Plaintiff, individually and on behalf of all persons similarly situated, by his undersigned attorneys, for his class action complaint, alleges upon personal knowledge as to himself and his own acts, and as to all other matters upon the investigation made by and through his counsel, which included, among other things, review of Securities and Exchange Commission ("SEC") filings, news reports, press releases, and other publicly available documents. Plaintiff believes that further substantial evidentiary support will exist for the allegations set forth below after a reasonable opportunity for discovery.

1. Plaintiff brings this action as a class action on behalf of himself and all persons or entities, except for the defendants and their affiliates (as defined below), who purchased or otherwise acquired the common stock of CareMatrix Corp. ("CareMatrix" or the "Company") (the "Class") between October 29, 1998, and October 7, 1999 (the "Class Period).
2. During the Class Period, defendants engaged in a scheme and course of conduct, in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to which they artificially inflated the price of CareMatrix stock through a series of false and misleading statements and omissions concerning the Company's financial condition and results of operations.

1. This action arises 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 by the SEC pursuant to Section 10(b). The jurisdiction of this Court is based on Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and on Section 1331 of the Judicial Code, 28 U.S.C. § 1331.
2. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.
3. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 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.
4. In connection with the acts, conduct and other wrongs complained of herein, defendants used the means and instrumentalities of interstate commerce.

1. Plaintiff Michael E. Glass purchased CareMatrix common stock during the Class Period, as set forth in the certification attached hereto and incorporated herein by reference, and has suffered substantial damages as a result of the wrongful acts of defendants as alleged herein.
2. Defendant CareMatrix is a Delaware corporation with its principle executive offices located at 197 First Avenue, Needham, Massachusetts. CareMatrix develops, manages, and operates assisted living facilities and various other healthcare facilities.
3. Defendant Abraham D. Gosman ("A. Gosman") has served as the Company's Chairman of the Board of Directors since October 1996, and as Chief Executive Officer since April 15, 1999.
1. A. Gosman has served as the Chairman of the Board of Directors and Chief Executive Officer of PhyMatrix Corp. ("PhyMatrix"), a publicly-traded, physician-driven, integrated medical management company, since 1996. A. Gosman has also served as Chairman of the Board of Meditrust and its successor Meditrust Corporation, a real estate investment trust, from its inception in 1985 to August 1998, and was its Chief Executive Officer from 1985 to November 1997. A. Gosman served as the Chairman, Chief Executive Officer and Treasurer of Meditrust Operating Company from November 1997 until August 1998. A. Gosman was the Chief Executive Officer and Chairman of the Board of The Mediplex Group, Inc. ("Mediplex"), an operator and developer of health care facilities, from August 1990 until June 1994.
2. A. Gosman and certain members of the Company's senior management are the primary owners of Chancellor Senior Housing Group, Inc. and its affiliates ("Chancellor" or the "Chancellor Entities"). During the years ended December 31, 1998, 1997, and 1996, the Company reported revenue of $12.8 million, $4.8 million, and $0.3 million, respectively, for marketing and management services provided to various Chancellor Entities.
3. A. Gosman is the father of Andrew Gosman and Michael Gosman.
4. Defendant Andrew Gosman has served as a director of the Company since October 1996 and as Vice Chairman of the Board of Directors, a post he previously held from October 1996 to August 1997, since April 8, 1999. From August 1997 until April 8, 1999, he served as President of the Company. He served as Executive Vice President of the Company from October 1996 to August 1997. From January to October 1996, he served alternatively as President and Executive Vice President of a group of privately-owned corporations (the "CareMatrix Affiliates") that merged with and into the Company on October 4, 1996.
5. Defendant Robert Kaufman ("Kaufman") was, until April 15, 1999, when he resigned from the Company, Chief Executive Officer of the Company. Since his resignation, Kaufman provides consulting services to the Company as a principal of K&G Associates. Kaufman served as President of the Company from October 1996 to August 1997, and as President of the CareMatrix Affiliates from July 1996 to October 1996.
6. Defendant Frederick R. Leathers ("Leathers") has served as Chief Financial Officer of the Company since April 15, 1999. From June 1994, Leathers served as the Chief Financial Officer and Treasurer of PhyMatrix Corp. Leathers also served as Treasurer, Chief Financial Officer, and Principal Accounting Officer of Mediplex from October 1991 to June 1994.
7. Defendant Michael M. Gosman ("M. Gosman") has served as a director of the Company since October 1996, and as its Vice Chairman from August 1997 until April 8, 1999. M. Gosman currently serves as a principal of K&G Associates, a firm which provides consulting services to the Company. M. Gosman also served as Executive Vice President-Acquisition and Development of the Company from October 1996 until April 8, 1999. He was Executive Vice President-Assisted Living of the CareMatrix Affiliates from January to October 1996.
8. The individuals named in paragraphs 9-13 are collectively referred to as the "Individual Defendants".
9. The Individual Defendants, as officers and/or directors of the Company had a duty, because of the positions they held, to disseminate complete, accurate, and truthful information regarding the Company's business and operations. The Individual Defendants had a duty to correct promptly any public statements issued by CareMatrix that had become false and misleading.
10. The Individual Defendants participated in the drafting, preparation, and/or approval of the various public reports and 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/or executive and managerial positions with CareMatrix, each of the Individual Defendants had access to the adverse, non-public information about the Company's business practices, financial condition, and results of operations as particularized herein. The Individual Defendants knew or recklessly disregarded that these adverse facts rendered the positive representations made about the Company's financial condition and results of operations, issued or adopted by the CareMatrix, materially false and misleading.
11. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various SEC filings, press releases, and other public statements pertaining to the Company during the Class Period. Each Individual Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is primarily liable for the representations contained herein.
12. Because of their positions, their ability to exercise power and influence with respect to the Company's course of conduct, and their access to material inside information about CareMatrix, the Individual Defendants were, at the time of the wrongs alleged herein, controlling persons of CareMatrix within the meaning of Section 20(a) of the Exchange Act.
13. Because of their positions and access to material non-public information available to them but not the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then false and misleading. As a result, each of the Individual Defendants is responsible for the accuracy of CareMatrix's corporate releases detailed herein as "group-published" information and is responsible and liable for the representations contained therein.
14. Each of the defendants is liable as a primary violator in making false and misleading statements, and for participating in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of CareMatrix stock during the Class Period. All of the defendants had motives to pursue a fraudulent scheme in furtherance of their common goal, i.e., inflating the reported profits of CareMatrix and the trading price of CareMatrix stock by making false and misleading statements and concealing material adverse information. The fraudulent scheme and course of business was designed to and did: (i) deceive the investing public, including plaintiffs and other Class members; (ii) artificially inflate the price of CareMatrix stock during the Class Period; (iii) enable the Individual Defendants to profit from the increase in the Company's stock price to obtain both cash and stock incentive awards; (iv) keep the Company in compliance with its debt covenants; and (v) cause plaintiff and other members of the Class to purchase CareMatrix stock at inflated prices.

1. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class consisting of all persons or entities who purchased the common stock of CareMatrix between October 29, 1998 and October 7, 1999, inclusive. Excluded from the Class are the defendants named herein, members of each Individual Defendant's immediate family, any entity in which any defendant has a controlling interest, and the legal affiliates, representatives, heirs, controlling persons, successors, and predecessors in interest or assigns of any such excluded party.
2. During the Class Period there were more than 18 million shares of CareMatrix stock issued and outstanding. 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. Thousands of CareMatrix shares were traded publicly during the Class Period. Plaintiffs believe that there are hundreds, if not thousands, of Class members.
3. Plaintiff's claims are typical of the claims of the members of the Class and plaintiff and all members of the Class sustained damages as a result of defendants' wrongful conduct complained of herein.
4. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class action litigation. Plaintiff has no interests antagonistic to, or in conflict with, the Class that plaintiff seeks to represent.
5. 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 individual members of the Class may be relatively small, the expense and burden of individual litigation make it virtually impossible for Class members to redress the wrongs done to them. The likelihood of individual class members prosecuting separate claims is remote.
6. Plaintiff anticipates no unusual difficulties in the management of this action as a class action.
7. The questions of law and fact common to the members of the Class predominate over any questions affecting individual members of the Class. The questions of law and fact common to the Class include whether, among others:
1. the federal securities laws were violated by defendants' acts as alleged herein;
2. the Company's publicly disseminated releases and statements during the Class Period omitted and/or misrepresented material facts;
3. defendants participated in and pursued the fraudulent scheme or wrongful course of business complained of;
4. defendants acted willfully, with knowledge, or recklessly in omitting and/or misrepresenting material facts;
5. the market prices of CareMatrix common stock during the Class Period were artificially inflated due to the material nondisclosures and/or misrepresentations complained of herein; and
6. the members of the Class have sustained damages and, if so, what is the appropriate measure of damages.

1. With regard to the allegations arising under Section 10(b) and Rule 10b-5, plaintiff intends to rely on the fraud-on-the market doctrine, which assumes the existence of an efficient market for CareMatrix common stock. In that connection, brokers nationwide have immediate access to press releases and trading information about CareMatrix through computer and news wire systems. These systems display, within minutes of the release or transaction taking place, pertinent information and the most recent trades and prices.
2. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:
1. defendants made public misrepresentations and/or failed to disclose facts during the Class Period;
2. the omissions and misrepresentations of fact were material;
3. CareMatrix met the requirements for listing, and was listed on the New York Stock Exchange, an open, highly efficient, and automated market;
4. as a public company, CareMatrix filed periodic public reports with the SEC;
5. the Company's trading volume, during the Class Period, was substantial, thereby reflecting numerous trades each day;
6. the misrepresentations and/or omissions alleged herein would tend to induce a reasonable investor to misjudge the value of the Company's common stock;
7. plaintiff and the members of the Class purchased their common stock during the Class Period without knowledge of the omitted or misrepresented facts; and
8. CareMatrix was followed by various analysts employed by major brokerage firms that wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms and which were available to the public through various automated data retrieval services. Thus, each of these reports was publicly available and entered the public marketplace.
3. Based upon the foregoing, plaintiff and the members

of the Class are entitled to a presumption of reliance upon the integrity of the market for their Section 10(b) claim.

1. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. The statements alleged to be false and misleading herein all relate to then-existing facts and conditions. In addition, to the extent certain of the statements alleged to be false may be characterized as forward looking, they were not identified as "forward-looking statements" when made, there was no statement made with respect to any of those representations forming the basis of this Complaint that actual results "could differ materially from those projected," and there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor is intended to apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker had actual knowledge that the particular forward-looking statement was materially false or misleading, and/or the forward-looking statement was authorized and/or approved by an executive officer of CareMatrix who knew that those statements were false when made.

FACTUAL BACKGROUND

1. CareMatrix describes itself as a developer, manager, and operator of assisted living care facilities for the elderly. The Company's operations, revenues, growth, and earnings were inexorably intertwined with the Chancellor Entities. The Chancellor Entities, in conjunction with CareMatrix, purportedly developed the Company's assisted living development sites. CareMatrix and the Chancellor Entities were under common control - A. Gosman and his family.
2. Prior to and throughout the Class Period, CareMatrix reported that it was developing numerous assisted living sites with the Chancellor Entities. At the inception of a development project, CareMatrix's "in-house development staff" would identify potential markets, perform market studies, identify zoning issues, and determine the size and configuration of the facilities to construct. Thereafter, CareMatrix and Chancellor would enter into a development contract, which obligated Chancellor to finance, purchase, and construct the proposed facility and obligated CareMatrix to "coordinate" all aspects of each project, such as obtaining final permits and approvals and performing construction and capital budgeting for the project. CareMatrix accrued "development fees" from Chancellor for the services it purportedly performed under the development contracts.
3. As alleged herein, defendants artificially inflated and manipulated the Company's earnings through the improper recognition of development fees. Defendants implemented this scheme by improperly recognizing development fees immediately upon the execution of a development contract with Chancellor when, in fact, the likelihood that the project would be completed and CareMatrix would be paid the development fees was remote at best, if at all. Indeed, unbeknownst to investors, Chancellor's ability to adequately finance the development projects was materially impaired given the diminished market for assisted living developments. Thus, defendants knew, or recklessly disregarded, that the development fees CareMatrix recognized as income during the Class Period were, in all likelihood, uncollectible.
4. The revenues recognized from the related party "development fees" were material to the Company's earnings. During the Class Period, approximately 65% of the Company's earnings were derived solely from related party development fees:

