Departure could cost Standard millions: Former top executive seeks severance package worth about $3.8 mllion

June 13, 2005

Standard Management Corp. may have to add more than $10 million to the cost of completing its shift to health care services from financial services if a former top executive prevails with his severance claim.

P.B. "Pete" Pheffer, the holding company's former president and chief financial officer, became the latest top executive to leave Standard Management with a severance dispute when he resigned May 31.

He claims his contract calls for a severance package worth roughly $3.8 million. On top of that, the company may have to pay substantial penalties and an additional $1.7 million to compensate for an excise tax.

Standard faces a daily penalty of roughly $380,000 if the company doesn't hand over the money within 10 days of Pheffer's resignation, according to Jeffery Mallamad, an attorney representing the executive. However, Standard representatives say they owe only $50,000, enough to pay Pheffer's unused vacation time and a portion of his 2005 bonus.

An eight-figure severance package may be tough to swallow for a company that has reported quarterly losses for more than a year and just completed the sale of its most consistent performer. Standard announced June 9 that it had closed a deal to sell its financial services business, which includes Standard Life Insurance Company of Indiana, to Louisville-based Capital Assurance Corp.

Standard expects to net about $28 million from the deal, money it plans to use to grow its health care services.

Pheffer, 54, joined Standard Management in 1997 with an MBA and a resume filled with insurance experience. "I came to Standard to build a substantial financial services enterprise," the Carmel resident said in a recent phone interview.

However, Standard's priorities changed. In 2002, the company added its U.S. Health Services sub- sidiary, which provides direct-to-consumer retail and mail-order pharmacy products. Company leaders liked the prospects for growth in this field and eventually decided to explore a sale of the financial services business.

This February, the company announced the Capital Assurance deal.

Pheffer, who ranked second to company Chairman and CEO Ronald D. Hunter, said he didn't decide to resign until "most recently." He has no health services background, he said, and the focus switch was a major reason he decided to step down.

Pheffer's three-year contract, set to expire in January, allowed him to resign "for good reason" under several scenarios. One involves a change in control like the one Standard Life and the financial services business recently underwent, according to Pheffer and Mallamad.

"It's a matter of me interpreting my rights under my contract, and we have a sale of a substantial portion of the business that I was directly responsible for," Pheffer said.

Standard Management officials would not comment beyond a statement issued last week.

"The company intends to vigorously contest any additional amounts or benefits claimed by Mr. Pheffer as a result of his termination of his employment," according to the statement.

Mallamad contends the switch in company focus is exactly what the contract intends to compensate Pheffer for. The key, he said, is "to appreciate why these contracts exist, why they're written the way they're written."

The contract offers security. It allows the executive to focus solely on what's best for the company and shareholders.

"You want executives who can perform in their jobs for the benefit of the shareholders without letting their personal interests intrude in the decision making, and that's exactly what he did," Mallamad said.

Both Mallamad and Pheffer say they're prepared to pursue litigation if necessary.

Court time with a former executive would be nothing new for Standard Management lawyers. In fact, that's where they wound up with the man Pheffer replaced.

John Quinn served as Standard Management's chief financial officer from 1993 to 1997. He said he recommended Pheffer, among five or six other names, as his possible replacement.

Quinn, now operating managing partner for the PricewaterhouseCoopers Indianapolis office, also did battle with Standard over payment. He sued the company the year he left, charging that his resignation should have triggered more than $1 million in payments. The company said the payments were not due in a voluntary resignation.

The two sides settled their case in 2001, but Quinn declined to comment on the amount.

Last summer, Dr. Murray I. Firestone filed a job-discrimination lawsuit in U.S. District Court against the company.

Firestone served as president of Standard's U.S. Health Services subsidiary from January 2003 until the company fired him 10 months later. His pending complaint seeks punitive damages as well as wages Firestone contends he is owed under his employment agreement.

The $3.8 million severance estimate in Pheffer's case includes his base salary multiplied three times and a formula for converting the stock he owns.

The company must make this payment within 10 days of his termination or face an additional 10 percent each day after, up to double the amount owed, or roughly $7.6 million, Mallamad said.

Standard believes Pheffer left "without cause" and should only receive about $50,000, according to a statement filed by the company with the U.S. Securities and Exchange Commission.

The company also contends Pheffer cannot tack on the wage penalty.

Pheffer, Mallamad said, "is clearly within his rights to trigger the good reason provision in his contract.

"That was a bargain he made with them when he first signed the agreement," the attorney said. "I'm not going to speculate on their motives, but they'll have plenty of opportunity to explain that to the judge down the road."

While Pheffer resigned from the company, he remains on Standard's board of directors, and he hopes to stay there. When asked what he thinks of the company's new direction, he replied, "I wish the company the best and I'm still a shareholder. I have not sold any shares."
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