In Re: Odyssey Healthcare, Inc. Securities Litigation 04-CV-00844

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UNITED STATES DISTRICT COURT CLF NORTHERN DISTRICT OF TEXAS By - - T

DALLAS DIVISION

In re ODYSSEY HEALTHCARE, INC. § Civil Action No. 3:04-C V-0844-N SECURITIES LITIGATION § § CLASS ACTION § This Document Relates To: § § ALL ACTIONS. § §

CONSOLIDATED COMPLAINT FOR VIOLATION OF §lO(b) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934

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INTRODUCTION

1. This is a class action brought on behalf of all persons who purchased Odyssey

HealthCarc, Inc. ("Odyssey" or the "Company") common stock between May 5, 2003 and

October 18, 2004, inclusive (the "Class Period"). This case arises out of a fraudulent scheme by defendants to publicly issue false and misleading statements to the investment community about

Odyssey, its aggressive expansion strategy, hospice care services, compliance with applicable

Medicare laws, rules and regulations, earnings and prospects for future growth. The information provided by defendants to investors was knowingly false and misleading when issued and had the 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 care centers in several states, which resulted in Odyssey reporting increased revenues, net income and 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 accelerated Odyssey's expansion program and stepped up its patient referral and retention efforts. Further, to ensure the success of Odyssey's expansion program and to continue its substantial growth, defendants falsely represented that Odyssey was pursuing a well-planned strategy of expansion, which would result in steady revenue, net income and EPS growth. Additionally, defendants represented to investors that

Odyssey's centralized operations and information systems were robust enough to sustain the

Company's rapid growth without compromising the quality of its hospice services or patient care; that Odyssey's was successfully integrating the acquisitions that it was making into Odyssey's business without any problems and that Odyssey had professionally trained community education

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representatives who specialized in educating the medical community about the benefits hospice care and Odyssey services, thereby increasing patient referrals to Odyssey and increasing its revenues and earnings. Thus, according to defendants, Odyssey's expansion program and highly centralized and closely monitored business model would contribute significantly to 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.

4. As a result of, and reflecting the positive image created by defendants of Odyssey's business and prospects, securities analysts repeatedly issued "strong buy," "buy," "market overweight," and "market outperform" recommendations emphasizing Odyssey's ongoing growth and strong growth prospects. For example, a Stifel, Nicolaus & Company analyst, based on 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.

5. Similarly, based on information provided by defendants and with their approval, SG

Cowen wrote on November 5, 2003:

Odyssey Health Care: Strong Buy Acquisition Pace Running Ahead Of Our 2003 Thinking

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. -2- Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 4 of 54 PageID 352

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.

6. Further, a SunTrust Robinson Humphrey analyst, based on information provided by

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 opportunities, as well as acquisition opportunities in the highly fragmented hospice sector.

7. 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 and

CEO (until January 1, 2004), sold 628,769 shares of his personal Odyssey stock, for proceeds of

$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.

8. Defendants' positive statements, creating the impression that Odyssey was successfully pursuing an aggressive expansion program which would lead to solid and dependable revenue and earnings growth, were false and misleading when made, because defendants misrepresented and failed to disclose the material facts detailed in ¶J44-47, 50-51, 53-56, 59-61, 63-

65, 68-69, 71-74, 76-77, 79-86, 88-89, 91-95 and 101-104, below. In particular, Odyssey was,

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during the Class Period, experiencing substantial difficulties in profitably integrating the hospice care centers it was acquiring into Odyssey's business which made it very probable that the expansion program could not be successfully completed and would have to be curtailed or abandoned. Further, to make it appear that Odyssey's business was more profitable than it 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. As a result of these practices, Odyssey is now the subject of a federal investigation by the Civil Division of the

U.S. Department of Justice ("DOJ") under the False Claims Act, rendering defendants' statements about Odyssey's compliance with applicable federal and state laws, rules and regulations false and misleading when made.

9. Suddenly, on October 18, 2004, 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, and announced that Odyssey's President and CEO, defendant

Gasmire, had abruptly resigned and that Odyssey's Chairman, defendant Burnham, will assume the additional duties of President and CEO. Additionally, defendants acknowledge on October 18, 2004, that due to the Company's patient admission, patient retention and billing practices since 2000,

Odyssey was now under investigation for violations of the False Claims Act by the DOJ. As a result of these shocking revelations, Odyssey's stock price collapsed, falling nearly 48%, to as low as

$8.80 per share, on extraordinarily heavy volume of 22.4 million shares.

10. While defendants profited handsomely from their fraudulent scheme, selling 969,526 shares of their personal Odyssey stock, for $24.1 million in unlawful insider trading proceeds, Lead

Plaintiffs and the Class did not. Instead, they suffered tens of millions of dollars in damages as a result of defendants' alleged misconduct. By this action, Lead Plaintiffs and the Class seek to Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 6 of 54 PageID 354

recover damages against defendants for their violations of §10(b) and 20(a) of the Securities

Exchange Act of 1934 (the "1934 Act") and Rule lob-S promulgated thereunder by the Securities and Exchange Commission (the "SEC")

JURISDICTION AND VENUE

11. This Court has jurisdiction over the subject matter of this action under §27 of the

1934 Act. The claims alleged herein arise under §10(b) and 20(a) of the 1934 Act, 15 U.S.C.

§78j(b) and 78t-1, and Rule lOb-5 promulgated thereunder by the SEC.

