CLAIMS BY PENSION FUNDS AND HEALTH AND WELFARE FUNDS

Whatley Drake & Kallas represents pension funds and health and welfare funds in cases throughout the country. Those cases include: (1) securities fraud claims to recover decrease in stock value due to corporate fraud and misconduct; (2) health care fraud actions by welfare funds to recover excessive charges due to misconduct by hospitals and other health care entities; (3) anti-trust claims to recover excessive prescription drug charges and other costs due to corporate collusion and misconduct; and (4) cost-recovery claims where welfare funds have paid for health care treatment resulting from defective or dangerous drugs.

If you have any questions about any of these kinds of cases, please feel free to call one of us, or if you already have an attorney, please have your attorney do so.

Our firm has the attorneys, staff, experience and resources to handle complex cases. We represent funds in the cases discussed in this memo on a contingency basis, which means that the cases cost the funds no on-going attorneys' fees during the pendency of the case. Any fees will come from the recovery in the cases. If there is no recovery for the fund, then there is no attorneys' fee. We also pay expenses related to claims such as expert witness fees and court reporters' bills.

I. Securities Fraud Claims.

Whatley Drake & Kallas has represented pension funds in a number of securities fraud cases. For example, the firm represented the Denver Pension Fund and other investors in securities fraud claims against MedPartners. The action resulted in a recovery of approximately 65 million dollars for pension funds and other shareholders. The firm is currently representing the City of Birmingham Pension Fund in the Mattel Securities Fraud Action and in other securities fraud cases.

Pension funds and their trustees have an important role in fighting securities and in recovering loss of stock value. Attached is a copy of a Memorandum of Law submitted by the United States Secretary of Labor regarding the role of pension funds as plaintiffs in securities fraud actions and the important role that pension funds serve. The fiduciary obligations of trustees make it vital that actions be taken to recover losses due to securities fraud.

In 1995, Congress passed the Private Securities Litigation Reform Act in order to correct what many perceived as abuses that had evolved in the prosecution and settlement of securities class action litigation. The Reform Act did not outlaw securities fraud litigation or securities class actions. Indeed, the joint House and Senate Conferees issued a statement in support of passage saying:

In passing the Reform Act, Congress perceived that in many cases the plaintiffs in securities class actions were small investors with no great financial stake in the outcome of the lawsuit. As a result of perceived abuse, the Reform Act ended a practice where the first investor whose lawyer filed a complaint became the lead class plaintiff, virtually assuring his or her attorneys of a large legal fee if the case could be successfully resolved.

Instead, Congress mandated that the Court appoint the "most adequate plaintiff" which is the person or entity that comes forward in the litigation and has "the largest financial interest in the relief sought by the class" as lead plaintiff. The new law then goes on to state that the "most adequate plaintiff" will select and retain lead counsel, subject to court approval. The drafters of the Reform Act believed that institutional investors would be the most adequate plaintiffs and wanted them to ask for appointment as Lead Plaintiff, retain Lead Counsel and thereafter monitor the progress of the class litigation.

The concept that institutional investors should take a proactive role in class actions was first proposed in an article in The Yale Law Journal by Professors Elliott Weiss and John Beckerman titled "Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions." That article became the basis for the statutory lead plaintiff provisions. Professors Weiss and Beckerman conclused that institutional investors, including many pension funds, have the largest stake in securities class actions and therefore, the greatest incentive to act as lead plaintiffs and monitor class litigation. It almost goes without saying that the entities with the largest stake in the litigation have the greatest incentive to recover as much as possible for all defrauded investors.

On August 14, 1997, Carl McCall, New York's Comptroller announced that he had filed suit on behalf of the New York State and Local Retirement Systems against Columbia/HCA. In filing that case, Mr. McCall stated:

Mr. McCall's statement was an accurate description of the fiduciary responsibilities of trustees of pension funds.

In their article, Weiss and Beckerman analyzed the fiduciary responsibilities of those who manage trust funds.

