Case 1:17-cv-01954-PAC Document 30 Filed 10/27/17 Page 1 of 120 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE INSYS THERAPEUTICS, INC. Civil Action No. 1:17-cv-01954-PAC SECURITIES LITIGATION SECOND AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case 1:17-cv-01954-PAC Document 30 Filed 10/27/17 Page 2 of 120 TABLE OF CONTENTS SUMMARY OF THE ACTION..................................................................................................... 1 JURISDICTION AND VENUE ..................................................................................................... 4 THE PARTIES................................................................................................................................ 4 I. Lead Plaintiff........................................................................................................................ 4 II. Defendants............................................................................................................................ 5 A. Insys Therapeutics, Inc..................................................................................................... 5 B. The Individual Defendants............................................................................................... 5 STATEMENT OF FACTS ........................................................................................................... 11 I. Company Background........................................................................................................ 11 A. Insys’s Success Is Dependent on the Sale of Subsys, Its Only Product on the Market. 11 B. The Majority of Insys’s Revenue From Subsys Is Derived From Reimbursements Received From Third-Party Payers................................................................................ 13 C. Insys Closely Monitored Authorization and Reimbursement Rates Through Its Insurance Reimbursement Center. ................................................................................. 16 D. Insys Top Management Admittedly Monitors the Company’s Main Customers’ Inventory Levels Through Inventory Reports Received Directly From Customers...... 17 II. Third-Party Payers Cease Approving and/or Reimbursing for Off-Label Prescriptions of Subsys Upon Revelation of the Company’s Illegal Kickback Scheme.............................. 18 III. Defendants Institute a “Tone at the Top” to Engage in Accounting Manipulations in Order to Conceal the Company’s Declining Subsys Revenues.................................................... 23 A. Defendants Prematurely Recognize Revenue for Subsys Before It Was Sold to the End- User or the Right of Return Expired.............................................................................. 23 B. Defendants Fail to Properly Recognize Product Returns and Rebates, Which Could Not Be Reasonably Estimated Based on Insys’s Lengthy Return Policy............................. 25 IV. The Audit Committee of the Insys Board of Directors Commences an Internal Investigation of the Accounting Fraud............................................................................... 27 POST-CLASS PERIOD EVENTS ............................................................................................... 27 I. Insys Announces “Material” Restatements to the Company’s Interim Financial Statements Resulting from a “Tone at the Top” and Woeful Lack of Internal Controls. ..................... 27 II. The Chief Operating Officer, Chief Executive Officer, Interim Chief Executive Officer, Chief Medical Officer, and Chief Financial Officer of Insys “Resign” or Are “Terminated.” ..................................................................................................................... 28 DEFENDANTS’ MATERIALLY FALSE AND MISLEADING CLASS PERIOD STATEMENTS AND OMISSIONS ............................................................................................ 30 ii Case 1:17-cv-01954-PAC Document 30 Filed 10/27/17 Page 3 of 120 I. False and Misleading Statements in the May 7, 2015 Press Release and First Quarter Earnings Call ...................................................................................................................... 30 II. False and Misleading Statements in the 2015 First Quarter Form 10-Q............................ 31 A. False and Misleading Statements Concerning Compliance with Accounting Policies and GAAP............................................................................................................................. 32 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 33 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting........................................................................................................................ 34 III. False and Misleading Statements in the August 6, 2015 Press Release............................. 38 IV. False and Misleading Statements in the 2015 Second Quarter Report and Earnings Call. 39 A. False and Misleading Statements Concerning Compliance with Accounting Policies and GAAP............................................................................................................................. 39 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 41 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting........................................................................................................................ 42 V. False and Misleading Statements in the November 5, 2015 Press Release ....................... 43 VI. False and Misleading Statements in the 2015 Third Form 10-Q and Earnings Call.......... 44 A. False and Misleading Statements Concerning Compliance With Accounting Policies. 44 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 46 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting........................................................................................................................ 47 VII. False and Misleading Statements in the February 23, 2016 Press Release ........................ 48 VIII. False and Misleading Statements in the 2015 Annual Report and Earnings Call.............. 50 A. False and Misleading Statements Concerning Compliance With Accounting Policies. 50 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 52 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting........................................................................................................................ 55 IX. False and Misleading Statements in the April 28, 2016 Press Release .............................. 56 X. False and Misleading Statements in the 2016 First Quarter Form 10-Q and Earnings Call ..................................................................................................................................... 57 A. False and Misleading Statements Concerning Compliance With Accounting Policies. 58 iii Case 1:17-cv-01954-PAC Document 30 Filed 10/27/17 Page 4 of 120 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 59 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting........................................................................................................................ 61 XI. False and Misleading Statements in the August 3, 2016 Press Release and Earnings Call 63 XII. False and Misleading Statements in the 2016 Second Quarter Report .............................. 66 A. False and Misleading Statements Concerning Key Financial Metrics and Compliance With Internal Policies .................................................................................................... 66 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 67 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting........................................................................................................................ 68 XIII. False and Misleading Statements in the November 3, 2016 Press Release ....................... 70 XIV. False and Misleading Statements in the 2016 Third Quarter Form 10-Q .......................... 72 A. False and Misleading Statements Concerning Compliance With Accounting Policies. 73 B. False and Misleading Statements Concerning Insys’s Financial Statements and Compliance With GAAP ............................................................................................... 74 C. False and Misleading Statements Concerning Insys’s Internal Controls Over Financial Reporting.......................................................................................................................