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The Journal Gazette

Wednesday, June 05, 2019 1:00 am

CHS accused of fraud in suit

Shareholder says company misled

SHERRY SLATER | The Journal Gazette

A shareholder has filed a class action lawsuit against Community Health Systems and three of its executives, alleging they committed securities fraud by misleading investors about the company's financial health.

Caleb Padilla of California filed the lawsuit Thursday in U.S. District Court for the Middle District of Tennessee. He requested a jury trial against the Franklin, Tennessee-based parent company of Lutheran Health Network.

The court filing is just the latest development in a challenging time for Community Health Systems, which reported losses totaling almost $5 billion over the past three years and has faced intense criticism from some local employees and community leaders, who allege the corporation has failed to invest profits earned here back into Lutheran's network.

Padilla wants to represent all investors who bought stock in Community Health Systems between Feb. 20, 2017, and Feb. 27, 2018, when, he says, the company filed inaccurate annual and quarterly earnings disclosures with the Securities and Exchange Commission.

Officials also distributed false information in news releases and presentations to analysts, institutional investors and others, he alleges.

During that 12-month period, the lawsuit states, “defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the company's business, operations and prospects.”

The individuals named as defendants are Wayne T. Smith, who was CEO the entire period; Larry Cash, who was chief financial officer until May 2017; and Thomas J. Aaron, who was named CFO in May 2017.

The filing says the executives would have – or should have – known the company's actual financial status differed from the improperly optimistic picture presented to the market.

Specifically, the lawsuit accuses the defendants of failing to disclose about $591 million that it didn't expect to ever collect for unpaid medical bills and discounts negotiated with insurance companies. The filing described that decision as part of a scheme to defraud investors.

If the allegations are proven true, the actions would violate the Securities Exchange Act of 1934.

Tomi Galin, Community Health Systems spokeswoman, described the lawsuit as meritless in an email. Although the company doesn't usually comment on pending litigation, she provided some context in this case.

The plaintiff's law firm, Galin said, “routinely files cases such as this one.”

“In fact,” she wrote, “the adjustment in revenue estimates that occurred at December 31, 2017, was the result of new accounting methodologies and processes required to implement a change in Generally Accepted Accounting Principles. ... The adjustment had no material impact on our adjusted EBITDA, cash flows or other operations.

“We will vigorously defend against the baseless allegations in this litigation, and we expect to ultimately prevail,” Galin said.

The day after Community Health Systems revised its financial disclosures on Feb. 27, 2018, the company's stock price sank by $1.06 a share, more than 17%, to $5.12, the lawsuit states.

During the 12-month period covered in the class action lawsuit, the stock price reached a high of $10.32 on May 2, 2017, according to the filing.

“Plaintiff and other members of the class purchased or otherwise acquired the company's securities relying upon the integrity of the market price of Community Health's securities and market information relating to Community Health, and have been damaged thereby,” the lawsuit states.

Padilla bought 400 shares at $8.60 each July 26, 2017, and 100 shares at $4.30 each Dec. 18, 2017. His combined investment was $3,870, before broker or other fees.

Community Health Systems' shares closed Tuesday at $2.94, up 14 cents, in trading on the New York Stock Exchange.

The lawsuit doesn't specify a dollar amount for damages, which would be shared among anyone who qualifies to join the class. The number of affected shareholders could be in the thousands, according to the filing. Only those who bought shares during the designated period would qualify.

Although the previous shareholders would have benefited from selling stock at an inflated price, the company and its executives could have benefited in other ways.

For example, the executives' holdings of company stock would have been artificially more valuable during that period, if the allegations are true. And the company could have been able to borrow money or sell bonds during the 12-month period at comparably lower interest rates, based on its value – as determined by the number of shares multiplied by the share price.

Padilla is represented by multiple law firms, including Branstetter, Stranch & Jennings in Nashville, Tennessee.

The case has been referred to Magistrate Eli Richardson, who has encouraged the parties to consider a negotiated settlement. If the sides fail to reach agreement, the case will be scheduled for trial in the District Court in the Nashville Division.

sslater@jg.net