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UNITED STA ES DISTRICT COURT.-r FOR THE SOUTHERN- DISTRICT OF NEW YORK 11143 I NAL
ppiurpr.".. X Civil Action
GARY MITCHELL, ALEXANDER ) ip-- cit 1 4 5 4MITCHELL and BETSY MITCHELL, on ) CLASSE ACBehalf of Themselves and All Others )Similarly Situated, ) CLASS ACTION COMPLAINT FOR
) VIOLATION OF THE FEDERALPlaintiffs, ) SECUltrriEs LAWS
)v. ) JURY TRIAL DEMANDED
)COMPLETE MANAG EM I:NT, INC , )STEVEN RABINOVICI, DAVID R. ) •JACARUSO, ARTHUR L. GOLDBERG, )JOSEPH M, SCOTTI, DENNIS )SHIELDS, MANUS O'DONNET.L, ) ) ---.CLAIRE A. CARDONE, LAWRENCE )
01>':-W. SHIELDS, MD., NATIONAL )c ...--- y ,SECURITIES CORPORATION, ) .rf-I • nCOMMONWEALTH ASSOCIATES, ) ---v -. ,
PRUDENTIAL SECURITIES, and ) •.. LARTHUR ANDERSEN, LLP )
)Defendants ) —
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UNITED STA~ES DISTRICT COURT ` y ' FCR THE SOUTHERN DISTRICT OF NEW YORK IGIJ
-.._____-_-___- _-_______________________________-_ X Civil Action (TIT 1 4 5 4GARY MITCHELL, ALEXANDER )MITCHELL and BETSY MITCHELL, on)Behalf of Themselves and All Others ) CLASS ACTION COMPLAINT FOR
VIOLATION OF THE FEDERALPlaintiffs, ) v. 1 SECURITIES LAWS
JURY TRIAL DEMANDED
COMPLETE MANAGEMENT, INC.,STEVEN RABINOVICI, DAVID R.JACARUSO, ARTHUR L. GOLDBERG,JOSEPH M. SCOTTI, DENNIS SHIELDS,MANUS O'DONNELL, CLAIRE A.CARDONE, LAWRENCE W. SHIELDS,M.D., NATIONAL SECURITIESCORPORATION, COMPAONWEALTHASSOCIATES, PRUDENTIALSECURITIES, and ARTHUR ANDERSEN,LLP.
) ---------------------------------------------Defendants.X
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CERTIFICATION, OF GARY D. MITCHELLEtTMEANT TO FEDERA_L_, SECURITIES LAWS
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1 - I make this declaration pursuant to Section 101 of the Private Securities Litigation
6 -?, Reform Act of 1995 as required by Section 21D(a)(2) of Title I of the Securities Exchange Act of
1934.
• 2. I have reviewed a version of the complaint and authorize its filing on my behalf
and on behalf of all others similarly situated.
3. I did not purchase shares of Complete Management Inc, common stock, the
security that is the subject of this action, at the direction of counsel or in order to participate in
any action arising under Title I of the Securities Exchange Act of 1934.
4. I am willing to serve as a representative party on kind f of the class, including
providing testimony at deposition and trial, ilnecessary
5. To the best of my etuTent knowledge, the following are all of my transactions in
Complete Management Inc. securities during the class period specified in the Complaint:
Date Number of Shares Purchase or Sale Price
9-35-97 225 Purchase $17.68
10-23-97 175 Purchase $18.00
10-27-97 200 Purchase $16.00
12-12-97 400 Purchase $14.00
Declaration ofNamcd Plaintiff Page 1 of2
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;6. During the three year period preceding the date on which this certification is•
signed, I have not sought to serve as a representative party on behalf of a class under Title 1 of the
Securities Exchange Act of 1934.
7. I will not accept any payment for serving as a representative patty on behalf of the
. - class beyond plaintiffs pro rata share of any recovery, except as ordered or approved by the court,
including any award for reasonable costs and expenses (including lost wages) directly relating to
• the representation of the class.
8. I make this declaration without waiver of any applicable privileges and without
waiver of any right to challenge the necessity for, or the constitutionality of, this declaration or to
object to the filing of this declaration on any ground whatsuevel•
9. The niaiters stated in this declaration are true to the best of my current knowledge,
information and belief
10. I hereby certify, tinder penalty of perjur y , that the Cot egoing is true and correct.
•Dated: • J.7
(si aiure)
Declaration or Named Plaintiff Page 2 of 2
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. t I : 10 I k • ' 4 . • Lit t OilruRSITANT TO_FEDERA I , SECURITIES LAWS
..
1. I make this declaration pursuant to Section 101 of the Private Securities Litigation
Refbrm Act of 1995 as required by Section 21D(a)(2) of Title I of the Securities Exchange Act of
1934.
2. I have reviewed a version of the complaint and authorize its filing on my behalf and
on behalf of all others similarly situated.
3. I did not purchase shales of Complete Management Inc. common stock, the
seem ity that is the subject of this action, at the direction of counsel or in order to participate in
any action arising under Title I of the Securities Exchange Act o11934.
4. I am willing to serve as a representative party on behalf of the class, including
providing testimony at deposition and trial, if necessary.
5. To the best of my current knowledge, the following are all of my transactions in
Complete Management Inc. securities during the class period specified in the Complaint:
Date Number of Shares Eurehase or Sale Pric.e
9-9-97 500 Purchase $17.25
2-3-98 500 Purchase $1 1.00
Declaration of Named PlaintIff Page 1 of 2
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6. During the three year period preceding the date on which this certification is :.
FA-A , signed, I have not sought to serve as a representative party on behalf of a class under Title 1 of the
•
Securities Exchange Act of 1934.
7. 1 will not accept any payment for serving as a representative party on behalf of the
class beyond plaintiff's pro rata share of any recovery, except as ordered or approved by the court,;.,
• 4.p: including any award for reasonable costs and expenses (including lost wages) directly relating to
the representation of the class.
:..i; S. I make this declaration without waiver of any applicable privileges and without
waiver of any right to challenge the necessity for, ot the constitutionality of, this declaration or to
object to the filing of this declaration on any ground whatsoever.
9. The matters stated in this declaration are true to the best of my cutrent knowledge,
information and belief
10, 1 hereby certify, under penalty of perjury, that the foregoing is true and correct.
Dated: i 2- L, q (signature)
Jay B. Mitchell on behalf of hisson Alexander Mitchell
Declaration of Named Plaintiff Page 2 of 2
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CERTIFICATION OF BETSY MITI:PELLPURSUANT TO FEDERAL SECURITIES_LA_WS'
make this declaration pursuant to Section 101 of the Private Securities litigation
Reform Act of 1995 as required by Section 21D(a)(2) of Title 1 of the Securities Exchange Act of
1934.
t.- 2. I have reviewed a version of the complaint and authorize its filing on my behalf and
on behalf of all others similarly situated.
3. 1 did not purchase shares of Complete Management Inc common stock, the
‘.. security that is the subject of this action, at the direction of counsel or in order to participate in
• any action arising under Title I of the Securities Exchange Act of 1934.
4. I am willing to serve as a representative party on behalf of the class, including
' providing testimony at deposition and tiirri, if necessaiy.
5. To the best of my current knowledge, the following are all of my transactions in
Complete Management Inc. securities during the class period specified in the Complaint:
Pate Number of Shares Purchase or Sale Price
9-9-97 500 Purchase $17.375
2-3-98 500 Purchase $11_00
Declaration of Named Plaintiff Page 1 o[2
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6. During the three year period preceding the date on which this certification is
signed, I have not sought to serve as a representative party on behalf of a class under Title I of the
Securities Exchange Act of 1934.. .4
ir7, I will not accept any payment for serving as a representative party on b ehalr of tl e
. class beyond plaintiffs pro rata share of any tecovely, except as ordered or approved by the court,='; =
42 including any award for reasonable costs and expenses (including lost wages) directly relating to
the representation of the class.
2 rpo,;S. I make this decimation without waivei of any applicable privileges and without
t, waiver of any right to challenge the necessity for or the constitutionality of this declaration or to
object to the filing of this declaration on any ground whatsoever.
• 9. The niatteis stated .1 11 this declaration are true to the best of my current knowledge,
.r.,'information and belief
10. I hereby certify, under penalty of perjury, that the foregoing is nue and correct.
Dated: 24:2- qi
() signature)
Jay 11 Mitchel] on behalf of hisdaughter Betsy Mitchell
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-ur Plaintiffs, through their attorneys, bring this action on behalf of themselves and all others •
similarly situated. Based on personal knowledge as to themselves and their activities and the
investigation conducted by counsel, plaintiffs hereby allege as follows:
INTRODUCTION
1. This action is being brought as a class action on behalf of all individuals who
purchased or otherwise acquired the common stock or convertible debentures of-Complete
Management, Inc. (CMI" or the 'Company") between May 1, 1996 and August 13, 1998 (the
'Class Period"), inclusive. As is more fully alleged throughout the Complaint, defendants engaged
in a scheme and common course of conduct including the dissemination of false and misleading
statements and/or omissions concerning the present and future finances and business prospects of
the Company which operated as a fraud and deceit on Lime Class during the Class Period.
SUMMARY OF ACTION.
2. CM] pmovides physician practice management services to medical practices and
hospitals in the New York metropolitan area , including New York City, Long Island, the -Hudson
Valley region and portions of -New Jci sey arid Connecticut. The Company's services range from
managing all of the non-medical aspects of its full service clients' businesses to providing limited
non-medical services, such as billing and collections, transcription and temporary staffing to its
partial service clients. hi addition to its come business, the Company owns and operates MRI and
other diagnostic imaging equipment at seven hospitals.
3. (.1MI was incorporated on December 30, 1992. From the time or its incorporation
through March 31, 1993, the Company had no operations. The Company commenced operations
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in April 1993 when it entered into a management agreement with Greater Metropolitan Medical
Services ('GMMS''),
pt. ; 4. GMMS is a multi-site medical practice with offices throughout the greater New..%.•;••
:• .: kr% •• • York metropn/itan area. Most. of GMMS medical practice i3 devoted to the medical treatment of
. •accident victims who are insured under 'New York's no-fault motor vehicle law. Most of GMMS'•
. patients are generally entitled to ditecticimbuisement of their medical bills from insurance
carriers. Since many of these patients lack the financials means to pay those bills, GIVIMS
provides medical services subject to assi gnment by its patients of their ri ghts to reimbursement
under the insurance policies. For the year ending December 31, 1997, 57% of GNIMS's revenue
came from either no-fault or workers' compensation patients.
5. The relationship between CMI and GMMS was incestuous from its inception.
Lawrence Shields, M.D., a co-founder and principle shareholder of CMI, also has a 95%
ownership interest in GNIMS. Moreover, Shields' son, Dennis Shields (D. Shields") was an
Executive Vice-President, director, and co-founder of Cillf
6. According to the terms of the management agreement, CM1 provided GNIMS with
all the non-medical aspects of its practice, including but nut limited to: office space, equipment,
supplies, personnel, billing and collections. In return, GM \IS paid a large percent of its proceeds
to the Company. CNII was completely dependent on GMMS. From 1993 to 1995, GMMS was
CNII's only source of income and in 1996 and 1997. GINTMS remained C.NIF s largest single client.
7. Under the terms ofthe management agreement, UMMS did not pay cash for
CM1's services. Rather, GIVIMS "paid" CM.I by assigning its accounts receivables with a net
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;4,•• collectable vahic equal to the then current management fee owed to the Company. The collection•, •41.••;A, •
on the accounts receivables then became CMI's responsibility. Accordingly, CMI's success•
would be wholly dependent on the quantity and collectibility of GMMS receivables.
• 8. MB continuously represented to the public that the GMMS receivables that the
Company had ieeognized as revenue were collectible. To the extent that any of GIVEMS' bills had
not yet been paid, CM blamed an extended collection cycle typical of no-fault insurance claims.
In fact, CMI represented that its GM.MS receivables had collection cycles of up to three years.
However, at no time did defendants even hint that the majority of those receivables were not
collectible nor that CMI's finances 'web e built on a house of cards.
9. By recognizing revenue on doubtful receivables, CATE gave the impression that it
was a financially sound company. The 'record" revenues it posted quarter after quarter enabled
defendants to artificially inflate the value of CM" stock. By virtue of their representations,
defendants were able to generate public support fbr numerous stoc.k and debentuie ofkrings
well as form a financial basis from which to secure loans and other financing. The cash from these
events enabled C.Ml to purchase numerous medical practices throughout the Class Period.
10. Defendants' publicly stated goal in acquiring all these medical practices was to
grow and expand CM l's business. In truth, defendants needed to acquire othei medical practices
so as to reduce ('MI's complete dependence on GMMS and its illusory receivables. CMI used its
available cash to purchase everything in sight, often making rash decisions and overpaying for
medical practices. Defendants knew, however, that they onl y had a limited time before they could
no longer carry uncollected GMMS receivables on their books and be forced to write them down.
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1 , Tluoughout the Class Period, defendants recognized revenue. on GMMS
receivables which they knew would never be collected. By doing so, they willfully violated
Generally Accepted Accounting Principles ("GAMY) and caused the ar tificial inflation of CM1.
stock, which class members acquired and were darria.ged thereby. At the time they recognized
revenue on uncollectible GMMS receivables, defendants knew the following:
a. GMMS had a history °I:submitting claims for niedic.a.1 services which were
eKcessive and unnecessary;
b. Insurance companies routinely denied these claims,
c. This resulted in a continual increase of uncollectiblc GMMS receivable;
d. CM1. never wrote down these receivables nor took a reserve for doubtful
accounts which ultimately necessitated a $56.7 million charge for had debt at the end of the Class
Period.
12. In June 1998, a New York Court of Appeals issued an opinion nAillich had the
effect of substantially speeding up the collection of no fault receivables. Rather than henefttting
CM1, the insurance carriers rejected millions of dollars of GMMS receivables forcing CMI to seek
arbitration or simply write off the receivables as bad debt.
13. Shortly thereafter, on August 19, 1998, CMT's charade came to an end when it
announced it would be writing off $28.9 million in management fees due flout GMMS, another
$13 million for non-payment of management fees from another entity, and would be severing its
relationship with GAMS.
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14. Later that year, on November 18, 1998, CMI announced an additional $21.2
• million write off. By this time CND's stock price had fallen to $.4375 po slime, as compared with
$16.50 exactly one year before.
15. Throughout the Class Period, defendants misrepresented the true nature of OAF s
financial condition. Misrepresentations permeated all C.MI's public filings with the Securities
Exchange Commission as well as those representations made directly to the investing community.
16. During the Class Period certain CMI insiders sold shares of CMI stock at
artificially inflated prices reaping proceeds clover $13 million.
THE PARTIES
17, Plaintiff Gary Mitchell purchased 1000 shares of CMI during the Class Period and
• has been dammed as a result of defendants' dec.eptive and illegal conduct.
18. Plaintiff Alexander Mitchell purchased 1000 shares of CM f during the Class Period
and has been damaged as a result of defendants' deceptive and illegal conduct.
19. Plaintiff Betsy Mitchell pnrchased 1000 shares of CM L during the Class Period and
has been damaged as a result of defendants' deceptive and illegal conduct,
20. Defendant CMI maintains its principal executive offices in this district at 254 West
31th Street, New York, NY, 10001-2813, The Company, at all relevant times, was listed as a
publicly held corporation whose shares were traded in an efficient market on a national exchange.
As of November 2], ]98, approximately 15 million shares or CMI stock are issued and
outstanding.
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Defendant Steven Rabinovici ('Rabinuvici") is a co-founder of CMI, He served as
CMI's Chairman of the Board, Chief - Executive Officer and President throughom-. the Class
Period. During the Class Pei iod, while in possession of material adverse inside information
concerning CM!, Rabinoviei sold over 350,000 shares of CMI stock, representing almost 90% or
Ins holdings, fin proceeds of more than S1.6 million.
22. Defendant David lacaniso ("Jacartiso") is a co-founder of CMI. He seived as
Vice Chairman of the Board throughout the Class Period. Prior to the Class Period, Jacaruso
served as President and Chairman of the Board. During the Class Pet loci, while in possession of
material adverse inside information concernin g CMI, Jacaruso sold over 158,000 shares of CU
stock, representing almost 33% of his holdings, flu i occeds of just under $2 million.
23. Defendant Arthur L. Goldberg ('Goldberg') served as CM l's rxe.culive Vice
President and Chief Operations Officer throughout the Class Period
24. Defendant Joseph M. Scotti ("Scotti") served as Vice President, Chief Financial
Officer, Treasurer., Secretary and Director or CMI from December 28, 1995 until January of
1997. Subsequently, he served as Fxecutive Vice President - Acquisition Analysis, Treasuiei and
a director of the Company.
2:5. Defendant Dennis Shields ('D. Shields') is a co-founder of CMI. Duting the Class
Period, he served as an Executive Vice President and director. Durin g the Class Period, while in
possession of material adverse inside information concerning CMJ, D. Shields sold ovei 158,000
shares of CMI stock, representing almost 33% of his holdings, for proceeds to himself of just
under $2 million.
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26. Defendant Manus O'Donnell ("O'Donnell") served as Vie..e President and Chief
Financial Officer of the Company since January 1997.
27. Defendant Claire A. Cardone (''C 1arc,.one.") sei veil as Viee President of Operations
for I )iagnostic Imaging of the Company at all relevant times. During the Class Period, while in
possession of material adverse inside information concerning CM1, Cardone sold eve] 25,000
shales of CMI stock, iepresenting almost 25% of her holdings, for proceeds ofjust over
3U0, 000.
28. Defendant Lawrence W. Shields, M.D. ("L. Shields") is a co-founder of CM1 and
its largest shareholder. He also owns 95% of GMMS, the Company's largest customer. During
the Class Period, while in possession of material adverse inside inibrmation concerning CM, L.
Shields sold over 644,000 Andes or CMI stock.
29. Defendant National Securities Corporation ("National") is an investment banking
and brokerage firm located Seattle, Washington. National was responsible rm nude " wfiting
CMI's Initial Public Offering and its June 6 Convertible Debenture Offering.
