CHS reaches $53M deal in class-action stock drop lawsuit

Franklin, Tenn.-based Community Health Systems has agreed to pay $53 million to resolve a class-action lawsuit filed by pension funds and shareholders, according to Law360.

The class-action lawsuit dates back to 2011 and alleges CHS made misleading statements that resulted in artificially inflated prices for the company's stock. The fraud allegations first surfaced nearly nine years ago in a complaint filed by Dallas-based Tenet Healthcare, which sued CHS to avoid a hostile takeover bid. Immediately after Tenet sued, CHS issued a press release stating Tenet's allegations were meritless. CHS' stock fell nearly 36 percent after Tenet sued.

CHS released weaker-than-expected earnings in October 2011. On an earnings call, Larry Cash, who then served as CHS' CFO, said inpatient admissions had declined at 75 percent of its hospitals after physicians phased out the Blue Book. Blue Book was a guide CHS created that allegedly prompted physicians to provide inpatient services for many conditions other hospitals would treat as outpatient cases. On that same call, CHS Chairman and CEO Wayne Smith said, "there's no question we've had some adverse impact related to issues … around the Tenet lawsuit," according to court documents. The day after the earnings call, CHS' stock price dropped another 11 percent.

Shareholders subsequently sued CHS, claiming they lost a combined $891 million in the little more than six months between when Tenet sued and the day of the earnings call and the executive admissions.

Although CHS continued to deny Tenet's allegations, the company entered into a $98.15 million settlement with the Department of Justice in 2014 to resolve allegations that it knowingly billed government payers for inpatient services that should have been billed as outpatient or observation services.

The U.S. District Court for Middle Tennessee dismissed the consolidated lawsuit filed by shareholders in 2016. The court said the shareholders failed to show Tenet's lawsuit caused CHS' stock to drop and triggered their losses.

An appeals panel revived the shareholder suit in December 2017, finding that CHS executives' public admissions combined with the fraud allegations were enough to keep the shareholders' lawsuit alive. The court remanded the case to the district court.

In 2019, the U.S. District Court for Middle Tennessee certified the class-action lawsuit. In a September filing with the Securities and Exchange Commission, CHS provided an update on the consolidated lawsuit. The company said the lawsuit is meritless, and it will "vigorously defend this case."

According to court documents filed Jan. 7, the parties have reached an agreement on the principal terms of the settlement. The parties are preparing a stipulation of the $53 million settlement, and the lead plaintiff is preparing a motion for preliminary approval. Both documents are expected to be filed by Jan. 21, according to the notice of settlement.

More articles on legal and regulatory issues:

Wisconsin health system will pay $10M to settle whistleblower case
Dignity Health's $100M ERISA class-action settlement was largest of 2019
2 San Diego physicians pay $949K to settle billing fraud allegations


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