1 consolidated amended complaint 05/11/2012
TRANSCRIPT
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UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY
COVINGTON DIVISION
Case No. 2:11-CV-00173-DLB-CJS
In re Omnicare, Inc. Securities Litigation CLASS ACTION
CONSOLIDATED AMENDED COMPLAINT
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TABLE OF CONTENTS
I. NATURE OF THE ACTION ............................................................................................. 1
II. JURISDICTION AND VENUE ......................................................................................... 3
III. PARTIES............................................................................................................................ 3
A. Lead Plaintiff .......................................................................................................... 3
B. Defendants .............................................................................................................. 4
IV
BACKGROUND................................................................................................................ 9
V. DEFENDANTS’ FRAUDULENT SCHEME .................................................................. 14
A. The Stone Qui Tam Action Reveals That Medicare/Medicaid Fraud Disavowed By Omnicare Continued .......................................................... 15
B. Former Omnicare Employees Describe Class Period Medicare and Medicaid Fraud, Corroborating Stone’s Allegations ..................................... 23
C. Omnicare Pays Nearly $100 Million To Settle Allegations Of Kickbacks Involving Ongoing Medicare And Medicaid Fraud ............................ 28
VI
OMNICARE’S FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD ............................................................... 30
A. Omnicare’s Class Period Forms 10-K Falsely Represent Compliance With Applicable Medicare And Medicaid Requirements ..................................... 32
B. Omnicare Falsely Represented That It Was Complying With Its CodesOf Conduct ................................................................................................. 35
C. Omnicare’s Class Period Financial Statements Attribute Positive Impact To Operating Metrics While Omitting To Disclose Positive Impact From Medicare And Medicaid Fraud ....................................................... 38
D. Omnicare Made False Statements Concerning The Risks That Could Befall Its Business Were It To Fail To Comply With Medicare And Medicaid Regulations ................................................................... 60
E. Omnicare’s Reported Financial Results Were Materially False And Misleading Throughout The Class Period ........................................... 61
F. Omnicare Made False Statements Concerning The Accuracy Of The Statements Made In Its Class Period Forms 10-K And 10-Q .................. 72
VII. THE TRUTH EMERGES PROMPTING DEFENDANTS GEMUNDER AND HODGES’ RESIGNATIONS AND A MASSIVE STOCK SELLOFF ................. 75
VIII. LOSSCAUSATION ......................................................................................................... 79
IX. ADDITIONAL SCIENTER ALLEGATIONS ................................................................. 81
X. CLASS ACTION ALLEGATIONS ................................................................................. 84
XI. RELIANCE SHOULD BE PRESUMED WITH RESPECT TO DEFENDANTS’ OMISSIONS ........................................................................................ 87
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XII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE ..................................................................... 87
XIII. NO SAFE HARBOR EXISTS FOR DEFENDANTS’ STATEMENTS ......................... 88
COUNTI .......................................................................................................................... 89
For Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against Defendants .............................................................. 89
COUNTII ......................................................................................................................... 93
For Violation of Section 20(a) of the 1934 Act (Against The Individual Defendants Based On Omnicare’s Violation Of Section 10(b)) ................. 93
PRAYER FOR RELIEF ............................................................................................................... 94
JURY TRIAL DEMAND ............................................................................................................. 95
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I. NATURE OF THE ACTION
1. Lead Plaintiff KBC Asset Management N.V. (“KBC” or “Plaintiff”), on behalf of
itself and all other persons similarly situated, alleges the following based upon personal
knowledge as to itself and its own acts, and upon the investigation of Plaintiff’s counsel, which
included, inter alia, a review of United States Securities and Exchange Commission (“SEC”)
filings by Omnicare, Inc. (“Omnicare” or the “Company”) and other companies, as well as
regulatory filings and reports, securities analysts’ reports and advisories about the Company,
press releases and other public statements issued by the Company, interviews of former
Omnicare officers and employees, publicly available filings in federal and state court actions
concerning Omnicare, the defendants, and other persons, including the qui tam action filed on
behalf of the federal government against Omnicare in the United States District Court for the
Northern District of Illinois captioned United States of America ex. rel. Stone v. Omnicare, Inc. ,
09-cv-4319 (N.D. Ill. July 17, 2009) (the “Stone Qui Tam Action”), and media reports about the
Company. Plaintiff believes that substantial additional evidentiary support will exist for the
allegations set forth herein after a reasonable opportunity for discovery.
2. This is a class action for violations of the federal securities laws on behalf of
purchasers or acquirers of Omnicare securities between January 10, 2007 and August 5, 2010,
inclusive (the “Class Period”), against Omnicare, Joel Gemunder (“Gemunder”), the Company’s
former President and Chief Executive Officer (“CEO”), David W. Froesel, Jr. (“Froesel”), the
Company’s former Senior Vice President and Chief Financial Officer (“CFO”), John L.
Workman (“Workman”), Omnicare’s current President and CFO, and Cheryl D. Hodges
(“Hodges”), the Company’s former Senior Vice President and Secretary (collectively,
“Defendants”). Plaintiff’s claims arise from allegations of securities fraud in violation of
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Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15
U.S.C. §§ 78j(b) and 78t(a); and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.
3. During the Class Period, Defendants concealed material information and issued
materially false and misleading statements concerning Omnicare’s compliance with federal and
state laws governing Medicare and Medicaid, the Company’s financial results, and the
operational underpinnings of Omnicare’s revenues and profits. Omnicare concealed from
investors a widespread scheme to defraud Medicare and Medicaid by seeking – and obtaining –
reimbursement for claims that did not comply with the laws and regulations governing those
programs. While engaging in this conduct, and in efforts to rebut existing stock market concerns
regarding Omnicare’s Medicare and Medicaid compliance, Defendants falsely represented that
the Company was in fact fully compliant. The illegal conduct was lucrative, allowing Omnicare
to report in its annual and quarterly financial statements net sales, net income, accounts
receivable, total assets, and earnings per share that were fraudulently inflated by the improper
inclusion of these illegal Medicare and Medicaid reimbursements. These false and misleading
statements artificially inflated the price of the Company’s publicly traded securities during the
Class Period. Ultimately, when the truth emerged, with the Class Period-ending disclosure of
allegations of Medicare and Medicaid fraud in a federal qui tam action and the near simultaneous
termination of defendants Gemunder and Hodges, the artificial inflation was removed from the
price of Omnicare’s publicly traded securities, causing the Company’s shareholders hundreds of
millions of dollars of damages.
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II. JURISDICTION AND VENUE
4. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act (15 U.S.C. §§ 78j(b) and 78t(a)) and Rule 10b-5 (17 C.F.R. § 240.10b-5)
promulgated thereunder by the SEC.
5. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act.
6. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. § 1391(b). Many of the acts and transactions giving rise to the violations of law
complained of herein, including the preparation and dissemination to the investing public of false
and misleading information, occurred in this District. Omnicare has its principal place of
business at 1600 RiverCenter II, 100 East RiverCenter Boulevard, Covington, Kentucky 41011,
where the day-to-day operations of the Company are directed and managed.
7. In connection with the acts, conduct and other wrongs alleged in this Complaint,
the Defendants directly or indirectly, used the means and instrumentalities of interstate
commerce, including, but not limited to, the United States mails, interstate telephone
communications, and the facilities of the national securities markets.
III. PARTIES
A. Lead Plaintiff
8. Plaintiff KBC Asset Management N.V. is based in Brussels, Belgium and is the
asset management company of KBC Group. As of year-end 2010, KBC had approximately EUR
160 billion under management. During the Class Period, KBC purchased and held shares of
Omnicare common stock as detailed in KBC’s certification filed with the Court in support of its
motion to be appointed Lead Plaintiff. As a result of the Defendants’ conduct detailed herein,
KBC suffered damages in connection with its purchases of Omnicare securities.
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9. On March 12, 2012, the Court appointed KBC as Lead Plaintiff to represent the
proposed class of Omnicare shareholders.
B. Defendants
10. Defendant Omnicare is a Delaware Corporation with its principal place of
business at 1600 RiverCenter II, 100 East RiverCenter Boulevard, Covington, Kentucky 41011.
Omnicare is a leading provider of pharmaceutical care for the elderly, serving residents in long-
term care facilities, chronic care and other settings comprising approximately 1.4 million beds in
47 states, the District of Columbia, and Canada. In addition, Omnicare is the largest U.S.
provider of professional pharmacy-related consulting and data management services for skilled
nursing, assisted living and other institutional healthcare providers as well as for hospice patients
in homecare and other settings. The Company’s pharmacy services also include distribution and
patient assistance services for specialty pharmaceuticals. Omnicare also offers clinical research
services for the pharmaceutical and biotechnology industries in 31 countries. At all relevant
times, Omnicare’s common stock traded under the symbol “OCR” on the New York Stock
Exchange (“NYSE”), which is an efficient market. As of March 31, 2011, Omnicare had over
115 million shares of common stock outstanding.
11. Defendant Joel Gemunder served as President, CEO and a Director of Omnicare
for nearly thirty years, from May 20, 1981 until his abrupt resignation on August 2, 2010 – three
days before the Company disclosed the existence of the Stone Qui Tam Action. Defendant
Gemunder, as reported by The Wall Street Journal on August 8, 2010, received financial benefits
totaling at least $130 million in connection with his resignation, including a $91 million pension
payout, severance payments, vesting of restricted stock, and other financial benefits. This is in
addition to Gemunder’s total compensation of over $25 million in 2009, over $23 million in
2008, and over $12 million in 2007.
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(a) During the Class Period, Gemunder knew about all material aspects of the
Company’s operations, finances, financial condition, and present and future business prospects,
including the Medicare and Medicaid fraud alleged in the Stone Qui Tam Action and other qui
tam actions, government investigations, and subsequent settlements. In fact, it was Gemunder
who is alleged to have constructively fired Stone, the Stone Qui Tam Action whistleblower,
reportedly telling him to “begin looking for other employment” after he presented several reports
detailing massive Medicare and Medicaid fraud throughout the Company to Omnicare’s Internal
Audit Committee.
(b) Gemunder was responsible for the issuance of false and misleading
statements about Omnicare during the Class Period, including, but not limited to Omnicare’s
Forms 10-K, 10-Q, and press releases on Form 8-K. During the Class Period, Gemunder signed
the following SEC filings, each of which contained materially false and misleading statements
and omitted to disclose material information: Form 10-K for the fiscal year ended December 31,
2006, filed with the SEC on March 1, 2007 (the “2006 Form 10-K”), Form 10-K for the fiscal
year ended December 31, 2007, filed with the SEC on February 28, 2008 (the “2007 Form 10-
K”), Form 10-K for the fiscal year ended December 31, 2008, filed with the SEC on February
26, 2009 (the “2008 Form 10-K”), and Form 10-K for the fiscal year ended December 31, 2009,
filed with the SEC on February 25, 2010 (the “2009 Form 10-K”). Gemunder also executed
Sarbanes-Oxley Section 302 and Section 902 certifications falsely confirming the accuracy of the
Company’s financial statements and internal controls over financial reporting for each of the
SEC filings that he signed, and for the following Class Period SEC filings that he did not sign:
Form 10-Q for the quarter ended March 31, 2007, filed with the SEC on May 21, 2007 (the “Q1
2007 Form 10-Q”), Form 10-Q for the quarter ended June 30, 2007, filed with the SEC on
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August 9, 2007 (the “Q2 2007 Form 10-Q”), Form 10-Q for the quarter ended September 30,
2007, filed with the SEC on October 31, 2007 (the “Q3 2007 Form 10-Q”), Form 10-Q for the
quarter ended March 31, 2008, filed with the SEC on May 8, 2008 (the “Q1 2008 Form 10-Q”),
Form 10-Q for the quarter ended June 30, 2008, filed with the SEC on July 31, 2008 (the “Q2
2008 Form 10-Q”), Form 10-Q for the quarter ended September 30, 2008, filed with the SEC on
October 30, 2008 (the “Q3 2008 Form 10-Q”), Form 10-Q for the quarter ended March 31, 2009,
filed with the SEC on April 30, 2009 (the “Q1 2009 Form 10-Q”), Form 10-Q for the quarter
ended June 30, 2009, filed with the SEC on July 30, 2009 (the “Q2 2009 Form 10-Q”), Form 10-
Q for the quarter ended September 30, 2009, filed with the SEC on November 5, 2009 (the “Q3
2009 Form 10-Q”), and Form 10-Q for the quarter ended March 31, 2010, filed with the SEC on
May 6, 2010 (the “Q1 2010 Form 10-Q”). In addition, Gemunder made materially false and
misleading statements during the Company’s quarterly earnings calls and during conferences
with securities analysts. Gemunder’s materially false and misleading statements are set out in
detail in Section VI, below.
12. Defendant David W. Froesel, Jr. (“Froesel”) was Omnicare’s Senior Vice
President and CFO from March 1996 until November 2009. During the Class Period, Froesel
knew about all material aspects of the Company’s operations, finances, financial condition and
present and future business prospects, including the Medicare and Medicaid fraud complained of
in the Stone Qui Tam Action. Further, during the Class Period, Froesel assisted in the
preparation and/or approval of Omnicare’s SEC filings, each of which contained materially false
and misleading statements and omitted to disclose material information, including, but not
limited to, Omnicare’s Forms 10-Q and 10-K. Froesel signed Omnicare’s 2006 Form 10-K, Q1
2007 Form 10-Q, Q2 2007 Form 10-Q, Q3 2007 Form 10-Q, 2007 Form 10-K, Q1 2008 Form
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10-Q, Q2 2008 Form 10-Q, Q3 2008 Form 10-Q, 2008 Form 10-K, Q1 2009 Form 10-Q, Q2
2009 Form 10-Q, and Q3 2009 Form 10-Q. Froesel also executed Sarbanes-Oxley Section 302
and Section 902 certifications falsely confirming the accuracy of the Company’s financial
statements and internal controls over financial reporting for each of these SEC filings. Froesel’s
materially false and misleading statements are set out in detail in Section VI, below.
13. Defendant John L. Workman (“Workman”) is Omnicare’s current President and
CFO. Workman has been Omnicare’s CFO since November 2009 and its President since
February 2011. Before joining Omnicare, Workman was Executive Vice President and CFO of
HealthSouth Corporation. During the Class Period, Workman assisted in the preparation and/or
approval of Omnicare’s SEC filings, each of which contained materially false and misleading
statements and omitted to disclose material information as set forth in detail below, including,
but not limited to, Omnicare’s Forms 10-Q and 10-K. Workman signed Omnicare’s 2009 Form
10-K, its Q1 2010 Form 10-Q, and its Form 10-Q for the quarter ended June 30, 2010, filed with
the SEC on August 5, 2010 (the “Q2 2010 Form 10-Q”). Workman also executed Sarbanes-
Oxley Section 302 and Section 902 certifications falsely confirming the accuracy of the
Company’s financial statements and internal controls over financial reporting for each of these
SEC filings. Workman also made materially false and misleading statements during the
Company’s quarterly earnings calls. Workman’s materially false and misleading statements are
set out in detail in Section VI, below.
14. Defendant Cheryl D. Hodges (“Hodges”) was Omnicare’s Senior Vice President
and Secretary from 1994 until her abrupt resignation on August 2, 2010 – three days before the
Company disclosed the existence of the Stone Qui Tam Action. Hodges served as an Omnicare
Director from 1984 to 1991 and again from May 1992 to May 2004. During the Class Period,
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Hodges assisted in the preparation and/or approval of Omnicare’s SEC filings, which contained
materially false and misleading statements and omitted to disclose material information. Hodges
also made a number of materially false and misleading statements during the Company’s
quarterly earnings calls, as set forth in detail in ¶¶ 120-133, 140-153, 157, infra .
15. Defendants Gemunder, Froesel, Workman, and Hodges are referred to herein as
the “Individual Defendants.” The Individual Defendants, collectively with Omnicare, are
referred to as the “Defendants.”
16. During the Class Period, the Individual Defendants, by virtue of their senior
executive positions with the Company, were privy to confidential and proprietary information
concerning Omnicare and its operations, financial condition, and present and future business
prospects. The Individual Defendants had access to such information via internal corporate
documents, conversations and connections with other corporate officers and employees,
attendance at management and/or board of director meetings and committees thereof, and via
reports and other information provided to them. Among other information, the Individual
Defendants had access to materially adverse non-public information concerning Omnicare’s
failure to comply with Medicare and Medicaid regulations, as well as its violations of FDA rules
and regulations, as discussed below, and the impact these violations were having on the
Company’s reported financial results. Because of their possession of such information, the
Individual Defendants knew or recklessly disregarded that the adverse facts specified herein had
not been disclosed to, and were being concealed from, the investing public.
17. The Individual Defendants, because of their positions with the Company,
controlled and/or possessed the authority to control the contents of the Company’s SEC filings,
reports, press releases, and presentations to securities analysts. The Individual Defendants were
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provided with copies of the Company’s SEC filings, reports, press releases, and other statements
alleged herein to be false and misleading prior to or shortly after their issuance and had the
ability and opportunity to prevent their issuance or cause them to be corrected. Thus, the
Individual Defendants had the opportunity to prevent as well as to commit the fraudulent acts
alleged herein.
18. Moreover, as set forth in Section VI, certain of the Individual Defendants signed
the SEC filings that are alleged to have been false or misleading in material respects. By signing
these SEC filings, the Individual Defendants personally attested to the accuracy of their content
and assumed a duty to disclose adverse facts that undermined the statements contained therein.
19. Certain of the Individual Defendants also personally made materially false and
misleading statements during the Company’s quarterly earnings calls and during conferences
with securities analysts, as set forth at length in Section VI.
20. As senior executives of a publicly traded company whose common stock is
registered with the SEC pursuant to the Exchange Act, is traded on the NYSE, and is governed
by the federal securities laws, the Individual Defendants had a duty to promptly disseminate
accurate and truthful information with respect to Omnicare’s financial results, growth,
operations, and present and future business prospects, and to correct any previously issued
financial or other statements that were or had become materially misleading or untrue, so that the
market price of Omnicare’s common stock would be based upon truthful and accurate
information. The Individual Defendants’ misrepresentations and omissions during the Class
Period violated these specific requirements and obligations.
IV. BACKGROUND
21. Omnicare provides pharmaceutical care for the elderly. The Company services
residents in long-term care facilities, chronic care and other settings, and purports to serve more
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than 1.4 million people receiving geriatric care in 47 states and Canada. Omnicare is also the
largest U.S. provider of professional pharmacy-related consulting and data management services
for skilled nursing, assisted living, and other institutional healthcare providers, as well as for
hospice patients in homecare and other settings.
22. Omnicare obtains most of its revenue directly or indirectly from government-
sponsored programs, primarily the federal Medicare program and, to a lesser extent, state
Medicaid programs. In 2010, over half of Omnicare’s pharmacy billings were directly
reimbursed by government-sponsored programs. In fact, according to the Company’s 2010 Form
10-K, federal Medicare and state Medicaid programs accounted for roughly 54% of Omnicare’s
revenue in 2010.1 To put this in perspective, of the $6.14 billion of revenue the Company
reported in 2010, over $3 billion came from government-sponsored programs. Given the critical
importance of the Medicare and Medicaid programs to the Company’s revenue, compliance with
all requirements necessary to ensure the continued right to participate in these programs was
critical to the Company’s success both before and throughout the Class Period.
