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/raid1/www/Hosts/bankrupt/CAR_Public/990604.MBX C L A S S A C T I O N R E P O R T E R Friday, June 4, 1999, Vol. 1, No. 86 Headlines CALIFORNIA PERS: Ninth Circuit Prohibits Age Based Benefits CONNECTICUT: Police Barracks Secret Wiretap Settlement Nears ENGELHARD CORP: Maximum Settlement Payment Set at $7.2 Million GOLDEN BEAR: Florida Securities Litigation Consolidated HECHINGER CO: Delaware Shareholders Suit Dismissed by Agreement INTERNATIONAL RECTIFIER: Securities Trial Set for August 1999 KTI INC: Shareholders Complain Accounts were Misrepresented MOTOROLA INC: Cellular Telephones Linked to Injuries & Accidents NATIONAL REALTY: Florida Investor Sues for Fraud in Wisconsin PARAMETRIC TECHNOLOGY: Denies Misrepresenting 1998 Earnings PROJECTAVISION INC: Submitting Reply in Motion to Dismiss PRUDENTIAL INSURANCE: Actuarial Firm Used for Medical Decisions US DOJ: Federal Prosecutors Seek $250 Million in Unpaid Overtime VITAMIN LITIGATION: Animal Feed Industry Makes Antitrust Claims WELFARE BENEFITS: Denver Pays for Dropping Families w/o Notice ********* CALIFORNIA PERS: Ninth Circuit Prohibits Age Based Benefits ----------------------------------------------------------- The Recorder reports that the Ninth Circuit U.S. Court of Appeals handed a victory to a class of older workers and held Wednesday that the state can't use age as a factor when calculating disability retirement benefits. In Arnett v. California Public Employment Retirement System, 99 C.D.O.S. 4184, the court sided with a group of retired state police and correctional officers who claimed that using a worker's starting age to determine disability benefits violates the Age Discrimination in Employment Act. The workers had allies in the Equal Employment Opportunity Commission and the American Association of Retired Persons, both of which filed amicus curiae briefs siding with the plaintiffs. The suit challenges California's method of calculating disability benefits under the California Public Employees Retirement System and may change the disability benefits package offered by 2,600 agencies to 1.1 million people involved in the program. U.S. District Judge Charles Breyer granted defense motions to dismiss claims of disparate treatment and disparate impact against the state. But on Wednesday the appellate court said the state's argument that using age in calculating disability benefits is a "sufficient business necessity" was not enough to toss the plaintiffs case. "It is unquestionable that the employees would have received greater disability retirement benefits but for their older ages at hire," wrote Ninth Circuit Judge Margaret McKeown. McKeown reversed Breyer's pretrial ruling and sent the case back for further proceedings. "Whether such a rationale constituted a sufficient business necessity could not be determined on a motion to dismiss," she wrote. Ninth Circuit Judge Ferdinand Fernandez and Senior U.S. District Judge Charles Weiner of Pennsylvania, sitting by designation, concurred. Under PERS disability benefits, an employee is eligible for retirement benefits equal to the amount the worker would have been paid if employed to age 55. To get to that amount, the state calculates an employee's "years of service" by subtracting his age at the time of hire from 55. Under the system, a 25- year-old worker will receive 10 years more benefits than a 35- year-old worker who started on the same day. The participants in the class action were all 40 or older at their time of hire and all later retired because of an industrial disability. The state argued that beginning work at a later age is "voluntary" and that older workers have more resources than their younger counterparts. McKeown didn't buy it. "PERS contends that the employees cannot complain about lower disability benefits because they voluntarily chose to begin work at a later age," McKeown wrote. "This argument not only ignores the reality of the modern work force, it conflicts with our rejection of precisely the same argument" in a 1993 case, E.E.O.C. v. Local 350, Plumbers and Pipefitters, 998 F.2d 641. Deputy Attorney General Irene Tamura, who argued on behalf of the state, could not be reached for comment Wednesday. A spokesman for the AG's office said the opinion was "under review." Ellen Lake, the Oakland solo who argued on behalf of the plaintiffs, called the ruling a "terrific victory." "The statute has unfairly impacted older people for 18 years," she said. Whether Arnett ever makes it to trial, however, is another matter. Already, California AB 448 aims to achieve the same objective by changing how benefits are calculated. (The Recorder; June 3, 1999) CONNECTICUT: Police Barracks Secret Wiretap Settlement Nears ------------------------------------------------------------ In dollar terms the pending $17 million settlement between Connecticut criminal defense lawyers and the state police over secret wiretaps on all police barracks phones between 1978 and 1989 is nailed down. But the public policy lessons of this battle, by the settlement's very terms, are open to question. The state admits no wrongdoing. And, says Rep. Robert Farr, R-West