stuart glasser, m.d., et al. v. the miix ... - class...
TRANSCRIPT
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEW JERSE Y
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STUART GLASSER, M.D.,Master File No. 03-CV-586 (AET )
Plaintiff,
V.
THE MIIX GROUP, INC ., THE MEDICALSOCIETY of NEW JERSEY, VINCENT A .MARESSA, DANIEL GOLDBERG, KENNETHKOREYVA, PARTICIA A . COSTANTE,THOMAS REDMAN, PAUL J . HIRSCH,ANGELO S . AGRO, HARRY M . CARNES,ROBERT S. MAURER, A. RICHARDMISKOFF, CHARLES J . MOLONEY, EILEENMARIE MOYNIHAN, GABRILE F. SCIALLIS,MARTIN L. SORGER and BESSIE M .SULLIVAN,
Defendants .
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This Document Relates To: ALL ACTIONS------------------------------------------------------
[CORRECTED] CONSOLIDATEDAMENDED CLASS ACTIONCOMPLAINTAND JURY DEMAND
F1 .P 0 8 2003
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AT 8:30HT
tDO-: WILL R
CLERK. . . ,r,
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Lead Plaintiff, Stuart Glasser, M .D., ("Lead Plaintiff'), on behalf of himself and al l
others similarly situated, brings this action to recover damages caused by defendants' violation s
of federal securities laws . Lead Plaintiff alleges upon personal knowledge as to matters know n
to himself and his own acts, and upon the investigation of his counsel as to all other matters, the
following allegations :
OVERVIEW OF THE AC TION
1 . This is a class action on behalf of all purchasers of the common stock of The MIIX
Group, Inc . ("MIIX") between July 30, 1999 and September 12, 2002, inclusive (the "Class
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Period"), to recover damages caused by defendants' violations of the Securities Act of 1933 (the
"Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") .
2. At all relevant times, Mf1X was a medical professional liability insurance carrier
based in New Jersey. The Company was started by the Medical Society of New Jersey
("MSNJ") as a non-profit insurance exchange insuring only physicians in the state of New
Jersey. Beginning in the 1990's, however, the Company expanded to other states and into other
insurance products, including products for institutional clients such as hospitals and medical
groups (the "expansion") . On July 30, 1999, the defendants used MIIX's expansion as a
platform to take the Company public in an initial public offering ("IPO"), which marks the
beginning of the Class Period . Unbeknownst to the investing public, however, before and during
the Class Period, the defendants grew MJIK by setting predatory prices that were inadequate for
the risks M1fX was underwriting and by under reserving for existing and future losses .
3 . As a result of the defendant's actions, less than three years after the IPO, on Februar y
20, 2002, MUX shocked the market by announcing that it would, inter alia, significantly increase
its Net Loss Reserve, report a substantial loss for 2001 and close its offices in expansion states .
This news shattered the public's confidence in MIX, prompting an immediate, massive sell-off
of MIIX stock . MEX's share price dropped over 63% in one day with unusually high trading
volume - over 1 .5 million shares traded - to close at $4.90 per share on February 21, 2002. As a
result of the Company's misrepresentations, MIIX investors have sustained tremendous losses .
4. The defendants' scheme to defraud the public did not end with their abrupt
announcement that Ml3X's expansion was a failure . As detailed below, the defendants led the
public to believe that MIIX would continue to sell insurance in New Jersey . However, the plan
in fact was to sell MIIX's profitable New Jersey insurance underwriting business to a privatel y
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held company, MIIX Advantage, which they controlled . In May 2002, the defendants finally
disclosed that they were "running off' MIlX's insurance businesses in expansion states and
spinning off MII 's profitable New Jersey insurance business to MIIX Advantage . The
defendants, however, failed to disclose that they controlled MUX Advantage and materially and
falsely represented that the sale of MIJX's insurance underwriting business to NM Advantage
was negotiated at "arms length" and "fair . "
As now revealed, at all times during the Class Period, defendants issued false and
misleading financial statements and press releases concerning MIIX's financial results, insurance
business and their intentions for M]IX after February 2002 . The defendants engaged in a
campaign to depict MUX as a growing, profitable and vital insurance institution with, (1)
disciplined procedures for underwriting and pricing insurance policies that allowed MII to set
"appropriate" premiums for the risks that it insured ; (2) disciplined procedures for estimating
losses both for outstanding and incurred but not yet reported ("IBNR") claims ; and (3) a reserve
for losses that was "adequate" and which represented "management's best estimate" of loss and
loss adjustment expenses ("LAE") (hereinafter collectively referred to as the "Net Loss
Reserve") . Further, the Company's financial statements during the Class Period, all of which the
defendants either implicitly and/or expressly represented as being prepared in conformity with
generally accepted accounting principles ("GAAP") were materially false and misleading . In
particular, MIIX's Net Loss Reserve was grossly inadequate, which resulted in MIIX's net
income, earnings, earnings per share and shareholder equity being grossly overstated . As a result
of the defendants' actions, MII .X's stock price was artificially inflated, thereby causing Lea d
Plaintiff and other Class members substantial damage .
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PARTIES
1. Lead Plaintiff
6. Lead Plaintiff Stuart Glasser, M .D. ("Glasser" or the "Lead Plaintiff') is a resident o f
Greensburg, Pennsylvania . As demonstrated in the certification previously filed with the Court ,
Dr. Glasser purchased shares of MJTX Group common stock during the Class Period , and was
damaged as a result of defendants' violations of the securities laws .
2. Institutional Defendants
7 . Defendant Ml Group ("MIIX"), a Delaware corporation, maintains its corporate
headquarters and principal executive offices at 2 Princess Road, Lawrenceville, NJ 08648. MIIX
stock currently trades on the Over-the-Counter ("OTC") Bulletin Board under the ticker symbo l
"NM." During the Class Period and before it was delisted, MUX's stock traded on the Ne w
York Stock Exchange ("NYSE") under the ticker symbol "MHU." At all relevant times, M11(
touted itself as the leading provider of medical professional liability insurance in New Jersey an d
one of the top providers in the United States .
8. Defendant Medical Society of New Jersey (hereinafter "Medical Society" or
"MSNJ") is a New Jersey non-profit corporation whose principal executive offices are als o
located at 2 Princess Road , Lawrenceville, NJ 08648 . As of March 22, 2002, the Medical
Society owned 821,365 shares of M1TX common stock. The Medical Society is an organization
whose members are physicians purportedly dedicated to issues concerning the New Jerse y
medical community, including promoting malpractice insurance availability and securin g
insurance premium cost reductions for New Jersey physicians . MSNJ leases approximatel y
47,000 square feet of office space to MBX at over $750,000 per year . MEX has also made
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0 •significant grants to MSNJ which also benefited the MIIX director defendants, identified below ,
who were also officers and/or trustees of MSNJ .
3. Individual Defendants
9. Defendant Vincent Maressa, Esq . was the Chairman of the Board of Directors of
M]I during the Class Period and was Executive Director and General Counsel to MSNJ .
During the Class Period, Maressa signed : (1) MllX 's Form S-1 Registration Statement (th e
"Registration Statement") registering 3,450,000 shares of MIIX common stock for MIX 's initia l
public offering ("IPO") that took place on July 30, 1999 (the "Registration Statement") ; (2)
MIT X's annual reports filed on Form 10-K with the SEC' for fiscal years 2000, 2001 and 2002 ;
and (3) MDX's quarterly report filed on Form 10-Q for fiscal quarters that ended March 31, 2001
and June 30, 2001 . Maressa further made various false and misleading public statements about
MDIX as set forth below .
10. Defendant Daniel Goldberg was the President, Chief Executive Officer ("CEO") an d
a directo r of MIIX at the time of the Company's IPO . Goldberg was also an executive of MSNJ .
Goldberg left M1Tx after the ]PQ in November 1999 because he was arrested and charged wit h
growing marihuana in his Bucks County, Pennsylvania home .2 During the Class Period ,
Unless otherwise indicated, all registration statements, annual reports onForm 10-K and quarterly reports on Form ] 0-Q were filed with the SEC .
2 According to the September 23, 2002 issue of Medical Economics :
Goldberg and his live-in companion were arrested forgrowing a sizable quantity of marijuana in a sophisticatedhyrdroponic garden in the attic of Goldberg's home .Goldberg insisted the pot was for personal use only, andeventually pleaded guilty to a charge of possession . Hewas sentenced to one year probation and forfeited half theequity in his $350,000 home .
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Goldberg signed : (1) MIIX's Registration Statement ; (2) MIIX's proxy statement; and (3)
MIIX's Form 10-Q for the fiscal quarter that ended September 30, 1999 . Goldberg further mad e
various false and misleading public statements about MIIX as set forth below .
11 . Defendant Kenneth Ioreyva was hired by defendant Goldberg . Koreyva was an
Executive Vice President and the Chief Financial Officer ("CFO") of MIIX at the time of th e
IPO . Koreyva assumed the duties of President and CEO on November 8, 1999 when Goldber g
took a leave of absence, as discussed in 1 10 above, and Koreyva was named President and CE O
on or about December 22, 1999 . In 2000, I oreyva was elected to the Board of Directors .
Koreyva subsequently left MIiX on April 18, 2001 . During the Class Period Koreyva signed : (1)
MIIX's Registration Statement ; (2) MIIX's annual reports on Form 10-K for 2000 ; and (3)
MIiX's quarterly reports on Form 10-Q for the fiscal quarters that ended September 30, 1999,
March 31, 2000, June 30, 2000 and September 30, 2000. Koreyva further made various fals e
and misleading public statements as set forth below .
12. Defendant Patricia A . Costante joined MI [IX in 1996 as Senior Vice President. She
was subsequently promoted to Chief Operating Officer ("COO") and, in November 2001 ,
defendants Maressa and Hirsch and other MIfx directors promoted Costante to CEO . In May
2002, she was elected to be the Chairman of the Board of Directors . In addition to being o n
MIIX's Board of Directors and the CEO of the Company, defendant Costante was also on th e
Board of Directors and the CEO of a privately held company, M]1X Advantage, which was
created by MII executives and officers, including defendants Maressa, Hirsch and Costante, to
buy M1IX's insurance business and name . During the Class period, Costante signed : (1) MIIX's
annual report on Form 10-K for 2001 ; (2) MIIX's quarterly reports on Form 10-Q for fisca l
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quarters that ended September 30, 2001, December 31, 2001, March 31, 2002 and June 30, 2002 .
Further, during the class period, Costante also made various false statements as set forth below .
13 . Defendant Thomas Redman became MIllX's acting CFO in or about November 1999
and became a Senior Vice President and CFO in or about late 1999 . On December 21, 2001 ,
MIIX announced that Redman was resigning but would stay on until March 31, 2002, and
Redman ultimately stayed until April 2002 . Redman subsequently returned to M]IX as the CFO
just a couple of months later on June 5, 2002, where he remained until July 2002. During the
Class Period Redman signed : (1) MIIX's annual report on Form 10-K for 2000, 2001, and 2002 ,
(2) MJIX's quarterly reports on Form 10-Q for fiscal quarters that ended September 30, 1999 ,
March 31, 2000, June 30 , 2000, September 30, 2000, March 31, 2001 , June 30 , 2001 and
September 30, 2001 ; and (3) a Form. S-K filed with the SEC dated December 19, 2000 .
14 . Defendant Paul J . Hirsch, M.D., was a director of MID( at the time of the IPO an d
continued to be a director throughout the Class Period . Hirsch also served as Vice Chairman of
the Board of Directors and on the Audit Committee during the Class Period. During the Class
Period, Hirsch signed : (1) MIIX's Registration Statement and (2) MIJX's annual report on Form
l o-K for 2000, 2001 and 2002. Defendant Hirsch further engaged in unusually high inside r
trading in July 2000 just prior to when M1TX announced that it was increasing its Net Los s
Reserve by $70 .1 million .
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4 . Additional Director Defendants
15. Defendant Angelo S . Agro, M,D., was a Director of M.UX at the time of the IPO an d
during the Class Period . Agro was also the President and a trustee of MSNJ . .A,gro signed
MHX's Registration Statement .
16. Defendant Harry M. Carnes, M .D., was a Director of MUX at the time of the IPO an d
during the Class Period . Cames signed MIIX's Registration Statement .
17 . Defendant Robert S . Maurer, D .O., was a Director of MIIX at the time of the IPO and
during the Class Period . Maurer signed MIIX's Registration Statement.
18. Defendant A. Richard Miskoff, D.O., was a Director of MEEK at the time of the IP O
and during the Class Period. Miskoff signed MILx 's Registration Statement .
19. Defendant Charles J . Moloney, M .D., was a Director of MIIX at the time of the IP O
and during the Class Period . Moloney signed MlIX's Registration Statement .
20. Defendant Eileen Marie Moynihan, M .D ., was a Director of MIDI at the time of the
IPO and during the Class Period . Moynihan was also the Treasurer and a trustee of MSNJ .
Moynihan signed MITX' s Registration Statement .
21 . Defendant Gabriel F . Sciallis, M.D., was a Director of M71X at the time of the IP O
and during the Class Period. Sciallis signed MIIX's Registration Statement.
22, Defendant Martin L. Sorger, M.D., was a Director of MIIX at the time of the IPO an d
during the Class Period . Sorger signed MFIX 's Registration Statement .
23 . Defendant Bessic M. Sullivan, M.D., was a Director of MTJX at the time of the IPO
and during the Class Period . Sullivan was also the Secretary and a trustee of MSNJ . Sullivan
signed MIIX's Registration Statement .
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1] •24, The Individual Defendants and the additional director defendants had the power an d
authority to cause , and did cause, Ml]X to engage in the wrongful conduct complained of herein
by virtue of their respective positions as CEO, CFO, COO, Chairman of the Board of Directors ,
Vice Chairman of the Board of Directors, directors and Audit Committee members . By reason
of their positions at MIIX, each of the Individual Defendants and the additional directo r
defendants named in this Complaint also had access to internal Company documents, reports and
other inforrrmation, including adverse nonpublic information about its business, financia l
condition and future prospects, and attended management and/or board of directors meetings . As
a result, they were also responsible for the truthfulness and accuracy of MI 's public reports ,
filings, statements and press releases .
25. It is appropriate to treat the Individuals Defendants and the additional director
defendants as a group for pleading purposes and to presume that the false and misleading
information contained in the Company's public filings, press releases and other statements, a s
alleged herein, are the collective actions of this narrowly defined group of defendants . By virtue
of their high-level positions at M1JX, each of the Individual Defendants and the additiona l
director defendants directly participated in the management of the Company and was privy to
confidential, proprietary information about the Company's business, operations and accounting
practices. They were involved or participated in drafting, producing, reviewing, approving
and/or disseminating the false and misleading statements alleged in this Complaint and were thu s
aware that the statements were being made , or approved and ratified, in violation of federal
securities laws.
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JURISDICT19N AND VENUE
26 . The claims asserted herein arise under and pursuant to Sections 11, 12 and 15 of th e
Securities Act of 1933 (the "Securities Act")(15 U .S.C. § 77k, 77n and 77o) and Sections1D(b) ,
20(a) and 20A of the Exchange Act (15 U .S .C. § 78j(b), 78t(a), and 78t-1) and Rule 1 Ob-5
promulgated thereunder by the SEC (17 C .F.R. §240.1 Ob-5) .
27 . This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S .G .
