The number of major public pension funds suing executives of Columbia/HCA Healthcare Corp. has swelled to 12, with a collective stake of 15.3 million shares worth $466 million, but there is little evidence that other funds will jump on the bandwagon.
Last month, six more big funds joined the suit initiated in August by New York State Comptroller H. Carl McCall, sole trustee of the $90 billion New York State Common Retirement Fund, in an attempt to protect shareholders' interest in the ailing health care giant.
The Teachers' Retirement System of the City of New York; New York Police Department Pension Fund; New York City Board of Education Retirement System; New York State Teachers' Retirement System, Albany; Los Angeles County Employees' Retirement Association, Pasadena, Calif.; and National Industry Pension Fund, Washington, were the latest funds to add their names to the suit.
They join the California Public Employees Retirement System, Sacramento; Teachers Retirement System of Louisiana, Baton Rouge; New York City Employees' Retirement System; New York City Fire Department Pension Fund; City of Philadelphia Pension Fund; and New York State Common fund, Albany.
Strength in numbers
Mr. McCall, who has been lobbying institutional shareholders around the country to join his suit, said he was delighted that so many pension funds had come aboard.
"The participation of these pension funds strengthens the message we are sending to those responsible that shareholders are deeply concerned about the reckless mismanagement and abuse of control by certain officials of Columbia/HCA. Our shared interest is to restore the viability of the company and the value of the stock," he said.
Mr. McCall sued after the federal and various state governments began an extensive, ongoing probe into Nashville, Tenn.-based Columbia's billing and acquisitions practices, allegations of Medicare payment fraud and destruction of evidence. The suit, filed on Aug. 13 in U.S. District Court in Nashville, seeks to ensure that illegal practices are halted and that the nine current and former directors of the company do not profit from alleged insider trading or fraudulent business practices.
New York State Common fund owned 4.8 million Columbia shares as of March 31, and continues to own 2.5 million shares of the company.
In their best interests
Sue Ellen Dodell, deputy general counsel to New York City comptroller Alan Hevesi, who oversees the city's public employee pension funds, said: "We recommended that they vote to join the lawsuit. We thought it would be in their best interests to ensure that corrective internal controls and enhanced corporate governance mechanisms are adopted by Columbia. We're seeking to recover for the corporation any profits the defendants achieved through alleged insider or illegal trading."
But other big shareholders take a different view. Officials at the State Teachers Retirement System of Ohio, Columbus; Virginia Retirement System, Richmond; State of Wisconsin Investment Board, Madison; and the Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, all say they have no plans to sue. Officials at the California State Teachers' Retirement System, Sacramento, declined to comment.
In defense of Columbia
Despite the scandals and negative publicity swirling around Columbia, big money managers are defending it and sticking with their investments, arguing that there is still a lot of potential upside to the stock.
Erwin Will, chief investment officer at the $28 billion Virginia Retirement System, which owned 204,000 shares as of June 30, said: "Why join? A lot of companies have problems. We're not sure what they have done wrong here. No one has been prosecuted at this point."
Herbert Dyer, executive director at the $43 billion Ohio State Teachers' fund, which held 846,000 shares as of June 30, concurs.
Mr. Dyer said he didn't expect to participate in the lawsuit because, "it's being well handled by those who are involved. We have other fish to fry." He said he was more concerned about Columbia's ethics and how it has been delivering medical care than about the lawsuit.
TIAA-CREF, New York, which oversees $100 billion in assets, now holds 5.64 million shares of Columbia, valued at around $168 million in its passive portfolios, said spokeswoman Claire Sheahan.
"We sold our active holdings in the stock before all the investigations began," she said. She pointed out that TIAA-CREF's stake is minuscule in terms of its total assets, accounting for less than 0.2% of the pension fund.
"We're just waiting for the investigation to run its course, and aren't really commenting while the litigation is pending," she said.
But the fact that so many large institutions sued has already had an effect on the company, said David Muir, chief counsel for LACERA.
"One of the main concerns has been Columbia's ethics. Just last week Columbia hired Alan Yuspeh, who is known as an ethics guru, to develop a new code of ethics for the company," he said.
New audit teams will monitor Columbia's facilities to be certain the company isn't taking advantage of loopholes in Medicare rules, according to The Wall Street Journal.
Falling stock price
On March 14, five days before news broke that Columbia was under investigation by the FBI for Medicare fraud, LACERA's $23 billion pension fund owned 534,425 shares in the company, Mr. Muir said.
The stock was trading at $43.14 a share. As of Oct. 29, the pension fund owned 600,000 shares. On that date, the stock closed at $27.50, down 36% from its pre-investigation price. Thursday it closed at $30.44.
But it's that fall in the stock price that makes some investors see Columbia as a good investment.
Carol McMurtrie, managing partner at Loomis Sayles, whose clients hold 2.9 million shares of Columbia stock worth $90 million, believes the stock still has upside potential. "I see it coming back as a company and as a stock.
"There has been a great deal of publicity, but no outcome that we know of that's disastrous. More important, there haven't been any allegations that Columbia's hospitals aren't well-run or that they're not delivering good health care," Ms. McMurtrie said.
"Uncertainty clouds the future of the stock because there is no way to know what kind of penalties Columbia may have to pay eventually. On the other hand, it has been a significant cash generator, and unless there are findings of systemic fraud, the penalties should be manageable."
Meanwhile, Columbia is expected to shrink by one-third within 18 months as it restructures itself. As many as 108 of its hospitals may be spun off.
The end result will be a stronger regional health care company, said Ms. McMurtrie, who considers the company a classic out-of-favor value stock.
According to Ms. McMurtrie's projections, the company's earnings growth rate will be low over the next year -- around 0 to 5% -- because of attorneys' fees and fines, and that growth rate is reflected in the stock price. But after those have been settled, its earnings will grow between 10% and 12% a year. Before the investigations, the company's earnings had been growing between 15% and 17% annually, she said.
Jim Glickenhaus, general partner at Glickenhaus & Co., New York, has been making money off the stock's gyrations, buying when it fell to $26 and selling some of his position when it climbed back to $30 to take profit. As of June 30, his firm held 265,000 shares on behalf of clients, he said.
" I still think it's a good company and that it will do well over the long term unless other problems come out," he said.