Hartford, the case highlights the shortsightedness of Congress. Federal lawmakers in 1986 imposed as much as $10,000 in damages per phone call on the police whenever a call is made without knowledge by either caller or recipient that the conversation is recorded. "There's no indication that anyone listened to the tapes -- that anyone's privacy was actually invaded, yet there are these huge damages," Farr says. Using the $10,000 per call yardstick, class plaintiffs calculated in 1992 that the state faced over $1 billion in potential liability. Farr and the rest of the legislative Judiciary Committee approved the May 7 agreement without objection on May 25. It is now subject to the approval of U. S. District Judge Alan H. Nevas. For Christopher D. Bernard, of Bridgeport's Koskoff, Koskoff & Bieder, the settlement represents the culmination of ten years work. The agreed payments of $300 to $650 per call are well below damages set out in state and federal laws against illegal wiretapping. Those laws originally called for $1,000 per incident until 1986 when the federal maximum was raised to $10,000, says Bernard. Through years of discovery, he says, the plaintiffs determined that the state police spent hundreds of thousands of dollars installing equipment that would record every call coming in and going out of Connecticut's 13 state police barracks. Steps were taken to make sure no beep tones would sound, Bernard says, to avoid alerting callers they were being taped. "The nature of the offense is that it's secret, and that's the problem," he says. "You can imagine how useless a law would be if you had to prove that somebody was secretly listening to the tape. A defendant would have to be pretty stupid to disclose the fact that they'd listened." The Connecticut Defense Lawyers Association brought the original lawsuit against the state police in 1989, and named then police commissioner Lester Forst as the lead defendant. Forst resigned in the uproar over the taping scandal. The state successfully defended the original lawsuit on sovereign immunity grounds. Subsequently, ranking barracks commanders were sued individually. This was an indirect tactic that relied on the state's practice of indemnifying state employees for excusable acts at work that expose them to civil liability. The plaintiffs were represented by Bernard and Michael Koskoff, also of Koskoff, Koskoff & Bieder, and Hartford's R. Bartley Halloran. A subclass of rank-and-file troopers and barracks employees also sued. William B. Yelenak, of Moore, O'Brien, Jacques & Yelenak in Cheshire, represented them. The state was defended by the attorney general's office and the Hartford firm of Cowdery & Ecker, along with San Francisco-based Morrison & Foerster. Like the Watergate tapes, the state police taping practice came to light unexpectedly -- in the course of examining a witness. Robert Little, a Waterbury policeman, was arrested by state trooper Christopher Garrity for an Aug. 5, 1988, traffic accident in which a female hitchhiker was killed. Little faced charges of manslaughter and drunk driving, and retained Hugh F. Keefe of New Haven's Lynch, Traub, Keefe & Errante to defend him. In the course of his efforts to suppress the evidence gathered from Little at the time of his arrest, Keefe questioned Garrity on the stand. Keefe says Garrity volunteered information from a conversation between Little and his lawyer. Where did you hear that conversation? Keefe recalls asking. "On the tape. These telephones are all automatically tape recorded, and the tapes are available afterwards to listen to," Keefe recounts Garrity answering. "I said how long have they been automatic," Keefes recalls, "and he says always, as long as I know, everywhere in the state, in every state police barracks, the calls are automatically taped. The judge leaned over and asked, 'Trooper, do you know what you just said?' " "The poor kid -- it was blissful ignorance. He was a nice young trooper," says Keefe. "But all hell broke loose. The press was all over the case the next day." On a smaller scale, police taping lawsuits have been successfully prosecuted against city departments in New Haven, which settled for $1.2 million in 1985, and Torrington, which settled for $3.4 million in 1992. The potential exposure of the state police class action loomed far larger than these city department cases. Under the terms of the proposed settlement, lawyers and their clients, troopers and their families, and others calling to or from state police barracks would be entitled to payments ranging from $300 to $650 per call, with a cap of $1,950 per person. Most calls between clients and lawyers would fall under category "A" of the settlement at $550 per incident, if the call was between Jan. 1, 1978, and Jan. 18, 1987. The rate increases to $650 for attorney-client calls between Jan. 19, 1987, and Nov. 9, 1989, which is the end of the covered period. According to Bernard, much of the police taping appeared to be used on their own members. The taping covered calls made between troopers and the state police union or troopers and family members. Calls that are not between attorneys and clients are divided into five separate classes, and