5 subscribers sue Blues officials

April 01, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

Five subscribers of Blue Cross and Blue Shield of Maryland sued 18 of the insurance company's present and former executives and directors yesterday, saying they "recklessly wasted" millions of dollars and seeking $145 million in damages to restore the company's financial health.

The lawsuit, filed in Circuit Court for Baltimore County, names several prominent Baltimore business leaders, as well as ousted president Carl J. Sardegna and his former top managers. It charges them with gross negligence and mismanagement, misuse of corporate assets for personal benefit and breach of fiduciary duty, actions which cost "massive losses of subscriber money."

"I don't expect to get one penny from the suit. I want the money to go back to the treasury of Blue Cross," said one plaintiff, Kenneth R. Glauber, owner of Fine Candies Inc., who said he was forced to drop coverage for employees of his 117-year-old family business because it cost too much.

Also named as a defendant was Booz Allen & Hamilton Inc., a New York-based international manage

ment consultant firm, and Hadley C. Ford, a former Booz Allen senior vice president. The company has done substantial consulting work for the Maryland insurer. Booz Allen officials could not be reached for comment yesterday.

Blue Cross itself is not a target of the lawsuit, and company Vice President Amy Levy said yesterday that the insurer could not comment on behalf of the individuals named.

Frank A. Gunther Jr., chairman of the Blues, said it would be inappropriate for him to comment because he had not seen a copy of thelawsuit. Other directors and former executives reached yesterday also declined comment.

Maryland regulators said yesterday they believed the Maryland lawsuit was the first such subscriber suit brought to recover money on behalf of an existing plan in the nation. A lawsuit involving the West Virginia plan, which failed in 1990, was settled when the national Blue Cross and Blue Shield Association agreed to pay the state $8.6 million.

The plaintiffs in the Maryland suit include two former directors of Blue Shield before it was merged with Blue Cross in 1984; Mr. Glauber; a private consultant; and an attorney. The five sued on behalf of the Blue Cross corporation and all other subscribers in an action similar to that taken by shareholders of any public company in similar circumstances. Blue Cross is a nonstock membership corporation. But Stephen J. Nolan, one of two private attorneys representing the plaintiffs, said he believes there are sufficient legal grounds to support the suit.

A similar lawsuit was brought by depositors of the former Old Court Savings & Loan Association against its officers and directors. But it did not proceed because the depositors, unlike the plaintiffs in yesterday's lawsuit, had failed to first seek action from the company's directors, Mr. Nolan said.

He said farmers who belonged to a milk producers' cooperative brought a successful suit against the cooperative in 1967 using the same legal standard.

Blue Cross, with 1.4 million subscribers, is the state's largest health insurance company and is trying to recover from years of large losses and poor business decisions. Many of the company's shortcomings were revealed last summer in an extensive U.S. Senate subcommittee investigation and report.

The suit claims the board of directors delayed taking action against former executives for eight months out of fear that they themselves would become targets of charges of gross misconduct. It calls a decisionlast week by the Blues board to hire outside counsel to look into a possible lawsuit against former executives "a charade."

The plaintiffs had asked the board to sue former company executives for damages in early March.

Citing many of the allegations contained in yesterday's suit, Attorney General J. Joseph Curran Jr. last week also asked the Blues board to consider suing former executives.

Yesterday, Mr. Curran said he would await action by the board of directors, pending the advice from the outside law firm, before deciding if the state would begin legal action.

In addition to Mr. Glauber, the plaintiffs include two former directors of Blue Shield of Maryland, Charles F. O'Donnell, an orthopedic surgeon who is a Medicare beneficiary, and Paul A. Mullan, a pediatrician. The others are John C. Ahlberg, a management consultant whose annual premium for himself and his wife rose 248 percent, to $6,272, in five years, and Dana Whitehead, an associate with a Baltimore law firm insured by Blue Cross.

The suit names 10 of the current 14 board members, most of whom served on either the executive compensation committee or the audit committee.

In addition to Mr. Gunther, the directors sued are Barry Bosworth, J. Owen Cole, Dan A. Colussy, Richard E. Hug, M. Thomas Goedeke, John D. Jefferies, Albin O. Kuhn, Shirley F. Phillips, George L. Russell Jr. Also named were former board members Conrad L. Inman and William A. Beasman Jr., who is now acting chief executive.

Former executives named in the suit, in addition to Mr. Sardegna, are: Fred M. Gloth Jr., Charles E. Vadakin, Phillip H. Grantham, Stephen E. Bailey and Peter J. Campisi.

A copy of the report by the U.S. Senate subcommittee that investigated the company was attached to the suit.

Blue Cross directors already have spent $2 million, including $850,000 in legal fees, responding to the Senate investigation. Their decision last week to set up a second special committee and hire more lawyers was the last straw, the suit says.

The suit accused Booz Allen, which performed $2 million worth of studies for Blue Cross, and one of its former executives of JTC publishing statements and written reports to the public "that were in many instances in complete contradiction to the private assertions and findings that Booz-Allen consultants knew to be the truth."

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