Odyssey Healthcare, Inc. Securities Litigation 04-CV-00844-Amended

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXA S DALLAS DIVISION In re ODYSSEY HEALTHCARE, INC . § Civil Action No . 3 :04-CV-0844-N SECURITIES LITIGATION § CLASS ACTION This Document Relates To : ALL ACTIONS. § DEMAND FOR JURY TRIAL AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF §§10(b) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934 INTRODUCTION 1 . This is a class action brought on behalf of all persons who purchased Odysse y HealthCare, Inc. ("Odyssey" or the "Company") common stock between May 5, 2003 an d October 8, 2004, inclusive (the "Class Period") . This case is about defendants engaging in Medicar e fraud to create the appearance of profitability and rapid growth at Odyssey while at the same tim e selling off their own stock at record high prices . Odyssey and the defendants publicly issued fals e and misleading statements to the investment community about Odyssey's earnings, compliance wit h applicable Medicare laws, rules and regulations and prospects for future growth. The information provided by defendants to investors was knowingly false and misleading when issued and had th e purpose and effect of artificially inflating the market price of Odyssey common stock during the Class Period. 2 . Odyssey provides hospice care services to terminally-ill patients and their families . During 2001 and 2002, Odyssey grew rapidly acquiring existing and opening new hospice car e centers in several states, which resulted in Odyssey reporting increased revenues, net income an d earnings per share ("EPS") . As a result, Odyssey stock was a strong performer . 3 . However, by early 2003, Odyssey's business had begun to slowdown as competition in the hospice care sector increased . To overcome this situation, defendants began committin g Medicare fraud to falsely inflate Odyssey's earnings. Defendants embarked upon a scheme that involved the adoption of a number of unlawful and improper patient admissions, patient retentio n and billing practices. For example, to artificially inflate the Company's revenues, Odyssey billed Medicare for services that were never rendered to hospice patients and their families, thereb y artificially inflating Odyssey's revenues and drastically decreasing its expenses . Odyssey also routinely admitted patients who were not eligible for hospice care because theyhad a life expectancy of more than six months. Similarly, when doctors refused to recertify admitted patients as eligibl e -1- for hospice care, Odyssey refused to timely discharge them, thereby allowing the Company to bill for and receive payment for services rendered to patients who were not eligible for hospice care . Moreover, since Odyssey recognized revenue on hospice care services in the first month received , the Company was able to retain the improper payments for at least 30-90 days, thereby artificially inflating the Company's revenues and financial results in violation of GAAP. 4. To mask the Medicare fraud and paint a legitimate face on the Company's illegal earnings, defendants accelerated Odyssey's expansion program and stepped up its patient referra l and retention efforts. Notwithstanding the fact that this expansion was riddled with operationa l challenges, defendants falsely represented that Odyssey was pursuing a well-planned strategy o f expansion, which would result in steady revenue, net income and EPS growth. Additionally, defendants represented to investors that Odyssey's centralized operations and information system s were robust enough to sustain the Company's rapid growth without compromising the quality of it s hospice services or patient care; that Odyssey was successfully integrating the acquisitions that it was making into its business without any problems ; and that Odyssey had professionally traine d community education representatives who specialized in educating the medical community about th e benefits hospice care and Odyssey services, thereby increasing patient referrals to Odyssey an d increasing its revenues and earnings . Thus, according to defendants, Odyssey's expansion program and highly centralized and closely monitored business model would contribute significantly t o Odyssey reporting annual earnings growth of 30+%, and FY03 EPS of $1 .20-$1 .25 per share and FY04 EPS of $ 1 .50-$1 .60 per share, respectively. As a result of the positive image created by defendants of the Company's illegal earnings and business prospects, securities analysts repeatedly issued "strong buy," "buy," "marke t overweight," and "market outperform" recommendations emphasizing Odyssey's ongoing growt h -2- and strong growth prospects . For example, a Stifel, Nicolaus & Company analyst, based o n information provided by defendants and with their approval, stated on May 6, 2003 : Odyssey exceeds our March quarter estimates on every front, with EPS $0 .03 better at $0.29 vs. $0.16 prior. Importantly, staffing utilization remains excellent, and the company is on track with its 2003 expansion plans . Strong Buy, $37 [price] target. We like Odyssey's balanced approach to growth, with