Case 3:04-cv-00844-ó Document 22 Filed 12/20/04 Page 1 of 54 PageID 349 o RtGi,:,kii:jc 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 Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 2 of 54 PageID 350 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 -1- Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 3 of 54 PageID 351 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, -3- Case 3:04-cv-00844-N Document 22 Filed 12/20/04 Page 5 of 54 PageID 353 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.