NASHVILLE, Tenn. - The lawsuit filed against Columbia/Healthcare
Corp. by New York State Comptroller H. Carl McCall seeks to protect the interests of Columbia shareholders by propping up the value of the slumping stock.
The suit accuses 11 current and former senior Columbia/HCA directors and officers of "reckless mismanagement" and behavior that has put the value of Columbia stock at risk. It was filed Aug. 14 in U.S. District Court in Nashville by Mr. McCall in his role as sole trustee of the $90 billion New York State and Local Retirement Systems.
Columbia's stock price has dropped more than 20% since February, as the company has been rocked by a series of scandals. The company is the focus of a sweeping federal investigation into its billing practices, business practices associated with its home health care unit, and accusations of Medicare payment fraud and destruction of evidence. The company faces the possibility of stiff government fines.
The suit seeks to restrict the 11 executives from financial gain from alleged insider trading or fraudulent business practices. In addition, the suit would prevent any of the 11 from receiving severance benefits or golden parachute pay-outs even if it were part of an employment agreement.
The New York system owns approximately 2.6 million shares of Columbia stock. According to a fund spokesman, the objective of the suit is to improve the value of Columbia common shares for investors; no monetary damages are being sought.
The suit also would require Columbia to implement tighter corporate governance and internal controls designed to monitor Columbia's compliance with state and federal laws and ensure illegal activities uncovered in the future are reported promptly to Columbia's board of directors.
The suit comes at a time when Columbia is considering adding company stock to its $2.3 billion 401(k) plan as part of an effort to improve overall plan design.
Mr. McCall said actions by Columbia officials have put the value of Columbia stock "at risk."
"The reckless mismanagement and abuse of control by certain officials of Columbia/HCA has resulted in one of the most extensive and widespread federal fraud investigations in history," said Mr. McCall. "These individuals had an obligation to fulfill that obligation. The company and its shareholders should not have to pay the price for the fraudulent actions of these individuals."
A spokesman in the comptroller's office said the system's objective is "to keep assets in the company and to get it back on its feet" while increasing the value of Columbia's common stock.
The goal of improving the value of Columbia common shares also is an element in the possible addition of a company stock investment option in the company's 401(k) plan, which already has nearly 36% of its $2.3 billion in assets in company stock. The drop in the stock price wiped out between $25 million and $26 million from the value of the shares.
The company stock held in the plan was rolled over from an employee stock ownership plan in 1991, and is not an active investment choice for the embattled health care firm's 85,000 plan participants, according to Kim Sharp, director of retirement and savings at Columbia. The plan does not accept new contributions or transfers into company stock.
With Columbia's shares trading in the $32 to $34 range, down from more than $44 per share in February, the addition of a company stock investment option in the 401(k) plan might be good timing for plan participants and investors seeking an undervalued stock, according to some Wall Street analysts.
Columbia Chairman and Chief Executive Thomas F. Frist Jr., who assumed leadership of the nation's largest for-profit hospital chain July 25 and who is named in the New York fund suit, is said to be actively pursuing actions to strengthen Columbia's perception with the public and with investors. He has said Columbia will cooperate fully with federal agencies and to address the practices that led to its current difficulties.
Ms. Sharp. said Columbia is reviewing the 401(k) plan structure and design and is stepping up its communications and education program to increase participation above the current 30%.
She said the plan will add a series of lifestyle investment options to the plan in the spring of 1998 in conjunction with Hewitt Associates, Lincolnshire, Ill., its record keeper and third-party administrator.
Analysts believe improvements to the company's 401(k) plan will help shore up relations with a beleaguered employee population that totals nearly 285,000.
The Columbia 401(k) plan now offers five options - an income fund, balanced fund, large-company stock fund, small-company stock fund and an international equity fund - each managed by eight to 10 outside managers, she said.
"We are currently conducting an analysis and review of the plan, and anticipate making some improvements to the plan," including the addition of a company stock investment selection, said Ms. Sharp.
While the federal probe into Columbia's business practices continues to expand and the outlook for a final resolution of the company's problems is uncertain, a few analysts have started to look more favorably on its longer term prospects.
Argus Research Corp., Furman Selz Inc. and Goldman Sachs & Co., all of New York, have issued buy ratings on Columbia/HCA or placed the stock on recommended lists.
Columbia's earnings per share increased 15% in the second quarter alone, according to a report by Argus, which projects annual earnings growth of 15% for the foreseeable future.
The stock is trading at the lower end of the Argus projected trading range of $29 to $45 per share, but the report said there are good reasons to acquire Columbia stock, including "the company's ability to generate cash, its growth prospects and the stock's current low valuation relative to the market."
John Eades, Argus co-chairman, said Columbia's second quarter performance "is remarkable in the context of the controversy that has surrounded the company."