12. Venue is proper in this District under §27 of the 1934 Act, as many of the false and misleading statements and omissions allegedly made by defendants were made in or issued from this

District. Additionally, Odyssey's principal executive offices are in Dallas, Texas, where defendants managed and oversaw Odyssey's daily operations.

THE PARTIES

Lead Plaintiffs

13. (a) Lead Plaint jff Massachusetts Laborers Annuity Fund purchased Odyssey common stock and was damaged thereby.

(b) Lead P1aintffAlaska Electrical Pension Fund purchased Odyssey common stock and was damaged thereby.

Defendants

14. Defendant Odyssey Healthcare, a Delaware corporation, is headquartered and may be served at 717N. Harwood, Suite 1500, Dallas, Texas 75201. Odyssey's common stock trades in an efficient market on the NASDAQ National Market System.

15. Defendant Richard R. Burnham ("Burnham") was, during the Class Period,

Chairman and CEO (until January 1, 2004) of Odyssey. Prior to joining Odyssey, Burnham was a

Vice President for Vitas Healthcare, Inc., a hospice care provider. Burnham, as a member of the

Odysseys' small, insular senior management team, personally guided the Company's expansion -5- Case 3:04cv00844Document 22 Filed 12/20/04 P 7 of 54 PageID 355 i 1 -6 0

program and oversaw Odyssey's business and financial affairs on a daily basis. Burnham sold

628,769 shares of Odyssey common stock that he owned during the Class Period for prices as high

as $32.56 per share, reaping proceeds of $14.8 million from insider trading activity. These sales

were unusual in timing and amount in that they came on the heels of Odyssey's positive earnings

announcements, reporting strong 1st, 2nd and 3rd quarter FY03 results, and while Odyssey stock

traded at prices near its then Class Period highs. Burnham may be served at 2505 Woodbridge Trail,

Mansfield, Texas 76063.

16. Defendant David C. Gasmire ("Gasmire") was, during the Class Period, President,

CEO (from January 1, 2004 to October 15, 2004) and Director of Odyssey. Prior to joining

Odyssey, Gasmire was the General Manager and Director of Business Development for Vista

Healthcare, Inc., a hospice care provider. Gasmire, as a member of Odyssey's small, insular senior

management team, personally guided the Company's expansion program and oversaw Odyssey's

business and financial affairs on a daily basis. Gasmire sold 277,011 shares of Odyssey common

stock that he owned during the Class Period for prices as high as $30.68 per share, reaping proceeds

of $7.7 million from insider trading activity. These sales were unusual in timing and amount in that

they came on the heels of Odyssey's positive earnings announcements, reporting strong 1st, 2nd and

3rd quarter results, and while Odyssey stock traded at prices near its then Class Period highs.

Gasmire may be served at 5504 Wilts Court, Piano, Texas 75093.

17. Defendant Douglas B. Cannon ("Cannon") was, during the Class Period, Senior

Vice President, CFO, Assistant Secretary and Treasurer of Odyssey. Prior to joining Odyssey,

Cannon was the CFO of Cornerstone Health Management Company, a specialty provider of geriatric

services to hospitals and operator of long-term acute hospitals. Cannon, as a member of Odyssey's

small, insular senior management team, personally guided the Company's expansion program and

oversaw Odyssey's business and financial affairs on a daily basis. Cannon sold 63,746 shares of

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Odyssey common stock that he owned during the Class Period for prices as high as $34.70 per share,

reaping proceeds of $1.6 million from insider trading activity. These sales were unusual in timing

and amount in that they came on the heels of Odyssey's positive earnings announcements, reporting

strong 1st, 2nd and 3rd quarter results, and while Odyssey stock traded at near its then Class Period highs. Cannon may be served at 4728 Yorkshire Trial, Piano, Texas 75093.

18. Burnham, Gasmire and Cannon were the top executives of Odyssey and members of its senior management group. They ran Odyssey as "hands-on" managers, dealing with important issues facing Odyssey's business and representing to the investing public that they were:

(i) successfully managing its expansion program; (ii) profitably growing Odyssey's business by providing superior patient care and assistance services; and (iii) complying with all applicable

Medicare and Medicaid laws, rules and regulations; thereby enabling the Company to continue to report 30% - 33% annual revenue and 35% - 40% net income growth in FY03 and beyond.

