According to National Home Health Care Corporation’s FORM 10-K for the fiscal year ended July 31, 2001, in February 2001, the Court dismissed the Consolidated Amended Complaint and granted plaintiffs leave to amend. The plaintiffs' Second Consolidated Amended Complaint (the "Complaint") purported to assert claims under sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, as amended, based upon alleged acts or omissions of the defendants that allegedly resulted in misrepresentations or omissions of material information concerning the financial condition of SunStar (and its subsidiary SunStar Health Plan, Inc., a Florida HMO presently in receivership ("Plan")). The Complaint also alleged that the Company (which allegedly held 30.5% of SunStar's common stock during SunStar's fiscal year ended July 31, 1998 and reduced its holdings to approximately 25% in 1999) and the director defendants exercised control over SunStar and therefore are liable as "controlling persons" of SunStar. In October 2001, the Court granted the defendants' motion to dismiss the Complaint with prejudice.
The original Complaint charges Sunstar's senior management and certain controlling persons of Sunstar with violations of the Securities Exchange Act of 1934 by issuing a series of materially false and misleading statements during the Class Period concerning the Company's publicly reported revenue, its claim paying practices, enrollment figures, and its failure to take adequate reserves to pay foreseeable healthcare claims. As a result of defendants false and misleading statements, the price of Sunstar's securities were artificially inflated during the Class Period. The market learned of Sunstar's improprieties on December 14, 1999 when the Company disclosed that the Florida Department of Insurance ("DOI") commenced an action alleging significant deficiencies in Sunstar's financial condition and its statutory capital. According to the DOI action, Sunstar's capital reserves were reportedly inadequate in an amount exceeding $9 million and the Company was allegedly engaged in other inappropriate activities, including the intentionally slow payment of claims. The market reaction to the news was disastrous. The price of Sunstar lost nearly 45% of its value.
NOTE: Sunstar Healthcare, Inc., is not a party herein because the State of Florida Department of Insurance filed a Verified Petition For Order to Show Cause, Injunction and Notice of Automatic Stay prohibiting the commencement of any action against Sunstar Health Plan Inc., a wholly owned subsidiary of Sunstar Healthcare Inc., or its affiliates.