Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 1 of 124 IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION MARY E. ORMOND 6549 Lyceum Court Cincinnati, Ohio 45230-2402, On Behalf of Herself and All Others Similarly Situated, CASE NO. 1:05 CV 01908-DFH-TAB JUDGE DAVID F. HAMILTON MAGISTRATE JUDGE TIM A. BAKER and DANIEL J. CESCATO 3546 Erie Avenue Cincinnati, Ohio 45208, and KEVIN T. HEEKIN 86 Henry Court Ft. Thomas, Kentucky 41075, Plaintiffs, vs. ANTHEM, INC. (now known as WELLPOINT, INC.) 120 Monument Circle Indianapolis, Indiana 46204, THIRD AMENDED CLASS ACTION COMPLAINT FOR MONEY DAMAGES AND FOR INJUNCTIVE AND OTHER EQUITABLE RELIEF (Jury Demand Endorsed Hereon ) and ANTHEM INSURANCE COMPANIES, INC. 120 Monument Circle Indianapolis, Indiana 46204, and LARRY C. GLASSCOCK 120 Monument Circle Indianapolis, Indiana 46204, and )
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 2 of 124 GOLDMAN, SACHS & COMPANY ) 85 Broad Street ) New York, New York 10004, ) Defendants. ) Plaintiffs, Mary E. Ormond a/k/a Eileen M. Ormond ("Ormond"), Daniel J. Cescato ("Cescato") and Kevin T. Heekin ("Heekin"), on behalf of themselves and all others similarly situated, for their Third 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"), Anthem Insurance Companies, Inc. ("Anthem Insurance"), Larry C. Glasscock (" Glasscock ") and Goldman, Sachs & Company ("Goldman Sachs "), 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 2
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 3 of 124 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 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 2005 1. This is a class action brought under the Court's diversity jurisdiction as expanded by the Class Action Fairness Act of 2005 asserting (i) Indiana statutory claims for Defendants' (a) failure to pay "fair value " in exchange for Plaintiffs' mutual membership interests in Anthem Insurance, and (b) violations of state securities fraud statutes, and (ii) state common law claims for breach of fiduciary duty, breach of contract, unjust enrichment 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, Anthem Insurance, Glasscock and Goldman Sachs, 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) deceptive and manipulative acts, and the employment of false, deceptive and manipulative devices, schemes, artifices or practices, to defraud or deceive Plaintiffs regarding the value of their membership interests, and (iii) 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 2001. 3. 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 3
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 4 of 124 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 Kentucky, and the unnamed class members in each class are citizens of Ohio, Indiana, Kentucky and Connecticut. Defendants are citizens of Indiana, Delaware and New York 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. 4. 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. 5. Venue is proper over the foregoing diversity claims 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. B. FEDERAL SECURITIES LAW CLAIMS UNDER SECTIONS 10(B) AND 20(A) OF THE EXCHANGE ACT OF 1934. 6. In addition to the foregoing, Defendants engaged in manipulative schemes, devices or artifices in connection with Plaintiffs' rights to purchase 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-appropri ate 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 Insurance had already voted on the plan, but without disclosures to either. Defendants' concealed 4
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 5 of 124 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. 7. 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. 8. The federal claims asserted herein allege "scheme liability" against all Defendants and arise under and pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j(b), and Rules lob-5(a) and lob-5 (c) promulgated thereunder, 17 C.F.R. 240.1Ob-5( a) and (c). 9. In addition, Plaintiffs allege "controlling person" liability against Glasscock arising 5
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 6 of 124 under and pursuant to Section 20(a) of the Exchange Act, 15 U. S.C. 78t(a). 10. The Court has federal question jurisdiction over the subject matter of such claims pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa, and the provisions of 28 U.S.C. 1331. 11. Venue is proper in this judicial district, pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa, and the provisions of 28 U.S.C. 1391 (b), because Defendants reside, transact business or are found in this judicial district, and because many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading statements and information, occurred in substantial part in this judicial district. 12. In connection with the acts alleged herein, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to the United States mails, interstate wire communications, and the facilities of a national securities exchange. THE PARTIES 13. Ormond is an individual residing in Cincinnati, Hamilton County, Ohio. 14. Cescato is an individual residing in Cincinnati, Hamilton County, Ohio. 15. Heekin is an individual residing in Ft. Thomas, Campbell County, Kentucky. 16. 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. 17. 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 collectively referred to as the "Anthem Defendants." 18. Glasscock is an individual residing within this judicial district. At all material times, 6
