Summertime means fun in the sun, and likely time spent poolside with family and friends.
As drowning remains the number one unintentional cause of death for children in the U.S. ages 1 to 4, and the second leading cause among children ages 5 to 14, it is important to make pool safety a top priority this summer.
Cohen Milstein’s Complex Tort Litigation team has prepared a quick checklist on what to look for when evaluating the safety of public swimming pools:
- Are there adequate layers of security? According to major safety organizations, including the American Red Cross, the U.S. Consumer Product Safety Commission, and the American Academy of Pediatrics, public swimming pools should have adequate layers of protection. At a minimum, all swimming pools should have a child safety fence with self-locking doors and gates.
- Is the pool really closed? American National Standard for Public Swimming Pools (ANSPS) advocates that when a public pool is closed for use, a secondary lock system be put in place to prevent access.
- Are utility or service gates secure? The International Swimming Pool and Spa Code recommends that gates not intended for pedestrian use, such as utility or service gates, remain locked when not in use.
- What happens during bad weather? Centers for Disease Control and Prevention advocates that swimming pool activity should be prohibited during inclement weather.
- Are there safety devices? ANSPS requires that public pools always have safety hooks and flotation devices mounted in easy to see places and that are readily available for use and that all pools with a slope transition have safety line anchors and a safety line in place.
- Who can perform CPR? ANSPS requires that a CPR-certified individual be on premises whenever a public pool is in use.
Cohen Milstein’s Complex Tort Litigation practice litigates Unsafe & Defective Products, and Wrongful Death & Catastrophic Injury claims related to swimming pool safety. If you’re interested in learning more about the firm’s Complex Tort Litigation practice, please email us, or call us at 561.515.1400.
We co-counsel nationwide.
The authors address criticism of shareholder lawsuits presented in two recent reports by the U.S. Chamber’s Institute for Legal Reform (“ILR”). Released in October 2018 and February 2019, the ILR reports emphatically urge Congress, the Securities and Exchange Commission, and federal judges to act to curb a “contagion” of “abusive” securities class action litigation.
Reiser and Toll focus on securities lawsuits that have been targeted by the ILR as nuisance cases that warrant legislative intervention. These “event-driven” lawsuits seek to compensate shareholders, who allege that a company has recklessly concealed or misrepresented business or operational risks, leading to a catastrophic event that, among other things, drives down the company’s stock price. Examples include the BP Deepwater Horizon disaster, where the company for years had failed to implement safety systems despite repeated public claims to the contrary. Reiser and Toll find that the ILR relies on flawed logic and circular reasoning to argue that the legislature must intervene to limit these cases rather than allowing the courts to make such determinations. Indeed, many of these suits provide an important remedy for investors and have resulted in large settlements that could not have been achieved otherwise.
The purported mission of the U.S. Chamber of Commerce’s Institute for Legal Reform (“ILR”) is to bring about “civil justice reform” by, among other things, lobbying Congress to limit investors’ access to the courthouse. For decades, the ILR has allied itself with powerful publicly traded corporations under the pretext of protecting their defrauded investors. The ILR’s latest campaign, like so many of its previous endeavors, relies on the illogical premise that investors and the economy are harmed by securities fraud litigation rather than by corporate fraud and malfeasance. In two reports authored by Mayer Brown Partner Andrew Pincus, A Rising Threat the New Class Action Racket that Harms Investors and the Economy (October 2018) and Containing the Contagion, Proposals to Reform the Broken Securities Class Action System (February 2019), the ILR asserts that the 1995 Private Securities Litigation Reform Act (“PSLRA”) has failed to curtail meritless securities lawsuits and that Congress therefore must place additional constraints on investors’ ability to hold companies accountable for fraud.
Citing the increase in the number of securities-related lawsuits over the past several years, the ILR argues that courts should not be permitted to separate the meritorious cases from the weak and that certain types of cases must be scaled back through legislation. Both ILR reports specifically target federal securities class actions that: (i) challenge M&A transactions; and (ii) arise from corporate disasters. This article focuses only on the category of lawsuits the ILR calls “event-driven litigation.”
The ILR insists that cases involving corporate disasters “extort large settlements” from corporations for meritless claims. That bold assertion conveniently ignores the fact that many cases of this type have settled only after hard-fought litigation in which the corporate defendants were vigorously represented by lawyers from the country’s most elite law firms, making the ILR’s efforts to victimize the companies even more of a distortion. Contrary to the ILR’s claims, the existence of “event-driven litigation” simply reflects the reality that when companies behave recklessly, there often are two groups of victims: individuals who suffer personal or property injuries, and shareholders who sustain investment losses.
