Pomerantz LLP

January/February 2013

Pomerantz Reaches Major Healthcare Settlement With Aetna

Pomerantz Monitor, January/February 2013 

Readers of the Monitor may recall our reports on our $250 million settlement with Health Net, followed by our $350 million settlement with United Healthcare. Both actions involved underpayments by health insurers of claims for out-of-network medical services based on miscalculations of “usual, customary and reasonable,” or “UCR,” rates. The $350 million settlement with United Healthcare represented the largest cash settlement of an ERISA healthcare class action ever. 

We continued to pursue UCR claims against other healthcare insurers, and are now pleased to report that we have reached a settlement with Aetna, Inc. This settlement, in In re Aetna UCR Litigation, pending in the District of New Jersey, will -- once it is approved by the Court -- result in the reimbursement, through three settlement funds Aetna will create, of up to $120 million to providers and plan members who were also subjected to out-of-network underpayments based on miscalculated UCR rates. 

This settlement arises out of an action that alleged that Aetna used databases licensed from Ingenix, a wholly-owned subsidiary of United Healthcare, to set UCR rates for out-of-network services. We alleged the Ingenix databases were inherently flawed, statistically unreliable, and unable to establish proper UCR rates. Aetna, United Healthcare, and a number of other healthcare insurers had agreed to stop using the Ingenix databases pursuant to settlements with the New York Attorney General in 2009 simultaneous with Pomerantz’s settlement with United Healthcare. The settlement involves Aetna’s use of other non-Ingenix-based reimbursement mechanisms as well. 

The Aetna settlement represents another successful milestone for Pomerantz’s Insurance Practice Group. We are proud of this latest success in forcing managed care companies to follow the law. This settlement provides an opportunity for providers to obtain reimbursement for monies taken by Aetna in the guise of usual, customary and reasonable payments. It brings to a successful close years of litigation on behalf of providers, for whom we have long fought against the largest health insurers in the country, including Aetna. 

Pomerantz’s Insurance Practice Group represents hospitals, provider practice groups and providers in litigation involving such issues as recoupments and offsets, internal medical necessity policies that are inconsistent with generally accepted standards, and misrepresentations of insurance coverage.

Government Goes After Insider Trading

Pomerantz Monitor, January/February 2013 

Whatever one thinks of the government’s record in punishing Wall Street for fomenting the financial crisis, the success rate against insider trading has been strong. Ever since Preet Bahara was appointed U.S. Attorney for the Southern District of New York in 2009, he has focused heavily on insider trading cases. In a 2010 speech to a room jam-packed with white collar criminal defense attorneys, he declared that “unfortunately from what I can see, from my vantage point as the United States Attorney here, illegal insider trading is rampant.” 

The law imposes liability for insider trading on anyone who improperly obtains material non-public information and trades based on such information, and also holds liable any “tippee,” the person with whom the “tipper” shares the information, as long as the tippee knows the information was obtained in breach of a duty to keep the information confidential or abstain from trading. Since the beginning of Bharara’s tenure in 2009, his office has secured 69 convictions or guilty pleas of insider trading without losing a single case. Many of those cases were developed jointly or in parallel with the SEC, which has commenced over 200 enforcement actions of its own since 2009. 

Critical to the prosecutors’ unblemished record of securing insider trading convictions has been the aggressive use of wiretaps and of informants. Private plaintiffs contemplating insider trading lawsuits can benefit from the treasure-trove of incriminating evidence collected by the government that private parties cannot get themselves through the normal “discovery” process. 

Of the 75 people recently charged by Bharara’s office, until now the biggest fish caught were Raj Rajaratnam, a billionaire investor who once ran Galleon Group, one of the world’s largest hedge funds, and Rajat Gupta, a former McKinsey chief and Goldman Sachs director who allegedly fed inside information to Rajaratnam. 

Wiretaps were key to the case against Mr. Rajaratnam. The case broke when prosecutors, while investigating a hedge fund owned by Rajaratnam’s brother Rengan, uncovered a slew of incriminating e-mails and instant messages between Raj and his brother, and wiretapped their conversations. In a call, Rengan told his brother about his efforts to extract confidential information from a friend who was a McKinsey consultant. Rengan referred to the consultant as “a little dirty” and touted that he “finally spilled his beans” by revealing non-public information about a corporate client. Other powerful evidence obtained from wiretapped calls was used to place Rajaratnam squarely in the forefront of the insider trading scheme: “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Rajaratnam said to one of his employees ahead of the bank’s earnings announcement. 

Rajaratnam was found guilty on all 14 counts levied against him, and was sentenced to 11 years in prison and fined $10 million. It was the longest-ever prison sentence for insider trading, a watershed moment in the government’s aggressive campaign to rout out the illegal exchange of confidential information on Wall Street. He is currently appealing his conviction to the Second Circuit. 

Gupta, for his part, was accused of passing a flurry of illegal tips to Rajaratnam, including advance news that Warren Buffet was going to invest $5 billion in Goldman Sachs. Gupta received a two-year prison sentence and was ordered to pay $5 million in fines. 

More recently, in what federal prosecutors describe as the most lucrative insider trading scheme, prosecutors and the SEC filed separate insider trading charges against Mathew Martoma, a portfolio manager at CR Intrinsic Investors. CR Intrinsic is an affiliate of SAC Capital Advisors, a $10 billion hedge fund founded by billionaire Steven Cohen, one of Wall Street’s most successful and prominent investors. 

