The original complaint alleges that Select Medical, at all relevant times, was an operator of specialty hospitals, including long-term acute care facilities, whose financial performance was heavily dependent on Medicare reimbursements. The complaint further alleges that: (a) throughout the Class Period Select Medical touted its strong operations and financial performance, reported remarkable quarterly increases in revenues, income and earnings per share, and represented that the Company was operating pursuant to a business model that would enable it to grow organically and through acquisitions; (b) unbeknownst to investors, Select Medical at all relevant times operated under the shadow of an imminent regulatory crackdown that could have a devastating effect on the Company’s operations and financial performance; (c) defendants knew of or recklessly disregarded this danger but failed to disclose it to investors; and (d) defendants engaged in this conduct so that they and other Select Medical insiders could see more than 11 million of their personally-held Select Medical shares at artificially inflated prices to unsuspecting shareholders for proceeds in excess of $270 million.
The truth began to emerge on May 11, 2004. On that date, defendants issued a press release in which they announced that proposed Medicare reimbursement rate rule change, if adopted, would have a “material adverse effect on Select’s results of operations for the periods after the rule becomes effective.” On this news, Select Medical shares, which had opened on May 11, 2004, at $18.55, closed the date ay $13.68, their low for the day. On May 12, 2004, the share opened at $11.80 and fell to a low of $10.25 before rebounding slightly to close the day at $11.20 – for a total two-day decline of 40%. Subsequently, on August 2, 2004, the Centers for Medicare and Medicaid Services announced the phase-in of reduced Medicare reimbursement rates for long-term acute care facilities accepting admissions from host hospitals, such as those operated by Select medical, and, on August 23, 2004, Select Medical announced that it was scaling back its expansion plans to compensate for the anticipated Medicare cuts.
As summarized by the Company’s FORM 10-Q For the Quarter Ended September 30, 2007, in February 2005, the Court appointed James Shaver, Frank C. Bagatta and Capital Invest, die Kapitalanlagegesellschaft der Bank Austria Creditanstalt Gruppe GmbH as lead plaintiffs (“Lead Plaintiffs”). On April 19, 2005, Lead Plaintiffs filed an amended complaint, purportedly on behalf of a class of shareholders of Select, against Martin F. Jackson, Robert A. Ortenzio, Rocco A. Ortenzio, Patricia A. Rice, and Select as defendants. The amended complaint continues to allege, among other things, failure to disclose adverse information regarding a potential regulatory change affecting reimbursement for Select’s services applicable to long-term acute care hospitals operated as hospitals within hospitals, failure to disclose improper revenue practices and the issuance of false and misleading statements about the financial outlook of Select. The amended complaint seeks, among other things, damages in an unspecified amount, interest and attorneys’ fees. The Company believes that the allegations in the amended complaint are without merit and intends to vigorously defend against this action. In April 2006, the Court granted in part and denied in part Select and the individual officers’ preliminary motion to dismiss the amended complaint. In February 2007, the Court vacated in part its previous decision on Select’s and the individual officers’ motion to dismiss and dismissed Plaintiffs’ claims regarding Select’s alleged improper revenue practices. The Plaintiffs asked the court to reconsider this ruling, and in June 2007, the court denied the Plaintiffs’ request. Select and the individual officers have answered the amended complaint.
According to a press release dated November 15, 2007, on October 25, 2007, the U.S. District Court for the Eastern District of Pennsylvania granted class certification to a class of shareholders in a securities fraud class action against the owner of hospitals alleging that it engaged in Medicare abuses by making highly profitable referrals to its own hospitals that resulted in substantial increases in its Medicare reimbursements and the company's financial growth.
On April 3, 2008, the defendants filed a motion for summary judgment. Before any ruling on that motion, the parties engaged in a settlement. On November 14, 2008, the plaintiffs filed a motion for settlement. Honorable J. Curtis Joyner preliminarily approved the settlement on December 19, 2008. On April 17, 2009, Judge Joyner signed the Final Judgment and Order approving the $5 million settlement and dismissing the complaint with prejudice. Plaintiffs' counsel was awarded 29 percent of the gross settlement fund, and $466,435.90 in reimbursement of expenses. The case is now closed.