Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 1 of 114 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION

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1 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 1 of 114 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION MARY E. ORMOND ) CASE NO. 1:05-cv DFH-TAB 6549 Lyceum Court ) Cincinnati, Ohio , ) CHIEF JUDGE DAVID F. HAMILTON ) MAGISTRATE JUDGE TIM A. BAKER and ) ) THE ESTATE OF MARY A. MOORE ) c/o William G. Moore, Executor ) 2722 Bullitsburg Church Road ) Petersburg, Kentucky 41080, ) ) and ) ) DANIEL J. CESCATO ) 2826 Wassen Rd. ) Cincinnati, Ohio 45209, ) ) and ) ) KEVIN T. HEEKIN ) 86 Henry Court ) Ft. Thomas, Kentucky 41075, ) ) On Behalf of Themselves and ) All Others Similarly Situated ) ) Plaintiffs, ) ) FOURTH AMENDED CLASS ACTION vs. ) COMPLAINT FOR MONEY DAMAGES ) AND EQUITABLE RELIEF ANTHEM, INC. ) (now known as WELLPOINT, INC.) ) 120 Monument Circle ) (Jury Demand Endorsed Hereon) Indianapolis, Indiana 46204, ) ) and ) ) ANTHEM INSURANCE COMPANIES, INC. ) 120 Monument Circle ) Indianapolis, Indiana 46204, ) ) Defendants. )

2 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 2 of 114 Plaintiffs, Mary E. Ormond a/k/a Eileen M. Ormond ( Ormond ), the Estate of Mary A. Moore ( Moore ), Daniel J. Cescato ( Cescato ) and Kevin T. Heekin ( Heekin ), on behalf of themselves and all others similarly situated, for their Fourth Amended Class Action Complaint seeking class-wide compensatory and punitive damages and injunctive and other equitable relief against Defendants, Anthem, Inc., now known as WellPoint, Inc. ( Anthem ), and Anthem Insurance Companies, Inc. ( Anthem Insurance ), and each of them, jointly and severally, hereby claim, allege, state and aver on information and belief, except for allegations pertaining to them which are made on personal knowledge, based upon the investigation conducted by Plaintiffs counsel, which included a review of United States Securities and Exchange Commission ( SEC ) filings by Anthem, Forms S-1 and S-1/A, prospectus, membership information statements and supplement thereto distributed by Anthem and Anthem Insurance to their mutual members, the regulatory order approving the Anthem Plan of Conversion, Anthem s annual reports, financial statements, Forms 10-K and other regulatory filings and reports, press releases, conference calls, announcements and other public statements issued by Anthem, media reports about Anthem and the demutualization transaction, and information publicly available on the Internet, as well as similar public documents, regulatory filings, articles and information pertaining to the demutualizations of other mutual insurance companies, including without limitation The Metropolitan Life Insurance Company ( MetLife ), Prudential Mutual Life Insurance Company ( Prudential ), Phoenix Home Life Mutual Insurance Company ( Phoenix Home Life ), Principal Mutual Life Insurance Company ( Principal Mutual ), Indianapolis Life Insurance Company ( Indianapolis Life ), John Hancock Life Insurance Company ( John Hancock ), Manufacturers Life Insurance Co. of Canada ( ManuLife ), Sun Life Assurance Company of Canada ( Sun Life ), The Canada Life Assurance Company ( Canada Life ), Mutual of New York ( MONY ) and Provident Mutual Life Insurance Company ( Provident ), and Plaintiffs believe that substantial additional evidentiary support will 2

3 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 3 of 114 exist for the allegations set forth herein after a reasonable opportunity for discovery, as follows: NATURE OF ACTION, JURISDICTION AND VENUE A. THE STATE LAW CLAIMS FOR RELIEF UNDER THE CLASS ACTION FAIRNESS ACT OF This is a class action brought under the Court s diversity jurisdiction as expanded by the Class Action Fairness Act of 2005 asserting state common law claims for breach of fiduciary duty, breach of contract and negligence, and seeking compensatory and punitive damages, as well as certain injunctive and other equitable relief. 2. Plaintiffs claims arise out of (i) the significant and material undervaluation of Plaintiffs membership interests in Anthem Insurance, as determined by Anthem and Anthem Insurance, and each of them, jointly and severally, in exchanging such membership interests for approximately $2,063,600,000 in cash paid to Plaintiffs in December 2001, (ii) the under-allocation of Anthem shares to all but a relative few of the members of Anthem Insurance, (iii) the denial of stock compensation to some members who were entitled to stock instead of cash, (iv) the dilution of the members equity interests, and (v) erroneous tax information and advice provided by Anthem and Anthem Insurance to Plaintiffs on or about August 17, 2001 which caused Plaintiffs to overpay their federal and state income taxes for In addition to the foregoing, Defendants engaged in manipulative schemes, devices or artifices in connection with Plaintiffs rights to receive shares of Anthem stock that artificially depressed the amount of cash compensation paid to Plaintiffs in exchange for their mutual membership interests by (i) setting a lower-than-appropriate share price for Anthem s initial public offering ( IPO ) on which such cash compensation was directly based, and (ii) radically increasing the size of the IPO immediately before it was launched. The timing was particularly disturbing because these events occurred after the Commissioner of the Indiana Department of Insurance (the Commissioner ) had approved the transaction and after many mutual members of Anthem 3

