A little more than a year after 3 retinal surgeons invested $69,750 apiece in a startup surgery center, each received a buyout check for $185,031. That's a $115,281 profit over their original investment - not a bad (165%!) return.

Except the 3 physicians didn't want to sell their shares in the first place. They claim in a lawsuit that the surgery center bought them out because they weren't meeting the One-Third Rule, which stipulates that at least one-third of each physician-investor's medical practice income for the previous year must be derived from the physician's performance of surgical procedures at an ASC or hospital surgical setting and that at least one-third of the physician's surgical procedures are performed at the ASC in which he is investing. The ASC also claims that the few retina surgeries that the surgeons were performing at the ASC were losing money, according to the lawsuit.

So the physicians sued the ASC, claiming securities fraud. The retinal surgeons claimed that their stock actually had a fair value of $1,323,000 and they were denied $423,000 in distributions that occurred after their membership interests were repurchased. The courts threw out the case, finding no fraud because the physicians had gotten a handsome profit.

Retinal surgeons Jeffrey Lipkowitz, MD, Darmakusuma Ie, MD, and Kekul Shah, MD, were original investors in Surgery Center at Hamilton in Hamilton, N.J., which opened in mid-2005. Each of them initially purchased 4 shares and later added 5.5 shares, for a total investment of $69,750.

The physicians signed the ASC's operating agreement, in which they agreed to comply with the "one-third/one-third" safe harbor for ASCs. After Hamilton Surgery Center began operation, the governing board found that the 3 physicians weren't scheduling enough cases to meet the safe harbor criteria. In June 2006, about 1 year after the ASC opened for business, a representative from the surgery center scheduled a meeting with Drs. Lipkowitz and Ie to discuss the low percentage of retinal surgeries they were performing. In the previous year, they had only scheduled 31 surgeries at the ASC, of which only 20 were actually performed, according to court records. A review of those 20 surgeries revealed that the Medicare reimbursement was less than the actual direct costs. The ASC contended that it was losing money on the surgeries.

The physicians refused to sign a statement specifically complying with the "one-third/one-third" rule and indicated they wanted to hold onto their shares, says R. James Kravitz, the attorney for the surgery center. Unable to convince the physicians to sell, the governing board sold their shares for them and issued each physician a check for $185,031. The ASC also stopped hosting retinal surgeries. "The surgery center did nothing wrong," says Mr. Kravitz, noting the board's wish to comply with the safe harbor.

But the physicians felt they could have gotten a higher return and sued the surgery center on a variety of grounds, including violating the New Jersey Uniform Securities Law, which is usually used against brokers and investment advisors accused of bilking unsuspecting clients. Mr. Kravitz says the case was the first time the law was applied to ASCs, and he thinks the legal decision will be used as precedent for future cases involving ASC investments.

Mr. Kravitz succeeded in getting the case against the ASC dismissed, arguing that the physicians - far from being forced into a money-losing investment - had made a very generous return on their investment. While the internist dropped out of the case, the 2 ophthalmologists appealed the dismissal, but lost again. Todd Mizeski, a lawyer for the physicians, declined to comment.

Leigh Page