As reported by the Company’s FORM 10-K for the fiscal year ended December 31, 2003, on July 1, 2002, the defendants filed an answer to the complaint, denying all liability. Plaintiffs filed a motion for class certification on August 15, 2002. On November 5, 2003, the parties entered into a stipulation and agreement of settlement for $2.3 million. The court granted final approval of the settlement on February 5, 2004, which amount was later paid entirely by the Company’s directors’ and officers’ liability insurance carrier.
According to a Press Release dated December 10, 2003, on February 5, 2004 a hearing will be held to determine whether an order should be entered (i) finally approving the proposed settlement of the claims asserted by plaintiffs in this consolidated action, against defendants Penn Treaty American Corporation and defendants Irving Levit and Cameron B. Waite for the sum of $2.3 million in cash and on the terms set forth in the Stipulation and Agreement of Settlement dated as of November 5, 2003 (the "Settlement"); (ii) dismissing the Action with prejudice as to the Defendants; (iii) approving the Plan of Allocation of the Net Settlement Fund; and (iv) awarding counsel fees and reimbursement of expenses to counsel for Plaintiffs and the Class.
The Complaint charges Penn Treaty and its senior officers with violations of sections 10 and 20(a) of the Securities and Exchange Act of 1934 for materially false and misleading statements and filings with the SEC. The complaint charges Penn Treaty, which underwrites, markets and sells individual accident and health insurance products through its subsidiaries, with defrauding investors by issuing false and misleading statements about the company's financial health. According to the lawsuit, the defendants reported during the class period that Penn Treaty was experiencing tremendous growth in sales. Furthermore, they repeatedly stated that the growth was not affecting the company's fiscal health, and that it had adequate reserves for the increased level of business. The Complaint alleges that Penn Treaty did not disclose that it continued selling policies during its fourth quarter of 2000 although its reserves were well under the amount required by regulators, causing it to face possible liquidation. When the Company announced on March 30, 2001 that its ability to remain solvent was at risk, the price of Penn Treaty stock dropped 42% in one day. Further revelations about the company's inadequate reserves and financial problems allegedly drove down the stock price to nearly $3 a share by April 2, 2001.