In re Health Management, Inc. Securities Lit.
| Decision Date | 21 July 1997 |
| Docket Number | No. CV 96-889 (ADS).,CV 96-889 (ADS). |
| Citation | 970 F.Supp. 192 |
| Parties | In re HEALTH MANAGEMENT, INC. SECURITIES LITIGATION. |
| Court | U.S. District Court — Eastern District of New York |
Kaplan, Kilsheimer & Fox, L.L.P. by Frederic S. Fox, Richard J. Kilsheimer, Joel B. Strauss, New York City; Zwerling, Schacter & Zwerling, L.L.P. by Jeffrey C. Zwerling, New York City, for Plaintiffs.
Edwards & Angell, New York City, for Defendant BDO Seidman, L.L.P.; Ira Greenberg, Mark J. Goldberg, of counsel.
Reed, Smith, Shaw & McClay, Pittsburgh, PA, for Defendants Irwin Hirsch, Lloyd N. Myers; W. Thomas McGough, Jr., Theresa C. Williams-Harris, Richard J. DeMarco, Jr., of counsel.
Matthew S. Dontzin, New York City, for Defendant Clifford E. Hotte; Edward Wolf, of counsel.
Poli & Lamura, Northport, NY, for Defendant Virginia Belloise; John G. Poli, Barry J. Casper, Lawrence Kushnick, of counsel.
This action arises from a consolidated amended complaint (the "complaint") by the plaintiffs on behalf of all persons who purchased the common stock of Health Management, Inc. ("Health Management") from August 25, 1994 through February 26, 1996 (the "Class Period"), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) ("Section 10(b)" and "Section 20(a)", respectively), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), against Health Management, certain of its officers and/or directors-specifically, Irwin Hirsh ("Hirsh"), Lloyd N. Myers ("Myers"), Clifford E. Hotte ("Hotte"), Drew W. Bergman ("Bergman"), and Virginia Belloise ("Belloise") (collectively, the "Individual Defendants"), and its outside auditor, BDO Seidman, LLP ("BDO").
By a Final Judgment and Order of Partial Dismissal of Action dated June 9, 1997, this action was dismissed as to Health Management. Presently before the Court are: (1) BDO's motion pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss for failure to state a claim upon which relief can be granted; (2) Hotte's motion pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss for failure to state a claim upon which relief can be granted; (3) Belloise's motion pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss for failure to state a claim upon which relief can be granted; and (4) Hirsh and Myers' motion pursuant to Fed.R.Civ.P. 12(e) and 9(b), for a more definitive statement.
According to the eighty-nine page complaint, the defendant Health Management is engaged in the business of providing integrated health management services to individuals suffering from chronic medical conditions, and to various health care professionals, drug manufacturers, and third-party payers involved in the care of such patients. Health Management has purportedly grown rapidly since its shift in 1989 from the general home healthcare market to the specialized field of chronic disease management. The plaintiffs allege that converting increasing revenues and earnings to cash proved to be a daunting task for Health Management and as a result, prior to the commencement of the Class Period, Health Management began to experience increasing difficulty collecting payment for its enhanced services, which resulted in ballooning accounts receivable and days sales outstanding ("DSO"), the average number of days that a receivable remains outstanding prior to collection. Faced with these pressing concerns, Health Management embarked upon an aggressive acquisition strategy designed to improve Health Management's balance sheet by acquiring complimentary companies with lower DSO levels in order to generate cash flow. The plaintiffs allege that because Health Management lacked resources to acquire these businesses, it was forced to use its common stock to fund many of these acquisitions. Health Management soon recognized that its acquisition strategy would fail unless it was able to support the value of its stock.
In addition, Health Management had certain loans from Chemical Bank under which disappointing earnings report falling below prevailing analyst expectations would place Health Management in default.
The cast of characters in the alleged fraudulent scheme include the Individual Defendants and BDO, Health Management's outside auditor. Set forth in the complaint is each defendant's relationship to Health Management, which are as follows.
Hotte, the founder of Health Management in 1986, was the President and Chairman of the Board of Directors of Health Management. He was the second largest shareholder of Health Management. As of September 20, 1995, Hotte owned or controlled in excess of 1.1 million shares of Health Management common stock, which is approximately 11.4% of the outstanding common stock, including shares held in the name of his wife, co-defendant Belloise, and shares subject to exercisable options. Hotte is alleged to have signed: (1) Health Management's Form 10-Q for the first three quarters of Fiscal 1995; (2) the statement in the letter to shareholders dated December 18, 1994; (3) the statement contained in the 1995 Form 10-K; (4) the statement contained in Health Management's letter to shareholders dated August 5, 1995; and (5) Health Management's Form 10-Q for the first two quarters of Fiscal 1996.
Belloise was a member of Health Management's Board of Directors and also served as its Secretary from March 1988 to December 1993. Belloise is alleged to have signed the 1995 Form 10-K.
Bergman was Corporate Development Officer, Treasurer and Secretary of Health Management, as well as a member of Health Management's Board of Directors. From approximately June 1995 through December 21, 1995, Bergman served as Chief Financial Officer and Principal Accounting Officer of Health Management. As of September 20, 1995, Bergman owned or controlled 25,667 shares of Health Management common stock, including shares subject to exercisable options. Bergman is alleged to have signed: (1) Health Management's Form 10-Q for the first three quarters of Fiscal 1995; (2) the statement contained in the 1995 Form 10-K; and (3) Health Management's Form 10-Q for the first two quarters of Fiscal 1996.