a steady blend of small acquisitions and new office openings, never biting off more than they can chew. We see this strategy as an effective way to maintain momentum in the race for new patients and in maintaining strong operating margins. At 22x 2003 estimates, and with more than a 25% discount to its growth rate , ODSY shares remain attractively priced . Strong Buy. 6 . Similarly, based on information provided by defendants and with their approval, S G Cowen wrote on November 5, 2003 : Odyssey Health Care: Strong Buy Acquisition Pace Running Ahead Of Our 2003 Thinkin g Odyssey has completed seven acquisitions this year with ADC of 517, well ahead of the 300 ADC we expected initially this year. The largest, Heritage Hospice in Utah, had ADC of 280 . Management continues to seek acquisitions of many sizes . On the development side, Odyssey has received Medicare certifications for seven of the eight offices planned for 2003 : Cleveland, OH; Toledo ; OH, Cincinnati, OH ; Philadelphia, PA; Mobile, AL; Memphis, TN ; Portland, OR and Richmond, VA. Further, a SunTrust Robinson Humphrey analyst, based on information provided b y defendants and with their approval, stated on December 19, 2003 : ODSY: Initiating Coverage with Overweight Rating Initiating coverage with Overweight rating and establishing a valuation range of $35-$36. Our positive investment thesis is underscored by our belief that ODSY is poised to grow EPS 20%-25%, with the potential for 30%+ growth during FY04 and FY05 . Importantly, we believe ODSY's highly-evolved corporate /divisional infrastructure should position it well to exploit both internal growth -3- opportunities, as well as acquisition opportunities in the highly fragmented hospice sector . 8 . The false image of Odyssey created by defendants ' statements to investors and securities analysts drove Odyssey's stock price to a Class Period high of $37 .35, while Odyssey' s insiders sold 969,526 shares of Odyssey stock, reaping more than $24 .1 million in unlawful insider trading proceeds for themselves. In fact, defendant Richard R. Burnham, Odyssey's Chairman an d CEO (until January 1, 2004), sold 628,769 shares of his personal Odyssey stock, for proceeds o f $14.8 million, while Odyssey's next two highest ranking officers, David C . Gasmire (President and CEO (from January 1, 2004 - October 15, 2004)), and Douglas C . Cannon (Senior Vice President and CFO), sold 277,011 and 63,746 shares of their personal Odyssey stock, for proceeds of $7 . 7 million and $1 .6 million, respectively . 9. Odyssey' s earnings and defendants' positive statements , creating the impression that Odyssey was successfully pursuing an aggressive expansion program which would lead to solid an d dependable revenue and earnings growth, were false and misleading when made, because defendant s only achieved these earnings through illegal conduct . Defendants misrepresented and failed to disclose the material facts detailed in ¶¶47-50, 53-54, 56-59, 62-64, 66-68, 71-72, 74-77, 79- 80, 82- 89, 91-92, 94-98 and 104-107 . In particular, Odyssey was, during the Class Period, experiencing substantial difficulties in profitably integrating the hospice care centers it was acquiring into Odyssey's business . Again, to make it appear that Odyssey's business was more profitable than i t actually was, before and during the Class Period, Odyssey engaged in unlawful patient admission , patient retention and billing practices which violated Medicare and Medicaid laws, rules and regulations . Asa result of these practices, Odyssey has been the subject of a federal investigation b y the Civil Division of the U .S. Department of Justice ("DOJ") under the False Claims Act for wel l over a year, rendering defendants' statements about Odyssey's compliance with applicable federal and state laws, rules and regulations false and misleading when made. -4- 10. During the Class Period, defendants were acquiring hospice after hospice and valuing goodwill and other intangibles at inflated p rices in violation of GAAP to hide operational problem s they were experiencing with their rapid growth, at the same time they were violating Medicare law s by admitting patients and retaining patients that did not meet Medicare guidelines and double-billin g to attain their projected earnings. All this had to stop when the DOJ began its investigation into thi s very activity. Therefore, without the ability to continue their fraudulent course of conduct (becaus e the DOJ was on defendants' trail), Odyssey was forced to reveal the true condition of its business . On October 18, 2003 , Odyssey revealed that its 3rd quarter FY04 EPS would be only $0 .24 per share, sharply below the levels that defendants had previously misled the market to expect . In revealing this earnings decline, Odyssey also slashed its EPS estimates for 2004 to $0 .94-$0.96 from $1 .03-$1 .05 . The Company also announced that Odyssey's President and CEO, defendant Gasmire , had abruptly resigned and that Odyssey's Chairman, defendant Burnham, would assume the additional duties of President and CEO.

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