The ILR’s assertion that the increase in event-driven litigation causes damage to investors and companies, rather than reflect it, is as fundamentally unsound as the idea that the number of firefighters dispatched to a fire causes greater fire damage. To the contrary, event-driven cases serve as a deterrent to companies who might otherwise conceal or misrepresent their operations because they recognize that investors will hold them accountable for doing so.
Editor’s Note: As reported in the Fall 2018 issue of Shareholder Advocate, Cohen Milstein Partner Laura Posner and Associate Eric Berelovich submitted an amicus curiae (“friend of the court”) brief in support of the Securities and Exchange Commission in Lorenzo v. SEC.
In a victory for plain language, the Supreme Court ruled in March that an investment banker who intended to defraud clients by relaying an email with contents he knew were misleading was liable for fraud even though he didn’t technically “make” the fraudulent statement at issue.
In Lorenzo v. Securities and Exchange Commission, the Court held that the SEC correctly found Francis V. Lorenzo in violation of its Rule 10b-5(a) and (c), for his “dissemination of false or misleading statements with intent to defraud” prospective investors. The ruling upheld a decision by the D.C. Court of Appeals.
As the Supreme Court noted in its March 27 opinion, SEC Rule 10b-5’s three subsections make it unlawful: (a) “to employ any device, scheme, or artifice to defraud,” (b) “to make any untrue statement of a material fact,” or (c) “to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit … in connection with the purchase or sale of any security.”
Writing for a 6-to-2 majority, Justice Stephen Breyer held that Lorenzo, then director of investment banking at broker-dealer Charles Vista, had violated subsections (a) and (c) of Rule 10b-5 by sending prospective investors emails that vastly understated the assets of a company whose debt Charles Vista was trying to sell— “emails he understood to contain material untruths.” Rule 10b-5 was promulgated by the SEC to enforce Section 10(b) of the Securities Exchange Act (Exchange Act). The Court also held that Lorenzo was liable under Section 17(a)(1) of the Securities Act of 1933, which mirrors Rule 10b-5(a)’s language against “any device, scheme, or artifice to defraud,” this time in connection with sales and offerings.
In reaching its conclusion, the majority rejected Lorenzo’s argument that he couldn’t be held responsible under Rule 10b-5(a) and (c) because the email containing the fraudulent information was composed largely by his boss. Lorenzo, who sent the email to clients after adding his title and an offer to answer questions, did not deny knowing that the message’s content was false.
Lorenzo’s argument relied on a 2011 Supreme Court decision, Janus Capital Group, Inc. v. First Derivative Traders, which restricted primary liability under subsection Rule 10b-5(b) to “makers”—those who had “ultimate authority” over the statement’s content “and whether and how to communicate it.” The Supreme Court took the case “to resolve disagreement about whether someone who is not a ‘maker’ of a misstatement under Janus can nevertheless be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerns a misstatement,” Justice Breyer wrote.
“After examining the relevant language, precedent, and purpose,” including dictionary definitions of the words in the statute, the Court concluded that “dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b–5 … even if the disseminator did not ‘make’ the statements and consequently falls outside subsection (b) of the Rule.”
The majority also rejected an argument made by Justice Clarence Thomas, who was joined in his dissent by Justice Neil Gorsuch, that finding Lorenzo liable would nullify the restrictions in Janus, rendering it “a dead letter” and potentially putting at risk secretaries who relayed their boss’s fraudulent emails. On the contrary, the Court said, Janus would still apply in cases “where an individual neither makes nor disseminates false information—provided, of course,
that the individual is not involved in some other form of fraud.” And while the Court recognized that Rule 10b-5’s “expansive language” could create some “problems of scope in borderline cases,” it rejected the idea that someone “tangentially involved in dissemination—say a mailroom clerk” was anything like Lorenzo, who “sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company.”
Allowing Lorenzo to avoid responsibility for what appeared to be “a paradigmatic example of securities fraud” would violate both Congress’s and the SEC’s intentions, Breyer wrote, not to mention common meanings of the terms used in the rules themselves. “It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud,” he wrote.
Rule 10b-5 was promulgated by the SEC to enforce the Exchange Act, a sweeping law enacted after the 1929 Stock Market Crash, that is relied on by the SEC and private litigants to bring most securities fraud cases. In his conclusion, Justice Breyer wrote that in enacting the law, “Congress intended to root out all manner of fraud in the securities industry. And it gave to the Commission the tools to accomplish that job.” Under Lorenzo, those tools will continue to include any and all of the subsections of SEC Rule 10b-5.