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 7 of 124 Glasscock has been the President, Chief Executive Officer and a member of the Board of Directors of Anthem and Anthem Insurance. In such capacities, Glasscock was at all material times authorized and empowered to act on behalf of and in the name of Anthem and Anthem Insurance and to bind those entities by his actions, decisions and statements. At all material times, for purposes of the allegations set forth herein, Glasscock's actions, statements and decisions were taken or made on behalf of and did bind Anthem and Anthem Insurance, respectively. 19. As the President and Chief Executive Officer of Anthem, as well as a member of its Board of Directors, Glasscock personally directed, authorized and participated in (either alone or with others, and either directly or indirectly, unless otherwise indicated) each of Anthem's actions, statements, determinations and decisions alleged in this Third Amended Complaint, and personally caused or knowingly allowed them to occur or take place in the course and scope of his official duties, capacities and functions with Anthem. 20. As the President and Chief Executive Officer of Anthem Insurance, as well as a member of its Board of Directors, Glasscock personally directed, authorized and participated in (either alone or with others, and either directly or indirectly, unless otherwise indicated) each of Anthem Insurance ' s actions, statements, determinations and decisions alleged in this Third Amended Complaint, and personally caused or knowingly allowed them to occur or take place in the course and scope of his official duties, capacities and functions with Anthem Insurance. 21. Goldman Sachs is a corporation organized under the laws of the State of Delaware and has its principal place of business in New York, New York. Goldman Sachs is authorized to do business, and in fact conducts substantial business activities, in the State of Indiana and within the Southern District of Indiana. 22. 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 7
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 8 of 124 insurance company to a stock company pursuant to Indiana Code 27-15. 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. 23. 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. 24. 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. 25. 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: (a) Member Information Statement - Part One (mailed to members in August 2001); (b) Member Information Statement - Part Two (mailed to members in August 2001); (c) Instruction Guide (mailed to members in August 2001); (d) Questions and Answers (mailed to members in August 2001); and (e) Member Information Statement - Supplement (mailed to members in October 2001). 26. On or about October 29, 2001, the members approved the Plan of Conversion. 8
Case 1:05-cv-01908- -T Document 35 Filed 08/16/2006 Page 9 of 124 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. 27. In or about December 2001, the Anthem Defendants delivered the promised consideration and mailed checks totaling over $2 billion to its former members residing in Ohio, Indiana, Kentucky and Connecticut. 28. Goldman Sachs was the financial advisor to Anthem and Anthem Insurance and the lead underwriter of the initial public offering for Anthem common stock. 29. In December 2001, Ormond, 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. 30. Plaintiffs allege the existence of one Plaintiff class with two separate and distinct, but partially overlapping, sub-classes in this case. 31. The members of the Plaintiff class consist of all persons who resided in Ohio, Indiana, Kentucky and Connecticut and received cash compensation in 2001 in connection with the Anthem Insurance demutualization, and the communities comprised of them and their spouses, if any, excluding: (i) (ii) Defendants, their predecessors and successors; the officers and directors of Defendants, their predecessors and successors; (iii) counsel of record in this action and their respective parents, spouses and children; and (iv) judicial officers who enter an order in this action and their respective parents, spouses and children. The Plaintiff class is sometimes referred to hereinafter as the "Depressed-Price Class." 32. Each member of the Depressed-Price Class had his or her membership interests in 9
Case 1 :05-cv-01908 -D -T D ocument 35 Filed 08 / 16/2006 P age 10 of 124 Anthem Insurance artificially depressed by actions committed by each Defendant that improperly undervalued such membership interests and violated, inter alia, federal and state securities laws. The wrongful actions of each Defendant caused each 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. 33. Ormond, Cescato and Heekin are members of the Depressed-Price Class. Ormond is representative of the members of the Class. 34. The members of the first subclass of the Class, who as Class members had their membership interests in Anthem Insurance improperly undervalued by each Defendant's wrongful actions in violation of, inter alia, federal and state securities laws, 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, and the communities comprised of them and their spouses, if any. This first subclass of the Class is hereinafter referred to as the "Denied-Stock Subclass." 35. The persons comprising the Denied-Stock Subclass are those members of the Class 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 32. 89 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 10
Case 1 :05-cv -01908 -D -T D ocument 35 Filed 08 / 16/2006 P age 11 of 124 public was substantially increased from 32.89 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. 36. Ormond was allocated 353 shares and is a member of the Denied-Stock Subclass. She is representative of the members of that subclass. 37. The members of the second subclass of the Plaintiff class, who hereafter assert claims that Anthem and Anthem Insurance furnished them with misinformation regarding their respective federal and state income tax liabilities, consist of all persons who resided in Ohio, Indiana, Kentucky and Connecticut and received cash compensation in 2001 in connection with the Anthem Insurance demutualization, and the communities comprised of them and their spouses, if any, excluding: (i) persons identified by a federal taxpayer identification number other than a social security number; (ii) (iii) Defendants, their predecessors and successors; the officers and directors of Defendants, their predecessors and successors; (iv) counsel of record in this action and their respective parents, spouses and children; (v) judicial officers who enter an order in this action and their respective parents, spouses and children; and (vi) persons whose only policies or contracts of insurance with Anthem were continuously in force for less than one year as of November 2, 2001. This subclass of the Class is hereinafter referred to as the "Tax Misinformation Subclass." 38. Ormond, Cescato and Heekin are members of the Tax Misinformation Subclass. Ormond is representative of the members of that subclass. 11
