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Stanford University Law School - Securities Class Action Clearinghouse
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_________________________________________________________
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WAYNE ALEXANDER and ANDREW MERSON, on | Civil Action No.
behalf of themselves and all others similarly situated, | CV-96-0889
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Plaintiffs, |
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v. |
| CLASS ACTION
HEALTH MANAGEMENT INC., CLIFFORD E. | COMPLAINT
HOTTE and DREW W. BERGMAN, |
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Defendants. |
_________________________________________________________| JURY TRIAL DEMANDED
Plaintiffs, by their attorneys, for their Class Action Complaint, allege the
following upon personal knowledge as to themselves and their acts and as to all other matters
upon information and belief based upon, inter alia, the investigation made by and through
their attorneys, including a review of the public filings of Health Management Inc. ("Health
Management" or the "Company") with the Securities and Exchange Commission (the
"SEC"), published reports and news articles.
JURISDICTION AND VENUE
1. This Court has jurisdiction over the subject matter of this action
pursuant to Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15
U.S.C. § 78aa.
2. The claims asserted herein arise under Sections 10(b) and 20(a) of the
Exchange Act, 15 U.S.C. § 78j(b) and § 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5,
promulgated thereunder by the SEC.
3. Venue is proper in this District pursuant to Section 27 of the Exchange
Act and 27 U.S.C. § 1391(b). Many of the acts and transactions giving rise to the violations
of law complained of herein, including the preparation and dissemination to the investing
public of false and misleading information, occurred in this District. Additionally, Health
Management maintains its offices within this jurisdiction.
4. In connection with the acts, conduct and other wrongs alleged in this
Complaint, defendants, directly and indirectly, used the means and instrumentalities of
interstate commerce, including the mails, telephone communications and the facilities of
national securities exchanges.
NATURE OF THE ACTION
5. This is a securities class action brought by plaintiffs on behalf of all
persons (the "Class") as described below, other than defendants and related parties, who
purchased or acquired the common stock of Health Management during the period from
June 15, 1995 to February 27, 1996, inclusive (the "Class Period"). During the Class
Period, Health Management's financial results, as reported, did not accurately reflect the
Company's true financial position and results of operations. The financial results which
defendants issued failed to be reported in accordance with generally accepted accounting
principles. Such results contained material accounting irregularities. When this information
subsequently was disclosed, the price of the Company's common stock reacted swiftly. The
stock price plummeted from $10 7/8 per share on February 22, 1996 to trade at lower than
$3 per share on February 27, 1996 following the Company's disclosure that the Company
would restate its financial results for the fiscal year ended April 30, 1995 and restate its
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interim financial results for the first and second quarters of fiscal year 1996, to reflect,
among other things, the correction of previous overstatement of accounts receivable,
inventory and other assets.
THE PARTIES
6. Plaintiff Wayne Alexander purchased 2,000 shares of Health
Management common stock on November 10, 1995 during the Class Period.
7. Plaintiff Andrew Merson purchased 2,000 shares of Health
Management common stock on November 21, 1995 during the Class Period.
8. Defendant Health Management is a corporation duly organized and
existing under the laws of the state of Delaware with its principal executive offices located at
4250 Veterans Memorial Highway, Holbrook, New York. The Company focuses on the
provision of integrated health management services to patients with chronic medical
conditions and to the general health care industry. Services offered include distribution of
prescription drugs, drug utilization review, patient compliance monitoring and other services.
Health Management's common stock are listed and traded on the NASDAQ under the symbol
HMIS [sic].
9. At all relevant times, defendant Clifford E. Hotte ("Hotte") was
Chairman of the Board and Chief Operating Officer of Health Management.
10. At all relevant times, defendant Drew W. Bergman ("Bergman") was
Health Management's Chief Financial Officer, Corporate Development Officer, Treasurer
and Secretary.
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11. Hotte and Bergman are sometimes referred to herein as the "Individual
Defendants."