19. A key factor in the Odyssey "story" was its ability to expand rapidly by opening new or acquiring and integrating other hospice care companies, while sequentially reporting strong revenue and earning growth. As defendants stated in Odyssey's 2003 Report on Form 10-K, "[w]e intend to expand our business by actively pursuing strategic acquisitions of other hospices in new and existing markets throughout the United States. We believe that significant opportunities exist for growth through acquisitions of hospices.... We believe that the fragmented nature of the hospice industry, combined with these other factors, provides us with significant opportunities to grow our business through acquisitions ...." To capitalize on these opportunities, defendants closely monitored and managed every material aspect of Odyssey's expansion program. As a result of this intense focus, defendants knew or recklessly disregarded that, by the beginning of the Class Period, the

Company's earlier growth had overwhelmed the Company's infrastructure and management

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capabilities such that its expansion program would have to be curtailed, if not abandoned, leading to lower revenue and earnings growth on a going forward basis.

20. Nevertheless, at every opportunity during the Class Period, defendants flooded the market with false positive statements about Odyssey's expansion program and their own ability to successfully open and/or integrate newly acquired hospice care centers into Odyssey's business, thereby increasing Odyssey's overall revenues and earnings. Defendants likewise misrepresented, for example, in Odyssey's 2003 report on Form 10-K, dated March 11, 2004, that Odyssey was in compliance with all applicable Medicare and Medicaid laws, rules and regulations, stating that

Odyssey is "in material compliance with all conditions of participation for the Medicare programs and all eligibility requirements for the Medicard program," as well as "all applicable federal and state fraud and abuse laws."

21. Each defendant is liable for making false statement or for failing to disclose adverse material facts while selling Odyssey stock or for participating in a fraudulent scheme which operated as a fraud or deceit on purchasers of Odyssey common stock. They are also liable for the false statements pled at ¶J44, 50-5 1, 53-54, 59, 63, 68-71, 76, 82-83, 91-92 and 97, as those statements were each collectively-published information for which defendants were collectively responsible as officers and directors of the Company, as well as for the false statements pled at ¶1J 45-47, 55-56, 64-

65, 73-74, 77, 80-81, 84-86, 89 and 93-95, as those statements were made by defendants to securities analysts for the purpose of artificially inflating Odyssey's stock price during the Class Period.

22. In addition to knowing that their Class Period statements were actually false when made, defendants also had the motive and opportunity to perpetrate the fraudulent scheme and course of conduct detailed in ¶J 1-10, 23-100. Specifically, by artificially inflating Odyssey's stock price by making it appear that Odyssey was a fast growing company with sustainable growth,

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Odyssey insiders were able to sell 969,526 shares of their personal Odyssey stock during the Class

Period, pocketing over $24.1 million in unlawful insider trading proceeds.

DEFENDANTS' FRAUDULENT SCHEME TO DEFRAUD INVESTORS AND SCIENTER

23. Formed in 1996 by defendants Burnham and Gasmire, Odyssey grew rapidly during

the late 1990s and the early 2000s and enjoyed steady growth in revenues and earnings. Through a

series of acquisitions and the development of new hospices, Odyssey grew from a single hospice

program to over 50 Medicare-certified hospice programs to serve patients and their families in more

than 20 states. Today, although headquartered in Dallas, Texas, Odyssey's operations stretch from

coast-to-coast, and involve more than 25,000 patients, nurses, doctors and other healthcare providers

and suppliers.

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24. To effectively oversee and manage Odyssey's far-flung operations on a daily basis,

defendants invested in and developed a centralized operations and division structure within the

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Company. The hub of Odyssey's "centralized operations" is its corporate office in Dallas, Texas.

The Dallas office supports each of the Company's hospice programs by providing coordination,

centralized resources and corporate services to each of its hospice programs. These include, among

other things: (i) financial accounting systems, including billing, accounts receivable, accounts

payable and payroll; (ii) information and telecommunication systems; (iii) clinical support services;

(iv) human resource administration; (v) regulatory compliance and quality assurance; (vi) marketing

and educational materials; (vii) training and development; and (viii) centralized cash management

and account payable and payroll processing.

25. In addition, Odyssey processes all billings to the United States, private insurers and

patients electronically at its corporate office in Dallas. Under the oversight of the defendants, the

Dallas office bills Medicare monthly and generally receives payment electronically within fourteen

working days. The corporate offices accounting personnel prepare monthly operating statements for

each of the hospice programs and review these statements for operating trends and variances to

budget forecasts. Defendants, at all relevant times, received the monthly operating statements

mentioned above in parallel with the individual hospice programs.

26. Under defendants' supervision, the Dallas corporate office also prepared annual

operating budgets for each of the Company's hospice programs, which defendants reviewed and

approved before each fiscal year, as well as used throughout the fiscal year to monitor the

performance of individual hospice programs, groups of hospice programs, and the company as a

whole versus its annual budgets and forecasts.

