess a duty to
FPA and its shareholders to prudently supervise, manage and control FPA's
operations.
76. Defendants by their actions, either directly or through aiding and
abetting, abandoned and abdicated their responsibilities and duties with regard
to prudently managing the assets of FPA in a manner consistent with the
operations of a publicly-held corporation.
77. By subjecting FPA to the unreasonable risk of substantial
writeoffs, losses and liability by engaging in a massive fraud, and by
concealing this fraud and its effect on FPA's reputation and finances,
defendants breached their duties of due care and diligence in the management and
administration of FPA's affairs and in the use and preservation of FPA's assets.
44
<PAGE> 45
78. Defendants caused the Company to engage in this fraud and were
aware of the problems and probable losses associated with such fraud. During the
course of the discharge of their duties, defendants knew or should have known of
the unreasonable risks and losses associated with the fraud, yet defendants
caused FPA to engage in this scheme which defendants knew had an unreasonable
risk of material loss to FPA, thus breaching their duties to both FPA and its
shareholders. As a result, defendants grossly mismanaged or aided and abetted
the gross mismanagement of FPA and its assets by causing FPA to perpetrate an
enormous fraud on governmental customers, which defendants knew would likely
lead to material and substantial losses.
79. As a proximate result thereof, FPA has been damaged and will
continue to suffer damages, and has sustained and will continue to sustain
irreparable injury for which it has no adequate remedy at law, and is also
entitled to an award of punitive damages against defendants.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment as follows:
1. Declaring that the defendants, and each of them, have committed
breaches of their fiduciary duties to FPA, have abused their control, have
grossly mismanaged FPA, have wasted FPA's assets and have committed constructive
fraud;
2. Requiring the defendant to pay FPA the amounts by which the
corporation has been damaged by reason of the conduct complained of herein;
3. Awarding FPA punitive damages for defendants' oppressive, fraudulent
and malicious acts;
45
<PAGE> 46
4. Awarding plaintiff the costs and disbursements of this action,
including reasonable attorneys' and experts' fees;
5. Awarding extraordinary equitable and/or injunctive relief as
permitted by law, equity and federal and state statutory provision sued
hereunder, including attaching, impounding, imposing a constructive trust upon
or otherwise restricting the payment or proceeds of defendants' trading
activities and improper bonuses and severance payments or their other assets so
as to assure that plaintiff has an effective remedy; and
6. Granting such other and. further relief as this Court may deem just
and proper.
DATED: July 9, 1998
McCUE & McCUE
JONATHAN McCUE
CHARLES T. McCUE
/s/ Jonathan McCue
-----------------------------------
JONATHAN McCUE
600 West Broadway, Suite 930
San Diego, CA 92101
Telephone: 619/338-8136
Attorneys for Plaintiff
46
<PAGE> 1
EXHIBIT 99.5
PHILIP BOROWSKY (State Bar No. 56590)
CHRISTOPHER J. HAYES (State Bar No. 184287)
LAW OFFICES OF PHILIP BOROWSKY
Steuart Tower, Suite 2600
One Market Plaza
San Francisco, California 94105-1417
Telephone: (415) 896-6800
Facsimile: (415) 896-0600
Attorneys for All Plaintiffs
IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA
IN AND FOR THE COUNTY OF ORANGE
<TABLE>
<S> <C>
CHARLES T. MADDEN, SHASHIDHAR ACHARYA, No. 802244
M.D., ACHAUER FAMILY LIMITED PARTNERSHIP,
ANGELA ALLEVATO, M.D., ROBERT A. BAIRD, M.D., FIRST AMENDED COMPLAINT
ANNETTE C. BERNHUT-CAPLIN, D.O., THOMAS W. (C.C.P. Section 472)
BRODERICK, M.D., NANCY K. BROWNELL, M.D.,
DAWN LYNN BRUNER M.D., ROBERT BUDMAN, Assigned for All Purposes to:
M.D., ROBERT WILLIAM BUSTER, M.D., MICHAEL Judge Seymour H. Tully
W. CATER, M.D., ANNA LISA CHAVEZ, M.D., JANAK Department 30
R. CHOPRA, M.D., RAMAN CHOPRA, M.D., GASTON
CILLIANI, M.D., CARMELITA R. CO-CASQUEJO, M.D. May be subject to Rule 436 of the Rules of
F.A.A.P., WILLIAM J. COLLINS, M.D., LEO H. the Coordinated Trial Courts of Orange
CUMMINS, M.D., CHRISTINA K. ELLIOTT, MARK H. County as explained in paragraph 5
ELLIS M.D., STANLEY P. GALANT, M.D., SHERWIN
A. GILLMAN, M.D. AND BONNIE S. GILLMAN, as Related Case: Madden, et al., v. FPA
Trustees for the Gillman Community Property Trust, KEITH Medical Management, Inc., et al., No.
L. GLADSTIEN, M.D., LEON M. GOLDBERG, M.D., 796263, Superior Court of California,
STUART M. GORDON, KENNETH E. GRUBBS, D.O., County of Orange
NORAH GUTRECHT, M.D., THOMAS A.
HRYNIEWICKI, M.D., R. JUDD JESSUP, STANLEY
KANOW, M.D. LEONARD FRANK KELLOGG JR.,
M.D., MARK E. KRUGMAN, M.D., LAWRENCE N.
KUGELMAN, MELVYN B. LIEBERMAN, M.D., as
Trustee for the Melvyn B. Lieberman Trust Dated
November 18, 1997, ALAN MADERIOUS, MARK C.
MARTEN, WILLIAM C. MCMASTER, M.D., MARIA E.
MINON M.D., JUDITH MONGE, M.D., as Trustee for the
Harrison-Monge 1996 Family Trust, RONALD W.