4 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 4 of 114 Insurance had already voted on the plan, but without disclosures to either. Defendants concealed purpose was to create the appearance of fairness while deliberately minimizing the number of shares to be issued to mutual members and minimizing the number of members who could become shareholders in the new corporation. 4. By making almost twice as much stock available in the IPO as previously disclosed, this manipulative scheme proximately caused several adverse consequences with resulting damages to the class members. First, the effect of almost doubling the size of the IPO was to depress the IPO price, thus reducing the cash paid to each mutual member who received cash compensation in exchange for his or her mutual membership interest since the cash compensation was tied to the IPO share price. Second, since the total number of shares available to be (i) issued as compensation to mutual members and (ii) sold to IPO purchasers was fixed at slightly more than 100 million shares, any increase to the IPO shares necessarily resulted in a corresponding decrease in shares available to compensate mutual members. Thus, by making almost twice the number of shares available to be sold in the IPO, Defendants deliberately and significantly reduced the number of shares available to compensate the mutual members, thereby preventing hundreds of thousand of mutual members from becoming Anthem shareholders. Correspondingly, the increase in the size of the IPO generated almost twice as much cash as originally disclosed, which provided the funds to compensate those hundreds of thousands of additional members in cash instead of stock. Third, those members who were denied shares lost the opportunity to benefit from the subsequent significant appreciation of the Anthem stock. 5. This Court has diversity jurisdiction over the subject matter of the foregoing state law claims asserted in this class action, pursuant to the provisions of 28 U.S.C. 1332(d)(2), because the parties are citizens of diverse states and the amount in controversy, aggregating the claims of all class members, exceeds the sum of $5,000,000. The named Plaintiffs are citizens of Ohio and 4

5 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 5 of 114 Kentucky, and the unnamed class members in each class are citizens of Ohio, Indiana, Kentucky and Connecticut. Defendants are citizens of Indiana for purposes of 28 U.S.C. 1332(c)(1). Thus, one or more of the named Plaintiffs (and one or more of the unnamed class members) is a citizen of a state different from at least one of the Defendants. 6. This Court also has supplemental jurisdiction, pursuant to the provisions of 28 U.S.C. 1367(a), over any claims that are so related to the claims asserted under the Court s federal diversity jurisdiction that they form part of the same case or controversy within the meaning of Article III of the Constitution of the United States. 7. Venue over the foregoing diversity claims is properly laid within the Southern District of Indiana, pursuant to 28 U.S.C. 1391(a)(1), because all Defendants reside for venue purposes in Indiana, and at least one Defendant resides for venue purposes, within the meaning of 28 U.S.C. 1391(c), in this judicial district. THE PARTIES 8. Ormond is an individual residing in Cincinnati, Hamilton County, Ohio. 9. At the time of her death, Moore was an individual residing in Petersburg, Boone County, Kentucky. 10. Cescato is an individual residing in Cincinnati, Hamilton County, Ohio. 11. Heekin is an individual residing in Ft. Thomas, Campbell County, Kentucky. 12. Anthem is a corporation organized under the laws of the State of Indiana and has its principal place of business in Indianapolis, Indiana, within this judicial district. Anthem is the parent company of Anthem Insurance. 13. Anthem Insurance is a corporation organized under the laws of the State of Indiana and has its principal place of business in Indianapolis, Indiana, within this judicial district. Anthem Insurance is a wholly-owned subsidiary of Anthem. Anthem and Anthem Insurance are sometimes 5

6 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 6 of 114 collectively referred to as the Anthem Defendants. BACKGROUND OF THE TRANSACTION 14. On or about November 2, 2001, Anthem Insurance entered into a transaction of conversion (hereinafter referred to as a demutualization ) in which it converted from a mutual insurance company to a stock company pursuant to Indiana Code Pursuant to the demutualization, the membership interests of certain members of the mutual insurance company, Anthem Insurance, were extinguished. In exchange for such interests, those members had the right to receive compensation in the form of either cash or shares of common stock of Anthem, the parent company of Anthem Insurance. 15. In order for Anthem Insurance to demutualize, Anthem and Anthem Insurance adopted a Plan of Conversion to a Stock Insurance Company dated June 18, 2001 (the Plan of Conversion ), which formed a contract among Anthem, Anthem Insurance and its members. Pursuant to the contract, Anthem and Anthem Insurance agreed to pay consideration to the members in the form of cash or Anthem common stock and the members agreed to the extinguishment of their membership interests in Anthem Insurance. 16. Anthem and Anthem Insurance engaged the investment banking firm, Goldman, Sachs & Company ( Goldman Sachs ), to serve as both the financial advisor for the demutualization and to serve as the lead underwriter for the initial public offering ( IPO ) of Anthem stock. 17. To effect the demutualization, Anthem and Anthem Insurance solicited approval of the Plan of Conversion from members residing in four states, Ohio, Indiana, Connecticut and Kentucky. 18. Solicitations prepared and mailed to their members by the Anthem Defendants targeted their members residing in those four states. Such extensive solicitation activities included sending members hundreds of pages of written materials in at least five separate documents: 6