27. To manage, monitor and oversee Odyssey's daily operations on a real-time basis,

defendants also developed an extensive information management system. The information system

known, in part, as MUMMS within the Company utilizes multiple server-based systems with laptop

and desktop computers to connect all of Odyssey's hospice programs to one another electronically,

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and to allow defendants to monitor the performance of individual hospice programs or groups of

hospice programs on demand. To accelerate the payment for services rendered, billings are also

handled through a centralized server-based systems located at Odyssey's Dallas headquarters. Under

this system, each local office enters all initial patient registration information and updates into the

billing status through the Company's intranet systems, supposedly resulting in greater accuracy and

more rapid collections. Through the use of the Company's intranet site, defendants are also able to

facilitate communications and enhance standardization of all of Odyssey's operations through

publication and dissemination of a standard vision and a consistent, comprehensive corporate

direction.

28. Moreover, through the use of the Company's centralized operating model and

information system, defendants were able to, and did in fact, "monitor and manage" the most critical

and essential elements of Odyssey's business, i.e, "admissions, discharges by type of discharge and

admission conversions," on a daily and regular basis, to control costs and thereby maintain or

increase profitability. As defendants stated in Odyssey's 2003 Report on Form 10-K, dated

March 11, 2004:

We actively manage and monitor several day-to-day indicators, including admissions, discharges by type of discharge and admission conversions on a daily basis. We also track on a regular basis various key measures of our costs per day of care, including costs of labor, medications, durable medical equipment, medical supplies and mileage expense incurred by our caregivers

In the same report, regarding their habit of monitoring and managing Odyssey's business and

progress towards its financial objectives throughout the Class Period, defendants stated: "We

actively manage and monitor several indicators to track performance across our multiple hospice

programs, which enables us to develop best practices, improve efficiencies and manage costs ...."

29. The centralized and standardized operations and information system developed by

defendants served Odyssey well during the early phases of its rapid growth. However, by early

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2003, Odyssey's expansion had overwhelmed the Company's internal controls and corporate

infrastructure, i.e., its centralized operations and information systems, thereby impairing the

Company's ability to profitably expand in existing and new markets via new developments and/or

acquisitions. As Odyssey's business expanded into new markets and areas, the Company's

operational challenges grew exponentially, resulting in significant declines in the quality of hospice

care delivered to patients and their families, and material increases in the Company's drug costs,

labor costs, and associated operating expenses.

30. For example, former Odyssey staffers complained to management about lack of

access to supplies and caseload that are heavier than industry norms. In one instance, the lack of

access to supplies was so bad that the attending nurse was unable to give the patient over-the-counter

Robitussin. And Odyssey's 55-to-I patient-to-nurse ratio exceeded industry norms by a wide

margin. Although former Odyssey nurses and supervisors reported these problems to defendants,

they persisted throughout the Class Period unabated.

31. Patients and their families also reported incidents where Odyssey's rapid growth

resulted in the Company providing a level of care and service below the standards set forth under

government guidelines. As Barron's reported on April 12, 2004, a son of an Odyssey patient told

"of Odyssey's ignoring calls from a nursing home as the staff sought the assistance of the hospice

firm [Odyssey] with which he'd contacted." "Byron 'Pat' Connelly hired Odyssey to provide

hospice care for his mother, who [in the summer of 2003] was a patient in Vista Knoll Specialized

Care Facility in Vista, Calif., dying of congestive heart failure. When her condition began to

deteriorate, Connelly adds, nurses at Vista Knoll said that Odyssey ignored their repeated calls to

come and care for the 86-year-old woman. 'We felt she was not getting the care she should be

getting,' Connolly remembers. "I wasn't mad. I was upset." He says that his mother died within a

week of being transferred to another hospice program."

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32. As a result of this and other reports, in September 2003, the California Department of

Health Services found Odyssey's San Diego hospice program to violate certain patient care

standards after conducting a routine recertification survey. The 33-page report detailed numerous

instances of patients in severe discomfort and distress being cut from the program inappropriately

and without consultation involving all members of the medical team. Drugs, including simple items

such as cough syrup, were not immediately available because the hospice had not contracted with a

pharmacy to pay for them. Volunteer services were not provided and other treatments and services

typically covered were not provided. The California report also found that a lack of communication

and documentation had led to misguided care, because, among other things, Odyssey's clinical

records were in disarray.

33. Additionally, as Barron's reported, former Odyssey nurses and marketing

representative told them of patients being kicked out of Odyssey's program after 90 days upon being

"reevaluated" or because they required hospital care. According to persons familiar with Odyssey,

this raises the possibility that the patients should not have been admitted into Odyssey's hospice

program in the first place. In fact, the DOJ is currently looking into this issue as a part of its

investigation under the False Clams Act into Odyssey's patient admission, patient retention and

billing practices since 2000.

34. The increase in Odyssey's operational problems, coupled with the slowdown in its

business, presented defendants with a desperate situation. On the one hand, to increase Odyssey's

revenues the Company needed to grow rapidly. However, to grow rapidly, the Company needed to

attract capital by continuing to report strong revenue and earnings growth. Thus, to overcome this

situation, as early as 2000, defendants embarked upon a scheme that involved the adoption of a

number of unlawful and improper patient admissions, patient retention and billing practices. For

example, to artificially inflate the Company's revenues, Odyssey routinely admitted patients who

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were not eligible for hospice care because they had a life expectancy of more than six months.