§ 1331 and Section 22 of the Securities Act, 15 U .S.C. §77v, and Section 27 of the Exchange Act ,
15 U. .G. §78aa .
28 . Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28
U.S .C. § 139(b). MIIX's corporate headquarters and principal place of business are located i n
the District, and the acts charged herein, including the preparation and dissemination of
materially false and misleading information, occurred in substantial part in this District .
29 . In connection with the acts alleged herein, defendants, directly or indirectly, used th e
means and instrumentalities of interstate commerce, including, but not limited to, the mails ,
interstate telephone communications, and the facilities of the national securities markets .
CLASS ACTION ALLEGATION S
30 . Lead Plaintiff brings this class action pursuant to Federal Rule of Civil Procedure
23(a) and (b)(3) on behalf of a class of all persons who purchased or otherwise acquired MIX' s
publicly traded common stock in the initial offering or on the open market (the "Class") betwee n
July 30, 1999 and September 12, 2002 (the "Class Period"), inclusive, and who were damage d
by the defendants' actions described herein . Excluded from the class are defendants and M11X' s
other directors, employees and/or business affiliates , subsidiaries , as well as the legal
representatives, heirs, successors and assigns of any excluded party.
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1 31. The Class members are so numerous that joinder of all members is impracticable .
Lead Plaintiff believes that there are at a minimum, thousands of Class members who purchase d
MIIX stock during the Class Period .
32. Lead Plaintiffs claims are typical of the claims of other Class members . All Class
members are similarly affected by defendants' wrongful conduct that was in violation of federal
law and complained of herein .
33 . Lead Plaintiff will fairly and adequately protect the interests of Class members and
has retained counsel competent and experienced in class action and securities litigation. Lead
Plaintiff has no interests antagonistic to or in conflict with those of the Class .
34 . Common questions of law or fact exist as to all Class members and predominate
over any questions solely affecting individual members of the Class . Among the questions of
law and fact common to the Class are :
a. Whether the federal securities laws were violated by the defendants' acts a s
alleged herein ;
h. Whether documents , press releases, and other statements disseminated to Class
members and the investing public during the Class Period misrepresented and/or omitted
material facts concerning MlIC's business ;
c . Whether the Individual Defendants issued or caused MIIX to issue false and
misleading statements ;
d. Whether the defendants acted knowingly or recklessly in omitting and/o r
misrepresenting material facts ;
e. Whether the market prices for MFIX stock during the Class Period were
artificially inflated due to the defendants' improper conduct ; and
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f. Whether Class members have sustained damages and , if so, the proper measure
of their damages .
35, A class action is superior to all other available methods for the fair and efficien t
adjudication of this controversy since , joinder of all members of the Class is impracticable .
Furthermore, because the damages suffered by individual Class members may be relativel y
small, the expense and burden of individual litigation make it impossible for members of the
Class to separately redress the wrongs done to them. Lead Plaintiff knows of no difficulty in the
management of this action as a class action .
SUBSTANT AI,LI ATIONS
ll . Overview
36. On February 20, 2002, the defendants shocked the market by announcing that Mf
was delaying the release of its 2001 financial results and that MDX allegedly experienced
"significant increases" in "loss development" which required the Company to increase its Net
Loss reserve, thereby resulting in losses for the quarter . Defendant Costante stated "1t is quite
clear- . . . that the information developed from the reserve studies [done in 2000] will require
further aggressive actions to build a new operating plan around reduced resources ."
Significantly, the defendants also announced that MR X was ceasing to write business in several
states, including Texas, Ohio, Massachusetts, Illinois, and Virginia - reversing the very
expansion that MIIX touted and used to get investors to invest in the Company .
37. Following the Company's February 20 announcement , M('s common stock price
plummeted from $13 .33 per share to as low as $4 .50 per share , ultimately closing at $4 .90 on
February 21, 2002-a 6 3% decline .
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38. As now revealed, the Company 's press releases , statements and SEC filings during
the Class Period were materially false and misleading because they misrepresented , inter alia ,
that MIIX had : (1) disciplined procedures for underwriting and pricing insurance policies tha t
allowed MIS to set "appropriate" premiums for risks insured when MIIX was in fact setting
predatory prices at the expense of long term profitability in order to gain market share ; (2)
disciplined procedures for setting and in fact had a Net Loss Reserve that was "adequate" an d
which represented "management's best estimate" of losses and LAE when defendants in fac t
knew that the procedures were ignored or violated in order to suppress reserves below adequat e
levels ; and (3) more net income , earnings , earnings per share and shareholder equity than it
actually had as a result of the Net Loss Reserve being inadequate . The defendants' actions ,
misrepresentations and omissions artificially inflated MIIX' s stock price, violated GAAP and the
securities laws .
2. The JPO - MIJX's Registration Statement and Prospectus
a. The Representations
39. Mlle's final Registration Statement and Prospectus were filed with the SEC on or
about July 30, 1999, which was the effective date of the IPO and the beginning of the Class
Period. The Registration Statement was signed by defendants Maressa, Goldberg, Koreyva ,
Hirsch, Agro, Carnes, Maurer, Miskoff, Moloney, Moynihan, Sciallis, Sorger and Sullivan . The
Medical Society of New Jersey controlled MIIX (in its privately owned form) prior to an d
leading up to the IPO through various of its trustees who were on Mlix's Board of Directors ,
including defendants Goldberg, Maressa, Hirsch, Agro, Carnes, Maurer, lvliskoff, Moloney,
Moynihan, Sciallis, Sorger and Sullivan .
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• •40. The Registration Statement and Prospectus falsely represented that MI X's business
strategy was to "profitably" "expand[] and diversify[] its product lines and geographic markets to
meet the insurance needs of the changing health care market" by "increasing the number of states
in which the Company writes policies[ .]" The Registration Statement and Prospectus further
focused on MHX's geographic expansion and emphasized MIIX's business strategy, which
allegedly included "maintaining underwriting discipline[ .]" Both the Registration Statement and
Prospectus represented :
Business Strategy
The Company has adopted a strategy which it believes will allow itto compete effectively and create long-term growth . . . TheCompany' s strategy is to :
- maintain underwriting discipline to seek to assure thatprofitability, rather than premium volume, is emphasized ;
Maintain Underwriting Discipline . The Company 's experiencewith, commitment to and focus on medical professional liabilityinsurance for over 20 years has allowed it to develop strongknowledge of the market and to build an extensive data base ofmedical malpractice claims experience . The Company takesadvantage of this specialized expertise in medical professionalliability insurance to set premiums that it believes are appropriatefor exposures being insured. As the Company expands itsbusiness, it will maintain underwriting discipline and emphasizeprofitability over premium growth. (Emphasis added) .
41 . The defendants further intentionally and/or recklessly misled investors by laying ou t
in detail the way M17( purportedly set premiums on its policies when, as set forth in detai l
below, 11 54-62, the defendants knew that MIIX did not follow its own pricing guidelines and ,
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s •instead, set predatory prices designed to increase premium volume regardless of the long term
profitability of the risks being underwritten . The Registration Statement falsely stated :
PRICING
The Company establishes, through its own actuarial staff andindependent consulting actuaries, rates and rating classificationsfor its physician and medical group insureds based on loss andLAE experience it has developed over the past 20 years and onother relevant information . The Company has various ratingclassifications based on practice location, medical specialty andother factors . The Company applies various discounts, includingdiscounts for part-time practice, physicians just entering medicalpractice, large medical groups and claims experience . TheCompany has established its premium and ratings classification forhospitals and managed care organizations using actuariallysignificant data filed publicly by other insurers .
42 . Defendants further intentionally and/or recklessly misled investors by suggesting that
MIIX did not engage in predatory pricing practice . Specifically, in the Registration Statement
and Prospectus, the defendants stated .
Many of the Company's current and potential competitors mayhave greater financial resources than the Company and may seek toacquire market share by decreasing pricing for their productsbelow prevailing market rates, thereby reducing profitability .Several insurance companies that have greater financial resourcesthan the Company have started to write medical malpractice inNew Jersey. There can be no assurance that the Company will beable to compete effectively against these potential and existingcompetitors .
43, The Company's Annual Reports throughout the Class Period contained fals e
representations similar to those in paragraphs 41 and 42 regarding M1 X's pricing of it s
insurance policies .
44. The Registration Statement and Prospectus further contained false and misleadin g
statements regarding MIX's Net Loss Reserve , net income , earnings , earnings per share and
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• tshareholder equity for the years 1996, 1997, 1998 and the first three months of 1999. For
example, the defendants falsely stated in the prospectus that'.
a. "The Company' s total revenue and net income were $200 .4 million and $28 . 9
million respectively , for 1997 and were $55 . 2 million and $3 . 3 million ,
respectively, for the three months ended March 31, 1998 . As of March 31, 1998 ,
the Company had total assets of $1 .4 billion and total equity of $304 .7 million .
Since 1993, the Company's equity has grown at a compound annual rate of
9 .9% ."
h . The Company's Net Loss Reserve was set based on "estimates of amounts
needed to pay reported and unreported claims and related LAE." (Emphasi s
added) .
c. The Net Loss Reserve "estimates are based on assumptions related to the ultimate
cost of settling such claims based on facts and interpretation of circumstances
then known, predictions of future events, estimates of future trends in claims
frequency and severity, judicial theories of liability, legislative activity, and othe r
factors ." (Emphasis added) .
d, The "Company's Claim Department is responsible for claim s investigation
land] establishment of appropriate case reserves for loss andALAE[]"
(Emphasis added) .
e. Ml 's claims history represents "losses and LAE paid by the Company in prior
periods, and case reserves for anticipated losses and ALAE developed by the
Company's Claims Department as claims are reported and investigated."
(Emphasis added).
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f. The "Company believes that its reserves for losses and LAE are adequate[ .] "
(Emphasis added).
g. The Company uses a disciplined approach to setting and adjustingfinancial statement loss and LAE reserves that begins with theclaims adjudication process . Claims examiners establish casereserves by a process that includes extensive development and useof statistical information that allows for comparison of individualclaim characteristics against historical patterns and emergingtrends . This process also provides critical information for use inpricing of products and establishing the [incurred but not reported]component of the financial statement reserves .
Initially, the Company establishes its best estimate of loss andLAE reserves using pricing assumptions. The reserves areevaluated every quarter and annually and are adjusted thereafter ascircumstances warrant . These periodic evaluations include avariety of loss development techniques that incorporate variousdata accumulated in the claims settlement process including paidand incurred loss data, accident year development statistics, andloss ratio analyses . Important in these analyses are considerationsof the amounts for which claims have settled in comparison tothe case reserves held at settlement. Case reserves are eliminatedupon settlement of related claims. Actual settlement amountsabove or below case reserves are then regularly evaluated todetermine whether estimated ultimate losses by accident year,including [incurred but not reported] reserves, should be adjusted .
The aggregate reserves reported in the financial statementsrepresent management's best estimate of the remaining costs ofsettling all incurred claims. The Company increased prior yeargross reserves by $0.2 million and $3 .8 million during 1997 and1998, respectively and decreased prior year gross reserves by $0 .8million during the three months ended March 31, 1999 . Noadjustment to prior year aggregate reserves was made in 1996 orduring the three months ended M. . arch 31, 1998 . (Emphasis added) .
45. The Notes to the Combined Financial Statements in the Registration Statemen t
further misrepresented that :
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• sa. "Estimatesfor unpaid losses and loss adjustment expenses are based on th e
Company's evaluation of reported claims" and that while "variability is inherent
in such estimates, management believes that the reserves for unpaid losses and
loss adjustment expenses are adequate ."
b. "certain individual cases were settled during the years ended 1998 and 1997 a t
values more or less than specific case reserve amounts established in prior years ,
there were no overall indications thatprior established aggregate reserves ,
including the sign ificant portion of reserves for incurred but not reported
claims, should be adjusted beyond the amounts recorded." (Emphasis added) .
46. MIIX 's annual reports to shareholders contained similar false and misleading
statements to those in paragraph 44 throughout the Class Period .
47 . The Registration Statement further falsely stated that "[alll selected financial data i s
presented in accordance with GAAP[.l„
48. MIIX' s annual and quarterly reports and filings contained similar false and
misleading statement to those in paragraph 47 throughout the Class Period .
h. The Representations Were False and Misleadi n
49. The defendants knew and/or recklessly disregarded that the above statements wer e
false and misleading when made because the defendants knew and /or recklessly disregarded that :
(i) MTCX lacked a "strategy" to "compete effectively and create long-term growth [ ;]" (ii)
contrary to its representation , MlIX did not have "expertise" that allowed MIIX to "set premiums
it believes are appropriate for exposures being insured" in expansion states (iii) MIXX in fact
did not. "maintain underwriting discipline ," set "appropriate" prices for risks insured or plan to
do so when expanding after the TPO in order to "assure profitability, rather than premiu m
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volurne[,]" (iv) MII did not maintain a Net Loss Reserve that was "adequate" or tha t
represented management 's "best estimates" of losses and LAE ; (v) as a result of the Net Los s
Reserve being inadequate , MIIX 's net income, earnings, earnings per share and shareholde r
equity were overstated; and (vi) "selected financial data [was not] presented in accordance wit h
GAAF[ .]" In fact, as set forth below, defendants caused MEEK to set premiums at predatory
prices , which were inadequate to cover exposures being insured , and set M1.XX's Net Loss
Reserve at inadequate levels in order to generate premium volume and expand MIIK's business .
i . MIIX lacked a "strategy" to "compete effectively and create long-term growth[ .]"
50. Contrary to the defendants representations, MIIX lacked a "strategy" to "compete
effectively" or to "ensure long-term growth[ .]" The defendants aggressively expanded MIIX' s
business without a business plan. They failed to research the medical malpractice insuranc e
markets in expansion states and when marketing managers asked the defendants to identify th e
volume, type of business and risks MIX wanted them to insure, the defendants failed to provid e
any such guidance . (Source: Witness 33 and Witness 44) . Rather, the defendants charged
MII 's marketing department with selling as much insurance as possible, regardless o f
Witness 3 was the Marketing Manager for M17X's Mid-America region
from 1997 to 2001 . Witness 3 marketed professional insurance for othercompanies for approximately 20 years before joining MDX in 1997 . At Mil ,Witness 3 worked with brokers and agents pitching MIIX 's insurance products invarious states, including Georgia, Kentucky, Indiana, Florida and Ohio .
4 Witness 4 is the former Assistant Vice President and General Manager ofMIIX's Southeast region, which covered the states of Georgia, Alabama,Tennessee, Florida, South Carolina and Virginia . Witness 4 was recruited byMIIX in February 1998 to open the Atlanta office and left MIIX just prior to the1PO in June 1999. Witness 4's job was to sell MIIX's products in the SoutheastRegion .
19
•profitability . (Source: Witness 3) . This expansion without a business strategy was contrary t o
their representation and was doomed to fail .
51 . Further, the defendants, knowing that the marketing department lacked a busines s
plan, and was focused on premium volume rather than pricing policies to cover risks, put the
marketing department in charge of M]IX's branch offices in expansion states . By doing so, the
defendants further emphasized premium volume and not long term profitability, which was
contrary to what they represented in the Registration Statement .
52. Further, as discussed in more detail in 153 below, ML 's lack of business strategy
included hiring and retaining insurance professionals who lacked the skills or knowledge t o
allow MT to compete effectively or to create "long term growth . "
ii . The Company did not have "expertise" that allowed it to "setpremiums it believes are appropriate for exposures being insured[.]"
