Magellan settles suit with CMG

It pays $24.1 million, regrets its charge of misrepresentation

April 10, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

Magellan Health Services Inc., of Columbia, has settled a lawsuit against officers of CMG Health Inc. with a letter of regret and a $24.1 million payment to former CMG stockholders.

The dispute arose after a series of transactions at a time the mental health insurance business was rapidly consolidating. CMG, of Owings Mills, was acquired by Merit Behavioral Care Corp. of New York for $57.1 million in September 1997. Magellan, in turn, bought Merit a few months later for $750 million.

In a lawsuit, Magellan charged that while Merit was reviewing CMG's books before the deal closed, CMG executives had concealed and misrepresented problems CMG had in two major contracts - the Medicaid programs in Maryland and Montana. The suit charged that CMG had withheld information "in order to assure that the acquisition would be consummated, and that CMG would be sold at a premium price."

FOR THE RECORD - An article in Tuesday's Business section reported an incorrect job title for Alan Shusterman. He is chief operating officer of 4GL Software Solutions Inc. of Monkton.
The Sun regrets the error.

Alan Shusterman, founder, chairman and chief executive officer of CMG, said yesterday that, "This is an end to a 2 1/2 -year lawsuit that should never have been filed in the first place."

"There never was any case against CMG," he continued. "We held a very open process, and Merit had access to all the information it needed to value CMG."

Shusterman now is chairman and CEO of 4GL Software Solutions Inc., a Monkton company.

Besides Shusterman, defendants in the suit were Jill B. Reamer, vice president and general counsel of CMG, and Albert R. Graves, vice president of operations.

In a letter to the defendants which was part of the settlement agreement, Magellan said it would withdraw "any and all allegations against Mr. Shusterman, Mr. Graves and Ms. Reamer, and sincerely regret any embarrassment or difficulties that this lawsuit has caused to those individuals."

"There was no fraud," said Joseph Dominguez, a Philadelphia lawyer who represented the defendants. "There was no misrepresentation or omission."

Erin Somers, a Magellan spokesman, said the company "made a business decision to settle the case now and put the matter behind us."

She said, "This is a case we've always known was going to be relatively difficult to prove." When Judge J. William Hinkle in Baltimore County Circuit Court dismissed five of Magellan's seven counts, saying the law cited didn't apply in this case, "it diminished our chances," leading to the decision to settle.

Somers said the settlement will have no impact on Magellan's operations, since the company had already budgeted about $24 million to cover additional payments negotiated when Merit acquired CMG.

Those additional payments depended on the performance of a contract CMG had with the federal program that provides health coverage for military dependants and retirees. Magellan announced Friday it will be receiving $25 million in price adjustments from that contract, based on changes in enrollment and services.

The price adjustment, Somers said, allowed Magellan to compute the final earnout.

Shusterman, however, said the earnout payment should have been made previously and that, until the settlement, he was not sure when - or whether - Magellan would pay.

Somers said $1.5 million of the settlement would go to the three CMG executives, with the rest going to the earnout payment, to be divided among all former CMG shareholders. Shusterman said there were about 150 owners of the privately held company who would share in the settlement.

Magellan's suit had sought more than $10 million in damages from the CMG executives.

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