At the February 2019 meeting of the National Association of Public Pension Attorneys (NAPPA), I had the pleasure of moderating a panel on a topic of perennial interest to many clients: “Governance and Fiduciary Implications of Delegation and the Proper Role of the Board in These Matters.” The Fiduciary and Plan Governance Section panel discussed the design and implementation of delegations to pension fund staff and the proper role of the board. Panelists Lisa Marie Hammond from the California Public Employees’ Retirement System, Ben Brandes from the Wyoming Retirement System, and Julie Becker from Aon Hewitt shared a broad range of pension system perspectives, making it clear that this is not a “one size fits all” exercise. We discussed delegation in the context of all aspects of pension system administration—benefit matters, third-party contracting, investments, securities lawsuits and other litigation, and proxy voting. We gave particular consideration to staff’s accountability to report to the board, including what level of reporting or communication would satisfy the board’s fiduciary duty.
A survey of NAPPA membership was undertaken before the February meeting to guide the discussion. Public funds of all sizes responded, and we reviewed the results to look for trends—whether delegation increased with fund size, for example. (Interestingly, fund size correlated positively with delegation in some areas, such as investment manager selection, but not across the board.)
Because fiduciaries are judged by the decision-making process they undertake, the survey looked at how delegation was typically documented. A clear majority of respondents (62%) indicated that staff delegations were set forth in “policies” of the system. The next-largest number said they relied on “law, rules and regs,” followed by those who said their funds memorialized delegations in “Board minutes.”
From a fiduciary perspective, the question of whether to delegate is tied to trustees’ application of the duty of prudence. As panelists noted, trustees simply cannot be experts on all pension-related subjects, particularly when it comes to sophisticated investments. Thus, delegation is not an abdication of responsibility; on the contrary, boards may even have a duty to delegate depending on the facts and circumstances:
Restatement (Third) of Trusts: A trustee has a duty to personally perform the responsibilities of trustee except as a prudent person might delegate those responsibilities to others. In deciding whether, to whom and in what manner to delegate fiduciary authority in the administration of a trust, and thereafter in supervising agents, the trustee is under a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances.
Proper delegation is also related to the application of the duty of care: duty to properly select the delegate, duty to monitor, duty to ensure that the delegate has adequate information and resources, and duty to impose standards of care and loyalty upon the delegate.
From a governance perspective, the panel said delegating may help the board make more effective use of its time, noting that boards should focus on policy, setting direction for their systems, and oversight—not on day-to-day administration..
Rick Fleming is the Securities and Exchange Commission’s first Investor Advocate. Established in 2014 under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s Office of the Investor Advocate has four core functions: to provide a voice for investors, to assist retail investors, to study investor behavior, and to support the SEC’s Investor Advisory Committee. While Mr. Fleming reports to the SEC Chair, the Investor Advocate has some independence, submitting reports directly to Congress without review from the SEC Commissioners or staff.Prior to becoming Investor Advocate in February 2014, Mr. Fleming spent 15 years as a state securities regulator, including over a decade as general counsel for the Office of the Kansas Securities Commissioner. He also worked as deputy general counsel for the North American Securities Administrators Association (NASAA), representing the state securities regulators organization before Congress and federal agencies. Mr. Fleming agreed to answer questions of interest to Shareholder Advocate readers after speaking at the National Conference on Public Employee Retirement Systems’ (NCPERS) Legislative Conference earlier this year.1
The questions were posed by Director of Institutional Client Relations Richard Lorant and New York based Partner Laura Posner. Like Mr. Fleming, Ms. Posner was a state securities regulator, serving as Bureau Chief for the New Jersey Bureau of Securities before joining Cohen Milstein. During her three-year tenure as the state’s top regulator, she also was an active member of NASAA, where she served as Chair of Enforcement.
Shareholder Advocate: As the first Investor Advocate, how have you worked to establish an office that can effectively influence the Commission on behalf of investors? How do you maintain your independence?
Rick Fleming: Congress has given the Office of the Investor Advocate unique tools to ensure our independence and enhance our influence. For example, we are authorized to make recommendations to the Commission, and the Commission must respond to our recommendations within 90 days. We also report directly to Congress and describe the Commission’s responses to our recommendations. However, I also report to the Chairman of the Commission, so I am in a role that can involve public disagreement with my boss. I have been fortunate to have worked for two Chairmen who have respected my role and do not take my criticisms of Commission actions personally. On the other hand, I live by some simple rules that help me maintain a constructive role at the Commission—for example, I do not criticize decisions publicly unless I have already made my position clear privately.