53. The defendants knew at the time they made the above representations that M IN
lacked experienced and knowledgeable staff to underwrite appropriate risks or profitable
business in expansion states and further knew that they did not intend to retain adequately traine d
staff to underwrite insurance in expansion states . MITE simply did not have insurance
underwriting and actuarial professionals experienced at underwriting or evaluating risks i n
MEX's expansion markets . (Source: Witness 4) . MIIX's expansion efforts were simply "icing "
and lacked "substance ." (Source: Witness 4) . The expansion efforts were done to take the
Company public by making MITX appear to be a "nationally successful company showing a lo t
of growth" when in truth it lacked the experience or staff to take on the new markets . (Source :
Witness 4) Key MTLX employees who had substantive insurance backgrounds were brought t o
MTJ to put up a "good front" for the MJ IPO, the road show and Wall Street analyst s
20
evaluating M]:IX's business. (Source. Witness 2) . Defendant Goldberg did not have an y
"need" for insurance professionals because they got in Goldberg's way of "expansion ." (Source :
Witness 2) . MIIX in fact employed only two or three "young" people who "did not know wha t
they were doing" regarding non-New Jersey state insurance regulations because they incredibl y
lacked familiarity with regulatory requirements in expansion states . (Source: Witness 4) . For
example, claims representatives saw claims submitted to MEEK that, based on their extensiv e
knowledge ❑f the types of claims MJJX underwrote in New Jersey, were not covered. (Source :
Witness 76) When claims representatives inquired as to why MIIX was accepting the claims,
they learned that MIX had mistakenly written coverage for the risks because MIIX staff lacked
the knowledge and experience necessary to write appropriate policies . (Source: Witness 7 )
iii . The Company did not "maintain underwriting discipline," set"appropriate" prices for risks insured or plan to do so whenexpanding after the IPO in order to "assure profitability, rather thanpremium volume[ .]"
54 . The defendants knew that they, along with Ml broker s and agents, wrote
unprofitable policies because, unlike the defendants represented , they did not maintain
"underwriter discipline" or follow the other internal controls they represented were in place for
setting prices . Rather, within the Company, the defendants emphasized premium volume ove r
profitability by setting predatory prices .
5 Witness 2 is a former M1TX employee who was hired by defendantGoldberg as an Operations Executive in November 1998 . Witness 2 left MIIX inNovember 1999. Witness 2 in fact took over Witness l's underwriting positionafter Witness I left MJIX in maid-1999 .
6 Witness 7 was a Medical Liability Representative and subsequently aSenior Claims Representative for Mlix from in or about 1992 through in or aboutOctober 2000 . Witness 7 had over 15 years of experience in claims, most ofwhich were medical malpractice claims, prior to joining Ml]X in 1992 .
21
•55, On September 23, 2002, Medical Economics published an article entitled "How a
malpractice insurer grew TOO BIG TOO FAST," which focused on MI X's expansion .? The
article contained the following quote from defendant Maressa :
"I still feel that MHX's expansion strategy was correct . It was'either expand or lose ground to competitors," he explains. "Of
course, in retrospect 11. could have been better executed . The real
problem was that the company's management may have tried todo too much, too fast, without having as much knowledge of the
markets in the other states that it had in New Jersey. And thecompetition was greater in those states, so the company wasn'table to be selective [on the prices it charged to underwrite risks]."(Emphasis added).
56. The defendants in fact knew that MI[ X's prices were inappropriate . MIIX's
premiums and loss history at the time of the IPO showed that MUX needed to increase premiu m
rates for hospitals by as much as 50% in order for the policies to be profitable . (Source: Witness
18) However, defendants refused to increase the premiums because doing so would have
resulted in less renewals and, therefore, less premium volume .
57. MIIX in fact had a long standing policy, even before the representations in th e
Registration Statement, to set predatory prices in order to gain premium volume regardless o f
profitability of the risks insured. In particular, Howard P . Weiss,9 as reflected in an article date d
7 Notably, on July 26, 2002, a law firm representing MIIX wrote a five page
letter to Medical Economics threatening legal action if the article was published .
Witness 1 is a former MlTx employee who was hired by defendantGoldberg in or about July 1998 as the Chief Actuary. Witness I subsequently
also became the Chief Underwriter and held both positions until s/he left M1 11X inMay 1999, which was just two months before the TPO .
9 Howard P. Weiss was one of a team of health care consultants who helped
form MTTX in late 1976 and early 1977 . After MIIX was formed, Weiss
continued to work for the Company as a consultant and in October 1978 he
became a vice president and later a senior vice president . Weiss worked as a
senior executive at MIIX from 1978 through 1992 . Before leaving in 1992, Weis s
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May 13, 2003 (http://www .nice ' . oreemedicalmalpraetice/howard -p.htm ) concerning the alleged
"medical malpractice crisis" in New Jersey, stated that the "crisis' occurred because the medica l
malpractice insurers underwrote bad risks at inadequate premiums in environments about whic h
they knew nothing (Pennsylvania, Ohio, Texas, etc .) . "
58 . As reflected in Weiss's article , the defendants were specifically involved in predator y
pricing rather than setting prices "appropriate " for risks insured or to "assure profitability[ :]"
MIIX was formed in combination by the Medical Society andOsteopathic Association . MIIX was formed as a reciprocalinsurance company and hence had a Board of Governors made upof 17 physicians . As a reciprocal, MIIX had no employees. It wasrun by an attorney-in-fact that was fully owned by the MedicalSociety of New Jersey. It had a Board of Directors made up offive physicians, Vince Maressa, the executive director of theMedical Society and Peter Sweetland, the President of theattorney-in-fact . Both the Board of Governors and the Board ofDirectors were "stacked" with physicians who also served on theBoard of the Medical Society, Osteopathic Association or wereotherwise politically connected with these organizations . Far andaway the Medical Society had the most representation. As such,MIfX was always governed with an eye toward what was good forthe Medical Society .
In the late eighties and early nineties after Peter Sweetland, thePresident of MIIX passed away, Vincent Maressa used thisopportunity to seize the Chairman of the Board spot . Up until thattime, the Chairman had always been a physician .
Vincent Maressa hired Dan Goldberg as President . He changedMHX philosophy. Up until that time MHX's mission was to assurethat doctors in New Jersey would never he without a reasonablypriced market for medical malpractice insurance and hence one offiscal responsibility .
We were a not for-profit company, who had returned money tothe physicians in the form ofdividends. Vince Maressa and DanGoldberg, with an eye toward taking M!IX public, measured
was responsible for, among other things, MIIX's actuarial and statistical analysisand information services . Since leaving MID( in 1992, Weiss has continued towork in the medical malpractice liability arena.
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success in terms of market share . The more insureds the better,even at inadequate premium rates .
The expansion into other states was undertaken with the idea towrite as many insureds as possible regardless of whether theywere reasonable risks or whether the pricing was adequate . Ipersonally saw Dan Goldberg take a large group of doctors awayfrom Princeton Insurance Company by offering them a largereduction in premium after Princeton had quoted them a hugerenewal increase because of their adverse claims experience .The difference in premium was over 50%.
More and more insureds and more and more premium income(immediate cash) would make it easier to take MIIX public and
make several insiders very well off. In essence, the physicians inNew Jersey were abandoned by MIIX and the Medical Societybecause of a few greedy individuals . (Emphasis added) .
59. Further for, example, to increase premium volume the defendants sold insurance
policies to cover the same risks as the customer,' old policies at a lesser price. The result was
that the policies were unprofitable . The new customers' former insurance carriers, which were
more familiar with the insureds and the market, were in fact increasing the prices they wer e
charging. (Source: Witness 1) . Therefore, the defendants knew that MIKX was setting
predatory prices and knew that the prices were inappropriate for the risks underwritten . The
defendants' under pricing of MIIX's competitors was purely and simply designed to increase
premium volume regardless of profitability. Even further, the Company's assumption of
coverage for Physician Insurance Exchange's ("PIE") insureds provides the best example of the
defendants knowingly taking on business at prices they knew were inappropriate and
unprofitable. PIE was a company that aggressively and rapidly expanded its business by selling
policies at deeply discounted prices . PIE, as the defendants were readily aware, went out of
business as a result of under pricing its policies . When PIE stopped writing insurance, MIIX
24
took over "a lot" of PIE 's business at even more deeply discounted prices than PIE had charged .
(Source: Witness 410) .
60. The defendants further did not maintain underwriting discipline because they pai d
insurance agents and brokers based on premium volume generated and not based on the
profitability of policies underwritten, which resulted in NlEEi underwriting risks at inappropriate
levels . (Source: Witness 511) . The defendants, however, despite knowing this information and
despite the representations to the public that Mil? would conduct its expansion in a way that
emphasized profitability over premium volume and maintain underwriter discipline, did not
change the way brokers were paid bonuses . (Source: Witness 5 )
61 . The defendants further set predatory prices and undermined underwriting discipline
by giving non-MIIX underwriters authority to write policies in Texas . On multiple occasions,
MITX's Texas branch office refused to underwrite risks because they were inappropriate under
MTCX guidelines but a Texas agent to whom the defendants gave underwriting authority, wrote
the risks anyway, at even lower prices . This was particularly costly to M1XX because Texas was
known to be a high risk state . (Source : Witness 4)
62. Further, MIIX employees examined how insurance policies were written by broker s
in expansion states and reported the results to the defendants . (Source: Witness 5) The
examination showed that the underwriting guidelines defendants gave brokers were imprecise
and, as a result, brokers were buying insureds "tails" from previous policies at inadequate prices .
That is, brokers, as a way to get new business from physicians in expansion states, were offerin g
10 Witness 4' s information on this point was obtained from a MII X employee
who worked in Texas .
I I Witness 5 was a Business Controller for Ml from 1997 until 1999 .
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the physicians MIix coverage for prior years but were not increasing the premiums charged t o
cover the additional risks they were underwriting. As a result, the policies were not profitabl e
(Source: Witness 5) . While the policies would result in long term losses , in the short tenn ,
MIi.X's premium volume grew. The defendants knew brokers were buying "tails" at
inappropriate premiums and permitted the practice anyway in order to increase premium volume .
iv. MIIX did not maintain a Net Loss Reserve that was "adequate" orthat represented management 's "best estimates" of losses and LAE .
63 . At the time of the IPO, the defendants had ample evidence that MHX 's Net Loss
Reserve was not "adequate" and did not represent management 's "best estimates . "
64. First , the defendants knew or should have known , as discussed in ¶(ff 54 - 62 above ,
that MTIX set predatory prices and failed to maintain underwriter discipline . The defendants
knew or should have known that because prices and discipline were inadequate , the net los s
reserve was likewise inadequate .
65 . Second, the defendants undertook a "special reserve study" by an "outside actuary "
during the first quarter of 2000 - within approximately six months of the representations in th e
Registration Statement and Prospectus that MDX's Net Loss Reserve was "adequate" and
represented management's "best estimate" of losses . This "special" reserve study, by virtue of
its name, was a significant and unusual event at Ml .
66. Third, in August 2000, as set forth below , the defendants increased Mm's Net Loss
Reserve by an unprecedented $70.1 million . Over $59 million of the increase was for fiscal year
1999 - the year of the IPO - alone .
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67, Fourth, one of the defendants ' primary objectives was to maintain MIL 's rating wit h
A.M . Best. (Source : Witness 512) Analysis done in the spring of 1999 showed that MIIX was
very close to having insufficient capital to continue its operations . The defendants knew that
Mid needed to increase its reserves and step down its expansion efforts in states such as Texas,
Tennessee and Kentucky in order to maintain sufficient operating capital . Defendant Koreyva,
however, refused to adjust the reserves because he was concerned that A .M. Best would
downgrade MII 's rating . (Source: Witness 5) . Despite knowing this information, defendants
did not disclose it and further misrepresented that the reserves were "adequate . "
68. Fifth, the defendants and other MIIX management employees pressured claim s
representatives to suppress their estimates of losses on outstanding claims . (Source: Witness 7) .
Claims representatives had authority to set estimated losses (which were directly reserved for in
the Net Loss Reserve) up to a predetermined amount. Amounts over their individual limits
required approval by claims managers, who reported to Lisa Kramer . Kramer was defendant
Goldberg's "hatchet man." (Source: Witness 7) . Claims representatives submitted requests for
increases in reserve losses, which were based on their "best estimates" of losses for the case, on
"yellow forms." The defendants and other MITX employees, however, frequently rejected the
claims representatives' requested increases in reserves . They so rejected the requested increases
without justification and without analysis of the particular claims . The rejections of the
requested increases were done in order to understate the future losses on outstanding claims .
(Source: Witness 7) Senior executives such as defendant Goldberg closely monitored reserves
and large reserve increases required Goldberg's direct approval . (Id.) ,
12 Witness 5 prepared financial information MTIX provided to A.M . Best on
a quarterly basis . In the process of preparing this information for A .M. Best, s/he
analyzed, among other things, the adequacy of MIIX's capital and reserves .
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69, Sixth, losses on future claims were calculated based, at least in part, on MIIX' s
estimates of losses on outstanding claims . By suppressing losses on outstanding claims, MIIX' s
estimates of future losses were likewise suppressed . This snowballing effect made MI 's Net
Loss Reserve grossly inadequate, as evidenced by the reserve increases in August 2000 an d
February 2002 .
70. Seventh, Robert Goley was in charge of claims in Pennsylvania and eventually
became the head of claims for all expansion states . Goley, however, refused to increase loss
estimates for outstanding claims to accord with MIA's exposure on these claims . In particular,
in Pennsylvania, MUX was liable for up to a fixed predetermined loss amount -- somewhere
between $200,000 to $500,000 depending on the year - and the remaining loss was covered by a
state run catastrophic loss fund . MIIX policy required MBX to turn over cases to the
catastrophic loss fund once MIT X determined that its exposure in a particular case had been
maximized, Goley, however, on multiple occasions, refused to allow claims representatives to
reserve MHX's full exposure for cases . (Source : Witness 7) . As a result, MITX's reserv e
estimate for these cases were suppressed for this additional reason.
71 . Eighth, the defendants suppressed losses on outstanding claims when the reserve s
were audited by outside firms, Specifically, the defendants caused claims representatives to
engage in wholesale reviews of reserves on outstanding claims in an effort to reduce the amounts
reserved for the claims . (Source: Witness 7) Witness 7 stated that the reviews were cyclical an d
s/he believed they were tied to audits by outside actuaries but was not "100% sure ." Claims
representatives received constant pressure to reduce the amounts reserved on claims but wer e
never pressured to increase reserves . (Source: Witness 7 )
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72. Ninth, MIIX further disregarded loss estimates on outstanding claims by experience d
defense counsel in order to suppress its Net Loss Reserve . MTiX guidelines required the claims
department to obtain estimates of potential losses and LAE for outstanding cases from defense
attorneys who were defending the cases . (Source : Witness 7) MIIX management frequently
reject defense attorneys' estimates of the losses without justification . (Ld . )
73 . Tenth, the defendants delayed settlement of outstanding claims in order to delay any
impact on the Net Loss Reserve and operating income . (Source: Witness 7) Claims
representatives frequently sought settlement authority for cases that they believed should be
settled but the representatives were "stone walled" by management without justification . Former
employees experienced in the evaluation of medical malpractice claims acknowledged that this
practice existed at all points during the Class Period . (Bourse. Witness 7) .
