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KPS officials slammed in stock lawsuit

The state Insurance Commissioner has filed a civil lawsuit in Pierce County Superior Court against three former KPS Health Plans officials over a botched $2.5 million investment in Federal Way-based Unified Physicians of Washington.

Named in the case are Robert Schneidler, president of KPS during the February 1996 stock purchase; Mark Adams, ex-chairman of the KPS board; and attorney Andrea Olson, who acted as corporate secretary and provided legal services to KPS.

“I always had the best interest of KPS at heart,” said Adams, a surgeon who practices in Bremerton. “I always went the extra distance for KPS, and in many ways it is like an old friend turning on you.”

The state alleges the defendants urged KPS to purchase 25,000 shares of overvalued stock which fell and helped propel KPS into insolvency and receivership in 1999.

On the advice of the defendants, the lawsuit alleges KPS paid $100 per share for UPW stock in February 1996. Just five months before, Arthur Andersen accountants valued the stock at $50 a share. Independent evaluations pegged its worth at $0-$75 per share, according to the state.

R. Broh Landsman, an attorney for Olson, downplayed the failed investment’s role in the company’s financial struggles.

“If you look at what happened in the marketplace, all health care plans were suffering economically, and many small plans failed. The only ones that survived were big plans like Premera and Regence, because they had the financial reserves,” Landsman said.

KPS was placed in receivership of the Insurance Commissioner Deborah Senn in August 1999 and is still in rehabilitation. The firm lost $2.8 million in 1998, and failed to meet the State’s requirement that insurers maintain reserves of at least $3 million.

The plaintiff in the case, Deputy Insurance Commissioner James Odiorne, charges the defendants with breach of fiduciary duty, or failure to act in the best interest of the corporation; breach of special duties by Olson, or failure to assess legal requirements and heed the warnings of outside legal counsel; self interest by Adams, who acted as a stockholder and board member of UPW and a board member of KPS; and failure to report stock value.

The case was filed Oct. 15, 2001, and a jury trial is scheduled to begin Oct. 14. The state is seeking financial damages, including the $2.5 million invested in UPW.

“It is our belief that there is no merit to the lawsuit at all,” said Ed Wolfe, Schneidler’s attorney. “We are pursuing our own claims against the receiver.”

The state contends Schneidler and Adams began to promote the purchase of UPW preferred stock in September 1995. UPW is a physician-sponsored health care service provider formed in 1994.

“After disclosing his status as a stockholder and board member, defendant Adams held himself out as having a high degree of knowledge concerning UPW and the proposed investment, and advocated” for the investment, the state alleges.

Adams recused himself from the board’s vote, and Schneidler did not have voting rights as president.

“I believe I took every step to avoid a conflict of interest. I identified the potential conflict, communicated it to all parties and I excused myself when it was time to act. It is all documented,” Adams said.

The defendants told the Office of the Insurance Commissioner in January 1996 that the investment was prudent and would benefit subscribers, the state alleges. They sought an exemption from a law prohibiting placing more than 4 percent of an insurer’s reserves in a single investment, which was granted.

“I want to highlight that the investment was acknowledged and approved by the Office of the Insurance Commissioner. Then they turned around and brought a lawsuit against the defendants,” Wolfe said.

The company already was mired in financial troubles at the time of the purchase, the case alleges.

“Defendants knew or had reason to know that underwriting losses would be nearly $6.5 million at the same time they went through with the purchase of the stock,” the state contends.

The state’s charging papers also point out that KPS’ other investments during this time period were making money. Olson warned the board about the risks, Landsman said, and she did not participate in the decision to buy the stock.

Landsman said Olson “pointed out in a letter to the Office of Insurance Commissioner, in advance of approval, the short-term negative financial consequences and the long-term uncertainty regarding the investment.”

Olson now works for the Kitsap Regional Economic Development Council.

The receivership of KPS Health Plans, Inc. is pending.

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