Attorneys handling the 10 class-action lawsuits filed so far against MedPartners say they're getting calls from hundreds of aggrieved stockholders, including MedPartners employees.
But one prominent group of MedPartners stockholders -- the physicians who received stock in exchange for turning over their practice assets to the PPM -- apparently plans to sit out the legal action.
The gist of the stockholder lawsuits is that MedPartners defrauded investors by intentionally hiding its troubled finances well before they came to light in the wake of the Jan. 7 collapse of its merger with PhyCor Corp., its largest competitor in the physician practice-management business. MedPartners surprised investors that same day with a $145 million charge against earnings to cover unexpected expenses, practice integration costs and more money for reserves to cover unpaid bills.
Michael Swick, an attorney with Stull, Stull & Brody in New York, one of the plaintiffs' lawyers, says one reason he may not be hearing from physicians is that about a week before MedPartners' stock price collapsed on Jan. 8, in reaction to the bad news of the day before, the company took action to protect its 15,000 doctors from the worst of a forthcoming stock debacle.
In a December 30 memo obtained by Modern Physician, the company told doctors that they were being stricken from its Med$tock program, which allows employees and affiliates to put a portion of their salaries toward buying shares at a 15% discount. In lieu of access to the Med$tock program, the doctors were refunded all of the money they had contributed toward stocks in 1997, with 8.5% interest. The stock is bought in addition to whatever shares physicians receive when they sell the assets of their practices to MedPartners.
However, MedPartners' nonphysician staff remained in the Med$tock program, which sets specific dates throughout the year on which stock is parceled out. Shares they bought at the discounted rate of $16 at the beginning of 1998 ended up a week later being worth less than $10, a 38% loss. The stock has languished at $10 to $12 in the first 45 days of 1998.
In its memo to doctors, MedPartners said it pulled doctors out of the program out of concern that offering them discounted stock could be construed as a federal fraud-and-abuse violation.
MedPartners spokesman Tom Dingledy confirmed the memo's existence. The action was taken, he said, because the company didn't want to arouse the ire of HHS' increasingly aggressive inspector general's office, which investigates fraud-and-abuse cases.
Dingledy says MedPartners is not under investigation by the OIG, which comments only after a case has been completed. PPM stock analysts say they have never heard of a PPM being investigated because of a stock plan.
Michael Blau, who leads the PPM group for law firm McDermott Will & Emery in Boston, says it was "his understanding" that MedPartners' stock price, which had been tumbling from the mid-20s since last fall, was a factor in suspending the plan. Blau, who has worked with MedPartners and its doctors but is not participating in any of the lawsuits, says the company "was concerned about putting equity in the hands of physicians at a time when its stock price was declining. The more they issue additional shares, the more they dilute the stock."
Dingledy had no comment on whether MedPartners employees are planning to participate in any lawsuits. However, Dingledy, who is enrolled in the Med$tock program, says he has no plans to sue his employer.
Swick says the memo regarding suspending physicians from the Med$tock plan could partly explain why, among the 100 or so people calling his firm about participating in a shareholder lawsuit, "not all that many physicians who sold their practices for stock have called me."
Swick hasn't said whether he will present the document as evidence against MedPartners, but then again, Swick doesn't know yet whether he'll be arguing the case.
In late March, judges in Birmingham, Ala., MedPartners' hometown, are scheduled to consider how to combine the multiple lawsuits into one federal court case and one state court case. Typically, judges pick the law firm that has amassed the greatest representation of shareholders -- either in collective shares held or number of stockholders -- to be the lead plaintiffs' attorney.
Under federal rules governing shareholder lawsuits, attorneys may not market themselves beyond issuing a press release stating that they have filed a class-action lawsuit with at least one shareholder as a plaintiff. They also can use the release to brag about past accomplishments; most of the firms involved in lawsuits against MedPartners litigate big-profile cases for a living, having taken on such past bogeymen as Ivan Boesky and Michael Milken.
Stockholders have until the first two weeks of March, depending on which law firm they choose, to add their names to a lawsuit. The date is tied to a 60-day deadline to the end of the class-action date, which in most of the lawsuits is Jan. 8., the day MedPartners' stock price dropped almost 50%. (Plaintiffs don't pay attorneys' fees upfront; attorneys collect 25% to 35% of any damages awarded.)
MedPartners is getting off comparatively easy for a company in its position, attorneys say. Robert Frutkin of the Philadelphia law firm Savett Frutkin Podell & Ryan, another firm angling to head a shareholder lawsuit against MedPartners, says it's not unusual for 30 to 40 law firms to litigate initially against a fallen company.
"The more actively traded, the more it's highly touted, the more likely it is that people will buy the stock and the more likely they'll be the type who might be angry," Frutkin says.
According to a lawsuit filed by an individual investor, represented by Stull, Stull & Brody, PhyCor backed out of its $6.5 billion purchase of MedPartners after seeing problems in the company's books. MedPartners' stock already was falling before PhyCor's Jan. 7 withdrawal announcement -- the stock-and-debt exchange was valued at $8.2 billion on Oct. 29, 1997, when the deal was announced.
"As a result of the company's business problems and accounting irregularities, PhyCor backed out of the merger and the company was forced to disclose that it was facing charges of up to $145 million," according to the lawsuit.
"We've made no such statement," says John Crawford, PhyCor's chief financial officer. PhyCor's official statement was that it dropped out of the deal because it would be too difficult to merge the companies' vastly different corporate cultures.
"We have disclosed all we're going to talk about," Crawford says.
Meanwhile, MedPartners is not commenting on any issues raised in the lawsuits.