Critics say award to ex-Tenet executive is way off the mark.

A three-judge appellate panel's ruling that Tenet Healthcare Corp. owed a former executive $253 million as compensation for shares and options has been roundly criticized by compensation experts and securities litigators.

Complex cases like the one brought by John Bedrosian, which involved the calculation of the value of shares and options over time, are often settled before making it to trial. Bedrosian's case, first brought in 1993, has been through both L.A. Superior Court and the 2nd District Appellate court three times.

The panel's recent decision overturned a lower court's $9.2 million award to Bedrosian, a co-founder of Tenet's predecessor company, National Medical Enterprises Inc. He was fired a decade ago.

"It's the most unconscionable thing I ever read," said Graef Crystal, an executive compensation expert and columnist for Bloomberg News. "The court has posited a world that doesn't exist. It has posited a world where there are no taxes. Then, it has compounded its idiotic reasoning by picking the highest point at which the stock traded--a stock price that was artificially high because of malfeasance."

An earlier 2nd District appellate panel ruled in 1999 that Bedrosian was entitled to 220,000 shares under a long-term incentive plan and 616,000 restricted shares as part of a stock incentive plan, plus options on 1 million shares.

All that was left for a judge to determine were the actual dollars his shares would have been worth had Tenet granted them in the first place.

That, experts say, is the biggest sticking point.

"That involves going back in time and figuring out when Bedrosian should have gotten the stock options and what would he have done with them once he got them?" said David Nolte, a principal at Fulcrum Financial Inquiry, which provides financial expertise in lawsuits.

No rules exist to determine such a figure. Courts often use the highest stock price within a "reasonable period of time" of the breach to determine securities awards, said Allan Browne, a partner at Browne & Woods LLP, who represents two former Tenet executives in separate compensation suits against the company.

Yet judges still disagree on methodologies, the value of private stock, when damages occurred or how much stock is even in question.

In the case of Tenet, L.A. Superior Court Judge John Segal granted Bedrosian about $9.2 million, based on a share price of $19, Tenet's highest price before the first court ruling in 1994.

The most recent appellate ruling, however, used a price of $52.50 a share, reached on Oct. 3, 2002, to come up with its award. This included a three-for-two stock split in 2002 that increased Bedrosian's shares by half.

The court's assumption, Nolte said, was that Bedrosian would not have received his shares until after the case's most recent appellate ruling, in 2002, rather than the first ruling in 1994.

The total award, $141.1 million, swelled when the court added $111.8 million in interest.

But Tenet's shares fell 13.8 percent on Oct. 27, 2002, to $42.50, after a UBS Warburg analyst downgraded the stock because of concerns about potential Medicare fraud. The stock plummeted to $19.20 on Nov. 8, 2002, a day after Santa Barbara-based Tenet announced a widespread restructuring of its management team.

On Oct. 28, the day of the 2nd District panel's ruling, Tenet's shares closed at $12.85, a quarter of the value they were ascribed in the ruling.

"The question is what's your trigger point?" Nolte said. "The appellate court here decided its trigger point is the appellate ruling. And at that point in time, it just so happens the stock price was at an all-time high."

Tenet, which just reported that it would miss its third quarter earnings forecast, said it would seek an appellate review of the ruling, which deputy general counsel Gary Robinson called unjustified in light of the evidence.

Determining value

"The authority on these things is very thin," said Jeffrey Davidson, a partner at Kirkland & Ellis LLP whose practice involves defending companies involved in securities litigation. "There's no definitive formula. At some point, a reasonable person says, 'There are too many unknowns, and it's too speculative.' And that, although it sounds amorphous, is how judges and juries make these decisions."

In most cases, said Davidson, trial judges never even hear securities cases.

Most involve a class action of shareholders who allege they were defrauded by artificially inflated stock prices. The damages in such cases involve little more than assessing the difference between the inflated price and the adjusted price over a specified period of time.

Those cases often prove costly, and as a result most shareholder litigation results in negotiated settlements for amounts substantially lower than may occur if a case is heard by a judge, Davidson said.

For Bedrosian, the issues more closely resembled those of a breach of contract lawsuit, rather than a traditional securities case, because the case involved an employment contract.

In recent years, judges have based the value of shares in such disputes at their price at the time the breach was discovered, rather than when it was committed.

Another factor in determining value is that over time a shareholder may have sold shares at vastly different prices. One consideration is evidence of a plaintiff's pattern of buying and selling stock.

The Bedrosian award, Crystal said, is based on unrealistic assumptions.

First, Bedrosian would have had to sell all his shares at $52.50 on Oct. 3, 2002, which was higher than the closing price for that day. Second, the court assumed Bedrosian would not have had to pay income taxes or capital gains taxes on the shares he would have received. And third, in determining the strike price of Bedrosian's options, the court adjusted the number of shares he was due for a three-for-two stock split in 2002 but failed to adjust the share price accordingly.

But the purpose of the award, said Richard Hedge, the Santa Monica attorney representing Bedrosian, is not to calculate the actual earnings Bedrosian could have achieved from his shares, but what he is owed given the circumstances of the case.

"There are other details that could he addressed in arriving at damages, but it is rare that income tax effects of any damage award are encompassed within the award," he said. "It would be impossible for a court to do that. They would be sorting out affairs all day long."