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Stanford
University Law School
- Securities Class Action Clearinghouse
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
___________________________________
)
GRANT K. WARD, on behalf of )
himself and all others similarly )
situated, ) CASE NO. 96-CV-0521
)
Plaintiff, ) CLASS ACTION COMPLAINT
) FOR VIOLATIONS OF
) FEDERAL SECURITIES LAWS
v. )
)
THE WELLCARE MANAGEMENT GROUP, )
INC.; EDWARD A. ULLMANN; and )
MARYSTEPHANIE CORSONES, ) JURY TRIAL DEMANDED
)
Defendants. )
___________________________________)
Plaintiff makes the following allegations upon
information and belief, except as to allegations specifically
pertaining to the plaintiff and his counsel, based on the facts
alleged below, which are predicated upon a review by forensic
accountants and the investigation undertaken by plaintiff's
counsel, which investigation included analyses of publicly-
available news articles (including reliable investigative
reports), public filings, releases, and other matters of public
record. Plaintiff believes that further substantial evidentiary
support will exist for the allegations set forth below after a
reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a class action on behalf of all persons
who purchased the common stock of The WellCare Management Group,
Inc. ("WMG" or the "Company") between August 2, 1994 and
March 18, 1996, inclusive (the "Class Period"), seeking to pursue
remedies under the Securities Exchange Act of 1934 (the "Exchange
Act"). As hereinafter alleged, during the Class Period, WMG, a
managed health care holding company, and the two Individual
Defendants, each of whom is an executive officer, director and
controlling person of WMG, knowingly or recklessly misrepresented
the financial condition and performance of the Company.
Defendants' fraudulent scheme and deceptive course of business
artificially inflated and maintained the trading price of WMG
common stock during the Class Period and thereby injured
plaintiff and other purchasers of WMG stock. By misportraying
the Company's financial results, defendants drove the price of
WMG common stock, which was initially offered to the public in
August 1993 at a price of $11.75 per share, to a Class Period
high of $37 per share (the closing price on March 27, 1995). Per
share earnings reported by the Company rose from $0.52 in 1992 to
$1.25 in 1995.
2. Notwithstanding defendants' efforts to conceal
their misconduct, the truth about WMG's financial condition and
performance finally began to leak to the public on or about
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March 16, 1996, when Barron's, a prominent national financial
publication, published a report -- based on, among other things,
an examination of internal Company documents and interviews with
Company employees -- detailing a series of "unusual transactions
[that] have inflated the HMO's profits since coming public."
During a week of extremely heavy trading following the
publication of the Barron's report, the price of WMG stock
plummeted in value by $7.25 per share -- or more than 30% -- to
close at $16.50 on March 22, 1996.
JURISDICTION AND VENUE
3. This Court has jurisdiction over the subject
matter of this action pursuant to 28 U.S.C. §§ 1331 and 1337, and
Section 27 of the Exchange Act (15 U.S.C. § 78aa).
4. This action arises under Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder (17
C.F.R. § 240.10b-5).
5. Venue is proper in this District pursuant to Sec-
tion 27 of the Exchange Act and 28 U.S.C. § 1391(b). WMG has its
corporate headquarters in this District at Park West/Hurley
Avenue Extension, Kingston, New York, and the acts charged
herein, including the preparation and dissemination of materially
false and misleading information, occurred in substantial part in
this District.
6. In connection with the acts alleged in this com-
plaint, the defendants, directly or indirectly, used the means
and instrumentalities of interstate commerce, including, but not
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limited to, the mails, interstate telephone communications, and
the facilities of the national securities markets.
PARTIES
7. Plaintiff Grant K. Ward purchased 200 shares of
WMG common stock during the Class Period on June 26, 1995, at a
price of $22.75 per share (excluding fees, charges and
commissions), and was damaged thereby.
8. (a) Defendant WMG is a corporation organized and
existing under the laws of the State of New York. The Company's
principal executive offices are located at Park West/Hurley
Avenue Extension, Kingston, New York. WMG is a managed health
care holding company. Its wholly-owned subsidiary WellCare of
New York, Inc. ("WCNY") is a direct contract independent practice
association ("IPA") model health maintenance organization
("HMO"). An HMO is an organization that accepts contractual
responsibility for the delivery of a stated range of health care
services to its enrollees for a predetermined, prepaid fee. As a
direct contract IPA model HMO, WCNY enters into agreements with
physician groups and individual primary care physicians or
practices for the provision of all medical care to WCNY's
enrollees for a specified monthly payment ("capitation fee").
WCNY provides comprehensive health care services to members in
the Hudson River Valley, Mohawk River Valley, Albany, and
Leatherstocking regions of New York State through a provider
network consisting of approximately 500 primary care physicians,
1,000 specialists, and 24 hospitals. Another wholly-owned
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subsidiary, WellCare of Connecticut, Inc., operates as an HMO in
the State of Connecticut. Through other wholly-owned
subsidiaries, WMG also provides specialty benefit programs and
related administrative services to employer and other groups that
utilize health care services, and administrative and management
services to physician practices.
(b) WMG first issued shares to the public,
pursuant to an initial public offering, in or about August 1993
at a price of $11.75 per share. At all times relevant to this
action, the common stock of WMG was actively traded on the NASDAQ
National Market System, a national securities exchange, under the
ticker symbol "WELL" and was registered pursuant to Section 12 of
the Exchange Act (15 U.S.C. § 78e). The market for WMG common
stock was therefore open, well-developed and efficient at all
relevant times. WMG files annual, quarterly and other reports
with the Securities and Exchange Commission (the "SEC") in
accordance with the Exchange Act.
(c) As of November 1, 1995, the Company had
outstanding more than 4.8 million shares of common stock and
approximately 1.5 million shares of Class A common stock. The
Class A common stock and the common stock are identical in all
respects except for voting rights, conversion rights, and the
non-transferability of the Class A common stock. Holders of
Class A common stock are entitled to ten votes per share and
holders of common stock to one vote per share. Class A common
stock is not transferable and must be converted to common stock
to be sold. Holders of Class A common stock may, at their
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option, convert their shares to common stock on a share-for-share
basis.