Weiss and Beckerman cited several cases in which trustees had been held liable to beneficiaries for failing to enforce claims of a trust including a case which held that the duty to preserve and maintain trust assets included the obligation to pursue shareholder claims. They suggest that in keeping with the institutional fiduciary's obligation to preserve trust assets, that upon learning of the pendency of a class action or the possibility that a class action may be initiated, the Trustee has a DUTY to:

1. Investigate the claim;
2. Determine whether the claim is likely to result in a substantial recovery; and
3. Determine whether the benefit to the institution from serving as lead plaintiff exceeds the probable cost of such service.

If the answers to these questions are yes, the institution has an affirmative obligation to come forward and act as lead plaintiff. In the attached Memorandum, the United States Secretary of Labor has taken a consistent position.

Further, Professors Weiss and Beckerman recognized the role of firms like ours in insuring that securities fraud actions were aggressively prosecuted. Because the Model Rules of Professional Conduct permit attorneys to advance expenses, with reimbursement of expenses as well as recovery of fees contingent on the outcome, Weiss and Beckerman concluded that the only costs to be incurred by an institution acting as lead plaintiff would be those of its own in house counsel in reviewing legal papers, as well as the costs associated with producing documents and witnesses in various discovery proceedings. These costs are minimal in comparison to the benefits likely to be obtained.

How to Get Involved
Now that we've discussed why your pension fund has an opportunity and obligation to become involved in securities fraud litigation, we should address the mechanics of how you may do that. Here are some things to look for:

First, was there a sudden, unexpected large percentage drop in the price of the stock? One of the criticisms of class action lawyers that led to passage of the Reform Act was that they purportedly sued only based upon a drop in the price of a stock, without more. No one should bring a lawsuit only because a stock drops in value. But if there is a large unexpected drop in the price of a stock, there are other questions which should be asked in order to determine whether or not the possibility of fraud or other wrongdoing exists.

The other questions to ask include the following:

1. Did the price drop of a stock move with the market as a whole or did the market move up or remain level at the time of a sudden dramatic drop in price of the stock?
2. Was the price drop preceded by heavy selling by corporate insiders?
3. Did the company restate its earnings?
4. Had there been positive announcements causing the stock price to rise at the time insiders were selling?
5. Were those positive announcements untrue?
6. Is there reason to believe that company officials knew that the positive announcements were untrue at the time made?
7. Did the SEC or any other governmental agency announce an investigation of the company?

These are some of the things to consider to determine whether the possibility of fraud exists.

What should you do when you believe that fraud may have occurred with respect to the stock one of your funds owned?

What should you do when you read a press release indicating that a class action has been started regarding a company whose stock one of your funds owned?

Professors Weiss and Beckerman suggest that you take advantage of the Reform Act's 60 day period to conduct an investigation, contact a reputable class action attorney to discuss the matter, negotiate realistic contingent legal fees, retain counsel and move to be appointed lead plaintiff. This opportunity that did not exist prior to the enactment of the Reform Act is yours for the taking. If you don't take the opportunity that Congress allowed you and don't exercise the responsibility you have, the odds are overwhelming that securities class action litigation will remain as it was. Small investors will continue to be the lead plaintiffs in these cases, cases will be settled in much the same way as they have been in the past, and whatever the proponents of the Reform Act viewed as "abuses" will continue.

A good example of what will continue to happen if institutional investors don't become proactive can be seen by examining a Seventh Circuit Court of Appeals decision, Felzen v. Andreas, 1998 U.S. App. LEXIS 800, regarding a derivative suit that had been filed against directors and officers of Archer Daniels Midland in which defendants were charged with exposing ADM to criminal penalties and treble damage liability for anti-trust violations.

The lawsuit resulted in a settlement under which ADM's Directors and Officers' insurance carrier agreed to pay $8 million of which $4 million was set aside for attorneys fees. The California State Pension System and the State of Florida complained that this was a sweetheart deal for plaintiffs' attorneys and objected to the settlement. But they had never become parties to the lawsuit. The Seventh Circuit held that although they were shareholders, the objectors had no standing to appeal because they had never intervened as parties to the lawsuit.