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 12 of 124 CLASS ACTION ALLEGATIONS 39. 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 Depressed-Price Class and the two subclasses described in Paragraphs 30-38, inclusive, above. 40. Ormond is a member of the Class and each of the subclasses she seeks to represent. 41. The members of the Depressed-Price Class and of each subclass 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 subclass, certainly consists of tens of thousands, if not hundreds of thousands, of persons. 42. 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 subclass, 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. Civ. P. 23(b)(3). 43. 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 12
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 13 of 124 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 3rd Quarter 2001 earnings became public and could be included in the pricing of the IPO stock, which would have driven the price up 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 Class members' cash compensation was directly based, was significantly higher than the IPO price set by Anthem Defendants and Goldman Sachs; (g) whether Anthem, Anthem Insurance, Glasscock and Goldman Sachs are liable to the members of the members of the Depressed-Price Class for the damages 13
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 14 of 124 they suffered by receiving cash compensation in exchange for their membership interests that was inadequate and less than fair value; (h) whether Anthem, Anthem Insurance, Glasscock and Goldman Sachs 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 Defendants violated Section 10(b) of the Exchange Act and Rules 10b-5 (a) and (c), and/or the provisions of IC 23-2-1-12; (j) whether Glasscock is liable to the members of the Depressed-Price Class, or to the members of the Denied-Stock Class, under Section 20(a) of the Exchange Act; (k) 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; (1) 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; (m) whether the Anthem Defendants were unjustly enriched by cost savings derived from their misuse of the cash-default mechanism to eliminate hundreds of thousands of Class members from the Anthem shareholder 14
Case 1 :05-cv -01908 -D -T D ocument 35 Filed 08 / 16/2006 P age 15 of 124 population; (n) whether Goldman Sachs was unjustly enriched by its share of $41.4 million of additional underwriting fees received from increasing the size of the IPO and fully exercising the increased over-allotment, when it knew that the purpose and effect of the increase was to eliminate hundreds of thousands of members from receiving Anthem stock; (o) whether the Anthem Defendants and Glasscock breached fiduciary duties they owed to the members of the Depressed-Price Class and/or the Denied-Stock Subclass; (p) whether the Anthem Defendants and Glasscock breached duties of reasonable care they owed to the members of the Depressed-Price Class and/or the Denied-Stock Subclass; and (q) whether the Anthem Defendants and Glasscock breached contractual obligations they owed to the members of the Depressed-Price Class and/or the Denied-Stock Subclass. 44. As the lead Plaintiff and named representative Plaintiff for the Class, Ormond's claims are typical of the claims of the Class and typical of the claims of each subclass she seeks to represent, pursuant to Fed. R. Civ. P. 23(a)(3). There are no conflicts between Ormond's interests and the interests of the members of the Class as a whole. There are likewise no conflicts between Ormond's interests and the interests of the members of each subclass as a whole. 45. Ormond will fairly and adequately protect and represent the interests of the Depressed-Price Class, and the interests of each subclass, as required by Fed. R. Civ. P. 23(a)(4). Ormond's interests are not antagonistic to or in conflict with the interests of any other member of the Class, or any other member of either subclass, and the interests of no member of the Class or either 15
Case 1 :05-cv -01908 -D -T D ocument 35 Filed 08/16/2006 P age 16 of 124 subclass are antagonistic to or in conflict with the interests of any member of the Class or any subclass. Moreover, Ormond has retained competent counsel experienced in class action litigation to represent the Class, the two subclasses and the members of each herein. 46. Defendants, and each of them, have acted on grounds generally applicable to the Depressed-Price Class as a whole, and/or separately to the Denied-Stock Subclass as a whole, and/or separately to the Tax Misinformation Subclass as a whole, 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). 47. 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 either of the subclasses is impracticable. Because damages suffered by individual class members of the Class and of each respective subclass are relatively small in comparison to the expense and burden of prosecuting this litigation, class members of the Class and of each subclass cannot redress the wrongs done to them on an individual basis. Even if the class members of the Class or of either subclass 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 1. The Anthem Plan of Demutualization 48. 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. 16
