According to the firm's 10-Q filing dated 5/15/1998, on November 25, 1997, the Retirement Care Associates (RCA) and representatives of the plaintiffs entered into a Memorandum of Understanding (MOU). Pursuant to the MOU has agreed to pay $9 million into an interest bearing escrow account maintained by Sun to settle ten putative class action lawsuits ("Actions") filed in the United States District Court for the Northern District of Georgia against the Company and certain of its officers and directors. The Company has also agreed to assign coverage under its directors' and officers' liability insurance policy for these specific claims to the plaintiffs in the Actions. The payment and assignment (the "Settlement") is contingent upon the closing of the merger with Sun and confirmatory discovery and is subject to the execution of definitive documentation and court approval. Upon satisfaction of the conditions precedent to the Settlement, all claims by the plaintiffs that were or could have been asserted by the plaintiffs against the Company or any of the other defendants in the Actions will be settled and released and the Actions will be dismissed in their entirety with prejudice in exchange for the release of all funds from the Escrow Account to the plaintiffs.
The original complaint alleges that the retirement-facility operator issued "materially false and misleading" financial statements to inflate the price of its stock ahead of a proposed merger with Sun Healthcare Group Inc. (SHG). The suit charges that Retirement Care improperly recognized about $13.5 million in revenue for its first three quarters of 1997.
More specifically, the complaint alleges that the RCA and certain of its officers and directors violated Section 10(b) and 20(a) of the Securities and Exchange Act of 1934. Specifically, the complaint alleges that Retirement Care Associates issued materially false and misleading financial statements for its first three fiscal quarters of 1997 ended September 30, 1996, December 31, 1996, and March 31, 1997, by, among other things, improperly recognizing approximately $13.5 million in revenue before the Company was permitted to do so under generally accepted accounting principles. On August 22, 1997, the company announced that its auditors, Coopers & Lybrand L.L.P., resigned and that it would restate its financial results for the above-referenced fiscal periods.
The complaint further alleges that Retirement Care Associates (RCA) issued these false and misleading financial statements to inflate the price of its common stock so that the Company could complete a proposed stock-for-stock merger with Sun Healthcare Group, Inc. ("Sun Healthcare"), whereby Sun Healthcare would acquire the Company at an artificially inflated price. Upon disclosure of the restatement, Sun Healthcare insisted upon a renegotiation of the original merger agreement, which had the effect of reducing the value of Retirement Care's common stock outstanding by approximately $51 million. Accordingly, the complaint alleges that RCA's stock price declined substantially and the exchange ratio of a stock for stock merger by RCA into Sun Healthcare Group was substantially modified to the detriment of RCA's shareholders.