23. Despite its reliance on reimbursements from the Medicare and Medicaid programs
to drive its revenue, in the period before the Class Period Omnicare was often accused of fraud
against those programs. These fraud allegations and concurrent media coverage put substantial
downward pressure on the Company’s stock price. As a result, Omnicare’s compliance with
applicable Medicare and Medicaid regulations was of paramount concern to investors.
24. On November 7, 2005, Johnson & Johnson filed its third quarter 2005 financial
results with the SEC on Form 10-Q. In its 10-Q, Johnson & Johnson disclosed that it had
1 Similarly, federal Medicare and state Medicaid programs accounted for 53% of Omnicare’s revenue in 2007, 52% in 2008, and 53% in 2009.
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“received a subpoena from the United States Attorney’s Office, District of Massachusetts,
seeking documents related to sales and marketing of eight drugs to Omnicare. . . .”
25. The Johnson & Johnson disclosure fueled rumors that Omnicare was engaged in
illegal practices. Omnicare responded on the same day, stating that:
[I]n response to inquiries related to recent 10-Q filings of certain drug companies:
“Omnicare’s policy is to comply with all applicable federal and state laws and regulations. To the best of our knowledge, our purchases of pharmaceuticals comply with all applicable laws and regulations and are consistent with Omnicare’s goal of providing appropriate pharmaceutical care cost-effectively for the seniors we serve.”
26. On January 13, 2006, Omnicare filed a Form 8-K with the SEC reporting for the
first time that the Company had also been subpoenaed by the Massachusetts United States
Attorney and explaining:
[T]he Company has been made aware that the federal government and certain states are investigating allegations relating to three generic pharmaceuticals provided by the Company in connection with the substitution of capsules for tablets (Ranitidine), tablets for capsules (Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone). The Company is cooperating fully in these matters.
Omnicare’s stock responded with a decline of over 3%, to $58.04 per share on the next trading
day, January 17, 2006.
27. On January 18, 2006, the Ohio Attorney General disclosed that it had conducted a
search of Omnicare’s Dublin, Ohio office and seized information related to suspected Medicaid
fraud. As news of the Massachusetts subpoenas and the Ohio search was more widely reported,
Omnicare’s shares continued to fall, closing at $56.10 on January 19, 2006, and at $54.75 on
Friday, January 20, 2006, a one week decline of nearly 9%.
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28. On January 27, 2006, The Cincinnati Enquirer reported that the Michigan
Attorney General’s office had led a raid of Omnicare offices in the Detroit suburb of Livonia and
other cities. On January 30, 2006, the raid was again reported by The Associated Press in an
article titled “Omnicare Shares Drop on Michigan Raid Report; Omnicare Declines Comment on
Report of Michigan Raid; Stock Falls on Report, Analyst Downgrade.” Although the story noted
that Omnicare claimed its goal was “to comply with all laws and regulations,” it also recounted
that Stifel Nicolaus analyst Jerry Doctrow had downgraded the stock to “Hold” from “Buy,”
citing his concerns regarding the raid.
Doctrow reiterated his optimism about Omnicare’s earnings prospects, but said he was “troubled” by news of a fourth investigation at Omnicare’s offices since the beginning of the year, and was concerned about the potential for further raids.
He speculated that the raid may be part of a coordinated multistate review of Omnicare’s drug pricing under state Medicaid programs.
These reports caused Omnicare shares to fall from $55.05 on January 27, 2006 to $48.96 on the
next trading day, January 30, 2007, a decline of over 11%.
29. In efforts to clear its name and enhance its stock value, Omnicare needed to – and
did – settle these allegations.
30. In October 2006, Omnicare agreed to pay $52.5 million to settle allegations that it
had cheated Michigan’s Medicaid health program – the largest fraud case in the history of the
state of Michigan. In this action, Omnicare’s Specialized Pharmacy Services Unit was accused
of improper medication billing practices. Among its more noteworthy offenses, the Specialized
Pharmacy Unit was accused of submitting for reimbursement charges for hospice patients and
other individuals who were already deceased. As conditions of the settlement, Omnicare was
required to hire a special compliance officer and to change its billing procedures. Omnicare
attempted to prevent harm to its reputation by representing that the pertinent billing disputes
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were confined to the State of Michigan, and defendant Gemunder was quoted in the press saying
the Company had a “zero tolerance policy” for Medicare wrongdoing.
31. Following this announcement, on October 5, 2006, JP Morgan analyst Lisa Gill
wrote that the settlement of the Michigan investigation was a positive for the stock, that it had
removed one of the key overhangs for the stock’s performance, and that it had minimized the
risk of additional headlines. Omnicare’s stock rose 5.75% in response to the settlement, analyst
comments and the market’s belief that Omnicare was putting issues of Medicare and Medicaid
fraud behind it.
32. In November 2006, Omnicare agreed to pay $49.5 million to settle claims by the
U.S. government and 42 states alleging that it overcharged for certain drugs it provided to
seniors. In these actions, Omnicare was accused of substituting more expensive forms of generic
versions of drugs, including the antacid Zantac and the antidepressant Prozac, to evade price
limits set for Medicaid reimbursement. As a condition of this settlement, Omnicare was required
to enter into a corporate integrity agreement that required the Company to provide extensive
training and oversight of its employees.
33. Following this announcement, Morgan Stanley wrote in a November 14, 2006
report that the nationwide settlement of Medicare fraud claims was “a clear positive for the
shares as it removes another long-standing non-operating overhang.” As a result, Omnicare’s
stock rose 2.82% on November 15, 2006.
34. While the Company strenuously denied wrongdoing in connection with these
settlements, Omnicare announced corporate changes designed to show the market that going
forward Omnicare would be compliant with all applicable state and federal healthcare laws and
regulations.
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V. DEFENDANTS’ FRAUDULENT SCHEME
35. Having survived the damning allegations of Medicare and Medicaid fraud that
had massacred the Company’s stock price, Defendants knew the Company would have to present
a face of compliance with Medicare and Medicaid laws and regulations if the Company’s stock –
and the Individual Defendants’ options and restricted shares – were to perform well going
forward. To this end, Defendants set about a course of conduct designed to falsely reassure the
market that the Company had turned over a new leaf, that potential Medicare and Medicaid
issues that could hamper share performance going forward had been identified and resolved, and
that the Company was poised for growth. This scheme began on January 10, 2007. On that date,
Omnicare President and CEO Joel Gemunder took the podium at a JP Morgan Healthcare
Conference and proclaimed that the Company’s “goal is to comply with all laws and
regulations,” and that it was “getting [regulatory issues] behind us.”
36. The market bought what Gemunder was selling, and Omnicare’s stock price rose
17% in the following weeks, from $38 on January 10, 2007 to $44.59 on February 22, 2007.
37. As set forth in detail below, however, and unbeknownst to stock market analysts
or Omnicare’s public shareholders, the Company had not ceased its campaign of Medicare and
Medicaid fraud. Instead, it was “business as usual” at Omnicare, as the Company continued to
submit improper claims for reimbursement to the Medicare and Medicaid programs, and to
include in its financial statements the net sales, net income, accounts receivable, total assets, and
earnings per share that corresponded to such improper and un-reimbursable claims. For years,
the Company continued this fraud unabated until a whistleblower lawsuit filed by the Company’s
former head of internal audit revealed the truth, wiping out hundreds of millions of dollars of the
Company’s ill-gotten stock price gains. During the Class Period, by virtue of numerous internal
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audits, Omnicare also discovered a raft of pre-existing health care fraud. None of this fraud,
ongoing or preexisting, was revealed to the investing public until the end of the Class Period,
when allegations made by Omnicare’s internal auditor, John Stone, were disclosed in the Stone
Qui Tam Action.
A. The Stone Qui Tam Action Reveals That Medicare/Medicaid Fraud Disavowed By Omnicare Continued
38. In 2009, John Stone, Omnicare’s then Vice President of Internal Audit, filed a qui
tam action against the Company accusing it of engaging in a scheme to defraud the Medicare and
Medicaid systems that was ongoing during the Class Period. The Stone Qui Tam Action makes
clear that the Company continued to engage in a widespread scheme to defraud Medicare and
Medicaid long after Gemunder proudly proclaimed that the Company had put these issues behind
it.
39. According to Stone, during the Class Period Omnicare was repeatedly reimbursed
by Medicare as a result of claims submitted by the Company for durable medical equipment
(“DME”) that were not accompanied by a physician’s order as required by federal law. Stone’s
complaint details illegal claims for Medicare reimbursement for DME services provided by
Omnicare Medical Supply Services in August 2007 and January 2008, long after Gemunder’s
January 10, 2007 declaration that these matters were “behind” the Company.
40. Likewise, Stone alleges that Omnicare submitted, and was reimbursed for, false
claims submitted to Medicare for DME items that lacked the proof of medical necessity required
by law. Stone’s complaint details illegal claims for DME services at the Company’s Annapolis
Junction facility in June 2007, a full six months after Gemunder’s January 10, 2007 statements.
41. In 2009, according to Stone, Omnicare attempted to conceal the true scope of this
fraud by remitting a nominal payment to DME Regional Carriers responsible for processing
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DME claims for Medicare Part B reimbursement and for reimbursing DME suppliers like
Omnicare, on the basis of assignment of benefits executed by a Medicare beneficiary. The
payments allegedly concealed the true volume of false claims actually submitted to Medicare.
42. While Gemunder publicly proclaimed in January 2007 that Omnicare had moved
beyond its checkered past, internal audits conducted after that date made clear that the Company
had only just begun to understand the depth and extent of the Company’s fraud. In 2007,
Omnicare commissioned Stone to perform an audit of the Company’s previously submitted
Medicare and Medicaid claims for “ancillary services,” including, but not limited to, intravenous
medications and nutrition products, respiratory therapy services and other DME and supplies.
This audit was referred to internally as the “Wave I” audit. The Wave I audit examined only a
small selection of Omnicare’s Medicare and Medicaid reimbursements and yet found pervasive
fraud at each of the facilities audited. Indeed, according to Stone, the Wave I audit was not
designed or intended to “identify all of the false and fraudulent claims made upon the Medicare
and State Medicaid programs.” For each year between 2000 and 2005, eighteen of Omnicare’s
pharmacy facilities that provided ancillary services were selected and thirty-nine claims from
each pharmacy were reviewed for each year. The parameters of the Wave I audit were
established by Omnicare’s internal audit department and approved by Omnicare’s Chief
Compliance Officer.
43. The Wave I audit revealed that the eighteen Omnicare pharmacy facilities
examined had submitted numerous false, un-reimbursable claims to DME Regional Carriers
(“DMERC”) Regions A, B, C, and D between 2000 and 2005.2 Omnicare was improperly paid,
2 DMERC Regions A, B, C, and D process and review Medicare claims (typically “Part B” claims) for durable medical equipment across the United States.
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at a minimum, $157,531.91 by DMERC Regions A, B, C, and D pursuant to the small subset of
fraudulent submissions identified in the Wave I audit. DMERC Regions A, B, C, and D
encompass the entire United States. Importantly, Omnicare received improper reimbursements
in connection with each of the facilities throughout the country. The improper Medicare billing
identified by the Wave I audit was not restricted to one pharmacy or even one portion of the
United States, rather it was pervasive across Omnicare’s pharmacy facilities and the four
DMERC facilities nationwide.
44. The Wave I audit also revealed that the Company’s pharmacy facilities had
submitted false and fraudulent claims to the Medicaid programs in Illinois, Colorado, Louisiana,
Nevada and Washington between 2000 and 2005. Wave I revealed that Omnicare was paid, at a
minimum, $314,671 by these states pursuant to the false claims submitted. According to Stone,
“[t]he results of Wave I reveal[ed] that Omnicare’s pharmacy facilities have engaged in a pattern
and practice of systematically making claims upon the Medicare and Medicaid program which
were unjustified, unjustifiable, and false.” Stone also averred that the “error rates” (defined as
unsupportable claims relative to total claims) at the eighteen Omnicare pharmacies examined as
part of the Wave I audit “were so high that [Omnicare] knew or should have known that false
and fraudulent claims were being made.”
45. Between March and August of 2007, in connection with the finalization of the
Wave I audit results, Stone participated in exit interviews with staff members from each of the
audited Omnicare pharmacies. Omnicare’s Chief Compliance Officer participated in virtually all
of these interviews. According to Stone, pharmacy managers “repeatedly indicated the sentiment
that claims were routinely submitted without required documentation and that receipt of payment
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was the paramount concern,” with one pharmacy manager summarizing Omnicare’s approach:
“[A]ll we’re trying to do is get paid.”
46. Stone presented the results of the Wave I audit to Omnicare’s Internal Audit and
Corporate Compliance Committees. On information and belief, the information was
immediately given to defendants Gemunder, Froesel, and Hodges and received by defendant
Workman when he started at the Company in November 2009. Further, there is nothing to
indicate that the illegal practices identified by the Wave I audit were remedied or stopped. In
fact, evidence from later audits strongly suggests that the wrongdoing continued unabated.
47. The results of the Wave I audit, at a minimum, undermine Gemunder’s January
10, 2007 proclamation that the Company had put the regulatory imbroglios of the past behind it.
With the Wave I audit, Omnicare became acutely aware of pervasive ongoing fraud that had not
been disclosed to the investing public and would not be until the end of the Class Period.
48. Wave I also should have caused Omnicare to sharply question whether the
financial results reported to the investing public accurately reflected the Company’s operations.
Instead, Omnicare swept the Wave I audit under the rug, remaining silent until it was forced to
disclose the Stone Qui Tam Action on August 5, 2010.
49. In 2008, following the completion of the Wave I audit, Omnicare commissioned
Stone to perform a second internal audit, known as the “Wave II” audit. According to Stone,
“Omnicare’s corporate management decided to conduct a follow-up audit of its pharmacies’
more recent claims in 2008 . . . because Pat Keefe, then the Executive Vice President and Chief
Operating Officer, wanted to show that the allegedly missing documents identified in the 2007
audit had originally been present and thereafter lost.” Like Wave I, the Wave II audit used a
limited sample and still discovered substantial fraud. Wave II examined thirty claims from
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fifteen Omnicare pharmacies in 2008. Wave II revealed continuing companywide Medicare and
Medicaid fraud. Again, the Wave II audit provided evidence of false reimbursement claims
submitted to each DMERC Region across the country. Rather than showing that missing
documents from the Wave I audit had originally been present and later lost, the “subsequent
2008 audit verified that such proof continued to be absent and was certainly not present at the
time the audited claims were submitted for Medicare or Medicaid reimbursement.” That all
DMERC Regions were affected by Omnicare’s fraudulent submissions leaves no doubt that the
conduct was pervasive throughout the Company.
50. The Wave II audit also uncovered that Omnicare continued to defraud state
Medicaid programs by submitting deficient claims for reimbursement. For example, Omnicare
subsidiary, Pharmacy Solutions, Inc., in Conway, Arkansas, billed for Medicaid patients (nearly
60% of the patients at the facility) at a higher rate than the rate billed for non-Medicaid patients.
Of the 40% comprising non-Medicaid patients, nearly 100% were billed at a rate at least 10%
less than that billed Arkansas Medicaid. According to Stone, Omnicare’s facilities “engaged in
the pattern and practice of billing Medicaid at a rate greater than the usual and customary rate
charged to non-Medicaid beneficiaries,” and the Wave II audit did not even purport to identify
all of the facilities that overbilled Medicaid.
51. On information and belief, Stone presented the results of the Wave II audit to
Omnicare’s Internal Audit and Corporate Compliance Committees and the results were
immediately given to defendants Gemunder, Froesel, and Hodges and received by defendant
Workman when he started at the Company in November 2009. Further, there is nothing to
indicate that the illegal practices identified by the Wave I and Wave II audits were remedied or
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stopped. In fact, evidence from the Wave II audit strongly suggests that the wrongdoing
identified in the Wave I audit continued unabated.
52. Stone further alleges that Omnicare attempted to conceal the ongoing Medicare
fraud uncovered in connection with the Wave I audit by repaying each of the Medicare DMERC
Regions (covering the entire United States) for the small sample of false claims uncovered as
part of the Wave I audit. Omnicare made these payments without further examination of the
claims submitted during the period 2000 through 2005, despite the small sample and likelihood
that the incidence of fraud was far higher than the audit had revealed. Further, at the time of its
reimbursement of the DMERC Regions, Omnicare had knowledge of the Wave II audit results
and the continuing Medicare and Medicaid fraud they revealed, but chose to pocket the money
from that fraud without any attempt at reimbursement. Finally, Omnicare made no effort to
reimburse state Medicaid programs for the false billings uncovered by the Wave I and Wave II
audits. Omnicare considered the matter closed after taking these halfhearted steps at reimbursing
Medicare.
53. As with the Wave I audit, the Wave II audit should have caused Omnicare to
sharply question the accuracy of Gemunder’s January 10, 2007 proclamation that the Company
had put the regulatory imbroglios of the past behind it. The Wave II audit concluded after
Gemunder’s statements were made and revealed pervasive ongoing fraud that had not been
disclosed to the investing public and would not be disclosed until the end of the Class Period.
54. Wave II also should have caused Omnicare to sharply question whether the
financial results reported to the investing public accurately reflected the Company’s operations.
Instead, Omnicare swept the Wave II audit under the rug, remaining silent until it was forced to
disclose the Stone Qui Tam Action on August 5, 2010.
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55. Following the Wave I and Wave II audits, Stone continued to investigate
Omnicare’s fraudulent practices. In 2008, Stone was directed by the Company to perform an
audit of newly acquired pharmacies (the “Pharmacy Audit”) to determine whether those facilities
were in compliance with Medicare and Medicaid regulations. The Pharmacy Audit found that
Omnicare’s pharmacies were in violation of numerous statutory and regulatory requirements for
Medicare and Medicaid reimbursement due to, among other things, order processing errors and
control test failures.
56. According to Stone, Omnicare was “fully aware of the [] deficiencies and that
their wholly owned, operated and controlled pharmacies were submitting false and fraudulent
Medicare and Medicaid claims.”
57. As with the Wave I and Wave II audits, the Pharmacy Audit should have caused
Omnicare to question the accuracy of Gemunder’s January 10, 2007 proclamation that the
Company had put regulatory issues behind it. The Pharmacy Audit revealed pervasive ongoing
fraud that had not been disclosed to the investing public and would not be disclosed until the end
of the Class Period.
58. The Pharmacy Audit also should have caused Omnicare to sharply question
whether the financial results reported to the investing public accurately reflected the Company’s
operations and results. As with the Wave I and Wave II audits, however, Omnicare did nothing,
remaining silent until it was forced to disclose the Stone Qui Tam Action on August 5, 2010.