range from $300 to $450 per call. The claims are to be administered by a Birmingham, Ala., concern that specializes in class-action settlements. Once the proposed settlement is approved by a court, potential claimants will be able to sign up with the claims administrator in Alabama and receive mail notice of claim filing procedures. The proposed claim form requires applicants to answer 11 questions stating the approximate dates of phone calls; whether attorney-client business was discussed and the parties to the call. The claimant must have been unaware of the taping, and assert that the phone call was not for emergency purposes. The claim form provides penalties for making a false statement, but does not require documentary proof that the calls were made. Documents would be helpful, however, and criminal defense attorneys can expect to receive calls from old clients from that time period. A dime used to call a lawyer from a state police lockup back then has clearly grown in value. It is too early to tell how many claimants will come forward, Bernard says. The class action didn't require plaintiffs to opt in to be a member of the class, but plaintiffs counsel have a list of 1,600 known potential claimants. Over an 11-year period, at 13 state police barracks, that class only averages one claimant per location per month. However, anyone arrested and allowed to call a lawyer from a state police post is a potential claimant during the time period. So the share of the $17 million available for attorneys' fees is not known at this time. Farr, a partner in Hartford's Heffernan & Farr, says he voted to approve the settlement as a practical solution since the state's potential exposure was so large. Nevertheless, he feels the federal wiretap law was never intended to be used in this scenario. "What I think Congress envisioned was the police going out and putting a wiretap on your house or something. But here there was no expectation of privacy, if you were calling the police station," he says. As a policy matter, taxpayers' dollars are now being spent in this settlement to send a message that's been learned long ago, Farr says. "To me it's outrageous that you can now go and make these claims. The people who are really going to make the money on these things are the lawyers, " Farr contends. The state is paying about $12 million of the settlement not insurance companies, says Farr. "That $12 million is money that could otherwise go to run a community college, or help the elderly or the poor or veterans -- all the great programs that are underfunded, but instead we're paying it out to plaintiffs for whom it's a windfall, and who didn't suffer any damages." Bernard, the lead plaintiffs' counsel, says he found considerable damage to the privacy of troopers themselves. "A lot of the motivation," for the taping, he says, "was to spy on their own." Indeed, he says, "There were specific instances we know of where troopers were reprimanded for things that were heard on tapes that never should have been heard." Bernard takes issue with the idea that damages are unproven here. "That's a frightening argument to be made by someone in government -- that there's no damage to private citizens in having private conversations in essence stolen, without their knowledge, or consent. Just because somebody doesn't lose money, in an invasion of privacy, shouldn't mean they haven't suffered damage." The purpose of Connecticut's $1,000 liquidated damages figure for illegal wiretaps, and the federal statute's $10,000 amount, says Bernard, "is a recognition that this is not an economic loss that you can prove, but that it's a real loss, and it's to send a message to those who would steal these kinds of communications, that this is not to be tolerated. If you didn't have these liquidated damages, what remedy would you have?" And the next time the state upgrades its telephone technology, predicts Bernard, decision-makers will have individual privacy firmly in mind, because of this settlement. (The Connecticut Law Tribune; May 31, 1999) ENGELHARD CORP: Maximum Settlement Payment Set at $7.2 Million -------------------------------------------------------------- ENGELHARD CORP and certain of its present and former officers have agreed to a Stipulation of Settlement ("Stipulation") of a class action filed in November 1995 which alleged misstatements and omissions in connection with press releases issued in 1995 concerning the Company's PremAir(trademark) catalyst systems. In the settlement, which was approved by the Court on December 8, 1998, in exchange for the dismissal of the complaint against all defendants, the Company will pay no more than $7.2 million of a maximum settlement amount of $21.5 million. The balance of the settlement amount will be paid by insurance carried by the Company for such purposes. Because the final settlement amount will depend on the number of eligible shares of the Company's common stock for which claims are submitted, the amounts to be paid by the Company and the insurer could be less, but in no event more, than the above- stated amounts. This matter, if resolved in accordance with the Stipulation of settlement, will not have a