According to the press release dated November 5, 2006, an institutional investor failed to plead with the required specificity that an Atlanta-based health information company and its officers fraudulently misstated the company's revenues by engaging in "channel stuffing" and other improprieties, the U.S. Court of Appeals for the Eleventh Circuit affirmed Oct. 12 (Garfield v. NDC Health Corp., 11th Cir., No. 05-14765, 10/12/06). Among other conclusions, the court said the Sarbanes-Oxley Act certifications signed by the defendant officers attesting to the validity of the allegedly flawed financial statements are not indicia of the officers' scienter, or culpable intent. The accounting reform law was not intended to change the requirements for pleading scienter under the 1995 Private Securities Litigation Reform Act, the appeals court stated. Channel stuffing, which is not necessarily fraudulent, is a practice in which a company floods distribution channels by using incentives to induce customers to buy its products in large quantities, creating a short-term bump in revenue, the court explained. It added, however, that while legitimate reasons may exist for attempting to achieve earlier sales via channel stuffing, seeking to create a misleading impression of the entity's financial health is not among them. During the course of the litigation, NDC restated its financial results, indicating that its "prior financial reporting may not have been accurate and may not have reflected the performance of the company," the court noted. … Affirming, the appeals court first concluded that by appealing the dismissal, rather than seeking leave to amend, DeKalb waived its right further to amend its complaint.
On August 26, 2005, the plaintiffs filed a notice of appeal as to the July 27, 2005 Order granting the motions to dismiss the Second Amended Complaint. The appeal is currently pending in the 11th Circuit Court of Appeals.
In a press release dated July 28, 2005, NDCHealth Corporation announced that the United States District Court for the Northern District of Georgia granted the company's Motion to Dismiss the securities class-action complaint naming NDCHealth Corporation and certain of its officers and advisors as defendants. NDCHealth's motion to dismiss the second amended complaint was filed on October 13, 2004, and that motion was granted yesterday by order of the Honorable William S. Duffey Jr., United States District Court Judge for the Northern District of Georgia.
The original complaint charges defendants with violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Throughout the Class Period, defendants issued quarter after quarter of strong financial results. Defendants failed to disclose that these stellar financial results were only made possible through improper revenue recognition practices in violation of Generally Accepted Accounting Principles ('GAAP'). On April 1, 2004, before the market opened, defendants shocked the market by announcing that NDC would delay it will delay the release of its fiscal third-quarter financial results as it 'reviews some aspects of how it records revenue.' The Company said the review relates to the timing of sales recognition in its value-added reseller channel in NDC's physician business unit. In response to the news concerning NDC's previously undisclosed accounting issues, the price of NDC stock dropped nearly 20% to close at $22.70 on unusually large trading volumes of nearly 4.8 million shares traded - - far greater than NDC's average daily trading volume of about 298,000 shares.