Development

Fees

As A Per-

centage Of

Earnings Earnings

Develop- From From

ment Fees Operations Operations

Quarter ended 9/30/98 6,153,218 8,556,330 71.91%

Year Ended 12/31/98 21,721,231 30,706,668 70.74%

Quarter ended 3/31/99 5,949,218 11,801,130 50.41%

Quarter ended 6/30/99 7,668,338 12,004,896 63.88%

FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

1. On October 29, 1998 (the start of the Class Period), defendants caused the Company to issue a press release announcing its financial results for the period ending September 30, 1998.
1. For the quarter, the Company reported net income of $4,937,234, or $0.27 per share, on revenues of $39,604,947, compared to net income of $1,935,131, or $0.11 per share, on revenue of $20,818,581 for the same quarter of 1997.
2. Commenting on the Company's purportedly growing development pipeline, Kaufman stated:

During the first three quarters of 1998 the Company added 18 facilities with a resident capacity of 2,700 and currently operates 44 facilities with a resident capacity of over 5,300. In addition 22 facilities with a resident capacity of over 2,400 are expected to open in the next two quarters. Additionally, the Company's development pipeline consists of 84 facilities representing over 10,000 units including 32 in construction representing over 3,450 units. All of the facilities in construction are expected to open in the next twelve months. [Emphasis added.]

1. On the same day, analysts at Jeffries & Company, Inc. ("Jeffries & Co.") reiterated their "BUY" rating on CareMatrix common stock. In the research report, the analysts supported the rating and earnings estimates (earnings of $1.38 per share in 1999, and a 12-month stock price target of $39 per share) by incorporating defendants' guidance concerning the Company's development pipeline. In this regard, the report stated:

The Company continues to exceed street and internal expectations, which gives evidence of the continued strong demand for senior care services as well as management's ability to effectively execute its aggressive growth strategy. Moreover, [CareMatrix] has the cost and access to capital to continue its rapid growth plan of new developments and opportunistic acquisitions. We believe the shares of [CareMatrix] are significantly undervalued and should be purchased aggressively. [Emphasis added.]

1. On or about November 16, 1998, defendants caused CareMatrix to file its quarterly report on Form 10-Q for the period ending September 30, 1999 (the "Third Quarter 1998 10-Q"). Defendant Kaufman signed the Third Quarter 1998 10-Q. The Third Quarter 1998 10-Q confirmed the previously announced financial results. The Third Quarter 1998 10-Q represented that the Company recognized approximately $6.2 million in development fee revenues from related parties and that the receivable balance carried by the Company with respect to those fees had a net realizable value of $14.4 million at September 30, 1998.
2. In the "Notes To Consolidated Financial Statements," contained in the Third Quarter 1998 10-Q, defendants stated the following with respect to the Company's related party transactions with Chancellor and others:

As used, herein, a "Chancellor Entity" is Chancellor Senior Housing Group, Inc. (a company primarily owned by Abraham D. Gosman... and certain members of the Company's senior management) or a Company in which Mr. Gosman and certain members of the Company's senior management exercise significant control.

In January 1998, the Company purchased, for $0.8 million, a management agreement for a skilled nursing facility located in Florida from PhyMatrix, Corp. a publicly owned physician practice management company of which Mr. Gosman is Chairman of the Board and Chief Executive Officer and of which together with his two sons, beneficially owns approximately 24.6%.

In 1998, the Company has paid various Chancellor entities a total of $7.0 million for lease rights to three facilities...

During 1998, the Company also paid a Chancellor Entity $2.0 million for development and lease rights related to a senior living community in New York.

1. In the section of the Third Quarter 1998 10-Q entitled "Management's Discussion And Analysis Of Financial Condition And Results of Operations," defendants discussed the Company's primary sources of revenue, its polices for revenue recognition, and the Company's liquidity and capital resources. In pertinent part, defendants stated:

The Company derives its revenues from three primary sources: (i) resident fees fore the delivery of independent and assisted living and other long-term care services; (ii) management services income for the management of and marketing for facilities; and (iii) fee income from the development and construction of facilities; and (iii) fee income from the development and construction of facilities. Resident fees typically are paid monthly by residents, their families or other responsible parties. Resident fees and management fees are recognized as revenue when services are provided. Development fee revenue is recognized on a percentage of completion basis using the achievement of specific milestones in the development process. [Emphasis Added.]

The Company will require resources in the future to fund the planned acquisition and development of additional assisted living . . . facilities as well as its working capital requirements. The Company expects to partially fund these resource requirements with its cash on hand as well as related party and third party financing of assisted living facilities. The Company and certain related parties are currently in discussions with a number of third parties to secure commitments regarding sources of additional financing . . . . [Emphasis added.]

1. Following defendants announcement of the Company's financial results for the third quarter of 1998, and the highly positive "booster" reports issued and disseminated by investment analysts, the price of CareMatrix shares increased steadily, on active trading, reaching a Class Period high of $31.00 per share on November 23, 1998.
2. The statements concerning the Company's revenues and earnings and development pipeline, alleged above in paragraphs 36, and 38 through 40 were materially false or misleading when issued as defendants knowingly or recklessly misrepresented and/or omitted the following adverse facts, which then-existed and disclosure of which was necessary to make the statements made not false and/or misleading, including:
1. CareMatrix's revenues, earnings, and assets were materially overstated;
2. at least a majority of the related party development fees reported as income by the Company during the third quarter of 1998, were recognized in violation of generally accepted accounting principles (GAAP) because, among others things, their collection could not be reasonably assured;
3. the value of the Company's assets were materially overstated and included certain doubtful receivable balances from related parties, and also included certain assets purchased from related parties at inflated prices in violation of GAAP;
4. a majority of the Company's "development pipeline" was comprised of projects that defendants knew, or recklessly disregarded, would never be completed because of the Company's and/or Chancellor's inability to obtain the financing necessary to complete them;
5. the Company's "discussions" with third parties and others to obtain the financing necessary to complete the Company's development projects were, in part, dependent upon the current market value of CareMatrix common shares, which defendants had used and would continue to use as collateral to support the debt incurred by Chancellor in the purchase and construction of the various facilities projects; and
6. given the foregoing, defendants' estimates, projections and opinions as to the Company's operations, products, earnings and the value of CareMatrix common stock were knowingly lacking in reasonable basis at all relevant times.
3. On December 1, 1999, CareMatrix senior management provided guidance to analysts and investors about the Company's growth prospects and Chancellor's ability to finance the Company's development pipeline through "late 1999." The presentation was made at BancBoston Robertson Stephen's ("Robertson Stephens") Medical Conference. On that same day, analyst S.R. Skolnick of Robertson Stephens issued a research report that repeated the statements made by CareMatrix management at the Medical Conference:

At today's . . . [conference] management of [CareMatrix] provided new guidance on growth in facilities. Specifically, management indicated that new CMD facilities are opening at a run rate of 30 to 35 facilities per year in the U.S.