9. Defendant Edward A. Ullmann founded WMG in 1983
and since then has served as its Chairman, President and Chief
Executive Officer, capacities in which he has received
substantial compensation. Defendant Ullmann's employment
agreement with the Company provides for an annual bonus equal to
two percent of the Company's net profits (up to a maximum of
$200,000 per annum), and such additional bonus as the Board of
Directors may determine. As of April 20, 1995, Ullmann was the
beneficial owner of at least 763,610 shares of WMG Class A common
stock, representing 49% of all such shares outstanding, and 6,500
shares of WMG common stock, and thereby controlled approximately
38% of the total voting power within the Company. Defendant
Ullmann signed each of the Form 10-K and 10-Q reports filed by
the Company during the Class Period, as the "principal executive
officer" of the Company.
10. Defendant Marystephanie Corsones joined the
Company in July 1993 as Finance Director and since May 1994 has
served as its Chief Financial Officer and Vice President of
Finance, capacities in which she has received substantial
compensation. Defendant Corsones also has been a member of the
Company's Board of Directors since November 1994 and was during
the Class Period a member of the Audit Committee of the Board,
which meets with the Company's outside auditors to review the
scope of their annual audit, the adequacy of the Company's system
of internal controls, and the sufficiency of its financial
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reporting. Defendant Corsones's employment agreement with the
Company provides for an annual bonus equal to one-half percent of
the Company's net profits (with an annual maximum amount of
$35,000), and such additional bonus as the Board of Directors or
the Company's President may determine. According to the
Company's Form 10-K report for the fiscal year ended December 31,
1994 (the "1994 10-K"), Corsones has more than ten years'
experience in international finance and taxation and was senior
director of U.S. International Operations at the "big-six"
accounting firm of Coopers & Lybrand for more than five years.
Corsones is therefore knowledgeable and experienced concerning
financial and accounting matters. Defendant Corsones signed each
of the Form 10-K and 10-Q reports filed by the Company during the
Class Period, as the "principal financial and accounting officer"
of the Company.
11. The individual defendants identified above are
sometimes referred to herein collectively as the "Individual
Defendants."
12. It is appropriate to treat the Individual
Defendants as a group for pleading purposes and to presume that
the false and misleading information conveyed in the Company's
financial statements, public filings, press releases and other
publications as alleged herein are the collective actions of the
narrowly defined group of defendants identified above. Each of
the above officers and directors of WMG, by virtue of his or her
high-level positions with the Company, directly participated in
the management of the Company, was directly involved in the day-
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to-day operations of the Company at the highest levels, and was
privy to confidential proprietary information concerning the
Company and its operations, finances, financial condition,
performance and results as alleged herein. Said defendants were
involved in drafting, producing, reviewing and/or disseminating
the false and misleading statements alleged herein, were aware
that false and misleading statements were being issued regarding
the Company and approved or ratified these statements, in
violation of the federal securities laws.
13. As officers, directors and controlling persons of
a publicly-held company whose common stock was, and is,
registered with the SEC pursuant to the Exchange Act, traded
on the NASDAQ National Market System, and governed by the provisions
of the federal securities laws, the Individual Defendants each
had a duty to disseminate promptly accurate and truthful
information with respect to the Company's financial condition,
performance, results, operations, business, products, markets,
management, earnings, and business prospects, and to correct any
previously-issued statements that had become materially
misleading or untrue, so that the market price of the Company's
publicly-traded securities would be based upon truthful and
accurate information. The Individual Defendants' mis-
representations during the Class Period violated these specific
requirements and obligations.
14. The Individual Defendants participated in the
drafting, preparation, and/or approval of the various financial
statements, and public and shareholder and investor reports and
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other communications complained of herein and were aware of or
recklessly disregarded the misstatements contained therein and
omissions therefrom, and were aware of their materially false and
misleading nature. Because of their Board membership and
executive and managerial positions with WMG, each of the
Individual Defendants had access to the adverse non-public
information about WMG's financial condition and performance as
particularized herein and knew that these adverse facts rendered
the positive representations made by and about WMG and its
business and the financial statements issued by the Company
materially false and misleading.
15. The Individual Defendants, because of their
positions of control and authority as officers and directors of
the Company, were able to and did control the contents of the
various quarterly and annual financial reports, press releases
and other public statements pertaining to the Company. Each
Individual Defendant was provided with copies of the financial
statements and documents alleged herein to be false and
misleading prior to or shortly after their issuance and had the
ability and opportunity to prevent their issuance or to cause
them to be corrected. Accordingly, each of the Individual
Defendants is responsible for the accuracy of the financial
statements and public reports and releases detailed herein and is
therefore primarily liable for the representations contained
therein.
16. Each of the defendants is liable as a participant
in a fraudulent scheme and course of business that operated as a
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fraud and deceit on purchasers of WMG stock, by disseminating
materially false and misleading statements and/or concealing
material, adverse facts. The scheme: (i) deceived the investing
public regarding WMG's business, its financial condition and
performance, and the intrinsic value of WMG shares; and (ii)
caused plaintiff and other members of the Class to purchase WMG
stock at artificially inflated prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
17. Plaintiff brings this action as a class action
pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on
behalf of a Class consisting of all persons who purchased or
otherwise acquired shares of WMG common stock from August 2, 1994
through March 18, 1996, inclusive (the "Class Period"), and who
were damaged thereby. Excluded from the Class are defendants,
members of the immediate family of each of the Individual
Defendants, any subsidiary or affiliate of WMG and the directors,
officers and employees thereof, any entity in which any excluded
person has a controlling interest, and the legal representatives,
heirs, successors and assigns of any excluded person.
18. The members of the Class are so numerous that
joinder of all members is impracticable. While the exact number
of Class members is unknown to plaintiff at this time and can
only be ascertained through appropriate discovery, plaintiff
believes that there are thousands of members of the Class located
throughout the United States. As of November 1, 1995, there were
more than 4.8 million shares of WMG common stock outstanding.
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Throughout the Class Period, WMG common stock was actively traded
on the NASDAQ National Market System. Record owners and other
members of the Class may be identified from records maintained by
WMG and/or its transfer agent and may be notified of the pendency
of this action by mail, using a form of notice similar to that
customarily used in securities class actions.
19. Plaintiff's claims are typical of the claims of
the other members of the Class as all members of the Class were
similarly affected by defendants' wrongful conduct in violation
of federal law that is complained of herein.
20. Plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained counsel
competent and experienced in class and securities litigation.
21. Common questions of law and fact exist as to all
members of the Class and predominate over any questions solely
affecting individual members of the Class. Among the questions
of law and fact common to the Class are:
(a) Whether the federal securities laws were vio-
lated by defendants' acts and omissions as alleged herein;
(b) Whether defendants participated in and
pursued the common course of conduct complained of herein;
(c) Whether documents, press releases, public
filings, and other statements disseminated to the investing
public and the Company's shareholders during the Class Period
misrepresented material facts about the business, financial
condition and performance of WMG;
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(d) Whether statements made by defendants to the
investing public during the Class Period misrepresented material
facts about the business, financial condition and performance of
WMG;
(e) Whether the market price of WMG's common
stock during the Class Period was artificially inflated due to
the material misrepresentations and failures to correct the
material misrepresentations complained of herein; and
(f) To what extent the members of the Class have
sustained damages and the proper measure of damages.
22. A class action is superior to all other available
methods for the fair and efficient adjudication of this contro-
versy since joinder of all members is impracticable. Further-
more, as the damages suffered by individual Class members may be
relatively small, the expense and burden of individual litigation
make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in
the management of this suit as a class action.
SUBSTANTIVE ALLEGATIONS
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
23. At all relevant times, the market for WMG common
stock was an efficient market for the following reasons, among
others:
(a) WMG common stock met the requirements for
listing, and was listed and actively traded, on the NASDAQ
National Market System, a highly efficient and automated market;
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(b) As a regulated issuer, WMG filed periodic
public reports with the SEC and the NASD; and
(c) WMG was followed by securities analysts
employed by major brokerage firms who wrote reports which were
distributed to the sales force and certain customers of their
respective brokerage firms. Each of these reports was publicly
available and entered the public marketplace. Among the
securities firms that followed the Company during the Class
Period were: A. G. Edwards; Advest Group; Furman Selz; Hambrecht
& Quist; Ladenburg, Thalmann; Merrill Lynch; Morgan Stanley &
Co.; Robertson Stephens & Co.; Smith Barney; and Vector
Securities International.
24. As a result, the market for WMG securities
promptly digested current information with respect to WMG from
all publicly-available sources and reflected such information in
WMG's stock price. Under these circumstances, all purchasers of
WMG shares during the Class Period suffered similar injury
through their purchase of shares at artificially inflated prices
and a presumption of reliance applies.
MATERIALLY AND FALSE MISLEADING STATEMENTS AND OMISSIONS
25. The Class Period begins on August 2, 1994, the day
the Company issued a press release purporting to report financial
results for the second quarter of 1994, the first fiscal quarter
during which improprieties specified in the Barron's
investigative report occurred. In its press release of August 2,
1994, the Company reported total revenue of $29,707,000 and net
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income of $1,466,000, or $0.24 per share, for the quarter. The
Company also reported total assets of $55,422,000, liabilities of
$26,999,000, and shareholders' equity of $28,423,000, as of
June 30, 1994. The August 2 press release stressed that WMG
provides "cost-effective comprehensive health care
services. . . ." As an HMO, WMG's ability to control the costs
associated with providing health care coverage to its HMO members
is critical to its success as an enterprise and to the valuation
of the Company by the marketplace.
26. On or about August 4, 1994, the Company filed its
Form 10-Q report for the quarterly period ended June 30, 1994
(the "Second Quarter 1994 10-Q") with the SEC. The Second
Quarter 1994 10-Q was signed by each of the Individual
Defendants. The 10-Q reiterated the purported financial results
announced by the Company on or about August 2. In the notes to
the financial statements, defendants represented that:
In the opinion of management, the
accompanying unaudited interim financial
statements contain all adjustments necessary
to present fairly the financial position at
June 30, 1994, and the results of operations
and cash flows for the interim periods
presented.
27. On or about November 1, 1994, the Company issued a
press release purporting to report financial results for the
third quarter of 1994. The Company reported total revenue of
$31,021,000 and net income of $1,561,000, or $0.25 per share, for
the quarter. The Company also reported total assets of
$55,972,000, total liabilities of $25,902,000, and shareholders'
equity of $30,070,000, as of September 30, 1994.
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28. On or about November 11, 1994, the Company filed
its Form 10-Q report for the quarterly period ended September 30,
1994 (the "Third Quarter 1994 10-Q") with the SEC. The Third
Quarter 1994 10-Q was signed by each of the Individual
Defendants. The 10-Q reiterated the purported financial results
announced by the Company on or about November 1. In the notes to
the financial statements, defendants represented that:
In the opinion of management, the
accompanying unaudited interim financial
statements contain all adjustments
(consisting only of normal recurring
adjustments) necessary to present fairly the
financial position at September 30, 1994, and
the results of operations and cash flows for
the interim periods presented.
29. On or about February 14, 1995, the Company issued
a press release purporting to report financial results for the
quarter and full year ended December 31, 1994. The Company
reported total revenue of $31,831,000 and net income of
$1,956,000, or $0.31 per share, for the quarter and total revenue
of $121,770,000 and net income of $6,238,000, or $1.00 per share,
for the full year, as compared to total revenue of $75.9 million
and net income of $0.72 per share (before the cumulative effect
of a change in accounting for income taxes) for 1993. The
Company also reported total assets of $55,876,000, liabilities of
$23,790,000, and shareholders' equity of $32,086,000, as of
December 31, 1994. The press release quoted defendant Ullmann as
stating:
1994 was a year of investment as WellCare
prepared for the growth we anticipate through
increased penetration in our current service
area and through geographic and product
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expansions. With the failure of national
health care reform, WellCare is prepared to
take advantage of the tremendous
opportunities that are emerging for cost-
effective health care companies in the
private sector.
(Emphasis added.) The February 14 press release reiterated that
WMG "currently provides cost-effective comprehensive health care
services. . . ."