MORELAND, STANLEY K. NAKAMOTO, M.D.,
CHRISTOPHER C. OHMAN, KUSUM OHRI, M.D.,
JACK M. OSBORN, M.D., RICHARD T. PITTS, M.D.,
NORMAN J. ROSEN, M.D., ERIC MURROW ROWEN,
M.D., HELEN ROWEN, as Trustee for the Rowen Family
Trust Dated May 5, 1982, MARK STEVEN ROWEN,
MARSHALL ROWEN, M.D., individually and as Trustee
</TABLE>
<PAGE> 2
for the Rowen Family Trust Dated May 5, 1982, SCOTT
JEFFREY ROWEN, M.D., PRAVIN V. SHARMA, M.D.,
HAL S. SHIMAZU, M.D., SIERRA VENTURES V, L.P.,
AISHA SIMJEE, M.D., JAMES B. TANANBAUM,
ALLAN G. WEISS, DANIEL L. WEISSBERG, M.D.,
LINDA F. WEISSBERG, LAURENCE D. WELLIKSON,
M.D., ANGELA F. WINTHEISER, M.D., AND ALLAN
WONG, M.D. ,
Plaintiffs,
v.
DELOITTE & TOUCHE LLP, VOLPE BROWN
WHELAN & COMPANY, SETH FLAM, STEVEN M.
LASH, STEPHEN J. DRESNICK, JAMES A. LEBOVITZ,
AND DOES 1 through 50, inclusive,
Defendants.
- -------------------------------------------------
Plaintiffs allege as follows:
I. INTRODUCTION
1. This action is brought by Plaintiffs CHARLES T. MADDEN, SHASHIDHAR
ACHARYA, M.D., ACHAUER FAMILY LIMITED PARTNERSHIP, ANGELA ALLEVATO, M.D., ROBERT
A. BAIRD, M.D., ANNETTE C. BERNHUT-CAPLIN, D.O., THOMAS W. BRODERICK, M.D.,
NANCY K. BROWNELL, M.D., DAWN LYNN BRUNER, M.D., ROBERT BUDMAN, M.D., ROBERT
WILLIAM BUSTER, M.D., MICHAEL W. CATER, M.D., ANNA LISA CHAVEZ, M.D., JANAK R.
CHOPRA, M.D., RAMAN CHOPRA, M.D., GASTON CILLIANI, M.D., CARMELITA R.
CO-CASQUEJO, M.D., F.A.A.P., WILLIAM J. COLLINS, M.D., LEO H. CUMMINS, M.D.,
CHRISTINA K. ELLIOTT, MARK H. ELLIS, M.D., STANLEY P. GALANT, M.D., SHERWIN A.
GILLMAN, M.D. AND BONNIE S. GILLMAN, as Trustees for the Gillman Community
Property Trust,
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<PAGE> 3
KEITH L. GLADSTIEN, M.D., LEON M. GOLDBERG, M.D., STUART M. GORDON, KENNETH E.
GRUBBS, D.O., NORAH GUTRECHT, M.D., THOMAS A. HRYNIEWICKI, M.D., R. JUDD JESSUP,
STANLEY KANOW, M.D., LEONARD FRANK KELLOGG JR., M.D., MARK E. KRUGMAN, M.D.,
LAWRENCE N. KUGELMAN, MELVYN B. LIEBERMAN, M.D., as Trustee for the Melvyn B.
Lieberman Trust Dated November 18, 1997, ALAN MADERIOUS, MARK C. MARTEN, WILLIAM
C. MCMASTER, M.D., MARIA E. MINON, M.D., JUDITH MONGE, M.D., as Trustee for the
Harrison- Monge 1996 Family Trust, RONALD W. MORELAND, STANLEY K. NAKAMOTO,
M.D., CHRISTOPHER C. OHMAN, KUSUM OHRI, M.D., JACK M. OSBORN, M.D., RICHARD T.
PITTS, M.D., NORMAN J. ROSEN, M.D., ERIC MURROW ROWEN, M.D., HELEN ROWEN, as
Trustee for the Rowen Family Trust Dated May 5, 1982, MARK STEVEN ROWEN,
MARSHALL ROWEN, M.D., individually and as Trustee for the Rowen Family Trust
Dated May 5, 1982, SCOTT JEFFREY ROWEN, M.D., PRAVIN V. SHARMA, M.D., HAL S.
SHIMAZU, M.D., SIERRA VENTURES V, L.P., AISHA SIMJEE, M.D., JAMES B. TANANBAUM,
ALLAN G. WEISS, DANIEL L. WEISSBERG, M.D., LINDA F. WEISSBERG, LAURENCE D.
WELLIKSON, M.D., ANGELA F. WINTHEISER, M.D., and ALLAN WONG, M.D. (hereinafter
referred to as "Plaintiffs") who together constitute the majority in interest of
the shareholders of each of the former companies known as Orange Coast Managed
Care Services, Inc. ("OCMCS") and St. Joseph Medical Corporation ("SJMC"), who
tendered their stock, stock warrants, or stock options in exchange for
securities of FPA MEDICAL MANAGEMENT, INC. ("FPAM") on or about March 20, 1998,
in connection with the acquisition of OCMCS and SJMC by a wholly-owned
subsidiary of FPAM. FPAM and its wholly-owned subsidiary, FPA MEDICAL MANAGEMENT
OF CALIFORNIA, INC. ("FPA-CAL") are referred to collectively as "FPA." As these
Plaintiffs represent a majority in interest of each of OCMCS and SJMC, their
votes were necessary,
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<PAGE> 4
sufficient, and critical to the decision to approve said merger. As will be
hereinafter discussed, said approval was based on the fraudulent misconduct and
negligent misrepresentation and negligent conduct hereinafter specifically
described of each of the defendants.
