Download 1 Plaintiff`s First Amended Consolidated Class Action Complaint 01

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WECHSLER HARWOOD HALEBIAN
& FEFFER LLP
Robert I. Harwood (RH-3286)
Matthew M. Houston (MH-2218)
Joshua D . Glatter (JG-0184)
488 Madison Avenue
New York, New York 10022
Telephone : (212) 935-7400
Lead Counsel For Plaintiffs
[Additional Counsel Listed on
Signature Page]
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
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IN RE: OMEGA HEALTHCARE INVESTORS, INC.
SECURITIES LITIGATION
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Consolidated Action No.
00 Civ. 4547 (MGC)
This Document Relates To:
ALL ACTIONS
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PLAINTIFFS' FIRST AMENDED CONSOLIDATED
CLASS ACTION COMPLAINT
BASIS OF ALLEGATIONS
1.
Plaintiffs allege the following based upon the investigation of plaintiffs'
counsel, which included a review of United States Securities and Exchange Commission ("SEC")
filings by Omega Healthcare Investors, Inc. ("Omega" or the "Company"), as well as regulatory filings
and reports, securities analysts reports and advisories about the Company, press releases and other
public statements issued by the Company, and media reports about the Company, and plaintiffs
believe that substantial additional evidentiary support will exist for the allegations set forth herein
after a reasonable opportunity for discovery.
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NATURE OF THE ACTION
2.
This is an action by purchasers of the common stock of Omega, on their own
behalf and on behalf of all others similarly situated, seeking to pursue remedies under the Securities
Exchange Act of 1934 (the "Exchange Act").
JURISDICTION AND VENUE
3.
The claims asserted herein arise under and pursuant to Sections 10(b) and
20(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule I Ob-5 promulgated thereunder
by the Securities and Exchange Commission ("SEC") [17 C.F.R. § 240. 10b-5].
4.
This Court has jurisdiction over the subject matter of this action pursuant to
28 U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
5.
Venue is proper in this District pursuant to Section 27 of the Exchange Act,
and 28 U.S.C. § 1391(b) and (c).
6.
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.
PARTIES
7.
Lead Plaintiff Benjamin A. LeBorys ("LeBorys") purchased the common stock
of Omega at artificially inflated prices and has been damaged thereby. Leborys, who purchased
12,000 shares of Omega common stock during the class period, listed the individual purchases on the
certification annexed to his original complaint (Civil Action No. 00 Civ. 6523).
8.
Defendant Omega is organized under the laws of the state of Maryland, and
maintains its principal executive offices located at 900 Victors Way, Suite 350, Ann Arbor, Michigan
48108 . The Company is a self-administered Real Estate Investment Trust ("REIT") which invests
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in income-producing healthcare facilities, primarily long-term care facilities located in the United
States. These investments primarily consists of lease or mortgage financing.
9.
The individual defendants identified below (the "Individual Defendants"),
served at all times material to the claims set forth herein, as senior officers and/or directors of Omega
in the positions set forth opposite their names:
Name
Position
Essel W. Bailey, Jr.
Chairman, President, Chief Executive Officer
and Director
David A. Stover
Vice President, Chief Financial Officer and
Chief Accounting Officer
Scott F. Kellman
Chief Operating Officer
10.
Because of the Individual Defendants' positions with the Company, they had
access to the adverse undisclosed information about its business, operations, products, operational
trends, financial statements, markets and present and future business prospects via access to internal
corporate documents (including the Company's operating plans, budgets and forecasts and reports
of actual operations compared thereto), conversations and connections with other corporate officers
and employees, attendance at management and Board of Directors meetings and committees thereof
and via reports and other information provided to them in connection therewith.
11.
It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company' s public filings , press releases and other publications as alleged herein are the collective
actions of the narrowly defined group of defendants identified above. Each of the above officers of
Omega, by virtue of their high-level positions with the Company, directly participated in the
management ofthe Company, was directly involved in the day-to-day operations of the Company at
the highest levels and was privy to confidential proprietary information concerning the Company and
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its business, operations, products, growth, financial statements, and financial condition, as alleged
herein. Said defendants were involved in drafting, producing, reviewing and/or disseminating the'
false and misleading statements and information alleged herein, were aware or recklessly disregarded,
that the false and misleading statements were being issued regarding the Company, and approved or
ratified these statements, in violation of the federal securities laws.
12.