Martoma is accused of illegally trading on confidential information ahead of a negative public announcement poised to disclose the results of a clinical trial for an Alzheimer’s drug jointly developed by Elan Corporation and Wyeth Ltd. Armed with confidential information, Martoma allegedly emailed Cohen requesting that they speak (“Is there a good time to catch up with you this morning? It’s important.”). Martoma and Cohen subsequently spoke by phone for approximately 20 minutes. The next day, Cohen and Martoma instructed SAC’s senior trader to quietly begin selling the Elan position. At day’s end, the trader e-mailed Martoma that he had sold 1.5 million shares of Elan, and that “obviously no one knows except you me and [Cohen].” A few days later, the senior trader e-mailed Cohen the results of the week’s activity: “We executed a sale of over 10.5 million ELN for [four internal Hedge Fund account names] at an avg price of 34.21. This was executed quietly and effectively over a 4 day period through algos and darkpools and booked into two firm accounts that have very limited viewing access. This process clearly stopped leakage of info from either in [or] outside the firm and in my viewpoint clearly saved us some slippage.” 

From one end of Wall Street to the other, people are wondering whether Martoma, facing the likelihood of serious jail time, will “flip” on Cohen, creating probably the most sensational insider trading case ever. There is no doubt that Martoma is facing intense pressure: reportedly, when confronted by an F.B.I. agent in his front yard, Martoma fainted. If Martoma is convicted of the charges, federal guidelines call for a stiff 15-19 year sentence. And, while no SEC charges have yet been brought against Cohen, the Commission recently issued a Wells notice to SAC Capital, indicating that the staff is probably going to recommend that the SEC take action against SAC.

Companies Fight to Keep Their Political Contributions Secret

Pomerantz Monitor, January/February 2013 

In the wake of the Supreme Court’s 2010 Citizens United decision, which allowed corporations and unions to make unlimited expenditures for political purposes, a new battle has erupted to force companies to disclose these expenditures. Writing for the majority in that case, Justice Anthony Kennedy noted that prompt disclosure of political expenditures would allow stockholders and citizens to hold corporations accountable. Shareholders, he said, could determine whether the corporation’s financing of campaigns “advances the corporation’s interest in making profits.” But in many, perhaps most cases, disclosure and accountability are the last things that corporate managers want. 

Although dozens of major companies have voluntarily disclosed their political spending, most do not. Currently, the most common shareholder proposals submitted to public companies are those requesting information on political spending. Most, however, have not fared well. Many companies probably fear that revelation of their political expenditures would be an invitation to backlash from shareholders and others at the opposite end of the political spectrum. 

Months ago the “Committee on Disclosure of Corporate Political Spending,” headed by Professors Lucian Bebchuck of Harvard Law School and Robert M. Jackson of Columbia Law School, filed a rulemaking petition asking the SEC to adopt a disclosure rule for corporate political spending. Over 300,000 responses to this petition flooded the Commission, all but 10 of which supported it. The SEC recently announced that by April it plans to issue a Notice of Proposed Rulemaking to require disclosures of political spending. 

The Committee said that one of the main reasons for its proposal is that a significant amount of corporate political spending currently occurs under investors’ radar screen, particularly when public companies spend shareholder money on politics through intermediaries, who are never required to disclose the source of their funds. Investors clearly want to receive information about such spending. 

While we await action by the Commission, one investor, the New York State Comptroller Thomas P. DiNapoli, has taken matters into his own hands. He controls the New York State Common Retirement Fund, which holds about $378 million in stock of Qualcomm, one of the country’s largest makers of computer chips for mobile devices. After Qualcomm allegedly rebuffed his multiple requests for access to information on political spending, DiNapoli sued Qualcomm late last year in Delaware Chancery Court, seeking to allow him to review documents showing the company’s political expenditures. Mr. DiNapoli is trying to determine whether Qualcomm made corporate contributions to tax-exempt groups and trade associations that are not required to disclose their donors. Those groups poured hundreds of millions of dollars into the 2012 election, including money from large corporations seeking to avoid negative publicity or customer outcries. Although DiNapoli is a prominent Democratic politician, he cannot be accused of filing the petition for political purposes: Irwin Jacobs, Qualcomm’s controlling shareholder, is a prominent contributor to Democratic candidates and causes. 

Delaware, where Qualcomm is incorporated, has a statute that allows shareholders to gain access to corporate records, so long as they have a “proper purpose” for doing so. As we have noted previously in the Monitor, the question of what a shareholder has to show to establish a “proper purpose” has generated heated debate over the past few years, with corporations making some headway in raising the bar for shareholder access. 

Typically, shareholders have tried to gain access to company books and records to determine whether wrongdoing has occurred, such as breach of fiduciary duties by directors or executives. It is a novel question whether discovery of political activities is a proper purpose. Even if it can be a proper purpose in some cases, such as if the expenditures create some risk for the corporation, the next question is whether the investor will have to show some reason to be concerned in a particular case. Otherwise, the courts may view his request as simply a “fishing expedition.” 

The Council of Institutional Investors, an association of pension funds, foundations and endowments, supports Comptroller Di Napoli’s suit. Amy Borrus, deputy director of CII, reportedly has stated that the suit offers hope to investors stonewalled in their search for basic information about corporate political spending after Citizens United. “Shareholders have tried proxy proposals, and they’ve tried asking, but some companies are unfortunately resistant to providing basic disclosures," Borrus said Thursday. The present suit “certainly opens up a new avenue,” she said. 

If DiNapoli succeeds in obtaining this information, the next question will be whether he can publicly disclose it, allowing other shareholders and interested parties to weigh in on the appropriateness of the company’s actions.