A federal judge granted class-action status to shareholders suing Community Health Systems over the hospital chain's leaders failing to disclose an alleged fraud that hurt its stock price and downplaying the scandal's impact.
The U.S. District Court for Middle Tennessee certified the class in the $891 million securities fraud lawsuit to include anyone who bought stock in Franklin, Tenn.-based CHS between July 27, 2006, and April 8, 2011, excluding company executives, officers and directors and their immediate family members and legal representatives, among others.
In his July 26 decision, U.S. District Judge Eli Richardson appointed NYC Funds, a group of pension funds serving more than 750,000 active and retired NYC employees, as the class representative. NYC Funds, which has about $194 billion in assets managed by outside managers, acquired about 825,000 CHS shares during the class period. Richardson also appointed White Plains, N.Y., law firm Lowey Dannenberg as class counsel.
"The NYC Funds are pleased that the court has certified the class and that our years of work on behalf of CHS investors will advance this case," Barbara Hart, CEO of Lowey Dannenberg, wrote in an email.
The exact number of people who acquired CHS stock during the class period is unknown, but court records show at least 834 major institutional investors owned CHS common stock during the period.
CHS spokeswoman Tomi Galin wrote in an email that the company has appealed the judge's decision to certify the class. "Community Health Systems believes this consolidated matter is without merit and will vigorously defend this case," she said.
The investors originally wanted the class to include people who bought stock until Oct. 26, 2011, but Richardson determined those who bought stock after April 2011 had access to vital information that those who bought it before April 2011 did not have. That's the month CHS' alleged Medicare fraud came to light.
In a separate April 2011 anti-takeover complaint, Tenet Project Japan Corp. accused CHS of billing Medicare for expensive, unnecessary hospital stays. Tenet claimed CHS, which derived 30% of its revenue from Medicare between 2006 and 2011, did so using its Blue Book, a guide that directed physicians to classify patients with certain conditions as inpatient, even though standard medical care would classify them as outpatient.
A federal judge dismissed Tenet's lawsuit in 2012 on the grounds that only shareholders could recover damages.
In December 2017, a three-judge panel for the 6th U.S. Circuit Court of Appeals unanimously ruled that the shareholders plausibly alleged CHS' shares plummeted in value due to secret practices surrounding a Medicare fraud scandal.
The shareholders originally sued CHS; the company's CEO, Wayne Smith; and its former chief financial officer, Larry Cash. Plaintiffs said Smith and Cash were repeatedly warned that CHS' use of Blue Book and a policy of never granting observation status to Medicare patients created substantial risk of Medicare fraud enforcement action. After Tenet filed its lawsuit, CHS' stock price fell nearly 36%. The company's stock value dropped by $1.3 billion in a single day.
The plaintiffs also allege that Smith and Cash sold 980,000 in CHS shares in 2009 and 2010 knowing CHS would need to make changes that would reduce emergency department volume, reaping millions in unlawful profits in each year. Meanwhile, both executives downplayed the effects of the Blue Book lawsuit and assured analysts the transition away from the protocol wouldn't impact financial results. Cash later conceded that 75% of hospitals that converted saw inpatient admissions decline.