30. Defendant Commonwealth Associates ("Commonwealth") is an investment
banking firm located in New York City, New Yolk. Commonwealth was a co-lead underwriter
with National for CM I's lime 6 Convertible Debenture Offering.
31. Defendant Prudential Securities ("Prudential") is an investment banking and
brokerage firm located in New York, New York. Pnidentia/ was the sole underwriter in CM1's
December 10, 1998 Convertible Debenture Offering.
::017MAMORLDOM:',DOCT,STULLIPLD\COMPL.CM1 8
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32, Arthur Andersen, LLP ("Andersen") is a public accounting firm with office
throughout. the United States. During the Class Period, Andersen served as CMI's independent
public accountant.
33, Defendants Rabinoyici, Jacaruso, Goldberg, Scotti, D. Shields, O'Connell,
Cardone and I— Shields are referred to herein as the "Individuai Defendants." By reason of their
stock ownership, management positions, and/or membership on CMI's Board, the individual
Defendants were controlling persons of CM1 and had the power and influence, and exercised the
same, to cause it to engage in the illegal conduct complained of herein. The Individual
Defendants are liable for the false statements pleaded herein, as those statements were each
"group published" information, the result of the collective action of the Individual Defendants.
34, As officers, directors and/or controlling persons °Fa Company iegistered with the
SEC under the federal securities laws, whose common stock is registered with the SEC, and
during the Class Period traded on the NASDAQ. AMEX and NYSE and governed by the
provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate
truthful information promptly end am irately with respect to the Company's operations, products,
markets, management, earnin gs and business prospects, to correct an y previously issued
statements that had become materially misleading or untrue, and to disclose any trends that would
materially affect earnings and the financial results of CMI, so that the market price of the
Company's publicly traded securities would be based upon truthful and accurate information.
Tinder rules and regulations promulgated by the SEC under the Exchan ge Act, the Individual
Defendants also had a duty to report all trends, demands or uncertainties that were likely to
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• t.influence (a) CM1's liquidity; (b) CIVIPs net sales, revenues and/or income; and (c) previously
reported financial information such that it would not be indicative of operating results. The
Individual Defendants' representations during the Class Peliod violated these specific
requirements and obligations.
35. The Individual Defendants, because of their positions with the Company,
controlled and/or possessed the power and authority to control the contents cpf CM1's quarterly
and annual reports, prospectuses, registration statements, press releases and presentations to
securities analysts, which information was conveyed through the analysts to the investing public..
Each defendant was provided with copies of the Company's reports and press releases alleged
herein to he misleading prior to or shortly after their issuance and had the ability and opportunity
to prevent their issuance or cause them to be corrected.
36. Because at their positions and access to material non-public information available
to them but not to the public, each ofthese defendants knew or recklessly disiegalded that the
adverse facts specified herein had nut been disclosed to and were being concealed from the public
and that the positive representations which were being made were then materially false and
misleading. And, despite their duty not to sell theit 0141 stock under such circumstances,
defendants nonetheless did so.
37. Defendants are also each liable as individual participants in a ri .0 dulent scheme
and course of conduct that operated as a fraud andlor deceit upon the class. Because of their
executive, managerial and/or directorial positions with the Company, each of the defendants had
access to the adverse, non-public information about the business, finances and future business
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prospects of CMI as particularized herein and acted to misrepresent, misstate or conceal such
information from plaintiffs and the investing public.
38. It is also appropriate to treat the defendants as a group for pleading purposes
under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the
false and misleading information complained of herein was disseminated through the collective
actions of the defendants. Defendants wcrc involved in the drafting, producing, reviewing, and/or
disseminating of the false and misleading information detailed herein, knew or recklessly
disregarded that such materially misleading statements weie being issued by the Company, and/or
approved or ratified these statements hi violation of the federal securities laws. Defendants' false
and misleading statements and omissions of tact consequently had the effect of, both on their own
and in the aggregate, artificially inflating the price of the common stock of CIVII at all times during
the Class Period.
39, With the benefit of inside inrormation concerning the Company's true results,
financial condition and prospects, the Individual Defendants sold CN/11 stock during the Class
Period to the unknowing public, reaping more than SI3 million in profits that would not have
been possible had defendants disclosed the truth. Defendants knew, among ()thin things, that: (1)
CNII's earnings were illusory because they vvele based on uncollectible receivables of its primal},
customer, GIVIMS; (2) the majority of GMMS receivables were tincollcctible because its doctors
were billing for medical treatments and tests that were unnecessary; (3) the majority of GAMS
receivables were being rejected by insurance carriers; (4) despite the uncollectibility of GIVINIS
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receivables, ('MT hooked them as revenues in contravention of Generally Accepted Accounting
Principles.
SUMMARY Of ACTION
BACKGROUND
40. On January 4, 1996, CMI announced the completion of its initial public offering
("IPO") of 2,000,000 Common Shares at $ 9.00 per share. The IPO was underwritten by a
syndicate represented by Paulson Investment Company, Inc., National Securities Corporation and
Marion Bass Securities Corporation.
41. Concurrent with the 'PO, CIVII merged with Medical Management, Inc. (MGT).
At the time, MMGT was a publicly tiaded company that installed and managed MRI equipment
for private practice physicians whose patient base wasn't large enough to support an ''in house
system. MMGT was headed by Steven Rabinovici, with Dennis Shields and Joseph Scotti serving
as Chief Operating Officer and Chief Financial Officer, respectively. Reimbursement for M.R.1
scanning, the pritnaly diagnostic method used to detect soft tissue injury (the principal on-the-job-
injury) was as high as $900. CMI could now make NMI scanning available to physicians who
were unable to purchase an MIO outright, due to stringent requirements placed by NY laws, hut
deshed to eaptuie additional ie.venues tin ough use of them. The acquisition of MMGT signaled
the beginning of the Company's gi myth by acquisition strategy. As reported by the March 20,
1996 Business Wire, defendant Rabinovici, stated:
Given the $ IS million financing from the IPO, we are well positioned to growthrough strategic acquisition of medical practice assets and other applicableacquisitions in New York state over the next several yea's. Our goal is to inct easethe number of physician practices with a wide range of medicat specialties. We are
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encouraged that the solid foundation established in 1995, coupled with ouraggressive acquisition stiategy, will lead to increased profits in 1996.
42. Subsequent to thc IPO, nearly every communication from CMI to the investment
community was to announce their newest acquisition, claim it would add to CMI revenues and
tout the 1.1ompany's growth by acquisition strategy. As reported by the April 10, 1996 Business
Wire:
CMI MANAGEMENT, INC. (Nasdaq NM- (1M6T) toda.y announced that itsprincipal medical practice client (Greater Metropolitan Medical Services) hadentered into a letter of intent to acquire the practice of' two Board Certifiedneurologists with offices in the boroughs or the Biutlx and Queens in New YorkCity.
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Steven Rabinovici, CEO and Chairman of the. Board, stated, 'This acquisition is animportant step in implementing our business plan to assist our clients in acquiringmedical practices, thus expanding the client base to which we provide medicalmanagement services under long-term contracts. We also con ;t.nue to seek toacquhe utlii medical service businesses. This acquisition represents the first ofwhat we expect will be. on-going acquisition activity.' The new offices areexpected to generate additional management fees of approximately $700,000 to$1,000,000 per year."
Empha.sis added unless otherwise noted
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FALSE AND MISLEADING STATEMENTS
43. all needed to acquire new practices to manage in order to lessen the Company's
dependence on MIMS for revenue. GM:MS doctors were infamous for conducting unnecessary
tests which insnrance companies routinely refused to reimburse. CM.I knew this because they
were primarily responsible for collection on all GNIMS receivables. Knowing that CMI would
never be able to ustain growth if the truth about GMMS doubtfi_d receivables were known, they
actively misled the market claiming that GNINIS receivables were all collectible but due to the
nature of the workman's compensation and no-fault claims, the collection cycle was as long as
• three years. Convincing the market that the reason GMMS leceivables were not being recovered
was due to a extended collection cycle, allowed CMI to immediately recognize revenue on these•
receivables and carry them for a period of three years without taking a reserve for doubtful
accounts.
44. With less than (Iii ce years in which to legitimize CM1's business and make up for
the millions of dollars of i GM MN's receivables which defendants already had recognized as
revenue but knew would never be collected, CNC began rapidly acquiring new practices.
Typically, CMI would pay for its acquisitions on a tripartite basis -- 1/3 cash, 1/3 stock and 1/3
debt. This formula required the Company to have cash in its coffers. Since MINIS receivables
were not being collected, they could not generate sufficient cash flow needed to acquire new
companies. Needing a cash infusion, CIVII announced zmothei public offering. As reported by
Reuters on May 1, 1996:
::ODMR.WORLDOXWV:\DOMSTULLTLO \COMPL.CMI 14
•
•
•
Civil said on Wednesday it has filed a registration statement with the SecuritiesExchange Commission for a public offering of 330 million of convertibledebentures with an interest rate range of 7 percent to 5- I/2 percent.
45. The announcement olthis offering was desi gned to generate cash and to
reinvigorate the price of CMI's stock price which had traded around the $9.00 WO price. The
announcement had the intended effect with CM1's stock price rising immediately afler the
announcement.
• 16. With cash coming in from the anticipated offering, CM' continued to actively
acquire new companies. As reported hi the May 2, 1996 Business Wire:
CMI MANAGEMENT, 1NC. (Nasdaq NM: CMGT) today announced that it hasentered into a letter of intent to acquire the assets, and then manage, a New YorkCity, five-physician multi-specialty community healthcare practice.
* *
Steven Rahinovici, CEO and Chairman of the Board, stated ; 'This is the firstacquisition to offer us the opportunity to manage a community based primary careoffice that provides internal medicine, family practice and general surizery services.This acquisition fits oui stiategy of managing multi-specialty practice assets, thusdiversifying our base of medical services with less emphasis on injury-relatedinedic.a/ cases The new office is expected to E,ierier ate additional managjethent feesof approximately 31,000,000 $1,500,000 arter one year of operation.'
47. On May 6, 1996 CM1 began tiading on the AMCI ican Stock Exchange.
Defendants' goal wa.s to increase the Company's visibility, obtain ITIUT e investois and to aitificiany
inflate the price of CM1 stock by touting false earnings. As reported on the PR Newswire of that
date:
Steven Rabinovici, CML Management's Chairrnan and CEO, said, ''We are pleasedto join the AMEX and believe that the national auction market will offer ourcompany glen:ter market visibility. We anticipate diat. the AMEX listing willprovide improved liquidity and efficiency for the company's stock."
::0DMAMoRLDOXWV:TQC,3\STULLTLD1COMFL.CM1 15
48. As the acquisitions continued, defendants took every opportunity to tout the
expansion of CM1 and its ability to achieve "economies of scale." As reported in the May 9, 1996
Business Wire:
, . CMI MANAGEMENT, INC. (ASE: C11,1I) today announced that it has signed aletter of intent to acquire a medical billing and collections company located in theNew York metropolitan area. The hining company now serves a client base ofmore than 700 physicians, and 20 hospitals.
*
Steve Rahinovici, CMI Management's Chairman and CEO, said, "This acquisition,if CMI, will expand C.MI Management's ability to serve its present medical practiceand hospital clients, and enhance its ability to grow its client base by offeringpractice management services to potentially 700 new customers." Mr. Rabinovicicontinued, ''The acquisition will also allow CM1 Management to reduce costs overthe long-run by consolidating its present billing and collection departments andachieving economies of scale. In addition, the management team biings extensiveexperience in billing and collecting for certain types ofmedical services renderedby its clients."
/19, On May 13, 1996 CM announced record first quarter results touting increases in
revenues and earnings. As reported in the Business Wire the same day:
COMPIFTE MANAGEMENT, INC. (ASE: CM° today announced that grossrevenues for the three months ended March 31, 1996 increased 10% to a record $5,200,000 compared with proforma revenues of S 4,738,000 for the three monthsended March 31, 1995. Actual ievenues in the three months ended March 31,1995 were $ 3,000,000. Net income tbr the three months ended March 31, 1996increased 20°/,, to a record $ 1,110,000 million, or $ 0.15 per share, compared withproforma net income of $ 928,000, or $ 0.12 per share, for the three months endedMarch 31, 1995. Aetnal net income in the three months ended March 31, 1995was $ 826,000 and net income per share (before giving effect to the issuance ofshares in the merger with Medical Management, Inc. and the public offering) was $0,28, Steven Rabinoviei, Chairman of the Board and CEO, stated, ''We are verypleased with our first quarter results. Revenues and earnings were in line withexpectations. Revenues improved principally due to the increased level of servicespt uvided to our major clients. We look for continued progress during 1996,
::ODMAWVORLDOHWV:TOCCASTULLT LOG areL.cmi 16
Ragic_uhrly if acquisitions can be suceessfUlly concluded and are reflected in ourresults.'
50 These statements were false and misleading because at the time they were made,
the defendants knew that:
a. The majority of the revenue and earnings increases were due to the
recognition of revenue on receivables owed to CM.E. by CIMMS
b. GIVLNIS had a history of submitting claims for medical services which were
excessive and unnecessary...•
c. Insurance companies routinely denied these claims,
d. This resulted in an increase of uncolleetibIe GMN1S receivables that were
carded as asset on CM1's financial records;
c. CM1 never wrote down these receivables nor took a reserve for doubtful
accounts which ultimately necessitated a $56.7 million charge fbr had debt at the end of the Class
Period.
51. On June 6, 1996 CM1 announced that its registration statement covering $35
million of convertible subordinated debentures became effective. The debentures had an 8%
coupon and were convertible into CM! Management's common stock at 514 per share. The
managing underwriter was National Securities Corporation.
52. On June 24, 1996, H, 1 Meyers Sz. Co. inc. ("Meyers") and their analyst Sharon di
Stefano, initiated coverage of Ova with a "BUY" rating. The report was based on false and
misleading information provided to Meyers by the defendants n .vhich when released was used to
artificially inflate the price of CMI stock.
::ODMAANORLDOXWVADOMSTuLLTLMCOMPL.CMI 17
'•;v.
•
•:•;.
With a team of managers experienced in the deliveiy of health care within the. highly regulated New York market, a business model that stresses operating .
efficiencies, and enough capital to attain niemingfai revenue and earnings growththrough acquisitions, we believe purchase of CMI provides investors the
.„
opportunity to participate in one of the fastest growing sectors of health care.-
-:. • *
We project 1997 revenue and earnings growth o166% and 5 71%, tespectively.... As• it becomes harder to find undei valued stocks in the fast-growing PPM market, we • '4• believe OM will he recognized as one of the few plays in this group that hasn't
already gained significantly in price.
*
REASONS TO Bt...".{3! *
°VII has a war chest of S30 million earmarked for acquisitions. ,kpplying astandard payment formula, we estimate CMI can purchase up to $135 million in
• potential revenues for itself The company is aheady proving its ability to identifycandidates: in 1Q96, management obtained five letters of intent for acquisitionsand is considering dozens more. This gives confidence CMI can drive its growthexternally.
Roughly two thirds of 0,41' s patient mix are no-fault and workers' compensationcases whose account receivable collection cycles sometimes extend as long asthree years. Because of this, the c.ornpany's days sales outstanding IPSO) islengthy, pressuring cash flow from operations and inviting the need to fund futureoperations with debt. Should this occur. GM1 runs the risk of increasing itsleverage rations and depressing net income with intetest expense. Furtheiinvestors may discount CAIrs multiple for its high D50.
We uote any risks stemming from workers compensations cases may eventuallydiminish because acquired practices, whose receivables are not necessarily fromworkers' compensations claims, will dilute the percentage of those claims withrespect to total receivables.
ADgmeatin ,, a:N.11's advantage hi the NY markelk the physicians soci Le syjth
as..puLlat - on a m
er of in' ir ical evalwitior is
• . ::0 VMALWUR LI) 070W:00C:3 T UT' MC OM P L.CMI 18
V' •. .
ClVIrs Workers Compensation Claims are Growing
From 1993 to 1995, CM1's payor mix shined to favor workers' compensationpatients over no-fault patients. We view this move as beneficial to [MI for severalreasons: 1) workers' compensations claims are typically reimbursed at a higher ratethan Medicare or private-pay insurance, and 2) no-fault claims tend to be litigiousand lengthy, drawing our the health care provider's collection period.
In support of these points we offei that workeis' uompensation reimbursementrates exceed those for Medicare by 30% (due to a steady rise in reimbursementrates while Medicare rates have stagnated or declined). This spread is not likely tochange soon: although regulation for the detection of fraudulent claims istightening at the state and federal levels, there is no proposed legislation to limitreimbursement rates for workers' compensation. To CM1's advantage, efforts toclean up claims only enhances the quality of:those receivables and may shortencollection times. In addition, as the number of fraudulent claims declines, CMI can•devote more attention to the collection of legitimate claims.
We note that New York state is expanding its definition of woikeis' compensation„ . to include the hard-to-dcteet eases such as soft tissue damage (where MR scanning
• is a superior diagnostic modality to x-ray) that ‘, n•••ould have required bruises to• legitimize claims in addition, almost 1/3 of lost time related to workers'• •
compensation claims are related to back injuries. (The most common I\TR scan).Thus, CMI is at an advantage for capturing more business by virtue of the fact itcan make MRT facilities available to its expanding patient base, post acquisitions.
CONCLUSION'
We believe CMI's shares are undervalued compared to a group of pecis, and havea target price on the stock of S30 in six to 18 months. C.M1 is mated STRONGBUY.
53. These statements were false arid misleading because at the time they were made,
defendants knew the following:
a. CMI did not have enough capital to attain meaningful revenue and earnings
growth. On the contrary, since a material amount of GM -MS receivables weie not collectible,
CM1 needed its cash just to sustain its existing business.
::ODMALWORLDOXIWADOCS\STULL \PLLACOMPL.Chill
'./
b. Since all GMMS receivables had been recognized as revenue yet a material
amount of those receivables would not be collectible, a projection of "revenue and earnings
growth of 66% and 54%, respectively" would be unattainable. As the day to day managers of
GMNIS receivables, defendants knew that a material amotmt were highly doubtful, would never
be collected and would therefore never be transformed into CIV1l revenue.
c. The "war chest of $30 million dollars earmarked Col acquisitions" was
really needed to pay for the Company's current operating expenses.
d. The physicians associated with GAMS had not built "strong reputations
among both attorneys and insurers as 'defenders urinjuiy, meaning their medical evaluation is
viewed as unbiased." Quite to the contrary, in 1998 GIVIMS initiated a lawsuit against a number
of insurance carriers for refusing to reimburse its claims. In theii cross motion to dismiss the
complaint, the earl iers stated that MIMS "has a history of submitting claims for medical services
-which are excessive and unneecssaiy" and therefore we have "denied some of these claims."