material adverse effect on the operating results of the Company. GOLDEN BEAR: Florida Securities Litigation Consolidated ------------------------------------------------------- Based on a comprehensive review conducted by GOLDEN BEAR GOLF INC of its Paragon subsidiary's construction projects, it was necessary for the Company to restate certain financial statements it had previously filed with the Securities and Exchange Commission. As a result of the restatement of the Company's financial statements, numerous purported class action lawsuits have been filed against the Company and certain current and former officers and directors of the Company, asserting various claims under the federal securities laws. On July 28, 1998, individuals purporting to be shareholders of the Company filed a class action lawsuit in the United States District Court for the Southern District of Florida against the Company and certain of the Company's present and former officers and directors. Since the filing of this matter, nine additional lawsuits have been filed against the Company and certain of its present and former officers and directors. Eight of these lawsuits were filed in the United States District Court for the Southern District of Florida and one was filed in the United States District Court for the Eastern District of New York, though the court in New York has entered an order transferring this action to the Southern District of Florida. The District Court in Florida entered an order consolidating all of the actions originally filed in the Southern District of Florida and all similar actions which are transferred to or subsequently filed in the Southern District of Florida and directed the plaintiffs to file a consolidated complaint. On December 24, 1998, plaintiffs filed their First Consolidated Class Action Complaint ("Consolidated Complaint") on behalf of themselves and all others who purchased common stock of the Company from April 30, 1997 through July 27, 1998, with the exception of the defendants and certain related or affiliated persons or entities. The defendants named in the Consolidated Complaint are Golden Bear Golf, Inc., Jack W. Nicklaus, Richard P. Bellinger, Jack P. Bates, Stephen S. Winslett, John Boyd and Arthur Andersen LLP. The Consolidated Complaint alleges that during the purported class period, the defendants violated Section 10(b) and Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of 1934 by making misrepresentations or omissions of material fact in publicly filed documents and in other alleged public statements relating to the Company's financial condition and that of its wholly- owned subsidiary, Paragon Construction International, Inc. The plaintiffs are seeking an unspecified amount of damages, interest, costs and attorneys' fees. The Company intends to vigorously defend each of the foregoing lawsuits, but their respective outcomes cannot be predicated. HECHINGER CO: Delaware Shareholders Suit Dismissed by Agreement --------------------------------------------------------------- On July 23, 1997, a purported class action complaint was filed in the Delaware Chancery Court on behalf of all holders of the Company's common stock against the Company and the former Company directors. The plaintiff alleged that the former officers and directors of the Company breached their fiduciary duties to the holders of the common stock by, among other things, failing to take all reasonable steps to assure the maximization of stockholder value, including the implementation of a bidding mechanism to foster a fair auction of the Company, and by entering into an agreement with Centers Holdings under which the consideration offered by Centers Holdings to holders of the common stock was "unfair and grossly inadequate." On April 1, 1999, the complaint was dismissed by the court at the request of both parties with no payment required by either party. INTERNATIONAL RECTIFIER: Securities Trial Set for August 1999 ------------------------------------------------------------- INTERNATIONAL RECTIFIER CORP and certain of its directors and officers have been named as defendants in three class action lawsuits filed in Federal District Court for the Central District of California in 1991. These suits seek unspecified but substantial compensatory and punitive damages for alleged intentional and negligent misrepresentations and violations of the federal securities laws in connection with the public offering of the Company's common stock completed in April 1991 and the redemption and conversion in June 1991 of the Company's 9% Convertible Subordinated Debentures Due 2010. They also allege that the Company's projections for growth in fiscal 1992 were materially misleading. Two of these suits also named the Company's underwriters, Kidder, Peabody & Co. Incorporated and Montgomery Securities as defendants. On March 31, 1997, the Court, on the Company's motion for summary judgment, issued the following orders: (a) the motion for summary judgment was granted as to claims brought under Sections 11 and 12(2) of the Securities Act of 1933; (b) the motion was denied as to claims brought under Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission Rule 10b-5; and (c) the motion was granted as to the common law claims for fraud and negligent misrepresentation to the extent said claims are based on representations contained in the offering prospectus and was denied as to other such claims. The Court also granted the summary judgment motion brought by the underwriters. The plaintiffs' motion for reconsideration or certification of an interlocutory appeal of these orders was denied. On January 28, 1998, the Court decertified the class pursuing common law claims for fraud and negligent misrepresentation and granted the defendants' motion to narrow the shareholder class period to June 19, 1991 through October 21, 1991. Plaintiff's motion for reconsideration or certification of an interlocutory appeal of these rulings was denied. Although the Company believes that the remaining claims alleged in the suits are without merit, the ultimate outcome cannot be presently determined. A substantial judgment or settlement, if any, could have a material adverse effect on the Company's financial condition and results of operations. Trial is scheduled for August 1999. KTI INC: Shareholders Complain Accounts were Misrepresented ----------------------------------------------------------- On or about April 26, 1999, Salvatore Russo purported to have filed an action in the U.S. District Court, District of New Jersey against KTI INC and two of its principal officers, Ross Pirasteh and Martin J. Sergi, on behalf of all stockholders who purchased common stock of the Company from May 4, 1998 through and including August 14, 1998. The complaint alleges that the defendants made material misrepresentations in the Company's Form 10-Q for the period ended March 31, 1998 in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, concerning its allowance for doubtful accounts and net income. The plaintiff is seeking undisclosed damages. The Company believes it has meritorious defenses to the complaint. MOTOROLA INC: Cellular Telephones Linked to Injuries & Accidents ---------------------------------------------------------------- Motorola has been a defendant in several cases arising out of its manufacture and sale of portable cellular telephones. Schiffner v. Motorola, Inc., filed on March 3, 1995 in the Circuit Court of Cook County, Illinois, was a purported class action by purchasers of portable cellular phones alleging economic losses. On March 22, 1999, the United States Supreme Court denied the plaintiffs' petition for writ of certiorari, thereby terminating the litigation in favor of Motorola. Jerald P. Busse, et al. v. Motorola, Inc. et al., filed on October 26, 1995 in the Circuit Court of Cook County, Illinois, Chancery Division, is a purported class action alleging that defendants have failed to adequately warn consumers of the alleged dangers of cellular telephones and challenging ongoing safety studies as invasions of privacy. All claims have been dismissed on defendants' motions. Plaintiffs have moved for reconsideration of the Court's decision. Silber, et al. v. Motorola, Inc., et al., filed on August 1, 1995 in the Supreme Court of the State of New York, County of Suffolk, is an action wherein it is alleged that a traffic accident was caused by the use of a cellular phone. On April 27, 1999, the Court granted defendants' motion for summary judgment and dismissed the suit. Plaintiffs may appeal. Motorola has been named as one of several defendants in Freeland v. Iridium World Communications, LTD, et al., Yong v. Iridium World Communications, LTD, et al., Kleinman v. Iridium World Communications, LTD, et al., Marshall v. Iridium World Communications, LTD, et al., Ackerman v. Iridium World Communications, LTD, et al., Hargrove v. Iridium World Communications, LTD, et al., and Turner v. Iridium World Communications et al., a series of nearly identical putative class action securities lawsuits filed beginning April 22, 1999 in the U.S. District Court for the District of Columbia. All of these lawsuits allege violations of the Federal securities laws arising from alleged material misrepresentations or omissions regarding difficulties in the satellite communications business of Iridium World Communications, LTD, Iridium LLC and Iridium Operating LLC. The alleged classes consist of purchasers of all Iridium securities during the period from September 9, 1998 to March 29, 1999. NATIONAL REALTY: Florida Investor Sues for Fraud in Wisconsin ------------------------------------------------------------- The Milwaukee Sentinel & Journal reports that a Florida investor has filed a lawsuit against a real estate company and business executive, John Vishnevsky, alleging that the company and Vishnevsky defrauded hundreds of investors in limited partnerships. David Paustenbach is the only investor named in the lawsuit, which asks a judge to certify the case as a class action. That would allow others to join. More than 1,000 other investors in apartment complexes in Milwaukee and Madison were charged excessive fees and defrauded into extending the lives of partnerships, Paustenbach alleges in his lawsuit, which was filed last week by attorneys in Oshkosh and Atlanta. The lawsuit accuses Vishnevsky, a longtime real