As officers and controlling persons ofa publicly-held company whose common
stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the New York
Stock Exchange (the "NYSE"), and governed by the provisions of the federal securities laws, the
Individual Defendants each had a duty to disseminate promptly, accurate and truthful information
with respect to the Company's financial condition and performance, growth, operations, financial
statements, business, products, markets, management, earnings and present and future business
prospects, and to correct any previously-issued statements that had become materially misleading or
untrue, so that the market price of the Company's publicly-traded securities would be based upon
truthful and accurate information. The Individual Defendants' misrepresentations and omissions
during the Class Period violated these specific requirements and obligations.
13.
The Individual Defendants participated in the drafting , preparation, and/or
approval of the various public and shareholder and investor reports and other communications
complained of herein and were aware of, or recklessly disregarded, the misstatements contained
therein and omissions therefrom, and were aware of their materially false and misleading nature.
Because oftheir Board membership and/or executive and managerial positions with Omega, each of
the Individual Defendants had access to the adverse undisclosed information about Omega's business
prospects and financial condition and performance as particularized herein and knew (or recklessly
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disregarded) that these adverse facts rendered the positive representations made by or about Omega
and its business issued or adopted by the Company materially false and misleading.
14.
The Individual Defendants , because oftheir positions of control and authority
as officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the Class
Period. Each Individual Defendant was provided with copies of the documents alleged herein to be
misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent
their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is
responsible for the accuracy of the public reports and releases detailed herein and is therefore
primarily liable for the representations contained therein.
15.
Each of the defendants is liable as a participant in a fraudulent scheme and
course of business that operated as a fraud or deceit on purchasers of Omega common stock by
disseminating materially false and misleading statements and/or concealing material adverse facts.
The scheme: (i) deceived the investing public regarding Omega's business, finances, financial
statements and the intrinsic value of Omega common stock; and (ii) caused the plaintiff and absent
class members to purchase Omega securities at artificially inflated prices.
CLASS ACTION ALLEGATIONS
16.
Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased Omega
common stock during the period from April 13 , 1999 through May 11, 2000 inclusive (the "Class
Period"), and who suffered damages thereby. Excluded are the defendants, any entity in which the
defendants have a controlling interest or is a parent or subsidiary of or is controlled by the Company,
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and the officers, directors, employees, affiliates, legal representatives, heirs, predecessors, successors
and assigns of the defendant (the "Class").
17.
The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class members is unknown to plaintiffs at this time and
can only be ascertained through appropriate discovery, plaintiffs believe there are, at a minimum,
thousands of members of the Class who traded during the Class Period.
18.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the
questions of law and fact common to the Class are:
19.
i)
whether the federal securities laws were violated by defendant's acts
as alleged herein;
ii)
whether the Company issued false and misleading financial statements
during the Class Period;
iii)
whether defendant acted knowingly or recklessly in issuing false and
misleading financial statements;
iv)
whether the market prices of the Company's securities during the
Class Period were artificially inflated because of the defendant's
conduct complained of herein; and
v)
whether the members of the Class have sustained damages and, if so,
what is the proper measure of damages.
Plaintiffs' claims are typical of the claims of the members of the Class as
plaintiff and members ofthe Class sustained damages arising out of defendant's wrongful conduct in
violation of federal law as complained of herein.
20.
Plaintiffs will fairly and adequately protect the interests ofthe members ofthe
Class and have retained counsel competent and experienced in class actions and securities litigation.
Plaintiffs have no interests antagonistic to or in conflict with those of the Class.
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21.
A class action is superior to other available methods for the fair and efficient
adjudication of the controversy since joinder of all members of the Class is impracticable.'
Furthermore, because the damages suffered by the individual Class members maybe relatively small, .
the expense and burden of individual litigation make it impossible for the Class members individually
to redress the wrongs done to them . There will be no difficulty in the management of this action as
a class action.
22.
Plaintiffs will rely , in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
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i)
defendants made public misrepresentations or failed to disclose
material facts during the Class Period;
ii)
the omissions and misrepresentations were material;
iii)
the securities of the Company traded in an efficient market;
iv)
the misrepresentations and omissions alleged would tend to induce a
reasonable investor to misjudge the value ofthe Company's securities;
and
v)
plaintiffs and members of the Class purchased their Omega stock
between the time the defendant failed to disclose or misrepresented
material facts and the time the true facts were disclosed, without
knowledge of the omitted or misrepresented facts.
Based upon the following, plaintiffs and members of the Class are entitled to
the presumption of reliance upon the integrity of the market.
SUBSTANTIVE ALLEGATIONS
24.