* * *

Chancellor ([CareMatrix]'s off-balance sheet real estate owner) has $360-400 million of financing committed which should finance projects through late 1999.

* * *

[CareMatrix] said that at the end of Q1:99, it expects to have 60 buildings with 7,000 units in operation versus 44 buildings and 5,300 units currently open. It also expects to continue to have 32 facilities in construction.

1. The statements referenced above in paragraph 43 were each materially false or misleading when issued for the reasons stated in paragraph 42 (d) and (e) above.
2. On February 4, 1999, analyst S.R. Skolnick of Robertson Stephens issued a research report stating that an impending GAO study on the assisted living industry would be negative. The GAO study was believed to be addressing industry pricing practices and other consumer protection issues. Robertson Stephens suspended its "STRONG BUY" rating of CareMatrix, along with other assisted living companies, pending release of the GAO study. Following the release of the Robertson Stephens report, the price of CareMatrix shares fell approximately 22%.
3. In an effort to mitigate the effect of the Robertson Stephens report, defendants caused the Company to issue a press release on February 16, 1999, announcing "record" revenues and earnings for the quarter and fiscal year ending December 31, 1998. For the fourth quarter of 1998, the Company reported net income of $5,605,982, or $0.30 per share, on revenue of $43,501,182, compared to net income of $2,598,292, or $0.15 per share, on revenue of $24,352,510 for the same quarter of 1997. Commenting on the reported financial results, A. Gosman stated, in pertinent part:

We doubled our revenues and nearly tripled our income as compared to 1997. During the past three months we added 11 facilities for 1,360 residents .... We currently operate 52 facilities with a resident capacity of over 6,500 compared to 26 facilities for 2,700 residents a year ago. Additionally we expect to complete construction on ten facilities for 1,050 residents in the next three months. Included in these openings are 6 facilities in the metropolitan New York market, our deepest cluster.

* * *

Our development pipeline remains strong, representing 80 facilities for over 11,000 residents in 18 states. [Emphasis added.]

1. On February 16, 1999, Robertson Stephens issued another research report authored by S.R. Skolnick. Robertson Stephens continued its suspended rating while awaiting the final GAO report, but maintained its 1999 EPS estimate of $1.40. The report stated:

Financing and construction plans roll forward with strong momentum, in our view, as the [C]ompany's real estate related party has received term sheets for $300 mm in construction financing. With other low coupon capital available to it, the [C]ompany could finance its growth through mid-2000. We expect CMD to start building 3,000 units in Q1 in its cluster markets.

* * *

[T]he [C]ompany has turned in yet another record quarter of revenue and earnings, with more of the results coming from assisted living operations than from development of management fee than in any prior quarter. Revenue of $43.5 mm included $6.4 mm of development fees, consistent with prior quarters. (Recall that as long as the [C]ompany continues to start construction of about 3,000 units, development fees will continue to track at about $6.2 - $6.4 mm per quarter. Development receivables will also consistently track at about $15mm on the balance sheet.) Thus, we expect the [C]ompany to show about $0.25 per share per year of earnings from development and management activities. Thus, earnings quality is likely to continue to improve in 1999, in our view. [Emphasis added.]

1. On February 17, 1999, defendants caused CareMatrix to issue a press release announcing a one million share repurchase program. Defendants represented that CareMatrix common stock was "undervalued." In pertinent part, defendants stated:

We consider the shares of CareMatrix undervalued at current levels and this action reiterates our confidence in the future growth prospects of the Company, especially in light of the strong 1998 results announced yesterday. The Company announced that it had doubled revenues and nearly tripled earnings in 1998 as compared to 1997. [Emphasis added.]

1. Defendants' spin control succeeded. In the three trading days following the Company's earnings announcement and guidance to analysts, the price of CareMatrix stock rose to as high as $20.9375 per share from the $15.875 per share closing price on February 16, 1999.
2. The statements concerning the Company's financial results and development pipeline referenced above in paragraphs 46 through 48 were each materially false or misleading when issued for the reasons stated in paragraph 42 above. Additionally, these statements were materially false and misleading because:
1. the Company's development pipeline was not "strong" as the Company and Chancellor were unable to secure the necessary financing for the projects and, therefore, the Company's ability to develop the projects was remote and attenuated; and
2. given defendants' knowledge of the true state of affairs of the Company, defendants lacked a reasonable basis for their statement that CareMatrix common stock was "undervalued."
3. On March 29, 1999, defendants caused the Company to file with the SEC its annual report on Form 10-K for the year ended December 31, 1998 (the "1998 10-K"). The 1998 10-K, which was signed by defendants Kaufman, A. Gosman, Andrew D. Gosman, and M. Gosman, among others, confirmed the Company's previously announced financial results.
4. In the 1998 10-K, defendants described the Company's facility development activities as follows:

The Company currently plans to develop approximately 25 facilities a year with a total capacity of over 8,000 residents over the next three years.

The Company's in-house market research and development staff has the ability to target potential markets, perform the appropriate market studies, identify zoning issues and determine the appropriate size and configuration of facilities to develop and/or acquire. With respect to properties that it intends to develop it will coordinate all aspects of each project, including obtaining the final permits and approvals, design, construction and capital budgeting.

Facilities will be developed primarily in conjunction with: (i) related party entities, (ii) joint ventures in which related parties have some level of ownership and (iii) third parties. It is anticipated that a majority of the facilities developed in the next three to four years may be for related party entities owned primarily by Abraham D. Gosman, members of his immediate family and other members of the Company's senior management. The Company expects that it will only enter into agreements with entities that it believes have demonstrated the capabilities to obtain the financing necessary to construct and own the facilities.

Generally, the Company has entered into development agreements whereby construction financing is obtained by the related or third parties. The Company expects the risks related to construction and the initial operation of the facilities its develops will be borne primarily by related or third parties. The Company enters into management agreements with these parties either at the time of property acquisition or upon completion of the construction of such facilities or upon acquisition of completed facilities.

The Company also generally has an option to convert such management agreements into fair market value leases (which will be a negotiated percentage of total project costs) for fifteen year initial term with two to four five-year fair market value renewal options.