estate investor who filed for bankruptcy in the early 1990s but settled the case, and his company of engaging in racketeering, mail fraud, kickback schemes and illegal charging of overhead and other expenses to limited partnerships without the investors' knowledge. Vishnevsky and a spokeswoman at National Realty Management Inc. in Pewaukee declined to comment and referred questions to attorney John Erich. Erich released a statement calling the lawsuit's allegations "baseless and without merit." "We believe that (Paustenbach) is not the real party in interest," Erich said. "Rather, this is a hostile takeover attempt by a firm which has sought to take advantage of Mr. Vishnevsky's investors and purchase their limited partnership interest at fire-sale prices." "To protect his investors, Mr. Vishnevsky will vigorously defend against this action," said Erich, who added that he planned to file a counterclaim seeking punitive damages. An attorney representing Paustenbach, Vincent Gresham, could not be immediately reached for comment. But in an earlier interview, Gresham said Paustenbach had suffered "substantial" losses from his investments in several partnerships with Vishnevsky's company. "We believe that the investors have incurred substantial losses which we are seeking to recover in this lawsuit," Gresham said. "We are trying to get them a fair return on their investment and a fair liquidity." Gresham said the partnerships were sold in the 1970s and 1980s "with the expectation that they would be liquidated in quick fashion." "They're still not sold," he said. "We believe that the investors might benefit from having these properties properly marketed and shopped." He estimated that distribution of assets after liquidation could reach millions of dollars. "There was an example where a purchase offer was made by a third party in the property," Gresham said. "That purchase offer was met with hostility." Of the 12 partnerships in Paustenbach's lawsuit, all involve apartment complexes and nine are in the Milwaukee and Madison areas. The remaining three are in Las Vegas. Several other people and various limited partnerships are also named as defendants in the lawsuit. The lawsuit asks a judge to close out the partnerships and conduct a financial accounting of them, remove the current general partners and install new general partners, and award compensatory and punitive damages. It alleges that Vishnevsky and his company engaged in mail fraud by mailing fraudulent annual reports to investors that failed to disclose excessive and illegal fees charged to partnerships. Also, Paustenbach alleges that Vishnevsky set up a kickback scheme consisting of consulting fees that netted him more than $650,000 in 1997 alone. (Milwaukee Sentinel & Journal; 06/01/99) PARAMETRIC TECHNOLOGY: Denies Misrepresenting 1998 Earnings ----------------------------------------------------------- Certain class action lawsuits were filed in the fourth quarter of 1998 against PARAMETRIC TECHNOLOGY CORP and certain of its current and former officers and directors in the U.S. District Court in Massachusetts claiming violations of the federal securities laws based on alleged misrepresentations regarding anticipated revenue and earnings for the third quarter of 1998. The plaintiffs in these lawsuits joined together to file a consolidated and amended complaint in the second quarter of 1999. These actions seek unspecified damages. PARAMETRIC TECHNOLOGY CORP believes the claims made in the amended complaint are without merit, and intends to defend them vigorously. PROJECTAVISION INC: Submitting Reply in Motion to Dismiss --------------------------------------------------------- In December, 1998, a stockholder of PROJECTAVISION INC initiated an action in Supreme Court, State of New York, alleging common law fraud, negligence and breach of fiduciary duty claims against the Company and its Directors. In February, 1999 the Company and the Defendant Directors moved to dismiss this action based upon undisputed documentary evidence and based upon an assertion that the Complaint failed to state a cause of action. The Plaintiffs' responsive papers are due in April, 1999 and reply papers are due to be submitted by the Company and the Defendant Directors in May, 1999. Based upon discussions with counsel, the Company's management believes that the motion to dismiss is well-founded. In the event, however, that the motion were not granted, the Company's management believes that it has meritorious defenses and intends to vigorously defend against these claims. PRUDENTIAL INSURANCE: Actuarial Firm Used for Medical Decisions --------------------------------------------------------------- A Manhattan judge has given the go-ahead to a class action alleging that a leading health maintenance organization committed fraud and breach of contract by letting personnel other than doctors decide what length of hospital stay will be covered. In denying the Prudential Insurance Co.'s bid to have the case dismissed in its entirety, Supreme Court Justice Herman Cahn said the suit can proceed even though the plaintiffs had failed to exhaust their remedies under the insurance contract. Cahn also rejected