CLASS ACTION ALLEGATIONS
12. Plaintiffs bring this case as a class action pursuant to Rule 23 of the
Federal Rules of Civil Procedure, on behalf of themselves and all other persons (the "Class")
who purchased or otherwise acquired Health Management stock between June 15, 1995 and
February 27, 1996, inclusive (the "Class Period"). Excluded from the Class are the
Company, its subsidiaries and affiliates, the Individual Defendants, members of the
immediate families of each of the Individual Defendants, and the successors and assigns of
any defendant.
13. This action is properly maintainable as a class action because:
(a) During the Class Period approximately 9 million shares of
Health Management common stock were outstanding. These shares were actively traded on
NASDAQ, an impersonal and efficient trading market during the Class Period. The
members of the Class for whose benefit this action is brought are dispersed throughout the
United States and are so numerous that joinder of all Class members is impracticable.
Millions of Health Management shares were publicly traded during the Class Period and,
upon information and belief, plaintiff believes that there are thousands of members of the
Class;
(b) Plaintiffs' claims are typical of the claims of the members of the
Class, and plaintiffs and all members of the Class sustained damages as a result of
defendants' wrongful conduct complained of herein;
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(c) Plaintiffs are representative parties who will fairly and
adequately protect the interests of the members of the Class and has retained counsel
competent and experienced in class action securities litigation. Plaintiffs have no interests
antagonistic to, or in conflict with, the Class that plaintiffs seek to represent;
(d) A class action is superior to other available methods for the fair
and efficient adjudication of the claims asserted herein, because joinder of all members is
impracticable. Furthermore, because the damages suffered by the individual Class members
may be relatively small, the expense and burden of individual litigation make it virtually
impossible for the Class members individually to redress the wrongs done to them. The
likelihood of individual Class members prosecuting separate claims is remote;
(e) Plaintiffs anticipate no unusual difficulties in the management of
this action as a class action; and
(f) The questions of law and fact common to the members of the
Class predominate over any questions affecting any individual members of the Class.
14. The questions of law and fact which are common to the Class include,
among others:
a. Whether the federal securities laws were violated by defendants'
acts as alleged herein;
b. Whether the documents, releases, reports, and/or statements
disseminated to the investing public and to the Company security holders during the Class
Period omitted or misrepresented material facts about the business affairs and profits of the
Company;
c. Whether defendants have acted with knowledge or with reckless
disregard for the truth in omitting to state and/or misrepresenting material facts;
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d. Whether, during the Class Period, the market price of Health
Management securities was artificially inflated due to the non-disclosures and/or material
misrepresentations complained of herein;
e. Whether defendants participated in and pursued the common
course of conduct complained of herein; and
f. Whether the members of the Class have sustained damages and,
if so, what is the proper measure thereof.
SUBSTANTIVE ALLEGATIONS
15. On June 15, 1995, Health Management announced its expected
revenues for its 1995 fiscal year ending April 30, 1995 to be between $88 million and $90
million. Revenues for the fourth quarter ending 1995 were seen at $28 million to $29
million. Revenue increases for both periods would be greater than 100 percent. Net income
was expected to be over $7 million for the year, about 75 percent more than in 1994. Fiscal
1995 earnings per share were seen between $0.74 and $0.75, an increase of more than 40
percent over the last year. The earnings per share estimates include a one-time charge of
$0.03 per share which the Company expected to take in the fourth quarter. The Company
said it had made several investments in the past year which had not yet begun to generate
sufficient revenues to offset the capital outlays and overhead necessary to support them.
16. However, the information contained in the June 15, 1995 press release
was false and misleading, because at the time such results were disseminated, defendants
knew or recklessly disregarded that such results departed from generally accepted accounting
principles and therefore were a material overstatement of assets and earnings. Among other
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things, reported accounts receivable exceeded amounts expected to be collected, in violation
of accounting rules.