2. On March 20, 1998, FPA acquired OCMCS and SJMC, two components of a
thriving Orange County medical practice, in a stock-for-stock merger. Since that
date, the former shareholders of OCMCS and SJMC have discovered that FPA induced
this merger and acquired the assets of these two entities through fraud, deceit,
negligence and intentional misconduct of all those who are named defendants in
this action. As detailed herein, FPA, persuaded the OCMCS and SJMC shareholders
to approve the Merger through misleading financial statements on which their
auditors DELOITTE & TOUCHE ("DELOITTE") gave negligently or recklessly
misleading audit opinions, as well as through misrepresentation by their
financial advisor VOLPE BROWN WHELAN & CO. VOLPE and FPA's officers and
directors, hereafter named, falsely represented that FPA was a sound business
that utilized financially conservative accounting procedures and whose prospects
for continued financial stability and success were excellent. Likewise, in 1997
and the early months of 1998, Defendants persuaded thousands of investors,
including and in addition to the OCMCS and SJMC shareholders, to purchase FPA
stock by portraying FPA as an increasingly successful and rapidly growing
corporation. FPA's common stock reached a high of nearly $40 per share in late
1997.
3. Shortly after the merger was consummated, Plaintiffs discovered the
falsity of FPA's financial statements and publicly filed documents, the falsity
of DELOITTE'S audit opinion, and the falsity of other said misrepresentations.
The shocking revelations of skyrocketing debt, cash-flow crisis, increasingly
impatient creditors, mismanagement, and impaired goodwill have caused FPA to go
into bankruptcy, rendering valueless Plaintiffs' equity in the space of less
than four months since the Merger Agreement was consummated, all during a period
in which Plaintiffs were contractually barred from selling their shares in FPA.
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<PAGE> 5
4. By this lawsuit, Plaintiffs seek to recover damages compensating them
for Defendants' misconduct, as well as punitive damages.
5. This First Amended Complaint may be subject to the provisions of Rule
436 of the Rules of the Coordinated Trial Courts of Orange County, in that it
involves many of the same parties, facts, and causes of action as alleged in an
action captioned Charles T Madden, Lawrence Wellikson, William T McMaster, Maria
Minon, R. Judd Jessup, and Sierra Ventures V, L.P., Plaintiffs, v. FPA Medical
Management, Inc., a Delaware Corporation, FPA.Medical Management of California,
Inc., a California Corporation, Seth Flam, Steven M. Lash, Stephen J. Dresnick,
James A. Lebovitz, Cowen & Company, a New York limited Partnership, Cowen
Incorporated, a New York corporation, and Does I through 50, inclusive,
Defendants, No. 796263 (hereinafter the "FPA Action" by the "FPA Action
Plaintiffs" against the "FPA Action Defendants"). All FPA Action Plaintiffs are
among the Plaintiffs in this First Amended Complaint, and they assert claims on
behalf of themselves and all others similarly situated, who include all the
Plaintiffs in this Complaint. Some of the named FPA Action Defendants,
specifically SETH FLAM, STEVEN M. LASH, STEPHEN J. DRESNICK, and JAMES A.
LEBOVITZ, are defendants in this Complaint. Numerous facts alleged in the FPA
Action are the same or essentially the same as those alleged in this Complaint.
Several causes of action alleged in this FPA Action are the same or essentially
the same as those alleged in this Complaint. Concurrently with the filing of the
Complaint in this action, the FPA Action Plaintiffs secured the dismissal
without prejudice of the FPA Action against SETH FLAM, STEVEN M. LASH, STEPHEN
J. DRESNICK, and JAMES A. LEBOVITZ, as well as against COWEN & COMPANY and COWEN
INCORPORATED. The Plaintiffs in this First Amended Complaint and the FPA Action
Plaintiffs have elected to do so for the following purposes: (a) to allow the
FPA Action as originally pleaded to proceed only against FPAM and FPA-CAL, both
of which are entitled to a stay of proceedings in this Court by order of the
United States Bankruptcy Court for the District of Delaware by virtue of their
filing of petitions for reorganization under Chapter 11 of the
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<PAGE> 6
United States Bankruptcy Code, captioned respectively In re FPA Medical
Management, Inc., No. 98-1596-PJW, and In re FPA Medical Management of
California, Inc., No. 98-1703-PJW, so that the bankruptcy stay will not unduly
affect the litigation proceeding in this Court against other parties; (b) to
allow Plaintiffs to pursue their claims in their individual capacities rather
than as a class in order to expedite this litigation; (c) to allow Plaintiffs to
bring additional causes of action and to join additional defendants against whom
they have claims, in light of the bankruptcy of FPAM, and FPA-CAL; and (d) for
other lawful and proper purposes.
II. THE PARTIES
6. Before it merged into FPA on March 20, 1998, SJMC was a California
professional medical corporation which provided medical services through two
divisions, St. Joseph IPA, an independent practice association ("SJIPA"), and
St. Joseph Medical Group, a primary care medical group ("SJMG"). SJIPA operated
a physician network of approximately 600 physicians in Orange County,
California, which provided health care services to members of various payors,
including more than 135,000 members of health maintenance organizations ("HMOs")
and thousands of members of preferred provider organizations ("PPOs"). SJMG
delivered primary medical care through nine medical offices located in central
Orange County.
7. Before it merged into FPA on March 20, 1998, OCMCS was a physician
practice management company headquartered in Orange County, California. OCMCS
provided a wide range of medical management services, organizational development
and contracting support to SJMC, including administrative support to SJIPA and
SJMG, in the areas of network development, provider contracting, claims
processing, financial management, management information systems, quality
management, utilization management and grievance resolution, billing and
collections and medical office support services.
6
<PAGE> 7
8. The combined value of SJMC and OCMCS on March 20, 1998 was
approximately $60 million.
9. FPA MEDICAL MANAGEMENT, INC. ("FPAM") is a corporation incorporated
under the laws of the State of Delaware and has its principal place of business
in San Diego, California. While not a party to this action, it is here described
as is its subsidiary to enable the reader of this First Amended Complaint to
better understand the claims here made. FPA's common stock is publicly traded
(symbol FPAM) on the NASDAQ stock exchange, an efficient securities market. FPAM
is a national health care management service organization that organizes and
manages primary care physician networks to contract with HMOs and other prepaid
insurance plans to provide physician and related health care services and also
provides contract management and support services to hospital-based emergency
departments.
10. FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC. ("FPA-CAL") is a
corporation incorporated under the laws of the State of California and has its
principal place of business in San Diego, California. It is a wholly-owned
subsidiary of FPA MEDICAL MANAGEMENT, INC. (FPAM and FPA-CAL are collectively
referred to herein as "FPA.")
11. Defendant SETH FLAM ("FLAM") was, until his abrupt "resignation"
effective March 25, 1998, the President and Chief Executive Officer of FPA, as
well as a member of FPA's Board of Directors. Because of his positions with FPA,
and as a result of his responsibility for preparation of internal corporate
documents (including operating plans, budgets and forecasts, and reports of
actual operations), conversations and connections with other corporate officers
and employees, and attendance at management and Board of Directors' meetings and
committees thereof, FLAM knew the adverse non-public information about FPA's
business, finances, markets, and present and future prospects.
12. Defendant STEVEN M. LASH ("LASH") was, until his abrupt
reassignment effective March 25, 1998, the Chief Financial Officer of FPA.
Because of his positions with FPA, and as a result
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<PAGE> 8
of his access to internal corporate documents (including, operating plans,
budgets and forecasts, and reports of actual operations), conversations and
connections with other corporate officers and employees, and attendance at
management and Board of Directors' meetings and committees thereof, LASH knew
the adverse non-public information about FPA's business, finances, markets, and
present and future prospects.
13. Defendant STEPHEN J. DRESNICK ("DRESNICK") is the President and
Chief Executive Officer of FPA. Prior to approximately March 25,1998, when he
replaced FLAM as FPA's President and CEO, DRESNICK was the Vice Chairman of
FPA's Board of Directors. Because of his positions with FPA, and as a result of
his access to internal corporate documents (including operating plans, budgets
and forecasts, and reports of actual operations), conversations and connections
with other corporate officers and employees, and attendance at management and
Board of Directors' meetings and committees thereof, DRESNICK knew the adverse
non-public information about FPA's business, finances, markets, and present and
future prospects.
14. Defendant JAMES A. LEBOVITZ ("LEBOVITZ") is and at all relevant
times was FPA's Senior Vice President, General Counsel and Secretary. Because of
his positions with FPA, and as a result of his access to internal corporate
documents (including operating plans, budgets and forecasts, and reports of
actual operations), conversations and connections with other corporate officers
and employees, and attendance at management and Board of Directors' meetings and
committees thereof, Lebovitz knew the adverse non-public information about FPA's
business, finances, markets, and present and future prospects.
15. FLAM, LASH, DRESNICK, and LEBOVITZ are referred to collectively
herein as "DIRECTORS AND OFFICERS." The DIRECTORS AND OFFICERS, and each of
them, were the agents of one another and at all times alleged herein acted
within the scope of that agency. The
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<PAGE> 9
DIRECTORS AND OFFICERS also aided, abetted and conspired with one another in the
commission of the wrongful acts alleged herein.
16. DELOITTE & TOUCHE (hereinafter referred to as "DELOITTE") is a
national auditing firm which was the auditor for FPA. On information and belief,
DELOITTE and its partners and employees are, or work under the direction of,
certified public accountants duly licensed by the California State Board of
Accountancy to practice accountancy in California. DELOITTE audited the
financial statements of FPA and rendered audit opinions which it knew would be
specifically used for the merger agreement entered between Plaintiffs and FPA.
Said merger agreement would not have been consummated absent the
misrepresentations of the financial condition of FPA represented in FPA's
financial statements and DELOITTE'S misleading audit opinions. FPA's financial
statements on which DELOITTE gave misleading and unqualified audit opinions
knowingly or negligently misrepresented the value of FPA, understated the
liabilities of FPA by about $300 million, and made other serious and material
misrepresentations. DELOITTE, in the performance of its duties, knew that merger
negotiations were ongoing between FPA and Plaintiffs and that FPA's financial
statements and DELOITTE's audit opinion thereon would be specifically used as a
condition of consummating the Merger Agreement. Furthermore, DELOITTE
intentionally or recklessly made misrepresentations regarding the financial
condition of FPA and violated Generally Accepted Auditing Standards and
Generally Accepted Accounting Principles.
17. VOLPE BROWN WHELAN & COMPANY (hereinafter referred to as "VOLPE")
has offices in New York, New York and San Francisco, California, and is an
investment banking firm specializing in mergers and acquisitions. VOLPE acted as
the financial advisor for FPA and made numerous negligent or intentional
misrepresentations constituting fraud and deceit on which Plaintiffs relied in
losing their entire equity as a result of merging with FPA. Plaintiffs are not
certain as to the
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<PAGE> 10
exact business form of VOLPE and will seek leave to amend this First Amended
Complaint to set forth VOLPE's business form when it is known to them.
18. Plaintiffs are unaware of the true names of defendants named herein
as DOES 1 through 50 and therefore sue such defendants under these fictitious
names. Plaintiffs will seek leave to amend this First Amended Complaint to
substitute the true names of these fictitiously named defendants once such true
names become known.
III. THE MERGER
19. On or about January 21, 1998, FPA, OCMCS, and SJMC entered into a
written agreement titled "Agreement and Plan of Merger Dated As of January 21,
1998 By and Among FPA Medical Management, Inc., FPA Medical Management of
California, Inc., Orange Coast Managed Care Services, Inc., and St. Joseph
Medical Corporation" (the "Merger Agreement").
