Community Health Systems Faces Class Fraud Suit With ‘Red Flags’

A securities class action will proceed against Community Health Systems Inc. based on allegations that the company materially misstated its financial condition in documents and statements provided to investors, a federal court in Tennessee said.

CHS is one of the largest publicly traded hospital companies in the US. It owns or leases 155 hospitals in 21 states, with about 26,222 hospital beds. Its patients include Medicare and Medicaid beneficiaries, insured individuals, and self-pay clients, the US District Court for the Middle District of Tennessee said.

The company reported a loss of $1.7 billion for 2016, resulting in a steep decline in its stock price that allegedly cost shareholders up to hundreds of thousands of dollars. It has been criticized for its attempts to stem losses by divesting itself of several hospitals that allegedly were among its best performers, the court said.

Judge Eli J. Richardson refused on Wednesday to dismiss a securities fraud class action against CHS. The complaint adequately pleaded fraud, alleging that CHS used accounting practices that understated its bad debts and overstated its operating revenue in order to avoid triggering debt defaults, he said.

The plaintiffs pleaded with particularity facts demonstrating “red flags,” including misstatements in CHS’s provision for bad debts and its reporting of its adjusted EBITDA—earnings before interest, taxes, depreciation, and amortization. The court must treat those allegations as true at this stage of the litigation, it said.

The class action complaint also sufficiently pleaded that the statements were made with knowledge of their falsity or misleading character, the court said. Among other allegations, the proposed class said the company’s officers signed off on government-required reports that contained known misstatements.

The company grew rapidly between 2007 and 2014, mostly as the result of acquiring other health-care companies, according to the court. The acquisitions were financed by debt, and CHS had to adhere to strict financial ration in order to avoid default, it said.

CHS allegedly used unreasonable accounting practices to produce financial reports that were unlikely to trigger defaults, the court said. Whether those practices were actually unreasonable is a jury question, it said.

Branstetter, Stranch & Jennings PLLC, Glancy Prongay & Murray LLP, Pomerantz LLP, and Howard Smith of Bensalem, Pa., represent the proposed class. Riley & Jacobson PLC represents CHS and the individual defendants.

The case is Padilla v. Cmty. Health Sys., Inc., M.D. Tenn., No. 19-cv-461, 8/17/22.