7 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 7 of 114 (a) (b) Member Information Statement - Part One (mailed to members in August 2001); Member Information Statement - Part Two (mailed to members in August 2001); (c) Instruction Guide (mailed to members in August 2001); (d) (e) Questions and Answers (mailed to members in August 2001); and Member Information Statement - Supplement (mailed to members in October 2001). 19. On or about October 29, 2001, the members approved the Plan of Conversion. Having successfully solicited approval from members, Anthem and Anthem Insurance became contractually obligated to pay compensation to hundreds of thousands of members, the delivery of which compensation was to take place in Ohio, Indiana, Kentucky and Connecticut. 20. In or about December 2001, the Anthem Defendants delivered 48,095,675 shares of Anthem common stock consideration and mailed checks totaling over $2.063 billion to its former members residing in Ohio, Indiana, Kentucky and Connecticut. 21. In December 2001, Ormond, Moore, Cescato and Heekin each received cash compensation as a result of the Anthem Insurance demutualization on November 2, 2001, and each paid federal and state income taxes for 2001 on the full amount of cash compensation received. CLASS ACTION ALLEGATIONS 22. Plaintiffs allege the existence of one Plaintiff class (the Class ) with two separate and distinct, but partially overlapping, sub-classes. 23. The members of the Class consist of all former members of Anthem Insurance on November 2, 2001, residing in Ohio, Indiana, Kentucky and Connecticut, who received cash compensation in connection with the demutualization of Anthem Insurance, and the communities comprised of them and their spouses, if any, excluding: (i) all employers located in Ohio and Connecticut that maintained group health 7

8 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 8 of 114 insurance policies on their respective employees and retirees and that received demutualization compensation (the Grandfathered Groups ); (ii) (iii) (iv) Defendants, their predecessors and successors in interest; the officers and directors of Defendants, their predecessors and successors; counsel of record in this action and their respective parents, spouses and children; and (v) judicial officers who enter an order in this action, and their respective parents, spouses and children. I. The Depressed-Price Class 24. The Plaintiff class (the Class ) is sometimes referred hereinafter as the Depressed- Price Class. Each member of the Depressed-Price Class had the value of his or her membership interests in Anthem Insurance artificially depressed by actions committed by each Defendant that improperly undervalued such membership interests. The wrongful actions of each Defendant caused each Depressed-Price Class member to be injured by receiving less cash compensation than he would have received in exchange for his membership interests but for such wrongful actions. 25. Ormond, Moore, Cescato and Heekin are members of the Depressed-Price Class. Ormond, Moore, Cescato and Heekin are representatives of the Depressed-Price Class. II. The Denied-Stock Subclass 26. The first subclass of the Class is referred to as the Denied-Stock Subclass. The members of the Denied-Stock Subclass also had their membership interests in Anthem Insurance improperly undervalued by each Defendant s wrongful actions and consist of all persons in the Class whose membership interests were cashed-out with cash spent over and above the first $1,302,444,000 of cash paid in exchange for Anthem Insurance membership interests. 27. The persons comprising the Denied-Stock Subclass are those members of the Class 8

9 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 9 of 114 whose membership interests were each allocated a relatively larger number of shares in connection with the demutualization (from approximately 40 shares up to 473 shares) and who would have received stock compensation instead of cash if the initial public sale of Anthem stock had been limited to 28.6 million shares (or million shares with the underwriters over-allotment) as disclosed to Anthem Insurance s members. The aggregate sum of $1,302,444,000 was required to cash-out the membership interests of those members who were to receive cash compensation if the size of the IPO had remained so limited. The members of the Denied-Stock Subclass actually received cash compensation instead of stock only because, as the result of the direct or indirect actions and participation of each Defendant, the number of shares initially offered for sale to the public was substantially increased from million shares to 55.2 million shares (with the exercise of the underwriters over-allotment), thereby excluding from the shareholder population an additional 22.3 million shares that had been allocated to former Anthem Insurance members. All members of the Denied-Stock Subclass were eliminated as Anthem shareholders as a result of this last-minute substantial increase in the size of the initial public offering that was not disclosed to the membership. A. Membership in the Denied-Stock Subclass Is Not Solely the Result of the Anthem Defendants Nearly Doubling the Number of Shares Offered and Sold in the IPO 28. Some members of Anthem Insurance, including Ormond, were legally and contractually entitled to receive stock compensation, but received cash instead. They are also members of the Denied-Stock Subclass not solely for the reason that the Anthem Defendants substantially increased the size of the IPO by at least 22.3 million shares beyond what had been disclosed to members and regulators, but because the Anthem Defendants disregarded their grandfathered rights under Ohio insurance law to stock compensation in the event Anthem Insurance demutualized. 9