20. Pursuant to the Merger Agreement, OCMCS and SJMC agreed (subject to
shareholder approval) to be acquired by a subsidiary of FPA. The Merger
Agreement included a formula by which OCMCS and SJMC shareholders would receive
FPA common stock in exchange for their OCMCS and SJMC shares. The Merger
Agreement also provided that the shares of FPA common stock to be received in
exchange for the OCMCS shares would be contractually restricted from sale,
transfer, or other disposition for a period of ninety days commencing upon the
effective date of the Merger, and the sale of FPA shares received in exchange
for SJMC shares were subject to an even longer lock-up period under securities
rules (the "lock-up period").
21. On February 17, 1998, FPA filed a Registration Statement on Form S-4
with the Securities and Exchange Commission ("SEC" or the "Commission")
pertaining to FPA's offer and sale of shares of FPA common stock to be issued by
virtue of the Merger. The Registration Statement included a
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<PAGE> 11
Prospectus covering the 3,846,154 shares of FPA common stock to be issued in
connection with the proposed Merger. The Registration Statement also included a
Proxy Statement to be furnished to the shareholders of OCMCS and SJMC in
correction with the proposed Merger.
22. The following documents, filed with the SEC by FPA, were
incorporated by reference into the Proxy Statement/Prospectus with financial
data all prepared and audited by DELOITTE:
a. FPA's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 filed with the Commission on March 31, 1997,
as amended by Form 10K/A filed with the Commission on April 29,
1997.
b. FPA's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 filed with the Commission on May 15, 1997.
c. FPA's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 filed with the Commission on August 14,1997.
d. FPA's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 filed with the Commission on November 14,
1997.
e. PA's Current Report on Form 8-K dated March 17, 1997 filed with
the Commission on May 16, 1997, as amended by Form 8-K/A filed
with the Commission on May 28, 1997.
f. FPA's Current Report on Form 8-K/A dated July 31, 1997 filed
with the Commission on July 31, 1997, as amended by Form 8-K/A
filed with the Commission on October 10, 1997.
g. The audited combined balance sheets of Foundation Health Medical
Services (a wholly owned subsidiary of Foundation Health
Corporation) and affiliates as of June 30, 1995 and 1996 and the
related combined statements of operations, shareholders' deficit
and cash flows for each of the three years in the period ended
June 30, 1996 contained in FPA's Registration Statement on Form
S-4 dated February 13, 1997.
h. FPA's Current Report on Form 8-K dated December 9, 1997 filed
with the Commission on December 10, 1997.
[Prospectus, at p. 2.]
23. The Proxy Statement/Prospectus also provided that certain documents
filed with the SEC by FPA during the pendency of the Merger would be
incorporated by reference into the Proxy Statement/Prospectus:
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<PAGE> 12
All documents and reports subsequently filed by FPA pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the date of the OCMCS and SJMC
Special Meetings shall be deemed to be incorporated by reference in this
Proxy Statement/Prospectus and to be a part hereof from the date of
filing of such documents or reports.
[Id.]
24. On or about February 17, 1998, the Prospectus/Proxy Statement was
delivered by mail to all holders of record of OCMCS and SJMC stock.
25. On or about March 20, 1998, the, shareholders of OCMCS and SJMC had
special meetings at which they approved the Merger by majority vote.
26. The merger closed on March 20, 1998 (the "Closing Date").
IV. THE MATERIAL MISREPRESENTATIONS AND OMISSIONS
27. On or about January 7, 1998, representatives of OCMCS and SJMC met
with senior managers of FPA, including defendant LASH, in order to obtain
critical information about FPA in connection with OCMCS/SJMC's evaluation of FPA
as a possible acquirer of the two companies. During this meeting, the OCMCS/SJMC
representatives asked specific questions about a number of critical issues,
including:
- Whether FPA's financial and accounting procedures and
infrastructure were sound;
- Whether FPA had established adequate reserves, including
reserves for incurred but not reported ("IBNR") medical costs;
- Whether FPA's earnings forecasts were sound and whether they
were based on reasonable and appropriate accounting assumptions
and procedures;
- Whether FPA anticipated any significant write-offs;
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<PAGE> 13
- Whether FPA had established sufficient reserves to ensure, to
the fullest extent possible, that FPA's earnings would, at
worst, remain stable through the expiration of the anticipated
lock-up period; and
- Whether the market price of FPA common stock would remain
reasonably stable during the lock-up period.
Defendant LASH responded to these questions by specifically representing:
a. That FPA had established IBNR and other reserve accounts
conservatively, and was more than adequately reserved;
b. That FPA's financial and accounting procedures and
infrastructure were sound, and the information obtained by means
of those procedures was reliable;
c. That FPA did not anticipate making any significant write-offs,
with the sole exception of a $30 million write-off pertaining
to certain real estate in Sacramento obtained as a result of an
earlier merger; and
d. That FPA's earnings during the anticipated lock-up period and
beyond would be smooth, and could reasonably be expected to
cause the market price of FPA common stock to remain stable
through the expiration of that period.
28. The Merger Agreement, which was attached as Appendix A to the
Registration Statement, included the following representations and warranties by
FPA, all of which have now been revealed as false.
29. In section 5.7 of the Merger Agreement, FPA represented and
warranted the accuracy of its SEC filings:
5.7 SEC Reports and FPA Financial Statements. FPA has made available to
OCMCS and SJMC a true and complete copy of each form, report, schedule,
registration statement, definitive proxy statement and other document
(together with all amendments thereof and supplements thereto) filed by
FPA with the SEC since January 1, 1997 (as such documents have since the
time of their filing been amended or supplemented, the "FPA SEC
Reports"), which are all the documents (other than preliminary material)
that FPA was required to file with the SEC since such date. As of their
respective dates, the FPA SEC Reports (i) complied as to form in all
Material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not contain any untrue
statement of a Material fact or omit to state a Material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
interim consolidated financial statements (including, in each case, the
notes, if any, thereto) included in the FPA SEC Reports (the "FPA
Financial Statements") complied as to form in all
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<PAGE> 14
Material respects with the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto and except with respect to unaudited
statements as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited interim financial statements, to
normal, recurring year-end audit adjustments which are not expected to
be, individually or in the aggregate, Materially Adverse to FPA and its
Subsidiaries taken as a whole) the consolidated financial position of
FPA and its consolidated Subsidiaries as at the respective dates thereof
and the consolidated results of their operations and cash flows for the
respective periods then ended.