SA: How did your experiences as a state securities regulator in Kansas and as deputy general counsel for the NASAA influence your approach to this job? What are the biggest differences working at the federal vs. the state level? Any suggestions for making the relationships more symbiotic?
RF: My experience as a state regulator provided an ideal background for this position. In the federal government, you tend to become highly specialized in a very narrow area, but in state government you deal with a very wide range of issues. For example, I helped attorneys for small companies understand the ways to raise capital, and I dealt with numerous technical issues related to broker-dealer and investment adviser operations. I also “advocated” for investors nearly every day. I litigated enforcement matters, including criminal cases, and have argued cases in front of juries and the Kansas appellate courts. In addition, I have drafted regulations and testified before lawmakers numerous times. But, the biggest difference between state and federal government is that state regulators tend to maintain much closer contact with Main Street investors. This means that state regulators are in a good position to judge how federal rulemakings may impact real people, and I am hopeful that the SEC will take better advantage of state regulators’ insights.
SA: In December, as part of its rules-making process, the Commission issued a request for comment on “the nature, content and timing of earnings releases and quarterly reports made by reporting companies.” [Ed. Note: the comment period ended March 21, 2019.] You have said publicly that you would favor maintaining or increasing the frequency or reporting, a position that aligns you with investor advocacy groups like the Council of Institutional Investors but puts you at odds with comments made by the president last year. Why is reducing the frequency of financial reporting a bad idea? What can we do to discourage the “short-termism” practiced by some publicly traded companies?
RF: The justification for reducing the frequency of reporting has been to give management the space to run a company without having to fixate on quarterly performance. Management does not like how strongly the market can react to bad quarterly news, and I get that. But less frequent financial reporting will not solve the problem—it will just create even greater volatility when six-month or full-year reports come out. It also creates greater pressure for favored investors to gain access to corporate leaders, which would contribute to greater informational asymmetries in the marketplace. A better solution for quarterly volatility may be to discourage companies from issuing quarterly guidance. This is an idea that I think is worth exploring.
SA: At NCPERS earlier this year, you mentioned your general support for Regulation Best Interest, which would heighten the suitability standard under which brokers currently operate, but said it remains to be seen how close the final rule will be to a fiduciary standard—or, we might add, one that actually requires brokers to act in the “best interests” of their clients. How do you think the currently proposed rule could be modified to make it more robust?
RF: My view about Reg BI is that it should be judged by whether it actually reduces bad conduct. If, in the end, it merely requires brokers to disclose that they are doing bad things to customers, but they can disclose it in a way that doesn’t cause those customers to push back or walk away, then the disclosure isn’t good enough. So, for me, the key is not whether we label the new standard of conduct “fiduciary” or “best interest,” but whether the rule has enough teeth to actually make brokers stop selling products that pad their pockets when superior products are available to the customer at less cost. This means that the part of the proposed rule that requires brokers to “mitigate” financial conflicts of interest will be of critical importance.
SA: You are on the record against allowing companies with permanent dual-class shares and mandatory arbitration clauses to issue publicly traded stock. How important are these threats to corporate accountability to company shareholders and what other threats would you identify as important?
RF: One of my biggest concerns is the extent to which the for-profit exchanges have allowed their listing standards to deteriorate, particularly with respect to corporate governance. Things like dual-class shares (or non-voting shares) tip the balance of power too far from the shareholders to management, which I believe will ultimately damage the markets. The Council of Institutional Investors has sponsored some strong research showing that founder control may enhance value in the first few years after a company goes public, but founder control begins to detract from value in future years. I believe the exchanges should be doing more to address this concern and should strongly consider sunsetting dual-class shares if they are allowed at all. As far as other threats to shareholders, I am currently concerned with the Commission’s focus on proxy advisors. The business community does not like the influence wielded by proxy advisors, so they have called for increased regulation of those firms. They couch their arguments in terms of investor protection, but I have yet to hear from investors who want to “fix” proxy advisors by giving corporations a greater say in the recommendations they produce.
SA: As the SEC’s first Investor Advocate, you have had the opportunity to shape the role to some degree. Has your team changed its approach since 2014 as you have worked under two different administrations to fulfill the office’s mission?