10 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 10 of 114 B. Former Members of CMIC, Including Ormond, Had Legal and Contractual Rights to Stock Compensation Not Cash 29. Ormond and some of these Anthem Insurance members had been members of Community Mutual Insurance Company ( CMIC ). In a 1995 merger, they received membership interests in Associated, predecessor of Anthem Insurance, in exchange for their membership interests in CMIC. Associated changed its name to Anthem Insurance immediately following the 1995 merger with CMIC. To effectuate the 1995 merger between Associated and CMIC, Ormond and the other CMIC members each received a guaranty insurance policy and membership certificate from Associated (the Guaranty Policy ) (attached to Plaintiffs Fourth Amended Class Action Complaint as Exhibit A and incorporated by reference herein). 30. The Guaranty Policy conferred certain membership rights on Ormond and other former CMIC members, including equity rights in the event of a demutualization of Anthem Insurance (successor to Associated). At Article IV on page three of the Guaranty Policy, the membership rights are described as follows: As long as this Policy is in effect, the Associated Member shall be entitled to all rights of membership in Associated accorded to members of a mutual insurance company under Indiana law, including the right to one vote on all matters that come before the members of an Indiana Insurance Law and equity rights in the event of liquidation, merger, consolidation or demutualization as provided in Associated s Articles of Incorporation from time to time in effect. 31. Therefore, the demutualization rights of Ormond and other former CMIC members were written into Associated s Articles of Incorporation (Second Amended and Restated Articles of Incorporation of Associated Insurance Companies, Inc., attached to Plaintiffs Fourth Amended Class Action Complaint as Exhibit B and incorporated by reference herein). These rights were set forth in Article VIII at Section 8.3 and in relevant part provide: Rights of Former Members of The Community Mutual Insurance Company. 10

11 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 11 of 114 By virtue of the Community Merger described in Section 7.3, all of the members of Community became members of [Anthem Insurance] Accordingly, upon any liquidation, merger, consolidation, demutualization or conversion of [Anthem Insurance] described in Section 8.1, in the determination of the rights of any member of the Corporation who was, immediately prior to the Community Merger, a member of Community, full account and credit shall be given to such member of its former interests in Community, which rights shall reflect and include in full the value of such member s interests in Community immediately prior to the Community Merger (it being understood, for illustrative purposes, that if a liquidation, demutualization or conversion of the Corporation had occurred immediately after the Community Merger, each member of the Corporation who was, immediately prior to the Community Merger, a member of Community, would be entitled to the same value, calculated in accordance with Ohio law, as though a liquidation, demutualization or conversion of Community had occurred immediately prior to the Community Merger). (emphasis supplied) 32. Prior to the 1995 merger, CMIC was an Ohio mutual insurance company and Ohio law governed the demutualization rights of Ormond and CMIC s other members. Under the applicable Ohio insurance statute, Ormond and the other CMIC members were entitled to receive compensation in the form of stock. The Ohio statute does not permit the converting mutual insurer to cash-out its policyholders or require them to affirmatively elect stock compensation in order to avoid being paid cash by default. Ohio s demutualization statute, R.C (A), provides in relevant part: In effecting a conversion of a mutual insurance company into a stock insurance corporation pursuant to sections to , inclusive, of the Revised Code, each mutual policyholder is entitled to such shares of stock of the new corporation as his equitable share of the value of the mutual company will purchase. If such equitable share of the value of the mutual company entitles a policyholder to a fractional share of stock, he shall have the option of receiving the value of such fractional share in cash or of purchasing such additional fraction as will entitle him to a full share. If the initial issue of stock to the new corporation exceeds the number of shares to which the mutual policyholders are entitled in the aggregate, each mutual policyholder is also entitled to preemptive rights in subscribing to 11

12 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 12 of 114 his proportionate number of shares of such excess. 33. The Ohio demutualization statute, R.C (A), permits the payment of cash compensation, but only to the extent of the value of a fractional share. The statute provides the policyholder with the option of receiving the value of a fractional share in cash. Under the Ohio demutualization statute, the converting mutual insurer does not have the authority to pay cash for the full value of even a single share. It limits the cash payment to a policyholder to the value of just a fractional share at the option of the policyholder. 34. The Anthem Defendants clearly did not abide by Section 8.3 of the Articles of Incorporation and give full account and credit to the former interests in CMIC of Ormond and the other Anthem Insurance members who had been former members of CMIC. The Anthem Defendants devised a demutualization plan for Anthem Insurance that required the former members of CMIC, like Ormond, to affirmatively elect stock compensation even though Ormond and these other former CMIC members had grandfathered rights under Ohio insurance law written into the Articles of Incorporation of Anthem Insurance that entitled them to receive only stock (except to the extent of a fractional share and at the policyholder s option), not cash. 35. Ormond and tens of thousands of other former CMIC members who did not affirmatively elect stock compensation were cashed-out by the Anthem Defendants in late December 2001 and denied the Anthem shares to which they were legally and contractually entitled. The Anthem Defendants disregarded the grandfathered right under Ohio law to stock compensation expressly provided in Section 8.3 of the Articles of Incorporation to these former CMIC members because the Anthem Defendants wanted to eliminate them from Anthem s shareholder population to save shareholder servicing costs after the demutualization. 12