30. On or about March 30, 1995, the Company filed its
1994 10-K with the SEC. The 1994 10-K was signed by each of the
Individual Defendants, among other persons. The Company reported
total revenue of $32,643,000 and net income of $1,956,000, or
$0.31 per share, for the fourth quarter of 1994 and total revenue
of $122,582,000 and net income of $6,238,000, or $1.00 per share,
for the full year 1994. The Company also reported total assets
of $55,674,000, liabilities of $23,587,000, and shareholders'
equity of $32,087,000, as of December 31, 1994. With regard to the
Company's purported cost-effectiveness, the 10-K stated:
The Company's success depends to a significant degree
upon its ability to control health care costs.
WellCare controls such costs through (i) capitation
arrangements with the Alliances [physician groups] and
with non-Alliance primary care physicians, (ii)
discounted fee arrangements with non-Alliance
specialists and other health care providers (other than
hospitals which are paid on a DRG basis in New York
State), (iii) health care utilization review programs,
(iv) preventive care education for its members and
participating physicians, (v) quality of care programs
and (vi) co-payments by members for office visits and
other services. Notwithstanding such cost control
measures, certain factors, such as regulatory changes,
epidemics and natural disasters, which impact health
care costs, are beyond the Company's control and may
adversely affect its operations.
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31. On or about May 8, 1995, the Company issued its
1994 Annual Report to shareholders. The 1994 Annual Report
reiterated the purported financial results for 1994 reported in
the 1994 10-K. The Letter to Shareholders, which appeared at the
beginning of the 1994 Annual Report, contained, among others, the
following positive statements touting the Company's purported
financial success:
1994 was a year of innovation, unprecedented
growth and preparation for future growth.
* * *
While the fortunes of HMOs ebbed and flowed
in the uncertain investment market in 1994,
WellCare kept focused on the business of
providing high quality health care in the
most cost-effective way possible. As a
result, WellCare ended the year with record
profits. Net income for the year was $6.2
million or approximately $1 per share
compared to $3.6 million or $0.72 per share
before cumulative effect of a change in
accounting principle for 1993.
WellCare's excellent financial
performance, growth and innovative leadership
in health care established it as a solid
investment opportunity, and WellCare
attracted the attention of major investment
analysts and media in 1994. USA Today
highlighted WellCare as one of the top IPOs
in the nation, and a Fortune magazine cover
feature story listed WellCare among
"America's 100 Fastest Growing Companies."
Investor's Business Daily featured WellCare
as a public company presenting an excellent
investment opportunity. Among analyst firms
to issue buy recommendations for WellCare
stock in 1994 were A.G. Edwards & Sons, Inc.,
Smith Barney, Inc., Robertson Stephens &
Company and Punk Ziegel and Knoell. Their
recommendations proved out as WellCare
achieved the significant revenue, growth and
membership projections of the investment
community.
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And on a personal note, it was
WellCare's excellent performance as a company
that earned for me the title "Health Care
Entrepreneur of the Year in the Southern New
England Region" in the 1994 national
"Entrepreneur of the Year" competition
sponsored by Inc. magazine, Merrill Lynch,
and Ernst and Young.
* * *
By every measure, 1994 was a year of
vigorous growth for WellCare.
(Emphasis added.) The Letter to Shareholders was signed by
defendant Ullmann. The 1994 Annual Report further touted WMG's
purported cost-effectiveness, noting, among other things, that
"[a]t WellCare, cost-effectiveness and quality are woven into the
fabric of care."
32. On or about May 9, 1995, the Company issued a
press release purporting to report financial results for the
first quarter of 1995. The Company reported total revenue of
$34,875,000 and net income of $1,602,000,or $0.26 per share, for
the quarter. The Company also reported total assets of
$62,771,000, liabilities of $28,882,000, and shareholders' equity
of $33,889,000, as of March 31, 1995. The press release quoted
defendant Ullmann as stating: "The first quarter was one of
dramatic progress for WellCare, both in terms of geographic and
program expansion." The May 9 press release also stressed that
WMG "currently provides cost-effective comprehensive health care
services. . . ."
33. On or about May 12, 1995, the Company filed its
Form 10-Q for the quarterly period ended March 31, 1995 (the
"First Quarter 1995 10-Q") with the SEC. The First Quarter 1995
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10-Q was signed by each of the Individual Defendants. The 10-Q
reiterated the purported financial results announced by the
Company on or about May 9. In the notes to the financial
statements, defendants represented that:
In the opinion of management, the
accompanying unaudited interim financial
statements contain all adjustments
(consisting of only normal recurring
adjustments) necessary to present fairly the
financial position at March 31, 1995, and the
results of operations and cash flows for the
interim periods presented.
34. On or about August 7, 1955, the Company issued a
press release purporting to report financial results for the
second quarter of 1995. The Company reported total revenue of
$36,902,000 and net income of $1,762,000, or $0.28 per share, for
the quarter. The Company also reported total assets of
$68,999,000, liabilities of $33,301,000, and shareholders' equity
of $35,698,000, as of June 30, 1995.
35. On or about August 11, 1995, the Company filed its
Form 10-Q report for the quarterly period ended June 30, 1995
(the "Second Quarter 1995 10-Q") with the SEC. The Second
Quarter 1995 10-Q was signed by each of the Individual
Defendants. The 10-Q reiterated the purported financial results
announced by the Company on or about August 7. In the notes to
the financial statements, defendants represented that:
In the opinion of management, the
accompanying unaudited interim financial
statements contain all adjustments necessary
to present fairly the financial position at
June 30, 1995, and the results of operations
and cash flows for the interim periods
presented.
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36. On or about November 7, 1995, the Company issued a
press release purporting to report financial results for the
third quarter of 1995. The Company reported total revenue of
$40,112,000 and net income of $2,069,000, or $0.33 per share, for
the quarter. The Company also reported total assets of
$69,684,000, liabilities of $31,727,000, and shareholders' equity
of $37,957,000, as of September 30, 1995.
37. On or about November 13, 1995, the Company filed
its Form 10-Q report for the quarterly period ended September 30,
1995 (the "Third Quarter 1995 10-Q") with the SEC. The Third
Quarter 1995 10-Q was signed by each of the Individual
Defendants. The 10-Q reiterated the purported financial results
announced by the Company on or about November 7. In the notes to
the financial statements, defendants represented that:
In the opinion of management, the
accompanying unaudited interim financial
statements contain all adjustments necessary
to present fairly the financial position at
September 30, 1995, and the results of
operations and cash flows for the interim
periods presented.