59. Stone further alleges that Omnicare violated FDA regulations and committed
Medicaid fraud in connection with Synagis, a pediatric medicine used in children under the age
of two to fight the respiratory syncytial virus. While the FDA-approved label for Synagis
specifically instructed that unused portions of the drug be discarded, Stone discovered that
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Omnicare intentionally ordered excess Synagis and did not discard the excess but rather
stockpiled the undiscarded excess to fill new prescriptions. Omnicare then billed Medicaid for
“new” prescriptions that were, in reality, filled with stockpiled excess. The Synagis purchases
ranged from $402.50 to $7,739.10 per vial.
60. In 2008, during the Class Period, Stone, along with Omnicare’s Chief Compliance
Officer, conducted exit interviews related to the Wave II audit. During an exit interview
conducted by the Chief Compliance Officer, at which Stone was present, two pharmacy
managers, David Wuest and James Carnahan, from Omnicare’s Nevada pharmacy facility,
Arlington Clinical, explained that their pharmacy intentionally stockpiled excess Synagis and
billed all payors for prescriptions filled with the stockpiled Synagis, including Nevada Medicaid.
61. On information and belief, as with the Wave I and Wave II audits and the
Pharmacy Audit, this information was reported to Omnicare’s Internal Audit and Corporate
Compliance Committees and the results were immediately given to defendants Gemunder,
Froesel, and Hodges and received by defendant Workman when he started at the Company in
November 2009.
62. During November 2008, Stone presented the deficiencies uncovered by the
Pharmacy Audit to Omnicare’s Internal Audit Committee, stating that “said deficiencies resulted
in fraud upon Medicare and various State Medicaid programs.” On information and belief, the
information was immediately given to defendants Gemunder, Froesel, and Hodges and received
by defendant Workman when he started at the Company in November 2009. According to
Stone, “As a direct and proximate cause of [Stone’s] presentation to [Omnicare’s] Internal Audit
Committee, [defendant Gemunder] effectively discharged [Stone] by telling him to ‘begin
looking for other employment’ on or about December 1, 2008.” Defendant Gemunder’s
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knowledge of the Wave I and Wave II audits, and particularly the Pharmacy Audit is clear from
his reaction to Stone’s findings of rampant Medicare and Medicaid fraud at the Company.
63. While the Company knew the truth, it went to great lengths to keep the scheme
hidden. The Company succeeded, keeping the investing public in the dark until August 5, 2010,
when it was forced to disclose the existence of the Stone Qui Tam Action and the fraudulent
scheme detailed therein. These findings of Class Period Medicare and Medicaid fraud, known to
Omnicare through audits, as well as undisclosed and unaddressed Medicare and Medicaid fraud
in prior periods, belie Gemunder’s January 10, 2007 proclamation that Omnicare had moved
beyond its checkered past.
B. Former Omnicare Employees Describe Class Period Medicare and Medicaid Fraud, Corroborating Stone’s Allegations
64. A number of former Omnicare employees have corroborated the damning
allegations of ongoing Medicare and Medicaid fraud detailed in the Stone Qui Tam Action.
Confidential Witness 1 (“CW1”) began working at NeighborCare as a Medical Records Manager
in 1992 (NeighborCare became an Omnicare subsidiary in 2005). CW1 continued working at
NeighborCare as a Medical Records Manager until being transferred, in 2010, to another
Omnicare subsidiary, Hytech Homecare (“Hytech”), that provided DME services to healthcare
facilities. CW1 was a Customer Service Manager throughout his/her time at Hytech’s Mentor,
Ohio facility. As a Customer Service Manager, CW1 served in an office managerial role as well
as addressing complaints from customers (i.e. long-term care facilities). At Hytech, CW1
reported to General Manager John Wynne, who reported to Steve Parsons. CW1 resigned from
Omnicare in September 2011.
65. According to CW1, the Hytech facility’s Medicare reimbursement requests
commonly lacked the records necessary for compliance with federal and state law. Indeed, the
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facility was “riddled” with improper medical record-keeping. “Commonly” missing from
Hytech’s files were the dispensing orders, written orders, certificates of medical necessity and
other documents required for legitimate Medicare and Medicaid reimbursement. CW1 was
aware of these issues through his/her daily interactions with personnel at the facility.
66. When CW1 and other employees brought this fraud to the attention of General
Manager John Wynne, the response was “It was none of our f___ing business!” CW1 and other
employees also brought their concerns to the attention of Area Director Gloria Calhoun who
handled personnel and compliance issues. Omnicare did not implement measures to remedy the
fraud that was occurring at Hytech while CW1 was employed there.
67. CW2 also worked at Hytech’s Mentor, Ohio facility from 2000 until his/her
departure in July 2011. CW2 worked as a Billing Manager throughout his/her tenure at Hytech.
CW2 reported to General Manager of the Mentor facility John Wynne, who reported to Steve
Parsons.
68. As Billing Manager, CW2 oversaw all billing activity at the facility, including all
bills issued to Medicare. CW2 was the point-of-contact for all internal and external document
requests initiated in connection with Medicare and Medicaid audits. When Medicare or
Medicaid requested documents, CW2 would gather the requested medical records, to the extent
they were available, and provide them, along with the auditor’s request, to Omnicare’s corporate
office. Omnicare’s corporate office responded to external Medicare and Medicaid requests
directly.
69. CW2 confirmed CW1’s account of the substantial operational problems at the
Hytech facility, including improper medical record keeping. CW2 confirmed that the improper
medical record keeping caused the facility to routinely submit faulty Medicare and Medicaid
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reimbursement claims, for which it received payment, throughout CW2’s tenure (which began
before and ended after the Class Period).
70. CW2 also confirmed that various Omnicare employees, including CW1 and CW2,
regularly brought their concerns about inadequate record keeping and improper submission of
Medicare and Medicaid claims to the attention of General Manager John Wynne.
71. CW3 began working at Omnicare in 1994 and served as a Regional Director for
Heartland Health, an Omnicare subsidiary. In 2005, CW3 became the Director of one of
Omnicare’s fifteen Clinical Intervention Centers (“CIC”), supporting thirty-five Company
pharmacies in thirteen states. In 2007, CW3 became Corporate Vice President for Clinical
Operations, overseeing all fifteen of Omnicare’s CICs. CW3 reported to Gary Erwin (“Erwin”),
Senior Vice President for Professional Services, who reported to Jeff Stamps, Senior Vice
President for Pharmacy Operations. CW3 left Omnicare in late 2010 after the Company reduced
the number of CICs from fifteen to five as a cost saving measure.
72. According to CW3, the purpose of Omnicare’s CIC program was to specify the
use of particular medications at its long-term care facilities and arrange for high volume
purchases from particular pharmaceutical manufacturers. CW3 reported that problems
surrounding Omnicare’s compliance with federal and state laws governing this activity resulted
in a five-year Corporate Integrity Agreement (“CIA”) with the Office of the Inspector General
entered into on November 9, 2006 and amended on October 26, 2007.
73. CW3 was responsible for ensuring Omnicare’s compliance with the CIA, with
particular attention to compliance with the Medicare requirement that substitution of a more
expensive drug for a less expensive one be accompanied by a physician’s “Prior Authorization”
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form. This form was required to explain the need for the additional expense and the particular
facts surrounding specific patients.
74. CW3 reported that Omnicare did not undertake proper authorizations of these
drug “interchanges” on an individual patient basis. Instead, a single physician, often the long-
term care facility’s Medical Director, would authorize with a single stroke of the pen a “facility
formulary” that could switch as many as 20 different medications for an entire facility.
According to CW3, Omnicare made this comprehensive switch at many of its facilities when
oxybutynin, a generic medicine for treatment of urinary incontinence, was dropped in favor of a
more expensive alternative. No consideration was given to the circumstances of particular
patients.
75. CW3 stated that in 2004 Omnicare undertook an initiative to inquire as to the
propriety of using facility-wide formularies with state agencies for those states whose laws were
silent or unclear on the practice. According to CW3, when state agencies reacted cautiously by
informing Omnicare that such comprehensive drug interchanges were not permitted, CW3’s
supervisor, Erwin, brought the inquiry to a halt. Erwin told CW3 that by “giving too much
information” to state agencies, Omnicare’s inquiry had resulted in an outcome unfavorable to it.
Erwin’s clear attempt to push CW3 towards a path of plausible deniability speaks volumes about
the Company’s modus operandi .
76. Thereafter, from approximately 2005 until CW3’s departure in 2010, Omnicare
established and followed a policy whereby in states whose law was silent or unclear, the
Company assumed and operated as if the State did in fact permit comprehensive facility-wide
formulary-based physician authorizations – even though Omnicare had every reason to believe
that such comprehensive drug interchanges were not permitted.
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77. According to CW3, Omnicare also defrauded Medicare and Medicaid by
accepting rebates and other payments from preferred manufacturers without passing those
savings on to the federal and state governments. The illegal payments to Omnicare from
pharmaceutical manufacturers occurred throughout CW3’s tenure at the Company, at least
through 2010. CW3 said the rebates were negotiated “behind closed doors,” in direct violation
of federal and state laws, and at a high level, by Senior Vice President of Purchasing Dan
Maloney.
78. CW4 became an Omnicare employee when the Company acquired NeighborCare
in 2005. In February 2006, CW4 transferred to a pharmacy in Weston, Florida and served as
Supervisor of Adjudication and Prior Authorization. CW4 reported to Bill Manager Dina
Boehm, who reported to General Manager David Rombro. Rombro reported to Regional Vice
President for Pharmacy Operations, David West. CW4 left Omnicare after the end of the Class
Period.
79. As Supervisor of Adjudication and Prior Authorization at Omnicare’s Weston,
Florida facility, CW4 was responsible for Medicare and Medicaid claims arising from
medications delivered through several long-term care facilities including Omnicare’s Manor
Oaks and Manor Pines nursing homes. CW4 said the Weston facility regularly lacked the
required documentation for legitimate Medicare and Medicaid reimbursement. Among the many
violations was a “very common” failure to obtain written orders for medications within three
days of filling verbal orders, as required by law. Audits by Medicare providers such as Humana
disclosed “big problems with controls” accompanying the persistent lack of record-keeping.
80. Among Omnicare’s most egregious practices, CW4 reported that he/she and
subordinates were instructed by a “wink and a nudge” to deliberately change National Drug
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Code (“NDC”) numbers for drugs identified on Medicare and Medicaid reimbursement claims.
When a claim was rejected because the drug identified by the NDC was not covered by a
particular Medicare provider, the NDC was simply changed to identify a drug that was covered.
These clear and blatant falsifications of claims for Medicare and Medicaid reimbursement were
made at the behest of David Rombro, Weston’s General Manager.
81. As a result of these practices, CW4 confirmed that the Weston facility received
Medicare and Medicaid reimbursements for claims that were based on incomplete and inaccurate
medical records and altered NDCs.
82. CW5 was Omnicare’s Chief Compliance Officer from before the Class Period
through 2008 when he/she was replaced by James Mathis. CW5 confirmed the reports of the
other confidential witnesses detailed above, and qui tam relator Stone, stating that he/she had
brought compliance related concerns to the attention of defendant Gemunder and other Omnicare
executives. Specifically, he/she advised counsel that “as you were told by other people, I did my
best to bring it to the head [i.e. Gemunder], but it didn’t work.” CW5 also stated that he/she “did
what [he/she] was supposed to do as a Chief Compliance Officer and a Corporate Officer and
[he/she] threw up [his/her] arms, and said ‘I’m retired and I’m going home.’”
C. Omnicare Pays Nearly $100 Million To Settle Allegations Of Kickbacks Involving Ongoing Medicare And Medicaid Fraud
83. On November 3, 2009, the Department of Justice (“DOJ”) reported that Omnicare
had agreed to pay $98 million to settle charges that it knowingly submitted drug reimbursement
claims to Medicare and Medicaid that were false or fraudulent. In its settlement agreement with
the DOJ, entered into on behalf of the Department of Health and Human Services and the Office
of Inspector General, Omnicare admitted that it engaged in Medicare and Medicaid fraud during
and prior to the Class Period, including the following:
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(a) From December 2004 through December 2006, Omnicare knowingly
submitted drug reimbursement claims to Medicare and Medicaid that were false or fraudulent
because they resulted from a $50 million kickback that Omnicare paid to certain nursing home
chains in exchange for the nursing homes referring their patients to Omnicare for drug purchases,
including drug purchases covered by Medicare and Medicaid;
(b) From January 2000 through June 2004, Omnicare knowingly submitted
drug reimbursement claims to Medicaid that were false or fraudulent because they resulted from
an $8 million kickback paid to Omnicare to induce it to purchase certain generic drugs and to
recommend that physicians prescribe those drugs for their nursing home patients, including
patients covered by Medicaid;
(c) From September 1, 2005 through September 1, 2008, Omnicare
knowingly submitted drug reimbursement claims to Medicare and Medicaid that were false or
fraudulent because they resulted from kickbacks that Omnicare made to nursing homes in the
form of consultant pharmacist services provided at rates below Omnicare’s cost and below fair
market value;
(d) From January 1999 through December 2004, Omnicare knowingly
submitted false or fraudulent drug reimbursement claims to Medicaid for the antipsychotic drug
Risperdal. The claims resulted from payments that Omnicare solicited and received from
Johnson & Johnson, Risperdal’s manufacturer, from 1999 through 2004.
84. Accordingly, Omnicare had not in fact moved beyond its Medicare and Medicaid
fraud issues nearly three years after saying so. Particularly damning is Omnicare’s explicit
admission of fraud related to Medicare and Medicaid claims resulting from illegal kickbacks that
were perpetrated during the Class Period, during all of 2007 and the first nine months of 2008.
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85. Upon digesting these revelations, Omnicare’s stock fell 2% from $22.29 to $21.83
per share on November 5, 2009. Even after this disclosure, the Company continued to hide the
rampant Medicare and Medicaid fraud occurring at the Company. These settlements should have
caused the Company to further question Gemunder’s January 10, 2007 statements and the
veracity of Omnicare’s financial results. As with the investigations detailed above, however,
Omnicare did nothing and remained silent until it was forced to disclose the Stone Qui Tam
Action on August 5, 2010.
VI. OMNICARE’S FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD
86. Throughout the Class Period, Omnicare made numerous materially false
statements, and omitted to disclose material information needed to make the statements it did
make not misleading. Specifically, Omnicare made false statements concerning (1) its
compliance with applicable laws, rules, and regulations; (2) its financial results; (3) the accuracy
of the statements contained in its Class Period Forms 10-K and 10-Q; and (4) the root causes of
its financial performance. As a result of these false statements, Omnicare’s securities traded at
artificially inflated prices throughout the Class Period. When the truth about the Company was
revealed, the artificial inflation was removed from the price of its securities and Plaintiff and the
Class suffered substantial harm.
87. While Omnicare continued to engage in Medicare and Medicaid fraud, the
Company repeatedly – and falsely – represented that it was operating in compliance with all
applicable laws, rules and regulations, and that regulatory issues were behind it.
88. On January 10, 2007, Omnicare CEO Joel Gemunder told analysts at a JP Morgan
Healthcare Conference hosted by Lisa Gill (the same analyst that made positive comments about
the pre-Class Period settlements) that Omnicare’s goal was compliance with all laws and
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regulations, and that it was getting Medicare and Medicaid fraud issues behind it. During the
presentation, Gemunder touted the Company’s business model and addressed its regulatory
compliance:
. . . [W]e operate in a highly regulated industry with a significant amount of government oversight, and our goal is to comply with all laws and regulations. As part of the normal course of business, we and our industry peers, deal with government reviews and inquiries on a regular basis. And here I’m pleased to report that we are getting these matters behind us.
* * *
So, to sum it up, 2006 was quite a year with a number of seemingly unrelated issues affecting our business, but there are two important points I want to make here. First, despite the incremental costs required, patients continue to receive the service in pharmaceutical care they need and which they deserve. And second, we are, and will continue to work through these issues and believe that they will ultimately be resolved. We do not believe these issues alter the earnings power of the company, but rather they temporarily mask it. We believe the fundamentals of our business and the soundness of our strategy remain in place.
(emphasis added.)
89. These statements were materially false and misleading when made. As detailed
herein and contrary to Gemunder’s purported commitment to “getting these matters behind
[Omnicare],” the Company continued its campaign of fraud against the Medicare and Medicaid
programs. As set forth in Sections V and IX, Gemunder knew that these statements were false
when made, given his knowledge of the ongoing Medicare and Medicaid fraud scheme.
90. JP Morgan reported on Gemunder’s statements as “Positive Presentation; Await
Improved Performance in ’07,” in a January 10, 2007 report sent to investors. According to JP
Morgan, “On the regulatory front, the company has worked through many of the issues,”
referencing the Company’s October 2006 settlement with the Michigan Attorney General, and its
November 2006 settlement with the U.S. and states. The consequence of Omnicare’s public
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statements concerning disavowal of Medicare and Medicaid fraud was a 17% increase in the
Company’s stock price, from a close of $38 on January 10, 2007 to a close of $44.59 on
February 22, 2007.
A. Omnicare’s Class Period Forms 10-K Falsely Represent Compliance With Applicable Medicare And Medicaid Requirements
91. On March 1, 2007, Omnicare filed its 2006 Form 10-K with the SEC. The 2006
Form 10-K, signed and certified by defendants Froesel and Gemunder, reported Omnicare’s
financial results for the fourth quarter of 2006 and fiscal year 2006 as previously provided in the
Company’s February 23, 2007 press release. The 2006 Form 10-K, in discussing Omnicare’s
Medicare and Medicaid business, stated the following:
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. These audits and inquiries, as well as our own internal compliance program, from time-to-time have identified overpayments and other billing errors resulting in repayment or self-reporting to the applicable agency. We believe that our billing practices materially comply with applicable state and federal requirements. However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application.
* * *
Although we believe that we are in compliance in all material respects with federal, state and local laws , failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
(emphasis added.)
92. On February 28, 2008, Omnicare filed its 2007 Form 10-K with the SEC. The
2007 Form 10-K was signed and certified by defendants Froesel and Gemunder and reported
Omnicare’s financial results for the fourth quarter of 2007 and fiscal year 2007 as previously
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provided in the Company’s February 28, 2008 press release. The 2007 Form 10-K, in discussing
Omnicare’s Medicare and Medicaid business, stated the following:
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. These audits and inquiries, as well as our own internal compliance program, from time-to-time have identified overpayments and other billing errors resulting in repayment or self-reporting to the applicable agency. We believe that our billing practices materially comply with applicable state and federal requirements. However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application.
* * *
Although we believe that we are in compliance in all material respects with federal, state and local laws , failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
(emphasis added.)
93. On February 26, 2009, Omnicare filed its 2008 Form 10-K with the SEC. The
2008 Form 10-K was signed and certified by defendants Froesel and Gemunder and reported
Omnicare’s financial results for the fourth quarter of 2008 and fiscal year 2008 as previously
provide in the Company’s February 26, 2009 press release. The 2008 Form 10-K, in discussing
Omnicare’s Medicare and Medicaid business stated the following:
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. These audits and inquiries, as well as our own internal compliance program, from time-to-time have identified overpayments and other billing errors resulting in repayment or self-reporting to the applicable agency. We believe that our billing practices materially comply with applicable state and federal requirements. However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application.
