Deals & People October 5, 2009

Report: Invesco Out Front with Van Kampen Bid

Invesco has emerged in the lead to acquire the mutual fund business from Morgan Stanley’s Van Kampen, according to The Wall Street Journal.

Reported by

The Journal, citing anonymous sources, said the deal would likely increase Invesco’s assets under management to about $550 billion and leave Morgan Stanley with a minority stake in the Atlanta-based Invesco. The deal is estimated to be worth $1 billion to $2 billion. Morgan Stanley would also likely receive some cash.

Morgan Stanley started pursuing a buyer because its executives felt the Van Kampen business was not big enough to compete in the mutual fund marketplace where some players run $1 trillion or more, according to the report.

If a deal happens, it would be part of a trend of banks and insurers to shed their money-management units to raise capital and focus more on core businesses, the Journal said, citing the examples of Barclays PLC’s decision to sell Barclays Global Investors to BlackRock Inc. (see “Barclays Formally Accepts BlackRock’s Offer for BGI”), and Bank of America’s move to offload most of its asset-management business to Ameriprise Financial (see “BofA Sells Columbia to Ameriprise for $1B”).

Morgan Stanley in recent regulatory filings said its Van Kampen funds manage about $86 billion and Morgan Stanley-branded funds manage about $44 billion. Those would likely be added to Invesco’s assets, pushing assets under management to about $544 billion, according to the news report.

Compliance October 5, 2009

Court Dismisses Stock-Drop Case against Humana

A district court has dismissed claims by retirement plan participants that Humana officials violated their fiduciary duties by holding plan assets in company stock after mistakes made in pricing Medicare Prescription Drug Plans led to decreased company earnings.

Reported by

In his opinion, Judge John G. Heyburn, II, of the U.S. District Court for the Western District of Kentucky said defendants were following the plan’s explicit terms by investing plan assets in Humana stock, and that the “allegations do not suggest anything more than poor judgment on the part of the fiduciaries who relied on well-reasoned and researched advice in determining the earnings projections.”

According to Heyburn, the plaintiffs did not provide facts to support the allegations that a fiduciary would have discovered the problems with the PDP premiums and the projected earnings. The court said that in hindsight, there was no doubt the calculations were erroneous, and the plaintiffs may even be able to prove that some employees made mistakes, but that does not mean that defendants, who relied on third parties, should have recognized these mistakes. The plaintiffs did not allege that the defendants themselves actually made the mistakes, but blamed the mistakes on “internal control problems” and “old software.”

Heyburn noted in his opinion that the process of making projections and setting prices is a complex one. Humana uses a variety of projections and actuarial data to determine the amount of co-payment for each drug tier. Its Pharmacy Business Unit negotiated prescription prices with pharmacy chains. That PB Unit gathered the relevant actuarial data through its claims-processing software, and then sent its data to Argus Health Systems, an independent company that acted as the middle man between Humana and the pharmacies, to determine the appropriate price for each category of prescriptions.

The plaintiffs alleged that the PB Unit software was outdated and failed to properly organize and track claims data, and that based on flawed information, Argus set inconsistent prescription prices, and Humana projected earnings per share based on the belief that its Medicare Prescription Drug Plans would positively affect the next fiscal year. However, that didn’t happen, and adjusted earnings numbers were announced in a press release and in a conference call with analysts, after which Humana’s stock immediately dropped about 14%.

The incorrect projections also resulted in a direct loss to the company of more than $300 million represented by the shift of drug costs to Humana, new higher-cost members who joined the Humana plan to take advantage of the lowered co-pays, and the ratio of low income customers to low cost costumers.

The case is Benitez v. Humana Inc., W.D. Ky., No. 3:08CV-211-H, 9/30/09.

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