A Medical Device Daily

Abbey Spanier Rodd & Abrams, filed a class action lawsuit in the U.S. District Court for the Middle District of Florida on behalf of all persons who bought or acquired securities of Health Management Associates (HMA; Naples, Florida) between January 17 and July 30 of this year.

The complaint alleges that defendants violated the federal securities laws, by issuing a series of material misrepresentations during the period thereby artificially inflating the price of HMA securities. The complaint also alleges, among other things, that defendants engaged in a scheme to manipulate Health Management's policies in order to create the impression that the company had its "bad debt expenses" under control in order to borrow additional money, and to get the board to approve of their recapitalization plan.

On Jan. 17, HMA reported a major recapitalization which was completed in March 2007 and which required the company to borrow $3.25 billion of new debt to refinance existing debt and pay shareholders a special one-time cash dividend of $10. The individual defendants benefited substantially from this one time dividend, given that they were major shareholders and each defendant received large sums of money, according to the complaint.

As revealed on July 31, HMA, throughout the period, was experiencing a deterioration in the collectibility of its accounts receivable from uninsured patients. HMA reported that for 2Q07 it took a $39 million charge, and recorded it as an additional reserve to reflect a decline in collectibility of accounts receivable from uninsured patients. Moreover, the company updated its fiscal 2007 diluted EPS from continuing operations objective range to be between 45 cents and 50 cents to reflect increased uninsured volumes, a deterioration in the collectibility of accounts receivable related to those uninsured volumes, and lower than anticipated overall paying volumes.

HMA stock dropped almost 25% to close at $8.06 on July 31.

The plaintiff seeks to recover damages on behalf of all those who bought or otherwise acquired HMA securities between January 17 and July 30.

The company said it believes that the allegations in the lawsuit are "totally without merit," and said it intends to "vigorously defend itself and its executives named as defendants against all allegations."

HMA owns and operates general acute care hospitals in non-urban communities throughout the U.S. It operates 59 hospitals in 15 states with about 8,500 licensed beds.

In other legalities, the Federal Trade Commission has asked a federal district court to order the marketers of Ab Force to return money to consumers who bought their belts based on the marketers' advertising claims. According to the agency, the ads made false and unsubstantiated claims that using their electronic muscle stimulation belt caused weight loss and well-defined abdominal muscles, and was an effective alternative to regular exercise.

In 2002, the marketers advertised Ab Force using visual images of well-sculpted, gym-clothed bodies wearing the device, with verbal references to other, more expensive ab belts that were sweeping the nation at the time. The FTC alleged that through the product name, text and visual images, and by comparing their product to "those fantastic electronic ab belt infomercials on TV," the defendants made false and unsubstantiated claims about the product's abilities.

In 2005, the FTC upheld an administrative law judge's ruling that the marketers violated federal law by making the deceptive claims, and that they intended to convey those deceptive claims, even though the marketers knew that they did not have substantiation. After the marketers appealed, the Fourth Circuit Court of Appeals upheld the decision on Aug. 7, 2006.

The FTC is seeking money back for consumers who bought the belts from the marketers: Telebrands, TV Savings, and Ajit Khubani. They sold more than 700,000 Ab Force belts and accessories, earning about $16 million.

The FTC is also alleging that Ajit Khubani unlawfully transferred assets to his wife, Poonam Khubani. The FTC's case names her as a relief defendant — someone who is not accused of wrongdoing, but who has allegedly received ill-gotten gains, and does not have a legitimate claim to them.

The FTC is seeking full redress for consumers who bought the ab belts, with money from the companies and Khubani, as well as the funds transferred to Khubani's wife.