1. In the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," defendants discussed the Company's sources of revenue:

The Company derives its revenues from three primary sources: (i) resident fees from the delivery of independent and assisted living and other long-term care services; (ii) management services income for the management of and marketing for facilities; and (iii) fee income from the development and construction of facilities; and (iii) fee income from the development and construction of facilities. Resident fees typically are paid monthly by residents, their families or other responsible parties. Resident fees and management fees are recognized as revenue when services are provided. Development fee revenue is recognized on a percentage of completion basis using the achievement of specific milestones in the development process.

1. Under the caption, "Liquidity and Capital Resources," defendants discussed the expected source of financing for the Company's acquisitions and development of facilities:

The Company will require resources in the future to fund the planned acquisition and development of additional assisted living, independent and supportive independent and extended care facilities as well as its working capital requirements and common stock repurchases. The Company expects to partially fund these resource requirements with its cash on hand, borrowing under a $35.0 million line of credit (of which ($14.1 million was unused at December 31, 1998) as well as related party or third party financing of facilities to be developed. Furthermore, the Company intends to seek bank borrowing and other debt or equity financing to provide additional sources of capital in the future. The Company is in the process of refinancing some of the debt assumed in the SeniorCare acquisition and hopes to raise approximately $20.0 million through these refinancings.

1. The "Notes To Consolidated Financial Statements" contained in the 1998 10-K stated the following with respect to the Company's recognition of development fee revenues:

Development fee revenues are recognized on a percentage of completion basis using the achievement of specific milestones in the development process. The Company enters into development agreements with both related and unrelated parties and the time required for fulfillment of obligations under these agreements normally exceeds one year.

1. Defendants also discussed the various transactions entered into with related parties in the 1998 10-K during the reporting period:

As used herein, a "Chancellor Entity" is Chancellor Senior Housing Group, Inc. (a company primarily owned by Abraham D. Gosman, Chairman of the Board of the Company, and certain member's of the Company's senior management exercise significant control.

* * *

During the years ended December 31, 1998, 1997, and 1996, the Company recognized revenue of $12.8 million, $4.8 million, and $0.3 million, respectively for marketing and management services provided to various Chancellor entities.

At December 31, 1998 and 1997, $15.8 million and $8.2 million, respectively, of development fees earned from projects contracted with Chancellor Entities or joint ventures within which Chancellor Entities have certain interests were recorded as a receivable. The balance of the related party receivable relates to amounts due from Chancellor for management fees and various facility receivables.

1. During 1998, the Company recognized $34.6 million in revenues from various Chancellor entities related to development, marketing, and management fees. At December 31, 1998, only $12.8 million, or less than 38% of these fees reportedly had been paid to the Company, which resulted in a $21.7 million receivable as reported in the 1998 10-K. Defendants knew, or recklessly disregarded, that the collection of these remaining fees was remote, at best. Defendants, however, continued to accrue these fees and failed to record any provisions against earnings for reserves or allowances for any uncollectible amounts.
2. On April 6, 1999, CareMatrix announced that it had opened nineteen facilities with a capacity for 2,142 residents within the past six months. Defendant A. Gosman commented on the Company's purported "aggressive" growth stating:

These openings are the results of our aggressive construction and development pipeline. Currently, we have approximately 80 projects with 9,200 units at different stages, either in development or construction.

1. The statements referenced above in paragraphs 51 through 58 were each materially false or misleading when issued for the reasons stated in paragraph 42 above. In addition, defendants knew or recklessly disregarded that these statements were materially false or misleading when issued as they misrepresented and/or omitted the following adverse facts, which then-existed and disclosure of which was necessary to make the statements made not false and/or misleading, including:
1. at least a majority of the Company's "development pipeline" was comprised of projects that defendants knew would never be completed due to the Company's and/or Chancellor's inability to obtain the financing necessary to complete them; and
2. the Company's and Chancellor's ability to obtain the financing necessary to complete the Company's development projects were in part dependent upon the current market value of CareMatrix common shares, which defendants had used and would continue to use as collateral to support the debt incurred by Chancellor in the purchase and construction of the various facilities projects.
2. On April 7, 1999, based upon defendants' guidance concerning the Company's current and future earnings and growth prospects, PaineWebber Inc. initiated coverage of CareMatrix with a "Buy" rating.
3. On April 9, 1999, CareMatrix issued a press release announcing a "major reorganization" of the Company's senior management structure as the Company purportedly transitioned from a "development/management" company to an operating company. A result of the reorganization was to place within CareMatrix a chief financial officer who had previously been employed with several privately-held Gosman healthcare facilities. The press release stated:

[CareMatrix] today announced senior management changes as it continues with its growth and expansion. Abraham D. Gosman will take on the role of Chief Executive Officer. Additionally, Frederick Leathers, currently Chief Financial Officer for PhyMatrix and formerly Chief Financial Officer of Mediplex Group, Inc. will become Chief Financial Officer for CareMatrix.... The Company which operates facilities with a resident capacity of over 7,300 expects to have a resident capacity in excess of 10,000 within the next year.

The Company's current Chief Executive Officer Robert Kaufman, along with Michael Gosman, will now serve the Company through a newly created consulting firm. They will specialize in the areas of mergers and acquisition, financing and other expansion opportunities for CareMatrix. [Emphasis added.]

1. On May 4, 1999, defendants caused the Company to announce its financial results for the quarter ended March 31, 1999. For the first quarter of 1999, the Company reported net earnings of $5,895,841 or $0.32 per share, on revenues of $50,717,834, compared to net earnings of $3,365,190, or $0.19 per share, on revenues of $29,645,703 for the three month period ended March 31, 1998. Commenting on the reported results, defendant A. Gosman stated:

These results were due to strong occupancy levels at our stabilized facilities and increased operating margins on existing facilities, as well as the strength of our development pipeline.

The past few months have been very significant for the Company. We continue to grow through internal development as we fill in our existing market clusters. Currently, we have a development pipeline of 71 facilities, representing over 11,000 units. This includes 22 facilities with 2,400 units currently in construction. Our de novo growth along with our intention to capitalize on acquisition opportunities should reinforce our position as one of the leaders of the industry. [Emphasis added.]

1. On May 6, 1999, defendant A. Gosman appeared in an interview on Cable News Network, CNNFN. During the interview, Gosman highlighted the Company's historical earnings trends and CareMatrix's prospects for meeting analyst consensus estimates for 1999 earnings. Also during the interview, defendant A. Gosman continued to conceal and misrepresent the true financial condition of CareMatrix:

CNNFN: We're joined by Abraham Gosman, chairman and CEO of CareMatrix, whose earnings, Abe, are very good. We should point that out because I think maybe you got included and got painted with a broad brush in some of those analyst reactions to the alternative living story that came out.