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 17 of 124 49. 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 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. 50. 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 27-15-2, 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.) 51. 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. 52. 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. 53. Section 6.1(a) of the Plan provided, in pertinent part, that those eligible members who 17
Case 1 :05-cv-01908 -D -T D ocument 35 Filed 08/16/2006 P age 18 of 124 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 Section 6.1(d)" (emphasis supplied). 54. 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 Plaintiffs' Membership Interests to the Anthem IPO Share Price, Thus Setting the Stage for Their Severe Undervaluation of Such Interests By Artificially Depressing the IPO Price. 55. 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. 56. Indiana Code 27-15-2-2(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. 57. Indiana Code 27-15-2-2(4) also required Anthem Insurance, in its Plan of Conversion, to describe the manner in which the "fair value" of Anthem Insurance would be 18
Case 1 :05-cv -01908 -D -T D ocument 35 Filed 08 / 16/2006 P age 19 of 124 determined. 58. 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. Each eligible member would receive, at a minimum, 21 shares of Anthem common stock or its cash equivalent. The fixed amount (approximately 100 million shares) of 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. 59. Section 6.3 of the Plan 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. 60. Section 6.3 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% 19
Case 1 :05-cv -01908 -D -T D ocument 35 Filed 08/16/2006 P age 20 of 124 of the IPO Price or higher, the top-up enhancement would maximize at 10%. 61. On or about March 16, 1998, Anthem Insurance engaged Goldman Sachs to act as its financial advisor in connection with the proposed demutualization transaction. Indiana Code 27-15- 3-2(10) required Anthem Insurance to provide to the Commissioner of the Indiana Department of Insurance a fairness opinion from a qualified, independent financial advisor asserting, inter alia, that the consideration to be paid to the eligible members in exchange for their membership interests "is fair to the eligible members, as a group, from a financial point of view," and that the total consideration paid to eligible members "is equal to or greater than the surplus of the converting mutual." The Anthem Defendants agreed to pay Goldman Sachs for its services as financial advisor fees of $50,000 per month plus $1. 5 million upon delivery of a fairness opinion. 62. On or about June 18, 2001, Goldman Sachs delivered a fairness opinion to the Board of Directors of Anthem Insurance (a copy of which was attached as Exhibit "G" to the original Complaint filed in this case on August 16, 2005, and is incorporated by reference herein) (the "Fairness Opinion") in which Goldman Sachs opined that the cash consideration to be distributed to members of the Depressed-Price Class, and the additional consideration in the form of Anthem stock to be distributed to other eligible members, in exchange for their respective membership interests in Anthem Insurance, was "fair from a financial point of view to the policyholders who are [eligible members] taken as a group." 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 Instead. 63. 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 20
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 21 of 124 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.) 64. In the first part of the MIS sent to all eligible members (including without limitation the members of the Depressed-Price Class and the Denied-Stock Subclass), 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 $1.0674 billion. (See MIS-Part 1 at page 24.) 65. A copy of the Fairness Opinion was distributed to the eligible members along with the first part of the MIS. The Anthem Defendants informed the members that the reason Goldman Sachs was selected to be the financial advisor for this transaction was: MIS-Part 1 at page 36. because it is a nationally recognized investment banking firm that has substantial experience in mutual company restructurings. Goldman Sachs, as part of its investment banking business, is also continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporation and other purposes. 66. In the second part of the MIS distributed to Anthem members (including among others the members of the Depressed-Price Class and the Denied-Stock Subclass) 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 $1.0674 billion if the underwriters fully exercised their option to purchase additional over-allotment shares, assuming an IPO price of 21
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 22 of 124 $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.) 67. Moreover, in four separate documents disseminated to the members (including among others the Depressed-Price Class and the Denied-Stock Subclass) 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. 68. 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). 69. At the same time, the Answer to Question 13 in the Questions and Answers stated in relevant part: 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). 70. 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 22