'Such excessive charges are completely inconsistent with the legislative policy to control health
care costs; they threaten to deplete the limited resnitrces available for health care and the stability
of the no fault premium; they violate Insurance Law §5108 arid they harm the consumer and
premium paying public.'
54. As reported in various Business Wires, CMI announced the acquisition or
numerous medical practices between June and October 1996, each time touting the additional
revenue it would bring to CIVT.
• June 20, 1996: The largest provider of occupational medical services in NewJersey. That company now operates seven centers in six New Jersey counties employing
iioommwoRLoonv:\nocs .isrun\FLD\enm p i CMI 20
•'
136 people including 18 physicians. It had gross revenues of $13 million in 1995. Thetypes of services rendered include medical treatment of employee injuries and illness,company physicals and drug screening, loss prevention and related activities. Thatcompany now has voritiacts with about 3,200 employers representing in excess of 600,000employees.
• July 23, 1996: Intertec Corporation and Perna Automation Resources, 111C., relatedmedical billing and collections companies located in Syosset, New York. The companiescurrently serve a client base of more than 700 physicians and 20 hospitals. In 1995, they
ir!....:••••••• generated sales of more than 3 million. H intertech Corporation and Penta Automation•• Resources, Inc. and their expelienced management teams are very valuable additions to
our Company," said Steve Rabinovici, Chairman and Chief Executive Officer of CM!
.• Management. "The acquisition will immediately augment our ability to se] ve our presentmedical practice and hospital clients 1emiance our growth potential by oti-Cring practice•management services to potentially 700 new customers." We are confident that over timewe will be able to reduce costs by consolidating our present billing and collectiondepartments."
, . .
• September 20, 1996: Advanced Alliance Management Company. This companyhas a 30 year management contract for a 30 physician group to provide comprehensivemanagement services and, in addition, provides tianscription, billing, collection andtemporary staffing services to a total 450 medical practices that include 120 doctors andnine hospitals located in suburban areas north of New York City as well as in the Cityitself.. .. 'This transaction is the most significant one that CMI has yet completed,"noted Steven Rabinovici, Chaii man and Chief Executive Officer of CM1. ''We will nowhave a major presence in the area north of New York City up towards Albany, New York.This brings the total number of physicians to which CMI will provide full managementservices to 65, up from 16 at the end of 1995. hi addition, CM! provides billing andcollection services to about 700 doctors through its billing and collection company andwill provide partial services to the 120 physicians served by the Company just acquired fora total of 820 physicians under partial management." The existing business acquired inthis transaction is expected to generate revenues to (IMI ofabout $13 million in the nexttwelve months,' said Mr. Rabinovici.
• Oct. 24, 1996: C11,11M'ana gement Inc. and Amedisys Inc. announced today thatthey have signed a letter of intent to merge the two companies. CM will pay $9.00 inCMI stock (valued at not less than $14.25 per share nor more than 516.25 per share) foreach of the 2,583,864 outstanding shares of Amedisys Inc. common stock... . Amcdisysis a growing regional diversified health care company headquartered in Baton Rouge, La.Its revenues for the six months ended June 30, 1996 were 521,685,000. It offersphysician practice management and alternative site pi ()vide! services including out patient.surgery centers in Texas, WA management services, home health care, and temporary
iiciorimmoRtooxml\000s\sTut y.PLoNeororit.cmi 21
•medical staffing services.. .. Commenting on this merger, Steven Rahinovici, chairmanand CEO of CM1, said: "This transaction brings to CM1 important skills not easily fbundin the New York area. These include management of risk contracts and management ofIPM. We are very excited about the future of the new CM1/Amedisys organization andwe expect that its 1997 ievenues will exceed $100 million." Borne, chairman and CF.0 ofAmedisys, stated: ''This is a great opportunity for Amedisvs to join with a growing,dynamic and profitable company in our field. We will now has capital toaccelerate the growth of our ambulatory surgery center and IPA management businesses.We see this as the best way for Amedisys to niaximiLe shin eholder value over the longtenia."
55. On November 5, 1996 CMI filed a registration statement with the U.S. Securities
Exchange Commission for a stock and debt offering. As reported in Reuters of that day, the
Company said it would offer to sell 2.5 million shares and $ 25 million of convertible subordinated
debentures, and a non-manag,emeid shuieholdei would offer to sell 500,000 shares. Purportedly,
proceeds would be mostly used to fund future acquisitions and also for general corporate
purposes:
56. On November 14, 1996, CMI announced record third quarter revenues. As
reported in the Business Wire:
CMI Management Inc. a.nnounced that, fOr the three months ended Sept. 30, 1996,gross revenues increased by 85 percent to $8,767,000 from pro forma grossrevenues of S4,710,000 in the same 1995 quarter. Actual revenues in the threemonths ended Sept. 30, 1995 weie $2,666,000. Net income increased 85 percentto $1,476,000, or 18 cents per share, in the third quarter of 1996 from pro formanet income in the third quarter of 1995 of $798,000, or 11 cents per share.
4,le
For the nine months ended September 30, 1996 CM1 had gross revenues of$20,030,000 compared to pro forma gross revenues of $14,747,000 for the firstnine months of 1995 and actual gross revenues for the 1995 nine inunth period of$9,056,000.
*
::OUMAIWOHLUOX,VVADOC 5LS I ULLLI'LU \COMPL.CAll 22
"The results in the third quarter reflect both acquisitions made during the quarterand expansion of Our existing client's business resulting in increased manager.nentfccs to CM I," noted Steven Rabinovici, chairman and CEO of CM/. Our firstacquisition closed in July and three other transactions closed during the quarter.We have already closed two important transactions in the fourth quarter andexpect to close additional transactions before the end of the year. We believe thatour plan of improving our existing client's business and making sound acquisitionsis being implemented in accoi dance with our program. We gain market share andposition with each acquisition and we continue to make investments that willprovide future growth as we move toward achieving our goal of being the premierphysician practice management company in the tri-state area.''
57. These statements were fuse and misleading because at the time they were made,
the defendants knew that:
a. The majority of the revenue and earnings increases were due to the
recognition of revenue on receivables owed to CMI by GMMS;
b. GMMS had a history of submitting claims flu- medical services which were
excessive and unnecessary;
C . Insurance companies routinely denied these claims;
d. This resulted in an increase of uncollectible GAMS receivables that were
carried as asset on CM l's financial Teem ds;
1_1111 never wrote down these rec.eivabfes nor took a reserve for doubtful
accounts which ultimately necessitated a $56.7 million charge for bad debt at the end of the Class
58. On December 6 ; 1996 CM! announced a secondary offering of 2.5 million
common shares at $13.75 per share and $25 million 8 percent convertible debentures. The
::onmk.woRi nmeiw.orics ns-ruLurtmcomp r.cmi 23
Company sold 2 million shales of common stock and defendant Lawrence Shields, M.D., also
sold an additional 500,000 shares.
59 in order to create demand for the newly issued ('MI stock, Commonwealth
Associates, a co-load underwriter of the recent offering, initiated coverage with a
recommendation. As reported in the January 8, 1997 Business Wire:
Commonwealth Associates Inc., a New York-based brokerage firm, today initiatedcoverage on CM1 Management Inc. (AMEX: CM!) with a short term buy,long-term buy recommendation. Analyst Rick Y. Chen indicated in his report that"hi our opinion, the company (CM1 Management) is best situated to establish asignificant market position in the New York PPM (physician practice management)market through a series of potential acquisitions as well as internal urowth. Basedon our financial model, we believe CMI could achieve EPS of $ 1.03 in 1997 and $1.40 in 1998. Using a peer group industry average IVE multiple of 22, which webelieve CMI will warrant once management proves its ability to successfully closeand integrate. acquisitions, CMI should achieve our price objective of $ 22-23 in 12months." C,MI Management Inc. . is a physician practice management companyproviding a full range of management services to physicians located primarily inNew York State, including New York City ; Long Island and the Hudson Valley
• region. The company offers business, financial and marketing support required by. medical practices. Upon completion on Dec 6, 1996, of its secondary offering of
2.5 million common shares at$ 13.75 per share and $ 25 million 8 percent. „ convertible debentthes, the company has more than $ 70 million in cash for future. .
. acquisitions and developments. Commonwealth Associates believes that Cl1.41Management should be able to sustain earnings growth of 40 percent per annum
. during the next three years. Commonwealth Associates served as a co-underwriterof the CMI Management Inc. secondary offering.
60. These statements weYe false and misleading because at the time they were made,
defendants knew the following:
a, the Company was not "best situated to establish a significant market
position'' because its reported revenue, based largely on CiMMS receivables, was illusory.
Commonwealth purportedly conducted a due diligence on ('MT before underwriting the offering.
::COMA1VVORIDOXAVIDOCS \f-ITUU 'PLD\COMPLCME 24
•
• '
, • .'
..•_
At that time it learned CMI's current and future revenues were predicated on uncollectible
GUMS receivafiles.
b. Based on the due diligence examination, there was nu leas:p liable basis to
believe that the Company would achieve a.n ET'S of $1.03 in 1997 and $1.40 in 1998 much less
grow at 40% per year. First, earnings were overstated and would continue to be overstated to the
degree that they were based on mairagement fees owed by CirylMS.
the Company did not have more than $70 million in cash for future
acquisitions and developments" because it would need a significant pot (ion of it to support current
• • opeiating expenses in light of the fact that its (MM S receivables, which had already been booked
•
• •
as revenue, were not collectible.
61. Within the month, CM1's odic' co-lead underwriter, National Securities Corp.
• ("National") initiated coverage with a "buy." As reported in Reuters for January 27, 1997:
• • National Securities analyst Steven Kora& said he started coverage of CIVHManagement Inc with a buy.
* *
"CMI is the leading PPM in a highly regulated New York market. High barriers toentry have enabled CM1 to enjoy limited competition ... C.111L's solid capitalposition and high profit margins have laid the groundwork for gm:client growthprospects," Kornfeld said
62, These statements were false and misleading because at the time they were made,
defendants knew, through their due diligencc examination, that CM' did not have a solid capital
position, high profit margins, nor excellent prospects. The simple fact that C-MT et:own:4ml a
:ODMAVIORLDOX\VV:1DOGSISTULLIPLIDT,OMPLCM1 25
' •
significant number ofuncollectible receivables as revenue without taking a reserve for doubtful
accounts eliminated a reasonable basis for these statements.
63. The coverage was designed to generate interest in CM1 stock and to artificially
inflate its value. National was also pursuing its own agenda, to become a nationally known
underwriter. Commensurate with that objective, National turned a blind eye to what was revealed
during their due diligence investigation of CMI. As reported in the Puget Sound Business Journal
on October 25, 1996:
Despite its grandiose name, National Securities Corp. was a sleepy, low-profilestock tnokerage for its fhst 48 years. No more. In the past year, a new chairmanand controlling shareholder has transformed Seattle-based National into a prolificunderwriter of initial public offerings. Picking small, unproven companies Flomliterally around the world, National has orchestrated the sale of more than $144million win Eh of shares in 11 IPOs so far this year.
*
• [It finds] highly speculative companies with little track record. . f T 'heaggressive deal making is propelling the company forward. "We're really doing
•• • these deals fof the future. Some have done very, very well, and some have been adisaster. That's the business," he said. "1 think we've done remarkably well for afirm that was off the radar screen a year ago."
*
"They've clearly taken an aggressive approach. There are definitely up sides anddown sides to such an aggressive appi oach," said Pacific Crest's director ofcorporate finance, Scott Sandbo.
64. CMl continued acquiring new companies with the proceeds from the secondary
offering. On January 31, 1997 CMI announced the acquisition of a nine-physician and a
seven-physician practice which was expected to add $6.5 Million to CMI revenue in 1997. As
reported in the January 31, 1997 Business Wire:
::comAwyoRtooxwv:Tocs\sTownto ncom p nomi 26
. .
These two transactions bring to more than I the number of physicians under fullmanagement and some 950 physicians who arc provided partial services by CM!.Furthermore, the combined total of the two transactions should add about $6.5million to CMI l s revenues during 1997.
In the first transaction, CMI, on behalf of its client, Northern MetropolitanMedical, P.C., negotiated and financed the acquisition of a nine-physician primarycare practice with offices located in Beacon, Cold Spring and Yorktown, NewYork.
In the second tiansaction, ('Ml, on behalf of an unnamed client., negotiated and. .financed the acquisition ola seven-physician primary and emergency care practicewith its office in Cliffsidc Park, New Jersey. This transaction marked theexpansion of CMI services to a new market outside of New York State.
Steve Rabinovici, Chaii man and Chief Executive Officer of CM!, said, 'Both of•• these transactions are important in the expansion of CMI's services. One marks
• our entry into a market outside of New York State, while the other is part of ourongoing strategic plan that we developed with N'IV1iM to enable NMM to becomethe dominant primary care provider in their area."
65. On March 6, 1997, CM! announced its revenue and earnings for 1996 claiming a
• 69% increase in revenues and a 50% increase in net income. As reported in the Business Wire:
CMI Management Inc. (AMEX: CMI) announced today that it had recordrevenues and net income in calendar 1996. Revenue for 1996 was S33,158,000compared to 1995 pro fm-ma revenues of S19,581,000 for calendar 1995. Netincome for 1996 was $5,41 21,000 or $.68 per share on 8 million average sharesoutstanding compared to pro forma net income of $3,605,000 or eauniugs pershare of $.48 for 1995 on 7.4 million average shares outstanding. StevenRabinoyici, chairman and chief executive officer of CM 1, said: ''We are very proudof our 1996 results, which are in line with or exceeded expectations. In our firstyear as a public, company we closed our first acquisition in July 1996 with a totaloften transactions closed in the year. Therelcire, 1996 only reflects a few monthsof results from these acquisitions. Based on our December 1996 revenue we wereoperating at about a 550 million annualized run rate. So far in 1997 we closedthree more transactions. During [996 we completed two public offerings after ourIPO and raised a total of about $120 million fi-om the public. We are expandingour infrastructure to improve integration of the medical pr actices we manage andwe continue to find very viable acquisition candidates in the greater New York
:i0DMAWVORLIDOXWV:1000S`,3TULL1PLD\COMPL.CMi 27
• .
,
metropolitan area, which gives CM] a significant backlog of potential acquisitionsfrom winch it can select the best candidates."
66. These statements were false and misleading because at the time they were made,
defendants knew the following:
a. Revenue and income were based hi part on the recognition of uncollectible
GMMS receivables.
Ii GAMS was routinely billing for procedures that were unnecessaty and
designed solely to inflate receivables. Insurance can iers routinely refused to pay for such
procedures forcing GM-MS to enter into arbitration or fore go payment on those receivables. In a
typical example, Philemon Watson, a GMIVIS patient, allegedly sustained injuries on January 14,
1995. During the course of treatment he was given a variety of medical tests (e g., SSEP, BAER,
EEG, EKG, and hearing tests). His insurance carrier refused to pay for these tests and treatments
claiming they were unnecessary. GN1MS sought arbitration. The arbitrator ruled that these tests
and procedures va-ire unnecessary and the insurance company did not have to pay CiMMS tor
them.
c. 01.41, who had primary responsibility for collecting these receivables, was
aware that a significant portion were being rejected. Since CNIE's fees were directly related to
obtaining payment for GMMS receivables, defendants knew that it would adversely impact their
revenue sti eam.
d. Notwithstanding the existence of a material number of uncollectible
receivables, CNU booked all GNIIAS receivables as revenue without taking a reserve for doubtful
accounts in violation of Generally Accepted Accounting Principles.
::ODMAWVORLDOMMOUS\STULL1FLDV;OMPLuM1 28
• . •
•e. The Company's revenue was based on GIVIMS paying 00% of the
management fee it owed CM.I. Based on the foregoing. defendants knew that (AIMS would
never be able to pay CM! all of its management fees and therefore, CMI would never be able to•
generate $50 million per year in revenue.
67. On March II, 1997, National issued a press release in which it reiterated its "buy"
rating of the Company's common stock, The release repeated the false and misleading earnings of
the Company. National's analyst KornfeId said he believed that CM! Management was a
"compelling investment opportunity," given the Company's strong position in New York State
and its share price of 10.7 times 1997 estimates. Kornfeld also stated that the Company 's
'collection will continue to improve."
68. These statements were false and misleading because at the time they were made
defendants knew the following:
a. The Company was built upon illusory revenues that would never be
collected from GMMS. As such, it was not a "compelling investment opportunity" and in fact
would be a money losing venture because GNLMS would not and could not pay the millions it
owed in management fees;
b. OW would have to write off millions of dollars in receivables that it had
already recognized as revenue. The Company's financials would then reveal that it had not been
profitable from its inception, and
c. The Company's collection cycle was not improving at all. CMI hid behind
a three year collection cycle in order to falsify its earnings and to artificially inflate its stock price.
::ODMAWVORLDOXWVADOCS\STULDPLD\COMPL.CMf 29
_ --A faster collection cycle would only demonstrate that a mateiial amount or GWYN receivables
were not collectible, and force CMI to write it off as bad debt.
69. In March, Amedisys broke off negotiations with CM'. As repotted in the March
17, 1997 Reuter
CMI terminated merger discussions with .AMPIDISYS Inc purportedly because thecompanies failed to 'each tel ins. "Negotiations to acquire AMEDISYS have beenterminated because of the failure of the parties to reach agreement on variousterms, including price," said CM1 cliairmrin and chief executive. officer StevenRabinovici.
Rabinovici said the breakup of the merger would have ''a positive impact' on theCM_I's 1997 fiscal performance because of "the large number of opportunitiesbefore the company.'
• He said termination of the merger would "permit the company to more effectivelyfocus on the backlog of transactions that it is considering that are close to its corebusiness."