RF: The change in administrations has not altered our approach. The biggest challenge has been the fiscal environment in the past two years, which resulted in a hiring freeze that hindered our ability to build out the office as quickly as I would have preferred. In particular, we are working to build up our research capacities. Although rulemakings at the Commission are required to go out for “public comment,” it is not usually the public we are hearing from, so I want to utilize tools like surveys and focus groups to get a much better sense of how Main Street investors behave and how changes to the rules will impact them.
1The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. Mr. Fleming’s answers reflect his views and do not necessarily reflect those of the Commission, the Commissioners or other members of the staff.
Shareholders suing Tivity Health over the company’s failure to adequately disclose that one of its largest customers was becoming a direct competitor cleared an important hurdle in March when a federal judge denied defendants’ motion to dismiss the class action lawsuit.
Cohen Milstein represents Oklahoma Firefighters’ Pension & Retirement System as sole lead plaintiff in the lawsuit, which accuses Tivity and three individual defendants of violating the Securities Exchange Act of 1934 by misleading investors about the terms of the contract renewal with United Healthcare (UHC), the company’s second largest customer, and the actual competitive threat posed by UHC. Tivity’s share price fell by more than a third on news that UHC had launched a senior fitness program that would rival SeniorSneakers, the flagship program which generates 82% of Tivity’s revenues.
Working in partnership with fitness centers, Tivity provides UHC and other health plan customers with fitness and health programs that the health plans offer to their members. Because of UHC’s importance to Tivity, analysts and investors were closely watching Tivity and UHC’s contract renewal negotiations in early 2017. As defendants reported it, the news looked good. On April 27, 2017, Tivity said it had renewed the contract for three years. While defendants refused to provide specifics when pressed by analysts, they said they were “pleased” with the contract’s “favorable terms.”
On November 6, 2017, however, investors learned that defendants had failed to disclose that UHC had been offering a rival fitness program to SilverSneakers in two states since late 2016, and planned to roll it out in nine more states starting in January 2018. The stunning disclosure sent Tivity stock tumbling by more than 34%, causing significant losses to Oklahoma Firefighters and other investors who bought stock during the March 6, 2017 to November 6, 2017 class period.
In denying defendants’ motion to dismiss, Judge Waverly D. Crenshaw, Jr. of the U.S. District Court for Northern Tennessee rejected all their arguments, including that the alleged actionable statements were immaterial and that certain statements were protected because they were forward-looking and therefore exempt from liability under “safe harbor” statutory provisions.
In his March 18 ruling, Judge Crenshaw found that Oklahoma Firefighters sufficiently pleaded that Tivity’s statements about the terms of the UHC contract were material to investors because (1) Tivity had said UHC was one its most important health plan customers and (2) Tivity had warned that a loss or major change to its contract with UHC—or UHC’s launch of a competitive program—would hurt its operations. Further underscoring the material nature of the events, Judge Crenshaw noted, defendants themselves reacted when the contract terms changed to allow UHC to compete directly with SilverSneakers and UHC launched its own program. “Tivity was hardly nonplussed,” he wrote. “It formed a committee to address the problem.”
Judge Crenshaw also held that defendants could not avail themselves of the statutory safe harbor for forward-looking statements about Tivity’s ability to strengthen market share, long-term opportunities, and improved performance because the statements “were provided in the context of cautionary statements that were boilerplate, not meaningful, and inconsistent with the historical facts” that UHC had started to compete with Tivity and Tivity was scrambling to try and “contain the UHC threat.” In addition to the company, the lawsuit names as defendants Chief Executive Officer Donato Tramuto, former interim Chief Financial Officer Glenn Hargreaves, and Chief Financial Officer Adam Holland. The case has moved into the discovery phase with Oklahoma Firefighters scheduled to move for class certification on July 1.
The case is Eric Weiner, et al. v. Tivity Health, Inc., et al., Case No. 3:17-cv01469, U.S. District Court, Middle District of Tennessee, Nashville Division.
The Connecticut Supreme Court limited the scope of a federal law that shields gun manufacturers and dealers, reviving a lawsuit filed by Sandy Hook families. The Brady and Cohen Milstein attorneys examine the ruling and explain how it may have a domino effect nationwide.
By Julie Goldsmith Reiser and Molly J. Bowen of Cohen Milstein, and Jonatha Lowy of The Brady Center to Prevent Gun Violence
On Dec. 14, 2012, 20 first-grade children and six staff were murdered in a mass shooting at Sandy Hook Elementary School. A Bushmaster semiautomatic assault rifle enabled the killer to fire 154 shots in 264 seconds.