Omega, which was incorporated in Maryland in 1992, provides lease or
mortgage financing for long-term healthcare facilities to qualified operators and serves additional
healthcare facilities, including assisted living and acute care facilities. Financing for such investments
is provided by borrowings under the Company's revolving line ofcredit, private placements or public
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offerings of debt or equity, the assumption of secured indebtedness, or a combination of these
methods. The Company also finances acquisitions through the exchange of properties or the issuance
of shares of its capital stock.
25.
As of December 31, 1999, the Company's portfolio of domestic investments
consisted of 211 long-term care facilities, 3 medical office buildings and 2 rehabilitation hospitals.
The Company owns and leases 147 long-term facilities , 3 medical office buildings and 2 rehabilitation
hospitals, and provides mortgages, including participating and convertible participating mortgages
on 64 long-term healthcare facilities. The facilities are located in 28 states and operated by 24
unaffiliated operators. The Company's gross real estate investments at December 31, 1999 totaled
$892 million.
26.
Approximately 90 percent of Omega's equity and mortgage investments are
in skilled nursing home facilities, and most ofthose investments are concentrated in facilities managed
by certain large facility operators, including Sun Healthcare ("Sun") (24.9 percent of the Company's
financing investment), Integrated Health Services ("Integrated") (15.3 percent), Advocat, Inc.
("Advocat") (10.9 percent), RainTree Healthcare ("RainTree") (7.9 percent) and Mariner Post Acute
("Mariner") (5.6 percent). Omega's financial health in large part depends on the financial health of
these clients, who are required to make lease or mortgage payments to Omega pursuant to their lease
or mortgage agreements. These payments are Omega's primary source of income.
27.
Between 1992 and 1997, Omega, which historically has traded at around a
10% discount to its peer group, rewarded shareholders with a 23% average annual rate of return.
28.
To continue to qualify as a REIT under the Internal Revenue Code, Omega
is required to pay out at least 95% of its net income (as determined pursuant to the Internal Revenue
Code) as dividends . As a result, the primary investment objective of an investment in Omega is to
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receive such dividends, and the primary determinant of Omega's stock price is the attractiveness of
its yield. Omega is held primarily by small investors and is known as a "widows and orphans" stock,
in that its typical investor is interested in current income and stability of principal.
29.
Financing developments affect the cash flow of Omega's clients and therefore
their ability to make lease and mortgage payments to Omega, which in turn affect Omega's cash flow,
its ability to pay dividends, and ultimately affect the price of Omega's stock.
30.
In 1997, Congress enacted legislation mandating certain reform of the
Medicare payment system, which resulted, among other things, in a change in the way operators of
skilled nursing facilities - such as Sun, Integrated, Advocat, RainTree and Mariner-would be paid
for their services. Beginning January 1, 1999 (or earlier, depending on the facility's fiscal year),
Medicare began paying a lump sum per diem fee for each diagnosis, instead ofpaying for each service
supply or medication provided at the facilities. This new policy was effective July 1998.
31.
Reports throughout the United States predicted moderate to severe reductions
on Medicare payments to skilled nursing facilities as a result of this change. (See, for example, The
Providence Journal-Bulletin , May 4, 1998, Page C-0 1; Crain's Cleveland Business , September 21,
1998, Page 1 ; Ban gor Daily News , December 9,1998 , Page 3 ; The Hartford Courant, December 30,
1998, Page B 1.)
32.
Indeed, in a November 1, 1998 Best's Review - Life Health Insurance Edition
article authored by Meg Green, entitled "Medicare HMOs at Risk: Behind the Pullout Wave"Patricia
Riley, vice president of government programs at Medica Health Plans , a company whom, at that time,
was pulling its Medicare HMO out of several Minnesota counties, explained her company ' s actions
as follows:
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"We are a nonprofit heath plan," Riley said in October.
"We've been struggling with low reimbursement rates
for many years. We didn't see a light at the end of the
tunnel ." She said the company has lost $35 million on
its Medicare plans over the last 15 years.
33.
Defendants, by virtue oftheir knowledge ofthe industry, communications with
Omega's clients, and non-public contractually mandated regular periodic financial and operating
reports from their clients, were in a position to know and to quantify the effects of the Medicare
cutbacks on their clients' cash flow as they happened.
34.
Through 1998 and 1999, Omega maintained regular quarterly dividends on its
common stock of 700 per share ($2.80 per year). In January 1999, Omega common stock was
trading in the range of $28-1/2 to $30-1/2 per share , therefore yielding approximately 9-1/2 percent.