Similarly, when doctors refused to recertify admitted patients as eligible for hospice care, Odyssey

refused to timely discharge them, thereby allowing the Company to bill for and receive payment for

services render to patients who were not eligible for hospice care. 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. Moreover, and, perhaps, even worse, from time to time

Odyssey billed Medicare for services that were never rendered to hospice patients and their families,

thereby artificially inflating Odyssey's revenues and drastically decreasing its expenses.

35. Although defendants succeeded in concealing these unlawful practices and violations

of the federal securities laws, Medicare laws and state and federal abuse laws from investors and

regulators alike for several years, in September 2004, the DOJ notified the Company that it was

under investigation under the False Claims Act for acts and omissions concerning its patient

admissions, patient retention and billing practices.

36. Defendants' knowledge of Odyssey's patient admission, retention and billing

practices, as well as the fact that they violated the applicable Medicare laws, is in little doubt. As

defendants stated in Odyssey's 2003 Report on Form 10-K, Odyssey "actively manage and monitor

several day-to-day indicators, including admissions, discharges by type of discharge and admission

conversions on a daily basis." Moreover, as a part of the Company's internal auditing and

monitoring programs, Odyssey conducted "periodic, at least annual, internal regulatory audits and

mock surveys at each of [its] hospice programs," as well as, "quarterly comprehensive audits of

patient charts performed by each of [the Company's] hospice programs," as required under Medicare

conditions of participation. In addition, "at least once a year, a comprehensive audit of patient charts

[was] performed on each of [Odyssey's] hospice programs by [its] corporate staff."

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37. In light of the Company's "comprehensive" and redundant regulatory compliance

auditing and monitoring programs, defendants knew, or were reckless in not knowing, that

Odyssey's patient admission, patient retention and billing practices violated applicable Medicare and

federal and state false claims and abuse laws, as well as resulted in the Company materially

overstating its revenues by improper recognizing revenues on hospice services rendered to patients

who were ineligible.

38. More particularly, during the Class Period, Odyssey reported as revenue unlawful

billings to Medicare and private insurers to which Odyssey was not entitled. In violation of GAAP,

Odyssey reported revenues that were non-existent and that they knew would have to be returned to

Medicare or the insurance companies. This was accomplished by means of double billing, billing for

services not rendered, and recognizing revenue that exceeded Medicare caps for reimbursement.

These revenues had no justification but were made so that defendants could artificially inflate

Odyssey's publicly reported financial results and financial statements.

39. For example, during the Class Period, Odyssey routinely billed both Medicare and the

patients' insurance carrier for the full amount of services rendered to hospice patients and their

families. According to a former billing supervisor at Odyssey's headquarters in Dallas who oversaw

all of the hospice programs, the double billing occurred at several of Odyssey's hospice care centers,

including its hospice center in Detroit. According to the billing supervisor, Odyssey's Detroit

hospice center was "thriving" because of the improper double billing. In Detroit, there is a large

population of retired auto-workers which comprises the majority of Odyssey's hospice patients. The

auto-workers had Blue Cross/Blue Shield which would supplement Odyssey for whatever amount

that exceeded the patient's allowable Medicare reimbursement. However, Odyssey frequently billed

both Blue Cross/Blue Shield and Medicare for the entire amount, instead of billing the reduced

amount to both, allowing Odyssey to collect reimbursement for the full amount owed from both

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Medicare and Blue Cross/Blue Shield. Senior management knew about this practice because the

billing supervisor reported this activity to senior management and recommended that Odyssey

reimburse Blue Cross/Blue Shield. After senior management failed to take corrective steps, the

billing supervisor reported Odyssey's double billing to Blue Cross/Blue Shield, which demanded a

refund. Ultimately, Odyssey was forced to reimburse Blue Cross/Blue Shield for the over-payments.

However, Odyssey's practice of double billing Medicare and private insurers continued unabated at

other hospice sites.

40. During the Class Period, Odyssey billed for patient services that had not actually been

rendered. In fact, defendants would intimidate the hospice staff with the threat of termination if they

did not improperly bill the insurance carriers. According to a former reimbursement coordinator,

he/she was fired because he/she refused to bill for services that had not been rendered in Odyssey's

Orange County hospice facility. The root of this activity was that the hospices were understaffed

and did not have enough resources to provide the proper amount of care. According to a former

Odyssey billing supervisor, the bills generated through Odyssey's MUMMS system which would

ultimately reach the insurance companies did not match the "service notes" that had been input by

nurses at the hospices for the care they had administered to each specific patient. The MUMMS

system electronically linked billing and collections of every Odyssey hospice in the United States to

the corporate headquarters in Dallas. Odyssey hospice staff would enter patient information and

updates daily into the MUMMS system regarding what kinds of services that had been performed.