13 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 13 of 114 C. Defendants Were Required to Use the Cash from the IPO to Compensate Certain Non-electing Former Members of Southeastern, But Instead Used the Cash to Pay Other Members. 36. Some members of Anthem Insurance were paid cash and did not receive Anthem stock as their demutualization compensation because the Anthem Defendants disregarded the legal and contractual rights of certain Kentucky members to receive not less than fifty-percent (50%) of their demutualization compensation in cash. These Anthem Insurance members were cashed-out with funds that were required to be paid to certain Kentucky members. They are also members of the Denied-Stock Subclass. The denial of Anthem stock to these Anthem members in the Denied-Stock Subclass did not depend on the last-minute increase in the size of the IPO by 22.3 million shares. 37. In the event Anthem Insurance demutualized, certain policyholders and former members of Southeastern Mutual Insurance Company ( Southeastern ) had a grandfathered right under the Kentucky demutualization statute to receive not less than 50% of their demutualization compensation in cash. In 1993, Associated (later called Anthem Insurance) merged with Southeastern, a Kentucky mutual insurance company. Associated agreed to preserve the rights of Southeastern s members in the event Anthem Insurance later demutualized. Associated expressly preserved the pre-merger rights of Southeastern s members in Section 8.2 of its own Articles of Incorporation (Exhibit B attached to Plaintiffs Fourth Amended Class Action Complaint): Rights of Former Members of Southeastern Mutual Insurance Company. By virtue of the Southeastern Merger described in Section 7.2, all of the members of Southeastern became members of [Anthem Insurance] Accordingly, upon any demutualization or conversion of [Anthem Insurance] in the determination of the rights of any member of [Anthem Insurance] who was, immediately prior to the Southeastern Merger, a member of Southeastern, full account and credit shall be given to such member of its former interests in Southeastern, which rights shall reflect and include in full the value of such member s interest in Southeastern immediately prior to the Southeastern Merger (it being understood, for illustrative purposes, that if a 13

14 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 14 of 114 demutualization or conversion of [Anthem Insurance] had occurred immediately after the Southeastern Merger, each member of [Anthem Insurance] who was, immediately prior to the Southeastern merger, a member of Southeastern, would have been entitled to the same value, calculated in accordance with Kentucky law, as though a demutualization or conversion of Southeastern had occurred immediately prior to the Southeastern Merger). (Emphasis supplied.) 38. Prior to the 1993 merger, Southeastern was a Kentucky mutual insurance company and Kentucky law governed the demutualization rights of Southeastern s members. Under the applicable Kentucky statute, Southeastern s members had the right receive 50% of their demutualization compensation in cash, not stock. Moreover, the Kentucky demutualization statute did not permit the commissioner s approval of the mutual insurer s plan of conversion to a stock corporation unless the conversion plan mandated a cash payment to mutual members that did not elect stock of an amount not less than 50% of the member s equity. Kentucky s demutualization statute provides in relevant part: The commissioner shall not approve any such plan or procedure unless: The plan provides for payment to each policyholder not electing to apply his equity in his equity in the insurer for or upon the purchase price of stock to which preemptively entitled, of cash in the amount of not less than fifty percent (50%) of the amount of his equity not so used for the purchase of stock, and which cash payment together with stock so purchased, if any, shall constitute full payment and discharge of the policyholder s equity as an owner of such mutual insurer (Emphasis supplied.) 39. There were many Southeastern policyholders that became members of Anthem Insurance as a consequence of the 1993 merger, but did not elect stock compensation in 2001 when Anthem Insurance demutualized. Some of these non-electing former members of Southeastern (like Moore) had been allocated 473 or fewer Anthem shares and were paid cash in lieu of Anthem shares. Anthem and Anthem Insurance adopted a policy of paying cash rather than stock to all non-electing members with allocations below 474 shares. However some non-electing former member of 14

15 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 15 of 114 Southeastern received no cash in 2001 and 474 or more Anthem shares despite the fact that their grandfathered rights obligated Anthem and Anthem Insurance to pay them cash in amounts not less than 50% of the value of their respective Anthem share allocations. 40. The tens of millions of dollars in cash that Anthem was required to pay to Southeastern s grandfathered former members were improperly used by the Anthem Defendants to cash-out other members of Anthem Insurance who had been allocated 473 or fewer Anthem shares. In 2001, if Anthem and Anthem Insurance had paid at least 50% cash to each of the nonelecting former members of Southeastern as required, then many other members of Anthem Insurance would have not been cashed-out and would have instead received highly appreciated Anthem stock as their demutualization compensation. 41. Anthem and Anthem Insurance failed to reserve sufficient cash proceeds from the IPO to assure that each and every non-electing former member of Southeastern received at least 50% cash compensation. To the contrary, the Anthem Defendants devised a conversion plan that required Anthem Insurance to use the proceeds from the IPO to cash-out the non-electing members of Anthem Insurance beginning with those members with the smallest share allocation and then progressing to cash-out those members with incrementally larger share allocations until the IPO proceeds were exhausted. 42. Ormond was allocated 353 shares and is a member of the Denied-Stock Subclass. Moore was allocated 345 shares and is also a member of the Denied-Stock Subclass. All members of the Denied-Stock Subclass are also members of the Depressed-Price Subclass. III. Tax Misinformation Subclass 43. The second subclass is referred to as the Tax Misinformation Subclass. The Tax Misinformation Subclass consists of the members of both the Depressed-Price and Denied-Stock Subclasses, subject to the exclusions described below. The members of the Tax Misinformation 15