Myers served as Vice President and principal of both Murray Pharmacy, Inc., and Murray Pharmacy Too, Inc. (collectively, the "Murray Group"). On or about April 1, 1994, Health Management acquired substantially all of the net assets of the Murray Group. By virtue of this transaction, and subsequent to July 24, 1995, Myers became Vice President for Sales and Marketing of Health Management. In addition, since March 1994, Myers served as Vice President for Program Development of Health Management's wholly owned subsidiary, HMI Pennsylvania. Further, as a result of the acquisition, by September 20, 1995, Myers owned or controlled over 3.3% of Health Management's outstanding common stock.
Hirsh served with Myers as principal of the Murray Group. After Health Management's acquisition of the Murray Group, Hirsh became Vice President for Purchasing and Managed Care Contracts of HMI Pennsylvania. In addition, by September 20, 1995, Hirsh exercised control or ownership of more than approximately 3.3% of Health Management's outstanding common stock.
The complaint alleges that the individual defendants engaged in the following culpable conduct:
Each of the defendants ... reviewed or was aware of the materially false and misleading SEC filings, press releases, and other statements complained of herein at or about the time they were issued or circulated, knew or recklessly disregarded their materially false and misleading nature, and were in a position to control or influence their contents or otherwise cause corrective or accurate disclosures to have been made. Defendants engaged in the common course of conduct complained of herein from at least August 25, 1994 — the day that the Company announced its earnings for the first quarter of Fiscal 1995 — the purpose of which was to artificially inflate the market price of Health Management common stock, through the issuance of materially false and misleading statements to the public, all as particularized herein.
In addition, the complaint alleges that the individual defendants were "controlling" persons of Health Management within the meaning of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a),
by reason of their management positions in Health Management, their membership on the Company's Board, their extensive equity interest in the Company, and/or their direct and necessary participation in the fraudulent acts alleged herein. Because of their positions in the company, and/or their stock ownership, the Individual Defendants had the power and influence to Cause Health Management to engage in the unlawful acts and conduct alleged herein. The Individual Defendants participated in this wrongful conduct to inflate the price of the Company's common stock and to conceal the adverse facts concerning the Company's business and financial condition, so that they could (i) enhance the value of their extensive Health Management securities holdings; (ii) allow the Company to conclude various acquisitions by using the inflated value of its stock as merger consideration; and (iii) obtain financing on behalf of the Company to pursue various business acquisitions.
Finally, BDO is an accounting firm with its principal office located in New York, New York, and a regional office located in Mitchel Field, New York. Commencing as early as April 30, 1989, BDO served as Health Management's auditor. The plaintiffs allege that BDO issued an opinion included in Health Management's Form 10-K for Fiscal 1995, certifying that it had audited Health Management's financial statements in accordance with generally accepted...
To continue reading
Request your trial
-
In re Smartalk Teleservices Securities Litigation, No. 00-1315.
...Litig., 1 F.Supp.2d 1096, 1108 (D.Nev.1998); Powers v. Eichen, 977 F.Supp. 1031, 1040 (S.D.Cal. 1997); In re Health Mgmt. Securities Litig., 970 F.Supp. 192, 208-09 (E.D.N.Y. 1997); with, e.g., Allison v. Brooktree Corp., 999 F.Supp. 1342, 1350 (S.D.Cal. 1998) (questioning the continuing vi......
-
In re Intelligroup Securities Litigation
...informed about the facts making their statements untrue but elected to ignore the unfavorable information); accord Health Mgt. Sec. Litig., 970 F.Supp. 192 (E.D.N.Y.1997) (a strong inference of recklessness is sufficiently pled where the complaint alleges that defendant was actually advised......
-
In re Bankamerica Corp. Securities Litigation
...or her part in the alleged fraud. Zuckerman, 4 F.Supp.2d at 622; Silicon Graphics, 970 F.Supp. at 752; In re Health Management, Inc. Secs. Litig., 970 F.Supp. 192, 208 (E.D.N.Y.1997). This requirement can be met by the group publication doctrine, which involves a rebuttable presumption that......
-
In re Rent-Way Securities Litigation
...management that an employee was cooking the books, if true, would support a claim of reckless behavior); In re Health Mgmt. Inc. Sec. Litig., 970 F.Supp. 192, 203 (E.D.N.Y.1997) (allegation that accountant possessed a letter from an analyst warning that its client had inflated its accounts ......
-
Planning Discovery
...a responsive pleading. See Cumis Ins. Soc’y v. Peters , 983 F. Supp. 787, 798 (N.D. Ill. 1997); In re Health Mgmt. Inc. Sec. Litig. , 970 F. Supp. 192, 207 (E.D.N.Y. 1997); Classic Communications v. Rural Tel. Serv. Co. , 956 F. Supp. 910, 922-23 (D. Kan. 1997); Irvin v. Borough of Darby , ......
-
Planning discovery
...Cal. 2011) (same); see also, Cumis Ins. Soc’y v. Peters , 983 F. Supp. 787, 798 (N.D. Ill. 1997); In re Health Mgmt. Inc. Sec. Litig. , 970 F. Supp. 192, 207 (E.D.N.Y. 1997); Classic Communications v. Rural Tel. Serv. Co. , 956 F. Supp. 910, 922-23 (D. Kan. 1997); Irvin v. Borough of Darby ......
-
Planning discovery
...a responsive pleading. See Cumis Ins. Soc’y v. Peters , 983 F. Supp. 787, 798 (N.D. Ill. 1997); In re Health Mgmt. Inc. Sec. Litig. , 970 F. Supp. 192, 207 (E.D.N.Y. 1997); Classic Communications v. Rural Tel. Serv. Co. , 956 F. Supp. 910, 922-23 (D. Kan. 1997); Irvin v. Borough of Darby , ......