Nine families sued the gun’s manufacturers, distributors, and retailers. Building on theories developed decades ago in a Brady lawsuit for victims of another assault weapon massacre, the Sandy Hook families argued that advertising the gun’s militaristic, hyper-aggressive attributes amounted to negligent marketing that was a cause of the shooting.
If the victims sued members of any other industry, they would have a right to discover facts that could support their claims. But victims of gun industry wrongdoing must first overcome the Protection of Lawful Commerce in Arms Act (PLCAA), a federal law that gives gun manufacturers and dealers unique exemptions from civil justice liability. PLCAA has provided even greater protections than legislators intended because courts have interpreted it overly broadly.
On March 14, the Connecticut Supreme Court properly reined in PLCAA’s protections, reversing the PLCAA-based dismissal of the Sandy Hook families’ case. Providing the most thorough analysis of PLCAA since its 2005 enactment, the court held that the victims’ wrongful advertising claim overcame PLCAA and may proceed into discovery.
This ruling should influence courts nationwide to construe PLCAA as it was intended—limiting cases where the gun manufacturer or dealer did nothing wrong, while allowing cases to proceed where the gun industry played a role in the harm or death.
By: Julie Goldsmith Reiser, Partner, Cohen Milstein Sellers & Toll and Elisa Mendoza, Vice President, ISS Securities Class Action Services
Investors have filed many lawsuits in recent years alleging that Wall Street banks and related entities have unlawfully colluded to rig financial and commodities markets to benefit themselves and harm investors. Filed primarily under federal antitrust laws, these cases continue to generate substantial settlements, over $5.8 billion to date, largely because of the banks’ brazen behavior across such a wide array of financial markets. In addition to providing monetary recoveries to investors, these lawsuits also seek to curtail the banks from overcharging investors in the largest and most important financial markets.
The complete report can be viewed here.
If you believe you may have a whistleblower claim or if you’d like to learn more about our Whistleblower and False Claims Act practice, please contact us at whistleblower@cohenmilstein.com or 202.408.4600 for a confidential and free-of-charge consultation.
Over the last two decades, federal and state governments have dramatically increased their payments to private health care companies that manage Medicare Advantage and Medicaid managed care plans, now paying them around $400 billion a year. For the more than 20 million Americans enrolled in one of these plans, these companies function as the control center for payment decisions, receiving payments from the government and making payments to providers.
Although these companies take in tremendous amount of taxpayer money, and have immense power regarding how to distribute these funds, a cloud of secrecy shields from public view their financial operations and profitability. The unique environment in which Medicare Advantage and Medicaid Managed Care plans operate – enormous amounts of money to be spent, a thicket of government reimbursement guidelines, little transparency, typically no party with equal bargaining power, and what amounts to an honor system – can create a recipe for cooking up fraud.
. . .
These aren’t merely theoretical problems. A recent government audit found that Medicare overpaid Medicare Advantage plans by approximately $7 billion in 2016 alone. And this audit did not examine possible underpayments to providers, nor did it examine the approximately $200 billion the federal government and states jointly pay through Medicaid.
Because the internal workings of these companies are largely kept secret from the government, enforcement actions by the Department of Justice are often prompted by lawsuits filed under the False Claims Act. This law, enacted in 1863, was initially aimed at shady contractors who sold the Union Army faulty rifles and ammunition, spoiled food, and other unusable goods. Having been amended and its scope expanded through the years, it today prohibits companies from defrauding the government in a broad array of contexts. The False Claims Act allows whistleblowers to initiate lawsuits on the government’s behalf. If the government recovers money from a lawsuit, the whistleblower earns a financial reward.
The assault on investors’ rights to sue in court continues, with yet another attempt to compel mandatory arbitration of investor claims through a change in company bylaws.
The latest onslaught is being championed by Hal Scott, a Harvard Law professor and frequent critic of securities lawsuits. In November, Scott submitted a shareholder proposal on behalf of a trust he represents to Johnson & Johnson, Inc., a New Jersey corporation, seeking to amend the company’s corporate charter to require arbitration of all federal securities claims. Scott’s draconian proposal further seeks to prohibit class and joined claims, as well as eliminate appeals or challenges of awards, rulings and decisions.
The stakes for shareholders are high. Arbitration is neither cost effective nor practicable for investors who have lost money due to corporate misconduct, and lacks important safeguards guaranteed by the court system—the rights to a jury trial, discovery and a public hearing, to name just three.