16 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 16 of 114 Subclass assert claims that Anthem and Anthem Insurance furnished them with misinformation regarding their respective federal and state income tax liabilities, and consist of all persons who received cash compensation in 2001 in connection with the Anthem Insurance demutualization residing in Ohio, Indiana, Kentucky and Connecticut, excluding: (i) (ii) persons identified by a federal taxpayer identification number other than a social security number; and persons whose only policies or contracts of insurance with Anthem were continuously in force for less than one year as of November 2, Ormond, Moore, Cescato and Heekin are members of the Tax Misinformation Subclass. 45. Plaintiffs bring this class action, pursuant to Rules 23(b)(2) and 23(b)(3) of the Federal Rules of Civil Procedure, on behalf of the Class and the two subclasses described in Paragraphs Twenty-one (21) through Forty-three (43), inclusive, above. 46. The members of the Class and of each of the two subclasses are so numerous that joinder of all members is impracticable, as required by Fed. R. Civ. P. 23(a)(1). While the exact number and identity of all Class members (and of the members of each subclass) is unknown to Plaintiffs at the present time, that information is identifiable and will be ascertained from Defendants records through appropriate discovery. When it demutualized, Anthem Insurance had approximately one million members entitled to compensation. Therefore, Plaintiffs allege that the Class, as well as each of the two subclasses, certainly consists of tens of thousands, if not hundreds of thousands, of persons. 47. There are questions of law or fact common to all members of the Class, and there are questions of law or fact common to all members of each of the two subclasses, in satisfaction of the requirements of Fed. R. Civ. P. 23(a)(2). Moreover, such common questions predominate over any questions affecting only individual members of the Class or of each subclass, as required by Fed. R. 16

17 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 17 of 114 Civ. P. 23(b)(3). 48. These common legal and factual questions derive from a common nucleus of operative facts relating to and including, without limitation: (a) whether the cash compensation received by the Depressed-Price Class as a whole and individually was less than fair and just compensation in exchange for their membership interests as required by Indiana law; (b) whether the share price of the Anthem IPO stock was underpriced and set artificially low, thereby reducing the amount of cash compensation received by the members of the Depressed-Price Class in exchange for their membership interests in Anthem Insurance, because their cash compensation was directly tied to the IPO price; (c) whether the share price of the Anthem IPO stock was underpriced and set artificially low as part of a manipulative or deceptive device or scheme to increase the number of shares sold in the IPO; (d) whether the size of the IPO was increased in the last three days before it was launched as part of a manipulative or deceptive device or scheme to keep the IPO price low, to reduce the number of shares available to compensate members for their membership interests in Anthem Insurance, and to eliminate the members of the Denied-Stock Subclass from the Anthem shareholder population; (e) whether the launch of the Anthem IPO was hurried and accelerated so that it would take place before information regarding Anthem s significantly improved 3 rd Quarter 2001 earnings became publicly known and could be included in the pricing of the IPO stock, which would have driven the price up 17

18 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 18 of 114 higher than the $36 per share IPO price, to the benefit of the members of the Depressed-Price Class but contrary to Defendants concealed goals; (f) whether the actual value of the Anthem IPO stock, on which the Depressed- Price Class members cash compensation was directly based, was significantly higher than the IPO price set by Anthem Defendants and Goldman Sachs; (g) whether Anthem and Anthem Insurance are liable to the members of the Depressed-Price Class for the damages they suffered by receiving cash compensation in exchange for their membership interests that was inadequate and less than fair value; (h) whether Anthem and Anthem Insurance are liable to the members of the Denied-Stock Subclass for the damages they suffered by being eliminated from the Anthem shareholder population and being denied the opportunity to receive an appreciated asset, Anthem stock, they otherwise would have received under the Plan of Conversion; (i) whether Anthem and Anthem Insurance provided erroneous tax information and advice to the members of the Tax Misinformation Subclass that they had zero basis in their membership interests and that the entire amount of cash compensation they received in 2001 was taxable income; (j) whether the Anthem Defendants erroneous and negligent tax advice and misinformation damaged the members of the Tax Misinformation Subclass when they reported the entire amount of the cash compensation they received as taxable income, thereby overpaying their federal and state income taxes for 2001; (k) whether the Anthem Defendants breached fiduciary duties they owed to the 18

19 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 19 of 114 members of the Depressed-Price Class and/or the Denied-Stock Subclass; (l) whether the Anthem Defendants breached duties of due care they owed to the members of the Depressed-Price Class, the Denied-Stock Subclass and/or the Tax Misinformation Subclass; (m) whether the Anthem Defendants breached contractual obligations they owed to the members of the Depressed-Price Class and the Denied-Stock Subclass; (n) whether the Anthem Defendants misallocated shares of Anthem Insurance to certain employers in Ohio and Connecticut that maintained group health insurance coverage on their active and retired employees rather than to the Class; and (o) whether the Anthem Defendants wrongfully diluted the members equity interests in Anthem Insurance. 49. The claims of Ormond, Moore, Cescato and Heekin (collectively the Named Plaintiffs ) are typical of the claims of the Class and typical of the claims of each subclass they seek to represent, pursuant to Fed. R. Civ. P. 23(a)(3). There are no conflicts between the Named Plaintiffs interests and the interests of the members of the Class as a whole. There are likewise no conflicts between the Named Plaintiffs interests and the interests of the members of each subclass. 50. The Named Plaintiffs will fairly and adequately protect and represent the interests of the Class, and the interests of the members of each subclass, as required by Fed. R. Civ. P. 23(a)(4). The Named Plaintiffs interests are not antagonistic to or in conflict with the interests of any other member of the Class, or any member of the subclasses, and the interests of no member of the Class or any subclass are antagonistic to or in conflict with the interests of any member of the Class or any subclass. Moreover, the Named Plaintiffs have retained competent counsel experienced in class action litigation to represent the Class, the two subclasses and the members of each herein. 19