• 70. Iii truth, Amedisys broke off merger ne gotiations because in the process of due
diligence, they lealized that CMI would never he able to piovide the capital it required fin
expanding its business.
71. On March 17, 1997, based on representations Juade by the defendants, Credit
Suisse l'irst Boston initiated coverage of the Company with a "buy' rating and released a report of
the Company. The 'elicit was whiten by analyst L.F.. Uwe!l and teferenced the Company as a
source of the information obtained therein. The Company repeated its false and misleading 1996
revenue figui es to °twill all the while knowing that Olwell would both publish the 1996 figures
and then use the overstated 1996 revenue fi gures to make inaccurate predictions about the
Company's results in 1997 and 1998.
::nowaivoRi DOM:COCSISTUU PLEMOMPL.CMI 30
.m! $gg4 . •
P
72. The Company told 0Iwe11. that, 'a ielativeiy balanced mix of patients are referred
to Mils physicians by eithei plaintiffs attorneys I epresenting no-fault injuries ot workers'
compensation claims, or by insurance companies, defe.nse attorneys, and employers. Roughly one
half of cases are referred by the plaintiff side and one half by defense side," This statement was
false and misleading when made because it gave investors the impression that one half of CMIs
injury business was done for the defense side. It is known that work for the defense side would
be paid on a timely basis because the defense side would not dispute bills for services that it had
ordered. This impression was false because patients refeired by the plaintiff side received more
medical treatment (some alit unnecessary treatment) than patients sent by the defense side. The
defense side would only need a medical exam to define an injury while the plaintiff side required
more expensive medical treatment in addition to an exam. Even if the patients were split 50-50
between defendant and plaintiff referrals, the great majority of receivables came from plaintiff
patients.
73. As reported in the Ea Newswire lin- April 9, 1997:
CNII Management, Inc. (AMEX: (MI) announced today that it completed seventransactions, five ofwhich relate to management of medical practices with a totalof ten physicians, seven primary care and three specialists. The sixth is a contractwith a 500 bed hospital in New York City to provide an MIll unit and relatedadministrative services, and the last is a billing and collection company that will bemerged into CIVIrs existing billing and collection business.
Steven Rabinovici, Chairman and Chief Executive Officer of CMI, said, "We arevery pleased to CM' these transactions which will add a total of about 6million toour revenues in the next 12 months. The addition of ten more physicians to ournetwork brings the total to 132 physicians under full management. The sevenprimary care doctors, located in the Hudson Valley region of New York State,increase our strength in this critical area. The transactions involving the threespecialists were arranged and financed by CM' on behalf of one its clients.
::COMAMORLDOX\W:\DOCS\STULL\PLO \COMPLCMI 31
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"We already operate MR1 units at two maim New York City hospitals and addinga third expands our capabilities in this important market. "The billing andcollection company gives IntertechPenta (Troup, the billing company we acquiredin July 1996, valuable new clients and highly skilled pei simnel ; and In into toapproximately 1,000 the number of physicians for whom we provide billing andcollection services. These transactions imptement CMI's corporate growthstrategy to become the premier physician practice mana gement company in theNew York Metropolitan area."
74. Based upon their optimistic assessine.nts and representations, analysts gave the
Company 'buy' ratings. As reported in the Reuters for May 7, 1997:
Friend Weinress Frankson Presson analyst Steven Kornfeld said he startedcoverage of CMT Management inc with a buy rating.
* *
"CM1's strong cash position and high profit margins have laid the groundworkfor excellent growth prospects," Kornfeld said
J. On May 13, 1997 CM1 announced positive earnings for the quarter ended March
31, 1997. The financial representations made in that announcement were false and misleading
when made because at the lime defendants knew the following:
a. The majority of the revenue and earnings incicases were due to the
recognition of revenue on receivables owed to CMI by GMMS;
b. GMMS had a history of submitting claims for medical set vices which were
excessive and unnecessary;
c. Insurance companies routinely denied these claims;
d. This resulted in an increase of uncollectible GMIVIS ieceivahlcs that were
carried as asset on CMI's financial records; and
•,,::coivikiNortisiox\wnpocs\smwri_cacompt.cm
-
e. CM1 never wrote down these receivables nor took a ieserve for doubtful
accounts which ultimately necessitated a $56.7 million charge for bad debt at the end of the Class
Period.
76. CM1 continued its growth by acquisition strategy, acquiring companies based upon
false financials. As reported in the PR Newswire for June 5, 1997:
CMI Management, Inc. (AMEX: CM!) announced today that it hasCOMPLETED three transactions to manage medical practices with a total of eightprimary care physicians, seven OBIGYN doctors and one family practice doctor.These transactions were arranged and financed b y CM.I on behallof its client,Northern Metropolitan Medical P.C. (NMI).
tic *
These transactions will add approximately $1 million to CM l's revenue over thenext twelve months. This also brings the total of medical providers of NMM to45, increasing its importance as a health care provider in the Hudson Valley region.
* * *
Steven Rabmovici, Chairman and Chief kxecutive Officer of CM', said, "Thesetransactions demonstrate the advantage which CMI's management brings to 1\1MMand its other clients. These transactions add significantly to the scope and breadthof services offered by NMM in its market area. The total number of physiciansnow under Full managernent by CMI is 140 with about 1,100 physicians receivingpartial services."
77. Similarly, as reported in the PR Newswire for Juno 17, 1997:
CMI Management, inc. (AMEX: CM!) announced today that it hasCOMPLETED the purchase of Consumer Health Network, Inc. ('CHN")Piscataway, New Jersey for $12 million consisting of $8 million in cash and314,650 shares of common stock. In addition, a contingent $1 million paymentbased on future earnings of C}-IN may be made. CHN operates the largest PP()network in the State of New Jersey and has begun to establish its network in NewYork and Connecticut. its three-state PPO network consists of 7,818 physiciansand 119 hospitals, serving about 975,000 lives.
::OUMAILVORLUUXMIQUCSASTULLIPLU\COMPLCM1 33
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-This transaction will add about $9-10 million in revenue to CNII in the next twelvemonths. In 1996 CHN, which is historically profitable, geneiated revenues ofabout $8 million. The management of CFI \ will continue in their presentpositions.
Steven Rabinovici, Chairman and Chief Executive Officer of CM1, said, ''Thisacquisition catapults CMI to a new level, giving it access to thousands ofphysicians and many hospitals. Thu CHN business is in itself highly profitable andwe can leverage its expertise as the managed care market in New York continuesto develop in the next few years. We also have the potential °Coffering otherphysician services such as managing WA's in New Jersey, New York andConnecticut. After this acquisition, C.:MI serves 150 physicians with fullmanagement services and almost 9,000 physicians with partial services in the NewYork, New Jersey and Connecticut area
78. On August 13, 1997, CM announced a record 57% earnings increase for the
second quarter o11997. As reported in the PR Newswire Ur the same date:
Complete Management, Inc. (Amex: CMJ) announced today that revenues for thequarter ended June 30, 1997 increased to S17,760,000 from $6,063,000 in thesecond quarter of 1996. Net income increased 57% to $2,091,000 compared to$1,329,000 in the comparable quartei last year. Earnings per share were $.20 on10,437,000 weighted average shares outstanding compared to $. [8 last year on7,796,000 average shares outstanding
Steven Rabinovici, Chairman and Chief Executive Officer of CM1 said, Thegrowth of CIVII continued during the second quarter. One important acquisitionclosed in mid-June and another in early July so the full benefit of those transactionsare not reflected in our second quarter results. With those two transactions, CM l'sannualized revenue run rate is in excess of $80 million. CMI now provides fullmanagement services to 155 physicians compared to 16 at the beginning 0119%,and in addition, provides partial management services (mainly billing andcollection) to almost 1,000 additional doctors with another 8,000 additionalphysicians in the Preferred Provider Organizations operated by our ConsumerHealth Network subsidiary.
"One result," NIL Rabitiovici noted, "was CNIL's reliance on its initial client hassubstantially declined In the first quarter of 1997 it provided 45% of CMI'srevenues which declined to 32% in the second quartet of 1997, down from the65% level in 1996 and 100 0/0 in 1995. We expect the trend of declining reliance tocontinue throughout 1997".
::ODMAMORLDOXWVADOCS\STULL\PLacOMPL.CMI 34
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,
79, This statement was false and misleading because at the time it was made
defendants knew the following:
a. The majority of the revenue and earnings increases were due to the
recognition of revenue on receivables owed to CM! by LiMMS;
b. GIVIMS had a history of submitting claims for medical services which were
excessive and unnecessary;
c. Insurance compa.nies routinely denied these claims;
d. This resulted in an increase of uncollectible GMMS receivables that were
carried as asset on CMI's financial records; and
c. OM never wrote down these receivables nor took a reserve for doubtful
accounts which ultimately necessitated a $56.7 million cliaige fur bad debt at the end of the Class
Period.
80. On August 14, 1997, the day after its announcement of positive quarterly earnings.
Clvli announced its application to be listed on the NYSE. As reported in the PR Newswire of that
day:
Mil Management, Inc. (Amex: CMI) announced today that it has filed anapplication to list its common stock on the New York Stock Exchange. Trading isexpected to begin on or about September X. 1997 under the symbol "CMI". Twoissues of CiVirs convertible subordinated debentures will also trade on the NYSEat the same time as the common stock.
Steven Rabinovici, Chan man and Chief Executive Officer of CMI, said, "Therecognition of the growth and success of CIV1/ implicit in the trading of ourcommon stock on the world's leading stock exchange is very gratifying to all whohave helped CM1 reach its present level. Our employees, clients and investorsshould take this step as concrete recognition of our achievements to date as we
rededicate ourselves to continuing along the path of rapid profitable. growth."
• 1:0DMAIWORLDOXWV:\DOCSSTULL\PLID'COMPL.CM1 3
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8]. Although (MI was cash strapped, it continued to announce acquisitions.
Realizing that it would only be a matter of time before the public became aware of its improper
revenue recognition scheme, defendants confirmed to announce acquisitions in the hope of
portraying CMI as a vastly profitable enterprise, In truth, it was wasting what little cash it had
tell to pin chase piactices at prices that would offset any profitability. As reported in the PR
Newswire:
CMI Management, hie, (NYSE: CMI) today announced that it has enteredinto agreements to manage tOur medical practices with six offices located in LongIsland, Westchester county and northern New Jersey that employ a total of 16physicians and five physician assistants. This brings the total number of physiciansand physician assistants to whom CMI piovides full management services to 175.CMI also purchased a company which provides MR1 services to five hospitals inthe Hudson Valley region of New York State.
Steve Rabinovici, Chairman and CEO of CMI Management, Inc., said, "I expectthe anangements announced today will add a total of about S8-10 million to [Ml'srevenue in the next year and continues (All's program of expanding the number ofprimary and community based medical practices which it manages. This alsoprovides additional opportunities for a radiological practice managed by CM toexpand its services to these hospitals. The 17 health care providers on Long Islandrepresent CMI's first major penetration into that market and we expect continuedexpansion in that area. The other four physicians and their practices were added tomedical practices already managed by CAR"
82. Desperate to raise capital to continue its acquisitions and to pay for its significant
operating expenses, CMI secured equity financing. As reported in PR Newswire for October 21,
.1997:
CM/ Management Inc. (NYSE: CMI) today announced that it has obtained$5,000,000 of equity financing for its subsidiary, CM! Capital Corporation('Capital') in return for a 40% inteiest in Capital. The new financing wasprovided by a small group of institutional and other accredited investors. Theinvestor group included an affiliate and certain former affiliates of CMI whopurchased, in total, 7% of Capital. Capital's management team consists of David
I:oDMAlVVORLDOXIVV:\DOCS1STULL1PLIDICOMPL.CNII 36
•. •
Jacaruso, Chairman of Capital's Board or Direciors, Dennis Shields, ChiefExecutive Officer of Capital, and Harvey Hirschfeld, a Vice President of Capital.Mr. Jacaruso and Mr. Shields were formerly senior executives and directors ofCM1 and they have relinquished their positions with CMI in connection with theirassumption of the senior management responsibilities of Capital.
Steven Rabinovici, Chairman and Chief Executive Officer uf CMI, stated:"This transaction provides additional equity financin g for capital and should allowit to more rapidly expand its medical accounts receivables financing business whileat the same time permitting (WI to retain a substantial equity interest in Capital.Outside financing of Capital also allows CMI to focus its financial and otherresources on its core physician practice managernent business.'
83. On November 11, 1997 the Company announced another quad er of record
revenues touting a 86% increase in earnings fix the third quarter ending September 30, 1997. As
reported in the PR Newswire of that day:
CM1 Management, Inc. (NYSE: CMI) announced today that revenues for thequarter ended September 30, 1997 increased to $20,215,000 from $8,767,000 inthe third guar ter of 1996. Net income increased 86% to $2,738,000 compared to$1,476,000 in the comparable quarter last year. Primary earnin gs per share were.$14 on 11,304,000 weighted average shares outstanding compared to $.18 lastyear on 8,085,000 average shares outstanding. Fully diluted earnings per sharewere $.22 on 16355,000 weighted average shares outstanding compared to $.13last year on 10,950,000 average shares outstanding.
Revenues for the nine months ended Sepiemher 30, 1997 increased to S53,358,000Ibm $20,030,000 in the comparable period in 1996. Net income increased 61%to $6,542,000 compared to $3,915,000 for the nine months ended September 30_1996, Primary earnings per share were $.61 on 10,647,000 weighted averageshares outstanding compared to $.50 last year on 7,840,000 average sharesoutstanding bully diluted earnings per share were $.57 on 16,218,000 weightedaverage shares outstanding compared to $.42 last year on 9,264,000 averageshares out standing.
Stever] Rabinovici, Chairman and Chief Executive Officer of CM1 said, "Increasesin revenue and net earnings for the three months and nine months ended September30, 1997 reflect the continued growth of CM.'
::ODMAWVORLOOMNADOCS1STULLTLD \COMPLCMI 37
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84. These statements wet e false and misleading when made because knew the
following:
a. The majority of the revenue and earnings increases were due to the
recognition of revenue on receivables owed to CMI by GMMS,
h. GMMS had a history of submitting claims for medical services which were
excessive and unnecessary;
c. insurance companies routinely denied these claims;
d. This resulted in an increase of uncollectible GMNIS receivables that were
carried as asset on CMI's financial records; and
c. CMI never wrote down these receivables nor took a reserve for doubtful
accounts which ultimately necessitated a $56,7 million charge for bad debt at the end of the Class
Period.
85, Still desperate for cash, on December 1, 1997 CM announced an other offering of
3.5 Million Common Slim es undet written by Prudential Securities, Tucker Anthony and LAI.
Friend. Eighteen days later, CATI announced that the offering would "postponed due to market
conditions." In truth, CMI's stock price was dropping and defendants hoped to go foiWaid with
the offering when CMI's stock price was on an upswing.
86. Although CMI's stock price continued to decline, they had become desperate for
cash. Even though their stock price was mole deptessed titan it had been in December,
defendants announced the successful completion of another public offering on February 10, 1998.
This offering was for 2 million shares of COMMOD stock. Interestingly, it was for 1.5 million
::o pmAmontiox\wicocs\s-rin I \PI rricom p cmi 38
1 -I
shares less than the offering in December and was only underwritten by Prudential Securities. The
aggregate offering price was S21,500,00. The Prospectus for this offering, dated Febi Limy 9,
1998, repeated the false and misleading financial data from the third quarter l0-Q.
87. A sizeable portion of CMI's earnin g s were illusory. The accounts which they
assuied the investing community would be collected has long been doubtfirl. OJT had already
recognized these receivables as revenue without taking an appropriate reserve for doubtful
accounts. CMI still needed cash. Since it had just bilked the investing public foi over
21,500,000, it would have to resort to private lenders. As reported by Ne.vswire on February
25, 1997:
C.MT Management, Inc. (NYSE: C.M1) today announced that its 60% ownedsubsidiary, CM! Capital Corporation ('Capital) has accepted a proposal from theHealth Care Division of Bank of America Business Credit, Inc. for a $30 millionthree year secured revolving credit facility. Capital's business is the purchase andfinancing of medical receivables for third parties. The loan pi oposal is conditionedon, among other things, the completion of due diligence, the lender's final approvaland satisfactory legal documentation.
CMI also announced that it is in discussion with a major North American bank fora substantial secured credit facility that would include term loan, aCLI uisition and'evolving Cl edit facilities. This credit arrangement, if put into eflect, would helpfund the continuance of its acquisition program. No assurance can be given thateither of these two transactions will he consummated.
88. On March 26, 1998 CMI announced a 52% increase in ear nings in 1997 over
1996. As reported by the PR Newswire for March 26, 1998.
Complete Management, Inc. (NYSE: CMI) today announced that its grossrevenues for the year ended December 31, 1997 were $72,385,000 compiled to833,158,000 for 1996. Net income increased 52% to $8,207,000 for the yearended December 11, 1997 compared to $5,414,000 thr the year ended December31, 1996. Diluted earnings per share were $.74 on 15,993,000 weighted average
::ULMAALWORLLJUXLVT \DUCS%S . 1 UMPLEACOMPLCMI 39
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outstanding shares against $.66 last year on only 10,087,000 average sharesoutstanding.
Steven Rabinovici, Chairman and Chief l'1xecutive Officer of CNII, said "1997 wasa year of growth for CMI with revenues and net income reaching new highs. CMIcontinued to expand its management contracts with primary care physiciansclosing the year with 201 providers under management compared to 100 at thestart of 1997. We also saw veiy significant growth in our networking servicesoffered through Consumer Health Network, our preferred provider organization.r lhe health care providers that are members of CHN grew from 7,800 when weacquired the PPO in June of 1997 to over 11,000 today.
Steven Rabinovici also noted, "[hat OAPS reliank.:e on its initial client, whichspecialized in injury related medicine, has declined to 28% in 1997 from 65% in1996 and 100% in 1995. We expect this declining trend to continue throughout1998. Acquisition activities were slowed in the fourth quarter of 1997 due to thedelay in the financing that we expected to complete early in that quarter. Thisfinancing was successfully completed in Febi inn v 1998."