74. Eleventh, the defendants further failed to maintain sufficient accounting control s
necessary to detect that the claims department was suppressing estimates of losses on
outstanding claims, which suppressed the Net Loss Reserve.
v. MIJX's net income earnings, earnings per share and shareholder equitywere overstated .
75 . As discussed in 163 -74 above, the defendants knew and/or recklessly disregarded
that M1TX's Net Loss Reserve was inadequate and understated and, as a result, the Company' s
statement of net income, earnings per share and shareholder equity in the registration statemen t
and prospectus were overstated .
vi. "[S]elected financial data [was not] presented in accordance with GAAP[ .]"
76 . As set forth in ¶9[ 63-74, MI X's Net Loss Reserve was inadequate . As a result, as
discussed in detail below at 11 133-142, MIIX's financial statements were not prepared i n
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accordance with GAAP and, therefore, the defendants representations to the contrary were fals e
and misleading .
3 . Misrepresentations Post-Registration
77. Following M11X's TPO, defendants continued to tout their expansion as a successfu l
venture. In November 1999, however, M]IX's stock dropped after Goldberg was arrested fo r
growing marihuana in his Bucks County home . At that time, Koreyva replaced Goldberg as th e
CEO .
78 . Defendant Koreyva, however, continued the expansion effort without Goldberg ,
touting the success of the IPO and further emphasizing MIIX's expansion . According to a join t
statement in MIIX's 1999 annual report by defendants Koreyva and Maressa :
On July 30, 1999, MIIX transformed from a reciprocal [insurance]exchange to a publicly traded stock company, an impressiveachievement and a significant turning point for the company . Withour debut on the New York Stock Exchange, MIP( became theeighth largest publicly traded company specializing in medicalprofessional liability insurance in the United States .
The effects of the M1iX conversion meant a stock distribution tophysician. insureds and the IPO provided the facility to trade andrealize stock value, MIIX immediately demonstrated its financialstrength with dividends declared for both the third and fourthquarters of f 1999 .
Today we stand at the threshold of opportunity. As a stockcompany, MII gains access to capital markets . That means agreater ability to grow: to capitalize on new business ventures, tolook seriously at strategic mergers and acquisitions, and to broadenour line of products and services .
79, on February 24, 2000, defendants issued a press release reporting "record" ne t
operating income for the fourth quarter of 1999 and year ending December 31, 1999 . The pres s
release stated:
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LAWRENCEVILLE, NJ, February 24, 2000 - The MHX Croup,Inc . (NYSE: MT-1U), a leading provider of medical professionalliability insurance , today reported record net operating income forthe fourth quarter and year ended December 31, 1999, compared tothe same periods in 1998 . "Our fourth quarter results demonstrateour ongoing success in executing our plan to increase long-termshareholder value, as we continue to combine prudent growth ina very difficult market with diligent underwriting , outstandingclaims management and tight cost controls," said KennethKoreyva, President and CEO. "Our strong financial conditionunderscored by an "A" (Excellent) rating from A .M . Best allowsus to continue these business -building activities . Our performanceand strength , however, have not been reflected in our stock price,which continues to trade significantly below book value .Therefore , until the market more accurately reflects our true long-term value and earnings potential, we believe our stock repurchaseprogram provides an excellent means of enhancing returns to long-term shareholders ."
1999 PERFORMANCE HIGHLIGHT S
• Record operating earnings per share of $1 .8 1• Net investment income increased 1 6 percent to $75 .7 million• Net premiums earned increased 16 percent to $187 .8 million• Loss and LAE ratio decreased 2.8 points to 93.1 percen t
• Underwriting expense ratio improved 3 .2 points to 22.7 percent(Emphasis added) .
80. The above statements were materially false and misleading when made and/o r
omitted to disclose material facts because, inter alia, the defendants knew and/or recklessl y
disregarded that :
a. MlD's financial statements were not prepared in accordance with GAAP (see I
76 and 133-142) ;
b. MIX's reported financial results were materially inflated as a result of the Ne t
Loss Reserve being inadequate (see 9175) ; and
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c. the defendants were under pricing premiums to gain market share which th e
defendants knew did not "increase long-term shareholders value" (see ¶154-62) .
81 . On March 30, 2000, MICX filed its annual report on Form 1 O-K for the period that
ended December 31, 1999, which was signed by defendants Koreyva, Maressa and Hirsch .
Regarding the calculation of the Net Loss Reserve, the Form 10-K stated, inter alia:
Recorded loss and LAE reserves represent management's bestestimate of the remaining costs of settling all incurred claims.While the Company believes that its reserves for losses and LAEare adequate, there can be no assurance that the Company'sultimate losses and LAE will not deviate, perhaps substantially,
from the estimates reflected in the Company's financialstatements. If the Company's reserves should prove inadequate,the Company will be required to increase reserves, which could
have a material adverse effect on the Company's financialcondition or results of operations . (Emphasis added).
82. The Form 10-K further provided'.
Recorded loss and LAE reserves represent management's bestestimate of the remaining costs of settling all incurred claims .While the Company believes that its reserves for losses and LAEare adequate , there can be no assurance that the Company'sultimate losses and LAE will not deviate, perhaps substantially,from the estimates reflected in the Company's financial statements .If the Company's reserves should prove inadequate , the Companywill be required to increase reserves, which could have a materialadverse effect on the Company's financial condition or results ofoperations. (Emphasis added) .
83. On May 4, 2000, the defendants issued a press release announcing the first quarte r
results for fiscal year 2000, which touted a "significant " increase in net operating income. In
relevant part, the press release stated :
"Operating earnings were as anticipated, " said Kenneth Koreyva,President and CEO, "however our first quarter results, and therecent earnings announcements by certain competitors, reflect thevery difficult medical malpractice market that currently exists . Ourfirst quarter results reflect our approach to the difficulties inseveral ways :
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+ We have continued to adjust loss and loss adjustmentexpense reserves to best reflect the reality as weundersland it. Our net increase to prior years grossreserves of $3 .0 million during the quarter continues theprocess we have undertaken for several years of movingreserves no longer required on earlier accident years to lateraccident year reserves, particularly reserves held on newlywritten business in expansion states .
We will continue executing our plan to increase long-termshareholder value through prudent operations in a very difficultmarket. Our recent restructuring of operations into strategicbusiness units focused on specific markets positions us to be evencloser to our customers and the marketplace, and provides anenhanced platform for diligent underwriting , outstanding claimsmanagement and tight cost controls, (Emphasis added) .
Our recent restructuring of operations into strategic business unitsfocused on specific markets positions us to be even closer to ourcustomers and the marketplace, and provides an enhancedplatform for diligent underwriting, outstanding claimsmanagement and tight cost controls . "
2000 FIRST QUARTER PERFORMANCE HIGHLIGHT S
Strong operating earnings per share of $0.47. Net investment income increased 23 .5% percent [sic] to $21 .5 million• Underwriting expense ratio improved 0 .4 points to 20 .0 percent
2000 Q1 PERFORMANCE RESULT S
Loss and Loss Adjustment Expenses : The increase in loss and lossadjustment expenses for the quarter reflects the increase in netpremiums earned as well as an increase in the net loss and LAEratio from 94 .4% in the first quarter 1999 to 97.1% in the firstquarter 2000. The increase in loss and LAE ratio was primarilydue to a net adjustment of $3 million to loss and LAE reserves heldon prior years, all of which was ceded under existing aggregatereinsurance contracts but which resulted in additional cededpremiums earned of $1 .4 million . This net increase to priorreserves primarily related to continuing evaluation of thePennsylvania book of business .
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Further, certain of the Company's competitors in the medicalmalpractice market have recently reported changes in release ofprior year loss and loss adjustment expense reserves due to adversemarket, conditions . While the Company continues to believe itsreserves for losses and loss adjustment expense are adequate,there is additional uncertainty in the reserves at this time given
these recent everts.
84. The above statements were materially false and misleading when made and/o r
omitted to disclose material facts because, inter alia, the defendants knew and/or recklessly
disregarded that :
a. MIIX's Net Loss Reserve was inadequate (see ¶9163-74) ;
b. MII( lacked internal accounting controls necessary to determine whether its Ne t
Loss Reserve was "adequate" (see 19[63-74) ;
c. any "additional uncertainty" was in fact the result of their aggressive expansion
and not the result of new "adverse market conditions" (see 1350-62) ;
d. MIIX did not have "diligent underwriting" or "outstanding claims management "
(see 1150-62) ; and
e . MIIX' s financial statements were not prepared in conformity with GAAP (see I
76) .
85. On or about May 15, 2000 , the defendants filed a Form 10-Q for the fiscal quarter
that ended on March 15, 2000 representing that the defendants "continue[] to believe [MUC's]
reserves for losses and loss adjustment expense are adequate[ .]" This statement was materially
false and misleading when made and/or omitted to disclose material facts because, inter alia, the
defendants knew that MIIX's Net Loss Reserve was inadequate . (See 1163-74) .
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96, The defendants made similar false statements about the Company's Net Loss Reserve
throughout the Class period in . (1) the Company's annual reports on Form 10-K for 1999, 200 0
and 2001 and (2) in the Company's quarterly reports on Form 10-Q for each of the quarter s
between the third fiscal qua rter of 1999 and the second fiscal quarter of 2002 during the Class
Period. The statements in the these documents were materially false and misleading when mad e
and/or omitted to disclose material facts for the reasons set forth in 1 163-74 . Further, as to the
statements made during the period between August 2000 and February 2002, they were
materially false and misleading because MlTX claims supervisors told claims representatives to
reduce the amount each claim was valued at . (Source: Witness 613)
87. In particular, MllX claims supervisor, Robert Goley, told the Companies' clai m
representatives in emails just prior to the end of at least two quarters between August 2000 and
February 2002 , that the claims representatives (which consisted of 50-60 claims representative s
at the time) should re-evaluate existing claims in their portfolios to reduce the dollar value of th e
claims . (Source ; Witness 6) Claims representatives understood that the purpose of the emai l
was to direct claims representatives to inappropriately reduce their claims so that the Company
would not have to increase its Net Loss Reserve . (id.) Inappropriately reducing the dollar valu e
of claims resulted in MIIX's Net Loss Reserve being materially understated and MIIX's ne t
income, earnings, earnings per share and shareholder equity being materially overstated .
88. On June 21, 2000, the defendants further encouraged the public to purchase shares of
MILX by announcing a prospective dividend for all shareholders who purchased stock on o r
13 Witness 6 is a former MII claims representative who was employed atMIX during the Class Period until the spring of 2002 after MIIX's February 20,2002 announcement that it was increasing its Net Loss Reserve and showing asubstantial loss .
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before July 7, 2000 . The defendants announced in a press released entitled, "The MIIX Grou p
Announces Quarterly Dividend and Secures a $20 Million Credit Facility" that the "Company' s
Board of Directors declared a regular quarterly dividend of 5 cents per share . . . payable July 21 ,
2000 to stockholders of record on July 7, 2000 ."
89, MI X's announcement of a dividend on June 21, 2000 was materially false and
misleading when made and/or omitted to disclose material facts because, inter alia, the
defendants knew and/or recklessly disregarded that :
a. ] ;TX's Net Loss Reserve was inadequate and the announcement of a dividen d
falsely misled investors to believe that it was adequate (see ¶9[ 63 -74 and 86-87) ;
b . MIIX' s net income , earn ings, earnings per share, and shareholder equity were
artificially inflated and the announcement of a dividend misled investors to
believe they were not [see 9[ 75) ;
c, MIIX's financial statements were not prepared in accordance with GAAP (see y [
76); and
d. MIIX, at the time of the announcement, was allegedly engaged in a "specia l
study" or "comprehensive evaluation" of its Net Loss Reserve using "outside
actuaries[,]" which was not disclosed until August 2000 (se ¶9[ 90-91) .
90. On August 2, 2000, for the quarter ending June 30, 2000 -just seven days after the
defendants announced that MIIX would be paying a prospective dividend of $ .05 per share, the
defendants announced :
[MlTX] announced today a loss for the second quarter ended June30, 2000 resulting from an increase in the Company's loss and lossadjustment expense reserves .
For the second quarter ended June 30 , 2000 , the Companyrecognized a net operating loss of $47,6 million or $3 .34 per share
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as compared to net operating income of $6 .4 million, or $0.53 pershare in 1999 .
Net loss reserves were increased by $70 . 1 million at June 30, 2000to reflect a trend of increased loss severity identified this quarter
as well as greater than anticipated loss frequency in certain
expansion slates .
The reserve increase followed a special study conducted in thesecond quarter as the result of concerns with changes in theCompany's loss emergence patterns as well as changes in lossfrequency and severity reported by competitors in the first quarter(Emphasis added) .
91 . N11TX's 10-Q for the fiscal quarter that ended on June 30, 2000 provided :
Net loss and LAE reserves were increased by $70.1 million,including $58 .1 million for 1999 and prior accident years and
$12.0 million for accident year 2000 .
The increase in loss and loss adjustment expense reserves resultedfrom three primary factors: increased loss severity combined witha lengthened loss development period on the New Jersey physicianbook ; higher than anticipated loss frequency and, particularly,severity in certain of the Company's expansion states ; and greaterthan expected loss frequency and severity on the Pennsylvaniaphysician and institution book.
92. The above statements were materially false and misleading when made and/o r
omitted to disclose material facts because, inter cilia, as set forth in 1163-74 and 86-87, the
defendants knew the Net Loss Reserve was inadequate and loss frequency and severity i n
expansion states were not "higher than anticipated ." See also 1150-62) .
93 . Moreover, while the August 2, 2000 press release disclosed a reserve study and an
increase in the Net Loss Reserve by over $70 million, defendant Koreyva misled investors t o
believe that after the increase, Mm's Net Loss Reserve was adequate by stating :
The Company's financial results are obviously disappointing to theboard of directors, management and the Company's severalconstituencies . We believe, however, that the significant increase
in loss and loss adjustment expense reserves taken this quarter is
37
0 %prudent to ensure the Company's long term strength in a verydifficult and challenging market . As the result of trends seen in thefirst half of 2000, we conducted a special loss reserve study as ofJune 30, 2000 . The Company increased net reserves $70 .1 millionin the second quarter to maintain reserves at our best estimatelevel . We engaged outside actuaries to perform a comprehensiveevaluation which supported that conclusion . The Companyremains very strong after the reserve adjustment with $259.3
million of ` stockholders' equity at June 30, 2000. Afteradjustment for unrealized losses on the fixed-maturity investmentportfolio, most of which we expect not to be realized as theportfolio is largely held to maturity, stockholders' equity is justunder $300 million at June 30, 2000 . (Emphasis added) .
94 . The defendants continued to falsely allay conce rns about the Company's Net Los s
Reserve in a September 1, 2000 press release headlined : "MIIX Receives `A' Rating from A .M .
Best," The defendants' press release quoted, and therefore adopted, the following statement
from A .M. Best :
The rating remains in A .M. Best's Excellent category reflecting thegroup's historical profitability track record, despite the :recentearnings setback, strengthened reserve base and recent actionstaken by management to improve overall operations . Thesecorrecti 'e actions include the restructuring of operations intostrategic business units that focus on specific markets allowingMIIX to be more attuned to the dynamics of each individualmarket and implement more stringent underwriting guidelines .The rating also acknowledges the group's leadership position inproviding professional liability insurance for physicians andhospitals within its market .