Prudential's argument that the suit was rendered moot because of recent changes in New York's Public Health Law, which set up tighter standards for "medical necessity" determinations. The judge, however, refused to declare certain sections of Prudential's insurance contracts void on public policy grounds. The suit was brought by Musette Baras and Nancy T. Vogel, on behalf of themselves and all other subscribers to health care plans offered through Prudential or its subsidiary, Prudential Health Care Plan of New York Inc. (PruCare). Baras was admitted to the Winthrop Hospital in Mineola in 1996 after an attack of Crohn's Disease. She claims that even though her attending doctor recommended she stay in the hospital for additional tests, she was advised by Prudential that the additional stay would not be covered. She alleges that the decision not to authorize the tests was made by a Prudential clinical reviewer or "Concurrent Review Nurse." Baras was hospitalized for a burst intestine a month later, and she alleges that she was released earlier than recommended by her doctor, based on a decision made by a review nurse. Vogel was hospitalized in March 1996 for a hysterectomy and was discharged only two days after the operation, despite her doctor's recommendation that she stay for five days. She claims that the decision that a two-day stay was all that was medically necessary was made by a Prudential review nurse. Both women assert that the review nurses' decisions were based on guidelines created by a Seattle actuarial firm, Milliman & Robertson Inc., rather than on the doctors' recommendations. The firm's guidelines contain recommended hospital stays for illnesses from sore throats to heart attacks. In 1997, the women sued Prudential and PruCare in Manhattan Supreme Court alleging that the carriers' handling of the "medical necessity" determinations amounted to breach of contract, fraud, breach of fiduciary duty and interference with contract. Specifically, they contended that Prudential, through its subscriber contracts and its promotional materials, had represented that its "medical necessity" decisions were to be made by trained doctors in the relevant specialty based on prevailing medical opinion in the field. While Cahn agreed with Prudential that the claims of breach of fiduciary duty and interference with contract must be dismissed, he found that the contract and fraud claims were viable. Although conceding that Prudential's plan provided for a grievance procedure for denied claims, the judge said that the class claims did not fall within the scope of that process. The plaintiffs, he noted, base their cause of action on allegations that procedures employed by Prudential in making the medical necessity decisions were "not as promised." Such claims, he added, would not be barred by subsequent legislation concerning claims review procedures. As for the fraud claims, the judge found that it was too early in discovery to rule on the possibility that Prudential may have "misrepresented the terms and conditions of the benefits offered." Stanley M. Grossman, D. Brian Hufford and Robert J. Axelrod, of Pomerantz Hudek Block & Gossman represented the class. Peter L. Altieri, Claudia M. Cohen and Jeremy I. Bohrer, of Epstein Becker & Green, represented Prudential. This story originally appeared in the New York Law Journal. US DOJ: Federal Prosecutors Seek $250 Million in Unpaid Overtime ---------------------------------------------------------------- If the department of Justice began paying its 9,000 lawyers for overtime or limited them to a 40-hour workweek, either way the result would be chaos. That was the prediction of DOJ officials in an internal 1994 survey. Department heads said if Congress didn't give them the annual $ 45 million needed to pay overtime, paying from DOJ's budget -- $ 20 billion -- could bring layoffs. And if overtime were eliminated, cases would come to a grinding halt as prosecutors streamed out of their offices on Thursdays. But the reality, say prosecutors on both sides of the debate, is that whatever the result of John Doe v. U.S., No. 98-896, the class action seeking overtime pay for federal prosecutors, the lawyers will continue to work, paid overtime or not. Filed on Nov. 25, 1998, in the U.S. Court of Federal Claims before Judge Robert Hodges Jr., the suit has 115 name plaintiffs and a class of 12,000 current and former DOJ attorneys allegedly owed $250 million. DOJ argues that under the Federal Employees Pay Act, only overtime specifically authorized must be paid. The plaintiffs claim that overtime worked with the knowledge of superiors, when attorneys are "induced" to work, requires compensation. Documents obtained in discovery show that DOJ has known for decades that its internal rule against paying attorneys overtime was probably illegal. DOJ failed to obtain an exemption from Congress in 1996 and is seeking one again, several federal prosecutors said. "Damn them, they knew and they were trying to hide the ball. Then they try to go to Congress to get a quick fix. That's bad faith," said one name plaintiff, a veteran federal prosecutor. San Francisco Asst. U.S. Attorney William I. Shockley, a