According to a press release dated April 24, 2007, Hanger Orthopedic Group, Inc. confirmed today that on March 16, 2007, the United States District Court for the District of Maryland Southern Division granted Hanger's motion to dismiss with prejudice the consolidated class action complaints previously brought against it and certain of its directors and officers, and that the thirty-day period permitted for an appeal or motion for reconsideration had passed without the filing of any appeal or motion.
On September 1, 2006, the defendants filed a motion to dismiss the Second Consolidated Amended Class Action Complaint.
As disclosed by the Company’s FORM 10-Q for the quarterly period ended June 30, 2006, June 22, 2004 and July 1, 2004, five putative securities class action complaints were filed against the Company, four in the Eastern District of New York, Twist Partners v. Hanger Orthopedic Group, Inc., et al., No. 1:04-cv-02585 (filed 06/22/2004, E.D.N.Y); Shapiro v. Hanger Orthopedic Group, Inc., et al., No. 1:04-cv-02681 (filed 06/28/2004, E.D.N.Y.); Imperato v. Hanger Orthopedic Group, Inc., No. 1:04-cv-02736 (filed 06/30/2004, E.D.N.Y.); Walters v. Hanger Orthopedic Group, Inc., et al., No. 1:04-cv-02826 (filed 07/01/2004, E.D.N.Y.); and one in the Eastern District of Virginia, Browne v. Hanger Orthopedic Group, Inc., et al., No. 1:04-cv-715 (filed 06/23/2004, E.D. Va.). The complaints asserted that the Company’s reported revenues were inflated through certain billing improprieties at one of the Company’s facilities. The plaintiffs in Browne subsequently dismissed their complaint without prejudice, and the four remaining cases were consolidated into a single action in the Eastern District of New York encaptioned In re Hanger Orthopedic Group, Inc. Securities Litigation, No. 1:04-cv-2585 (the “Consolidated Securities Class Action”). On June 12, 2006, a Second Consolidated Amended Class Action Complaint was filed against the Company in the District of Maryland, In re Hanger Orthopedic Group, Inc. Securities Litigation, No. 8:06-cv-00579-AW (the “Second Amended Complaint”). The Second Amended Complaint asserts that the Company’s reported revenues were inflated through certain billing improprieties at some of the Company’s facilities. In addition, the Second Amended Complaint asserts that the Company violated the federal securities laws in connection with a restatement announced by the Company on August 16, 2004, restating certain of the Company’s financial statements during 2001 through the first quarter of 2004. The Second Amended Complaint purports to allege violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, as well as violations of Section 20(a) of the Exchange Act by certain of the Company’s executives as “controlling persons” of the Company. The Company has not yet filed its response to the Second Amended Complaint. On February 28, 2006, the court granted the Company’s motion to transfer the Consolidated Securities Class Action to the District of Maryland.
The original Complaint alleges that, throughout the Class Period, the Company performed poorly and that defendants waere under tremendous pressure to meet the expectations they themselves had set and thereby maintain their credibility. The complaint further alleges that, to achieve this end, they resorted to an illegal scheme to bilk the Medicaid and Medicare programs, the Veterans Administration and private insurers. Specifically, unbeknownst to investors, during the Class Period, Hanger improperly booked sales by filling out fake prescriptions and adding items that were not prescribed for existing patients in order to increase bills to Medicare and Medicaid. This practice not only artificially inflated Hanger’s revenues and earnings, it also jeopardized Hanger’s status as a Medicare and Medicaid provider, and its relationships with private insurers. It was, therefore, highly relevant to investors seeking to evaluate the effectiveness of the Company’s operations.
The complaint further alleges that the truth began to emerge on June 14, 2004, after the close of trading, when NBC News aired an investigative report in which a Hanger employee described the Company’s allegedly fraudulent billing practices. The next day, the Company issued a news release over the PR Newswire in which it admitted that the Company had initiated an investigation into “billing irregularities.” The Company’s shares had opened on June 14, 2004 at $15.75. They closed out the day at $14.41 and fell to a closing price of $12.75 on June 15, 2004 on heavy trading volume of 2.4 million shares for a two-day drop of 19 percent.
Similar class action had also been filed in the United States District Court for the Eastern District of Virginia on behalf of purchasers of Hanger Orthopedic Group's common stock during the period between February 26, 2003 and June 14, 2004. The complaint alleged that during the Class Period, defendants caused Hanger Orthopedic's shares to trade at artificially inflated levels through the issuance of false and misleading financial statements. As a result of this inflation, defendants were able to sell 167,270 Hanger Orthopedic shares, reaping insider trading proceeds of $2.4 million.