17. On July 10, 1995, Bloomberg Newswire reported a story concerning
Healthcare [sic] Management based upon an interview with defendant Hotte. The story indicated
that the Company's accounts receivable had grown to as many as 150 days outstanding.
Defendant Hotte was quoted as attributing the Company's growth in accounts receivable to
its installation of a new computer system. However, undisclosed by Hotte was that the
Company's accounts receivable were not reported in accordance with generally accepted
accounting principles, and, therefore, were materially overstated.
18. On August 2, 1995, the Company filed its Form 10-K for the year
ended April 30, 1995 with the SEC signed by defendants. The Form 10-K stated that the
Company's revenues were $89,297,547 for the year ended April 30, 1995 an increase of
$45,048,031, or 101.8%, over revenues of $44,249,516 for the year ended April 30, 1994.
"Revenues generated through the Company's recent acquisitions accounted for which
approximately $20,000,000 is attributable to the acquisition of the Murray Corp. The
balance of the increase in revenues was derived from internal growth, resulting from the
expansion of the Lifecare program into new disease states and referral sources."
19. The financial results contained in the August 2, 1994 Form 10-K for
the fourth quarter and fiscal year 1994 were false and misleading. At the time of the
issuance of the August 2, 1994 results, defendants knew of [sic] recklessly disregarded that such
results were not in accordance with generally accepted accounting principles, and, therefore,
the Company's assets and earnings were overstated. Among other things, the Company's
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reported accounts receivable exceeded amounts expected to be collected, the amount properly
reportable under generally accepted accounting principles.
20. On September 5, 1995, defendants filed Health Management's
Form 10-Q, for the quarter ended July 31, 1995 with the SEC. In its Form 10-Q defendants
reported Health Management's revenues were $39.8 million for the quarter ended July 31,
1995 an increase of $21.7 million or 119.7% over revenues of $18 million for the quarter
ended July 31, 1994. The Company further reported that unaudited Accounts Receivable,
less Allowance for doubtful accounts results were $41.9 million for the quarter compared to
audited results for the quarter ended April 30, 1995 of $35.9 million. Additionally, as of
July 31, 1995, unaudited inventories were at $9.3 million compared to the quarter ended
April 30, 1995 of $9.8 million.
21. On December 12, 1995, defendants filed Health Management's
Form 10-Q for the second quarter ended October 31, 1995 with the SEC. In its Form 10Q,
defendants represented that Health Management's revenues were $40.2 million for the
quarter ended October 31, 1995, an increase of $20 million or 100.3% over revenues of 20.1
for the quarter ended October 31, 1994. "This increase was attributable principally to the
increase in revenues generated by the recent acquisitions of the Company which expanded the
Company's Lifecare Program into other chronic disease therapies as well as the continued
growth in the Company's care aftercare business areas."
22. Additionally, the 10-Q stated that Accounts Receivable, less allowance
for doubtful revenues for the period ended October 31,1995 were $48.3 million and
inventories were $10.8 million.
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23. The financial statements and results contained in the second quarter
Form 10-Q were false and misleading, because at the time they were disseminated,
defendants knew or recklessly [sic] that due to material departures from generally accepted
accounting principles, reported results materially overstated income and assets. Defendants
failed, among other things, to report accounts receivable at the amounts expected to be
collected, as required by accounting principles.
24. On February 23, 1996, DJ Newswire reported that Health Management
announced that it expects to report a loss for the third quarter ended January 31, 1996. The
Company attributed the expected loss to a "material" writedown of assets for the third
quarter. The February 23, 1996 announcement further stated that the Company's Board of
Directors had formed a Special Committee to review certain financial and accounting
matters.
25. During the Class Period, Health Management stock traded at prices as
high as $14 per share. In response to the February 23, 1996 announcement, the price per
share of the Company's common stock fell from its $10 7/8 close on the previous day,
February 22, 1996, to $7 1/8.