20 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 20 of Defendants, and each of them, have acted on grounds generally applicable to the Class as a whole, and/or separately to the members or each of the two subclasses, thereby making the final injunctive relief or corresponding declaratory relief sought in this Class Action Complaint appropriate with respect to the Class as a whole, and with respect to each subclass as a whole, in satisfaction of the requirements of Fed. R. Civ. P. 23(b)(2). 52. A class action is superior to other available methods for the fair and efficient adjudication of this litigation, in satisfaction of the requirements of Fed. R. Civ. P. 23(b)(3), since individual joinder of all members of the Class or of the subclasses is impracticable. Because damages suffered by individual members of the Class and of each subclass are relatively small in comparison to the expense and burden of prosecuting this litigation, members of the Class and of each subclass cannot redress the wrongs done to them on an individual basis. Even if the members of the Class or of the two subclasses were able individually to prosecute their individual actions, it would be unduly burdensome on the courts to proceed with thousands, if not tens of thousands, of individual cases. By contrast, the class action device presents far fewer management difficulties and provides the benefits of unitary adjudication, economies of scale, and comprehensive supervision by a single court. FACTUAL ALLEGATIONS COMMON TO ALL CLAIMS FOR RELIEF I. The Anthem Plan of Demutualization 53. Prior to November 2, 2001, Anthem Insurance was a mutual insurance company, primarily engaged in the business of providing health insurance coverage to its policyholders. 54. The policyholders of Anthem Insurance had membership interests in the mutual company with attendant ownership rights. Just as stockholders own a company organized as a stock corporation, the policyholders ( members ) of a mutual insurer are its owners. For example, the policies acquired by Anthem Insurance s members entitled the policyholders to receive distributions 20

21 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 21 of 114 in the event of liquidation, to vote on the election of directors, to vote on whether to approve the Plan of Conversion or demutualization, as well as other matters relating to Anthem Insurance that in a stock corporation would be required to be voted on by the shareholders, and to receive fair and reasonable compensation in the event of a demutualization. 55. On or about June 18, 2001, the Board of Directors of Anthem Insurance approved a Plan of Conversion in accordance with the Indiana demutualization statutes, Indiana Code , et seq., to convert from a mutual insurance company to a stock insurance company. Anthem Insurance would then become a wholly-owned subsidiary of a newly-formed stock holding company, Anthem. (A copy of the Plan of Conversion was attached as Exhibit A to the original Complaint filed in this case on August 16, 2005, and is incorporated by reference herein.) 56. Under the applicable Indiana laws governing the demutualization, as a result of the conversion of Anthem Insurance from a mutual insurance company to a stock insurance company, Anthem Insurance was required to distribute either cash or Anthem common stock in exchange for the membership interests of all of Anthem Insurance s members. 57. Under the Plan of Conversion, Anthem Insurance proposed to extinguish the membership interests of its members and exchange them for consideration in the form of either cash or the common stock of Anthem. The default mechanism under the Plan was to receive cash; in other words, eligible members had to affirmatively elect to receive stock in order to receive stock, and all others would be compensated in cash. 58. Section 6.1(a) of the Plan provided, in pertinent part, that those eligible members who affirmatively requested to receive compensation in the form of Anthem common stock will be paid in shares of Common Stock... (emphasis supplied). By contrast, Section 6.1(b) of the Plan provided, in pertinent part, that eligible members who failed to make an election to receive their compensation in the form of stock may be paid in cash, subject to the limitations set forth in 21

22 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 22 of 114 Section 6.1(d) (emphasis supplied). 59. The limitations on cash payments to the members who did not elect to receive stock set forth in Section 6.1(d) of the Plan, and the contingency signified by using the word may that a form of compensation other than cash might be paid, primarily referred to the fact that the available cash raised by the IPO would be paid to members based on their allocated number of shares in increasing order, with the members allocated the fewest number of shares being paid in cash first, until the total amount of available cash was fully distributed. Then, in the event all available cash was fully distributed, any remaining eligible member who had not already received either stock or cash would be compensated in the form of stock. II. Although Indiana Reorganization Statutes Required Anthem Insurance to Pay Fair Value to Its Members in Exchange for their Interests, Defendants Tied the Valuation of the Membership Interests of the Members of the Depressed-Price Class to the Anthem IPO Share Price, Thus Setting the Stage for Their Severe Undervaluation of Such Interests By Artificially Depressing the IPO Price. 60. In order to generate the cash required to compensate members who did not elect to receive stock, the Plan of Conversion provided for an IPO of Anthem stock. It also authorized other capital-raising transactions if necessary. 61. Indiana Code (3) required the Plan of Conversion to provide that, upon the extinguishing of their membership interests, Anthem Insurance would compensate its members by paying aggregate consideration equal to the fair value of Anthem Insurance. 62. Indiana Code (4) also required Anthem Insurance, in its Plan of Conversion, to describe the manner in which the fair value of Anthem Insurance would be determined. 63. The Plan of Conversion provided that the aggregate consideration to be distributed to Anthem Insurance s eligible members, in exchange for their membership interests, would be equal to the value of 100 million shares (subject to a possible upward adjustment) of Anthem common stock. 22