director at the 1,200-member National Association of Assistant U.S. Attorneys, said that the increase in career prosecutors and the federalization of criminal law have led to this demand for better compensation. DOJ would not comment on the case, but in an undated memo titled "Attorney Overtime Compensation Options," DOJ officials said, "In a longstanding line of decisions, the U.S. Court of Claims has held that, absent specific order or approval, an agency is liable for overtime compensation when it 'induces' overtime." It suggests options including doing nothing, paying overtime, and offering flexible schedules and flat-rate, rather than hourly, overtime pay. But the memo criticized paying overtime, saying that it could be "at odds with a culture of professionalism." The case has divided prosecutors. "No one works at the DOJ for the money," said John Q. Barrett, former counselor to DOJ Inspector General. Former San Diego U.S. Attorney Charles La Bella agreed. "People feel strongly that we shouldn't be paid overtime. Career prosecutors find it offensive to be reduced to clock-punchers." But the plaintiffs feel that DOJ has exploited their sense of duty. "Obviously, those who say that haven't paid the price: hospitalization, failed marriage, lack of a relationship with your children," said one plaintiff. "It's a moral question." (The National Law Journal; May 24, 1999) VITAMIN LITIGATION: Animal Feed Industry Makes Antitrust Claims --------------------------------------------------------------- The Legal Times noted that D.C.'s Dickstein Shapiro Morin & Oshinsky filed an antitrust suit in federal court in Arkansas on May 25 against a host of international vitamin manufacturers and wholesalers on behalf of 12 U.S. companies, including Tyson Foods Inc. This is the first of what is expected to be a flood of similar suits following in the wake of a record-breaking $725 million criminal fine that the Justice Department announced May 20 against Swiss pharmaceutical giant Hoffman-La Roche and Germany's BASF AG. The drug-makers pleaded guilty to participating in a nine-year conspiracy to inflate the prices of several vitamins used primarily as supplements in animal feed. Dickstein Shapiro's case deals exclusively with choline chloride, a vitamin used to supplement the diets of poultry and hogs, and names BASF but not Hoffman-La Roche. "You're going to see other cases filed as other large purchasers make the decision that they want to go after the vitamin companies, " says Dickstein Shapiro partner Kenneth Adams, head of the firm's civil litigation practice. The firm represents on a contingent basis more than 30 buyers of bulk vitamins. "It's a billion-dollar case in terms of what it's going to cost these price-fixers to get out from under this, " says Adams. In a related development, attorneys in 25 lawsuits previously filed in federal courts have consolidated their claims against the manufacturers into one class action filed in U.S. District Court for the District of Columbia. Lead counsel will be litigation heavyweights David Boies of New York's Boies & Schiller, Michael Hausfeld of D.C.'s Cohen, Milstein, Hausfeld & Toll, and Stephen Susman of Dallas' Susman Godfrey. (Legal Times; May 31, 1999) WELFARE BENEFITS: Denver Pays for Dropping Families w/o Notice -------------------------------------------------------------- The Denver Post reported that Denver city officials say they're doing the right thing by paying about 1,900 welfare families $1,200 each to settle part of a class-action lawsuit against the city, the state and Adams County, in which the families claim the governments failed to give proper notice before dropping them from welfare rolls. Grass-roots organizations that monitor welfare reform and work with impoverished clients also told the Post that the notices were inadequate. The Denver City Council will vote June 7 on an ordinance to settle the matter. City attorneys already have filed a conditional settlement in district court. But the state and Adams County are reportedly going to fight the lawsuit, arguing that fair and adequate warnings were given to the families. The issue is complicated. Before welfare reform, all a family had to do was meet low- or no-income guidelines and have children. Welfare was an entitlement. In other words, if you were poor enough and had children, you were entitled to welfare benefits. But because welfare reform did away with Aid to Families with Dependent Children, there is no entitlement under current law. The only way a person can remain eligible for cash benefits is to participate in training for a job, actively search for a job or actually have a job. According to the Denver Post, that's why the state opposes Denver's decision to settle. Settling can be construed as creating an entitlement, which flies in the face of welfare reform and could cost millions to the state. (Denver Post; 05/27/99) ********* S U B S C R I P T I O N I N F O R M A T I O N Class Action Reporter is a daily newsletter, co-published by Bankruptcy Creditors' Service, Inc., Princeton, NJ, and Beard Group, Inc., Washington, DC. Peter A. Chapman, Editor. Kent L. 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