The services that had been performed for each patient were compiled at the end of the month by

billing supervisors at the Dallas headquarters in order to bill Medicare, Medicaid or private insurance

companies. The billing supervisors were supposed to also verify the services with patient "service

notes." According to the billing supervisor, often times the "service notes" did not match MUMMS.

This was because the hospices were actually billing for these missing services because they were

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required to perform them, whether they actually did so or not. The hospices were so understaffed

because of managements' efforts to cut costs and increase profit, that many nurses simply did not

have the time to see all their patients every day.

41. For example, Aetna Insurance Company would pay for hospice services for their

insureds for every day in the week, but the "service notes" indicated that Odyssey staff was only

providing services a few days out of the week. According to a billing supervisor, one of the hospice

patients informed Aetna of the situation and this caused Aetna to demand reimbursement, which

Odyssey fought but eventually had to give back the fees for that patient. However, Odyssey rarely

got caught and ended up improperly recognizing the improperly obtained revenue.

42. Odyssey also put a stop to billing supervisors having access to "service notes" after

several of them pointed out the improper billing practices to senior management. This put a stop to

billing mangers' ability to match services to bills. According to one billing supervisor, a member of

senior management stated that billing for services not rendered made Odyssey's reported revenue

"look good."

43. In addition to the above, Burnham, Gasmire and Cannon each knew about or

recklessly disregarded the problems with Odyssey's expansion program, patient care, financial

statements, patient admission, patient retention and billing practices alleged in the Complaint and

were motivated to conceal such problems. As Odyssey's three highest ranking corporate officers,

and the leaders of its senior management team, Burnham, Gasmire and Cannon were responsible for

Odyssey's financial reporting and communications with the market. They knew or recklessly

disregarded the adverse facts then impacting Odyssey's business detailed in the Complaint. But

nonetheless, flooded the market with positive statements about Odyssey, its business, expansion

program, hospice care services, compliance with applicable Medicare requirements, earnings and

prospects for future growth. Defendants did so to demonstrate that they could lead the Company

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successfully and generate the growth expected by the market, as well as to unload their personal

Odyssey shares.

DEFENDANTS' FALSE AND MISLEADING STATEMENTS

1st Quarter FY03

44. On May 5, 2003, Odyssey announced its 1st FY03 results, ended March 31, 2003,

reporting a 79% increase in net income to $7.2 million, or $.29 per share, on a 50% increase in

revenue to $60.1 million. The Company also announced that its average daily census for the 1st

quarter FY03 increased 45% to 5,363 patients, days of care for the quarter increased by 44% to

5,533, and that net cash provided by operations for quarter was $12.3 million. In the Company's 1St

FY03 earnings release, Burnham, with the approval of Gasmire and Cannon, attributed Odyssey's

strong performance to the success of its expansion program and the Company's ability to provide

excellent hospice care services to patients, stating:

"Our goal of providing excellent service to an increasing number of patients and their families and leveraging our existing infrastructure to produce strong financial performance is showing very good results," .... "As is typical in our company, the increase in days of patient care is primarily attributable to growth in our existing locations. In addition to this internal growth, during the quarter, we acquired a hospice south of Dallas, which complements our Dallas/Fort Worth service area."

"We expect revenue growth in 2003 of3O to 33 percent over 2002 and an increase of 35 to 40 percent in net income over 2002," he said. The company had previously provided guidance of 30 percent growth in revenue and 30 to 35 percent growth in net income year over year."

45. Following the release of the Company's 1st quarter FY 03 earnings press release,

securities analysts issued reports on Odyssey which were based on and repeated the false

information provided by Odyssey's senior management. For example, on May 5, 2003, CIBC World

Markets issued a report in which it recommended the purchase of Odyssey stock based largely upon

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the Company's representation of strong revenue and earning growth. The report written by Charles

W. Lynch stated:

Odyssey Health Care, Inc. Strong Start to 2003; Raising Estimates on 1Q Upside

ODSY reported 1Q:03 EPS of $.029, $0.02 ahead of our estimate and up an impressive 73% y-y. The quarter was of high quality, with virtually all financial metrics ahead of our estimates, strong cash flow generation, and no- one time items.

The company's EPS growth remains primarily top-line driven (IQ revs, up 50%), but also from margin leverage to this top-line growth....

We are raising 2003E EPS to $1.20 (up 39%) from $1.16 and 2004E EPS to $1.50 (up 25%) from $1.45. Our 2003 estimates are within management's target growth ranges, but we believe further upward revisions are possible through the remainder of the year.

We are also raising our price target modestly, to $33 from $32, and reiterate our Sector Outperformer rating.