38. On or about February 14, 1996, the Company issued
a press release purporting to report financial results for the
quarter and full year ended December 31, 1995. The Company
reported total revenue of $44,324,000 and net income of
$2,381,000, or $0.38 per share, for the quarter and total revenue
of $156,213,000 and net income of $7,814,000 or $1.25 per share,
for the full year (as compared to total revenue of $122,582,000
and net income of $6,238,000, or $1.00 per share, for 1994). The
Company also reported total assets of $76,392,000, liabilities of
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$35,672,000, and shareholders' equity of $40,720,000, as of
December 31, 1995. The press release quoted defendant Ullmann as
stating:
We are very pleased with the results for
1995. It was a great year for us financially
and in terms of product innovation,
operational growth and geographic
expansion. . . . In 1995, we substantially
advanced WellCare's vision for health care,
and we look forward to seeing the fruits of
our labors into the 21st Century.
The February 14 press release again stated that WMG "currently
provides cost-effective comprehensive health care
services. . . ."
THE TRUTH BEGINS TO EMERGE
39. One month later, on or about Saturday, March 16,
1996, Barron's published an article entitled "WellCare Management
Group: Conflicting Accounts," which concluded -- based on an
examination of internal Company documents apparently in the
possession of a Kingston, New York radiologist who had done
business with the Company (and which were then sent on to the
Company's outside auditors by the doctor), review of records of
an ongoing New York State Insurance Department investigation of
WMG, and interviews with WellCare employees -- that "various
unusual transactions have inflated the HMO's profits since coming
public." (A copy of the Barron's report is attached hereto as
Exhibit A.) Barron's reported that WMG had hired the private
investigative firm of Kroll Associates to determine who at the
Company had leaked the internal records. The Barron's article
- 21 -
detailed "a series of odd transactions" during the years 1994 and
1995 including the following:
(a) On April 5, 1994, defendant Ullmann issued a
memo to Catskill Medical Associates ("Catskill Medical"), an
independent medical practice for which a WMG subsidiary did
administrative work but which was not part of WMG, instructing it
to send checks on its own account totaling over $100,000 to more
than a dozen doctors to whom WMG owed money. Barron's reported
that Ullmann's orders "puzzled" WMG employees because none of the
doctors had contracts with Catskill Medical. "According to
WellCare computer records," some of the claims Ullmann wanted
paid off even had dates of service predating the incorporation of
Catskill Medical in September 1993.
(b) Catskill Medical sent money directly to WMG
itself. On May 13, 1994, the President of Catskill Medical, Dr.
Randall Rissman, who also has ties with WMG (and whose photograph
is featured prominently in the Company's 1994 Annual Report),
wrote WMG a $250,000 check drawn on Catskill Medical's account.
As the Barron's report noted, this "seemed strange since funds
generally flow from an HMO to doctors, not the other way around."
(c) On or about June 27, 1994 -- just days before
the end of the second quarter of the year -- a stack of 40 checks
to WMG, totaling approximately $1.5 million, were received.
(Significantly, reported net income for the second quarter of
1994 was only $1.466 million.) The checks were hard-to-trace
bank checks from two upstate New York banks, Key Bank of New York
and First National Bank of Rhinebeck. Both banks do business
- 22 -
with WMG. Each check was made payable to WCNY "on behalf of"
various doctors who did some business with the HMO. As bank
checks, the drafts would leave no record of the drawer in the
checking accounts of WMG. According to Barron's, defendant
Corsones, "told curious employees that the doctors were repaying
deficits they owed to WellCare." Barron's reported however that
several doctors whose names appear on the bank checks informed it
that they had no such deficits with WCNY and had never known of
the checks, let alone co-signed or otherwise authorized them.
One doctor named on a bank check who purportedly was repaying
WCNY more than $100,000 told Barron's, "I never got paid that
much in a whole year . . . so how could I have that balance?"
The Barron's report reprinted photographs of three of the bank
checks, totaling approximately $380,000, dated June 27 and 30,
1994.
(d) Barron's also reported that, although the
Company's 1994 10-K reported that 1994 medical expenses were
reduced by the recovery of $2.7 million from doctors with
deficits in their accounts with WMG, "WellCare employees say the
real sources of the money that reduced the HMO's 1994 medical
expenses were bank lines of credit taken out by doctors
associated with outfits like Catskill Medical." According to
Barron's, later in 1994, the money began to flow back from WMG to
the doctors' groups "in an unusual way." In less than a week's
time, WMG wrote three checks totaling nearly $1 million to
Catskill Medical, with one check as large as $741,716.64. The
check stubs called the payments "enhanced capitation."
- 23 -
(e) WMG's statutory filings with the New York
State Insurance Department report a $10.9 million asset called
"other receivables -- net." In a December 1995 response to
insurance examiners' request that the Company detail the asset,
Ullmann explained that the largest portion of the "other
receivables" was some $4.5 million purportedly owed WMG by
hospitals for "medical advances." This item, according to
Barron's, represented over a quarter of WCNY's statutory net
worth. Yet, Barron's reported that when it inquired of officials
at the hospitals listed on WMG's September 1995 account as owing
large amounts, they disputed the entries, saying instead that WMG
owed the hospitals money. For example, Horton Medical Center in
Middletown, New York advised Barron's that instead of it owing
WMG $63,901.70 in September 1995, as WMG claimed to the Insurance
Department, the HMO owed the hospital more than ten times that
amount in unpaid inpatient and outpatient claims.
(f) Doctors also told of claims checks they
received from WMG on which the Company identified no specific
claim in the "explanation of benefits," but rather called the
payment an "advance." By characterizing the payment of a claim
as an advance defendants avoided incurring an expense and thereby
improperly inflated reported income. The mischaracterization of
medical expenses as advances also improperly inflated the
Company's reported assets and net worth.