Gosman: We certainly did yesterday. We announced earnings the day before. Our earnings were up 68% quarter to quarter.

CNNFN: You beat the street by a penny here according [to] the graph.

Gosman: That's the tenth consecutive quarter that we've either met or exceeded earnings since our inception.

* * *

CNNFN: We have a chart of CareMatrix and we'll put it up there as we wind down the interview and take a look going of course to last sure [sic] [1998] when the entire world, shareholders all took a hit, but the stock rebounded nicely and then took another drop-off shortly after what? January? February for this year [1999]? What would be the reason for that decline that we [see] there, do you know?

Gosman: That would be the GAO Report.

CNNFN: That was the GAO report and the stock has rebounded since. You said you met or beat expectations 10 [quarters in] a row. Your outlook going forward [and] what shareholders can expect from CareMatrix.

Gosman: We're looking to meet street estimates [for 1999]. There's a wide range, the range is $1.30 to $1.36 for the year. Some estimates are a little higher than that, but we expect to be in the middle of that range.

CNNFN: So there's no large disappointment in terms of shareholders that you see on the horizon. Thanks for talking with us, Abe Gosman, chairman and CEO of CareMatrix.

1. On or about May 14, 1999, defendants caused the Company to file with the SEC its quarterly report on Form 10-Q for the period ended March 31, 1999 (the "First Quarter 1999 10-Q"). The First Quarter 1999 10-Q, which was signed by defendant A. Gosman, confirmed the previously announced financial results. The Notes To Consolidated Financial Statements contained in the First Quarter 10-Q stated the following with respect to related party transactions purportedly completed during the first quarter of 1999:

During the quarter ended March 31, 1999, the Company recognized revenue of $5.1 million for marketing and management services provided to various Chancellor Entities compares to $12.8 million for the year ended December 31, 1998.

During the quarter ended March 31, 1999, the Company paid a Chancellor Entity $2.0 million for development and management rights related to a senior community in New Jersey. The development rights are being amortized as the related fees are earned.

During the quarter ended March 31, 1999, the Company paid various Chancellor Entities and partnerships $9.0 million related to prepaid rent for seven facilities. The prepaid rent is being amortized over the terms of the related leases.

The Company purchased two parcels of land from certain Chancellor Entities for approximately $1.0 million.

1. On May 23, 1999, defendant A. Gosman stated that CareMatrix had increased its financing capabilities by $110 million to a total of over $330 million. The comments were made during an appearance on a CNBC/Dow Jones broadcast.
2. The statements referenced above in paragraphs 61 through 65 were materially false or misleading when issued for the reasons stated in paragraph 42 above. In addition, the statements were materially false or misleading when issued as they misrepresented and/or omitted the following adverse facts, which then-existed and disclosure of which was necessary to make the statements made not false and/or misleading, including: the primary reason that the Company had been able to beat analysts' earnings estimates was that the Company was improperly recognizing development fees.
3. On August 10, 1999, defendants caused the Company to issue a press release announcing its financial results for the quarter ending June 30, 1999. For the second quarter of 1999, the Company reported a 52% increase in net earnings to $6.3 million, or $0.34 per share, from $4.2 million, or $0.23 per share for the same quarter in 1998. The Company also reported that its revenues increased 56.8% to $53.6 million from $34.2 million for the same period last year. The press release stated in pertinent part:

CareMatrix operates 61 communities in 18 states with 7,400 units, which compares to 34 facilities in operation with 3,839 units for the second quarter of 1998. The Company currently has 18 properties under construction with 2,062 units, and continues to maintain a pipeline of properties at different stages of development.

1. On or about August 14, 1999, defendants caused the Company to file with the SEC its quarterly report on Form 10-Q for the quarter ended June 30, 1999 (the "Second Quarter 1999 10-Q"). The Second Quarter 1999 10-Q, which was signed by defendant A. Gosman, confirmed the Company's previously announced financial results. In the Second Quarter 1999 10-Q, defendants reported that the Company had recognized over $13.4 million of fee revenues from the Chancellor Entities, among others. The Notes To Consolidated Financial Statements described the Company's relationship with Chancellor, as follows:

The Company has entered into management and marketing agreements with Chancellor Entities which provide for fees to be earned by the Company during the fill-up and upon the initial move-in of residents into the new facilities up to the maximum occupancy of a facility and for fees based upon the revenues of a facility. For the six months ended June 30, 1999, the Company recognized revenues of $11.7 million for marketing and management services provided to various Chancellor Entities under the terms of these agreements compared to revenue of $12.8 million for the year ended December 31, 1998.

During the quarter ended June 30, 1999, the Company paid a Chancellor Entity $4.2 million to purchase, at estimated fair market value, an interest in a limited partnership. The investment is being accounted for under the equity method of accounting, accordingly the Company has recorded its share of the income earned on the investment in other income. The Chancellor Entity has guaranteed the value of the investment at $4.2 million.

During 1999, the Company paid certain Chancellor Entities $4.0 million for the right to receive the Chancellor Entity's share of cash flow for two facilities which are owned 50% by a Chancellor Entity and 50% by third parties. The rights are being amortized over the terms of the related agreement. In addition, the Company, paid various Chancellor Entities $8.3 million related to lease rights and deposits for five facilities. These lease rights are being amortized over the terms of the related leases.

During the quarter ended March 31, 1999, the Company paid a Chancellor Entity $2.0 million for development and management rights related to a senior community in New Jersey. The development rights are being amortized as the related fees are earned.

During 1999, the Company purchased, at cost, three parcels of land form certain Chancellor Entities for approximately $4.5 million.

1. In the section entitled "Management's Discussion And Analysis Of Financial Condition And Results Of Operations," defendants described the Company's Liquidity and Capital Resources, as follows:

The Company will require resources in the future to fund the planned acquisition and development of additional assisted living, independent and supportive independent and extended care facilities as well as its working capital requirements and common stock repurchases. The Company expects to partially fund these resource requirements with its cash on hand, borrowing... as well as related party or third party financing of facilities to be developed . . . .