89 This statement was false and misleading when made because at that time
defendants knew the following:
a. The majority of the revenue and earnings increases were due to the
recognition of revenue on receivables owed to CM! by GMMS;
b. GMMS had a history of submitting claims for medical services which weie
excessive and unnecessary.;
c. Insurance companies routinely denied these claims;
d. This resulted in an increase of uncollectible GMMS receivables that were
carried as asset on CM ['s financial records; and
e. CM! never wrote down these receivables nor took a reser ve an doubtful
accounts which ultimately necessitated a $56.7 million charge tor bad debt at the cad of the Class
Period.
::0DMAWVORLDOXIWDOCS\STULLTLD\COMPLCME 40
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90. in light outs pectinous financial state, ('MI c.oritinued to obtain financing. As
reported in the Pk Newswire of May 12, 1998:
CM! Management, Inc. (NYSE: CMI) today announced that it has signed acommitment letter for a two year accounts receivable financing facility of-up to$40 million. The amount that may be borrowed at any one time is limited by aformula based on eligible receivables with the initial borrowing under this facilitytotaling about $23 million.
The commitment letter is conditioned on several factors, including legaldocumentation satisfactory to the lender and no material adverse changes in thebusiness. It is expected that the transaction will close about the end of May 1998.
Steven Rabinovici, Chairman and Chief 13xecutive Officer of CML, said: "With thisline in place (Al can continue its 1.998 business plan without the sale of anyequity. This facility will provide CMI with the funds needed to continue itsprogram of assisting our clients to acquit e quality pinnacy care medical practicesand the must fiequently utilized specialists, as well as to implement its newinformation systems to better manage its client's practices."
91. Having run out of cash, CMI depended on addition debt financing. As reported by
the PR Newswire of May 27, 1998:
CMI Management, Inc. (NYSE: CMI) today announced that it has closed a $10.3million debt financing under a two year accounts receivable financing facifityproviding for Loans of up to $40 million. The amount that may be borrowed at anyone time is limited by a formula based on eligible receivables. Additional fundingwill he available within the next ten days.
Steven Rabino yiei, Chairman and Chief Executive Officer of CMI, said ''We are
pleased to enter into this facility with one of the leading companies financingmedical receivables in the USA. CMI can now continue towards completing its1998 business plan without the sale of any equity. The 1998 plan includes thepotential acquisition by our primary care medical practice clients of specialistpractices and hiring the. most frequently utilized specialists. In addition, the planprovides for the implementation of CM Es new information systems to bettermanage its client's practices."
::oommwoRwom:\vocs\sTuLuptocom pLcm 41
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92. Similarly, as reported in the June I. 1997 PR Newswii e.
CMI Management. Inc. (NYSE: CMI) today announced that its 60% ownedsubsidiary, CM Capital Corporation ("Capital") has accepted a commitment letterfrom the Health Care Division of BankAmerica Business Credit, Inc. for a $15million one year secured revolving credit facility. Capital's business is the purchaseand financing of medical receivables for third pat ties that are not lull servicemanagement clients of CMI. The loan closing under the commitment letter isconditioned on, among other things, satisfactory legal documentation. This loan isexpected to close later this month.
Steven Rabinovici, Chairman and Chief Executive Officei of CMI, stated: 'Thisfinancing from Bank of America will allow Capital to significantly expand itsportfolio of outstanding loans. This credit facility, along with the debt financingclosed by CM1 two weeks ago, puts us in a stron g position and should allow CMIto execute its 1998 business plan of internal growth and expansion."
93. In June, the Company issued a press release stating that S20 million in GMMS
•• receivables would be speedily paid, due to a recent decision by the Court of Appeals of the State
of New York. The Company said that 'Phis decision will allow GMMS to substantially speed up,
. the collection of the $21.2 million in no fault receivables on its books." This cash will then be7.: • ;
used by UMMS to satisfy invoices from CMI for its fees, therefore dramatically reducing CIVIIrs
receivables days outstanding." As reported in the PR Newswire:
• CMI Management, Inc. (AMEX: CM I) announced today that the June 10,• 1997 decision oft he Court of Appeals of the State of NeW York (the hi ghest court
of the State) will result in material benefit to Greater Metropolitan MedicalServices ("GMMS"), a major client. of CMI, and in turn benefit CMI, by materiallyspeeding up the collection of over $20 million of GMAIS receivables.
• Tbe Court held that a no-fault insurance carrier that does not, within thirty days ofits receipt of a proof of claim, issue a denial or "pend" the claim until receipt ofspecified information, must pay the claim if there is valid coverage. The insurancecarrier, the Court said, is piecluded flom offering any defenses (except lack ofcoverage) if they do not respond within the thirty days.
::o promoRLDoxwvizoesssruttwmcomi-tco.ii 42
_ . .
Steven Rabinovici, Chairman and Chief F.,xecidive Officer of CM1, said "GMAIS isa medical practice -which operates one of the largest iniuty related practices in theState of New York. It has historically had to wait as long as three years to collectits auto no-fault related invoices for medical services. This decision will allowGMMS to substantially speed up the collection of the $21.2 million of nu-laultreceivables on its books Significant collections are expected within the next sixmonths as the insurance carriers involved evaluate each unpaid claim. This cashwill then be used by GMNIS to satisfy invoices from C11,11 for its fees, thereforedramatically reducing CM l's receivable days outstanding."
94. in truth, the Appeal Court's decision would have a dramatic but adverse impact on
CMI. Defendants knew that many of GMMS receivables were not collectible because they were
predicated on unnecessai y tests and pioceduies. The fact that their was a lon g collection cycle
actually helped CMI, allowing them to recognize the receivables as revenue even though they
would surely be written off as had debt later on The Court's ruling, expediting decisions by
insurance carriers, resulted in the rejection of an enormous amount of GMMS receivables and
forced CM.1 to write down as bad debt the receivables which it had already recognized as revenue.
95. On June 22, 1998 GMMS filed a complaint for declaratory and injunctive relief
against Country-Wide Insurance Co., Progressive Insurance, Co. ("Progressive"), Allstate
Insurance Co., New York Central Mutual insurance Co., American Arbitration Association
(AAA) and 14 individual AAA arbitrators. The gr • avamen of the complaint alleged that the
defendants have "unlawfully threatened to withhold payment of millions of dollars" of medical
insurance claim proceeds because GMMS billed under the name Greater Metropolitan Medical
Services, P.C. -- a corporate entity that does not exist. "GM_MS brought suit to prevent
Defendants from using this 'inaccurate billing name defense" to deny claims in 47 disputes
currently pending before the American Arbitration Association and "numerous other unpaid
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claims in which plaintiff has not opted ffir arbitration at the present time." On July 28, 1998 the
Com L denied plaintiff's motion for preliminary injunctive relief and gave plaintiffleave to seek a
declaratory judgement on the issue of whether the inaccurate billing defense bars plaintiff's
recovery on the rejected claims which have not yet been submitted for arbitration. Of import to
the case at bar are the allegations the parties make in the course of their filings: (1) (AIMS
admitted that millions of dollars of claims have been denied since 1997; (2) in its cross motion to
dismiss the complaint, Progressive asserts that GIAMS "has a history of submitting claims for
medical services which are excessive and unnecessary" and therefore has ''denied some of these
claims." "Such excessive charges are completely inconsistent with the legislative policy to control
health care costs; they threaten to deplete the limited resources available for health care and the
stability of the no fault premium; they violate Insurance Law §5108 and they harm the consumer
and premium paying public. Consequently [Progressive] paid some of [GMIVIS'] charges and
denied those which were unreasonable and excessive. [Progressive] then defended those claims
[G.I\AMS] chose to arbitrate and has prevailed in arbitration against [GMMS);" (3) "[B]efore the
issue of the "inaccurate billing name" arose. GMMS had substantial unpaid bills apparently
because outs excessive billing which has propedy been denied." Progressive referred to the 5-3
Registration statement filed 9-5-97 in which CM! disclosed UMMS had 52,765,000 in accounts
receivables. Progressive intimated that there was no hope of collecting these receivables and that
the "substantial unpaid bills" resulting in 'adverse finances" were due to "excessive and
easonable billing" which Progressive and other insurance carriers had pi operly refirsed LE.1 pay;
(4) in claiming that GMMS' complaint had no merit, Progressive claimed that the ''inaccurate
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''' ..-,...I'...1... . billing name issue was but one relatively small part of problem with CilVIMS' submissions. In
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fact, GMMS submitted, as an exhibit, a case which was denied by an insurance carrier. ''The
insurer noted at the outset of its submission that (AIMS was submitting _excessive and
.n.e,..cess.awjtjl_g; billing. This billing included four char ges tbr somatosensory evoked potential tests
(SUP) even though only two such tests had been performed. SEP testing is generally
inappropriate as an initial screening test. Nevertheless, it is routinely used and excessively billed
to no-fault insurers by [GIVIMS]. [ nhere were multiple MI&J.s of the brain even though there was
no loss of consciousness reported in the hospital record. In addition there were issues of self-
referral, improper agreements with the management company and the corporate practice of
medicine."
96. These statements reveal that GNINIS had a history of over billing and were well
aware that insurance companies would continually reject bills for unnecessary procedures and
tests. The rejection of U11411,1S bills resulted in over S56 million wotth of unpaid receivables.
Defendants knew that collection of these receivables were doubtful yet recognized them as
revenue claiming they would be paid at the end of an extended collection cycle. These
representations stand in direct contradiction to sworn representations made by insurance
companies in the suit brought by OMMS.
97. On June 30, 1998 MU announced the 'reassignment' of Arthut • Goldberg, CMI's
CFO to Vice President of special projecr S.
iroommwoRtuux\wporissrut.tKo •cora p t.cm 45
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98. Notwithstanding the gradual decline in the value of CMI stock, defendants
reassured investors that it was taking actions preserve its business. As reported in the July 27,
1998 edition of Crain's New York Business:
Stock prices in the fledgling physician practice management industry have been onWall Street's sick list for months, and Manhattan-based CMI Management Inc. isno exception.
But CM1 is aggressively cutting costs to Jript me cash flow. Some. analysts believethat the Manhattan-based company may he one of a group of smaller companiesthat avoid the missteps of their larger competitors and survive an industryshakeout.
CMI's stock has been sliding steadily since it leached a high of $20 last Octoberand spent most of last week at just over Si a share. Analysts recently reducedtheir estimates of this year's earnings to 55 cents a share, compared with 7'1 centslast year, when the company had revenues of $72.3 million.
* *
CM] has been shrinking its traditional PPM business -- acquiring pltysician assetsand signing long-term management contracts with doctors -- and will continue todo so, says Chief Executive Steve Kabinoviei. About a sixth of CM1's 600 staffpositions are being eliminated.
The company is considering terminating its long-term management relationshipwith Greater Metropolitan Medical Services, a large physicians group thatspecializes in workers' compensation claims. Those claims are often disputed andcan take up to three years for payment. TI]] ec years ago, CrE1.1MS made up most ofCMI's revenues, but the proportion has been reduced sharply.
Also being examined for potential downsizing is a contract to manage 90physicians in Westchester County.
COMAIWORLDOMVV:\DOCSISTULL\PLD\COMPLCMI 46
. .
99, In an attempt to assure the market of CMI's viability, defendants stated that they
had fully funded CMI's interest payment on its cancel tible subordinate debenture. As reported in
the PR Newswire of August 6, 1997:
CM Management, Inc. (NYSE: CM].) today announced that it has fully funded itsinterest payment of $1,607,760 due August 15, 199S for its convertible,suhordinate debt due August 15, 2003.
Steven Rabino yici, Chairman and Chief Executive Officer of CM 1, stated, "Thispayment is consistent with our ability to meet all current obligations of theCompany.''
•• ••••::- •100. By early August, defendants could no longer cover up the fact that CMI was in
••hut rible financial shape. As reported in CRAIN'S New York Business on August 10, 1998:
Doctors in New York who signed up with physician practice managementcompanies in the last two years are feeling pain themselves as they watch the valueof PPM company stocks -- for which many doctors sold portions of their practices-- fall to pennies on the dollar. "I know colleagues who are not happy they sold,"says Dr. IIarlan Weinberg, a solo practitioner in White Plains. "I see them at thehospital, and they're not smiling."
Some physicians aie facing reduced salaries and less favora.hle contract terms, asthe practice management companies attempt to scale back their operations andimprove cash flow. For example, Northern Metropolitan Medical in JeffersonValley, N.Y., nod Greater Metropolitan Medical Associates in Brooklyn are. bothbeing downsized by CM! Management Inc. of Manhattan, the 'I'M company thatruns both practices.
In two years, CMI dramatically boosted Northern Metropolitan's multi-specialtyunit to over 40 doctors from six, and doubled the size of the radiology unit to over40 physicians. Some doctors on staff may he laid off, and doctors working underone-year and three-year contracts are being asked to accept new terms, includingfluctuations in their earnings based on their practice's profitability.
"Some doctors are upset, but we feel it's no pain, no gain," says Steve Kabinovici,president. of (WTI. So far, such anxieties arc limited in scope, because only a smallfraction of the doctors in New York state have signed up with PPM films.
::oommiivoRionxwtrincs\s-runTi_mcom p t.cmi 47
•
-. 4 •
Revenues for services
Typically, the physicians promise to pay the PPM companies 15% to 25% of theirgross revenues for 30 to 40 years. In return, they receive a full array ofmanagement services, including billing, administration and contract negotiation.The doctors who join also usually get a lump sum, payable in PPM stock and cash,that is roughly equivalent to a year's gross revenues.
101. On August 13, 1998 CMI revealed facts underlying its poor financial state. By this
time, however, its stoc.k price was severely depressed and its shareholders had lost most of their
investments. As reported in the PR Newswire, CND announced a restructuring plan which
revealed a $56,7 million charge for had debt
CMT Management, inc. (NYSE: CMI) today announced that it has initiated abroad restructuring program to eliminate unprofitable activities and focus theCompany on its highest-growth businesses. This program should enable CAI tobecome cash flow positive in the fourth quarter 1998 and position the Company asan important Physician Services Company in the New York and New Jerseymarketplaces.
Steven Rabino y ici, Chairman, President and (Thief Uxecutive Officer of CM,stated: 'With today's decisions behind us, we can focus our efforts on our mostsignificant growth opportunities, including, our preferred provider organization.Consumer Health Network, our billing and collections subsidiary, hitertech/PentaGroup, and our asset-backed lending subsidiary, CM' Capital. (:Ml shouldbecome cash flow positive during the fourth quarter of 1998. We will then focuson businesses that require minimum capital to maximize growth. While theone-time charges announced today have severely impacted earnings results for thisquarter and will severely impact the third quarter of 1998, we are confident thatthe demand for our physician services is strong and should provide us with a solidha.se of operations to enter 1999.”
CMIl s restructuring program includes the following:
CM1 terminated its services provided to Greater Metropolitan Medical Services(GMMS), which specialized in the injuiy related business, due to the longcollection cycle associated with, and difficulty in collecting, GMMS' accountsreceivable. As a result, CMI recorded a pre-tax charge to earnings this quarter ofapproximately $32.9 million. his charge includes the write down of
::ODMANORLDOX'AN:\DOCSSTULLAPLDlCOMPL.CMI 48
•
'
approximately $28 9 million of outstanding management fees owed by Ci!VMIS,which have been deemed uncolle.ctible, and S4.0 million in incremental costsassociated with collecting GIV1141S I receivables The Company also announced thatit expects to take additional charges against cal flings in -die thi, d quarter related loGMMS in the range of $4.0 million to $5.0 million.
* The Company will close several medical practice sites of its other clients,consolidate billing and collection operations, and down-size and relocate most ofits corporate offices to Long Island, NY. In connection with these actions and thewrite down of certain accounts receivable of non-injury related clients, theCompany recorded a charge of approximately $218 million in the second quarter.The Company also announced that it expects to take additional charges againstearnings in the third quarter in the range of $1.0 million to $7.0 million relating tosimilar actions taken by the Company.
* The Company will continue to expand its 1 1 1)0 business hy marketing thenetwork more broadly.
* The Company will seek additional clients for its billing and collections subsidiary.
* The Company will continue to expand its majority owned asset-backedreceivable lender, Coil Capital. To understand 0/11'..s potential, you have tounderstand that the dynamics oithe New Yolk marketplace make CM! different
•from other companies in the physician practice management industry,'' continued
• -Mr. Rabinoviei. "We operate in a highly-fragmented region where tee-for-scrvice,rather than capitation, is standard and doctors are forced to operate as small
independent groups. CMI possesses a series of services that physicians need to•" assist them in controlling costs and adapting to the changing methodologies in
••health care today. We can offer to manage the non-medicaI aspects of thenbusinesses, such as billing and collection, transcription and temporary staffing, inorder to provide the efficiencies needed to let them focus on practicing medicine
•—. • .and remain viable in a very competitive marketplace."
For the three months ended June 30, 1998, CM.I reported gross revenues of$15,05 ,1,000 compared to $17,760,000 the the same period of 1997, a decrease of$2,706,000. The Company's net loss for this period was $37,311,000, or $2.64per diluted share, compared to net income of $2.091,000 or $.19 per diluted share,for the second quarter of 1997. The net loss for the second quarter includesapproximately S56,700,000 in non-recurring expenses. Fin the six months endedJune 30, 1998, ChM reported gross revenues of $33,841,000 compared to$33,143,000 for the same period of 1997, an increase of S698„000. TheCompany's net loss for the first six months of 1998 was $35,727,000 in $2.67 per
::0DMAIWORLIDOXWID0051STUI L \POD \COATI .cmi 49
4diluted share, compared to net income of $3,803,000, or $.35 per diluted share, inthe first six months of 1997.
102. The ultimate truth of CM1's financial state was not uncovered until November IS,
1998 at which time it revealed an additional $1 7.5 million in charges. As reported in the PR
Newswii e oltliaL date,
CM1 Management, Inc. (NYSE: CM1) today announced the first results of itsbroad restructuring program initiated during the second quarter of 1998 toeliminate unprofitable activities and focus the Company on its highest-growthbusinesses. The Company's loss from operations decreased by 52.2 million fromthe previous quarter, excluding $3.7 million in accounts receivable write-offs andbad debt reserves and $17.5 million in other non recurring charges. As a result ofits efforts, the Company now expects that its restructuring program will enable theCompany to become cash flow positive during the first quarter of 1999.