30. In section 5.8 of the Merger Agreement, FPA represented that
"[s]ince September 30, 1997, there has not been any Material Adverse Change to
FPA and its Subsidiaries taken as a whole."
31. In section 5.9 of the Merger Agreement, FPA represented that it had
no undisclosed liabilities of any kind:
5.9 Absence of Undisclosed Liabilities. FPA and Sub do not have any
debts, liabilities or obligations of any nature (whether absolute,
accrued, unliquidated, contingent or otherwise, whether known or
unknown, and whether due or to become due) which are likely to have a
Material Adverse Effect on FPA and its Subsidiaries taken as a whole,
other than those which (a) are set forth in the FPA Financial
Statements, (b) have been specifically disclosed elsewhere herein, (c)
are exempt from disclosure pursuant to this Agreement, or (d) have been
incurred since the date of the most recent FPA Financial Statements in
the ordinary course of business in amounts and on terms consistent,
individually and in the aggregate, with FPA's past practice.
32. In addition, the Prospectus included the following representations
and warranties by FPA, all of which have now been revealed as false.
33. In the Prospectus, it was expressly represented that defendants FLAM
and LASH, among others, would remain in their same positions as executive
officers of FPA following the Merger.
34. In the Prospectus, it was also expressly represented that "[u]pon
consummation of the Combined Merger, SETH FLAM, Sol Lizerbram, Sheldon Derezin,
STEPHEN J. DRESNICK, Kevin Ellis, Howard Hassman and Herbert A. Wertheim, each
of whom is currently a director of FPA, will continue to serve as directors of
FPA." [Prospectus, at p. 68]
35. The Prospectus provided further that certain key representations of
FPA were to continue for one full year after the Closing Date:
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<PAGE> 15
The Merger Agreement contains various representations and warranties of
each of FPA, FPA California, SJMC and OCMCS (which are subject, in
certain cases, to specified exceptions, and which shall continue until
the first anniversary of the Closing Date, except for representations
related to taxes, which shall survive until expiration of the applicable
statute of limitations, and claims related to fraud, which shall survive
until expiration of the applicable statute of limitations) relating to,
among other things, the following: (i) organization and qualification to
do business; (ii) capitalization; (iii) subsidiaries; (iv) the
authorization, execution, delivery and enforceability of the Merger
Agreement and the transactions contemplated thereunder; (v) the absence
of any governmental or regulatory consent or approval required to enter
into the Merger Agreement and to consummate the transactions
contemplated thereby, except as so disclosed; (vi) the absence of any
conflict, breach or default of any corporate charter documents or
applicable law in connection with entering into the Merger Agreement;
(vii) the accuracy of the financial information contained therein;
(viii) the absence of certain changes or events; (ix) the absence of
undisclosed liabilities; (x) the absence of pending or threatened legal
proceedings; (xi) the accuracy of the information each party has
supplied with respect to the filings required with the Commission in
order to consummate the Combined Merger and the transactions
contemplated by the Merger Agreement; (xii) certain tax matters
including the tax-free status of the transaction under sections
368(a)(1)(A) and 368(a)(2)(D) of the Code; (xiii) matters concerning
employee benefit plans and ERISA; (xiv) title to assets; (xv) permits of
each of SJMC and OCMCS; (xvi) agreements; (xvii) insurance; (xviii)
compliance with laws; and (xix) accounting matters. Such representations
and warranties are limited to the extent that any event or occurrence
that has or, if it occurred reasonably would be expected to have, an
adverse effect in each case in excess of Five Hundred Thousand Dollars
($500,000) for SJMC and OCMCS and Fifty Million Dollars ($50,000,000)
for FPA and its subsidiaries taken as a whole, on the business,
condition (financial or otherwise), results of operations, prospects,
assets (including intangible assets), properties or liabilities
(including contingent liabilities) of SJMC, OCMCS and FPA, respectively.
[Prospectus, at pp. 70-71]
36. In the Prospectus, FPA also represented that it would not make any
material change to its business during the pendency of the Merger and through
the Closing Date:
At all times from and after the date of the Merger Agreement until the
Closing Date, each of FPA and FPA California covenants and agrees that
(except as expressly contemplated or permitted by the Merger Agreement,
or to the extent that SJMC and OCMCS shall otherwise consent in
writing): (i) it shall not make any material changes to its business or
structure which would reasonably be expected to have an adverse effect
on the consideration to be received by the SJMC shareholders and the
OCMCS stockholders . . . .
[Prospectus, at p. 72.]
37. In the Prospectus, FPA also represented that it would inform OCMCS
and SJMC of any significant changes in its business during the pendency of the
Merger and through the Closing Date:
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Each of FPA, FPA California, SJMC and OCMCS has further agreed prior to
the Effective Time to confer on a regular and frequent basis with the
other with respect to its business and operations and other matters
relevant to the Combined Merger and shall promptly advise the other of
any change or event, including any complaint, investigation or hearing
by any governmental or regulatory authority on the constitution or
threat of litigation, having or which can be reasonably foreseen to
have, a material adverse effect on OCMCS, SJMC, FPA or FPA California,
as the case may be, or on the ability of any of the parties to
consummate the transactions contemplated by the Merger Agreement.
[Prospectus, at p. 72.]
