An institutional investor in Coventry Health Care has filed a class-action suit, alleging company executives violated federal securities laws and participated in a “scheme” that caused investors to suffer “economic loss.”

The suit, filed in U.S. District Court in Maryland, alleges Bethesda, Md.-based Coventry Health Care stock purchasers between Feb. 9, 2007, and Oct. 22, 2008, suffered the losses in the scheme that helped company officials and others to realize $46 million in stock sales, by artificially inflating the value of the health insurer’s stocks, according to the law firm representing the investor, Coughlin Stoia Geller Rudman & Robbins.

The complaint alleges that the defendants, including former Coventry CEO Dale B. Wolf, Chief Financial Officer Shawn M. Guertin and Corporate Controller John J. Ruhlman, made numerous positive statements regarding the company’s financial condition, business and prospects during that time, when those statements were materially false and misleading because defendants failed to disclose the adverse facts, according to the suit.

The suit alleges that after providing what the investor says were false and misleading statements about the company’s stock, the defendants and “other Company insiders” were able to sell more than 800,000 shares of Coventry stock they held for more than $46 million in proceeds. The suit cites insider trading data.

The investor alleges Coventry officials did not disclose that the company employed under-pricing strategies to create the appearance that its new Medicare Private-Fee-For-Service initiative was capable of driving the high growth necessary to offset Coventry’s contracting commercial business; the true risks associated with its under-pricing strategies, including the fact that Coventry was generating new Medicare PFFS membership at the expense of profit margins and profitability; that the “true negative effects” of the company’s under-pricing strategies were masked by improper claims assumptions that materially understated Coventry’s healthcare claim expenses; that Coventry’s disclosure and internal controls representations, and defendants’ certifications were “materially false and misleading”; and that, as a result of these failings, defendants lacked a reasonable basis for their positive statements about the company, its prospects and earnings guidance during this time.

Coventry reported its profits were up to $184.3 million in the fourth quarter of 2007, then fell to $125 million in the first quarter of 2008, before falling further, to $83.2 million, in the second quarter of 2008.

On October 21, 2008, Coventry issued a press release announcing its financial results for its third quarter of 2008, saying earnings had fallen to $85.5 million. That disclosure led the price of Coventry common stock declined from $28.49 per share to $13.93 per share, or more than 51%, on very heavy trading volume, the law firm said.

The investor, and others, if a judge approves the class action, seek to recover damages from the decrease in stock prices during that period.

When the third quarter 2008 results were released, Wolf called 2008 numbers “unacceptable” and “a great disappointment,” noting that the company had “implemented a corrective action plan.” He said he continued to “have confidence in our future prospects, both strategically and financially.”

Wolf resigned in January, after fourth quarter 2008 numbers showed $88.2 million in earnings, and Chairman Allen F. Wise took over, reporting net earnings of $44.2 million for the first quarter of this year.