WellCare Health Plans (NYSE:WCG) is falling under class action pressure and more investigations.  Unfortunately the company has yet to admit to or to convince Wall Street that it has a full grasp of the situation and the verdict is still out on whether the company has the wherewithal to get out of the grave.  In its most recent filing it said it will defend itself against class action suits, although based on how this has gone and based on the shareholder implosions it is a safe assumption that any investor trying to use the company’s balance sheet for guidance is relying on fictional analysis.

On October 26, 2007, a putative class action complaint was filed in the United States District Court for the Middle District of Florida against the Company, Todd Farha, the Company’s chairman and chief executive officer ,and Paul Behrens, the Company’s senior vice president and chief financial officer, entitled Eastwood Enterprises, L.LC. v. Farha, et al. The complaint alleges that the defendants materially misstated the Company’s reported financial condition by, among other things, purportedly overstating revenue and understating expenses in amounts unspecified in the pleading in violation of the Securities Exchange Act of 1934, as amended. The complaint seeks, among other things, certification as a class action and damages. The Company intends to vigorously defend itself against this claim.

On October 29, 2007, a putative shareholder derivative action supposedly brought on behalf of the Company was filed in the United States District Court for the Middle District of Florida entitled Rosky v. Farha, et al. The action is asserted against all Company directors except for D. Robert Graham and also names the Company as a nominal defendant. The action primarily contends that the defendants allegedly allowed or caused the Company to misrepresent, in a manner unspecified in the pleading, its reported financial condition and asserts claims seeking damages and equitable relief for, among other things, the defendants’ supposed breach of fiduciary duty, waste and unjust enrichment. The Company intends to contest, among other things, the standing of the plaintiff to prosecute the purported claims in the Company’s name.

OCT. 30: Dreier LLP announced that a class action lawsuit was commenced in the U.S. District Court for the Middle District of Florida on behalf of investors who purchased the common stock of WellCare Health Plans, Inc. during the period from May 8, 2006 through October 24, 2007.

OCT. 29: Law Offices of Brian M. Felgoise, P.C. announced that a securities class action has been commenced on behalf of shareholders who acquired WellCare Health Plans, Inc. securities between May 8, 2006 and October 24, 2007, inclusive.

Yesterday, Reuters was reporting that New York state regulators were also probing the company.  It’s a safe bet that every state WellCare operates in is already looking into the company.  That’s how this works because if there is money "to be taken back" then they all have to act fast.

WellCare shares closed down huge at $22.04 yesterday.  Earlier this week 24/7 Wall St. noted that an analyst call from Jefferies was either genius or just crazy, and it appears that the analyst there was crazy.

The manner that this company has handled the raids by confirming problems but not fully disclosing what the problems are will be a classic "F" grade for any business school case studies.  These guys really dropped the ball, and personal liability (civil and perhaps criminal) is a serious notion at this point.  Shares have lost roughly 80% of their value since the raids.

Jon C. Ogg
October 31, 2007

Jon Ogg can be reached at [email protected]; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.

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