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* * *
Although we believe that we are in compliance in all material respects with federal, state and local laws , failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
(emphasis added.)
94. On February 25, 2010, Omnicare filed its 2009 Form 10-K with the SEC. The
2009 Form 10-K was signed and certified by defendants Workman and Gemunder and reported
Omnicare’s financial results for the fourth quarter of 2009 and fiscal year 2009 as previously
provided in the Company’s February 25, 2010 press release. The 2009 Form 10-K, in discussing
Omnicare’s Medicare and Medicaid business, stated the following:
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs. These audits and inquiries, as well as our own internal compliance program, from time-to-time have identified overpayments and other billing errors resulting in repayment or self-reporting to the applicable agency. We believe that our billing practices materially comply with applicable state and federal requirements. However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application.
* * *
Although we believe that we are in compliance in all material respects with federal, state and local laws , failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.
(emphasis added.)
95. Each of the statements identified above in ¶¶ 91-94 was false and misleading
because Defendants knew, but failed to disclose, both that Omnicare was not complying with
Medicare and Medicaid reimbursement regulations, and that much of the Medicare and Medicaid
fraud the Company committed prior to the Class Period remained secret from the investing
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public. Accordingly, Defendants had no good faith basis to assert that Omnicare’s billing
practices were in compliance with applicable state and federal regulations or that Omnicare was
in compliance in all material respects with applicable federal, state, and local laws and
regulations. Further, as set forth in Sections V and IX, Defendants knew that these statements
were false when made, given their knowledge of the ongoing Medicare and Medicaid fraud
scheme.
B. Omnicare Falsely Represented That It Was Complying With Its Codes Of Conduct
96. In addition, throughout the Class Period, Omnicare maintained two codes of
conduct and ethics: (1) a general Code Of Business Conduct And Ethics that applied to all
directors, officers, and employees, and (2) a Code of Ethics For The Chief Executive Officer
And Senior Financial Officers (together, the “Codes of Conduct”). Omnicare referred to these
Codes of Conduct in each of its Class Period proxy statements filed with the SEC on Form
DEF14A. These Codes of Conduct were themselves materially false and misleading because, as
set forth above, throughout the Class Period Omnicare was engaged in a Medicare and Medicaid
fraud scheme in violation of these Codes of Conduct.
97. Omnicare’s Code Of Business Conduct And Ethics provides:
I. OVERVIEW
Omnicare expects its directors, officers and employees to act with integrity in all of their activities on behalf of the Company, to comply with all applicable laws, rules and regulations, and to maintain a reputation for ethical dealings. . . .
* * *
III. ACCURATE BOOKS AND RECORDS
The Company shall maintain accurate business records in accordance with generally accepted accounting principles and the Company’s accounting policies. . . .
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* * *
IX. COMPLIANCE WITH LAW, RULES AND REGULATIONS
This Code is based on the Company’s policy that all employees, officers and directors are required to perform their duties in compliance with all applicable laws and regulations and with Company policies and procedures that are designed to facilitate compliance . This obligation includes, but is not limited to, compliance with all laws covering fraud , kickbacks, referral fees, false claims , commercial bribery, copyrights, trademarks and trade secrets, information privacy, insider trading, illegal political contributions, antitrust, foreign corrupt practices, employment discrimination or harassment, false or misleading financial information , or misuse of corporate assets. . . .
(emphasis added).
98. Given Omnicare’s troubled past, creating the impression that the Company had
adopted sufficient controls to ensure that the Company would clean up its act was critical to
securing the trust of the investing public. The Code Of Business Conduct And Ethics created the
false impression that Omnicare’s directors, officers and employees would comply with all
applicable laws, rules, and regulations when, in reality, the Company was engaging in repeated
violations of law, as set forth herein. Accordingly, the foregoing statements were materially
false and misleading.
99. Omnicare’s Code Of Ethics For The Chief Executive Officer And Senior
Financial Officers provided:
General Philosophy
Omnicare expects all of its employees to act in accordance with and to abide by the Omnicare “Corporate Compliance Program – Its [sic] About Integrity” (the “Omnicare Integrity Code”). The Omnicare Integrity Code is a set of business values and procedures that provides guidance to Omnicare employees with respect to compliance with the law in all of their business dealings and decisions on behalf of Omnicare and with respect to the maintenance of ethical standards, which are a vital and integral
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part of Omnicare’s business.
Code of Ethics
The Omnicare Integrity Code applies to all employees, including the Chief Executive Officer, the Chief Financial Officer, the Principal Accounting Officer and other senior financial officers (the “Covered Officers”). In addition to being bound by the Omnicare Integrity Code’s provisions about ethical conduct, conflicts of interest and compliance with law, Omnicare has adopted the following Code of Ethics for the Covered Officers (the “Code of Ethics”). To the best of their knowledge and ability, Covered Officers agree to:
a) Engage in and promote honest and ethical conduct, including the ethical handling of actual and apparent conflicts of interest between personal and professional relationships;
b) Provide full, fair, accurate, timely and understandable disclosure in reports and documents that Omnicare or its subsidiaries files with, or submit to, the Securities and Exchange Commission and other regulators and in other public communications made by Omnicare or its subsidiaries ;
c) Comply with applicable governmental laws, rules and regulations ;
d) Promptly report to the Chairman of the Audit Committee any information that he or she may have concerning (i) significant deficiencies in the design or operation of internal controls that could adversely affect Omnicare’s ability to process, summarize and report financial data or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in Omnicare’s financial reporting, disclosure or internal controls; and
e) Promptly report any violation of this Code of Ethics to the Chairman of the Audit Committee.
(emphasis added).
100. The Code Of Ethics For The Chief Executive Officer And Senior Financial
Officers created the false impression that Omnicare’s Covered Officers would comply with all
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applicable laws, rules, and regulations when, in reality, the Company was engaging in repeated
violations of law, as set forth herein. Accordingly, the foregoing statements were materially
false and misleading.
C. Omnicare’s Class Period Financial Statements Attribute Positive Impact To Operating Metrics While Omitting To Disclose Positive Impact From Medicare And Medicaid Fraud
101. Throughout the Class Period, Omnicare’s reported sales and income were
substantially assisted by the fraudulent Medicare and Medicaid schemes discussed herein. While
Omnicare frequently made statements concerning the causes of its performance, it failed to
reveal the whole truth, because the fraudulent Medicare and Medicaid schemes driving this
performance were never mentioned. By attributing Omnicare’s success solely to legitimate
factors, Defendants implicitly – and falsely – warranted that there were no illegal practices
contributing to that success. Further, by putting the source of its success at issue, Omnicare
obligated itself to disclose all information concerning the source of its success. Accordingly,
Omnicare’s statements concerning the reasons for its sales and income performance were
materially incomplete, and therefore false and misleading.
102. Omnicare stated the following in its 2006 Form 10-K filed March 1, 2007:
The Company’s consolidated gross profit of $1,600.4 million increased $301.3 million for the full year 2006 from the same prior-year period amount of $1,299.1 million, due primarily to the increase in sales discussed in the “Pharmacy Services Segment” and “CRO Services Segment” captions below. . . . Positively impacting overall gross profit margin were the Company’s purchasing leverage associated with the procurement of pharmaceuticals, the increased use of generic drugs, the impact of productivity enhancements, a favorable payor mix shift (offset in large measure by the aforementioned United reimbursement rate reduction), cost savings associated with the integration of NeighborCare, Inc. (“NeighborCare”), and the addition of the higher-margin RxCrossroads, LLC. (“RxCrossroads”) and excelleRx, Inc. (“excelleRx”) businesses.
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* * *
Omnicare’s Pharmacy Services segment recorded sales of $6,321.1 million for the year ended December 31, 2006, exceeding the 2005 amount of $5,110.4 million by $1,210.7 million, or 23.7%. . . . Contributing in large measure to the year-over-year increase in sales was the completion of several acquisitions in 2005 and 2006, in particular, the acquisition of NeighborCare completed in the third quarter of 2005. Further, the acquisitions of excelleRx and RxCrossroads in August 2005 and the completion of 17 acquisitions in 2006 also contributed to the year-over-year sales increase. In addition, Pharmacy Services sales increased due to a favorable payor mix shift (offset in large measure by the aforementioned second quarter reduction in reimbursement rates under the United Part D contract) and drug price inflation . . . .
Operating income of the Pharmacy Services segment was $584.0 million in 2005, a $105.8 million improvement as compared with the $478.2 million earned in 2004. . . . The increased operating income was primarily the result of the increased sales discussed above, the addition of NeighborCare, excelleRx and RxCrossroads, the impact of productivity enhancement initiatives, as well as the overall synergies from the integration of prior period acquisitions.
(emphasis added).
103. In reality, whatever the impact from the increased use of higher margin generic
drugs, acquisitions, and other factors suggested by Omnicare in the foregoing statement, the
Company’s gross profit and operating income in 2006 was favorably impacted by the
companywide Medicare and Medicaid fraud described in the Stone Qui Tam Action, uncovered
in the Company’s audits, and otherwise detailed herein. It was false and misleading to attribute
favorable impact to other factors while omitting the effect of fraudulent claims for Medicare and
Medicaid reimbursement submitted to the U.S. and states.
104. Omnicare’s other Class Period financial statements similarly credited financial
results to operating metrics while omitting to disclose the effect of the Company’s Medicare and
Medicaid fraud. On May 10, 2007, Omnicare filed its Q1 2007 Form 10-Q. The Q1 2007 Form
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10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder. The
Q1 2007 Form 10-Q stated the following:
The Company’s consolidated gross profit of $381.8 million decreased $34.7 million for the three months ended March 31, 2007 from the same prior-year period amount of $416.5 million. Gross profit as a percentage of total net sales of 24.2% in the three months ended March 31, 2007, was lower than the 25.1% experienced during 2006. Gross profit was lower than in the comparable 2006 quarter largely as a result of the aforementioned reduction in reimbursement under the United Part D contract, a lower number of beds served, and a special charge of $4.3 million relating to the incremental costs associated with the closure of the Company’s Heartland repackaging facility. Partially offsetting these factors were drug price inflation, the increased availability and utilization of higher margin generic drugs, the integration of prior-period acquisitions and year-over-year growth in hospice pharmacy and specialty pharmacy services .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,529.6 million for the three months ended March 31, 2007, down from the 2006 amount of $1,616.6 million by $87 million, or 5.4%. At March 31, 2007, Omnicare served long-term care facilities and other chronic care settings comprising approximately 1,400,000 beds as compared with approximately 1,437,000 beds served at March 31, 2006. Pharmacy Services sales were impacted by the effects of the reduction in reimbursement under the United Part D contract, the aforementioned deconsolidation of the pharmacy joint-venture operations, a lower number of beds served and the increased availability and utilization of generic drugs. Partially offsetting these factors were drug price inflation, the impact of acquisitions, and year-over-year growth in hospice pharmacy and specialty pharmacy services . . . .
Operating income of the Pharmacy Services segment was $135.6 million in the first quarter of 2007, a $14.9 million decrease as compared with the $150.5 million earned in the comparable period of 2006. . . . Operating income in 2007 was impacted unfavorably by the aforementioned reduction in the reimbursement rates under the United Part D contract, a lower number of beds served and the aforementioned increase in the provision for doubtful accounts. Partially offsetting these factors were the favorable impact of the increased availability and utilization of higher margin generic drugs, the year-over-year impact of the aforementioned special
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items, as well as the Company’s continued integration of prior-period acquisitions and productivity enhancements , . . .
(emphasis added.)
105. On August 9, 2007, Omnicare filed its Q2 2007 Form 10-Q. The Q2 2007 Form
10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder. The
Q2 2007 Form 10-Q stated the following:
The Company’s consolidated gross profit of $395.0 million decreased $5.3 million for the three months ended June 30, 2007, from the same prior-year period amount of $400.3 million. . . . Gross profit was favorably impacted in the 2007 period largely as a result of the increased availability and utilization of higher margin generic drugs, drug purchasing improvements and the continued integration of prior-period acquisitions . . . .
(emphasis added.)
106. On October 31, 2007, Omnicare filed its Q3 2007 Form 10-Q. The Q3 2007
Form 10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder.
The Q3 2007 Form 10-Q stated the following:
The Company’s consolidated gross profit of $382.3 million increased $4.4 million for the three months ended September 30, 2007, from the same prior-year period amount of $377.9 million. . . . Gross profit was favorably impacted in the 2007 period largely as a result of lower incremental costs associated with the closure of the Company’s Heartland repackaging facility as further described below, the increased availability and utilization of higher margin generic drugs, drug purchasing improvements and the continued integration of prior-period acquisitions . . . .
(emphasis added).
107. Omnicare’s 2007 Form 10-K likewise attributed positive impact to operating
metrics without crediting the ongoing Medicare and Medicaid fraud. It was signed by defendant
Froesel, certified by defendants Froesel and Gemunder, and stated the following:
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The Company’s consolidated gross profit of $1,538.6 million decreased $61.8 million for the full year 2007 from the same prior-year period amount of $1,600.4 million. Gross profit as a percentage of total net sales of 24.7% in the year ended December 31, 2007, increased from the 24.6% experienced during 2006.
Gross profit was favorably impacted in the 2007 period largely as a result of the increased availability and utilization of higher margin generic drugs, the continued integration of prior-period acquisitions, drug purchasing improvements, and year-over-year growth in specialty pharmacy services and CRO services, as well as the favorable year-over-year gross profit impact of the reduction in special items.
* * *
Omnicare’s Pharmacy Services segment recorded sales of $6,024.9 million for the year ended December 31, 2007, down from the 2006 amount of $6,321.1 million by $296.2 million, or 4.7%. At December 31, 2007, Omnicare served long-term care facilities and other chronic care settings comprising approximately 1,392,000 beds as compared with approximately 1,406,000 beds served at December 31, 2006. Pharmacy Services sales were unfavorably impacted by a lower number of beds served, the increased availability and utilization of generic drugs, the effects of the reduction in reimbursement under the United Part D contract, the aforementioned deconsolidation of the pharmacy joint-venture operations, and the impact of a bed mix shift toward assisted living, which typically has lower penetration rates than skilled nursing facilities. Partially offsetting these factors were drug price inflation, the impact of acquisitions, and year-over-year growth in hospice pharmacy and specialty pharmacy services . . . .
Operating income of the Pharmacy Services segment was $439.1 million in 2007, a $121.9 million decrease as compared with the $561.0 million earned in 2006. As a percentage of the segment’s sales, operating income of 7.3% in 2007 was lower than the 8.9% in 2006. The decrease in operating income in 2007 is primarily attributable to a lower number of beds served, the unfavorable impact of the aforementioned reduction in the reimbursement rates under the United Part D contract, and the previously discussed increase in the provision for doubtful accounts of $131.4 million pretax. Partially offsetting these factors was the increased availability and utilization of higher margin generic drugs, drug purchasing improvements, the Company’s continued integration of prior-period acquisitions and productivity enhancements, including the restructuring program relating, in part, to the
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NeighborCare acquisition and the “Omnicare Full Potential” Plan . . . .
*
Omnicare’s Pharmacy Services segment recorded sales of $6,321.1 million for the year ended December 31, 2006, exceeding the 2005 amount of $5,110.4 million by $1,210.7 million, or 23.7%. . . . Contributing in large measure to the year-over-year increase in sales was the completion of several acquisitions in 2005 and 2006, in particular, the acquisition of NeighborCare completed in the third quarter of 2005 . Further, the acquisitions of excelleRx and RxCrossroads in August 2005 and the completion of 17 acquisitions in 2006 also contributed to the year-over-year sales increase. In addition, Pharmacy Services sales increased due to a favorable payor mix shift (offset in large measure by the aforementioned second quarter reduction in reimbursement rates under the United Part D contract) and drug price inflation. . . .
Operating income of the Pharmacy Services segment was $561.0 million in 2006, a $23.0 million decrease as compared with the $584.0 million earned in 2005. As a percentage of the segment’s sales, operating income was 8.9% in 2006, compared with 11.4% in 2005. Operating income in 2006 benefited from the increased sales discussed above, including the addition of NeighborCare, excelleRx and RxCrossroads, the increased use of generic drugs, the impact of productivity enhancement initiatives, as well as the overall synergies from the integration of prior-period acquisitions, particularly the NeighborCare acquisition . . . .
(emphasis added).
108. On May 8, 2008, Omnicare filed its Q1 2008 Form 10-Q. The Q1 2008 Form 10-
Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder. The Q1
2008 Form 10-Q stated the following:
Operating income of the Pharmacy Services segment was $109.2 million in the first quarter of 2008, a $26.4 million decrease as compared with the $135.6 million earned in the comparable period of 2007. As a percentage of the segment’s sales, operating income was 7.2% for the first quarter of 2008, compared with 8.9% in 2007. The 2008 quarter was unfavorably impacted primarily by the operating income effect of the aforementioned reductions in sales as well as the year-over-year impact of the previously mentioned special items. Operating income in 2008 was
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favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, and purchasing improvements, as well as the Company’s continued integration of prior-period acquisitions and productivity enhancements.
(emphasis added).
109. On July 31, 2008, Omnicare filed its Q2 2008 Form 10-Q. The Q2 2008 Form
10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder. The
Q2 2008 Form 10-Q stated the following:
Net sales for the quarter were favorably impacted primarily by drug price inflation, increased use of certain higher acuity drugs and biologic agents, and acquisitions, as well as increased CRO Services revenues . . . .
The Company’s consolidated gross profit of $382.1 million decreased $12.9 million for the three months ended June 30, 2008, from the same prior-year period amount of $395.0 million. Gross profit as a percentage of total net sales of 24.7% in the three months ended June 30, 2008, was lower than the 25.5% experienced during the comparable 2007 period. Gross profit was unfavorably affected in the 2008 period largely due to the aforementioned factors that reduced net sales, primarily the lower net number of beds served, competitive pricing issues and the reductions in reimbursement and/or utilization for certain drugs. Partially offsetting these factors were the increased availability and utilization of higher margin generic drugs, the continued integration of prior-period acquisitions, the favorable effect of drug price inflation, lower incremental costs associated with the closure of the Company’s Heartland repackaging facility as further described below, and, purchasing improvements . . . .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,496.5 million for the three months ended June 30, 2008, down modestly from the 2007 amount of $1,498.9 million by $2.4 million, or 0.2%. . . . Pharmacy Services sales were unfavorably impacted by a lower number of beds served, as well as the impact of a bed mix shift toward assisted living, which typically has lower penetration rates than skilled nursing facilities, the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization of certain drugs as well as competitive pricing issues,
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and lower revenues reported from copays and rejects under Part D as well as from certain matters currently in litigation. Largely offsetting these factors was the favorable impact of drug price inflation, increased use of certain higher acuity drugs and biologic agents, and acquisitions . . . .
Operating income of the Pharmacy Services segment was $117.5 million in the second quarter of 2008, a $26.8 million decrease as compared with the $144.3 million earned in the comparable period of 2007. . . . Operating income in 2008 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, lower bad debt expense and purchasing improvements, as well as the Company’s continued integration of prior-period acquisitions and productivity enhancements .
(emphasis added).
