On February 7, 2019, the Honorable Catherine D. Perry of the U.S. District Court for the Eastern District of Missouri appointed Cohen Milstein Co-Lead Counsel in this consolidated stockholder derivative action and designated Plaintiffs Carpenters Pension Fund of Illinois, Iron Workers Local 11 Pension Fund, both Cohen Milstein’s clients, as well as Peoria Police Pension Fund Lead Plaintiffs.

Case Background

This is a stockholder derivative action brought on behalf of the nominal defendant, Centene, against certain of its directors and officers for violation of the federal securities laws, breaches of fiduciary duties, insider trading and other misconduct. These wrongs resulted in millions of dollars in damages to Centene, in part, from the overpayment for Health Net in a $6.8 billion merger, completed and closed on March 24, 2016, as well as sales of stock by insiders, serious harm to its reputation, goodwill and standing in the business community, which, in effect, have exposed the company to further potential liability for violations of the federal securities laws, California tax laws, and government regulations.

Specifically, plaintiffs allege that despite eight months of due diligence, Centene and its Board failed to fully disclose ongoing problems facing Health Net’s business to the SEC, California and Arizona state insurance regulators, and stockholders, starting as early as September 21, 2015 in its Form S-4 Joint Proxy Statement/Prospectus – material disclosures that would have led to a reduction in the value of Health Net’s business and ultimately the price to Centene’s stockholders.  Such problems not disclosed include:

  • Substantial liabilities stemming from poorly designed and unprofitable insurance products sold in California, as well as unprofitable business in Arizona, which ultimately forced Centene to increase its post-merger reserves by $390 million, resulting in a loss in market capitalization of over $1 billion;
  • Health Net’s refusal to pay claims from substance abuse treatment centers in California and Arizona, the recording of $160 million in additional reserves, and it becoming the subject of numerous lawsuits initiated by treatment centers seeking over $200 million for unpaid claims, and investigations by the California Department of Insurance and the California Department of Managed Health Care;
  • Health Net’s exposure to nearly $1 billion in past unpaid tax liabilities to the State of California, which are the subject of a California taxpayer litigation – litigation that was filed against Health Net before the vote on the merger and not disclosed by Centene for over 8 months, despite the fact that the case was considered by a state legislator as “monumental” to California taxpayers.

After the merger, the Board continued to conceal the massive problems at Health Net, in violation of its fiduciary duties. Centene’s CEO, Michael F. Neidorff, and other senior management, who regularly reported to the Board, subsequently admitted they had prior knowledge of the serious problems acquired from Health Net in the merger.

Centene’s concealment of Health Net’s substantial liabilities and business problems has since led to a litany of multi-million-dollar and multi-billion-dollar legal actions against the Company, exposing it to further massive risks and potential liabilities.

By July 2016, Centene was forced to disclose that Health Net had incurred $390 million in liabilities which existed as of the March 24, 2016 Merger date, but which Centene and Health Net had previously concealed. The increased liabilities were greater than Health Net’s entire pre-tax annual earnings as reflected in recent years, making it clear that Health Net’s earnings and valuations, as stated in the Joint Proxy, were vastly overstated. Centene was forced to record these increased liabilities in part because its acquired California and Arizona commercial insurance products were unprofitable.  The lack of profitability forced the Company to seek “price increases and benefit design changes, including reductions in reimbursement for out of network services as the Company paid a higher percentage of its insurance claims.” Profitability in Arizona was so poor that Health Net exited certain markets entirely. 

During this period of time, in breach of their fiduciary duties, the Selling Defendants disposed of over $28 million in Centene common stock while in possession of propriety inside information.  Defendant Neidorff sold nearly $20 million of his personal holdings and, in 2015 and 2016 he received total compensation of approximately $20.75 million and $21.97 million, respectively.

In short, the defendants caused Centene to buy Health Net at a highly inflated price, resulting in millions of dollars in damages to Centene, sales of stock by insiders, serious harm to its reputation, goodwill, and standing in the business community. 

Case name: Carpenters Pension Fund of Illinois, et al. v. Michael F. Niedorff, et al and Centene, et al., Case No.: 4:18-CV-113-CDP, U.S. District Court, Eastern District of Missouri