40. As a direct and immediate result of the stunning
revelations contained in the Barron's report, the price of WMG
stock fell. On Monday, March 18, 1996 -- the first trading day
- 24 -
after the release of the Barron's report -- the trading price of
WMG common stock dropped by $2.75 per share, or almost 12%, from
the previous trading day's closing price of $23.75 per share to
close at $21 per share, after trading as low as $17.75. The
trading volume that day of 757,500 shares was more than seven
times the three-month daily average of approximately 106,000
shares. After March 18, the trading price of WMG common stock
continued to fall on unusually heavy volume, closing at $16.50 on
March 22, 1996 -- a decline of $7.25 per share, or more than 30%,
from the closing price on March 15, 1996, and a drop of $20.50
per share, or more than 55%, from the Class Period high closing
price of $37. In the wake of the Barron's report, federal and
state investigators have been making inquiries of Company
personnel. In addition, the Company reportedly is in
consultation with its outside auditor with respect to its 1994
financial statements.
41. The market for WMG common stock was open, well-
developed and efficient at all relevant times. As a result of
these materially false and misleading statements and failures to
disclose the full truth about WMG and its financial condition,
performance, and business, WMG common stock traded at
artificially inflated prices during the entire Class Period,
reaching a Class Period high closing price of $37 per share,
until the time the adverse information referred to above was
finally provided to and digested by the securities markets.
Plaintiff and other members of the Class purchased or otherwise
acquired WMG securities relying upon the integrity of the market
- 25 -
price of WMG stock and market information relating to WMG, or in
the alternative, upon defendants' false and misleading
statements, and in ignorance of the adverse, undisclosed
information known to defendants, and have been damaged thereby.
Those who sold their shares during the Class Period were not able
to fully recoup their out-of-pocket losses and damages.
42. During the Class Period, defendants materially
misled the investing public, thereby inflating the price of WMG
stock, by publicly issuing false and misleading statements,
including false financial statements for the Company, and
omitting to disclose material facts necessary to make defendants'
statements, as set forth herein, not false and misleading. The
documents and statements referred to in paragraphs 25 through 38
above, as well as others disseminated by defendants during the
Class Period, were materially false and misleading in that, among
other things:
(a) Defendants engaged in deceptive transactions
which lacked a valid business purpose and were designed to and
did, among other things, inflate the reported profits of the
Company. Such deceptive transactions included, among other
things:
(i) Defendant Ullmann's ordering a company
with ties to WMG, Catskill Medical, to make payments to doctors
to whom WMG owed money thereby reducing WMG's expenses;
(ii) The receipt of checks from doctors at
Catskill Medical, which has ties to WMG;
- 26 -
(iii) The receipt, in the last days of the
second quarter of 1994, of mysterious, hard-to-trace bank checks,
and the effort by defendant Corsones to deceive suspicious
employees at WMG by telling them that the bank checks were issued
on behalf of doctors who purportedly were repaying "deficits"
they owed to the Company when in truth at least several of the
doctors whose names appeared on the checks owed no money to the
Company and had never authorized the checks;
(iv) The use of borrowed monies to reduce
medical expenses and thereby inflate profits;
(v) The recording of fictitious receivables;
and
(vi) The mischaracterization of medical
expenses as advances thereby improperly inflating reported
profits and net worth.
(b) Defendants misportrayed the Company's
financial results, among other things, reporting profits that
were improperly inflated by means of various deceptive devices as
heretofore alleged;
(c) Defendants falsely represented that the
Company's financial statements contained all adjustments
necessary to present fairly the financial position of the Company
and the results of operations and cash flows, when, in fact, the
Company's public financial statements did not fairly or
accurately report the Company's true financial results but
instead distorted and misportrayed the financial condition and
performance of the Company;
- 27 -
(d) Defendants repeatedly stressed that WMG
purportedly provides "cost effective" health care services, when,
in fact, reported medical expenses had been improperly reduced by
means of various deceptive devices, as alleged herein; and
(e) Defendants failed to disclose that the
Company's reported financial results did not comply with
Generally Accepted Accounting Principles ("GAAP"), as required.
43. The Company's reported financial results violated
at least the following provisions of GAAP, with which the Company
was, and is, required to comply because of its status as a
reporting company under the Exchange Act:
(a) The principle that expenses should be
recognized upon recognition of revenues that result directly and
jointly from the same transactions or other events as the
expenses was violated (FASB Statement of Concepts No. 5, ¶ 86);
(b) The mischaracterization of medical expenses
as advances violated the definition of "assets" embodied in FASB
Statement of Concepts No. 6, ¶¶ 25-33;
(c) The principle that financial reporting should
provide information that is useful to present and potential
investors and creditors and other users in making rational
investment, credit and similar decisions was violated (FASB
Statement of Concepts No. 1, ¶ 34);
(d) The principle that financial reporting should
provide information about an enterprise's financial performance
during a period was violated. Investors and creditors often use
information about the past to help in assessing the prospects of
- 28 -
an enterprise. Thus, although investment and credit decisions
reflect investors' expectations about future enterprise
performance, those expectations are commonly based at least
partly on evaluations of past enterprise performance (FASB
Statement of Concepts No. 1, ¶ 42);
(e) The principle that financial reporting should
be reliable in that it represents what it purports to represent
was violated. That information should be reliable as well as
relevant is a notion that is central to accounting (FASB
Statement of Concepts No. 2, ¶¶ 58-59);
(f) The principle of completeness, which means
that nothing material is left out of the information that may be
necessary to ensure that it validly represents underlying events
and conditions, was violated (FASB Statement of Concepts No. 2,
¶ 79); and
(g) The principle that conservatism be used as a
prudent reaction to uncertainty to try to ensure that
uncertainties and risks inherent in business situations are
adequately considered was violated. The best way to avoid injury
to investors is to try to ensure that what is reported represents
what it purports to represent (FASB Statement of Concepts No. 2,
¶¶ 95, 97).
44. At all relevant times, the material
misrepresentations and omissions particularized in this Complaint
directly or proximately caused or were a substantial contributing
cause of the damages sustained by plaintiff and other members of
the Class. As described herein, during the Class Period,
- 29 -
defendants made or caused to be made a series of false and
misleading statements about WMG's business, financial condition,
results and performance. These material misstatements and
omissions had the cause and effect of creating in the market an
unrealistically positive assessment of WMG, and its business,
financial condition, and performance, thus causing the Company's
securities to be overvalued and artificially inflated at all
relevant times. Defendants' false portrayal during the Class
Period of WMG, and its financial condition and performance,
resulted in plaintiff and other members of the Class purchasing
the Company's securities at a disparity between their market
price and their actual value, thus causing the damages complained
of herein, both to persons who bought and held until the end of
the Class Period as well as persons who bought and sold within
that time.