110. On October 30, 2008, Omnicare filed its Q3 2008 Form 10-Q. The Q3 2008
Form 10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder.
The Q3 2008 Form 10-Q stated the following:
Net sales for the quarter were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs and biologic agents and acquisitions, as well as increased revenues in the specialty pharmacy business and CRO Services . . . .
The Company’s consolidated gross profit of $414.8 million increased $32.5 million for the three months ended September 30, 2008, from the same prior-year period amount of $382.3 million. . . . Gross profit was favorably affected in the 2008 period largely due to the increased availability and utilization of higher margin generic drugs, the continued integration of acquisitions and productivity enhancements, the favorable effect of drug price inflation, lower incremental costs associated with the closure of the Company’s Heartland repackaging facility as further described below, and, purchasing improvements .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,551.9 million for the three months ended September 30, 2008, an increase from the comparable 2007 amount of $1,488.5 million by $63.4 million, or 4.3%. . . . Pharmacy Services sales were
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favorably impacted by drug price inflation, the increased use of certain higher acuity drugs and biologic agents and acquisitions, as well as increased revenues in the specialty pharmacy services business . . . .
Operating income of the Pharmacy Services segment was $151.8 million in the third quarter of 2008, a $22.1 million increase as compared with the $129.7 million earned in the comparable period of 2007. . . . The 2008 quarter was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, lower bad debt expense, and purchasing improvements, as well as the Company’s continued integration of prior-period acquisitions and productivity enhancements .
(emphasis added).
111. Omnicare’s 2008 Form 10-K, filed on February 26, 2009, likewise attributed
positive impact to operating metrics without crediting the ongoing Medicare and Medicaid fraud.
It was signed by defendant Froesel, certified by defendants Froesel and Gemunder, and stated the
following:
Net sales for the year were favorably impacted by acquisitions, drug price inflation, the increased use of certain higher acuity drugs and biologic agents, and growth in specialty pharmacy and CRO Services revenues. . . .
The Company’s consolidated gross profit of $1,592.4 million increased $53.8 million for the full year 2008 from the same prior-year period amount of $1,538.6 million. . . . Gross profit was favorably impacted in the 2008 period largely as a result of the increased availability and utilization of higher margin generic drugs, the integration of acquisitions, the favorable effect of drug price inflation, purchasing improvements and lower incremental costs associated with the closure of the Company’s Heartland repackaging facility . . . .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $6,107.3 million for the year ended December 31, 2008, up from the 2007 amount of $6,024.9 million by $82.4 million, or 1.4%. . . . Pharmacy Services sales were favorably impacted by the impact of acquisitions, drug price inflation, the increased use of certain
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higher acuity drugs and biologic agents and growth in specialty pharmacy . . . .
Operating income of the Pharmacy Services segment was $496.6 million in 2008, a $57.5 million increase as compared with the $439.1 million earned in 2007. . . . Operating income in 2008 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, the Company’s continued integration of acquisitions and productivity enhancements, drug price inflation, lower bad debt expense, and purchasing improvements .
(emphasis added).
112. On April 30, 2009, Omnicare filed its Q1 2009 Form 10-Q. The Q1 2009 Form
10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder. The
Q1 2009 Form 10-Q stated the following:
Net sales for the quarter were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy services . . . .
The Company’s consolidated gross profit of $397.4 million increased $17.8 million for the three months ended March 31, 2009, from the same prior-year period amount of $379.6 million. . . . Gross profit was favorably affected in the 2009 period largely due to the increased availability and utilization of higher margin generic drugs, purchasing improvements, the continued integration of acquisitions and productivity enhancements, and the favorable effect of drug price inflation .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,518.8 million for the three months ended March 31, 2009, an increase from the comparable 2008 amount of $1,509.8 million by $9.0 million, or 0.6%. . . . Pharmacy Services sales were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in the specialty pharmacy services business . . . .
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Operating income of the Pharmacy Services segment was $119.0 million in the first quarter of 2009, a $9.8 million increase as compared with the $109.2 million earned in the comparable period of 2008. . . . The 2009 quarter was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy, lower bad debt expense, and purchasing improvements, as well as by the continued progress in the Company’s productivity improvement initiatives and the continued integration of prior-period acquisitions .
(emphasis added).
113. On July 30, 2009, Omnicare filed its Q2 2009 Form 10-Q. The Q2 2009 Form
10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder. The
Q2 2009 Form 10-Q stated the following:
Net sales for the quarter were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy service . . . .
* * *
The Company’s consolidated gross profit of $370.9 million for the three months ended June 30, 2009, was relatively consistent with the same prior-year period amount of $371.3 million. . . . Gross profit was favorably affected in the 2009 period largely by the increased availability and utilization of higher margin generic drugs, purchasing improvements, the continued integration of acquisitions and productivity enhancements, and the favorable effect of drug price inflation . . . .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,499.7 million for the three months ended June 30, 2009, an increase from the comparable 2008 amount of $1,469.1 million by $30.6 million, or 2.1%. . . . Pharmacy Services sales were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy services . . . .
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Operating income of the Pharmacy Services segment was $129.6 million in the second quarter of 2009, an $11.2 million increase as compared with the $118.4 million earned in the comparable period of 2008. . . . The 2009 quarter was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy services, lower bad debt expense, and purchasing improvements, as well as by the continued progress in the Company’s productivity improvement initiatives and the continued integration of prior-period acquisitions . . . .
(emphasis added).
114. On November 5, 2009, Omnicare filed its Q3 2009 Form 10-Q. The Q3 2009
Form 10-Q was signed by defendant Froesel and certified by defendants Froesel and Gemunder.
The Q3 2009 Form 10-Q stated the following:
Net sales for the quarter were unfavorably impacted primarily by the unfavorable sales impact of the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization for certain drugs as well as competitive pricing issues, a lower average number of beds served year-over-year, along with a shift in mix towards assisted living, and lower sales in the Company’s clinical research business. Partially offsetting these factors were the favorable impact of drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy services . . . .
* * *
The Company’s consolidated gross profit of $366.2 million for the three months ended September 30, 2009, was lower than the same prior-year period amount of $404.4 million. . . . Gross profit was unfavorably affected in the 2009 period largely by certain of the aforementioned items that reduced net sales, primarily the reductions in reimbursement and/or utilization for certain drugs, competitive pricing issues and the lower average number of beds served year-over-year. Partially offsetting these factors were the increased availability and utilization of higher margin generic drugs, purchasing improvements, the continued integration of acquisitions and productivity enhancements, and the favorable effect of drug price inflation .
* * *
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Omnicare’s Pharmacy Services segment recorded sales of $1,507.0 million for the three months ended September 30, 2009, as compared with the same 2008 period amount of $1,526.8 million, a decrease of $19.8 million, or 1.3%. . . . Pharmacy Services sales were unfavorably impacted primarily by the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization of certain drugs as well as competitive pricing issues, a lower average number of beds served year-over-year, along with a shift in mix towards assisted living, which typically has lower penetration rates than skilled nursing facilities. Partially offsetting these factors were the favorable impact of drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy services . . . .
Operating income of the Pharmacy Services segment was $158.8 million in the third quarter of 2009 as compared with the $152.8 million earned in the comparable period of 2008, or an increase of $6.0 million. . . . The 2009 quarter was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy services, lower bad debt expense, and purchasing improvements, as well as by the continued progress in the Company’s productivity improvement initiatives, the continued integration of prior-period acquisitions and the year-over-year impact of the previously mentioned special items . . . .
(emphasis added).
115. Omnicare’s 2009 Form 10-K, filed on February 25, 2010, likewise attributed
positive impact to operating metrics without crediting the ongoing Medicare and Medicaid fraud.
It was signed by defendant Workman, certified by defendants Workman and Gemunder, and
stated the following:
Net sales for the year were favorably impacted by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indications, and acquisitions, as well as growth in specialty pharmacy services . . . .
The Company’s consolidated gross profit of $1,495.0 million decreased $57.0 million for the full year 2009 from the same prior- year period amount of $1,552.0 million. . . . Gross profit was
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favorably impacted in the 2009 period largely due to the increased availability and utilization of higher margin generic drugs, purchasing improvements, the continued integration of acquisition and productivity enhancements, and the favorable effect of drug price inflation . . . .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $6,009.5 million for the year ended December 31, 2009, up from the 2008 amount of $6,002.4 million by $7.1 million, or 0.1%. . . . Pharmacy Services sales were favorably impacted primarily by drug price inflation, the increased use of certain higher acuity drugs, biologic agents and existing drugs with new therapeutic indication, and acquisitions, as well as growth in specialty pharmacy services . . . .
Operating income of the Pharmacy Services segment was $568.5 million in 2009, a $65.4 million increase as compared with the $503.1 million earned in 2008. . . . Operating income in 2009 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy services, lower bad debt expense, and purchasing improvements, as well as by the continued progress in the Company’s productivity improvement initiatives and the continued integration of prior-period acquisitions . . . .
(emphasis added).
116. On May 6, 2010, Omnicare filed its Q1 2010 Form 10-Q. The Q1 2010 Form 10-
Q was signed by defendant Workman and certified by defendants Workman and Gemunder. The
Q1 2010 Form 10-Q stated the following:
Net sales for the quarter were impacted primarily by the unfavorable sales impact of the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization for certain drugs as well as competitive pricing issues, a lower average number of beds served year-over-year, along with a shift in mix towards assisted living, and lower sales in the Company’s clinical research business. Partially offsetting these factors were the favorable impact of drug price inflation, the increased use of certain higher acuity drugs and biologic agents, acquisitions, as well as growth in specialty pharmacy services .
* * *
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The Company’s consolidated gross profit was $351.9 million for the three months ended March 31, 2010, compared with the same prior-year period amount of $389.2 million. . . . Gross profit was unfavorably affected in the 2010 period largely by certain of the aforementioned items that reduced net sales, primarily the reductions in reimbursement and/or utilization for certain drugs, competitive pricing issues and the lower average number of beds served year-over-year. Partially offsetting these factors were the increased availability and utilization of higher margin generic drugs, purchasing improvements, the continued integration of acquisitions, productivity improvement initiatives, and the favorable effect of drug price inflation .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,494.5 million for the three months ended March 31, 2010, as compared with the same 2009 period amount of $1,497.4 million, a decrease of $2.9 million. . . . Pharmacy Services sales were unfavorably impacted primarily by the increased availability and utilization of generic drugs, reductions in reimbursement and/or utilization of certain drugs as well as competitive pricing issues, a lower average number of beds served year-over-year, along with a shift in mix towards assisted living, which typically has lower penetration rates than skilled nursing facilities. Partially offsetting these factors were the favorable impact of drug price inflation, the increased use of certain higher acuity drugs and biologic agents, acquisitions, as well as growth in specialty pharmacy services . . . .
Operating income of the Pharmacy Services segment was $151.2 million in the first quarter of 2010 as compared with the $121.2 million earned in the comparable period of 2009, or an increase of $30.0 million. . . . The 2010 quarter was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy services, lower bad debt expense, and purchasing improvements, as well as by the continued progress in the Company’s productivity improvement initiatives, the continued integration of prior-period acquisitions and the year-over-year impact of the previously mentioned special items . . . .
(emphasis added).
117. On August 5, 2010, Omnicare filed its Q2 2010 Form 10-Q. The Q2 2010 Form
10-Q was signed by defendant Workman and certified by defendant Workman and James D.
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Shelton, Omnicare’s Interim President and Chief Executive Officer. The Q2 2010 Form 10-Q
stated the following:
Net sales for the quarter were impacted primarily by the unfavorable sales impact of the increased availability and utilization of generic drugs, lower prescription volumes due to reductions in utilization for certain drugs, lower census in client facilities in certain areas as well as a lower average number of beds served year-over-year, along with a shift in mix towards assisted living, reductions in reimbursement and competitive pricing issues, and lower sales in the Company’s clinical research business. Partially offsetting these factors were the favorable impact of drug price inflation, the increased use of certain higher acuity drugs and biologic agents, acquisitions, as well as growth in specialty pharmacy services . . . .
* * *
The Company’s consolidated gross profit was $335.8 million for the three months ended June 30, 2010, compared with the same prior-year period amount of $370.9 million. . . . Gross profit was unfavorably affected in the 2010 period largely by certain of the aforementioned items that reduced net sales, primarily the reductions in prescription volumes and reimbursement, and competitive pricing issues. Partially offsetting these factors were the increased availability and utilization of higher margin generic drugs, the continued integration of acquisitions, cost reduction and productivity improvement initiatives, and the favorable effect of drug price inflation .
* * *
Omnicare’s Pharmacy Services segment recorded sales of $1,491.8 million for the three months ended June 30, 2010, as compared with the same 2009 period amount of $1,499.7 million, a decrease of $7.9 million. . . . Pharmacy Services sales were unfavorably impacted primarily by the increased availability and utilization of generic drugs, lower prescription volumes due to reductions in utilization for certain drugs, lower census in client facilities in certain areas as well as a lower average number of beds served year-over-year, along with a shift in mix towards assisted living, which typically has lower penetration rates than skilled nursing facilities, and reductions in reimbursement and competitive pricing issues. Partially offsetting these factors were the favorable impact of drug price inflation, the increased use of certain higher
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acuity drugs and biologic agents, acquisitions, as well as growth in specialty pharmacy services . . . .
Operating income of the Pharmacy Services segment was $110.3 million in the second quarter of 2010 as compared with the $129.6 million earned in the comparable period of 2009, a decrease of $19.3 million. . . . The 2010 quarter was unfavorably affected primarily by the operating income effect of certain of the aforementioned items that reduced net sales, in particular lower prescription volumes, reductions in reimbursement and competitive pricing issues. Operating income in 2010 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, drug price inflation, growth in specialty pharmacy services, lower bad debt expense, the continued progress in the Company’s cost reduction and productivity improvement initiatives and the continued integration of prior-period acquisitions .
(emphasis added).
118. In reality, whatever positive impact from factors identified by Omnicare in its
2006 Form 10-K, Q1 2007 Form 10-Q, Q2 2007 Form 10-Q, Q3 2007 Form 10-Q, 2007 Form
10-K, Q1 2008 Form 10-Q, Q2 2008 Form 10-Q, Q3 2008 Form 10-Q, 2008 Form 10-K, Q1
2009 Form 10-Q, Q2 2009 Form 10-Q, Q3 2009 Form 10-Q, 2009 Form 10-K, Q1 2010 Form
10-Q, and Q2 2010 Form 10-Q, the Company’s gross profit and net sales in those periods were
favorably impacted by the companywide Medicare and Medicaid fraud described in the Stone
Qui Tam Action, uncovered in the Company’s audits, and otherwise detailed herein. It was false
and misleading to attribute favorable financial results to other factors while omitting the effect of
fraudulent claims lodged with and reimbursed by the U.S. and states in connection with the
Medicare and Medicaid programs.
119. In addition to making false statements concerning the drivers of its sales and
income in its Class Period Forms 10-K and 10-Q, Omnicare made similar false statements during
quarterly earnings calls.
120. During the second quarter 2007 earnings call, Froesel stated:
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Adjusted EBITDA for the second quarter totaled approximately $170 million, representing a 5.8% sequential increase. The improvement in EBITDA was driven largely by the solid improvement in gross margins relating it our generic drug portfolio, the reduction of temporary staffing costs, and widening margins in our CRO business .
(emphasis added).
121. During this same conference call, Hodges stated:
Looking at the second quarter of 2007, our Pharmacy Services segment sales totaled $1.5 billion, and were about 2% below the first quarter of 2007. Second-quarter revenues were primarily impacted by increased generic utilization, a lower net number of beds served, lower acuity, and reduced anemia drug utilization, partially offset largely by drug price inflation .
(emphasis added).
122. During the fourth quarter 2007 earnings call, Gemunder stated:
The increase in sales reflects the fourth quarter impact of acquisitions made late in the third quarter, as well as drug price inflation, and an overall increase in the number of prescriptions dispensed .
(emphasis added).
123. During the second quarter 2008 earnings call, Hodges stated:
Looking at our performance by segment, sales in our pharmacy services businesses of approximately $1.5 billion were lower by about $13 million sequentially or less than 1%. The sequential results reflect primarily the continuing impact of generics on sales, seasonally lower acuity and other reductions in utilization and/or reimbursement for certain drugs, and a lower net number of beds served. Largely offsetting these factors, however, were continued strong drug price inflation with brand drugs and increased use of certain higher acuity drugs and biologic agents, as well as sequential growth in our specialty pharmacy services and hospice pharmacy businesses .
(emphasis added).
124. During this same conference call, Gemunder stated:
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We now see sales coming in a bit higher at $6.2 billion to $6.3 billion. And as Dave indicated earlier, given our strong cash flow performance in the quarter, we are raising our operating cash flow guidance $400 million to $450 million. With respect to earnings, we achieved results for the first two quarters of 2008 that on an adjusted basis were above our own internal forecast as well as the street consensus. And as I already discussed, we see a step-up from where we are in the second quarter, owing largely to the benefit of second-half generic launches and drug price inflation, and savings from the Omnicare Full Potential Plan, along with growth in our specialty pharmacy business, including a positive contribution from the ACS acquisition, continued improvement in our hospice pharmacy business, and ongoing growth of our CRO .
(emphasis added).
125. During the third quarter 2008 earnings call, Gemunder stated:
[O]ur sales growth both on a year-over-year as well as on a sequential basis was attributable to some key trends in the pharmaceutical marketplace, namely strong drug price inflation on branded drugs and increased utilization of higher acuity drugs and biologics, and importantly, exceptional growth in our specialty pharmacy services business, including the notably acquisition of Advanced Care Scripts in mid July . These factors more than offset the impact of increased penetration of generic drugs modestly lowered net debt served and a reduction in the utilization and reimbursement of certain drugs.
(emphasis added).
126. During this same conference call, Hodges stated:
Looking at our performance by segment, sales in our pharmacy services business of approximately $1.55 billion for the third quarter were up by about $63 million or 4.3% versus the same quarter last year, sequentially, pharmacy services sales were up $55 million or 3.7%. Strong sequential results reflect continuing robust drug price inflation related to brand drugs, the increased use of certain higher acuity drugs and biologic agents as well as sequential growth in specialty pharmacy services, most notably the acquisition of Advanced Care Scripts . These factors more than offset the impact of increased generic on sales, reductions in utilization and reimbursement for certain drugs and a lower number of beds served.
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(emphasis added).
127. During the fourth quarter 2008 earnings call, Gemunder stated:
With respect to our year-over-year sales growth, we benefited from drug price inflation, which was in the neighborhood of 7% or so on branded drugs, as well as the increased use of certain higher acuity drugs and biologic agents in our institutional pharmacy business, and growth in our specialty pharmacy services . These factors more than offset the impact on sales of generics, a lower net number of beds served, and reductions in utilization and/or reimbursement for certain drugs.
(emphasis added).
128. During this same conference call, Hodges stated:
Looking at our performance by segment, sales in our pharmacy services business of approximately $1.55 billion for the fourth quarter of 2008, were essentially even sequentially but up by about $41 million or 2.7% versus the same quarter last year. The increase in fourth quarter sales from the year earlier period was largely driven by ongoing drug price inflation on branded drugs, growth in our specialty pharmacy business including the acquisition of Advanced Care Scripts, as well as the increased use of certain higher acuity drugs and biologic agents .