46. Similarly, after discussions with Odyssey's CEO (Burnham) and CFO (Cannon), in a

report dated May 6, 2003, the investment firm of SG Cowen recommended the purchase of Odyssey

stock, based largely upon the Company's representation that its acquisition program was on-track

and succeeding. The report written by Kemp Dolliver stated:

Odyssey Health Care Strong Buy

ACQUISITION PACE TRACKING OUR MODEL YEAR-TO-DATE. Odyssey has grown rapidly through a focused strategy of acquisitions, the development of new hospice locations, and the expansion of existing locations. The company bought a 1 00-ADC in Washatchie, TX (Southern Dallas County) in January and acquired two small hospices with combined ADC of 40 in Valdosta, GA and Memphis, TN effective May 1. For 2003, we expect the company to develop and/or acquire fourteen locations, adding average daily census (ADC) of approximately 600-700. Acquired hospices have added ADC of 140 YTD....

RAISE 2003E AND 2004E EPS OUTLOOK. We are raising our 2003E EPS from $1.16 (+35%) to $1.20 (+40%) and our 2004E EPS from $1.48 (+27%) to $1.52 (+27%). For 2003, revenue estimate is $260MM (+34%) - the upper end of management's +30-35% guidance.

- 19 - Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 21 of 54 PageID 369 (1,

47. Further, on May 6, 2003, the investment firm of Stifel, Nicolaus & Company, after

discussions with defendants issued a favorable report on Odyssey, rating the Company's common

stock a "Strong Buy." The report written by Chris Sergeant stated:

In the break-neck race for territory and patient flow in the for-profit hospice arena, Odyssey kept up the pace in the first quarter. They again exceeded our estimates on every measure.

Odyssey is on track for its 2003 expansion plans, and they continue to deliver against plan.

We like Odyssey's balance 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.

48. After these announcements, Odyssey's stock price advanced to its then Class Period

high of over $22 per share. While Odyssey stock traded at artificially inflated prices, defendant

Burnham sold 300,000 shares of Odyssey stock that he owned, for prices between $17.20 and $22.02

per share, pocketing $5.4 million in unlawful insider trading proceeds. Defendant Gasmire sold

69,596 shares of Odyssey stock that he owned, for prices between $19.79 and $22.80 per share,

pocketing $1.4 million in unlawful insider trading proceeds. And defendant Cannon sold 19,492

shares of Odyssey stock that he owned, for prices between $19.86 and $20.16 per share, pocketing

$387,341 in unlawful insider trading proceeds. Defendants' stock sales were both suspicious in

amount and in timing as they were large in amount and occurred on the heels of Odyssey's positive

earnings announcement, reporting strong revenue and earnings for the 1St quarter of FY03, at prices

approaching Odyssey's then Class Period high.

49. The statements in ¶44-47 were false and misleading when made. At the time these

statements were made defendants actually knew that Odyssey's expansion program was not -20- Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 22 of 54 PageID 370

succeeding and could not be sustained because the Company's expansion activity had overwhelmed

Odyssey's infrastructure and resources and, as a result, the Company was experiencing serious

problems integrating newly acquired hospice centers, as detailed above. In addition, defendants

knew that Odyssey was violating federal Medicare and Medicaid laws by admitting patients who did

not qualify for hospice care, billing the government for services rendered to hospice patients that

were not actually provided, and failing to timely discard patients who no longer qualified for hospice

treatment under federal Medicare laws and guidelines, all for the purpose of artificially inflating the

Company's publicly reported revenues, net income and earnings. Moreover, defendants continued to

conceal the fact that the Company was continuing to submit false claims to the United States for

payment under Medicare and that its patient admissions, patient retention and billing practices

violated applicable federal and state laws.

50. Odyssey's artificially inflated stock price enabled the Company to acquire other

hospice care centers on more favorable terms by offering the acquiring company the opportunity to

join Odyssey's allegedly rapidly growing enterprise. For example, on May 6, 2003, Odyssey

announced a deal to acquire Mahogany Hospice Care, Inc., based in Memphis, Tennessee

("Mahogany"), and another deal to acquire Home Care Hospice, Inc., based in Valdosta, Georgia

("Home Care"). Commenting on the Mahogany acquisition, a senior Odyssey official stated:

Odyssey's services are provided in patient homes, long-term care facilities, nursing homes or hospitals.... "We are pleased that with the acquisition of Mahogany we will begin providing our high-quality service to Memphis-area patients immediately." Odyssey, headquartered in Dallas, Tex., currently has 67 hospice locations in 26 states, including the Mahogany location. During 2003, the company has provided care to approximately 5,400 patients. The company provides hospice care in many major metropolitan areas, including Nashville.

51. Based on the Odyssey's strong financial performance, on June 27, 2003, it was

announced that Odyssey had been added to the S&P 500 stock index. Three weeks later, on July 18,

2003, Odyssey announced a "a three-for-two stock split payable in the form of a fifty percent stock

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dividend to be distributed on August 12, 2003, to stockholders of record at the close of business on

July 28, 2003." Commenting on the dividend and Odyssey's "strong" operating performance,

Burnham, with the approval of Gasm ire and Cannon, stated:

"The company has a record of strong operating performance which the market has recognized," said Richard R. Burnham, chairman and chief executive officer. "We believe the three-for-two split will further improve trading liquidity and broaden ownership of the company's common stock."

52. On news of these developments, Odyssey's stock price advanced to over $25 per

share.