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 23 of 124 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 in,tparl (Instruction Guide at 3) (bolded emphasis in original; underlined emphasis supplied). 71. Finally, on the Stock Election Card (Card 3) page and on the Card itself, the Anthem Defendants made the following representations: If you prefer to receive your distribution in cash, do not return this card. We will assume that Eligible Statutory Members who do not return the Stock Election Card, or who fail to sign the card, prefer to receive cash. (Please note that there will be a limited amount of cash available for distribution, and it is likely that many Eligible Statutory Members who prefer cash will receive stock instead.) If you elect stock, your entire distribution will be in stock. Under the Plan of Conversion, you may receive cash unless you elect to receive shares of Anthem, Inc. common stock by signing and returning this card. If you do not sign and return this card, we will assume that you prefer to receive cash. Note that there may be a limit to the amount of cash available for distribution, and many Eligible Statutory Members who prefer cash may receive stock instead. (Instructions for Stock Election Card (Card 3), at page 5, and Card 3 itself) (bolded emphasis in original; underlined emphasis supplied). 72. Disregarding the example set by other mutual insurance companies that demutualized in the years immediately before Anthem Insurance, the Anthem Defendants unreasonably and disingenuously assumed that the Anthem members who expressed no preference as to the form of compensation (as between stock or cash) preferred to receive cash. This was a particularly unreasonable assumption given the Anthem Defendants' erroneous view that the cash compensation was fully taxable as a capital gain. 73. By way of illustration, only 25% of MetLife' s members elected to receive cash compensation when it demutualized in 2000. In 1999, 81% percent of Canada Life' s eligible 23
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 24 of 124 members elected to receive stock. ManuLife also demutualized in 1999 and only a small minority of its eligible members (27% of Canadian members and 22% of U. S. members) elected to receive cash. Similarly, Prudential expressed its pre - demutualization expectation, as reported in The Record (Hackensack, New Jersey) on February 2, 2001, that "[m]ost policyholders are expected to request shares of stock." 74. Most significantly, Glasscock himself originally represented to the media that the Anthem members would receive only stock. An article appearing in the February 1, 2001 edition of the New York Times reported on Anthem Insurance's proposed conversion to a publicly-traded corporation and directly quoted Glasscock by name: While mutual life insurance companies that have recently converted have given policyholders a choice of taking their share of accumulated profits in cash or stock, Mr. Glasscock said Anthem planned to distribute only stock. (Emphasis supplied.) 75. Indeed, cash by default was the rare exception rather than the rule in demutualizations taking place in the several years prior to Anthem Insurance's demutualization. As reported in an article on John Hancock's proposed demutualization and IPO in Business Week dated November 29, 1999: A key complaint of Hancock's IPO is its unusual plan to distribute cash instead of stock to policyholders. Most demutualizations have distributed stock. (Emphasis supplied.) 76. Unlike the Anthem Defendants, John Hancock was open, honest, indeed frank, about its reasons for choosing a cash default mechanism: Hancock estimates that about two-thirds of its $1.8 of the $2 billion from the IPO. policyholders will receive (Id.) This disclosure reveals that two-thirds of John Hancock's members would be cashed-out and eliminated from its shareholder population. John Hancock was equally forthcoming publicly about its motivation for selecting cash as the default. The Business Week article quotes John M. DeCiccio, 24
Case 1 :05-cv-01908-D -T Document 35 Filed 08/16/2006 Page 25 of 124 a John Hancock executive: He adds that Hancock will save $30 million a year in shareholder servicing costs by having 1 million shareholders instead of 2.9 million. "That $30 million goes directly to annual earnings," he [DeCiccio] says. 77. Even after changing the structure of the proposed transaction, from Glasscock's original representations that the members would receive only stock to the false and unsupportable "assumption" that members would prefer to receive cash, the Anthem Defendants were never honest about their true motivation in adopting the cash default mechanism - to reduce shareholder population, to lower shareholder servicing expenses, and to favor and prefer the interests of the underwriters and their institutional clients over the existing members. IV. The Anthem Defendants' Final Disclosures to Mutual Members Continued Falsely to Depict that the Mutual Members Would Own Over 70% of Anthem's Common Stock Following the Demutualization. 78. On or about October 1, 2001, the Anthem Defendants distributed to the members (including among others the Depressed-Price Class and the Denied-Stock Subclass) a supplemental Information Summary ("Supplement") (attached as Exhibit "D" to the original Complaint filed on August 16, 2005, and incorporated by reference herein), which continued to represent that Anthem Insurance expected to offer 28.6 million shares in the IPO at an expected price of between $33 and $37 per share. (See Supplement at page 1.) The Supplement was the final written description of the demutualization and the IPO transaction that the Anthem Defendants distributed to the mutual members. The next relevant written communication from the Anthem Defendants to all Class members was in December 2001, at which time each member received a check constituting his or her cash compensation attached to a Form 1099-B and a cover letter. 79. As confirmed by the Supplement, the Anthem Defendants continued to represent that the members would be issued 71,690,000 shares of common stock out of a total of 100,290,000 shares authorized and outstanding. The remaining 28,600,000 shares would be offered for sale to the 25