Tenet Healthcare Corp. moved toward resolving one legal problem last week, but the company can only wait while another resumed its slow march to a conclusion.
Tenet agreed to pay $215 million to settle shareholder and derivative lawsuits filed against the company after it disclosed in November 2002 its unusually high level of Medicare outlier payments. Also, last week, in U.S. District Court in San Diego, the jury in the physician kickback case against a Tenet hospital there resumed deliberations after a break for the holidays.
As part of the agreement to settle the shareholder and derivative lawsuits, former Chief Executive Officer Jeffrey Barbakow and former Chief Operating Officer Thomas Mackey will pay $1 million and $500,000, respectively, of the settlement. Tenet said its directors and officers insurance will cover about $75 million of the total, or about 35%.
The payments by Barbakow and Mackey would be unusual and are part of a recent change in securities settlements that should make directors more aggressive with the company managers that they're designated to monitor. Requiring executives or directors to pay part of the damages with their personal funds is a penalty that only recently has become part of some securities settlements, said Leonard Barrack, a securities lawyer and the senior and founding partner of Barrack, Rodos & Bacine.
Barrack's firm was the co-lead counsel in the first such settlement, involving lawsuits that investors filed against the former WorldCom. The directors paid $25 million toward the settlement, and two executives later contributed to the settlement after their criminal cases were resolved, Barrack said.
Barrack, who is not involved in the investor lawsuits against Dallas-based Tenet, also noted that Barbakow and Mackey both made significant sales of stock in the months before Tenet made the outlier warning. Barbakow grossed more than $111 million from exercising stock options in January 2002, Tenet said in a securities filing. Barbakow revealed in a letter to shareholders in November 2002 that the Securities and Exchange Commission had opened an investigation of trading in the company's stock (Nov. 25, 2002, p. 13). No complaints have been filed in the case.
The latest accord covers two cases consolidating the various securities lawsuits against the company, one in U.S. District Court, Los Angeles, and the other in California Superior Court, Santa Barbara, where the company's headquarters was formerly located. The federal lawsuits alleged that Tenet executives misled investors with statements regarding outlier receipts and other matters. The state lawsuits alleged breach of fiduciary duty, mismanagement, unjust enrichment and other causes of legal action. Tenet said the parties to the lawsuits expect that if the state court approves the settlement, the federal lawsuit will be dismissed.
Meanwhile in San Diego, the jury restarted its deliberations into whether a Tenet subsidiary, Alvarado Hospital Medical Center and the hospital's former CEO, Barry Weinbaum, conspired to funnel money to physician practices that referred patients to the hospital with overly generous physician-relocation contracts. The case is being tried for the second time after the jury deadlocked on the charges in February 2005.