Steven Rabinovici, Chairman, President and Chief FAecutivo Officer, stated: 'TheCompany made great strides during the third quarter of 1998 towards achievingour goal of being cash flow positive from operations. In the thitil quarter, wemade progress in reducing our general and administrative expenses, excludingnon-recurring charges, and terminated arrangements to manage several of ourclient's most unprofitable medical offices. We will continue to focus our efforts ongrowth opportunities including, our preferred provider organization, ConsumerHealth Network, our billing and collections subsidiary, Intel-tech/Perna Group, andour asset-backed lending subsidiary, CMI Capital.
We believe that we have made significant progress in our efforts to convert theCompany from a classic physician practice management model into thedevelopment of a company that provides a series of specialized services tophysicians in the New York metropolitan area. Our billing and collectionscompany provides a needed service to ph ysicians and hospitals and will be aplatform from which the Company can sell (Alm needed services in the future.Consumer Health Network, which now includes approximately 35,000 health careproviders, provides physicians new sources of patients, and CMI Capital, our assetbacked receivable lender, provides capital to physicians to grow their business aswell as support other financial strategies. We believe that all these services withallow physicians to adjust to the ever-changing healthcare environment. We willcontinue to implement our plans as we move into the fourth quarter."
.:0DMAWVORLDOXWV.IDOCSISTULLTLD\COMFL.CM1 50
. .1
As previously disclosed, the Company terminated several arrangements to managemedical practice sites of its full service clients, consolidated billing and collectionoperations, and down-sized corporate offices dining the third quarter o11998 Asa result, the Company iecorded a pre-tax charge to earnings this quarter ofapproximately $17..5 million, of which 111.3 related to non-cash charges. Thesecharges include the write down of approximately $8.4 million of outstandingmanagement fees owed by full service clients, which have been deemeduncolleetible, $1.7 million in incremental costs associated with collectingreceivables, and $7.4 in I elated lease terrnination, severance and other costs.
For the three months ended September 30, 1098, the Company reported grossrevenues of $11,265,000 compared to $20,215,000 .ror the same period of 1997, adecrease of $8,950,000. The Company's net loss firm this period was $26.1 million,or $1.81 per diluted shame, compared to net income of $2.7 million, GC $.22 perdiluted share, for the third quarter of 1997. The net loss for the third quarterincludes approximately $17.5 million in non-recurring charges.
For the nine months ended September 30, 1998, the Company reported grossrevenues of $45,106,000 complied to $53,358,000 for the same period of 1997, adecrease of $8,252,000. The. Company's net loss for the first nine months of 1998was $61.8 million, or 14.50 per diluted share, compared to net income of $6.5million, or S.58 per diluted share, for the first nine months of 1997.
DEFENDANTS' INSIDER TRADING
103. While defendants were issuing the materially false and misleading statements
alleged throughout the Complaint, certain individual defendants were taking advantage of their
knowledge of the adverse facts not disclosed to the public, until the end of the Class Period. The
extent of defendants trades, the timing of their trades and the nature of their trading habits all
establish that defendants had possession of the mateital adverse facts alleged herein. Specifically,
the Individual Defendants sold more than 1,075,740 shares of the ('Ml stock they owned rum
proceeds of over $12,777,835 million. The Individual Defendants sold the tbllowing amounts of
CMI shares at ai tificially inflated prices throughout the Class Period while in possession of
::0DMA1WORLDOX\VV:1DOCSISTULLTLDCOMPLCM1 51
•- ••
•.• - • •
, .
material. nun-putilic information that was not disclosed to the inve.stment community at the time of
such transaction:
NA11/111 DATE SLIAKEL PRICE PROCEEDSRabinovici 02/05/96 40,856 $ 8.19 $ 334,610.64
01/16/97 117,187 $ 13.75 $ 1,611,121.258/4-8/13/98 70,000 5 1.75-2.54 5 122,700.00
Jacaruso 02/05/96 4l,410 $ 8.19 S 339.393.6001/16197 117,188 $ 13.75 $ 1,611,335.00
D. Shields 02/05/96 48/144 $ 8.19 $ 396,756.3601/16197 140,625 $ 13.75 $ 1,933,593.75
L. Shields 12/06/96 500000 5 12.85 $ 6.428,125.001,075,7,10 $12,777,835.00
VIOLATIONS OF GAAP
104. Throughout the Class Period, all's financials reported on Forms 10-Q and
10-K, were materially false and misleading because they failed to comply with Generally Accepted
Accounting Principles ("GAAP"), those principles recognized by the accounting profession as the
conventions, rules and proculii us necessary to define accepted accounting, practice at the
particular time. Regulation S-X, to which 041 is subject as a reporting company under the
Exchange Act (17 C.F.R. §210.4-01(a)(1)), states that financial statemenis tiled with the SLC
which are not prepared in compliance with G-AAP are presumed to he misleading and 1)767u:untie.
105. in order in make the Company appear successful, to conceal the nature of GMMS
accounts receivables, and to otherwise artificially support CIVII's stock price until its expansion
2 Defendant Rabinovici also made additional, unre.vorted sales of over 100,000 shares ofcommon stock throughout the Class Period.
::0DMAYINORLDOXN:\DOMSTULLTLD\COMPL,CMI 52
•'
could be completed, dethndants caused CMI to falsely report its financial results during the Class
Period through improper revenue recognition and understated allowances for uncollectible
receivables.
106. Improper revenue recognition resulted from revenue being recognized on
management fees despite defendants knowing or recklessly disregarding that a material amount of
GMMS accounts receivables, upon which the fees were based, had been rejected by insurance
Ltan iet s. GAAP iequii ed defendants to have a reasonable expectation of receiving the revenue
recognized, or to defer recognition until the Company had a reasonable basis to expect to receive
the revenue, i.e., when all infoimation was properly submitted to the government or third party
payer and payment could be reasonably expected. GAAP, as set forth in FASB Statement of
Concepts (“Concepts") No S. provides the basic requirements lot i eeiiuc to be vecognizabler
revenue must have been earned; and (2) revenue must be realizable (i.e., collectible). See
Concepts No. 5, ¶83. ''lf collectibility . . is doubtful, revenues and gains may be recognized on
the basis of cash received." Concepts No. 5, rgLlg. Defendants had no basis for recognizing
revenue on billing invoices for which they did not reasonably expect reimbursement. Moreover,
defendants knew that it was likely that some bills would never be paid due to the fact that the
patient would have to win a negligence tort suit to be able to pay the bill. Because the
management fees from GNIMS wet e not likely to be paid in lull, CMI was required by GAAP to
book appropriate allowances for uncollectible receivables. GAAP, as set forth in SFAS No. 5,
Accounting for Contingencies, required that accounts receivable for which there is any degree of
uncertainty about collectibility must be reduced to the expected collectible amount by recording
::COMA \WORLDOVON:TOCT,Sn M.COMP1 CMI 53
an allowance for uncollectible receivables, even where the particular receivables that are
uncollectible cannot be identified. Sec &V AS No. 5, 1 ,22. Defendants failed to comply with SFAS
No 5, despite knowing or recklessly disregarding the fact that it would never be able to collect on
its invoices to GMMS.
107. While defendants publicly represented that they would be able to collect all
accounts receivables in full, the truth was that CMI was accumulating massive amounts of
accounts receivable of doubtful collectibility. Defendants were required, yet failed, to book
reserves pursuant to GA AP. Specifically, defendants weruiequiied to ieflcct on CAll's books
that the revenues previously booked as accounts receivable were, of doubtful collectibility due to,
among other things, claim disputes with insurance carriers,
108. The undisclosed adverse information concealed by defendants during the Class
Period is the type of information which, because of SEC regulations, legulations of the national
stock exchange and customary business practice, is expected by investors and securities analysts, .
to be disclosed and is known by corporate officials and their legal and financial advisors to be the
type of information which is expected to be and must be disclosed.
109. The Company's fiscal year-end 1996 and 1997 financial statements and all interim
financial statements disseminated to the investing public during the Class Period were not
presented in accordance Wit h GAAP in that such financial statements Wed to disclose that there
existed a material overstatement of accounts receivable. Defendants allowed CMI to book
• management fees from its customers when it knew, because it provided the billing services, that
the third pat ty payers were rejecting the bills with good cause. By concealing the mounting
•• • .• • :ODMA1WORLDOX1VV:\DOCS\STULLIPin•compr.cmi 54
• •• .
accounts receivable of doubtful collectibilit y , in contravention to specific GA AI requirements
compelling disclosure, defendants disscminated false and misleading earnings announcements and
financial statements which were not a fair presentation of CMI's results and were presented in
violation of GAAP and SEC rules.
••• CM l's FALSE FINANCIALS
110. On May 16, 1996 the Company released its 10-Q for the quarter ending March 31,
1996. The long term portion of accounts receivables (accounts ti-om GMMS that would be
collected more than 12 months from the date of the financials) was listed as $16,473,716.
Revenue from a related pa] ty for the quarter was listed as $5,07R,008, and net income was listed
as $1,10,020. The Company also announced that in January of 1996 the Company loaned GlVIMS
• $1,590,000. As represented in the 10-Q:
As collateral for its fee revenue receivable from its primary client, GIVIMS,. .• the Company has a security interest in GMMS i trade receivables. In 1996 ., as part
of the Company's periodic review for potential inipairment of all third-party•• . receivables prior to the acceptance for payment ()fits fee, the Company determined
•.• that based upon its Client's historical collection experience and the results of the- ' review, its Clients had receivables substantiaily in excess of the amounts owed to
• the Company after giving effect to their collect ability.•
Accordingly, this factor along with the fact that GMMS assigns itsreceivables to the Company on a full recourse basis in payment of its fees indicatesthat recognition of had debts is not required.
111. The above statements contained in the 10-Q were false and misleading and lacked
a reasonable basis when made because:
a. The financial statements materially overstated the Company's financial
position due to the fact that the Company recognized as revenue management fees based upon
-:ODMAN.VVORE DOXWV.IDOCSISTULLIPLMCOMP L.CMI 55
•
treatment for patients who would not be able to pa y for treatment unless they won negligence
tort actions. This revenue should not have been recognized before it was realized and to
consider these accounts as revenue was a violation of GAAP FAS-5.
b. Defendants failed to reveal that GMMS was billing for unnecessary tests
and procedures, that insurance carriers were refusing to pay for such tests and procedures, and
that arbitrators were finding for the insurance carriers and upholding the rejection of these
claims, Revenue from rejected claims became a contingent gam because payment was
contingent upon the Company prevailing at arbitration. This revenue should not have been
recognized before it was realized and to consider these accounts as revenue was a violation of
GAAP FAS-5.
c. It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compiornise disputed medical bilis. Like all
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
that the GMMS accounts receivables that it received in lieu of cash were collectable at 100%
when it knew that would never be true. At a minimum an allowance for bad debts should have
been created.
112. On June 3, 1996, the Company filed an S-1 for the issuance of Convertihle
Subordinated Debentures. The S-1 was audited by Arthur Andersen, UP. There was no bad
debt allowance on Civil receivables due from OMR. This failure to allow for had debts was
allowed, according to the financials, because ifthe Company had determined a GMMS billing was
:70DMA\WORLDOMADOCS1STULLTLD\GOMPLCM1 56
•doubtful, it was not used as collateral to secure GIMIS's debt to the Company. As tepeated
throughout the notes to the financial statements:
[Tjhe Company takes ownership on a recourse basis of receivables venerated byGNIMS medical practice from third party payors with a net collectable valueequal to the then current management fee owed to the ( mpany. To the extentany receivables assigned to the Company are disputed and/or referred toathitration proceedings; such receivables are immediately substituted under therecourse arrangements between G11,1MS and the Company.
There was a bad debt allowance on MM1 receivables (prior to its meiger with the Company) from
GMAIS, however the notes to the financials explained that Mil would no longer take a bad debt
,allowance and that the prior bad debt allowance would be reduced $3001( from its present $9001(
• because of the recourse agreement. The S-1 listed 1995 revenue from a related party as
S12,294,000. The S-1 also repeated the first quarter iinancial information that was listed above.
113. The above statements contained the S-1 were false and misleading and lacked
,a reasonable basis when made because:
a. The financial statements materially overstated the Company's financial
position due to the fact that the Company recognized as revenue management ices based upon
treatment for patients who would not be able to pay for treatment unless they won negligence tort
• actions. This revenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation of GAAP FAS-5.
b. I )efenda.nts failed to reveal that GMIVIS was billing for unnecessary tests
and procedures, that insurance carriers were refusing to pay for such tests and proceduics, and
that aibittaturs were finding for the insurance carriers and upholdinL, the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
::ODMAMORLDOVVV:\DCY.::S\STULUPLO\COMPL.cAll 57
_
the Company pievailing at arbitration. This revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation of ( ;AAP l'AS-5.
e. It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compromise disputed medical bills .ike all
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
that the GMMS accounts receivables that it received in leu of cash were collectable at 100% when
it knew that would never he true. At a minimum an allowanc.e for had debts should have been
created.
114. On or about June 6, 1996 Copies of Prospectuses were filed with the SEC
pursuant to Rule 424(b)(4). These Prospectus Statements repeated the information contained in
the June 3, 1996 S-1.
Under its ohjectives the Company listed
0 Assist Clients in Maintaining High Credibility with Third-Party Payers and otherReferral sources. The Company believes that its clients success is dependent to agreat extent on the received accura.cy and integrity both of the medical diagnosisand evaluations performed by the Company's clients and the records supportingsuch diagnosis and evaluations.
I_T]he Company takes ownership on a recourse ha.sis of receivables generated hyGM_MS' medical practice from third-party payers with a net collectable valueequal to the then current management fee owed to the Company. To the extentany teccivables assigned to [lie Company ale disputed and/ui mefeined Luarbitration proceedings, such receivables are immediately substituted under therecourse arrangements between CiMMS and the Company.
Each month the Company takes ownership on a full recourse basis of GMMSreceivables with a net collectable value equal to the amount of the managementfees then currently owed by MIMS, of an estimated average of /2% of GMMS'
:VDMAYINUHLDUAIVCDOCS S . 1 !ALT L.CMF 5g
• •• •
aggregate monthly receivables, and also takes a security interest in the balance ofGMMS' receivables for the payment of any uncollected fees.
11 5. The above statements contained in the S-1 were false and misleading and lacked
a reasonable basis when made because:
a. The Compaiiy would not maintain die high er edibility of GMMS because
GMMS had no credibility in the industry. GMMS was known throughout New York for over-
billing, billing for services not rendered, and providing treatment and testing that was not
necessary.
h. The financial statements materially overstated the Company's financial
position due to the fact that the Company recognized as revenue management fees based upon
treatment for patients who would not be able to pay for treatment unless they won negligence toi t
actions. This revenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation of GAAP FAS-5.
e. Defendants failed to reveal that GMMS was billing for unnecessary tests
and procedures, that insurance carriers were refirsing to pay for such tests and procedures ; and
that arbitrators were finding for the insurance carriers and upholding the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbitration. This revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation of GAM" FAS-5.
d. lt was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compromise disputed medical bills. Like all
litigated claims, compromise and settlement for less than the whole amount billed was common.
::0DMANORLDOMADOOS\STULL1FLUICOMPL.CM1 59
. • .
41._ .. • ,Although the Company knew this from its experience handling claims, it reported to the public
that the GAMS accounts receivables that it received in leu of cash were collectable at 100% when
' it knew that would never be true. At a minimum an allowance for had debts should have been
created.,. .. .e. Recognizing that 72% of CAMS receivables were goinu, to the Company
. .., .as payment of fees, defendants knew CMI -would he unable tu swap disputed receivables for
undisputed receivables. The 28% of the accounts receivables lea over from GNIMS were used by
GMMS to pay for medical personnel and to pay the owner of the medical practice. With the
instuance companies rejecting GM MS bills at a high rate, it was clear that disputed receivables
._ :!... could not be swapped for undisputed receivables because after owners and medical providers
were paid there would Inca be any undisputed receivables to swap.
..:_. 116. On or about November 5, 1996 CUE filed another S-li that was audited by Arthur
' • Andersen, LL,13 . There was no bad debt allowance on CM" receivables due from GMMS. This
failure to allow for bad debts was allowed, according to the financials, because if the Company
had determined a GMMS billing was doubtful, it was not used as collateral to secure GM.MS's
debt to the Company. As repeated in the notes to the financial statements:
To ensure that all GIOIA S billings result in bona fide accounts receivable, theCompany interviews all patients and reviews their insurance documentation beforeany medical services are rendered by GMMS. lf, as a result of this review, theCompany determines any billing to be doubtful, such bills, (bi- the puiposes ofpaying the Company's management fee or as amounts available under the recourserights, are not included in WNW accounts receivable, which are assigned to theCompany.
[T]he Company takes ownership on a recourse basis of receivables generated byGIVIMS' medical practice hum third-par ty payors with a net collectable value
::ODMA1WORLDOX\WADOCSISTULL\FLDICOMPLCMI 60
....... :. : • : .
I
.; ',..•.: ....- ....S.;; ,.,.'. ...:...1:
1
, •
equal to the then current management fee owed to the Company. To the extentany receivables assigned to the Company are disputed and/or referred toarbitration proceedings, such receivables are immediately substituted under therecourse arrangements between GMMS and the Company.
Each month the Company takes ownership on a full recourse basis of UMMSreceivables with a net collectable value equal to the amount of the managementfees then currently owed by GM11,1S, of an estimated aveiage. of 72% of GMMS'aggregate monthly receivables, and also takes a security interest in the balance ofGMMS receivables for the payment of an uncollected fees.
It is the COMpaily ' g experience that insurance carriers delay payment of claimsuntil just prior to the arbitration hearing.
. . . clients of the Company are liable Cor the Company's fees regardless of whetherthey receive payment for their medical selvices
• . GIvINIS is obligated to pay such fees regardless of its collections.
Audited financial statements for MIMS have not been provided becausemanagement believes that they would not provide any additional information thatwould be meaningful to the evaluation of the Company's financial position . . . .