95 . Defendant Koreyva, stated :
At June 30, 2000 we have over $1 .1 billion set aside for claimreserves, $700 million of which is set aside for unknown claimsthat may be reported in the future . Our prudent reserve
philosophy strongly positions us against the ever increasinguncertainties in the medical malpractice environment so we can,fulfill our long term commitment to protecting the reputation of
our clients . (Emphasis added).
38
s •96, The above statements were materially false and misleading when made and/o r
omitted to disclose material facts because, inter alia , the defendants knew and/or recklessl y
disregarded that :
a, even after the reserve increase, M1TX's Net Loss Reserve was still inadequate (see
19186-87) ;
h . MIIX's financial statements were not prepared in accordance with GAAP (se e
176); and
c, the defendants took steps to mislead A .M. Best by understating MIIX's claims
exposure (see 1163-74 and 86-87) .
97. On November 6, 2000, the defendants issued a press release stating MII ' s financia l
results, including "net operating income of $4.0 million at $0 .29 per share for the third quarter
ended September 30, 2000, compared to net operating income of $6 .5 million or $0.45 per share
for the prior year third quarter ." Koreyva stated :
The Company's financial results for the third quarter reflect ourefforts to get the Company back on track following the significantincrease in loss and loss adjustment expense reserves taken inthe second quarter of 2000.
*** *
We anticipate fourth quarter earnings to he consistent with thirdquarter results and have targeted $1 .40 as the high end of the rangefor projected 2001 operating earnings .
98. On February 22, 2001, the defendants issued a press release announcing positive net
operating income. The press release stated , inter cilia :
Our book value al, December 31, 2000 exceeded $21 per share andwe believe that the current trading range represents a significantopportunity for long term investors . We believe that reserveadequacy, debt leverage and management are key considerations
39
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when looking at M,IIX as an investment. Our reserves continueto be carried at Company best estimate levels and at year end ourgross loss reserves approximated $1 .142 billion[ .] Lastly, the newMIIX management team has demonstrated its commitment to takethe appropriate, often difficult actions to ensure the Company'slong-term success. (Emphasis added) .
99 . The statements identified in paragraphs 97-98 were materially false and misleadin g
when made and/or omitted to disclose material facts because, inter alia, the defendants knew
and/or recklessly disregarded that :
a. even after the reserve increase, MIIX 's Net Loss Reserve was still inadequate (se e
(fl 86-87); and
b, MIIX' s financial statements were not prepared in accordance with GAAP (gee
176) .
100. In the Company's Annual Report to shareholders for 2000, the defendants falsel y
stated the following:
For many companies in the industry, poor operating results canbe directly attributed to the aggressive growth of the late 1990's,along with inadequate pricing levels and a lack of marketplaceexpertise in new operating states .
MIIX has taken affirmativ e irmative action to ensure long-term
profitability through prudent risk selection, risk-adjusted pricing,and enhancement of products and services . (Emphasis added) .
101 . The statements identified from the 2000 Annual Report to shareholders wer e
materially false and misleading when made and/or omitted to disclose material facts because ,
inter aiia, the defendants knew and/or recklessly disregarded that :
a. M]T.X' s financial statements were not prepared in accordance with GAAP as set
forth in 1][ 76 ;
40
s •b . MIIX's Net Loss Reserve was inadequate , as set forth in 9[163-74 and 86-87; and
c. MIIX was in fact one of the companies whose increasingly poor operating result s
were directly attributed to the "aggressive growth along with inadequate pricin g
levels and a lack of marketplace expertise in new operating states" an d
defendants' representations to the contrary were knowingly or recklessly fals e
(see IN 50-62) .
102 . In April 2001, defendant Koreyva abruptly, and without explanation, resigned fro m
MTfX . In Koreyva's absence, defendant Maressa made various public announcements for th e
Company .
103. On May 2, 2001, the defendants issued a press release announcing financial results
for the quarter that ended March 31, 2001 . Defendant Maressa superficially, but falsely ,
reassured investors that the Company's Net Loss Reserve was adequate, by stating : "It is now
nine months since the loss reserve adjustment that occurred in June 2000, and we see no signs
of a need for any further significant adjustments to loss and loss adjustment expense
reserves ." (Emphasis added) .
104. In or about May 2001, the Company received an offer from a significant investor to
buy the Company. (Source: Witness 814) . Defendants, however, rebuffed the offer . In response
to the offer, on May 3, defendant Maressa announced that the Company was not for sale an d
reiterated false statements about the Company's financials .
105. On June 28, 2001, the defendants announced that MT1X was adopting a "Stockholder
Rights Plan," the effect of which was to frustrate any takeover attempt of MAX by a party no t
14 Witness 8 was a private investor and non-M1IX executive who organizedan investment group to potentially re-capitalize MIXX in or about May 2001 andthe spring of 2002 .
41
4 S
sanctioned by the defendants . Under the Plan, stockholders of record as of the close of busines s
on July 10, 2001 received rights that did not expire until June 27, 2011 . The "Rights plan will
generally he triggered if an acquiring party accumulates 15% or more of the Company's common
stock ." Chairman of the Board, Vincent A . Maressa, Esq ., stated :
The Rights Plan . . . is designed to. enable all MDX stockholders torealize the full value of their investment and to provide for fairand equal treatment for all stockholders in the event that anunsolicited attempt is made to acquire The MIIX Group . Theadoption of the Rights Plan is intended as a means to guardagainst abusive takeover tactics, and to improve The MIIGroup's ability to negotiate with potential acquirers [sic] . TheRights Plan is not intended to prevent an acquisition of theCompany on terms that are favorable and fair to all stockholders,and will not do so .
By instituting this Stockholder Rights Plan, the defendants insured that their continuing fraud
would go undetected .
106 . On August 20, 2001, the defendants announced that Richard J . Quagliaroli wa s
named President and CEO of Ml IX . However , just over one month later , on September 26 ,
2001, the defendants announced that Quagliaroli was resigning from the Company for "personal
reasons." it was later disclosed that Quagliaroli was paid over $400,000 for his 40 days o f
service to the Company . In November 2001, defendant Costante was appointed CEO .
107. On November 1, 2001, the defendants issued a press release announcing growing "ne t
operating income of $4 .2 million or $0 .31 per share for the third quarter ended September 30 ,
2001, compared to net operating income of $4 .0 million or $0.29 per share for the prior year
third quarter. Net income was $2 .5 million or $0.18 per share for the third quarter ende d
September 30, 2001, compared to net income of 2 .9 million or $0,21 per share for the prior year
third quarter ."
108. Defendant Costante, who was the COO at the time, falsely stated :
42
0 6
For the fifth quarter in a row, the Company has delivered solidearnings well within our expectations. The senior managementteam continues to execute its business plan. The business planfocuses on the fundamentals of underwriting discipline andservice delivery . It was implemented in late 1999, with strongevidence of success thus far,
*** *
We continue to see reduced loss frequency and case incurredlosses associated with business written since the commencementof the Company's new business plan in late 1999. The numberof reported losses and the values of those losses are clearly downfor accident year 2000, as compared to accident year 1999, at 21months of development. There is continuing validation of ourbusiness plan in these numbers . (Emphasis added).
109 . The statements identified in the preceding paragraphs were materially false an d
misleading when made and/or omitted to disclose material facts because, inter alia, th e
defendants knew and/or recklessly disregarded that :
a. MIIX' s financial statements were not prepared in accordance with GAAP (see
176) ;
h. MIIX's Net Loss Reserve was inadequate - the defendants in fact increase d
MiLK's Net Loss Reserve in February 2002 by over $60 million (see'Jfl 86-87 and
112-115) ;
c. MIIX did not have a business plan that "focused on fundamentals of underwritin g
discipline and service delivery[,]" as set forth above ; (see fi 50-62); and
d. to the extent reported losses and the values of those losses were "down" for
accident year 2000, they were "down" because the defendants directed MIIf' s
claims representatives to suppress their estimates of losses on outstanding claim s
and not because of any alleged changes in MIIX' s business plan (see 1[186-87) .
43
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110. On December 21, 2001 , MIIX announced that its CFO , defendant Redman, was
resigning but would stay on unt il March 31, 2002 .
111 . As a result of the defendants' materially false and misleading statements, the price o f
MTIX common stock climbed steadily to close at a 12-month high of $13 .39 per share on
February 19, 2002 .
4. The Defendants ' February 20, 2002 Corrective Disclosure
112 . On February 20, 2002, the defendants disclosed that despite the earlier assurances tha t
MHTX's Net Loss Reserve was adequate after they increased it by over $70 million in 2000, they
were again increasing the Net Loss Reserve . They further disclosed that MII X was delaying
announcement of its financial results for 2001, that MILX would show a loss for 2001 and tha t
Ml IX was closing its offices in its expansion states and was no longer writing insurance fo r
institutional clients .
113 . As a result of the announcement , Mm's stock price fell 63% to close at $4 .90 per
share on February 21, 2002 with unusually high trading volume .
114. On February 28, 2002, the defendants announced MUX's fourth quarter results for the
three months that ended on December 31, 2001 . The results were far below the levels tha t
defendants had led investors to expect . MII recognized a net operating loss of $162 .8 million ,
or $12 .01 per share, as compared to its reported net operating income of $4 .2 million, or $0.3 1
per share, in 2004 - a $12.32 negative differential from 2000 to 2001 . The press release state d
that the Company had increased its Net Loss Reserve by an additional $64 .5 million, whic h
resulted in the earnings per share and operating income losses reported . The Net Loss Reserve
was increased fourteen times greater than MYIX's net operating income of $4 .2 million in 2000 .
115 . On March 1, 2002, MIX's stock price fell even further to close at $2 .95 per share .
44
0 8
5. Post-February 20, 2002 Misrepresentations
116. Following the Company' s statement on February 20, 2002, the defendants continue d
to falsely reassure investors that the Company could rebound from its financial difficulties and
continue its insurance underwriting business at leas t in New Jersey and possibly in the mid-
Atlantic region . However, the defendants knew and/or recklessly disregarded that at the same
time they were making these statements , they were engaging MTl. in undisclosed related party
transactions that resulted in the defendants transferring MLT 's profitable New Jersey insuranc e
underwriting business to a privately held company that they controlled, MBX Advantage .
Further, during the same time the defendants were transferring the underwriting business to
MIlX Advantage, they also rejected third party independent offers to assist the Company by re-
capitalizing or investing in the Company . (Source : Witness 8) . Because MlIX was an insurance
company, any reorganization or recapitalization plan required the approval of the New Jersey
Department of Banking and Insurance . While awaiting approval, the defendants made the
following materially false and misleading statements .
117 . In the February 20, 2002 press release discussed above, Costante attempted to
alleviate investors' concerns regarding the Company's financial position by stating :
We are very aware of the substantial disappointment resulting fromthis news to investors and the Company's several constituencies,including most particularly our insureds and the employees, andwe take very limited comfort knowing that we are not alone amonginsurers in facing disappointment at this time . We believe stronglythat the best approach is to face the reality squarely and to respondaggressively to build a restructured platform that will allow theCompany to operate profitably . Fortunately, market pricingconditions are now significantly improved and, with continuedtight controls on expenses and an aggressive cost reductionprogram, we are optimistic that. an operating plan generating areasonable level of income can be developed and delivered.
(Emphasis added) .
45
6 1
118 . On February 22, 2002 A .M. Best downgraded MIfX' s rating from A- to B- an d
MIIX's stock price again declined, closing at $3.47 with over 600,000 shares traded .
119 . On March 4, 2002, MAX retained Fox-Pitt Kelton, Inc . as its financial advisor .
120. On March 22, 2002, A .M. Best downgraded MIDi's rating from B- to C+. In
response, the defendants issued a press release that "reiterated [MIIX's] long term financia l
strength[ .]" Defendant Costante stated, "We do not believe that the rating reflects the potentia l
positive impact of our ongoing actions . . . In addition, we have engaged Fox-Pitt, Kelton, Inc . as
financial advisor to explore strategic alternatives for the company." (Emphasis added) .
Costante further stated that "[w]hile we understand how A .M. Best reaches their conclusions, we
remain optimistic that we will he successful in working with the New Jersey Department o f
Banking and Insurance to finalize an operating plan . . . We have been diligently refocusing th e
business and cutting costs to take advantage of our strengths ." (Emphasis added).
121 . On March 25, 2002, A .M. Best published an article announcing the rating change an d
MIX's response. The March 25, 2002 article quoted the following statements by Costante :
In a recent conference call, The MIIX Group announced it willfocus on coverage for physician insureds in the New Jersey andMid Atlantic region where the company has a history ofprofitability and it will be exiting its institutional business . Otheractions necessary to lower expenses have already occurred,including the closure of offices in Indiana and Texas. Staffreductions have also been made in the Lawrenceville, NJ office .(Emphasis added) ,
122, After the A.M. Best article, MII('s stock price dropped again to close on March 26,
2002 at $2 .63 per share .
123. On April 17, 2002, defendant Costante falsely stated the following during a n
interview published in Professional Liability magazine :
46
• SWe have submitted a new business plan to the New JerseyDepartment of Banking and Insurance for approval that focuses onreturning the company to profitability in the near term . . . Our newbusiness plan focuses on returning the company to profitabilityin the near term . Our new business plan focuses on our coremarket, so that the company 's strengths are put front and center.
We plan to offer products primarily in New Jersey , . .consolidating our product distribution . . . Finally, we willcontinue the strict underwriting discipline that MIIX Groupinitiated in 2000, working to increase the overall profitability ofthe business .
Question 4, What is it that you now have pending before the NewJersey Department of Banking and Insurance? MIIX GROUP hasfiled what is called a preliminary Corrective Action Plan . . . Thekey components are a return to core markets , the segregation andrun-off of certain lines of business, geographic focus anddistribution, maintaining our close relationship to the medicalcommunity, continuing our underwriting discipline, andenhancing product offerings. (Emphasis added).
124. The February 22, March 22, March 25 and April 17, 20002 statements were
materially false and misleading when made and/or omitted to disclose material facts because,
inter alia, the defendants knew and/or recklessly disregarded that :
a. MIIX was in fact "building[ ing] a restructured platform[,], was not "refocusing "
its business, had not engaged a financial consultant to consider "strategic
alternatives," was not engaged in a "reorganization," and MUX was not seeking t o
"return" to "core markets" with a "geographic focus and distribution[,]" rather ,
the defendants had presented or were on the verge of presenting to DOBI, a s
reflected by the fact that the Company received approval from DOBI on May 3 ,
2002 (see 11125-126), a plan to put MIIX into a solvent run-off and sell MllX' s
New Jersey physician malpractice insurance business , which according to the
defendants remained profitable (see 1130), to a Company the defendants kne w
they would control, MIX Advantage ( see T 131) ; and
47
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b. the defendants engaged MffX in a related-party transaction without adequat e
disclosures in violation of GAAP and the securities laws (see J R 143 -148) .
125 . On May 3, 2002, the defendants for the first time announced the substance of some
aspects of the business plan they submitted to DOBI at an earlier unspecified date . The pres s
release announced that DOBI approved the plan , which called for :
the Company to move ahead with its plans to raise capital to forma new physician-supported medical professional liability insurancecompany. The new company will focus on what has been MIIX'sstrongest business, New Jersey physicians. MIIX expects to enterinto servicing and other financial arrangements to support the new
company.