38. On March 20, 1998, in connection with the closing of the Merger, FPA
provided OCMCS and SJMC with an "Officer's Certificate," executed by defendant
LEBOVITZ, in which FPA reaffirmed all of the representations and warranties made
in the Merger Agreement:
The representations and warranties made by FPA in the Agreement and Plan
of Merger dated as of January 21, 1998, as amended as of January 28,
1998, by and among FPA, FPA Medical Management of California, Inc., a
California corporation ("FPA-California"), OCMCS Managed Care Services,
Inc., a Delaware corporation, and St. Joseph Medical Corporation, a
California professional corporation (the "Merger Agreement'), are in all
Material respects complete, true and correct as of the date hereof
(except for such representations and warranties which are qualified by a
materiality standard, which are true and correct in all respects) with
the same force and effect as though such representations and warranties
had been made on and as of the date hereof.
39. DELOITTE, during the merger negotiations with OCMCS and SJMC,
communicated with the accounting firm for OCMCS and SJMC to arrive at the proper
and most beneficial tax treatment of the merger for the benefit of OCMCS and
SJMC, as well as to facilitate the consummation of the Merger Agreement.
40. Shortly after the Closing Date, FPA continued to voice confidence
regarding its financial prospects. For example, an FPA press release dated March
26, 1998, quoted defendant LASH: "Our business continues to track according to
expectations and we remain encouraged by the first quarter's operating and
financial performance."
41. Shortly after Plaintiffs, based on Defendants' misconduct, conveyed
all their stock in OCMCS and SJMC in exchange for FPA stock, FPA filed a
petition for bankruptcy, rendering Plaintiffs'
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equity in FPA, which was the only consideration Plaintiffs received by the
Merger Agreement, essentially valueless.
FIRST CAUSE OF ACTION
FOR VIOLATION OF SECTION 12(a)(2) OF THE SECURITIES ACT OF 1933
AGAINST THE DIRECTORS AND OFFICERS
42. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
43. The DIRECTORS AND OFFICERS offered up the FPA securities for sale
and sold FPA securities to Plaintiffs by means of the prospectus which contained
untrue statements of material fact and omitted to state material facts necessary
in order to make those statements, in light of the circumstances under which
they were made, not misleading.
44. The DIRECTORS AND OFFICERS offered FPA securities for sale and sold
FPA securities to Plaintiffs by means of oral communications which are
hereinabove alleged to contain untrue statements of material fact and omitted to
state material facts necessary in order to make those statements in light of the
circumstances under which they were made not misleading.
45. The DIRECTORS AND OFFICERS communicated the prospectus and made oral
communications to members of the classes by means of the United States Mail, as
well as by the use of instruments of transportation and communication in
interstate commerce.
46. Plaintiffs purchased or acquired FPA securities without knowledge of
the untruth or omissions contained in the prospectus, the DIRECTORS AND
OFFICERS' oral communications, or both.
47. By reason of the conduct alleged, time DIRECTORS AND OFFICERS
violated Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. Section
77(a)(2).
48. Plaintiffs purchased FPA securities in connection with the merger in
reliance on the prospectus and the foregoing written and oral misrepresentations
by which they suffered economic losses
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approximating $60 million. The exact amount of their specific losses will be set
forth at time of trial when the specific amount of losses are more fully
ascertained.
SECOND CAUSE OF ACTION
FOR VIOLATION OF SECTION 11 OF THE SECURITIES ACT OF 1933
AGAINST THE DIRECTORS AND OFFICERS
49. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
50. The DIRECTORS AND OFFICERS offered FPA securities for sale and sold
FPA securities to Plaintiffs by means of the prospectus and registration
statement, which are alleged hereinabove to contain untrue statements of
material fact and omitted to state material facts necessary in order to make
those statements, in light of the circumstances under which they were made, not
misleading.
51. Plaintiffs purchased or acquired FPA securities pursuant to the
prospectus, registration statement, without knowledge of the untruths or
omissions contained in the prospectus.
THIRD CAUSE OF ACTION
FOR VIOLATION OF SECTION 15 OF THE SECURITIES ACT OF 1933
AGAINST THE DIRECTORS AND OFFICERS
52. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
53. The DIRECTORS AND OFFICERS exercised actual control over FPA in
connection with the merger, including the actual control over the drafting of
the prospectus and the Merger Agreement including FPA's financial reporting and
results and actual control of the representations and warranties made by FPA to
Plaintiffs in connection with the merger and said SEC filings.
54. The DIRECTORS AND OFFICERS are therefore jointly and severally
liable for the above-alleged violations of Sections 11 and 12 of the Securities
Act of 1933.
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FOURTH CAUSE OF ACTION
FOR VIOLATION OF SECTIONS 25401 AND 25501 OF THE CORPORATIONS CODE
AGAINST THE DIRECTORS AND OFFICERS
55. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
56. The DIRECTORS AND OFFICERS offered and sold FPA securities to
Plaintiffs by means of written and oral communications which as alleged herein
contained untrue statements of material fact and omitted to state material facts
necessary in order to make those statements, in light of the circumstances under
which they were made, not misleading.
57. Plaintiffs purchased or acquired their FPA securities without
knowledge of the untruths or omissions contained in Defendants' written and oral
communications.
58. Plaintiffs, who purchased FPA securities in connection with the
merger in reliance on the prospectus and the foregoing written and oral
misrepresentations, suffered severe economic damages approximating $60 million.
The exact amount of said damages will be set forth at time of trial when said
sum is more fully ascertained.
FIFTH CAUSE OF ACTION
FOR INTENTIONAL MISREPRESENTATION
AGAINST THE DIRECTORS AND OFFICERS
59. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
60. The DIRECTORS AND OFFICERS made the above-alleged representations to
Plaintiffs, knowing that such representations were false and for the purposes of
inducing Plaintiffs to approve the merger in-exchange for their shares in OCMCS,
SJMC, or both, for FPA securities.
61. Plaintiffs were unaware of the falsity of the DIRECTORS AND
OFFICERS' misrepresentations. Plaintiffs relied on the DIRECTORS AND OFFICERS'
representations in deciding
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to approve the merger and to exchange their OCMCS and SJMC securities for FPA
securities. Such reliance was reasonable under the circumstances.