23 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 23 of 114 Each eligible member would receive, at a minimum, 21 shares of Anthem common stock or its cash equivalent. Any stock to be issued under the Plan of Conversion was to be issued first to those eligible members who elected to receive stock. The remaining shares would then be divided between the IPO and the eligible members who had not elected to receive stock. Thus, every additional share that was sold to the public in the IPO resulted in one less share being available to compensate non-electing eligible members, and correspondingly in more cash that had to be paid to them. 64. Section 6.3 of the Plan of Conversion tied the cash compensation directly to the IPO share price. The amount of cash paid to those members receiving cash compensation instead of stock would be equal to the number of shares allocated to each such member multiplied by either (i) the price at which Anthem s common stock would be offered to the public in the IPO (the IPO Price ), or (ii) the IPO Price enhanced by a top-up provision of as much as 10% more in the event the average closing prices of Anthem common stock for the twenty consecutive days following the Effective Date of the demutualization exceeded 110% of the IPO Price. 65. Section 6.3 of the Plan of Conversion further provided that the top-up provision was to be calculated as the sum of the IPO Price plus the lesser of (a) the amount by which the average closing price exceeds 110% of the IPO Price or (b) 10% of the IPO Price. Thus, if the average closing price were 110% of the IPO Price or lower, there would be no enhancement of the IPO Price. If the average closing price were 111% of the IPO Price, the top-up enhancement would be 1%. If the average closing price were 115% of the IPO Price, the top-up would be 5%. If the average closing price were 120% of the IPO Price or higher, the top-up enhancement would maximize at 10%. III. The Anthem Defendants Initial Disclosures to the Mutual Members Informed Them That the IPO Would Raise a Limited Amount of Cash and That, Even Though the Default Mechanism Would Be Cash Compensation, It Was Likely Many Members Who Preferred Cash Would Have to Receive Compensation in the Form of Stock 23

24 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 24 of 114 Instead. 66. Beginning on or about August 17, 2001, the Anthem Defendants distributed a Member Information Statement ( MIS ) in two parts to its members describing the Plan of Conversion and other issues relating to the proposed demutualization. (Excerpts of the MIS-Part 1 were attached as Exhibit B to the original Complaint in this case filed on August 16, 2005, and are incorporated by reference herein. Excerpts of the MIS-Part 2 were attached as Exhibit C to the original Complaint filed on August 16, 2005, and are incorporated by reference herein.) 67. In the first part of the MIS sent to all eligible members (including without limitation the members of the Class and each of the two subclasses), the Anthem Defendants forecast that the IPO would have an offering price of between $25 and $45 per share. Using the median of $35 per share, the Anthem Defendants indicated that between 26.4 million and 30.5 million shares would be sold at the IPO, raising between $924 million and $ billion. (See MIS-Part 1 at page 24.) 68. In the second part of the MIS distributed to Anthem Insurance s members (including among others the members of the Class and the members of the two subclasses) in August 2001, the Anthem Defendants informed those members that it intended to offer 28,600,000 shares of common stock in the IPO, and to issue up to 4.29 million additional shares of common stock in the event the underwriters exercised their over-allotments. Again, the Anthem Defendants indicated that net proceeds from the IPO would be between $924 million and $ billion if the underwriters fully exercised their option to purchase additional over-allotment shares, assuming an IPO price of $35 per share. The Anthem Defendants also represented that $837.2 million in cash compensation would be paid to eligible members in connection with the demutualization. This representation showed that the net proceeds of the IPO would be sufficient to cover the cash payments to eligible members who were to receive cash compensation. (See MIS-Part 2 at page 3.) 69. Moreover, in four separate documents disseminated to the members (including among 24

25 Case 1:05-cv DFH-TAB Document 122 Filed 01/26/2009 Page 25 of 114 others the members of the Class and the two subclasses) on or about August 17, 2001, the Anthem Defendants repeatedly represented that (i) the IPO would raise a limited amount of cash and (ii) it was likely many members who preferred to receive cash compensation for their membership interests would have to receive common stock instead. 70. Specifically, MIS-Part 1 represented, in pertinent part, as follows: Please note, however, that there will be a limited amount of cash available for distribution, and it is likely that many Eligible Statutory Members who prefer cash may receive common stock instead. * * * There will be a limit on the amount of cash available for distribution to Eligible Statutory Members, however, and it is likely that many Eligible Statutory Members who prefer to receive cash as their consideration may receive shares of common stock instead. (Id. at 23; 24-25) (emphasis supplied). relevant part: 71. At the same time, the Answer to Question 13 in the Questions and Answers stated in If you prefer to receive cash, do not fill out or return Card 3. However, please keep in mind that there may not be enough cash to pay everyone who prefers it, and many people who prefer cash may receive stock instead. (Id. at 6) (emphasis supplied). 72. Similarly, in the Instruction Guide, the Anthem Defendants represented as follows: Stock Election Card (Card 3). If you prefer to be paid in stock, you must sign and return this card. NOTE: If you prefer to receive cash, do not return this card. However, there will be a limited amount of cash available for distribution, and many Eligible Statutory Members who prefer cash may be paid in stock instead. (Instruction Guide at 3) (bolded emphasis in original; underlined emphasis supplied). 73. Finally, on the Stock Election Card (Card 3) page and on the Card itself, the Anthem Defendants made the following representations: 25