* * *
Adjusted pharmacy EBITDA reached 12.9% of sales, or $199.7 million for the fourth quarter of 2008. This reflects a sequential increase of 2% and a much more significant increase versus the prior-year quarter, even aside from the incremental provision for bad debt. Both comparative increases were largely the result of our growing contribution from generic drug price inflation, our productivity and cost reduction initiatives, which include savings attributable to the Full Potential Plan, and sequential margin expansion in our specialty and hospice pharmacy businesses .
(emphasis added).
129. During the first quarter 2009 earnings call, Gemunder stated:
Sales of approximately $1.6 billion in the first quarter of 2009 were modestly higher than in the first quarter of 2008, while growth margins expanded over a 100 basis points and operating
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margins expanded approximately 220 basis points, providing a nearly 30% increase in adjusted operating profits.
With respect to our year-over-year sales growth, we continued to benefit from robust drug price inflation, which continues in the 7% range, as well as the increased use of certain higher acuity drugs, existing drugs with new therapeutic indications and biologic age insare [sic] in our institutional pharmacy business and growth in our specialty pharmacy services businesses. These factors more than offset the impact of generics on sales, sales reductions and reimbursements and/or utilization of certain drugs and the lower net number of beds served .
(emphasis added).
130. During this same conference call, Hodges stated:
Looking at our performance by segment, the first quarter of 2009 sales in our pharmacy services segment were approximately $1.52 billion, which while modestly lower sequentially owing to the factors Joel mentioned earlier, were still above the $1.51 billion we reported in the first quarter of 2008, despite one month day in the 2009 period. The year-over-year increase was largely driven by ongoing drug price inflation, increased use of certain higher acuity drugs, existing drugs with new therapeutic indications and biologic agents as well as strong growth in specialty pharmacy services .
*
Adjusted pharmacy EBITDA was up 21% from the prior year to $191.5 million for the first quarter of 2009 and represented 12.6% of sales, up approximately 210 basis points. The substantial year-over-year growth is largely attributable to the increasing contribution from generic drug price inflation, our productivity and cost reduction initiatives including the Full Potential Plan, strategic sourcing, lower bad debt expense and the performance of our specialty pharmacy businesses .
(emphasis added).
131. During the second quarter 2009 earnings call, Hodges stated:
Looking at our performance by segment, second quarter 2009 sales in our pharmacy services segment were approximately $1.5 million up modestly on both a sequential and year-over-year basis. The year-over-year increase was largely driven by ongoing drug price
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inflation, increased use of certain higher acuity drugs, existing drugs with new therapeutic indications and biologic agents and strong growth in specialty pharmacy services .
(emphasis added).
132. During the third quarter 2009 earnings call, Hodges stated:
Looking at our performance by segment, second quarter 2009 sales in our pharmacy services segment were approximately $1.5 million up modestly on both a sequential and year-over-year basis. The year-over-year increase was largely driven by ongoing drug price inflation, increased use of certain higher acuity drugs, existing drugs with new therapeutic indications and biologic agents and strong growth in specialty pharmacy serves . These factors more than offset the increased use of generic reductions in reimbursement in our utilization for certain drugs and a lower net number of beds served on a year-over-year basis along with a shift in mix toward assisted living which typically has lower penetration rates.
(emphasis added).
133. During the first quarter 2010 earnings call, Hodges stated:
First, with respect to branded drugs, we continued to see drug prices stepping up from the 2009 level, and this trend is consistent with our expectations for drug price inflation of 8% for the full year. We also saw greater utilization of high acuity drugs and biologics and growth in our specialty pharmacy businesses. These factors brought in our Pharmacy Services sales at $1.49 billion, which is down less than 1% sequentially despite the impact of fewer billing days in the first quarter versus before as the continued growth in generics and fewer beds served .
(emphasis added).
134. The statements set forth in ¶¶ 102-117, 120-133, supra, were materially false and
misleading because Omnicare failed to disclose that, in addition to the stated factors, its sales and
income results were driven in large part by the inclusion of the proceeds of the Medicare and
Medicaid scheme discussed herein. By attributing Omnicare’s success solely to legitimate
factors, Defendants implicitly – and falsely – warranted that there were no illegal practices
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contributing to that success. Further, by putting the source of its success at issue, Omnicare
obligated itself to disclose all information concerning the source of its success. Accordingly,
Omnicare’s statements that its results were “primarily” or “largely” attributable to the stated
factors were false and misleading.
D. Omnicare Made False Statements Concerning The Risks That Could Befall Its Business Were It To Fail To Comply With Medicare And Medicaid Regulations
135. In each of its Class Period Forms 10-K, Omnicare disclosed the significant risks
that would befall its business were it to fail to comply with Medicare and Medicaid regulations.
Specifically, Omnicare’s Class Period Forms 10-K stated the following:
If we or our client facilities fail to comply with Medicaid and Medicare regulations, our revenue could be reduced, we could be subject to penalties and we could lose our eligibility to participate in these programs.
Historically, prior to Part D, approximately one-half of our pharmacy services billings were directly reimbursed by government sponsored programs (including Medicaid and, to a lesser extent, Medicare). Beginning January 1, 2006, the prescription drug benefit under Part D became effective. As a result, we experienced a shift in payor mix (as a % of annual sales) in 2006, such that payments under Part D now represent approximately 41% of total Company revenues for the year ended December 31, 2008 . 3 In particular, Medicare beneficiaries who are also entitled to benefits under a state Medicaid program (so-called “dual eligibles”), including the nursing home residents we serve whose drug costs were previously covered by state Medicaid programs, now have their outpatient prescription drug costs covered by the Medicare drug benefit. In 2005, the year immediately preceding Part D, approximately 46% of our revenue was derived from beneficiaries covered under state Medicaid programs. Under the Part D benefit, payment is determined in accordance with the agreements we have negotiated with the Part
3 The Class Period Forms 10-K reported the portion of revenue comprised of Part D payments as follows: 43% in the 2009 Form 10-K; 41% in the 2008 Form 10-K; 42% in the 2007 Form 10-K; and 41% in the 2006 Form 10-K.
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D Plans. The remainder of our billings are paid or reimbursed by individual residents, long-term care facilities and other third party payors, including private insurers. A portion of these revenues also are indirectly dependent on government programs. . . .
The Medicaid and Medicare programs are highly regulated. The failure, even if inadvertent, of us and/or our client facilities to comply with applicable regulations could adversely affect our reimbursement under these programs and our ability to continue to participate in these programs .
(initial emphasis in original; subsequent emphases added).
136. These statements were materially false and misleading because at the time they
were made, Omnicare knew that it was violating the rules of the Medicare and Medicaid program
and that, accordingly, what it publicly represented as hypothetical risks were, in reality, events
that were actually occurring, unbeknownst to the investing public.
E. Omnicare’s Reported Financial Results Were Materially False And Misleading Throughout The Class Period
137. Throughout the Class Period, Omnicare’s reported net sales, net income, accounts
receivable, total assets, and earnings per share were artificially inflated because these metrics
included the proceeds of the Company’s fraudulent Medicare and Medicaid submissions. The
Company’s Class Period SEC filings explained its accounting for Medicare and Medicaid
revenue as follows:
A significant portion of the Company’s Pharmacy Services segment revenues from sales of pharmaceutical and medical products that have been reimbursed by the federal Medicare Part D plan and, to a lesser extent, state Medicaid programs. Payments for services rendered to patients covered by these programs are generally less than billed charges. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and records an estimated contractual allowance for certain sales and receivable balances at the revenue recognition date, to properly account for anticipated differences between billed and reimbursed amounts. Accordingly, the total net sales and receivables reported in the
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Company’s financial statements are recorded at the amount ultimately expected to be received from these payors.
(emphasis added). Because the amounts Omnicare “expected to receive” from Medicare and
Medicaid that were reported in the “total net sales and receivables reported in the Company’s
financial statements” were fraudulently inflated by the inclusion of the expected proceeds of the
improper Medicare and Medicaid reimbursement scheme described herein, Omnicare’s reported
net sales and receivables were also fraudulently inflated. Further, because the Company’s total
net sales rolls up to the reporting of the Company’s net income and its accounts receivable rolls
up to the reporting of its total assets, the Company’s reported net income and total assets were
also fraudulently inflated throughout the Class Period. Accordingly, the reported figures for net
income, net sales, accounts receivable, and total assets during the Class Period were all
materially false and misleading, as they all were impacted by the inclusion of the proceeds of
illicit Medicare and Medicaid fraud. Accordingly, Omnicare’s Class Period financial statements
were false and misleading because they reported net sales, net income, accounts receivable, total
assets, and earnings per share artificially inflated by the fraudulent claims for reimbursement
detailed in the Stone Qui Tam Action.
138. The Company reported the following net sales, net income, accounts receivable,
and total assets in its Class Period SEC filings:
Net Income Net Sales Accounts
Total Assets SEC Filing Receivable
(thousands) (thousands) (thousands) (thousands)
2006 Form 10-K $183,572 $6,492,993 $1,522,266 $7,398,471
Q1 2007 Form 10-Q $42,987 $1,577,065 $1,527,691 $7,541,697
Q2 2007 Form 10-Q $49,241 $1,549,157 $1,505,986 $7,470,220
Q3 2007 Form 10-Q $42,597 $1,536,989 $1,464,372 $7,606,765
2007 Form 10-K $114,056 $6,220,010 $1,376,288 $7,593,779
Q1 2008 Form 10-Q $29,944 $1,558,979 $1,357,736 $7,574,092
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Q2 2008 Form 10-Q $36,805 $1,550,152 $1,348,042 $7,482,180
Q3 2008 Form 10-Q $57,705 $1,603,389 $1,374,770 $7,416,475
2008 Form 10-K $156,108 $6,310,607 $1,367,155 $7,459,718
Q1 2009 Form 10-Q $30,894 $1,563,560 $1,364,836 $7,441,573
Q2 2009 Form 10-Q $28,719 $1,540,507 $1,270,946 $7,326,026
Q3 2009 Form 10-Q $72,515 $1,543,901 $1,248,370 $7,391,900
2009 Form 10-K $211,923 $6,166,209 $1,208,595 $7,324,104
Q1 2010 Form 10-Q $50,852 $1,524,234 $1,182,799 $7,323,706
Q2 2010 Form 10-Q $11,599 $1,519,121 $1,162,536 $7,405,348
These reported net sales, net income, accounts receivable, and total assets were all false and
misleading, as they were artificially inflated by the inclusion of the proceeds of the Company’s
fraudulent Medicare and Medicaid submissions.
139. Omnicare also reported fraudulently inflated net sales figures at a number of
investor conferences during the Class Period. Gemunder reported that Omnicare had in excess
of $6 billion in annualized net sales at the following conferences: (1) the Bank of America
Health Care Conference on June 1, 2007; (2) the Citigroup Healthcare Conference on May 23,
2007; (3) the Goldman Sachs 28th Annual Global Healthcare Conference on June 13, 2007; (4)
the Jefferies Healthcare Conference on June 26, 2007; (5) the Bank of America Securities 37th
Annual Investor Conference on September 19, 2007; (6) the CIBC World Markets 18th Annual
Healthcare Conference on November 5, 2007; (7) the Credit Suisse Healthcare Conference on
November 13, 2007; (8) the Lazard Capital Markets 4th Annual Healthcare Conference on
November 27, 2007; (9) the Merrill Lynch Health Services Investor Conference on November
28, 2007; (10) the JP Morgan Healthcare Conference on January 8, 2008; (11) the Lehman
Brothers Healthcare Conference on March 18, 2008; (12) the Goldman Sachs Healthcare
Conference on June 11, 2008; (13) the Bank of America Health Care Conference on May 13,
2008; (14) the Jefferies & Co. Annual Healthcare Conference on June 24, 2008; (15) the
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Oppenheimer & Co. Annual Healthcare Conference on November 3, 2008; (16) the Credit Suisse
Group Healthcare Conference on November 12, 2008; (17) the JP Morgan Healthcare
Conference on January 13, 2009; (18) the Barclays Capital Healthcare Conference on March 10,
2009; (19) the Goldman Sachs Leveraged Finance Healthcare Conference on April 8, 2009; (20)
the Bank of America Securities Healthcare Conference on May 13, 2009; (21) the Credit Suisse
Healthcare Conference on November 11, 2009; (22) the Lazard Capital Healthcare Conference
on November 17, 2009; (23) the JP Morgan Healthcare Conference on January 12, 2010; and
(24) the Barclays Capital Global Healthcare Conference on March 23, 2010. These reported
sales figures were all false and misleading, as they were artificially inflated by the inclusion of
the proceeds of the Company’s fraudulent Medicare and Medicaid submissions.
140. Further, during the Company’s quarterly earnings calls throughout the Class
Period, Defendants reported on sales figures that were artificially inflated as a result of the
fraudulent scheme described herein. During the first quarter 2007 earnings call on April 27,
2007, defendant Hodges reported that Omnicare’s Pharmacy Service segment sales totaled $1.5
billion. Gemunder reported that overall sales for the Company for the year were expected to be
between $6.3 and $6.4 billion.
141. During the second quarter 2007 earnings call on August 2, 2007, Hodges
reported, “Looking at the second quarter of 2007, our Pharmacy Services segment sales totaled
$1.5 billion, and were about 2% below the first quarter of 2007.”
142. During the third quarter 2007 earnings call on October 31, 2007, Hodges reported
Pharmacy Services segment sales of $1.5 billion.
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143. During the fourth quarter 2007 earnings call on February 28, 2008, Hodges
reported Pharmacy Services segment sales of $1.51 billion and Gemunder reported that overall
Company sales for the year were expected to come in between $6.1 and $6.2 billion.
144. During the first quarter 2008 earnings call on May 8, 2008, Gemunder reported
“overall sales of $1.56 billion for the quarter” and that he “continue[d] to see sales coming in at
$6.1 billion to $6.2 billion” for the year; Hodges reported $1.51 billion in Pharmacy Services
segment sales.
145. During the second quarter 2008 earnings call on July 31, 2008, Gemunder
reported, “We recorded sales for the quarter at just over $1.55 billion” and that “[w]e now see
sales coming in a bit higher at $6.2 billion to $6.3 billion” for the year. Hodges reported
Pharmacy Services segment sales of $1.5 billion.
146. During the third quarter 2008 earnings call on October 30, 2008, Gemunder
reported, “Sales of $1.6 billion in the third quarter of 2008 were 4% ahead of the third quarter of
2007.” Hodges reported, “Looking at our performance by segment, sales in our pharmacy
services business of approximately $1.55 billion for the third quarter were up by about $63
million or 4.3% versus the same quarter last year, sequentially, pharmacy services sales were up
$55 million or 3.7%.”
147. During the fourth quarter 2008 earnings call on February 26, 2009, Gemunder
reported, “Sales of $1.6 billion in the fourth quarter of 2008 were higher than in the fourth
quarter of 2007” and that “[p]utting all of this together, we expect sales in 2009 to be in the
neighborhood of $6.4 billion, modestly higher than in 2008. . . .” Hodges reported, “Looking at
our performance by segment, sales in our pharmacy services business of approximately $1.55
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billion for the fourth quarter of 2008, were essentially even sequentially but up by about $41
million or 2.7% versus the same quarter last year.”
148. During the first quarter 2009 earnings call on April 30, 2009, Gemunder reported,
“Sales of approximately $1.6 billion in the first quarter of 2009 were modestly higher than in the
first quarter of 2008, while growth margins expanded over 100 basis points and operating
margins expanded approximately 220 basis points, providing a nearly 30% increase in adjusted
operating profits.” Gemunder also noted, “The performance of our specialty pharmacy services
businesses was again exceptional, characterized by very robust sales growth and widening
margins. In fact, at Advanced Care Scripts or ACS, we increased our sales nearly 16%
sequentially and this business is now running at an annualized rate of approximately $340
million in sales, continued organic growth within the existing contract, as well as the
implementation of a new compliance program for an important new oral oncology drug made by
a major new biotech company drove growth in the quarter.” Hodges noted during this earnings
call, “Looking at our performance by segment, the first quarter of 2009 sales in our pharmacy
services segment were approximately $1.52 billion, which while modestly lower
sequentially . . . , were still above the $1.51 billion we reported in the first quarter of 2008,
despite one month day in the 2009 period.”
149. During the second quarter 2009 earnings call on July 30, 2009, Gemunder
reported, “Sales for the second quarter of 2009 surpassed $1.5 billion, modestly higher than in
the prior year period.” Hodges reported, “Looking at our performance by segment, second
quarter 2009 sales in our pharmacy services segment were approximately $1.5 million [sic] up
modestly on both a sequential and year-over-year basis.”
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150. During the third quarter 2009 earnings call on November 5, 2009, Gemunder
reported, “Sales for the third quarter of 2009 of $1.54 billion were higher sequentially, but
modestly lower on a year-over-year basis.” Gemunder also noted, “With respect to our
pharmacy services segment, sales of $1.5 billion were also up sequentially and modestly lower
year over year.”
151. During the fourth quarter 2009 earnings call on February 25, 2010, Gemunder
reported, “[D]espite the impact of reimbursement reductions, sales in our Pharmacy Services
segment of $1.5 billion were relatively flat sequentially and modestly lower year-over-year.”
Gemunder also stated, “[W]e believe our sales will be in the neighborhood of $6.2 billion to $6.4
billion” for the year.
152. During the first quarter 2010 earnings call on May 6, 2010, Gemunder reported
“Pharmacy Services sales at $1.49 billion.” Workman reported on overall Company sales,
noting, “Net sales were lower by $15.5 million or 1% in the first quarter 2010, from the fourth
quarter 2009 results.”
153. During the second quarter 2010 earnings call on August 5, 2010, Gemunder
noted, “First addressing sales, net sales were lower by $5.1 million or 0.3% in the second quarter
2010 from the first quarter 2010 results. This represents a $2.7 million decline in our pharmacy
segment, and a $2.4 million decline in the CRO business.”
154. All of the sales figures reported during the Company’s Class Period quarterly
earnings calls, as set forth in ¶¶ 140-153, supra, were false and misleading because they were
artificially inflated by the inclusion of the proceeds of the Company’s fraudulent Medicare and
Medicaid submissions.
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155. In addition, Omnicare’s reported earnings per share (“EPS”) was artificially
inflated throughout the Class Period. In the Notes To Financial Statements contained in
Omnicare’s Class Period Forms 10-K, Omnicare explained how its EPS was calculated:
Note 15 – Earnings Per Share Data
Basic earnings per share are computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share include the dilutive effect of stock options, warrants and restricted stock awards, as well as convertible debentures.