117. These statements were false and misleadin g and lacked a reasonable basis when
made because:
a. Defendant Lawrence Shields, M.D., the Company's hugest shareholder and
co-founder would not be held liable for management fees owed the Company for services to
GMMS, a business name for Dr. Shields' medical practice. Dr, Shields' son, defendant Dennis
Shields, also was a major shareholder, an officer and a director at the time the Prospectus was
issued, The Company would never try to collect from its founder and largest client. As shown
when the Company and GM_MS parted ways on August 10, 1998, the Company wrote off $28.9
million owed to it by GMMS. Instead of holding Dr Wields liable, as the Prospectus stated it
would, the Company agreed to pay Dr. Shields 15% of any money collected from CAMS, up to
::uommyy uRiboximinoes\s N.PtmenmPf.cmi 61
•
$950.000. Dr. Shields was also given an independent contractors' position for $150,000 with a
client of the Company. Rather than being liable fur dm fees, Di. Shields was given a reward of
15% for paying the Company what his practice owes it.
b. Audited GNIMS financials have never been provided by the Company, even
though GMM.S is a related company owned by the Company's laigest shareholder. Audited
(ALMS financials would have provided investors with the knowledge that GAMS receivables
were doubtful. Audited financials of GMMS would provide meaningful information conceining
GAL
c. the financial statements materially oveistated die Company's financial
position due to the fact that the Company recognized as revenue management fees based upon
treatment for patients who would not be able to pay for treatment unless they won negligence tort
actions. Thisievenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation of GA AP FAS-5.
d. Defendants failed to reveal that MIMS was billing for unnecessary tests
and procedures, that insurance carriers were refusing to pay for such tests and procedures, and
that arbitrators were finding for the insurance COI I iers and uphuldine the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbittation. This revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation or GAAP FAS-5.
e. It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical pluvideis to compromise disputed medical bills. Like all
::01:1MAIVVORLDOX1W1000SISTUI 'n PLEACIIMPL.CM111 62
,
_ .
litigated claims, compromise arid settlement for less than the whole amonnt billed wag common
Although the Company knew this ['tom its expeiienc..e handling claims, it reported to the public
that the GIVIMS accounts receivables that it received in leu of cash were co/lei:table. at 100% when
it knew that would never be true. At a minimum an allowance for bad debts should have been
created.
. •f Recognizing that 12% of GAMS receivables were going to the Company• •
as payment of fees, defendants knew CM' would be unable to swap disputed receivables for
undisputed receivables. The 28% of the accounts receivahles left over from GMMS were used by
CATMS to pay for medical personnel and to pay the owner of the medical practice. With the
insurance companies rejecting GVIIVIS bills at a hi gh rate, it was clear that disputed receivables
could not be swapped for undisputed receivables because aller owners and medical providers
were paid there would not be any undisputed receivables to swap.
nThe Company eventually wrote off $28.9 million in accounts receivables
•
due from GIVD4S. A periodic review of long term accounts receivables would have revealed that
an allowance for doubthil accounts was needed prior to the surprise announcement of August 10,
1998. Due to the intertwined nature of the Company and UMMS, the defendants knew that it
would not be paid for its GIVIMS accounts receivables.
118. On or about Marchil, 1997 CM' filed a yearly 10-K report that was audited by
Arthur Andersen, LIT. Yearly revenue was $33 million, earnings were $5.4 million, and per
share earnings were $.68. There was no bad debt allowance on CM1 receivables due from
GMMS. This failure to allow for bad debts was allowed, according to the financials, because if
::onmAmuHLuonioDocs nutiLi nPLD\comPL.cmi 63
. . ,
. _
'
the Company had determined a GMMS billing was doubtful, it was not used as collateral to
secure GNIMS's debt to the Company. As repeated in the 10-K:
To ensure that all result in bona fide accounts receivable of the practices,the Company, in performing its duties, completes an interview of each patient andreviews patient insurance documentation prior to renderinu of the medical service.if based on this interview and review of documentation, the Company deems theensuing billing to be doubtful, such amounts are categorized and arc notconsidered part of the accounts receivable for pa yment of its fees or availableunder the recourse rights.
[T]he Company takes ()wiles ship on a recourse basis of GMNTS'ieoeivables with a net collection value equal to the then current management feeowed to the Company.
To the extent any receivables assigned to the Company are disputed arid/orreferred to arbitration proceedings, such receivables are immediately substitutedunder the recourse arrangements between the l'C and the Company.
The Company assesses the recoverability of its accounts receivable at a minimum,but no less than quarterly, and may, on a calendar quarter basis, exchangereceivables, at its sole discretion, without limitation or conditions which it deemsuncollectible within a period of time, for newl y .rzenerated receivables. TheCompany has not had to exercise such an option with respect to any receivableassigned to it for periods ended December 31, 1994, 1995 and 1996.
Periodically, the Company reviews all third-party pa.yor receivables prior toacceptance for payment of its fee in order to determine those amounts that arepotentially impaired as a result of disputes, billing differences and length of timeoutstanding. hose amounts deemed impaired are subtracted from the total third-party receivables that are available to the Company. This factor along with the factthat the PC assign its receivables to the Company on a full recourse basis inpayment of its fees indicates that recognition for had debts are not required.
it is the Company's experience that insurance carriers delay payment of claimsuntil just prior to the arbitration hearing.
in order to comply with applicable federal and state laws, the Company'smanagement fees (including lease payments for office space and equipment) are
::OUNIAWVORLUUMADUCSISTULLTLD\COMPL.CMI 64
.••
• 1 •-
payable to the Company by its clients without regard to (i) the fees which the clientcharges its patients for its medical services or (ii) whether the client actuallyreceives payment for such services.
119. These statements were false and misleading and lacked a reasonable basis when
made because:
• a. Defendant Lawrence Shields, M.D., the Company's largest shareholder and
founder would not be held liable for management fees owed the Company for services to GM.MS ,
a business name for Dr. Shields' medical practice. Dr. Shields' son, defendant Dennis Shields,
also was a major shareholder, an officer and a ditector at the time the 10-K was issued. The
Company would never try to collect from its founder and largest client. As shown when the
Company and GMMS par Led ways on August 10. 1998, the Compan y wrote off $28.9 million.
owed to it by GMNIS. Instead of holding Dr. Shields liable, as the Prospectus stated it would, the
Company agreed to pay Dr. Shields 15% of money collected from GMMS, up to $950,000.
Dr. Shields was also given an independent contractors' position for S150,000 with a client of the
Company. Rather than being liable for the fees, Dr. Shields was given a reward of 15% for
paying the Company what his practice owes it
b. The audited financial statements materially overstated the Company's
financial position due to the fact that the Company recognized as revenue management fees based
upon treatment for patients who would not be able to pay for treatment unless they won
negligence tort actions This revenue should not have been recotu-lized before it was realized and
to consider these accounts as revenue was a violation of GAAP FAS-5.
::ODMANORLDOXIWADOCS\STULL1PLD1COMPLCMI 65
•
c. Defendants failed to reveal that GIVIMS was billing for unnecessary tests
and procedures, that insurance carriers were refusing to pay for such tests and procedures, and
that arbitrators were finding for the insurance carriers and upholding the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contin gent upon
the Company prevailing at arbitration. This revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation of GA.AP PAS-5.
d. It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compromise disputed medical bills. Like all
litigated claims, compromise and settlement, for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
•• that the CiMMS accounts receivables that it received in lett of cash were collectable at 100% when
it knew that would never be true. At a minimum an allowance for bad debts should have been
created.
e. Recognizing that 72% of (ATMS receivables were going to the Company
as payment of fees, defendants knew CNE would be unable to swap disputed receivables for
undisputed receivables. The 28% of the accounts receivables tell over from GIVIMS were used by
CAMS to pay for medical personnel and to pay the owner of the medical practice. With the
insurance companies rejecting GMNIS bills at a high rate, it was clear that disputed receivables
could not be swapped fur undisputed receivables because aller owners and medical providers
were paid there would not be any undisputed ieceivahles to swap.
. • :10DMA\WORLDOX1W:\DoCSISTULLTLD \COMP LCMI 6t
."1. •
; •
f. The Company eventually wrote off S28.'-.1 million in accounts receivables•
• ' due from GMMS. A periodic review of - h •mg term accounts receivables would have revealed that
an allowance for doubtful accounts was needed prior to the surpiise minounc.ement of August 10,
• 1998. Due to the intertwined nature of the Company and UN/1MS, the Company knew that it
. would not be paid for its GNIMS accounts receivables.
120. On May 13, 1997 the Company released its 10-Q lOr the quarter ending March
. 31, 1997. The 10-Q announced revenues of $14.5 million, net income of $1.7 million and
Earnings per share of SAG. The 10-Q also stated:
In 1997, as part of the Company's periodic review for potentialimpairment of all its third party payor receivables prior to the acceptance forpayment of its fee, the t:ompany determined that based upon its Clients'historical collection experience and the results of the review, its Clients hadreceivables in excess of the amounts owed to the Company after giving effect totheir collectibility. Accordingly, this factor along with the fact that GYMSassigns its receivables to the Company on a full recourse basis in payment of itsfees indicates that recognition of bad debts is not required.
121 These statements were false and misleading and lacked a reasonable basis when
made because:
a Ihe financial statements materially overstated the Company's financial
position due to the fact that the Company recognized as ievenue management fees based upon
treatment for patients who would not he able to pay for treatment unless they won negligence tort
. • actions. This revenue should not have been recognized before it was iealized and to consider. .,
these accounts as revenue was a violation of GAAP FAS-5.
b. Defendants failed to reveal that GMMS was billing for unnecessary tests
and procedures, that insurance carriers were refusing to pay for such tests and procedures, and
' • . ::ODMANORLDOXVNADOCS\STULL1 p LD\C0MPL.cM1 67
• -. •
•
that arbitrators were finding for the insurance carriers and upholding the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbitration. This revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation of GAAP FA-.S.
c. it as the practice in the worlieis' compensation and no-fault industry fin
insurance companies and medical pi oviders to compromise disputed medical bills. Like all
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this fium itS experience handling claims, it reported to the public
that the GMMS accounts receivables that it rec.eivcd in leu of cash were collectable at 100% when
it knew that would never be true. At a minimum an allowance for had debts should have been
cleated.
d. Recognizing that 72% ur UMW.; receivables were going to the Company
as payment of fees, defendants knew CMI vvould be unable to swap disputed receivables for
. . undisputed receivables. The 28% of the accounts receivables left over from GMMS were used hy
GMMS to pay for medical personnel and to pay the ()wile' of the medical practice. With the
insurance companies rejecting GMMS bills at a high rate, it was clear that disputed receivables
could not be swapped lot undisputed receivables because alter owneis and medical providers
were paid there would not be any undisputed teceivables to swap.
e. The Company eventually wrote off $28.9 million in accounts receivables
due from GMMS. A periodic review of long term accounts receivables would have revealed that
an allowance for doubtful accounts was needed prior to the surprise announcement of August 10,
::0DMA\WORLDOX1VV:ZOCS n STULL\PLID\CoMPL.ONII fi8
•
1998. Due to the intertwined nature of the Company and GM_MS, the Company knew that it
would not be paid for its GMNIS accounts receivables.
122. On August 13, 1997 the Company released its 10 -1.2 for the quarter ending June
30, 1997. The 10-Q announced revenues of S31.5 million, net income of $3.8 million and
earnings per share of $.35 for the prior 6 months. .1he 1O-Q als.o stated that:•
It is the Company's experience that the insurance carriers from which it seeks
reimbursement for its clients delay payment of claims until just prior to the
arbitration hearing."
Gmms is obligated to pay such fees reu,a/dless outs uollections.
12. statements were false and misleading and lacked a reasonable basis when
made because:
a. Defendant Lawrence Shields, M.D., the Company's largest shareholder and
co-founder would not bc held liable for management fees owed the Company for .services to• •
:• .• GIVIIVIS, a business name for Ur. Shields' medical practice. Dr. Shields son, defendant Dennis
Shields, also was a major shareholder, an officer and a director at the time the 1C-Q was issued.
The Company would never try to collect from its founder and largest client.. As shown when the
Company and GMMS parted ways on August 10, 1998, the Company wrote off $28.9 million
owed to it by GMMS. Instead of holding Dr. Shields liable, as the Prospectus stated it would, the
Company agreed to pay Dr. Shields 15% of any money collected from GIVIN1S, up to $959,000.
Dr. Shields was also P,iven an independent contractors' position for S1'10,000 with a client of the
Company. Rather than being liable fur the fees, Dr. Shields was given a reward nf 15% for
paying the Company what his practice owes it.
::OLAINWORLUOXIVV: 00CSIS TULLIPLD \COMPL.CM1 69
•
t • •
b. The financial statements materiall y overstated the Company's financial
position due to the fact that the Company recognized as revenue management fees based upon
treatment for patients who would not be able to pay for treatment unless they won negligence tort
actions. This revenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation of CIA.A.P
c. Defendants failed to reveal that GN1MS was billing for unnecessary tests
and procedures, that insurance carriers were refiising to pay for such tests and pi ocedures, and
that arbitrators were finding for the insurance carriers and upholding the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbitration. This revenue should not have been recogniTed before it
was realized and to consider these accounts as revenue was a violation of GAAP FAS-5.
d. It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compromise disputed medical bills. Like all
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
that the GMMS accounts receivables that it received in feu of cash were collectable at 100% when
it knew that would never be true. At a minimum an allowance for bad debts should have been
created.
e. Recognizing that 72% of GMMS receivables were going to the Company
as payment of fees, defendants knew (WI would be unabie to swap disputed receivables for
undisputed receivables. The 28% of the accounts receivables left over from GMMS were used by
::COMA'sWoRLDOXM:\DOCSASTULLTLD\coMPLCMI 70
GIAMS to pay for medical personnel and to pa.y the owner of the medical practice. With the
insurance companies rejecting GIV1MS hills at a high rate, it was clear that disputed leceivables
could not be swapped for undisputed receivables because after owners and medical providers
were paid there would not be any undisputed receivables to swap.
The Company eventually wrote off $28.9 million in accounts receivables
due from GMMS. A periodic review of long term accounts receivables would have revealed that
an allowance for doubtful accounts was needed prior to the surprise announcement of August 10,
1998. Due to the intertwined nature of the Company and GMMS, the Company knew that it
would not be paid for its GMMS accounts receivables.
124. On November 14, 1997 in the third quarter 10-Q, the Company announced that
revenues for the third quarter ending September 30, I'M increased to $20 million and that net
income increased to $2.7 million. However, it was on the 10-Q for the third quarter that CMI• .
•„..•: announced that $24 million of GMMS accounts receivables would be paid for only when there
was a successful resolution of the patent's underlying negligence claim. The l 0-Q also stated:
The Company's full service clients are liable to the Company for management feesiegaidless of whether the client receives payment or the medical services
, . rendered.. .
125. These statements were false and misleading and lacked a reasonable basis when
made because:
a. Defendant Lawrence Shields, M.D., the Company's largest shareholder and
co-founder would not be held liable for management fees owed the Company for services to
GMMS, a business name for Dr. Shields' medical practice. Dr. Shields' son, defendant Dennis
:ioomAiwoRi_nonvv .Arincs%sTi a I Ti MCOMPI 71
.• t ,
Shields, also was a major shareholder, an officer and a director at the time the 10-Q was issued
The Company would never try to collect from its founder and largest client. As shown when the
Company and GM-MS parted ways on August 19, 1998, the Company wrote oil - S28.9 million
owed to it by Gln,,IMS Instead of holding Dr. Shields lia.h1c, as the Prospectus stated it would, the
Company agreed to pay Dr. Shields 15% uf any money collected riot!' GIMIS, up to $950,000.
Dr. Shields was also given an independent contractors' position for $150.000 with a client of the
Company. Rather than being liable for the fees, Dr. Shields was given a reward of 15% for
paying the Company what his practice owes it
b. The financial statements materially overstated the Company's financial
position dun to the fact that the Company recognized as revenue management fees based upon
. • treatment for patients who would not he able to pay for treatment unless they won negligence tort
actions. This ievenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation of GAAP FAS-5
.
c. Defendants failed to reveal that GIME was billing Ibr unnecessary tests
and procedures, that insurance carriers weie iefirsing to pay for such tests and procedures, and
that arbitrators were finding for the insurance caiiiers and upholding the !ejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contin gent upon
the Company prevailing at arbitration. '1'his revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation of GAAP FAS-5.
d, It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compromise disputed medical bills. Like all
::ODMA1WORLDOXMI:1DOCS\STULLTLMCOMPLCMI 7'
• •
. • ., .
• • .
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
that the GMMS accounts receivables that it received in leu of cash were collectable at 100% when
it knew that would never be true. At a minimum an allowance for bad debts should have been
created.
e. Recognizing that 72% of GMNIS receivahies were going . to the Company
as payment of fees, defendants knew CM1 would be unable to swap disputed receivables for
undisputed receivables. The 28% of the accounts receivables left over from GMIVIS were used by
GAMS to pay for medical personnel and to pay the owner of the medical pi actice. With the
insurance companies rejecting MIMS hills at a high rate, it was clear that disputed receivables
could not be swapped for undisputed receivables because glen owners and medical providers
. . were paid there would not be any undisputed receivables to swap.
The Company eventually wrote off $28.9 million in accounts receivables
due from GIVIIMS. A periodic review along tel in accounts receivables would have revealed that
an allowance for doubtful accounts was needed prior to the surprise announcement of August. 10,
1998. Due to the intertwined nature of the Company and GMIMS. the Company knew that it
would not be paid for its GMMS accounts receivables.
Inr....ron\wr_intooxwAriocs \min Li.pLu\compLemi 73
-•• . , ,
126. On February 9, 1998 CM[ issued a Prospectus for a stock offering. The
Prospectus repeated the false and misleading financial data from the third quarter 10-Q.
The Prospectus also stated:
The Company's full service clients are liable to the Company for the managementfees regardless of whether the client receives payment for the medical servicesrendered.