SCIENTER ALLEGATIONS
45. The manipulative and deceptive transactions
alleged herein were ones which the Individual Defendants caused
or permitted. Among other things, as heretofore alleged, the
Individual Defendants ordered a company with ties to WMG make
payments to doctors to whom WMG owed money, were aware that
checks were received by WMG from doctors and others with ties to
the Company, and acted to conceal from suspicious employees the
improper purpose of such payments to the Company.
46. Defendants also acted with scienter in that
defendants knew that the public documents and statements,
- 30 -
including the financial statements, issued or disseminated in the
name of the Company were materially false and misleading; knew or
recklessly disregarded that such statements or documents would be
issued or disseminated to the investing public; and knowingly and
substantially participated or acquiesced in the issuance or
dissemination of such statements or documents as primary
violators of the federal securities laws. As set forth elsewhere
herein in detail, defendants, by virtue of their receipt of
information reflecting the true facts regarding WMG, their
control over and/or receipt of WMG's materially misleading
misstatements herein alleged and/or their associations with the
Company which made them privy to confidential proprietary
information concerning WMG, participated in the fraudulent scheme
described herein. Defendants knew and/or recklessly disregarded
the falsity and misleading nature of the information which they
caused to be disseminated to the investing public. This case
does not involve allegations of false forward-looking statements
or projections but instead involves false financial statements
and false statements of financial condition and results.
47. The Individual Defendants engaged in such a scheme
to inflate the price of WMG securities in order, among other
things, to: (i) protect and enhance their executive positions and
the substantial compensation and prestige they obtained thereby;
and (ii) enhance the value of their substantial personal holdings
of WMG securities and options to acquire such securities.
- 31 -
FIRST CLAIM
(Violations of Section 10(b) Of The Exchange Act
And Rule 10b-5 Promulgated Thereunder)
48. Plaintiff repeats and realleges the allegations
set forth above as though fully set forth herein. This claim is
asserted against all defendants.
49. During the Class Period, defendants, and each of
them, carried out a plan, scheme and course of conduct which was
intended to and, throughout the Class Period, did: (i) deceive
the investing public, including plaintiff and other Class
members, as alleged herein; (ii) artificially inflate and
the market price of WMG securities; and (iii) cause
plaintiff and other members of the Class to purchase WMG securi-
ties at artificially inflated prices. In furtherance of this
unlawful scheme, plan and course of conduct, defendants, and each
of them, took the actions set forth herein.
50. Defendants (a) employed devices, schemes, and
artifices to defraud; (b) made untrue statements of material fact
and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices,
and a course of business which operated as a fraud and deceit
upon the purchasers of the Company's stock in an effort to
maintain artificially high market prices for WMG's securities in
violation of Section 10(b) of the Exchange Act and Rule 10b-5.
All defendants are sued as primary participants in the wrongful
and illegal conduct charged herein. The Individual Defendants
also are sued as controlling persons of WMG, as alleged below.
- 32 -
51. In addition to the duties of full disclosure
imposed on defendants as a result of their making of affirmative
statements and reports, or participation in the making of
affirmative statements and reports to the investing public, the
Individual Defendants had a duty to promptly disseminate truthful
information that would be material to investors in compliance
with the integrated disclosure provisions of the SEC as embodied
in SEC Regulations S-X (17 C.F.R. § 210.01 et seq.) and S-K (17
C.F.R. § 229.10 et seq.) and other SEC regulations, including
accurate and truthful information with respect to the Company's
business, operations, financial condition and performance so that
the market price of the Company's common stock would be based on
truthful, complete and accurate information.
52. WMG and the Individual Defendants, individually
and in concert, directly and indirectly, by the use of means or
instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct to
misrepresent and to conceal adverse material information
concerning the business, financial condition, performance, and
operations of WMG as specified herein. WMG and the Individual
Defendants employed devices, schemes and artifices to defraud,
while in possession of material adverse non-public information,
and engaged in acts, practices, and a course of conduct as
alleged herein in an effort to assure investors of WMG's value
and performance and continued substantial growth, which included
the making of, or the participation in the making of, untrue
statements of material facts and omitting to state material facts
- 33 -
necessary in order to make the statements made about WMG and its
business, operations, financial condition, performance, and
results in the light of the circumstances under which they were
made, not misleading, as set forth more particularly herein, and
engaged in transactions, practices and a course of business which
operated as a fraud and deceit upon the purchasers of WMG
securities during the Class Period.
53. Each of the Individual Defendants' primary
liability, and controlling person liability, arises from the
following facts, among others: (i) each of the Individual
Defendants was a high-level executive and director at the Company
during the Class Period and was a member of the Company's
management team; (ii) each of the Individual Defendants, by
virtue of his or her responsibilities and activities as a senior
executive officer and director of the Company, was privy to and
participated in the preparation of the Company's financial
statements and reporting of the Company's financial condition and
performance; (iii) the Individual Defendants enjoyed significant
personal contact and familiarity with each other and were advised
of and had access to other members of the Company's management
team, internal reports, and other data and information about the
Company's financial condition and performance at all relevant
times; and (iv) the Individual Defendants were aware of the
Company's dissemination of information to the investing public
which they knew or recklessly disregarded was materially false
and misleading. The manipulative and deceptive transactions
alleged herein were ones which the Individual Defendants caused
- 34 -
or permitted and for which they were thus responsible. The
Individual Defendants had clear knowledge as to the suspicious
nature and distorting effect of such transactions.
54. The defendants had actual knowledge of the
misrepresentations and omissions of material facts set forth
herein, or acted with reckless disregard for the truth in that
they failed to ascertain and to disclose such facts, even though
such facts were available to them. Such defendants' material
misrepresentations and/or omissions were done knowingly or
recklessly and for the purpose and effect of concealing WMG's
true operating condition and performance from the investing
public and supporting the artificially inflated price of its
stock. As demonstrated by defendants' overstatements and
misstatements of the Company's financial condition and
performance throughout the Class Period, defendants, if they did
not have actual knowledge of the misrepresentations and omissions
alleged, were reckless in failing to obtain such knowledge by
deliberately refraining from taking those steps necessary to
discover whether those statements were false or misleading, and
departed markedly from their fiduciary and full disclosure
obligations and duties in connection therewith.