156. During the Class Period, Omnicare reported basic and diluted EPS as follows:
SEC Filing Basic EPS Diluted EPS
2006 Form 10-K $1.55 $1.50
Q1 2007 Form 10-Q $0.36 $0.35
Q2 2007 Form 10-Q $0.41 $0.41
Q3 2007 Form 10-Q $0.36 $0.35
2007 Form 10-K $0.96 $0.94
Q1 2008 Form 10-Q $0.25 $0.25
Q2 2008 Form 10-Q $0.31 $0.31
Q3 2008 Form 10-Q $0.50 $0.49
2008 Form 10-K $1.33 $1.32
Q1 2009 Form 10-Q $0.27 $0.26
Q2 2009 Form 10-Q $0.25 $0.24
Q3 2009 Form 10-Q $0.62 $0.61
2009 Form 10-K $1.81 $1.80
Q1 2010 Form 10-Q $0.43 $0.43
Q2 2010 Form 10-Q $0.10 $0.10
Because the Company’s reported basic and diluted EPS was calculated based on net income
(which, as set forth above, was artificially inflated throughout the Class Period), the Company’s
reported basic and diluted EPS was also artificially inflated throughout the Class Period due to
the fraudulent Medicare and Medicaid submissions discussed herein.
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157. In addition to reporting EPS in its Class Period Forms 10-K and 10-Q, Omnicare
reported these results during its quarterly earnings calls as follows: (1) during the first quarter
2007 earnings call, Gemunder reported “adjusted diluted earnings per share of $0.47” for the
quarter and that Omnicare “expect[ed] diluted earnings per share, excluding special items, to be
in the range of $2.30 to $2.40 per share” for the 2007 fiscal year; (2) during the second quarter
2007 earnings call, Gemunder noted that Omnicare had “reported adjusted results of $0.51 per
diluted share” and that Omnicare expected “diluted earnings per share, excluding special items,
to be in the range of $2.15 to $2.20 per share” for the 2007 fiscal year; (3) during the third
quarter 2007 earnings call, Gemunder reported “fourth quarter diluted earnings per share
excluding special items coming in at $0.45 to $0.50” and that he expected that “this would bring
full-year diluted earnings per share to $1.87 to $1.92 excluding special items”; (4) during the
fourth quarter 2007 earnings call, Gemunder reported “diluted earnings per share as adjusted for
special items are expected to be in the range of $1.65 to $1.95” for the 2007 fiscal year; (5)
during the first quarter 2008 earnings call, Gemunder noted that Omnicare’s “adjusted earnings
for the quarter beat expectations, both the street consensus as well as our own expectations by
$0.05 a share” and that Omnicare was “keeping its full year guidance at $1.65 to $1.95 per
diluted share as adjusted for special items”; (6) during the second quarter 2008 earnings call,
Gemunder noted, “We are now raising the low end of our guidance and narrowing the range of
diluted earnings per share for 2008, as adjusted for special items, to $1.85 to $1.95 per share.
Building off the second quarter earnings of $0.46, we see mid-sized, single-digit improvement of
$0.48 to $0.50 in the third quarter, with the remainder of the ramp-up in earnings occurring in the
fourth quarter . . .”; (7) during the third quarter 2008 earnings call, Gemunder reported “diluted
earnings per share up 33% from last quarter” and that Omnicare was “raising [its] guidance for
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the full year, diluted earnings per share for 2008 as adjusted for special items to $2.09 to $2.11
per share, and this of course implies a range of $0.62 to $0.64 per diluted share excluding special
items for the fourth quarter”; (8) during the fourth quarter 2008 earnings call, Gemunder stated,
“We were pleased to report adjusted diluted earnings per share for the fourth quarter of $0.66,
ahead of both the prior quarter, the prior-year quarter, and ahead of the street consensus”; (9)
during the first quarter 2009 earnings call, Gemunder stated, “We are pleased to report first
quarter adjusted earnings of $0.64 per diluted share, which was 60% above the comparable prior
year period and above straight consensus estimates,” that Omnicare “continue[d] to see second
quarter earnings as roughly equal to the first quarter in the range of $0.63 to $0.65 cents,” and
that Omnicare continued to expect “adjusted diluted earnings per share of $2.50 to $2.70 for the
full year 2009, representing an 18% to 27% increase over our adjusted diluted earnings per share
for 2008.”; (10) during the second quarter 2009 earnings call, Gemunder stated, “We’re pleased
to report second quarter adjusted earnings from continuing operations of $0.64 per diluted share
which represents our fourth consecutive quarter of double-digit year over year earnings growth
and is also in line with our guidance and straight consensus estimates” and that Omnicare
“believe[s] [its] earnings will come in within the range of [its] original guidance, albeit toward
the lower end of the range. More specifically, [Omnicare] now see[s] [its] full year earnings
guidance at 250 to 255 per adjusted diluted share with associated revenues in the range of $6.2
billion to $6.3 billion.”; (11) during the third quarter 2009 earnings call, Gemunder noted that
“aside from a favorable income tax item of $19 million or $0.16 per share, [Omnicare’s] adjusted
earnings per share were in line with Company guidance and Street consensus”; (12) during the
fourth quarter 2009 earnings call, Gemunder noted, “Earnings per share for the quarter,
excluding special items and including the significant favorable tax adjustment, would equate to
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$0.74 per share, compared to $0.67 per share a year ago”; (13) during the first quarter 2010
earnings call, Gemunder noted, “We are pleased to report first quarter results at $0.58 per diluted
share, which is consistent with our guidance” and that Omnicare “continue[d] to expect adjusted
earnings per diluted share for the full year 2010 to be in the range of $2.60 to $2.70 per share”;
and (14) during the second quarter 2010 earnings call, Gemunder noted, “Earnings per share for
the quarter excluding special items equate to $0.48 per share.”
158. Because the Company’s reported basic and diluted EPS was calculated based on
net income (which, as set forth above, was artificially inflated throughout the Class Period), the
foregoing statements concerning the Company’s EPS were materially false and misleading.
159. Omnicare also reported its earnings per share results during investor conferences.
For example, during the Credit Suisse Group Healthcare Conference on November 12, 2008,
Gemunder noted, “Our adjusted earnings per share not only exceeded our own expectations but
were 24% above the Street consensus. Our strong results were driven by a significant step-up in
our sequential results with sales up 3%, operating profit up 23%, and diluted earnings per share
up 33% from just last quarter.”
160. During the Barclays Capital Healthcare Conference on March 10, 2009,
Gemunder noted that Omnicare’s “adjusted diluted earnings per share were up 65% above their
first quarter levels.”
161. During the Goldman Sachs Leveraged Finance Healthcare Conference on April 8,
2009, Gemunder noted, “The fourth quarter capped off a year of sequential improvement with
operating income up 33%, net income up 60% and adjusted diluted earnings per share up 65%
above the first-quarter levels.”
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162. During the Credit Suisse Healthcare Conference on November 11, 2009,
Gemunder noted, “Now, as you may know, we announced in 2009 the third quarter results last
week, with adjusted earnings per diluted share in line with consensus expectations before a
$0.16-per-share favorable income tax item.”
163. Because the Company’s reported basic and diluted EPS was calculated based on
net income (which, as set forth above, was artificially inflated throughout the Class Period), the
foregoing statements were materially false and misleading.
F. Omnicare Made False Statements Concerning The Accuracy Of The Statements Made In Its Class Period Forms 10-K And 10-Q
164. Omnicare falsely stated that its Class Period Forms 10-K and 10-Q did not
contain any misstatements. Defendants Gemunder, Froesel, and Workman executed
certifications pursuant to Section 302 of the Sarbanes-Oxley Act (the “§ 302 Certifications”) that
were included in the Company’s Class Period Forms 10-K and 10-Q, as set forth above. These
§ 302 Certifications stated:
1. I have reviewed this report . . . of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report ;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
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reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record,
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process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
(emphasis added).
165. The § 302 Certifications signed by defendants Gemunder, Froesel and Workman
that appeared in the Company’s Class Period Forms 10-K and 10-Q were all materially false and
misleading. As set forth above, the Company’s Class Period Forms 10-K and 10-Q all contained
materially false and misleading statements. Specifically, the Class Period Forms 10-K and 10-Q
all reported financial results for net sales, net income, accounts receivable, total assets, and basic
and diluted EPS that were artificially inflated by the inclusion of the proceeds of the Company’s
fraudulent Medicare and Medicaid submissions, as set forth in ¶¶ 137-138, 155-156, supra. In
addition, the Class Period Forms 10-K contained false statements concerning the Company’s
compliance with applicable laws, as set forth in ¶¶ 91-94, supra, and about the risks that would
befall Omnicare were it to fail to comply with Medicare and Medicaid regulations, as set forth in
¶¶ 135-136, supra. Finally, certain of the Class Period Forms 10-K and 10-Q, as set forth in
¶¶ 101-117, supra, contained false statements concerning the reasons for the Company’s
performance. Accordingly, the statements in the § 302 Certifications that the Forms 10-K and
10-Q in which such certifications appeared did “not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading” and that “the financial
statements, and other financial information included in [the Forms 10-K and 10-Q], fairly present
in all material respects the financial condition, results of operations and cash flows of the
Company” were themselves materially false and misleading.
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166. Defendants Gemunder, Froesel, and Workman also executed certifications
pursuant to Section 902 of the Sarbanes-Oxley Act (the “§ 902 Certifications”) that were
included in the Company’s Class Period Forms 10-K and 10-Q, as set forth above. These § 902
Certifications stated:
1. The [Report] . . . fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
(emphasis added).
167. The § 902 Certifications signed by defendants Gemunder, Froesel and Workman
that appeared in the Company’s Class Period Forms 10-K and 10-Q are all false. As set forth
above, the Company’s Class Period Forms 10-K and 10-Q all reported financial results for net
sales, net income, accounts receivable, total assets, and basic and diluted EPS that were
artificially inflated by the inclusion of the proceeds of the Company’s fraudulent Medicare and
Medicaid submissions. Accordingly, the statements in the § 902 Certifications that the
information in the Forms 10-K and 10-Q in which such certifications appeared “fairly
present[ed], in all material respects, the financial conditions and results of operations of the
Company” are themselves materially false and misleading.
VII. THE TRUTH EMERGES, PROMPTING DEFENDANTS GEMUNDER AND HODGES’ RESIGNATIONS AND A MASSIVE STOCK SELLOFF
168. On August 2, 2010, three days before disclosure of the Stone Qui Tam Action in
Omnicare’s financial statements, and after nearly 30 years at Omnicare’s helm, Gemunder
abruptly resigned, effective July 31, 2010. On August 3, 2010, The Wall Street Journal reported
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that Gemunder would receive in excess of $130 million in pension payments, severance, and
other benefits in connection with his unexpected departure.
169. Also on August 2, 2010, the Company announced the resignation of defendant
Hodges, effective July 31, 2010. In connection with her resignation, Hodges received over $2
million in severance, and the immediate vesting of over 500,000 options and shares of restricted
stock.
170. Three days later, on August 5, 2010, Omnicare disclosed the Stone Qui Tam
Action, which had been unsealed in June, and the concomitant accusations that the Company had
continued to engage in Medicare and Medicaid fraud long after Gemunder had previously
proclaimed that these issues were “behind” the Company. In its Form 10-Q for the second
quarter of 2010, filed with the SEC that day, Omnicare stated:
On June 11, 2010, a qui tam complaint, entitled United States ex rel. Stone v. Omnicare Inc., No. 1:09cv4319, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court. The U.S. Department of Justice and the various states named in the complaint have notified the court that they have declined to intervene in this action. The complaint was brought by John Stone, the Company’s former Vice President of Internal Audit, as a private party qui tam relator on behalf of the federal government and several state governments. The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that the Company submitted claims for reimbursement for certain ancillary services that did not conform with Medicare and Medicaid regulations, submitted claims for reimbursement from newly acquired pharmacies that were in violation of certain Medicaid and Medicare regulations, violated certain FDA regulations regarding the storage and handling of a particular drug, and violated certain Medicaid billing regulations relating to usual and customary charges. . . .
171. During the conference call discussing Omnicare’s second quarter 2010 results, a
Credit Suisse analyst questioned interim President and CEO Denny Shelton about the
Company’s checkered past. Shelton was unable to dismiss the allegations of Medicare and
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Medicaid fraud in the Stone Qui Tam Action and other litigations as meritless, or express
comfort that investigations would produce no “smoking guns”:
Glen Santangelo [Credit Suisse Analyst] – [T]here wasn’t much commentary with respect to past lawsuits and investigations and all that kind of stuff, and so, you know, this is a question for both [Denny Shelton] and John [Workman]. As you look at the financials of the Company, I mean do you feel very, very comfortable that there is no smoking gun here and nothing is going to come out of the woodwork from any of those past investigations? . . .
Denny Shelton [Omnicare President & CEO] – Well, let me say this. The first thing I did, one evening this week, was get the general counsel and the compliance officer in and asked, point blank, do I need to know something, is there anything out there that I need to know about that’s percolating its way up? And so at this point in time, I’m – I feel like it is what it is. I don’t know of anything and I’m in a work under the assumption that – just as our Board and we have focused on is that we are going to do anything and everything in our power to build this culture to one in which we don’t have any of these things. I mean I don’t want have one of them. I mean I don’t want have to worry about getting up in the morning and worrying about that we have something, something wrong in this Company that good culture would have repented, or we should have known about. I don’t want to ever have to ask those questions. So I can’t speak for what’s happened in the past, but I can tell you now, I’m starting from a base where I’m told there’s nothing, and I’m going to work hard to continue to move the culture where you don’t have to worry about anything.
(emphasis added). The inability of Omnicare’s interim CEO to categorically deny the existence
of any “smoking guns” more than three years after Gemunder stated that Omnicare was “getting
these matters behind us” undoubtedly caused the market to question the veracity of Gemunder’s
Class Period assurances.
172. The allegations set forth in the Stone Qui Tam Action made clear that Omnicare
had not put its checkered past behind it and raised the specter that the Company’s fraud could
jeopardize its continuing access to the Medicare and Medicaid systems so essential to the
Company’s financial results. Media outlets reported on the Stone Qui Tam Action immediately,
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beginning with Bloomberg’s August 5, 2010 story titled “Omnicare Discloses False Claims Suit
by Formal Internal Auditor.”
173. The market’s reaction to the August 5, 2010 disclosure of the Stone Qui Tam
Action – which exposed the possibility that the Company’s fraud against Medicare and Medicaid
was ongoing – was swift and severe. The Company’s stock price dropped $2.73 per share, down
10.8% from $25.26 per share on August 4, 2010 to $22.53 per share on August 5, 2010, wiping
out over $300 million in market capitalization overnight.
174. The first public announcement concerning the unsealing of the Stone Qui Tam
Action was Omnicare’s August 5, 2010 Form 10-Q. Despite having been unsealed in June, there
was no announcement by Omnicare concerning its existence and no news or analyst coverage
prior to Omnicare’s August 5, 2010 announcement.
175. Market analysts understood the Stone Qui Tam Action to have revealed ongoing
fraud and the concomitant falsity of Gemunder’s assurances that the Company had put such
issues behind it. J.P. Morgan, the same investment bank that described Omnicare’s pre-Class
Period settlements as having minimized going-forward risk and removed a key overhang for
stock performance, reported on August 5, 2010 that interim CEO Danny Shelton was now, again,
planning to “revamp the culture of the firm.” Oppenheimer’s August 6, 2010 report also blamed
Omnicare’s trouble on Medicare and Medicaid fraud that continued after Gemunder’s January
10, 2007 renunciation: “OCR’s prior restructuring efforts suggested that past operational issues
were dealt with, but apparently they weren’t.”
176. On August 8, 2010, The Wall Street Journal issued a follow-up article detailing
Gemunder’s huge exit package, titled “Omnicare Keeps Paying.” The article sharply criticized
Gemunder’s massive severance package, noting that during Gemunder’s tenure the Company’s
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stock price had declined from a $61 peak in March 2006 to under $23 per share, a drop of more
than 60% compared to an 11% decline in the S&P 500 during the same period. The role the
Company’s fraud played in this decline did not go unnoticed, as the article flatly questioned,
“[A]nd what did the taxpayers get? Omnicare has long been plagued by huge litigation costs and
allegations of kickbacks and billing schemes.”
177. Further, an August 12, 2010 article on Cincinnati.com titled “Omnicare Legal
Troubles Linger” noted that Omnicare spent $35 million in legal fees during the first half of 2010
alone, on top of the $77.4 million spent in 2009. The article pointedly noted that despite
replacing its long-time CEO and promises of a change in corporate culture, “a shelf full of
potentially costly lawsuits and other legal problems still await.”
VIII. LOSS CAUSATION
178. Plaintiff and the putative Class suffered substantial damages as a direct and
proximate result of Defendants’ fraudulent conduct as alleged herein.
179. During the Class Period, Defendants made or caused to be made a series of
materially false and misleading statements about Omnicare’s compliance with all laws and
regulations applicable to its business. Further, Defendants caused Omnicare to issue financial
results that included fraudulently inflated net sales, net income, accounts receivable, total assets,
and earnings per share. These material misstatements and omissions had the purpose and effect
of creating in the market an unrealistically positive assessment of Omnicare and its business
prospects, thus causing the Company’s securities to be overvalued and artificially inflated at all
relevant times. Defendants’ materially false and misleading statements during the Class Period
resulted in Plaintiff purchasing the Company’s common stock at artificially inflated prices. But
for Defendants’ misrepresentations and fraudulent acts, Plaintiff would not have purchased
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Omnicare common stock, or would not have purchased it at the artificially inflated prices at
which it was offered during the Class Period.
180. On January 10, 2007, Gemunder touted Omnicare’s business model and addressed
the regulatory matters that had been plaguing the Company. While Gemunder stated that
Omnicare’s “goal is to comply with all laws and regulations,” the Company was, unbeknownst to
the investing public, continuing to defraud the Medicare and Medicaid programs. As set forth in
¶¶ 91-94, above, the Company continued to falsely represent that it was operating in compliance
with all applicable laws and regulations.
181. Omnicare’s disclosure of the Stone Qui Tam Action on August 5, 2010 caused an
immediate reaction in the market for the Company’s securities. The disclosure of the Stone Qui
Tam Action revealed to the market that, despite its prior assurances, Omnicare had not put its
troubled past behind it, that the Company’s statements concerning its compliance with all
applicable laws and regulations were false, and that the Company’s fraud jeopardized its
continuing access to the Medicare and Medicaid systems so essential to the Company’s financial
results. For example, an August 8, 2010 article in The Wall Street Journal noted that Omnicare’s
troubles derived from “huge litigation costs and allegations of kickbacks and billing schemes.”
Another article in The Wall Street Journal published the same day specifically referred to the
fact that “Omnicare ha[d] long been plagued by huge litigation costs and allegations of kickbacks
and billing schemes.” Oppenheimer’s August 6, 2010 report flatly blamed Omnicare’s trouble
on Medicare and Medicaid fraud that continued after Gemunder’s January 10, 2007 renunciation,
noting that “OCR’s prior restructuring efforts suggested that past operational issues were dealt
with, but apparently they weren’t .” (emphasis added).
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182. In response to the disclosure of the Stone Qui Tam Action and the market’s
concomitant realization that the Company had been continuing to break the law, the Company’s
stock price dropped $2.73 per share, down 10.8% from $25.26 per share on August 4, 2010 to
$22.53 per share on August 5, 2010, wiping out over $300 million in market capitalization.