127. These statements were false and misleading and lacked a reasonable basis when
made because:
a. Defendant Lawrence Shields, 11.4.D., the Company's largest shareholder and
co-founder would not be held liable for mana gement lees owed the Company for services to
GIVINIS, a business name ful DI. Shields' medical practice. Dr. Shields' son, defendant Dennis
Shields, also was a major shareholder at the time the Prospectus was issued. The Company
would never try to collect from its foundet and laigest client. As shown when the Company and
GIIIMS parted ways on August. 10, 1998, the Company wrote off $28.9 million owed to it by
GMMS. Instead of holding Dr. Shields liable, as the Prospectus stated it would, the Company
agreed to pay Dr. Shields 15% of any money collected from GMNIS, up to 5950,000. Dr. Shields
was also given an independent contractors' position for $150,000 with a client of the Company.
Rather than being liable for the fees, Dr. Shields was given a reward of 15% for paying the
Company what his practice owes it.
b. The financial statements materially overstated the Company's financial
position due to the fact that the Company recognized as revenue management fees based upon
treatment for patients who would not be able to pay For tieatment unless they won negligence tort
:r0DMAMORLDOX\W:T0CS\STULLTLEACOMPLCMI 74
. •
actions. This revenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation of GAAP FAS-5.
c. Defendants failed to reveal that GMMS was billing for unnecessary tests
androcedures that insurance carriers were refusiri to ay for such tests and tocedures, andP P P
that arbitrators were finding for the insurance carriers and upholding the rejection of these claims.•
• Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbitration. This revenue should not have been recognized hethre it
was realized and to consider these accounts as revenue was a violation of GAAP PAS-5,
d. It was the practice in the workers' compensation and no-fault indusny for
insuranc.e companies and medical providers In compromise disputed medical hills. Like all
• .• litigated claims, compromise and settlement for less than the whole amount billed was common.
. .
. .
Although the Company knew this from its experience handling claims, it reported to the public
that the GM.MS accounts receivables that it received in lcu of cash were collectable at 100% when
S.•
it knew that would never be true. Al a minimum an allowance for bad debts should have been
created.
e. Recognizing that 72% or GUMS receivables were going to the Company. .
as payment of fees, defendants knew CMI would be unable to swap disputed receivables for
••undisputed receivables. The 28% of the accounts receivables left over from GMNIS were used by
GMNIS to pay for medical personnel and to pay the owner of the medical practice. With the
insui ance companies rejecting GMMS bills at a high rate, it was clear that disputed receivables
::0DMAWVORLDOXWVADOCSISTULLIPLD\COMPL.Ch,” 75
• •
•.
could not be swapped for undisputed receivables because anti owners and medical providers
were paid there would not be any undisputed receivables to swap.
f. The Company eventually wrote off $28.9 million in accounts receivables
due from GIIIMS. A periodic review of long term accounts receivables would have revealed that
an allowance for doubtful accounts was needed prior to the surprise announcement of August 10,
1998. Due to the intertwined nature of the Company and (lMMS, the Company knew that it
would nut be paid fur its GMMS accounts receivables.
128. The Company released financial information in its 10-K fur 1997 on March 3
1998. The 10-K stated:
To the extent permitted by applicable laws, management fees due from GMMS arecollateralized through the assignment, on a full recourse basis, of GMMS'saccounts receivable balances.
The Company's clients are liable to the Company for management fees regardlessof whether the client collects payment for the medical services rendered.
129. These statements were false and misleading and lacked a reasonable basis when
made because:
a. Defendant Lawrence Shields, M.D., the Company's largest shareholder and
co-founder would not be held liable for management fees owed the Company for services
GMIVIS, a business name for Dr. Shields' medical practice. Dr. Shields' son, defendant Dennis
Shields, also was a major shareholder. The Company would never Ii y to collect frum its founder
and largest client. As shown when the Company and GMMS parted ways on August 10, 1998,
the Company wrote ofT $28.9 million owed to it by GMMS. Instead of holding Dr. Shields liable,
as the Prospectus stated it would, the Company agreed to pay Dr. Shields 15% of any money
::oommwout.comvIcues \s I ut.o p i_mcom p L.emi 76
collected from. GMMS, up to $950,000. Dr. Shields was also given an independent contractors'
position for $150,000 with a client of the Company. Rather than being liable for the fees, Dr.
Shields was given a reward of 15% for paying the Company what his practice owes it
b. The financial statements materially overstated the Company's financial
position due to the fact that the Company Secognized as revenue management fees based upon
treatment for patients who would not be able to pay for treatment unless they won negligence tort
actions. This revenue should not have been recognized berore it was realized and to consider
these accounts as revenue was a violation of GA,A1'
c. Defendants failed to reveal that GivIMS was billing for unnecessary tests
and procedures, that insirra.nce carriers were retiising to pay lbr such tests and procedures, and
that arbitrators were finding for the insurance carriers and upholding the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbitration. This revenue should not have been recognized before it
was realized and to consider these accounts as revenue was a violation of GAAP FAS-5.
d. It was the practice in the workers' compensation and no-fault industry for
insurance companies and medical providers to compromise disputed medical bills. Like all
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
that the GMMS accounts receivables that it received in leu of cash were collectable at 100% when
it knew that would never be true. At a minimum an allowance for bad debts should have been
created.
;;ODMAWVORLDOXWV:\DOCS\STULLTLD\COMPLCM1 77
• •
r:.7:777-7
C . Recognizing that 72% of OMMS receivables were going to the Company
. as payment of fees, defendants knew CM1 would he unable to swap disputed receivahies for
undisputed receivables. The 28% of the accounts receivables left over from GMNIS were used by
GMMS to pay ti_ir medical personnel and to pay the ownet or the medical practice. With the•
insurance companies rejecting GMMS bills at a high rate, it was clear that disputed receivables
•could not be swapped for undisputed receivables because Ale' owners and medical providers
were paid there would not be any undisputed rc.ceivables to swap.
The Company eventually . wrote oil . `is0.8.9 million in accounts receivables
due from GNATS. A periodic review of long term accounts receivables would have revealed that
an allowance for doubtffil accounts was needed prior to the surprise announcement of August 10,
1998. Due to the intertwined nature of the Company and GIVIMS, the Company knew that it
would not be paid foi its GMMS accounts receivables.
130. On May 15, 1998 the Company released its 10 . Q for the quarter ending March
31, 1998. The financial information, including revenue, income and earnings per share were
false and misleading because:
a. Defendant Lawrence Shields, M.D., the Company's largest shareholder and
co-founder would not be held liable for management fees owed the Company for services to
GMMS, a business name for Dr. Shields medical practice. The Company would never try to
collect from its founder and largest client. As shown when the Company and GMMS parted ways
on August 10, 1998, the Company wiote off $28.9 million owed to it by GMMS. Instead of
holding Dr. Shields liable, as the Prospectus stated it would, the Company agreed to pay Di.
;:oDNIAMORLDOX1W: D 0 C MST U LLS.F LO C OM P L C 78
. .
• .
Shields 15% of any money collected from GMNIS, up to 5950,000, Dr. Shields was also given an
independent contractors' position for $150,000 with a client of the Company. Rather than being
liable for the fees, Dr. Shields was given a reward of 15% for paying the Company what his
practice he owes it.
b. The financial statements materially overstated the Company's financial
position due to the fact that the Company recognized as revenue management lees based upon
treatment for patients who would not be able to pay for treatment unless they won negligence tort
actions, This revenue should not have been recognized before it was realized and to consider
these accounts as revenue was a violation °FOAM' FAS-5.
c. Defendants failed to reveal that G11.1114S was billing for unnecessaiy tests
and procedures, that insurance carriers were refusing to pay for such tests and procedures, and
that arbitrators .were finding for the insurance carriers and upholding the rejection of these claims.
Revenue from rejected claims became a contingent gain because payment was contingent upon
the Company prevailing at arbitration. This revenue should not have been recmmized before it
was realized and to consider these accounts as revenue was a violation of GAAP FAS-5.
d, It was the practice in the workers' compensation and no-fault indusuy for
insurance companies and medical providers to compromise disputed medical bills. Like all
litigated claims, compromise and settlement for less than the whole amount billed was common.
Although the Company knew this from its experience handling claims, it reported to the public
that the 01111VIS accounts receivables that it received in feu of cash were collectable at 100% when
r:oomAmoktnoxmmucs\s ncompt.cmi 79
. .• • .
it knew that would never be nue. At a minimum au allowance for bad debts should have been
created.
e. Recognizing that 72% of GlvIMS receivables were going to the C_ornpany.
as payment ofTees, defendants knew cmi would be unable to swap disputed receivables for
undisputed receivables, The 28% of the accounts receivables left over from GMMS were used by
GIUMS to pay for medical personnel and to pal; the owner ur the medical practice. With the
insurance companies rejecting (;MIV1S hills at a high rate, it was clear that disputed receivables
could not be swapped for undisputed receivables because after owners and medical providers
were paid there would not be any undisputed teceivables to swap.
The Company eventually wrote off $28.9 million in accounts receivables
due from GILDA& A periodic review of long term accounts r ecei vables would have revealed that
an allowance for doubtful accounts was needed prior to the surprise announcement of August 10,
1998 Due to the intertwined nature of the Company and GMMS, the Company knew that it
would not be paid for its GMMS accounts receivables.
131. On August 19, 1998. with the release of the 10-Q for the quarter ending June
30, 1998, the Company partially revealed the truth concerning its operations. The Company
said it would be terminating its management agreement with "Grealet Metropolitan Neurology
Service, P.C. (d/b/a Greater Metropolitan Medical Services) ("GMMS")," For the first time
revealing the true identity of its largest client. The Company also stated that it would be
writing off $28.9 million of its accounts receivable owed by GMMS. Furthermore there was
an additional $4 million write-off for costs associated with collecting GMMS accounts
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• . • receivable. Another $13 million in receivables from an unidentified entity were also written-
, off. The Company also expected to write off additional charges in the next quarter.
132. The Company also for the first time revealed that it had instituted suit against
certain insurance carriers over the insurance carriers practice of denying substantial amounts. .•
of claims made by GMMS.
. 133. The 10-Q also stated that, under the terms of an agreement between Lawrence
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Shields, M.D. and the Company, DI . . Shields ),y otild be paid a 15% the for all of the accounts
receivables he helped the Company receive from GMMS receivables, up to $950,000. This•
was in fact a reward from the Company to its largest shareholder for not paying the money due
the Company in a timely manner. This rewaid showed that the Company would not hold
client liable as it had stated prior.
NO SAFE HARBOR
134. The statutory safe harbor provided ter lot ward looking statements under certain
circumstances dues not apply to any of the allegedly false statements pleaded in this complaint.
• The statements alleged to be false and misleading herein all relate to facts and conditions
existing at the time the statements were made. Tn addition, to the extent certain of the
statements alleged to he false may be characterized as forward looking, they were not
identified as "forward looking" when made, there was no statement made with respect to any
of those representations forming the basis of this complaint that actual results "could differ
materially from those projected,'' and there were no meaningful cautionary statements
identifying important factors that could cause actual results to differ materially from those in
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the purportedly forward looking statements. Alternatively, to the extent that the statutory safe
harbor is intended to apply to any forward-looking statements pled 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 had actual knowledge that the particular
forward-looknig statement was materially false or misleading, and/or the forward-looking
statement was authorized and/or approved by an executive officer of CMI who knew that those
statements were false when made.
CLASS ACTION ALLEGATIONS
135 Plaintiffs hring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3). Excluded from the Class are the Individual Defendants, members of
their farniIies and any entity in which they have an interest.
136. A well-defined community of interest exists in the questions of law and fact
affecting the patties and the putative class i uptescined in this action. The questions of law and
fact common to each member of the Class which predominate over questions which may affect
individual Class members include:
a. Whether the federal securities laws were violated by defendants acts and
omissions as alleged herein;
Whether defendants misrepresented or omitted material facts during the
Class Period as detailed herein;
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t 'c. Whether defendants knew, had reason to know or recklessly disregarded
that their statements were false and misleading, or failed to have reasonable basis for those
statements;
d. Whether the market price ofCMI's stock was artificially inflated by the
omissions and misrepresentations of material fact complained (-Wherein;•
e. Viiheiher the Individual Defendants knowingly sold more than $7 million
worth of MR stock to the investing public at artificially inflated prices during the Class Period;
and
The pi oper mcasui e of damages suffered by plaintiffs and the Class.
137, Plaintiffs' claims iii •e typical of the claims of other members of the Class, Plaintiffs
••••:•:'••• and the Class each sustained damages arising from the same wrongful conduct and violations of•
California law complained of herein.
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138. Plaintiffs will fairly and adequately protect the interests of the Class and have
chosen counsel experienced in class and securities litigation. Plaintiffs have no interests which
• conflict with those or the Class.
139. Members of the Class are so numerous that joinder of - each membei is impractical
• and disposition of their claims in a class action will provide substantial benefits to the parties and
• the Court. While the exact number of Class members is unknown to plaintiffs at this time, and
can only be ascertained through discovery, plaintiffs believe that Class members number in the
thousands. As of November 23, 1998, approximately 15 million shares of CM1 stock were issued,
outstanding and actively traded on the NYSE.
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140. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy. As the damages suffered by individual inembeis of the Class may
be relatively small, the expense and burden of individual litigation makes it impossible for Cla.ss
•members to individually redress the wrongs suffered. Plaintiffs anticipate no difficulty in
. .managing this action as a class action.
• JURISDICTION AND VENUE
141. 'I'his Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§1331 and 1337, and §27 of the Securities Exchange Act of 193/l (the 'Exchange Act")
(15 U.S.C. §78aa).
142. This action arises under §§ I ON and 20(a) of the kxchange Act and Rule 10b-5
promulgated thereunder-(, 17 C.F.R. §240.10b-5).
113, Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C.
1391(b) because We acts char god hei .ein, including the dissemination of materially false and
misleading information, occurred in this district
144. In connection with the acts alleged in this complaint, defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited
to, the mails, interstate telephone communications and the Facilities of the national securities
•markets.
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145. Plaintiffs rely, in part, upon the presumption of reliance established b y the
fraud-on-the-market doctrine iii that, among other things:
a. CMI stock met the requirements for listing, and was listed, on the
AMEX and the NYSE, both highly efficient markets:. .
b. as a regulated issuer, the Company filed periodic public reports with the. .. .
SEC;
c. the trading volume of the Company's stock was substantial, reflecting
numerous trades each day;
d. CMI was followed by securities analysts employed by several major
brokerage firms who wrote reports which were distributed to the sales force and certain
customers of such firms and which were available to various automated data retrieval services;
e. the misrepresentations alleged herein would tend to induce a reasonable
investor to misjudge the value of CMI common stock; and
f. plaintiffs and the Class purchased or otherwise acquired their common
stack during the Class Period without knowledge of the omitted or misrepresented facts,
146. Based upon the foregoing, plaintiffs and the Class are entitled to a presumption
of reliance upon the integrity of the market for the purpose of class certification as well as for
ultimate proof of their claims on the merits. Plaintiffs will also rely, in part, upon the
presumption of reliance established by material omissions and upon the actual reliance of the
Class members.
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FIRST CLAIM FOR RELIEFFOR VIOLATION OF SECTION 10(b) 01' '11W
EXCHANGE ACT AND SEC RILE 101)-5 (Against All Defendants)
147. Plaintiffs repeat and reaile2e each and every allegation contained in the
paragraphs above of the Complaint as if fully set forth herein.
148. Each of the defendants: (a) knew or had access to the material adverse non-
public information about [MI's financial results and then-existing business conditions, which
was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading
statements, releases, reports and other public repiesentations of and about CMI.
149. During the Class Period, defendants, with knowledge of or reckless disregard
for the truth, disseminated or approved the false statements specified above, which were
misleading in that they contained misrepresentations and failed to disclose material facts
necessary in order to make the statements made, in ligh t of the circumstances under which they
were made, not misleading.
150. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:
a. employed devices, schemes and artifices to defraud;
b. made untrue statements of material facts or omitted to state material facts
necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading; or
c. engaged in acts, practices and a course of business that operated as a
fraud or deceit upon plaintiffs and others similarly situated in connection with their purchases
of [MI stock during the Class Period.
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151. Plaintiffs and the Class suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices tbr their CNI.I. stock. Plaintiffs and the Class
would not have purchased or otherwise acquired CMI stock at the. prices they paid, or at all, if
they been aware that the market prices had been artificially and falsely inflated by defendants'
misleading statements.
SECOND CLAIM FOR RELIEF FOR VIOLATIONOF SECTION 20(a) OF THE EXCHANGEACT
(Against the Individual Defendants)
152. Plaintiffs repeat and reaIlege each and every allegation set forth in the
paragraphs above, as if set forth fully herein.
153. Each of the Individual Defendants, by virtue of their offices, directorships, and
specific acts was, at the time of the wrongs alleged herein, a controlling person of CMI within
the meaning of §20(a) of the Exchange Act. The Individual Defendants had the power iuld
influence and exercised the same to cause COI to engage in the illegal conduct and practices
complained of herein by causing the Company to disseminate to the. public, directly or through
intermediaries, the materially lake and misleading inlbrmation referred to herein.
154. The Individual Defendants positions made them privy to, and provided them
with, actual knowledge of the material facts concealed from plaintiffs and the Class by CM!
during the Class Period.
155. By reason of the conduct alleged in the First Claim for Relief, the Individual
Defendants are liable for the aforesaid wrongful conduct and liable to plaintiffs and the Class
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for the substantial damages suffered in connection with their purchases of CMI stock during
the Class Period.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
Declaring this action to he a proper class action on behalf of the
Class defined herein;
2. Awarding proper damages in favor of plaintiffs and the Class
against each defendant;
3. Awarding punitive damages in favor of plaintiffs aud the Class
against each defendant;
4. Awarding plaintiffs and the Class costs, including reasonable
attorneys and experts' fees;
5. Awarding pre-judgment and post judgment interest; and
6. Awarding such other further relief as this Court may deem just and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
. Dated: February 25, 1999 Jules BrodySTULL. STULL & BRODY
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By:JulArody (JO 9/5) )6 " ast 45th StreetNew York, NY 10017(212) 490-2022
::00MA1WORLDOM:1DOCS1STULLYLD \COMPLCM I g2
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1Michael D Braun
r 1 irnothy J BurkeSTULL, STULL & BRODY10910 Wilshire BoulevardSuite 2300Los Angeles, CA 90024(310) 209-2468
6Attorneys for Plaintiffs
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