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In Re: Tenet Healthcare Corporation Securities Litigation 02-CV-08462-Consolidated Amended Class Action Complaint for Violation

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In Re: Tenet Healthcare Corporation Securities Litigation 02-CV-08462-Consolidated Amended Class Action Complaint for Violation 4K U S "';STRICT COURT .stopher Kim (Bar No. 082080) a J. Yang (Bar No. 208971) .M RUGER & KIM LLP // fi^ Y23 055 West Seventh Street, Suite 2800 HAL 01 LOS Angeles CA 90017 Rt 0 CALIFORNIA Telephone: (213) 955-9500 [Liaison Counsel for Lead Plaintiff, the State of New Jersey, and tl\e Class] 5 Richard S. Schiffrin (Pro Hac Vice) Allyn Z. Lite (Pro Hac Vice) 6 Andrew L. Barroway (Pro Hac Vice) Joseph J. DePalma (Pro Hac Vice) Jacob A. Goldberg (Pro Hac Vice) Mary Jean Pizza 7 Stuart L. Berman (Pro Hac Vice) Susan D. Pontoriero SCHIFFRIN & BARROWAY, LLP Katrina Blumenkrants 8 Three Bala Plaza Suite 400 LITE DEPALMA GREENBERG Bala Cynwyd PA 19004 & RIVAS, LLC 9 Telephone: (^l0) 667-7706 Two Gateway Center, 12" Floor Newark, New Jersey 07102 10 Telephone : (973) 623 -3000 ' - 11 [Co-Lead Counsel for Lead Plaintiff, the State of New Jersey, and the$ lass] 12 UNITED STATES DISTRICT COURT X- 13 CENTRAL DISTRICT OF CALIFORNI\ 14 WESTERN DIVISION 15 In re TENET HEALTHCARE CORP. No. CV-02-8462-RSWL SECURITIES LITIGATION I 16 CLASS ACTION 17 This Document Relates To: CONSOLIDATED AMENDED 18 CLASS ACTION COMPLAINT ALL ACTIONS. FOR VIOLATION OF 19 SECTIONS 10b( (a), AND 20(A) OF THE SORITIES 20 EXCHANGE ACT OF 1934 AND SECTIONS 11 AND 15 21 OF THE SECURITIES ACT OF 1933 22 JURY TRIAL DEMANDED 1603 23 Date: 24 Time: Judge: The Hon. Ronald Lew 25 ^ e :at ` ;GOON Courtroom: 21 26 27 28 ` : 7- KAI880'u02\Amcnded Complaint (2003-05-23).wpd I AMENDED CLASS ACTION COMPLAINT 1 TABLE OF CONTENTS 2 1. INTRODUCTION ............................................ 1 3 II. SUMMARY OF THE ACTION ................................ I 4 III. JURISDICTION AND VENUE ................................ 9 5 IV. PARTIES .................................................. 10 6 V. DEFENDANTS' INSIDER SELLING .......................... 16 7 VI. CLASS ALLEGATIONS ..................................... 21 8 VII. BACKGROUND ............................................ 24 9 A. The Tenet Organization ................................. 24 10 B. Tenet' s Financial Results and Performance Sputter ......... 27 11 C. Defendants ' False Claims That Strategic Initiatives Caused Tenet's 12 Results to Improve Dramatically ......................... 34 13 D. The Medicare Inpatient Prospective Payment System ........ 37 14 1. Traditional Medicare .............................. 38 15 2. Medicare Outlier Payments ......................... 44 16 E. Tenet ' s Corporate Culture ............................... 49 17 VIII. DEFENDANTS' WRONGDOING DURING THE CLASS PERIOD 52 18 A. Tenet' s Abuse of Medicare Outlier Payments ............... 53 19 B. Tenet's Improper Upcoding .............................. 68 20 C. Wrongdoing at Redding Medical Center ................... 72 21 D. Tenet's Violations of Generally Accepted Accounting Principles73 22 1. Defendants Caused Tenet Improperly to Recognize Revenue ......................................... 74 23 2. Defendants Failed to Accrue A Reserve for Unasserted 24 Claims Resulting from Tenet 's Improper or Illegal Cond uct 25 IX. FALSE AND MISLEADING STATEMENTS .................... 81 26 X. THE TRUTH BEGINS TO EMERGE ......................... 125 27 XI. CLAIMS FOR RELIEF ..................................... 161 28 I K:\1880\02\Amended Complaint (2003-03 -23).wpd 2 AMENDED CLASS ACTION COMPLAINT 1 A. FIRST CLAIM FOR RELIEF For Violations of §10(b) of the 1934 Act and Rule 10b-5 Against 2 Tenet and the Management Defendants ................... 161 3 B. SECOND CLAIM FOR RELIEF For Violations of20(a) of the 1934 Act Against Tenet and the 41 Management Defendants ............................... 163 5 C. THIRD CLAIM FOR RELIEF For Violations of §20A of the 1934 Act Against Defendants 6 Barbakow, Mackey, Mathiasen, and Sulzbach ............. 164 7 D. FOURTH CLAIM FOR RELIEF For Violations of § 11 and 15 of the 1933 Act Against All 8 Defendants (Except Sulzbach) ........................... 165 9 PRAYER FOR RELIEF .......................................... 168 10 JURY DEMAND ................................................ 