183. As the negative attention continued, Omnicare’s stock price continued to
plummet. Omnicare closed at $19.86 per share on August 10, 2010, down over 20% since the
August 5, 2010 disclosure.
IX. ADDITIONAL SCIENTER ALLEGATIONS
184. The Individual Defendants acted with scienter in that each of them knew that their
own public statements, and the public documents and statements issued in the name of the
Company for which they were responsible, were materially false and misleading; knew that such
statements or documents would be issued or disseminated to the investing public; and knowingly
and substantially participated in the preparation and/or dissemination of such statements or
documents as primary violators of the federal securities laws.
185. The Individual Defendants, by virtue of their receipt of information reflecting the
true facts regarding Omnicare, and/or their roles and responsibilities with the Company, which
made them privy to confidential proprietary information concerning Omnicare, knew or
recklessly disregarded that the Company’s disclosures to investors were materially false and
misleading. Additionally, the Individual Defendants were motivated to deceive the investing
public regarding Omnicare’s business, operations, and the intrinsic value of Omnicare’s common
stock, because doing so inflated Omnicare’s stock price, thereby increasing their personal wealth
and securing their ongoing positions with the Company.
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186. The Individual Defendants were highly motivated by the terms of their
employment agreements, which tied their compensation directly to Omnicare’s reported financial
results and operating performance. A large portion of the Individual Defendants’ compensation
packages were dependent upon Omnicare posting favorable financial results. In addition to
maintaining their employment positions, the personal wealth of each Individual Defendant was
dramatically enhanced by the reported business condition and performance of Omnicare, as well
as the Company’s stock price and market capitalization, all of which were inflated by the
Individual Defendants’ false and misleading statements and material omissions.
187. Defendant Gemunder received total compensation of over $12.6 million in 2007,
$23.8 million in 2008, $25.2 million in 2009, and over $130 million in 2010 including the
benefits he received as part of his retirement. In 2007, Gemunder’s compensation included over
$2 million in stock and option awards, over $6 million in 2008, and nearly $9.5 million in 2009.
During 2010, the year of his resignation, Gemunder received over $32 million in compensation
and severance benefits, including cash severance of over $16 million. Gemunder also received
the immediate vesting of 2,670,019 stock options and 705,176 shares of restricted stock.
188. Defendant Froesel received total compensation of over $1.1 million in 2007, $2.4
million in 2008, and over $700,000 in 2009 (the year he resigned as Senior Vice President and
CFO). During 2008, Froesel received over $290,000 in stock awards and in 2009 over $1
million in stock and option awards. Further, Froesel’s duties as Omnicare’s CFO included
maintaining Omnicare’s financial records (including budgeting and forecasting) and, as Senior
Vice President, Froesel had significant responsibility over Omnicare’s operations.
189. Defendant Workman received over $4.8 million in total compensation for 2009,
the year he was hired, of which nearly $4 million was comprised of stock awards. In 2010,
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Workman received total compensation of nearly $2.5 million, of which over $1.2 million was
comprised of stock and option awards.
190. Defendant Hodges received total compensation of over $1.8 million in 2007, $2.8
million in 2008, and $4.8 million in 2009. In 2007, Hodges’ compensation included over
$250,000 in stock and option awards, over $1 million in 2008, and nearly $1 million in 2009.
During 2010, the year of her resignation, Hodges received total compensation of over $2.7
million and severance benefits including a cash payment of over $2.1 million, and the immediate
vesting of 446,859 stock options and 111,573 shares of restricted stock.
191. Medicare and Medicaid reimbursements accounted for more than 50% of
Omnicare’s revenue during the Class Period. Ensuring compliance with all applicable
regulations related to claims submissions, accordingly, was critical to the core operations of
Omnicare’s business. That Omnicare’s fraud related to the Company’s core business operations
demonstrates that the Individual Defendants – as the Company’s senior-most executive officers –
either knew about or were reckless in failing to discover the fraud.
192. Further, Omnicare’s checkered past – which included the payment of tens of
millions of dollars to settle fraud charges – placed the Individual Defendants on notice of the
potential for ongoing fraud. Under these circumstances, the Individual Defendants should have
been on heightened alert and should have taken steps to stop the fraud. Instead, the Individual
Defendants permitted this fraud to continue unabated. The Individual Defendants’ failure to stop
the fraud under these circumstances was, at a minimum, reckless. Defendant Workman’s failure
in this regard is particularly egregious. Notably, Omnicare announced Workman’s appointment
as CFO on October 23, 2009. Mere weeks later, the Company announced the payment of $98
million to settle allegations of illegal kickbacks. Having started at the Company hot on the heels
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of such a large alleged brush with the law, Workman should have been especially vigilant in
ensuring that Omnicare was operating in compliance with all applicable laws and regulations.
193. In addition, defendant Gemunder actually knew about the Medicare and Medicaid
fraud during the Class Period. Stone shared with Gemunder the results of the Pharmaceutical
Audit, and, on information and belief, the Wave I and Wave II audits, each of which revealed
that the Company was engaged in ongoing Medicare and Medicaid fraud. Gemunder’s response,
on December 1, 2008, was to tell Stone that he should “begin looking for other employment.”
As the long-time President and CEO of the Company, it is beyond peradventure that defendant
Gemunder had the power to put a stop to this fraud. Instead, defendant Gemunder swept the
problems under the rug, telling Stone to find a new job rather than attempting to stop the massive
wrongdoing to which Stone had alerted him. Gemunder’s decision to fire Stone is compelling
evidence of his scienter.
X. CLASS ACTION ALLEGATIONS
194. Before, during and after the Class Period, Defendants regularly communicated
with the public and investors via established market communication mechanisms, including
through regular dissemination of press releases on the major news wire services and through
other wide-ranging public disclosures, such as communications with the financial press,
securities analysts and other similar reporting services.
195. As a result, the market for Omnicare securities digested current information with
respect to Omnicare from publicly available sources and reflected such information in the price
of Omnicare’s securities. Under these circumstances, all purchasers or acquirers of Omnicare
securities during the Class Period suffered similar injury through their purchase of securities at
artificially inflated prices and a presumption of reliance applies.
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196. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of purchasers and acquirers of
Omnicare securities during the January 10, 2007 through August 5, 2010 Class Period who were
damaged by Defendants’ fraud. Excluded from the Class are Defendants, the officers and
directors of the Company, members of their immediate families, and their legal representatives,
heirs, successors or assigns, and any entity in which Defendants have or had a controlling
interest.
197. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Omnicare’s securities were actively traded on the
NYSE. While the exact number of Class members is unknown to Plaintiff at this time and can
only be ascertained through appropriate discovery, as of March 31, 2011, there were over 115
million shares of Omnicare’s common stock outstanding. Accordingly, Plaintiff believes that
there are thousands of members in the proposed Class. Record owners and other members of the
Class may be identified from records maintained by Omnicare or its transfer agent and may be
notified of the pendency of this action by mail, using the form of notice similar to that
customarily used in securities class actions.
198. Plaintiff’s claims are typical of the claims of the members of the Class as all
members of the Class were similarly affected by Defendants’ wrongful conduct in violation of
the federal securities laws complained of herein.
199. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
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200. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by Defendants’ acts and
omissions as alleged herein;
(b) Whether statements made by Defendants to the investing public during the
Class Period misrepresented and omitted material facts about the business and operations of
Omnicare;
(c) Whether Defendants acted with scienter;
(d) Whether reliance upon Defendants’ alleged false statements can be
presumed pursuant to the fraud-on-the-market doctrine;
(e) Whether the Individual Defendants were “control persons” of Omnicare;
(f) Whether and to what extent the market price of Omnicare’s stock was
artificially inflated during the Class Period as a result of Defendants’ violations of the securities
laws; and
(g) To what extent the members of the Class have sustained damages and the
proper measure of damages.
201. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
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XI. RELIANCE SHOULD BE PRESUMED WITH RESPECT TO DEFENDANTS’ OMISSIONS
202. Throughout the Class Period, Plaintiff and the members of the Class justifiably
expected the Defendants to disclose material information in connection with the offering and sale
of the Company’s securities. Plaintiff and the members of the Class would not have purchased
the Company’s securities at artificially inflated prices if Defendants had disclosed all material
information, including Omnicare’s ongoing scheme to defraud the Medicare and Medicaid
programs. Thus, reliance by Plaintiff and the Class members should be presumed with respect to
Defendants’ omissions of material information.
XII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
203. Plaintiff will rely upon the presumption of reliance established by the fraud-on-
the-market doctrine. This presumption provides, inter alia:
(a) Defendants made public misrepresentations or failed to disclose material
facts during the Class Period;
(b) The omissions and misrepresentations were material;
(c) The Company’s stock traded in an open, efficient, and well-developed
market;
(d) The misrepresentations alleged would tend to induce a reasonable investor
to misjudge the value of the Company’s securities; and
(e) Plaintiff and other members of the Class purchased Omnicare securities
between the time Defendants misrepresented or failed to disclose material facts and the time the
true facts were disclosed, without knowledge of the misrepresented or omitted facts.
204. At all relevant times, the market for Omnicare securities was efficient for the
following reasons, among others:
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(a) Omnicare’s common stock met the requirements for listing, and was listed
and actively traded, on the NYSE, a highly efficient market;
(b) as a regulated issuer, Omnicare filed periodic public reports with the SEC
and the NYSE;
(c) Omnicare’s common stock was regularly followed by securities analysts
employed by major brokerage firms who wrote reports that were distributed to the sales force
and customers of their respective brokerage firms; and
(d) Omnicare regularly communicated with the public and investors via
established market communication mechanisms, including via regular dissemination of press
releases on major news wire services and through other wide-ranging public disclosures, such as
communications with the financial press, securities analysts and other similar reporting services.
205. As a consequence, the market for Omnicare securities digested current
information with respect to the Company from publicly available sources and reflected such
information in the price of Omnicare’s securities.
206. Plaintiff and the other Class members relied on the integrity of the market price
for the Company’s securities and are entitled to a presumption of reliance on Defendants’
material misrepresentations and omissions during the Class Period.
XIII. NO SAFE HARBOR EXISTS FOR DEFENDANTS’ STATEMENTS
207. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
Many of the specific statements pleaded herein were not identified as “forward-looking
statements” when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
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extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because at the time each
of those forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, or the forward-looking statement was authorized or
approved by an executive officer of Omnicare who knew that those statements were false when
made.
COUNT I
For Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against Defendants
208. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
209. During the Class Period, Omnicare and the Individual Defendants carried out a
plan, scheme and course of conduct that was intended to and, throughout the Class Period, did:
(a) deceive the investing public, including Plaintiff and other members of the Class, regarding
Omnicare’s business, operations, financial prospects and the intrinsic value of Omnicare’s
publicly traded securities; (b) artificially inflate and maintain the market price of Omnicare’s
securities; and (c) cause Plaintiff and other members of the Class to purchase Omnicare’s
securities at artificially inflated prices and, as a result, suffer economic losses when the truth and
impact about Defendants’ fraud was revealed. In furtherance of this unlawful scheme, plan and
course of conduct, Defendants, and each of them, took the actions set forth herein.
210. Defendants: (a) employed devices, schemes and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements made not misleading; and (c) engaged in acts, practices and a course of business
which operated as a fraud and deceit upon the purchasers or acquirers of the Company’s publicly
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traded securities in an effort to maintain artificially high market prices for Omnicare’s publicly
traded securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All
Defendants are sued either as primary participants in the wrongful and illegal conduct charged
herein or as controlling persons as alleged below.
211. Defendants, individually and in concert, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business and its
operations as specified herein.
212. These Defendants employed devices, schemes and artifices to defraud, while in
possession of material, adverse, non-public information and engaged in acts, practices and a
course of conduct as alleged herein in an effort to assure investors of Omnicare’s value and
performance and continued growth, which included the making of, or the participation in the
making of, untrue statements of material fact and omitting to state material facts necessary in
order to make the statements made about Omnicare in light of the circumstances under which
they were made, not misleading, as set forth more particularly herein, and engaged in
transactions, practices and a course of business which operated as a fraud and deceit upon the
purchasers or acquirers of Omnicare’s publicly traded securities during the Class Period.
213. Each of the Individual Defendants’ primary liability arises from the following
facts: (a) these Defendants were high level executives and, in the case of defendant Gemunder, a
director of the Company during the Class Period and members of the Company’s senior
management team; (b) each of these Defendants, by virtue of his or her responsibilities and
activities as a senior officer and director of the Company, knew or should have known of the
Company’s widespread scheme to defraud the federal Medicare program and several state
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Medicaid programs by submitting claims for reimbursement for services that did not conform to
Medicare and Medicaid regulations; (c) each of these Defendants enjoyed significant personal
contact and familiarity with the other Defendants and was advised of and had access to other
members of the Company’s management team, internal reports, and other data and information
about the Company’s business and operations, at all relevant times; and (d) each of these
Defendants was aware of the Company’s dissemination of information to the investing public,
which they knew or recklessly disregarded was materially false and misleading and omitted
material information.
214. In addition to the duties of full disclosure imposed on Defendants as a result of
their making of affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, Defendants had a duty to promptly disseminate
truthful information that would be material to investors in compliance with the integrated
disclosure provisions of the SEC as embodied in SEC Regulation S-X, 17 C.F.R. § 210.01 et
seq. , and Regulation S-K, 17 C.F.R. § 229.10 et seq. , and other SEC regulations, including
accurate and truthful information about the status of the Company’s business and operations so
that the market price of the Company’s securities would be based on truthful, complete and
accurate information.
215. The Defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. As such,
Defendants’ material misrepresentations and/or omissions were made knowingly or with a
reckless disregard for the truth and for the purpose and effect of misrepresenting and omitting
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material information about Omnicare’s business and operations, thus supporting the artificially
inflated prices of the Company’s publicly traded securities.
216. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Omnicare’s publicly
traded securities was artificially inflated during the Class Period. In ignorance of the fact that the
market price of Omnicare’s publicly traded securities was artificially inflated, and relying
directly or indirectly on the false and misleading statements made by Defendants, or upon the
integrity of the markets in which the securities trade and/or on the absence of material adverse
information that was known to or recklessly disregarded by Defendants, but not disclosed in
public statements by Defendants during the Class Period, Plaintiff and the other members of the
Class acquired Omnicare publicly traded securities during the Class Period at artificially inflated
prices and were damaged when the artificial inflation came out of the securities.
217. At the time of said misrepresentations and omissions, Plaintiff and other members
of the Class were ignorant of their falsity, and believed them to be true and complete. Had
Plaintiff, the other members of the Class and the marketplace known the truth regarding the
Medicare and Medicaid fraud and the true condition of Omnicare’s business operations and
prospects, which was not disclosed by Defendants, they would not have purchased or otherwise
acquired their Omnicare publicly traded securities, or, if they had acquired such securities during
the Class Period, they would not have done so at the artificially inflated prices which they paid.
218. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder.
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219. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company’s publicly traded securities during the Class Period.
COUNT II
For Violation of Section 20(a) of the 1934 Act (Against The Individual Defendants Based On Omnicare’s Violation Of Section 10(b))
220. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
221. As alleged above, Omnicare violated Section 10(b) and Rule 10b-5, promulgated
thereunder, by making false and misleading statements in connection with the purchase or sale of
securities. This fraudulent conduct was undertaken with scienter because Omnicare is charged
with the knowledge and scienter of the Individual Defendants and others who knew of or
recklessly disregarded the falsity of the Company’s statements and the fraudulent nature of its
scheme.
222. Plaintiff and the other members of the Class suffered damages in connection with
their purchases of Omnicare securities as a direct and proximate result of those violations of
Section 10(b) and Rule 10b-5 by Omnicare.
223. The Individual Defendants acted as controlling persons of Omnicare within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high level
positions, and their ownership and contractual rights, participation in and awareness of the
Company’s operations, and intimate knowledge of the false statements and omissions made by
the Company and disseminated to the investing public, the Individual Defendants had the power
to influence and control and did influence and control, directly or indirectly, the decision making
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of the Company, including the content and dissemination of the various statements which
Plaintiff contends are false and misleading.
224. The Individual Defendants prepared, signed, and/or approved the Company’s
press releases and SEC filings that contained materially false and misleading statements or
omitted material facts. They were provided with or had unrestricted access to copies of those
statements prior to and/or shortly after these statements were issued and had the ability to
prevent the issuance of the statements or cause the statements to be corrected.
225. In particular, each of the Individual Defendants had direct and supervisory
involvement in the day-to-day operations of the Company and, therefore, is presumed to have
had the power to control or influence the particular transactions giving rise to the securities
violations as alleged herein, and exercised the same.
226. The Individual Defendants did not act in good faith in connection with the
conduct at issue in this Claim.
227. As set forth above, Omnicare violated Section 10(b) and Rule 10b-5 by its acts
and omissions as alleged in this Complaint. By virtue of their positions as controlling persons,
each of the Individual Defendants are jointly and severally liable to Plaintiff pursuant to Section
20(a) of the Exchange Act for Omnicare’s violations of Section 10(b).
PRAYER FOR RELIEF
WHEREFORE, Plaintiff respectfully prays for relief and judgment as follows:
A. Determining that this action is a proper class action, and certifying Plaintiff as
class representative under Federal Rule of Civil Procedure 23;
B. Awarding compensatory damages in favor of Plaintiff and the other members of
the Class against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants’ wrongdoing, and for all damages sustained as a result of wrongdoing by persons
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controlled by Defendants and/or for whose conduct Defendants are responsible pursuant to
principles of respondeat superior, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiff and the other members of the Class rescission and/or
rescissionary damages;
D. Awarding punitive damages against Omnicare and in favor of Plaintiff and other
members of the Class;
E. Awarding Plaintiff and the Class their reasonable costs and expenses incurred in
this action, including counsel fees and expert fees; and
F. Such equitable, injunctive or other and further relief as the Court may deem just
and proper.
JURY TRIAL DEMAND
Plaintiff hereby demands a trial by jury.
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DATED: May 11, 2012 BALLARD ROGERS LAW, PLLC
KIRBY McINERNEY LLP Ira M. Press Randall K. Berger David E. Kovel J. Brandon Walker 825 Third Avenue, 16th Floor New York, NY 10022 Telephone: (212) 371-6600 Facsimile: (212) 751-2540 Email: [email protected]
[email protected] [email protected] [email protected]
Lead Counsel for Plaintiff and the Class
STURMAN LLC Deborah Sturman 275 Seventh Avenue, 2nd Floor New York, NY 10001 Telephone: (212) 367-7017 Facsimile: (917) 546-2544 Email: [email protected]
GRANT & EISENHOFER P.A. Geoffrey C. Jarvis Christine M. Mackintosh 123 S. Justison Street Wilmington, DE 19801 Telephone: (302) 622-7040 Facsimile: (302) 622-7100 Email: [email protected]
Additional Counsel
/s/ Breaux Ballard Rogers Breaux Ballard Rogers 539 W. Market St., Suite 300 Louisville, KY 40202 Telephone: (502) 640-3535 Facsimile: (502) 582-2296 Email: [email protected]
Local Counsel for Plaintiff and the Class
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