2nd Quarter FY03

53. On August 4, 2003, Odyssey announced its 2nd quarter FY03 results, ended June 30,

2003, reporting a 60% increase in net income to $7.6 million, or $0.20 per share (post split), on a

39% increase in revenue to $64.9 million. The Company also announced that its average daily

census for the 2nd quarter FY03 increased 34% to 5,758 patients, days of care for the quarter

increased 34% to 5,239, and net cash provided by operations for the quarter was $15.1 million. In

the Company's earnings release, Burnham, with the approval ofGasmire and Cannon, attributed the

Company's strong performance to the success of its aggressive expansion program, stating:

"We are very pleased with our continued strong financial performance," said Richard R. Burnham, chairman and chief executive officer. "More importantly, our existing programs continue to reach more patients and families, and we are creating additional platforms for growth by expanding our programs into new communities around the country."

Because of increased visibility into the remainder of the year, the company noted that it was increasing its guidance for net income growth in 2003 to 40 to 43 percent over 2002 results. The company had previously provided guidance of35 to 40 percent net income growth in 2003 over 2002.

54. Following the release of Odyssey's 2nd quarter FY03 results, defendants hosted a

conference call for investors and securities analysts on August 5, 2003. Commenting on the success

of Odyssey's expansion program and the Company's strong performance, Burnham, with the

approval of Gasmire and Cannon, stated: - 22 - Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 24 of 54 PageID 372

We are pleased to report very good second-quarter results - a 34 percent increase in average daily census over second quarter of 2002, a 39 percent increase in revenues and 60 percent increase in net income. Our margins were 11.7 percent compared to 10.1 percent in the second quarter of 2002.

All these results I believe continue to show that we are making very good progress on our goals. By that I mean our existing programs are growing, we are aggressively expanding into new service areas, and therefore, we continue to leverage our corporate infrastructure across a large number of patients and programs. As you know, approximately 94 percent of our revenue is attributable to Medicare. Each summer the Centers for Medicare and Medicaid Services or CMS as it is known announces rate increases. The announcement was made in early July. Hospices were provided a 3.4 percent increase effective October 1, 2003. However, based on the information we have now and the growth we are experiencing, we are raising our bottom-line guidance. Previously we had guided you to a 35 to 40 percent increase in net income for 2003 as compared to 2002. We are now comfortable with raising our estimate for our 2003 bottom-line growth to 40 to 43 percent over 2002 results.

55. Analyst immediately repeated this false information to the market in analysts' reports,

projecting FY03 and FY04 earnings for Odyssey of$1 .25 and $1.60, respectively. For example, on

August 5, 2003, CIBC World Markets issued a report, written by Charles W. Lynch, which stated:

ODSY reported 2Q:03 EPS of $0.31, two pennies ahead of our estimate and up 58% y-y. This growth, and the upside to our expectation, was primarily top-line driven, with patient volumes ahead of our model.

. Based on 2Q:03 results and increased management guidance, we are raising 2003E/04E to $1 .25/$1 .60 from $1.20/$1 .50.

• We view our new estimates as a conservative outlook of potential growth over the next two years, given ODSY's patient-volume growth as well as a supportive governmental stance toward Medicare hospice services.

• We continue to view ODSY as an attractive small-cap growth investment and are raising our price target to $45. Reiterate Sector Outperformer rating.

56. Similarly, on August 20, 2003, Stifel, Nicolaus & Company issued a report, written

by Chris Sergeant, based on his conversations with Burnham and Cannon during Odyssey's

August 5, 2003 conference call, recommending the purchase of Odyssey stock as a "Buy," and

noting that "Odyssey is strongly cash flow positive, enjoying a 'self-sustaining growth equation."

Stifel, Nicolaus & Company also wrote: "Hospice is a very young and consolidating space - there is

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plenty of green-field and acquisition opportunity out there - and we see continued above average

growth at Odyssey for years ahead."

57. After these announcements, Odyssey's stock price soared to over $29 per share.

While Odyssey stock traded at artificially inflated prices, defendant Burnham sold 150,500 shares of

Odyssey stock that he owned, for prices between $30.00 and $32.56 per share, pocketing $4.6

million in unlawful insider trading proceeds. Defendant Gasmire sold 157,416 shares of Odyssey

stock that he owned, for prices between $30.00 and $30.68 per share, pocketing $7.5 million in

unlawful insider trading proceeds. And defendant Cannon sold 29,579 shares of Odyssey stock that

he owned, for prices between $28.90 and $29.90 per share, pocketing $855,644 in unlawful insider

trading proceeds. Defendants' stock sales were both suspicious in amount and in timing as they

were large in amount and occurred on the heels of Odyssey's positive earnings announcement,

reporting strong revenue and earnings for the 2nd quarter of FY03, at prices approaching Odyssey's

then Class Period high.

58. The statements in ¶5 0-51, 53-56 were false and misleading when made. At the time

these statements were made defendants actually knew that Odyssey's expansion program was not