126 . The May 3 press release further announced that the Company recently commissione d
Norman Hecht Research to conduct a "representative sample of MI1X's New Jersey physician
policyholders to assess their interest in capitalizing a new medical professional liability insurance
company" and further quoted Costante as stating that the "results of the survey are very
encouraging . . . Physician interest in capitalizing the new company is high, and based on our
survey, we believe that we can raise sufficient funds to finance its operations ." The press release
further announced that MIT} would "place its subsidiary, Ml Insurance Company, into
voluntary runoff in approximately 90 days . Until that time, MUX will continue to renew New
Jersey physician business ."
127. The statements identified in the May 3, 2002 press release were materially false an d
misleading when made and/or omitted to disclose material facts because, inter alia, the
defendants knew and/or recklessly disregarded that :
a. MIIX was not engaging Norman i echt Research to conduct research for MT1X
but rather to conduct research for a private company to underwrite business ,
which was MIEX Advantage ;
48
6 0
b . the Norman Hecht Research transaction was a related party transaction for th e
benefit of MIIX Advantage, which was controlled by the defen dants and the
defendants failed to make adequate disclosures regarding the transaction unde r
GAAP; (see In 143 - 148) and
c. engaging Norman Hecht Research to determine whether to capitalize a ne w
company was not in the best interest of the shareholders because the defendant s
disregarded various alternatives , including potentially selling MIIX to a thir d
party (see 9[ 116) .
128. On May 9, 2002 , MII announced that defendant Costante was named Chairman o f
the Board of Directors of MITX .
129. b a July 31, 2002 press release issued by MIX, defendant Costante was quoted as
stating: "The MIIX Group has engaged investment bankers to assist it in restructuring . . . based
on information received to date . . . it appears that the formation of the new company togethe r
with a voluntary solvent run-off of the MDX Group' s existing insurance business offers the
greatest opportunity to realize value for the Company's Stockholders' [,]" The press releas e
further stated :
"During the second quarter the Company successfully positioneditself for the voluntary solvent run-off of MIIX InsuranceCompany. The expected economic value of the runoff operations,largely comprised of ongoing revenue from investments andincluding the potential revenue from a management contract, saleof renewal rights associated with the New Jersey physicians book,and other licensing and financial agreements with the newcompany, is believed to be significant . Simultaneously, the processof obtaining approval from regulatory authorities for the newinsurance company commenced . New Jersey physicians havedemonstrated tremendous support for MIIX Advantage," statedPatricia A. Costante, Chairman and CEO .
49
6 0
130, The statements identified in the July 31, 2002 press release were materially false and
misleading when made and/or omitted to disclose material facts because , inter alia, the
defendants knew and/or recklessly disregarded that :
a . a "solvent run-off of" of MIIX's insurance business and the sale of its New Jerse y
business to a new company did not present the "greatest opportunity to realize
value for the Company's Stockholders" because as the defendants then and ther e
well knew, underwriting physician malpractice business in New Jersey was
profitable and MIX( shareholders were receiving insufficient value because : (1 )
MIIX was receiving inadequate consideration for managing and ser vicing its
policies as reflected by the fact that the same type of service was earlier reporte d
by the defendants to cost considerably more than what M is earning from
Mlle Advantage (i .e ., before MIIX went public and purchased its insuranc e
subsidiaries, NIIIX's insurance subsidiaries allegedly paid MICR fees for
administering and managing its insurance operations, which in 1997, 1998 and the
first eight months of 1999 amounted to $22 .7 million, $30 .6 million and $18.7
million respectively); (2) defendants represented to the New Jersey Department o f
Banking and Insurance that MTI( Advantage was expected to be profitable with
returned net income exceeding $8 million per annum for MITX Advantage
investors .from MIIX's renewal and other New Jersey business, none of whic h
was to be returned to MJIX shareholders ; (3) if the New Jersey business were no t
profitable, the defendants would not have started a new company to underwrit e
the business; and (4) the defendants knew that investors had offered to invest in
50
6 0
MIIX in the spring of 2002 (Source: Witness 8), but were rebuffed so that the
defendants could maintain control of MIIX.
131 . On September 12, 2002, in a Form 8-K filing with the SEC, the defendants
announced the details of the transfer ofMUX's insurance underwriting business to MID (
Advantage. While M] was transferring its renewal rights on its New Jersey business to MLIX
Advantage immediately, an elaborate payment system was set up, granting MEX Advantag e
many deferment and contingent payment options . Mf1X was also subject to a non-compet e
clause, prohibiting it from competing with MI[ Advantage for insurance business for up to te n
years. Notably, the board of directors of Mll Advantage was identical to the MTIX board and
certain of MIIX's officers, including defendant ostante, also served on MUX' s managemen t
team. The defendants, incredibly, represented that the value paid by MIIX Advantage for th e
assets were "negotiated in an arm's length process[ .]"
132. The statements identified in the September 12, 2002 Form 8-K filed with the SEC an d
the April 17 and May 3, 2002 statements were materially false and misleading when made and/o r
omitted to disclose material facts because, inter alia, the defendants knew and/or recklessl y
disregarded that :
a. the negotiation of the transactions related to MIIX Advantage, including the sal e
of MIIX's assets to MllX Advantage, were not "arms length" as they were
represented to be.;
h. the transactions done in preparation of the sale of MIT X's assets and the sale of
MUX's assets to Mll Advantage were related party transactions and inadequate .
disclosures were given regarding the transaction in violation of GAP, as se t
forth in 19[143-48 below ;
51
6 •c. that MI1X did not hold any stock or other ownership interest in MIIX Advantage ;
and
d. that MIIX's sale to MID( Advantage and the solvent run-off of MIIX's insurance
business provided insufficient consideration to MIS shareholders (see I 130a) .
DEFENDANTS ' GAAP VIOLATIONS
133. In addition to violations of the securities laws discussed above, the defendants furthe r
violated GAAP . The SEC requires that publicly traded companies present their financia l
statements in accordance with GAAP. 17 C.F.R . § 210.4-01(a)(1) . GAAP consists of those
principles recognized by the accounting profession as the conventions, rules, and procedure s
necessary to define accepted accounting practices at the particular time . Regulation S-X, t o
which the Company is subject as a registrant under the Exchange Act, 17 C .F .R. 210.4-01(a) ( 1) ,
provides that financial statements filed with the SEC that are not prepared in compliance with
GAAP are presumed to be misleading and inaccurate . Accounting Se ries Release ("ASR") 4 ,
codified at ASR 34 .
134 . As set forth in Financial Accounting Standards Board ("FASB") Statement o f
Financial Accounting Concepts No . 1, one of the fundamental objectives of financial reporting i s
to provide accurate and reliable information concerning an entity's financial performance during
the period being presented . Concept Statement No . 1,142 states ;
Financial reporting should provide information about anenterprise's financial performance during a period . Investors andcreditors often use information about the past to help in assessingthe prospectus of an enterprise . Thus, although investments andcredit decisions reflect investors' and creditors' expectations aboutfuture enterprise performance, those expectations are commonlybased at least partly on evaluations of enterprise performance .
52
6 S135 . Additionally, Section 1 3 of the Exchange Act requires, in part, that companies lik e
MIIX :
devise and maintain a system of internal accounting controlssufficient to provide reasonable assurance that -
transactions are recorded as necessary (1) to permit preparation offinancial statements in conformity with generally acceptedaccounting principles or any other criteria applicable to suchstatements, and (II) to maintain accountability for assets[ .] 15U.S .G. § 78m(b) .
136. Defendants ' representations that MIIX' s financial statements were prepared in
accordance with GAAP were materially false and misleading because , as alleged in . this
Complaint, they and other Company employees : (1) understated MILx's Net Loss Reserve and ,
therefore, materially overstated the Company' s reported earnings, earnings per share an d
shareholder equity (see ¶1163 -73 and 137-38); (2) failed to disclose that MIIX lacked internal
controls necessary to ensure proper estimating of losses on outstanding claims (fee 19[ 50-62, 74
and 139 -42) ; and (3) failed to disclose the existence of a material related-party transaction (see
9J1 116-32 and 143-48) . Each of these misrepresentations , material omissions, and fraudulent
reserve practices , standing alone, was a material breach of GAAP, applicable SEC regulations ,
and the Company's own accounting policies .
1. Understated Net Loss Reserve
137. Under GAAP, when it is probable that a loss has been incurred and the amount of th e
loss can be reasonably estimated, a company must record a reserve in order to reduce assets o r
income for the amount of the probable loss . See SFAS No . 5 . SFAS NO . 5, "Accounting for
Contingencies ," defines a contingency as "an existing condition , situation, or set o f
53
• •circumstances involving uncertainty as to loss ("loss contingency") to an enterprise that wil l
ultimately be resolved when one or more future events occur or fail to occur." SFAS 511 .
138. As discussed in detail above (1163-73), the defendants did not reserve "reasonabl e
estimates" of losses on outstanding claims, which in turn skewed their estimates of losses o n
future claims, and, the defendants' collective suppression of MIA's Net Loss Reserve resulte d
in an estimate that was not "reasonable" and in violation of GAAF.
2. MYIX Locked Internal Controls To Prevent Financial 1Vlisstatement s
139. Article 11 of Regulation S-X and GAAP , in FASB 's SFAS No. 5, required MIIX t o
disclose in the footnotes of its financial statements during the Class Period that the interna l
control problems regarding its Net Loss Reserve could have reasonably caused the Company' s
financial statements to be materially misstated . In violation of GAAP, MIIX 's financial
statements failed to disclose that these internal control weaknesses were reasonably likely to
have a material adverse effect on MIIX's results .
] 40 . In addition, Item 7 of Form 10-K and Item 2 of Form 10-Q, Management' s
Discussion and Analysis of Financial Condition and Results of Operations ("MD&.A"), require d
MIIX to furnish information required by Item 303 of Regulation S-K [17 C .F.R. 229 .303] . In
discussing results of operations, Item 303 of Regulation S-K says a registrant must :
Describe any known trends or uncertainties that have had or thatthe registrant reasonably expects will have a material favorable orunfavorable impact on net sales or revenues or income forcontinuing operations.
The Instructions to Paragraph 303(a) add :
The discussion and analysis shallevents and uncertainties known toreported financial information notfuture operating results .
focus specifically on materialmanagement that would causeto be necessarily indicative of
54
M •141 . In the SEC's May 18, 1989 interpretive Release No. 34-26831, the SEC indicated that
registrants should employ the following two-step analysis in determining when a known trend o r
uncertainty is required to he included in the MD&A disclosure pursuant to Item 303 of
Regulation S-K :
A disclosure duty exists where a trend, demand, commitment,event or uncertainty is both presently known to management and isreasonably likely to have a material effect on the Registrant'sresults of operations .
142. Defendants, however, in violation of Item 303 of Regulation S-K, failed to disclose
that Mkix lacked internal controls necessary to prevent reserve abuses (1J 74)and further knew
and/or recklessly disregarded that the absence of such internal accounting controls was
reasonably likely to have a material . adverse effect on the Company's operating results .
Defendants similarly failed to disclose adverse loss trends that negatively impacted the Net Loss
Reserve, including, for example, MID ('s pricing policy and the selling behavior of M1 's
brokers and agents in expansion states . (See 1150-62) .
3. The Related-Tartu Transaction - MIIX Advantage
143. Article 4 of Regulation S-X and GAAP, in FASB's SFAS No . 57, required the
Company to disclose in its financial statements relevant information regarding related parties and
related party transactions . In violation of these rules and procedures, MIIX's financia l
statements and press releases failed to disclose that : (1) MII had engaged a firm to conduct
research into creating a private company not owned by MIIX but operated by MITX directors and
officers; (2) Mli directors and officers were causing the significant and unusual sale of MffX' s
profitable New Jersey insurance underwriting business to Mlix Advantage, which wa s
controlled and operated by M1TC executives and officers .
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F] •144, Article I of Regulation S-X refers to the term "related parties" as defined in SFAS 57 ,
which defines "related parties" as follows :
Related parties . Affiliates of the enterprise ; entities for whichinvestments are accounted for by the equity method by theenterprise; trusts for the benefit of employees, such as pension andprofit-sharing trusts that are managed by or under the trusteeship ofmanagement ; principal owners of the enterprise ; its management ;members of the immediate families of principal owners of theenterprise and its management ; and other parties with which theenterprise may deal if one part controls or can significantlyinfluence the management or operating policies of the other to anextent that one of the transacting parties might be prevented fromfully pursuing its own separate interests . Another party also is arelated party if it can significantly influence the management oroperating policies of the transacting parties or if it has anownership interest in one of the transacting parties and cansignificantly influence the other to an extent that one or more ofthe transacting parties might be prevented from fully pursuing itsown separate interests . SFAS 1[24 .
145. According to FASB SFAS No. 57, the reliability of financial information involve s
"assurance that accounting measures represent what they purport to represent ."
Without disclosure to the contrary, there is a general presumptionthat transactions reflected in financial statements have beenconsummated on an arms-length basis between independentparties . However, that presumption is not justified when relatedparty transactions exist because the requisite conditions ofcompetitive, free-market dealings may not exist . Because it ispossible for related party transactions to be arranged to obtaincertain results desired by the related parties, the resultingaccounting measures may not represent what they usually wouldbe expected to represent .
146. Because of this, FA.SB SFAS No . 57 states that :
information about transactions with related parties is useful tousers of financial statements in attempting to compare anenterprise's results of operations and financial position with thoseof prior periods and with those of other enterprises . It helps themto detect and explain possible differences . Therefore, informationabout transactions with related parties that would make a
56
0 ftdifference in decision making should be disclosed so that users ofthe financial statements can evaluate their significance .
147 . F.ASB No. 57 also mandates that "financial statements shall include disclosures of
material related party transactions" and that such disclosure shall include a description of th e
transactions, including transactions in which no amounts or nominal amounts were ascribed, for
each of the periods for which income statements are presented, and such other informatio n
deemed necessary to an understanding of the effects of the transactions on the financia l
statements, including :
a, the nature of the relationship(s) involved ;
b . the dollar amounts of transactions for each of the periods for which incomestatements are presented and the effects of any change in the method ofestablishing the terms from that used in the preceding period ; and
c. amounts due from or to related parties as of the date of each balance sheetpresented and, if not otherwise apparent, the terms and manner of settlement ;
148. Under GAAP, defendants were required to disclose : ( 1) that they were developing a
new privately held company, MIIX Advantage, that they controlled ; and (2) that they were usin g
MIIX assets to enter into transactions for the benefit of MIIX Advantage such as engaging
Norman Hecht to research whether Ml IX could be capitalized . Such disclosure s
would have informed investors that Ml was nog longer an insurance underwriting company an d
that the transactions between MIIX and MIX Advantage were not "arms length" as defendant s
represented them to be . Had such disclosures been made, they would have further suppresse d
the price of MIIX's stock .