If they had become parties the appellate court would have considered their objections. But Judge Easterbrook, writing the opinion said:

You have the opportunity to monitor and control litigation that you believe is meritorious and you may have the opportunity to voice your opinion if you believe litigation has been started that is not meritorious, but you cannot voice your opinions or have a say in what is going on unless you take an active role and join the litigation as a party.

The Reform Act provides you an opportunity to exercise oversight with respect to litigation concerning investments in your portfolio. The Reform Act provides you with the ability to protect yourselves against loss of your investments caused by fraud or other corporate wrongdoing.

II. Health Care Fraud.

Studies have shown that health care fraud costs health and welfare plans and others billions of dollars each year. The fraudulent schemes take on many forms, from system billing for services that were not provided, to sophisticated up-coding of services that were provided to beneficiaries. For many of the same reasons trustees of Pension Funds should investigate and pursue securities fraud claims, trustees of health and welfare funds should consider health care fraud actions. Our firm is currently representing Funds in several cases and is investigating others.

We have represented health and welfare plans in claims against laboratory testing firms that added and billed for unnecessary and duplicative tests to groups of tests commonly done on beneficiaries so far, companies have agreed to pay up to $12.5 million for such unnecessary tests and SmithKline has recently agreed to pay additional amounts.

We are currently prosecuting fraud claims against the Columbia/HCA Hospital System for various fraudulent practices including unnecessary lab tests, upcoding of services, to increase charges, and billing for home health services that were not provided. An example of one claim is that we have uncovered evidence and made claims that the hospital system charged less severe lung problems as pneumonia in the billing CPT Codes. The result was to increase bills significantly.

We often see in the press instances of Medicare and Medicaid fraud. People do not always realize that the same fraud schemes affect health and welfare funds in much the same way.

By recovering damages from those who engage in health care fraud, we help preserve and protect your health care dollars so that your beneficiaries can receive greater services and your employers and beneficiaries can limit their premium costs. We all want to pay health care providers reasonable fees for services legitimately provided. However, by investigating and prosecuting claims of fraud, we can prevent the rip-off schemes that are driving up our health care costs.

III. Prescription Drug Price Fixing.

In recent years, prescription drugs have presented the most rapidly increasing cost component of health care. We have found that many of the price increases have resulted from price fixing, market collusion, and other misconduct by prescription drug companies and distributors. We are handling and investigating a number of claims involving such misconduct.

A case in point involves Mylan Labs, where Whatley Drake & Kallas is serving as national lead counsel for health and welfare funds. Mylan cornered the market on the raw material for two major generic drugs, lorazepam and chlorazepate. It did so by entering into an agreement with an Italian company where Mylan would receive practically all of the necessary ingredients for these drugs. The two companies agreed to share the proceeds from the planned price increase. Mylan then increased the prices for one of these drugs by more than 3000 percent and the other by nearly 2000 percent. We teamed up with other private lawyers around the country, the Federal Trade Commission, and Attorneys General from a number of states and jointly prosecuted the cases. After we conducted discovery and proved Mylan's misconduct, it agreed to pay more than $100 million to settle the claims against it.

Unfortunately, the Mylan Labs story is not an isolated occurrence. A number of prescription drug companies are taking unfair action to keep lower cost generic drugs off the market and to discourage their use. We were actively involved in the litigation about synthroid, which has been settled for more than $100 million dollars. We are currently involved in cases involving a number of drugs including, Tamoxifen, Ciprofloxacub, Taxol, and Coumadin.

We are investigating similar misconduct related to other drugs.

If you believe you have paid excessive amounts for any drug, we are interested in talking with you to determine how we can assist in recovering some of those amounts and in deterring price fixing and related misconduct.

IV. Cost Recovery Claims for Defective Drugs.

Health and Welfare Funds almost always have subrogation rights that may be exercised when a defective drug causing the Fund to spend significant amounts for medical care. One case that has received a great deal of publicity is the diet drug phen-fen. If that drug caused any of your beneficiaries heart or other problems and you expended significant sums on health care as a result, you may be entitled to recover some or all of those funds. Another example involves cold and diet drugs with PPA, which has caused certain strokes.