26. It was not, however, until February 27, 1996, that Health Management
shocked the investment community by disclosing the severity and reasons for writing down
the assets, its restatement earnings and breach of financial covenants.
27. On February 27, 1996, PR Newswire reported that the Company
announced that, the Company intends to take significant write-offs for accounts receivable
and inventory, as well as planned operational consolidations. The Company estimates that
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the total charges shall be in the range of $15 to $20 million. The Company further
announced that it has discovered certain accounting irregularities and that it believes it my [sic]
have to restate its financial statements for the fourth quarter of the fiscal year ended
April 30, 1995 and for the subsequent two fiscal quarters ended July 31, 1995 and
October 31, 1995. These irregularities were discovered in the course of an inquiry of the
Special Committee of the Company's Board of Directors. The extent of the adjustments to
past financials is still unknown. Based on the preliminary results of the Special Committee's
review, which has not yet been completed, the Company believes that these matters were
limited to periods stated above and may not have had an impact on prior fiscal periods. In
addition, the Company expects that it will be in default under its loan agreement.
Additionally, defendant Hotte resigned as Chairman of the Board, Chief Executive Officer
and President of the Company.
28. In response to the Company's February 27, 1996 announcement, Health
Management stock traded as low as $2 3/4 per share, on volume of 1.57 million shares,
more than ten times the average trading volume.
CAUSE OF ACTION
Sections 10(b) And Rule 10b-5
Thereunder And Section 20 Of The
Exchange Act (On Behalf Of The Class)
29. At all relevant times, the defendants, individually and in concert,
directly and indirectly, by the use and means of instrumentalities of interstate commerce
and/or of the mails, engaged and participated in a continuous course of course of conduct
whereby they knowingly and/or recklessly failed to correct public representations which had
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become materially false and misleading regarding Health Management's net income, earnings
and assets. This continuous course of conduct resulted in the defendants allowing Health
Management to publish public statements, which they knew, or were reckless in not
knowing, were materially false and misleading to materially influence the market price of
Management stock and which operated as a fraud and deceit upon the members of the
Class.
30. Defendant Health Management is a direct participant in the wrongs
complained of herein. The Individual Defendants are liable as direct participants in and
controlling persons of the wrongs complained of herein. Because of their positions of control
and authority as officers and directors of Health Management, the Individual Defendants
were able to and did, directly or indirectly, control the content of the aforesaid statements
relating to the Company, and/or the failure to correct those statements in a timely fashion
once they knew or were reckless in not knowing, that those statements were no longer true
or accurate. The Individual Defendants caused or controlled the issuance of public
statements and the failure to correct such public statements containing misstatements and
omissions of material facts as alleged herein.
31. The Individual Defendants had actual knowledge of the facts making
the material statements false and misleading, or acted with reckless disregard for the truth in
that they failed to ascertain and to disclose such facts, even though same were available to
them.
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32. By virtue of the foregoing, defendants have violated Section 10(b) of
the 1934 Act and Rule 10b-5 promulgated thereunder, and the Individual Defendants also are
liable as controlling persons pursuant to Section 20(a) of the 1934 Act.
33. In ignorance of the adverse facts concerning Health Management's
business operations and reported revenues and earnings and in reliance on the integrity of the
market, plaintiffs and the members of the Class acquired Health Management common stock
at artificially inflated prices and were damaged thereby.
34. Had plaintiffs and the members of the Class known of the materially
adverse information not disclosed by the defendants, they would not have purchased Health
Management common stock at all or not at the inflated prices paid.
35. This action has been brought within one year after the discovery of the
untrue statements and the omissions and within three years after the issuance of the
securities.