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4. Additional GAAP Violations
•
149 . In addition to the accounting violations described above, defendants allowed MICR t o
present its financial statements in a manner that violated, among others , the following GAA P
principles :
a. the principle that a conservative approach be takento ensure that uncertainty and risks inherent inbusiness situations are adequately considered, andthat errors in measurement be in the direction ofunderstatement rather than overstatement of netincome and net assets (see Statement of FinancialAccounting Standards "SFAC" No. 21191-97) ;
b . the principle that the financial informationpresented should be complete (sec SFAC No. 21179-80) ,
c . the principle of fair presentation ("presents fairly")(see SFAC No. 1,133) ;
d. the principle of adequacy and fairness of disclosure(see SFAC No, 1 .134 and SFAC No. 5, U7,12);
e. the principle of materiality concerning informationthat i s significant enough to affect the judgment of areasonable person (see SFAC No. 2, ¶132) :
f. the principle that the financial statements containand disclose relevan t and timely information for theeconomic decisions of the user (see SFAC NO . 2,fi 47, 48, 52, 56) ;
g. the p rinciple that the financial statements providereliable Financial information that represents theeconomic conditions or events that it purports torepresent ee SFAC No. 2, 1158, 62) ;
h . the principle that financial information should becomparable and consistent with similar informationabout other enterprises and with similar informationabout the same enterprise for some other period orsome other point in time see SFAC No . 2 p][ 111,115, 117, 120) ;
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the principle that financial information should beneutral, or free from bias towards a predeterminedresult see SFAC No. 2[1 9S, 99) ;
j . the principle that financial reporting should provideinformation about the economic resources of anenterprise, the claims to those resources, and theeffects of transactions, events, and circumstancesthat change resources and claims to those resources(see SFAC No. 1140);
k. the principle that financial reporting should provideinformation that is useful to users of the financialstatements in making rational investment, credit,and similar decisions (see SFAC No. 1 134) ;
the principle that disclosure of an entity'saccounting policies should identify and describe theaccounting principles followed by the reportingentity and the methods of applying those principlesthat materially affect the determination of financialposition, changes in financial position, or results ofoperations because information about theaccounting policies adopted by a reporting entity isessential for financial statement users (see APB 22,18, 12) .
APPLICABILITY OF PRESUMPTION OF RELIANCE :FRAUD-ON-THE-MARKET DOCTRIN E
150. Lead Plaintiff and the Class members will rely, in part, and only as to their Exchange
Act claims, upon the presumption of reliance established by the fraud-on-the-market doctrine .
Throughout the Class Period, M11X's stock traded on a fair and efficient market for the followin g
reasons, among others :
151 . MM ('s stock met the requirements for listing, and was listed and actively traded o n
the New York Stock Exchange, a highly efficient and automated market under the ticker symbo l
("M „ ) .
59
r152. As a regulated issuer , MIIX filed periodic public reports with the SEC and the New
York Stock Exchange ;
153. MI EX regularly communicated with public investors via established marke t
communication mechanisms, including through regular dissemination of press releases on th e
national circuits of major newswire services and through other wide-ranging public disclosures ,
such as communications with the financial press and other similar reporting services ; and
154. MILK was followed by several securities analysts employed by major brokerage firm s
who wrote reports that were distributed to the sales force and certain customers of thei r
respective brokerage firms . These reports were publicly available and entered the publi c
marketplace .
155. As a result of the foregoing, the market for MIIX stock promptly digested curren t
available information regarding the Company from all publicly available sources and reflecte d
such information in its stock price . Under these circumstances, all purchasers of MIIX commo n
stock during the Class Period suffered similar injury through their purchase .
156. Based upon the foregoing, plaintiff and the other members of the Class are entitled to
a presumption of reliance upon the integrity of the market for the purpose of class certification a s
well as for ultimate proof of their claims on the merits . Plaintiff will also rely, in part, upon th e
presumption of reliance established by material omissions and upon the actual reliance of th e
class members .
60
•ADDITIONAL SCIENTER ALLEGATIONS APPLICABLE TO
EXCHANGE ACT CLAIMS AGAINST DEFENDANT SMIIX MARESSA GOLDB RG KORLYVA COSTANTL REDMAN AND HIRSC H
157 . Lead Plaintiff incorporates by reference each and every allegation set forth above a s
if alleged in full herein . As to the Exchange Act claims, set forth below , Lead Plaintiff allege s
that defendants MIIX, Mtuessa, Goldberg, Koreyva, Costante, Redman and Hirsch (th e
"Exchange Act Defendants") acted with scienter throughout the Class Period, in that they eithe r
had actual knowledge of the misrepresentations and/or omissions of material facts set fort h
herein, or acted with reckless disregard for the truth in that they failed to ascertain and disclos e
the true facts, even though such facts were available to them .
158. MIIX. Defendant MT 1X acted either intentionally or recklessly in issuing false an d
misleading statements, and/or concealing material facts, because it . (1) intentionally engaged in
all of the wrongful conduct described herein ; (2) issued all of the false and misleading statement s
described herein; and (3) concealed all of the material facts described herein .
159 . The February 2002 Net Less Reserve Increase . The Exchange Act Defendants
acted either intentionally or recklessly in issuing false and misleading statements, and/o r
concealing material facts because they increased MIIX's Net Loss Reserve by over $65 millio n
in February 2002, within weeks of representing that MITX's Net Loss Reserve was adequate and
paying a . dividend . In light of the incredible increase in the Net Loss Reserve , defendants eithe r
knew and/or recklessly disregarded that MIIX's Net Loss Reserve was grossly inadequate when
they made the earlier representations .
160. The First Quarter 2000 Net Loss Reserve Study and August 2000 Reserve
Increase . The Exchange Act Defendants further acted either intentionally or recklessly in issuin g
false and misleading statements, and/or concealing material facts because they undertook " a
61
r •period of intense study" prior to adjusting the Net Loss Reserve in 2000 and because they
adjusted MIIX's Net Loss Reserve by over $70 million within weeks of representing that MIIX' s
Net Loss Reserve was adequate . In light of the alleged analysis and subsequent unprecedente d
increase in the Net Loss Reserve, defendants either knew and/or recklessly disregarded that
MIIX' s net loss reserve was inadequate .
161 . The A.M. Best Rating. The Exchange Act Defendants were further motivated t o
issue false and misleading statements and/or conceal material facts because they knew that any
adverse information regarding MIIX's ability to pay its claims would severely impact MIX' s
credit rating by A .M . Best, which would in turn negatively impact MIIX's business . A .M . Best' s
rating was extremely important to defendants because it impacted their year end bonuses an d
MIIX's business (see 11(1 166 and 67) . Further, if the defendants would have increased the
Company's Net Loss Reserve, it would have lowered MI 's operation capital and hurt MTIX's
A.M. Best. Rating , as reflec ted by the fact that MIIX ' s A.M . Best Rating was decreased after th e
February 2002 Net Loss Reserve increase (see 111] 8-120) . Defendants attempted to stave off
the downgrade of their business by A .M. Best as long as possible by falsely reporting that th e
Company's Net Loss Reserve was adequate ,
162. Defendants ' Desire to Stave Off a Hostile Takeover. The Exchange Act
Defendants' were further motivated to issue false and misleading statements and/or conceal
material facts because they wanted to make the Company appear as financially sound as possibl e
in order to stave off a hostile takeover. As set forth above (11 104 and 116), bidders attempted t o
buy or recapitalize MIIX in or about May 2001 and the spring of 2002 . In response to the firs t
attempt in June 2001, MI instituted a Shareholder Rights Plan designed to stave off a takeover ,
reflecting their motive retain control of MII?C . The defendants , including Maressa and Hirsch i n
62
M •
particular, had an incentive to stave off a takeover of the Company by a third party becaus e
Maresca was the Executive Director and General Counsel of the Medical Society and Hirsch wa s
a member of the Medical Society . The Medical Society was the majority shareholder of MILK
and its members consisted of New Jersey physicians . The Medical Society had an interest in
maintaining control of M]TX, which sets rates charged to New Jersey physicians for medica l
malpractice coverage .
163 . The MIIX Advantage Transaction . The Exchange Act Defendants were motivate d
to issue false and misleading statements and/or conceal material facts because they wanted t o
transfer MITX's profitable New Jersey insurance business to MITX Advantage, which th e
defendants continued to control and which wa s owned by New Jersey physicians , and leave
MILX shareholders with inadequate value . Defendant Costante and Redman also receive d
substantial bonuses for the work they performed for MITX Advantage, providing additiona l
incentive for them to sell MJTX 's assets to MIIX Advantage and to conceal the nature of the
transfer of assets . Further, because MIIX Advantage was a company that was capitalized b y
physicians and operated using MI X's insurance business, management and services, defendant s
needed to prop up and stabilize M11X ' s stock price and its rating by A.M . Best to garner
investment interest by New Jersey physicians to capitalize MII C Advantage .
164. Stock Purchase and Loan Agreements . Defendants Goldberg, Koreyva, Redman
and Costante were further motivated to issue false and misleading statements and/or concea l
material facts owing to MUX's Stock Purchase and Loan Agreement Plans ("SPLA Plans")
Under the SPLA Plans, the Company loaned money to them to purchase stock which they coul d
sell after one year. For example, around the time of the fPO, MII entered into SPLA Plan s
with defendants Goldberg and Koreyva that resulted in the Company loaning them
63
M L:]
$1,290,000.00 and $550,000 respectively, to purchase M11X common stock at the IPO price ,
which was $13 .50 per share. As a result of the loans, Goldberg and Koreyva were motivated t o
manipulate MIIX's stock price above $13 .50 per share because only if the p rice rose above thi s
price after one year would they he ab le to sell their shares , pay off their loans to the Compan y
and make a profit . Similar loans were made to defendant Costante and Redman, As o f
December 31, 2000, defendant Koreyva had borrowed $1,094,641 that was secured by a pledg e
of 77,489 shares; defendant Redman had borrowed $483,390 that was secured by 33,830 shares ;
and defendant Costantc had borrowed $462,907 that was secured by 38 ,895 shares .
165. Control of MTIX to Arrange for Forgiveness of Loans and the Retention
Incentive Plan. After M11X's stock pric e did not rise above the prices at which the abov e
mentioned defendants purchased stock, they were motivated to issue false and misleading
statements , and/or conceal material facts in order to maintain control of MJD( to arrange for the
waiver or forgiveness of their loans and/or to assure that they would receive compensation from .
the Company sufficient to pay off their loans . In 2002, M17X adopted an Employee Retentio n
Incentive Plan (the "Retention Incentive Plan") . On March 5, 2002, the defendants caused MI I
to pay defendant Costante $323,750 with another payment due to her on September 5, 2003
under this plan . C.ostante's first payment under the Retention Incentive Plan was used t o
extinguish part of her loan obligation under the SPLA Plans. Further, MIIX amended the SPLA
to extend the maturity dates of the loans for defendant Costante to March 1, 2005 and fo r
defendant Redman to March 1, 2007 .
166. The Annual Incentive Plan . Moreover, defendants Goldberg, Koreyva , Redman an d
Costante were further motivated to issue false and misleading statements owing to MIIX's
Annual Incentive Plan . The Annual Incentive Plan had specific goals attached to MIIX' s
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business, including targeted levels of written premiums, operating income and A.M. Best ratings .
According to one or more Proxy Statements issued by the Company during the Class Period ,
bonuses under the Annual Incentive Plan "generally are initially determined by reference to th e
Company's financial performance." For example, in 2000, the Company stated in its proxy that
"[i]n recognition of [the Company exceeding both its targeted written premiums and operating
income levels for 1999] the Compensation Committee recommended an increase in 1999' s
targeted bonus levels for certain executives ." The proxy statement for 2000 further highlighte d
defendant oreyva and Costante's bonuses for 1999 :' 5
in 1999, under the Annual Incentive Plan, defendantKoreyva received a $140,000 bonus, which was over 45%of his base salary, and defendant Costante received a$25,000 bonus, which was over 13% of her base salary .Further, in 1999, Koreyva's base salary was increased from$275,000 to $340.000 and the cash bonus he was eligible toreceive increased from 45% to 65% of his base salary .
167 . Violations of GAAP. The Exchange Act Defendants also acted either intentionall y
or recklessly in issuing false and misleading statements, and/or concealing material facts becaus e
they knew that the Net Loss Reserve was set in violation of GAAP and that the Company lacked
sufficient internal accounting controls to estimate actual losses on outstanding claims, as
discussed above in 1150-62, 63-74 and 137-42 .
168 . The Exchange Act Defendants' Opportunity to Commit Fraud . The Exchange
Act Defendants were the senior management of the Company, were directly responsible for th e
Company's SEC filings, press releases, news reports and insurance analysts, as set forth above ,
15 Defendant Goldberg left MIN in early November 1999 after he was arrested onmarijuana charges . Goldberg's separation agreement provided, inter alia, that Goldberg wouldreceive the following bonus for 1999 "the amount of $250,000, representing 1999 bonuscompensation through the Termination Date pursuant to the Company's Cash IncentiveProgram[ .]"
65
LI •and thus had the opportunity to disseminate the false and misleading statements and/o r
omissions.
169. Defendant Goldberg. In addition to the reasons set forth above, defendant Goldberg
further acted either intentionally or recklessly in issuing false and misleading statements and/o r
concealing material facts because : Goldberg personally set MIIX's agenda of expansion into
other states and product lines by setting predatory prices and knowing that the Company lacked a
business strategy and the experience necessary to succeed in those markets ; Goldberg knew
and/or recklessly disregarded that MIIX's reserves were not "adequate" and not management' s
"best estimates" ; Goldberg put MllX's marketing department in control of its branch office s
despite his knowledge that the marketing department was causing MIIX to enter into policies tha t
were not profitable ; and Goldberg signed MUX's false and misleading Registration Statement
and Form 10-Q's and Form 10-K's filed with the SEC .
170. Defendant Koreyva. In addition to the reasons set forth above, defendant Koreyva
further acted either intentionally or recklessly in issuing false and misleading statements and/o r
concealing material facts because : in at least two separate quarters between August 2000 an d
February 2002, a MIIX management employee who worked for Koreyva directed M17X claim s
representatives to re-evaluate and decrease the amount of their claims for the purpose of reducin g
the Company 's estimate of its Net Loss Reserve ; Koreyva refused to restructure the wa y
insurance brokers were paid to emphasize profitability over volume ; Koreyva directed a reserve
study to be done in the spring of 2000 without disclosing the study to the public and, at the same
time, representing that MIIX's Net Loss Reserve was "adequate ;" Koreyva signed MT 's false
and misleading Registration Statement and Form 10-K's and 10-Q's filed with the SEC .
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171„ Defendant Costante . In addition to the reasons set forth above, defendant Costant e
acted either intentionally or recklessly in issuing false and misleading statements and/o r
concealing material facts because : Costant,e caused MII. to announce a quarterly dividen d
payable in January 2002, just weeks before the Company announced an over $65 million
increase in the Company's Net Loss Reserve and an over $160 million net operating income
loss ; and Costante signed M1IX's false and misleading Form 10-K's and 10-Q's filed with SEC .
Further, Costante was also motivated to act in concert with defendants Maressa and Hirsch, wh o
promoted her to CEO and Chairman of the Board of Directors of M11X during the Class Period .
172. Defendant Redman . In addition to the reasons set forth above, defendant Redman
acted either intentionally or recklessly in issuing false and misleading statements and/o r
concealing material facts because. as CFO he was in a position to see and evaluate M ID' s
operating income and Net Loss Reserve ; he was further in a position to know first hand that
MI X's controls for setting Mlix' s loss reserves for outstanding claims were inadequate; and he
reviewed , approved and signed MIIX ' s false and misleading Form 10-K's and Form 10-Q' s
filed with the SEC .