62. Thus, the DIRECTORS AND OFFICERS fraudulently induced Plaintiffs to
exchange their OCMCS and SJMC securities for FPA securities. Plaintiffs hereby
demand damages for the loss suffered by the loss of equity so suffered and loss
of value of their stock.
63. As a proximate result of the DIRECTORS AND OFFICERS' intentional
misrepresentations, FPA acquired all of the assets of OCMCS and SJMC.
64. As a proximate result of the DIRECTORS AND OFFICERS' intentional
misrepresentations, Plaintiffs have suffered approximately $60 million in
damages, the specific amount of which will be determined at trial.
65. The DIRECTORS AND OFFICERS' intentional misrepresentations, deceit,
and concealment of known material facts, as alleged above, constitute fraud
under Section 3294 of the Civil Code, entitling Plaintiffs to an award of
punitive damages.
SIXTH CAUSE OF ACTION
FOR NEGLIGENT MISREPRESENTATION
AGAINST THE DIRECTORS AND OFFICERS
66. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
67. The DIRECTORS AND OFFICERS made the false representations as alleged
above to Plaintiffs without any reasonable ground for believing them to be true,
and for the purpose of inducing Plaintiffs to approve the merger in exchange for
their shares of OCMCS and SJMC stock for shares of FPA stock.
SEVENTH CAUSE OF ACTION
FOR NEGLIGENT MISREPRESENTATION
AGAINST DELOITTE & TOUCHE
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68. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
69. When DELOITTE made the misrepresentations as alleged above, DELOITTE
had no reasonable ground for believing them to be true, in that DELOITTE failed
to exercise reasonable c are as an independent auditor and as a certified public
accountant to discover FPA's true assets, liabilities, and internal accounting
practices and failed to comply with the professional standards of certified
public accountants.
70. DELOITTE made these representations with the intent to induce
Plaintiffs, or a particular class of persons to which Plaintiffs belong (namely,
the shareholders of SJMC and OCMCS), to act in reliance on the representations
and to be influenced in the specific merger transaction herein alleged, which
DELOITTE intended to influence, in that DELOITTE knew with substantial certainty
that Plaintiffs, or the particular class of persons to which Plaintiffs belong,
would rely heavily in the course of the transactions on the representations, in
particular DELOITTE's negligently rendered unqualified audit opinions and other
communications about the financial statements of FPA, as well as DELOITTE's
communications with Plaintiffs' corporate accountants regarding the tax
consequences of the Merger Agreement, as well as DELOITTE's reputation.
71. Had DELOITTE conducted a proper audit and disclosed the true
financial condition of FPA and the extent of its liabilities, Plaintiffs would
not have entered into the Merger Agreement but, instead, would have either
retained their shares in OCMCS and SJMC, or would have sold their stock in SJMC
and OCMCS for an amount approximating $60 million collectively to a purchaser
other than FPA.
EIGHTH CAUSE OF ACTION
FOR INTENTIONAL MISREPRESENTATION
AGAINST DELOITTE & TOUCHE
72. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
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73. When DELOITTE made the misrepresentations as alleged above, DELOITTE
knew them to be false, or had no belief in their truth and made them recklessly,
and made them with the intent to defraud and deceive Plaintiffs, or a particular
class; of persons to which Plaintiffs belong (namely, t he shareholders of SJMC
and OCMCS), whom DELOITTE intended or reasonably should have foreseen would rely
on the representations. DELOITTE made the representations with the intent to
induce Plaintiffs to consummate the Merger Agreement with FPA.
74. It was reasonable for Plaintiffs to rely on the financial
representations of DELOITTE as it concerned FPA because DELOITTE was a
nationally-known independent auditing firm which represented itself to be
competent and capable of rendering the opinion that it did as to the financial
condition of FPA.
75. Plaintiffs have accordingly suffered damages as a result of the loss
of their value in OCMCS and SJMC and FPA approximating $60 million. Said damages
will be more specifically set forth at time of trial when said sum is more fully
ascertained.
NINTH CAUSE OF ACTION
FOR NEGLIGENT MISREPRESENTATION
AGAINST VOLPE BROWN WHELAN & COMPANY
76. Plaintiffs hereby reallege and incorporate by this reference each of
the allegations of each of the foregoing paragraphs.
77. VOLPE held itself out to Plaintiffs as a financial advisor of
Defendants and failed to take such due diligence and reasonable care as were
necessary to ascertain the truth or falsity of the representations VOLPE made to
Plaintiffs.
78. In fact, VOLPE made egregious and serious misrepresentations to
Plaintiffs as it concerned the financial condition of FPA.
79. Absent such misconduct by VOLPE, Plaintiffs would not have suffered
the economic losses they have suffered.
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80. Plaintiffs have consequently lost approximately $60 million as a
result of Defendant VOLPE's misconduct. The exact amount of said damages will be
set forth at time of trial when said sum is more fully ascertained.
TENTH CAUSE OF ACTION
FOR INTENTIONAL MISREPRESENTATION
AGAINST VOLPE BROWN WHELAN & COMPANY
81. Plaintiffs incorporate herein by reference each of the allegations
of the foregoing paragraphs.
82. The misconduct of VOLPE, referenced in the Ninth Cause of Action,
was intentional. WHEREFORE, Plaintiffs pray for judgment, as follows:
1. For economic damages against Defendants and each of them
approximating $60 million, for which Defendants are jointly and severally
liable;
2. For punitive damages against Defendants and each of them in an amount
to be determined at time of trial by the Court and jury in this case;
3. For prejudgment interest in accord with law;
4. For costs of suit;
5. For such other further relief as the Court may deem appropriate.
Dated: November 23, 1998
LAW OFFICES OF PHILIP BOROWSKY
A PROFESSIONAL CORPORATION
/s/ Philip Borowsky
--------------------------------
By: PHILIP BOROWSKY
Attorneys for all Plaintiffs
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