55. As a result of the dissemination of the materially
false and misleading information and failure to disclose material
facts, as set forth above, the market price of WMG common stock
was artificially in inflated during the Class Period. In ignorance
of the fact that the market price of WMG stock was artificially
inflated, and relying directly or indirectly on the false and
- 35 -
misleading statements made by defendants, or upon the integrity
of the market in which the securities trade, and the truth of any
representations made to appropriate agencies or to the investing
public, at the times at which any statements were made, and/or on
the absence of material adverse information that was known to or
recklessly disregarded by defendants but not disclosed in public
statements by defendants during the Class Period, plaintiff and
the other members of the Class acquired WMG stock during the
Class Period at artificially high prices and were damaged
thereby.
56. At the time of said misrepresentations and
omissions, plaintiffs and other members of the Class were
ignorant of their falsity and believed them to be true. Had
plaintiff and the other members of the Class and the marketplace
known of the true financial condition and performance of WMG,
which were not disclosed by defendants, plaintiff and other
members of the Class would not have purchased or otherwise
acquired their WMG shares during the Class Period, or, if they
had acquired such securities during the Class Period, they would
not have done so at the artificially inflated prices which they
paid.
57. By virtue of the foregoing, defendants have
violated Section 10(b) of the Exchange Act, and Rule 10b-5
promulgated thereunder.
58. As a direct and proximate result of defendants'
wrongful conduct, plaintiff and the other members of the Class
- 36 -
suffered damages in connection with their purchases of the
Company's securities during the Class Period.
SECOND CLAIM
(Violations of Section 20(a) Of The Exchange Act
Against The Individual Defendants)
59. Plaintiff repeats and realleges the allegations
set forth above as if set forth fully herein. This claim is
asserted against the Individual Defendants.
60. The Individual Defendants acted as controlling
persons of WMG within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of their high-level
positions, share ownership, participation in and/or awareness of
the Company's operations and/or intimate knowledge of the
Company's business, financial condition, and performance, the
Individual Defendants had the power to influence and control and
did influence and control, directly or indirectly, the decision-
making of the Company, including the content and dissemination of
the various statements that plaintiff contends are false and mis-
leading. Each of the Individual Defendants was provided with or
had unlimited access to copies of the Company's financial
statements, reports, press releases, public filings and other
statements alleged by plaintiff to be false and misleading prior
to and/or shortly after these statements were issued and had the
ability to prevent the issuance of the statements or cause the
statements to be corrected.
61. Each of the Individual Defendants had direct
involvement in the day-to-day operations of the Company and
- 37 -
therefore, is presumed to have had the power to control or influ-
ence the particular transactions giving rise to the securities
violations as alleged herein, and exercised the same.
62. Pursuant to Section 20(a) of the Exchange Act, by
virtue of their positions as controlling persons, the Individual
Defendants are liable jointly and severally with and to the same
extent as the Company for the Company's aforesaid violations of
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder. As a direct and proximate result of defendants'
wrongful conduct, plaintiff and other members of the Class
suffered damages in connection with their purchases of the
Company's securities during the Class Period.
WHEREFORE, plaintiff prays for relief and judgment, as
follows:
(a) Determining that this action is a proper
class action under Rule 23 of the Federal Rules of Civil
Procedure, and certifying plaintiff as class representative and
his counsel as class counsel;
(b) Awarding compensatory damages in favor of
plaintiff and the other Class members against all defendants,
jointly and severally, for all damages sustained as a result of
defendants' wrongdoing, in an amount to be proven at trial,
including interest thereon;
(c) Awarding plaintiff and the Class their
reasonable costs and expenses incurred in this action, including
counsel fees and expert fees; and
- 38 -
(d) Such other and further relief as the Court
may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: March 29, 1996
WHITEMAN OSTERMAN & HANNA
/s/
By: ___________________________
Leslie M. Apple
BAR Roll No. 104216
1 Commerce Plaza
Suite 1900
Albany, NY 12260
(518) 487-7600
- and -
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
/s/
By: ___________________________
David J. Bershad
Robert P. Sugarman
Steven G. Schulman
Richard H. Weiss
One Pennsylvania Plaza
49th Floor
New York, NY 10119
(212) 594-5300
Attorneys for Plaintiff
- 39 -
[Attachment: March 18, 1996 Barron's article,
"WellCare Management Group: Conflicting Accounts," by Bill Alpert.]
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
___________________________________
)
GRANT K. WARD, on behalf of )
himself and all others similarly )
situated, ) CASE NO.
)
Plaintiff, )
)
)
v. )
)
THE WELLCARE MANAGEMENT GROUP, )
INC.; EDWARD A. ULLMANN; and )
MARYSTEPHANIE CORSONES, )
)
Defendants. )
___________________________________)
CERTIFICATION OF GRANT K. WARD
IN SUPPORT OF CLASS ACTION COMPLAINT
GRANT K. WARD ("plaintiff") declares, as to the claims
asserted under the federal securities laws, that:
1. Plaintiff has reviewed the complaint prepared by
counsel in the above-captioned case and has authorized its
filing.
2. Plaintiff did not purchase the security that is
the subject of the complaint at the direction of plaintiff's
counsel or in order to participate in any private action arising
under the federal securities laws.
3. Plaintiff is willing to serve as a representative
party on behalf of a class, including providing testimony at
deposition and trial, if necessary.
4. During the proposed Class Period, plaintiff
executed the following transactions relating to the common stock
of The WellCare Management Group, Inc.:
Date Action Amount Price
6/26/95 Bought 200 shares $22.75
1/9/96 Sold 200 shares $18.25
5. In the past three years, plaintiff has not filed
any other action under the federal securities laws in which he
has sought to serve as a representative party on behalf of a class.
6. Plaintiff will not accept any payment for serving
as a representative party on behalf of a class beyond plaintiff's
pro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly relating to the
representation of the Class as ordered or approved by the Court.
I declare under penalty of perjury that the foregoing
is true and correct. Executed this 26 day of March, 1996.
/s/
________________________________
Grant K. Ward
- 2 -
3 Aug 1997