173. Defendant Hirsch . In addition to the reasons set forth above, defendant Hirsch acted
either intentionally or recklessly in issuing false and misleading statements, and/or concealin g
material facts because he engaged in significant insider trading . Prior to July 2000, Hirsch had
not sold any of his shares of M1TX in the aftermarket. As discussed above , MILX announce d
publicly for the first time on or about August 8, 2000 that it had conducted a reserve study an d
was increasing reserves, and thereby reducing earnings and earnings per share, for the quarter .
As the following chart shows, defendant Hirsch, made the following sales of shares of MU X
stock prior to the August 2000 announcement :
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Trade llate Number ofShares
Price Total Proceed s
7/14/00 1,000 $12.31 $12,31 07/14/00 1,000 $12.44 $12,4407/14/00 3,000 $12.31 $36,9307/20/00 5(X) $12.69 $6,3457/20/00 4,500 $12.56 $56,5207/21/00 3,000 $12.63 $37,890
Total $162,435.00
174 . Defendant Hirsch's July 14, 20 and 21, 2000 insider sales were unusually large i n
volume and irregular in timing and demonstrate his knowledge that MIIX's stock price wa s
about to decline due to the fraudulent conduct complained of herein . These trades furthe r
establish his motive and opportunity to commit fraud . Witness 5 stated that after he left ML1X ,
he was told by a MILK employee that the Vice Chairman of MUX's Board of Directors ,
defendant Hirsch, engaged in .insider trading after a meeting was held with the Board in whic h
they were told that the Company was increasing the reserve for losses and LAE and before the
announcement was made to investors .
175. Defendant Hirsh, in addition to his insider trading , acted either intentionally or
recklessly in issuing false and misleading statements and/or concealing material facts, because he
reviewed, approved and signed M]TX's form 10-K's for fiscal years 1999, 2000, 2001 and 200 2
despite his knowledge that the Company's Net Loss Reserve and the prices of premiums wer e
inadequate .
16 Hirsch 's trades were also recorded as taking place when the Company'sstock was at or near its highest closing price for the month, which was $12 .75 onJuly 24, 2000 . Further, the trades were not reported to the SEC until on or aboutAugust 10, 2000, which was after the Company announced the increase in the NetLoss Reserve .
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THE SAFE HARBOR PROVISION DOES NUT APPLY
176 . The Private Securities Litigation Reform Act ("PSLRA") statutory safe harbo r
provided for forward-looking statements under certain circumstances does not apply to th e
allegedly false statements pleaded in this Complaint . The statements alleged to be false and
misleading relate to then existing facts and conditions . In addition, to the extent certain of the
statements alleged to be false may be characterized as forward-looking, they were not adequatel y
identified as "forward-looking statements" when made.. Moreover, to the extent there were any
forward-looking statements, (a) there were no meaningful cautionary statements identifying the
important then-present factors that could and did cause actual results to differ materially from
those in the purportedly forward-looking statements, and (b) the particular speaker of any such
forward-looking statement knew that the particular statement was false or misleading, and/or th e
forward-looking statement was authorized and/or approved by an executive officer of MIIX wh o
knew that those statements were false when made . Furthermore, any warnings contained in th e
press releases and statements quoted therein were generic statements of the kind of risks tha t
affect any insurance company and misleadingly contained no specific factual disclosure of any o f
MITX's looming financial problems which placed MTIX's profitability and growth at risk.
VIOLATIONS OF THE SECURITIES ACT
FIRST CLAIM
FOR VIOLATIONS OF SECTION 11 RELATING TO TILE REGISTRATIONSTATEMENT AGAINST DEFENDANTS MIIX, MARE A, GOLDBERG, KOREYVA ,
IIIR,SCH, AGRO, CARNES, MAURER, MIS OFF, MOLONEY,MOYNIHAN, SCIALLIS . SORGER AND SULLIVAN
177. Lead Plaintiff incorporates by reference each and every allegation set forth above a s
if alleged in full herein .
178. This claim is brought pursuant to Section 11 of the Securities Act, 15 U.S .C. §77k, on
behalf of the Class consisting of all persons who purchased or otherwise acquired NM' s
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M •
common stock traceable to the TPO and is against MIBX, Maressa, Goldberg, Koreyva , Hirsch ,
Agro, Carnes, Maurer, Miskoff, Moloney, Moynihan, Sciallis, Sorger and Sullivan .
179. As set forth above, the Registration Statement, when it became effective, containe d
untrue statements of material fact and omitted to state material facts required to be stated therei n
or necessary to make the statements therein not misleading .
180. MIIX is the registrant for the [PD shares sold to Class members . MIIl caused to be
issued and participated in the issuance of materially false and misleading written statement s
and/or omissions of material facts to the investing public that were contained in the Registration
Statement .
181 . Each of the Individual Defendants, either personally or through an attorney-in-fact ,
signed the Registration Statement or was a director or person pctlorniing similar functions fo r
MT1X at the time of the IPO .
182. The Defendant-, named in this Claim are liable to Class members who purchased o r
otherwise acquired MITX common stock traceable to the TPO .
183. By virtue of the foregoing, Class members who purchased or otherwise acquired
MIIX common stock traceable to the IPO are entitled to damages pursuant to Section 11 .
SECQDND CLAIM
FOR VIOLATIONS OF SECTION 12 RELATINGTO THE PROSPECTUS AGAINST DEFENDANT MIIX
184. Lead Plaintiff incorporates by reference each and every allegation set forth above a s
if alleged in full herein .
185. This claim is brought pursuant to Section 12 of the Securities Act on behalf of al l
persons who purchased or otherwise acquired MIIX's common stock traceable to the IPO, and i s
against MIIX .
70
r a18 6. As set forth above, the Prospectus contained untrue statements of material fact and
omitted to state material facts required to be stated therein or necessary to make the statement s
therein not misleadin g
187. MILX is the registrant for the JPQ shares sold to Class members . I IIM caused to be
issued and participated in the issuance of materially false and misleading written statements
and/or omissions of materially false and misleading written statements and/or omissions o f
material facts to the investing public that were contained in the Prospectus .
188. MIIX is liable to Class members who purchased or otherwise acquired M1I. common
stock traceable to the IPO .
189. By virtue of the foregoing, Class members who purchased or otherwise acquired
MUX common stock traceable to the IPO are entitled to damages pursuant to Section 12 .
THIRD CLAI MFOR VIOLATIONS OF SECTION 15 RELATING TO THE REGISTRATION
STATEMENT AND PROSPECTUS AGAINST DEFENDANTS MSNJ,MARESSA, GOLDBERG, KOREYVA, HIRSCH, AGRO, CARNES, MAURER,MISKOFF, MOLONEY, MOYNIHAN . SCIALLIS . SORGER AND SULLIVA N
190. Lead Plaintiff incorporates by reference each and every allegation set forth above a s
if alleged in full herein .
191 . This claim is brought pursuant to Section 15 of the Securities Act, 15 U.S .C. §77o, on
behalf of the Class consisting of all persons who purchased or otherwise acqu ired MIIX's
common stock traceable to the IPO and is against defendants M NJ, Maressa , Goldberg ,
Koreyva, Hirsch, Agra, Carnes, Maurer, Miskoff, Moloney, Moynihan , Sciallis, Sorger, and
Sullivan .
192 . MILX is liable under Section 11 and 12 of the Securities Act as set forth in the Firs t
Claim herein with respect to the IPD .
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M •193 . Defendants MSNJ, Maressa, Goldberg, Koreyva, Hirsch, Agra, Carnes, Maurer ,
Miskoff, Moloney, Moynihan, Sciallis, Sorger, and Sullivan were control persons ❑f MlIX with
respect to the IPO by virtue of that individual's position as a senior executive officer and/o r
director of MIIX and, as to MSNJ, by virtue of its ownership and control of MUX .
194. The defendants named in this Claim, by virtue of their managerial and/or board
positions with MIIX, controlled M11X as well as the contents of the Registration Statement at th e
time of the IPO. Each of the defendants named in this Claim was provided with or had unlimite d
access, to copies of the Registration Statement and had the ability to either prevent its issuance o r
cause it to be corrected .
195. As a result , the defendants named in this Claim are liable under Section 15 of th e
Securities Act for M11X's primary violation of Sections 11 and 12 of the Securities Act .
196. By virtue of the foregoing, the Class members who purchased or otherwise acquire d
MITX's common stock traceable to the IPO are entitled to damages against the defendants named
in this Claiim
VIOLATIONS OF THE EXCHANGE ACT
FOURTH CLAIMFOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE AC T
AND RULE 10b-5 THEREUNDER AGAINST DEFENDANTS MJJX, MARESSA,GOLDBERG KOREYVA COSTAN'I'E REDMAN AND HIRSCH
197. Lead Plaintiff incorporates by reference each and every allegation set forth above as
if alleged in full herein .
198. Defendants Mlix, Maressa, Goldberg, Koreyva, Costante, Redman and Hirsch : (a .)
knew or recklessly disregarded material adverse non-public information about MIIX's financial
results and then-existing business conditions, which were not disclosed ; and (h) participated i n
72
V 17drafting, reviewing and/or approving the misleading statements, releases, reports and othe r
public representations of and about MITC .
199. During the Class Period, the defendants named in this Claim, with knowledge of o r
reckless disregard for the truth, disseminated or approved the false statements specified above ,
which were misleading in that they contained misrepresentations and failed to disclose materia l
facts necessary in order to make the statements made, in light of the circumstances under whic h
they were made, not misleading .
200. The defendants in this Claim have violated § 10(b) of the Exchange Act and Rul e
10h-5 promulgated thereunder in that they : (a) employed devices, schemes, and artifices to
defraud; (b) made untrue statements of material facts or omitted to state material facts necessar y
in order to make statements made, in light of the circumstances under which they were made, not
misleading; or (c) engaged in acts, practices and a course of business that operated as a fraud o r
deceit upon the purchasers of MIIX stock during the Class Period .
201 . Lead Plaintiff and the Class have suffered damage in that, in reliance on the integrity
of the market, they paid artificially inflated p rices for MIIX stock . Lead Plaintiff and the Clas s
would not have purchased MllX stock at the prices they paid, or at all , if they had been aware
that the market prices had beer, artificially and falsely inflated by defendants' false an d
misleading statements .
FIFTH CLAIMFOR VIOLATIONS OF SECTION 20(a) OF THE
EXCHANGE ACT AGAINST DEFENDANTS MARESSA, GOLDBERG,KORFYVA MARESSA, REDMAN, G STANTF AND HIRSC H
202. Lead Plaintiff incorporates by -reference each and every allegation set forth above a s
if alleged in full herein .
73
r i203. Defendants Maressa, Goldberg, Koreyva, Maressa, Rodman, Costante and Hirsc h
were controlling persons of MIIX within the meaning of Section 20(a) of the Exchange Act . By
reason of their senior executive and/or director positions, they had the power and authority t o
cause MLICX to engage in the wrongful conduct complained of herein .
204. By reason of such wrongful conduct, the defendants named in this Claim are liabl e
pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of these
defendants' wrongful conduct, Lead Plaintiff and the other Class members suffered damages in
connection with their purchases of MIT) common stock during the Class Period .
SIXTH CLAIMFOR VIOLATIONS OF SECTION 20A O F
THE EXCHANGE ACT AGAINST DEFENDANT HIR H
205. Lead Plaintiff incorporates by reference each and every allegation set forth above a s
if alleged in full herein. This Claim for violation of Section 20A of the Exchange Act for insider
trading is asserted against defendant Hirsch .
206. By virtue of his position as a director of MIIX, Hirsch was in possession of materia l
non-public information about MUX that resulted in a duty to either disclose the information or
abstain from trading .
207 . Hirsch sold MIIX stock while in possession of material , non-public information, a s
set forth above .
208. Hirsch's sales were made contemporaneously with purchases by the Lead Plaintif f
and Class members .
209 . The Lead Plaintiff and all other Class members who purchased shares of MII X
common stock contemporaneously with the sales of MILX common stock by Hirsch (1) hav e
suffered substantial damages in that, they paid artificially inflated prices for MHX common stoc k
74
r lbas a result of the violations of Section 10(b) and Rule lOb-5 herein described ; and (2) would not
have purchased MIIX stock at the prices they paid, or at all, if they had been aware that the
market prices had been artificially and falsely inflated by defendants' misleading statements an d
concealment. At the time of the purchases by Class members, the fair and true market value o f
said common stock was substantially less than the price paid by them .
PRAYER FOR RELIT
WHEREFORE, Lcad Plaintiff, individually and on behalf of the Class, prays for relief
and judgment, as follows :
(a) Declaring this action to be a class action , certifying plaintiff as class
representative under Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure and Lea d
Plaintiffs counsel as Class counsel ;
(b) Awarding Lead Plaintiff and the Class compensatory damages against al l
defendants, jointly and severally, for all damages sustained as a result of defendants '
wrongdoing, in an amount to be proven at trial , plus interest thereon ;
(c) Awarding Lead Plaintiff and the Class prejudgment and post-judgment interest, a s
well as reasonable attorneys' and experts' witness fees and other costs and expenses incurred i n
this action; and
(d) Such other and further relief as the Court may deem just and proper .
75
r to
JURY TRIAL DEMANDED
A trial by .lury is hereby demanded .
Dated : August , 2003
SEEGER WEISS LLP
By :Stephen A. WeissDavid R. BuchananEric T. Chaffin550 Broad Street, Suite 920Newark, New Jersey 07102Tel : (973) 639-9100Fax : (973) 639-9393
Lead Plaintiff's Counsel
FRYDMAN LLCDavid Frydma n18 East 48th Street, Suite 1000New York, New York 10017Tel: (212) 355-9100Fax: (212) 355-898 8
LAMPF LIPKIND PRUPIS &PETIGROW P.A .Harvey J. KesnerNeil PrupisTheodore Botter80 Main StreetWest Orange, NJ 07052Tel, : (973)325-2100Fax: (973)325-2839
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_1b 4CERTIFICATE OF SERVICE
The undersigned Lead Plaintiff's Counsel certifies that a copy of the foregoing Motio n
and the attachments thereto were caused to be served via U .S . First Class Mail, postage prepaid ,
upon the following counsel of record for the defendants this Q day of August, 2003:
Counsel .for M1TX, Vincent A .Maressa, Kenneth Koreyva, PatriciaA. Costante, Thomas Redman, PaulJ. Hirsch, Angelo S . Agro, Harry M .Carnes, Robert S . Maurer, A .Richard Miskoff, Charles J .Moloney, Eileen Marie Moynihan,Gabrile F. Sciallis, Martin L. Sorgerand Bessie M. Sullivan :
Counsel for The MedicalSociety of New Jersey:
David J . D'Aloia, Esq .Saiber Schlesinge r
Satz & Goldstein, LLCOne Gateway Center, 13th FloorNewark, New Jersey 071 .02-5311
Brian C. Darreff, Esq.Marshall , Dennehey , Warner ,
Coleman and Goggi n200 Lake Drive East, Suite 300Cherry Hill, New Jersey 0800 2
SEEGER WEISS LLP
By :tephen A. Weiss
David R . BuchananEric T . Chaffin550 Broad Street, Suite 920Newark, New Jersey 07102Tel: (973) 639-9100Fax : (973) 639-9393
Lead Plaintiff°s Counsel