36. By virtue of the foregoing, each of the defendants has violated Section
10(b) and each of the Individual Defendants has violated Section 20(a) of the Exchange Act,
and Rule 10b-5 promulgated thereunder.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs demand judgment:
A. Determining that the instant action is a proper Class Action
maintainable under Rule 23 of the Federal Rules of Civil Procedure;
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B. Awarding compensatory damages as appropriate against defendants, in
favor of plaintiffs and all members of the Class for harm sustained as a result of defendants'
wrongdoing;
C. Awarding plaintiffs and members of the Class the costs and
disbursements of this suit, including reasonable attorneys', accountants' and experts' fees;
and
D. Awarding such other and further relief as the Court may deem just and
proper.
Dated: February 28, 1996
ABBEY & ELLIS
By: _______________________________
Arthur N. Abbey (AA-8074)
Mark C. Gardy (MG-0338)
Shari H. Lichtman (SL-8765)
212 East 39th Street
New York, New York 10016
(212) 889-3700
Of Counsel:
FARUQI & FARUQI LLP
415 Madison Avenue
New York, New York 10017
(212) 986-1074
LOWEY DANNANBERG BEMPORAD & SELINGER, P.C.
747 Third Avenue
New York, New York 10017
(212) 759-1504
GOODKIND LABATON RUDOFF & SUCHAROW
100 Park Avenue, 12th Floor
New York, New York 10017
(212) 907-0700
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
___________________________________________________
|
WAYNE ALEXANDER and ANDREW MERSON, | Civil Action No.
on behalf of themselves and all others similarly |
situated, |
|
Plaintiffs, |
|
v. |
|
HEALTH MANAGEMENT INC., CLIFFORD E. |
HOTTE and DREW W. BERGMAN, |
|
Defendants. |
___________________________________________________|
PLAINTIFF'S SWORN CERTIFICATION
I, Wayne Alexander, certify that:
1. I have reviewed the complaint and authorized its filing.
2. I did not purchase the security that is the subject of this action at the
direction of plaintiff's counsel or in order to participate in any private action arising under
this title.
3. I am willing to serve as a representative party on behalf of a class and
will testify at deposition and trial, if necessary.
4. My transactions in the security that is the subject of this litigation during
the class period set forth in the complaint are as follow:
Purchase of 2,000 shares on November 10, 1995 at $13.9375
Sale of 2,000 shares on February 27, 1996 at $2 7/8
5. I have not served as or sought to serve as a representative party on
behalf of a Class under this title during the last three years.
6. I will not accept any payment for serving as a representative party,
except to receive my pro rata share of any recovery or as ordered or approved by the court
including the award to a representative of reasonable costs and expenses (including lost
wages) directly relating to the representation of the class.
The foregoing are, to the best of my knowledge and belief, true and correct
statements.
_________________________________
WAYNE ALEXANDER
2
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
___________________________________________________
|
WAYNE ALEXANDER and ANDREW MERSON, | Civil Action No.
on behalf of themselves and all others similarly |
situated, |
|
Plaintiffs, |
|
v. |
|
HEALTH MANAGEMENT INC., CLIFFORD E. |
HOTTE and DREW W. BERGMAN, |
|
Defendants. |
___________________________________________________|
PLAINTIFF'S SWORN CERTIFICATION
I, Andrew Merson, certify that:
1. I have reviewed the complaint and authorized its filing.
2. I did not purchase the security that is the subject of this action at the
direction of plaintiff's counsel or in order to participate in any private action arising under
this title.
3. I am willing to serve as a representative party on behalf of a class and
will testify at deposition and trial, if necessary.
4. My transactions in the security that is the subject of this litigation during
the class period set forth in the complaint are as follow:
Purchase of 2,000 shares on November 21, 1995 at $13.06
5. I have not served as or sought to serve as a representative party on
behalf of a Class under this title during the last three years.
6. I will not accept any payment for serving as a representative party,
except to receive my pro rata share of any recovery or as ordered or approved by the court
including the award to a representative of reasonable costs and expenses (including lost
wages) directly relating to the representation of the class.
The foregoing are, to the best of my knowledge and belief, true and correct
statements.
_________________________________
ANDREW MERSON
2
3 Aug 1997