169 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I K:\1880\02\Amended Complaint (2003 -05-23).wpd 3 AMENDED CLASS ACTION COMPLAINT I 1. INTRODUCTION 2 1. Lead Plaintiff, the State of New Jersey and its Division of Investment 3 ("Plaintiff' or "New Jersey"), brings this class action individually and on behalf of 4 all persons and entities who purchased the securities of Tenet Healthcare 5 Corporation ("Tenet" or the "Company") between January 11, 2000, and 6 November 7, 2002 (the "Class Period"), against Tenet and its current or former top 7 officers and directors. Representative Plaintiffs, Floyd Stevens, Jr. and Joseph 8 Masters ("Representative Plaintiffs") allege violations of federal securities laws on 9 behalf of a sub-class of all Class Members who purchased or sold Tenet securities 10 contemporaneous with certain Defendants' (defined later as "Insider Trading 11 Defendants") purchases and sales of Tenet stock during the Class Period. Plaintiff 12 alleges violations of the federal securities laws arising from defendants' false and 13 misleading statements to investors throughout the Class Period related to Tenet's 14 financial results, growth, sustainability of growth, and its operations. Plaintiff 15 files this Consolidated Amended Class Action Complaint, incorporating the causes 16 of action of all parties who filed cases consolidated herein. 17 II. SUMMARY OF THE ACTION 18 2. Throughout the Class Period and before, Tenet represented - and, 19 until recently, investors believed - that it had distanced itself from its sordid 20 history. In 1991, state and federal authorities investigated Tenet, then known as 21 National Medical Enterprises, Inc., for abusive and fraudulent practices at its 22 psychiatric hospitals. In addition, private parties filed 135 lawsuits, claiming that 23 Tenet had improperly induced doctors to admit patients to those hospitals and kept 24 them hospitalized until their insurance benefits expired. In 1992, eight insurance 25 companies filed suit against Tenet, alleging fraudulent billing for psychiatric 26 services. The insurance companies obtained almost $215 million from Tenet in 27 settlement of these suits. 28 3. In 1993, the FBI began investigating allegations that Tenet's K:\1880\02\Amended Complaint ( 2003 -05-23).«pd 1 AMENDED CLASS ACTION COMPLAINT psychiatric hospitals had improperly induced physicians to refer patients, admitted 2 patients who needed no treatment, and forced the patients, against their wills, to 3 remain hospitalized until their insurance proceeds expired. Ultimately, on June 4 29, 1994, pursuant to the terms of a settlement agreement among Tenet, the United 5 States Department of Justice ("DOJ") and the Department of Health and Human 6 Services ("HHS"), Tenet pleaded guilty to an eight-count federal indictment and 7 paid what was then the largest health care related fraud fine in history. Tenet was 8 also prohibited from operating psychiatric hospitals for five years. 9 4. Pursuant to the terms of the settlement with DOJ and HHS, the 10 Company entered into a corporate integrity agreement ("Integrity Agreement"). 11 The Integrity Agreement was designed to ensure that Tenet maintained high 12 standards of business integrity required of a participant in a federally funded 13 health care program. The Integrity Agreement required Tenet to implement 14 certain review procedures, including its billing policies and practices, to ensure 15 that its hospitals complied with federal law, regulations, guidelines, and policies. 16 The Integrity Agreement also required Tenet to investigate and report any credible 17 evidence of misconduct that may have constituted any material violation of the 18 law, rules, and regulations governing federally funded health care programs, and 19 to take corrective action and reimburse the Government for any such wrongdoing. 20 5. In the Company's 10-K for fiscal year 2002, filed with the SEC on 21 August 14, 2002 ("2002 10-K"), long after the Integrity Agreement expired, 22 Defendants asserted that Tenet continued voluntarily to maintain "a multifaceted 23 corporate compliance and ethics program that meets or exceeds all applicable 24 federal guidelines and industry standards." Similarly, Tenet's Chairman and CEO, 25 defendant Jeffrey C. Barbakow's ("Barbakow") Letter to Shareholders contained 26 in the Company's 2002 Annual Report emphasized Tenet's focus on "high ethical 27 standards" over "many, many years." "Ethical behavior," he wrote, "is central to 28 our culture and we continually reinforce it in many ways.... With all the K:\I880\02Wmended Complaint (2003-0S-231.wpd 2 AMENDED CLASS ACTION COMPLAINT questions that have been raised about corporate credibility in recent months, I take 2 considerable comfort in that." During the Class Period and before, a profound 3 disconnect existed between Tenet's aspirations to ethical corporate behavior and 4 its corporate culture and operations. 5 6. Despite Barbakow's perfunctory words, Defendants knew or were 6 deliberately reckless in not knowing that Tenet was involved since as early as 7 1992 in systematic "upcoding" - an illegal practice by which Tenet received 8 material amounts from Medicare in excess of what it should have received. 9 Flouting the Integrity Agreement, according to a False Claims Act complaint filed 10 by the DOJ in January, 2003, Defendants either actively promoted or deliberately 11 recklessly allowed this systematic upcoding to continue, until at least September, 12 1998, infecting
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