* * *

Although Chancellor continues to seek additional sources of capital to finance its development pipeline, there can be no assurance that it will be successful in doing so. If Chancellor cannot obtain adequate capital or reduces the number and/or size of the projects in its development pipeline, then the Company's development fee revenue will decline. Currently, the Company expects that its development fee income will decline in the third and fourth quarters of 1999. If this were to occur, the Company is prepared to reduce its general administrative costs as appropriate, although there can be no assurance that any such reduction in expenses would offset potential lost revenue.

1. The statements referenced above in paragraphs 67 through 69 were each materially false or misleading when issued for the reasons stated in paragraph 42 above. In addition, the statements were materially false or misleading when issued as they misrepresented and/or omitted the following adverse facts, which then-existed and disclosure of which was necessary to make the statements made not false and/or misleading, including: the Company and CareMatrix were canceling projects that the Company had already recognized development fees from due to financing difficulties. For example, the Company cancelled the $25 million "Chancellor Gardens" facility that was under construction in Merrillville, Indiana.

1. On September 7, 1999, analysts at Jeffries & Co. issued a report by analyst P.L. Martin, which stated that it was downgrading its investment rating of CareMatrix from "BUY" to "HOLD." The report also stated that due to the "dramatic reduction in development projects associated with Chancellor" 1999 EPS estimates for CareMatrix's were being reduced to $1.12 per share. Martin cited sources that confirmed the potential sale of CareMatrix facilities and development sites. In relevant part, the report stated:

Our due diligence confirms the listing of several CMDC facilities and sites for potential sale. Most of the identified sites and/or facilities are outside of the [C]ompany's core markets or have not been deemed priority developments. Secondly, layoffs in the development, acquisition and design departments as well as administrative staff have occurred, which should result in a severance expense for the quarter.

1. The report also highlighted the Company's exposure to a "large potential liability" for Chancellor Entities receivables:

Upon review of the 2Q 1999 10-Q the line item Accounts receivable-related party jumped nearly $10 million to $31.5 million. These receivables relate to development, marketing and management fees owned to CareMatrix by Chancellor Senior Housing Group. We believe these receivables would have increased even further if it had not been for several related party transactions, which generated approximately $23 million in cash for Chancellor Entities.... Our worries rest upon the ability of Chancellor Senior Housing to fund its receivables. If a sale of the Chancellor entity were not to occur in a timely manner, we believe the likelihood of a write-off of this receivable increases. A complete recovery of these receivables, in our opinion, is dependent on a sale of assets within the Chancellor Entity. [Emphasis added.]

1. On October 7, 1999, CareMatrix shocked the market by announcing that it expected income for the third quarter of 1999 and 1999 fiscal year to fall below analysts' consensus estimates. The Company stated that it expected to report, in early November, third quarter income per share of $0.04 to $0.06 and $0.75 to $0.80 for the full year, "which does not take into consideration the potential write-off of any of the Company's assets, which is currently being evaluated." The Company attributed the shortfall to two primary factors:

[T]his shortfall is due to the difficulty in sustaining the development pipeline as a result of a lack of attractive financing. The Company derives a substantial portion of its revenue from this development pipeline. In addition, the Company has realized slower than expected fill-ups in certain of its non-stabilized facilities, and as a result it has taken longer than expected to convert management agreements to leases.

1. The astounding reduction in development fee revenues is underscored by the fact that the Company now expected to report a $6.8 million to $7.3 million shortfall in development fee income. The press release stated in this regard:

Development income in the third quarter is expected to be approximately $500,000 to $1,000,000 compared to $7,800,000 in the second quarter of this year. The Company expects this slowdown in development activity to continue, unless either a potential suitor desires to accelerate the development process or the Company's independent development resources can obtain attractive sources of financing.

1. Commenting on the Company's cutbacks in development and the inability to obtain the necessary financing, defendant A. Gosman stated:

We have been affected by the financing issues that have impacted the entire senior housing industry and have not been able to complete several financing that, until recently, we had anticipated to close . . . As a result we have cut back our development plans from 3,000 new units a year to 1,000 to 1,500 units. Currently, we have 17 facilities representing 1,900 units either under construction or fully permitted. To the extent that attractive financing can be secured, construction on the permitted sites will begin. Otherwise, those sites may be sold.

1. Market reaction to the Company's announcement was swift and punitive. On October 8, 1999, CareMatrix shares fell as much as 41% to close at $3.5625 per share on trading volume of more than 1.7 million shares, more than five times the three month daily average.

UNDISCLOSED ADVERSE INFORMATION

1. During the Class Period, defendants materially misled the investing public, thereby inflating the price of CareMatrix common stock, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business, and operations, including, inter alia, that:
1. CareMatrix's revenues, earnings, and assets were materially overstated;
2. at least a majority of the related party development fees reported as income by the Company during the third quarter of 1998 were recognized in violation of GAAP because, among others things, their collection could not be reasonably assured;
3. the value of the Company's assets at all relevant times were materially overstated and included certain doubtful receivable balances from related parties and also included certain assets purchased from related parties at inflated prices in violation of GAAP;
4. a majority of the Company's "development pipeline" was in fact comprised of projects that defendants knew, or recklessly disregarded, would never be completed due to the Company's and/or Chancellor's inability to obtain the financing necessary to complete them;
5. the Company's "discussions" with third parties and others to obtain the financing necessary to complete the Company's development projects were, in part, dependent upon the current market value of CareMatrix common shares, which defendants had used and would continue to use as collateral to support the debt incurred by Chancellor in the purchase and construction of the various facilities;
6. the Company's development pipeline was not "strong" as the Company and Chancellor were unable to obtain the necessary financing for the projects and, therefore, the Company's ability to develop the projects was remote and attenuated;
7. given defendants' knowledge of the true state of affairs of the Company, defendants' lacked a reasonable basis for their statement that CareMatrix common stock was "undervalued";
8. the primary reason that the Company had been able to beat analysts' earnings estimates was that the Company was improperly recognizing development fees;
9. the Company was canceling projects that they had already recognized development fees from due to financing difficulties, such as the $25 million "Chancellor Gardens" facility that was under construction in Merrillville, Indiana; and
10. given the foregoing, defendants' statements about the Company's operations, products, earnings, and the value of its common stock were knowingly lacking in reasonable basis at all relevant times.
2. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused the damages sustained by plaintiff and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about CareMatrix's business, financial condition, and results of operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of CareMatrix and its business, prospects, and operations, thus causing the Company's common stock to be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in plaintiff and other members of the Class purchasing the Company's common stock at artificially inflated prices, thus causing the damages complained of herein.

1. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements, issued or disseminated by or 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 participated 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 CareMatrix and its business practices, their control over and/or receipt of CareMatrix's allegedly materially misleading misstatements and/or their associations with the Company, which made them privy to confidential proprietary information concerning CareMatrix, were active and culpable participants in the fraudulent scheme alleged 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. The ongoing fraudulent scheme described in this Complaint could not have been perpetrated over a substantial period of time, as has occurred, without the knowledge and complicity of the personnel at the highest level of the Company, including the Individual Defendants.
2. The Individual Defendants engaged in such a scheme to inflate the price of CareMatrix common stock in order to: (i) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; and (ii) enhance the value of their personal holdings of CareMatrix common stock.

Enhancement of Executive Compensation and Stock Ownership

1. The Individual Defendants had the motive to commit and participate in the wrongful conduct complained of herein. On June 21, 1999, the Company filed with the SEC a proxy statement on Schedule 14A (the "Proxy Statement"). As set forth in the Proxy Statement, CareMatrix's executive compensation consists of base salary, annual incentive (i.e. bonuses), and long-term incentives, including shares of several performance-based stock award plans, including options to purchase CareMatrix stock. As the Compensation Committee Report contained in the Proxy Statement stated:

The Committee's objective is to have a significant portion of each executive's compensation package contingent on the Company's operational and, ultimately, financial success.

1. For the year ended December 31, 1998, defendant Kaufman received performance stock options representing 60,000 shares of the Company's stock. In July 1998, at the time he was Chief Executive Officer, defendant Kaufman received a $50,000 cash bonus "in recognition of his contributions to the continued growth of the Company."
2. In addition, as of April 26, 1999, certain of the Individual Defendants beneficially owned substantial shares of the common stock of the Company:

Defendant Shares Owned Percentage

A. Gosman 7,544,314 41.6

Andrew D. Gosman 1,528,329 8.5

Michael M. Gosman 1,527,309 8.5

Robert M. Kaufman 336,826 1.9

1. Thus, the Individual Defendants were highly motivated to inflate the value of the Company's common stock because a substantial and material portion of their compensation and individual wealth was derived from the value of the Company's stock and would continued to be under the CareMatrix incentive compensation programs and stock ownership.

Compliance With Debt Covenants

1. The Company reported the following in Note 9(d) to the financial statements filed in the 1998 Form 10-K::

In September 1998, the Company entered into an agreement with several banks for a $35.0 million line of credit (the "Line"). The Line will be used to fund ongoing working capital, acquisitions, letters of credit and general corporate purposes. . . . The Line matures in September 2001 and is collateralized, in part, by certain of the Company's accounts receivable. In addition, $3.9 million of the Line is restricted to be used to fund an existing Letter of Credit. The agreement contains, among other restrictions, provisions limiting the issuance of additional debt, the amount and type of investments and the payment of dividends, and the maintenance of specified financial ratios. [Emphasis added.]

1. At December 31, 1998, the Company had drawn down $20.9 million of the Line and reported $47.0 million in accounts receivable, of which $21.7 million was related party receivables.
2. Thus, defendants were highly motivated to inflate the value of the accounts receivable, as without the related party receivables, the Company would not be able to further access its line of credit.

1. Plaintiff repeats and realleges the allegations set forth above as though fully set forth herein. This claim is asserted against all defendants.
2. During the Class Period, defendants carried out a plan, scheme, and course of conduct that 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 maintain the market price of CareMatrix common stock; and (iii) cause plaintiff and other members of the Class to purchase CareMatrix stock at artificially inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct, defendants took the actions set forth herein.
3. 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 common stock in an effort to maintain artificially high market prices for CareMatrix common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5. These defendants are sued as primary participants in the wrongful conduct charged herein. The Individual Defendants are also sued herein as controlling persons of CareMatrix, as alleged below.
4. 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, they each 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 Regulation 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 operations, financial condition and performance so that the market prices of the Company's publicly traded securities would be based on truthful, complete and accurate information.
5. CareMatrix 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 conceal adverse material information about the business, business practices, performance, and operations of CareMatrix as specified herein. These 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 CareMatrix's value and performance and 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 necessary in order to make the statements made about CareMatrix and its business, financial condition, and results of operations 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 CareMatrix securities during the Class Period.
6. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) each of the Individual Defendants was a high-level executive and/or director at the Company during the Class Period; (ii) each of the Individual Defendants, by virtue of his responsibilities and activities as a senior executive officer and/or director of the Company, was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections, and/or reports; (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.
7. 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 readily available to them. Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing CareMatrix's operating condition, business practices, and results of operations from the investing public and supporting the artificially inflated price of its stock. As demonstrated by their overstatements and misstatements of the Company's financial condition and performance throughout the Class Period, the Individual 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.
8. 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 CareMatrix's common stock was artificially inflated during the Class Period. In ignorance of the fact that the market price of CareMatrix's shares was artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, 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 purchased and/or acquired CareMatrix common stock during the Class Period at artificially inflated high prices and were damaged thereby.
9. At the time of said misrepresentations and omissions, plaintiff 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 performance, business practices, future prospects and intrinsic value of CareMatrix, which were not disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their CareMatrix securities 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.
10. By virtue of the foregoing, CareMatrix and the Individual Defendants each violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
11. As a direct and proximate result of defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.

1. Plaintiff repeats and realleges the allegations set forth above as if set forth fully herein. This claim is asserted against the Individual Defendants.
2. The Individual Defendants were and acted as controlling persons of CareMatrix within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions with the Company, participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's actual 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 which plaintiff contends are false and misleading. Each of the Individual Defendants was provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiff to be 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.
3. In addition, each of the Individual Defendants had direct involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.
4. As set forth above, the Individual Defendants each violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. 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, on his own behalf and on behalf of the Class, prays for judgment as follows:

1. declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;

2. awarding plaintiff and the other members of the Class damages in an amount that may be proven at trial, together with interest thereon;

3. awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as their reasonable attorneys' and experts' witness fees and other costs; and

4. such other relief as this Court deems appropriate.

Plaintiff demands a trial by jury.

DATED: November 5, 1999

BERMAN DEVALARIO & PEASE LLP

By: Norman Berman, BBO #040460

Jennifer L. Finger, BBO #641830

One Liberty Square

Boston, Mass. 02109

(617) 542-8300

-and-

WOLF HALDENSTEIN ADLER FREEMAN

& HERZ

Fred Taylor Isquith

270 Madison Avenue

New York, NY 10016

(212) 545-4600