35.
In February and March 1999, as concerns about the skilled nursing facility
industry grew, the price of Omega stock fell, as investors grew concerned about the Company's ability
to maintain its dividend . By early April 1999, Omega common stock was trading in the range of $21
to $22 per share.
36.
However, in a press release dated April 13, 1999, Omega announced its first
quarter results, including a 14.3% increase in revenues. The announcement included defendant
Bailey's misleading assurance that the new Medicare funding system was not going to hurt Omega.
The press release stated:
Regarding the results, Essel W. Bailey, Jr.,
commented: "We had an excellent quarter with
improved diversity and strength in our investment
portfolio. Four new operators were added to the
portfolio during the first quarter, as well as new
investments with good coverages and at good rates.
Despite the controversy about the new Medicare
funding system, our operators continue to report
strong operating earnings at the facility level, with
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coverages increasin during the most recent quarter .
Additional revolving credit capacity of $50 million was
closed in March. Availability on our lines of credit
plus the anticipated proceeds of assets held for sale
will provide the capital needed to fund additional new
investments this year." [emphasis added]
37.
On April 20,1999, the Company issued another press release announcing that
it was maintaining its quarterly dividend of 700 per share. It stated:
Essel W. Bailey, Jr., President, commented: "The
declaration of dividends follows the recent
announcement of record Funds from Operations per
share, as well as records for invested assets and
revenues for the first quarter. Strong prope -level
performance continues to support confidence in our
portfolio and its stability ."
38.
As a result ofthese announcements, the price of Omega common stock, which
had closed at $21-3/8 on April 13, rose to a close of $28-11/16 on April 22 and continued to trade
at more than $26 per share throughout May 1999.
39.
Despite the fact that Omega's stock was trading in the high 20s in May 1999,
on May 12, 1999, Omega adopted a Stockholders Rights Agreement (commonly referred to as a
"Poison Pill"), declaring a dividend distribution of one preferred share purchase right for each share
of Omega common stock. The Poison Pill triggered only if an investor purchased more than 10%
of the shares of Omega. Exercise of preferred share rights would cause substantial dilution in the
holdings of any person or group that would attempt to acquire the Company on terms not approved
by Omega's Board of Directors.
40.
The issuance and timing ofthe Poison Pill occurred during a time that Omega
was aware or recklessly disregarded that many of its key clients were in significant financial distress,
a situation with presented Omega with the tangible risk of a hostile tender offer for the Company's
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shares.
Specifically, as demonstrated below, Omega was aware, but failed to disclose that its
principal clients were facing severe financial problems due, inter alia , to the changes in the Medicare
system, which in turn posed serious threats to Omega's ability to maintain its dividends, and,
accordingly, threatened the Company's stock price.
41.
On June 4, 1999, Moody's Investors Service placed under review for possible
downgrade the ratings of Omega's senior debt, citing the Company's exposure to financial
repercussions from the new Medicare repayment provisions on its clients, such as Sun, its largest
client.
42.
A June 30, 1999 article published on Dow Jones Business News , entitled
"Critics Say Sun Healthcare's Problems Go Beyond Medicare Charges ", authored by J.C . Conklin,
a staff reporter of the Wall Street Journal , (the "Conklin Article") demonstrated, however, that Sun
had problems which went beyond changes in the Medicare reimbursement system- - problems which
Omega knew of or recklessly disregarded.
43.
The Conklin Article noted that over the prior decade, Sun had embarked upon
an aggressive acquisition spree which left Sun with a heavy debt load. The Conklin Article quoted
Jean L. Swenson, an analyst at Deutsche Bank Alex Brown, as stating "[w]ith their balance sheet,
everything would have had to go perfect for them to succeed".
44.
According to the Conklin Article, during the 1990s , "[u]nder its risk taking
chairman and chief executive office, Andrew L. Turner", Sun "...gobbled up 389 nursing homes,
giving it an impressive debt load and the nickname Pac Man."
45.
The Conklin Article further noted that in the mid 1990's, Sun made a strategic
decision to move into high-margin services (such as speech or respiratory therapy), services which
were heavily dependent on Medicare reimbursements.
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46.
However, the Conklin Article noted, many of Sun' s competitors , anticipating
the Medicare changes, had the presence of mind to diversify by moving into lower-margin, but faster
growing businesses (such as assisted living facilities). Sun did not, and, accordingly, suffered financial
distress as a result . The Conklin Article quoted Bruce Broussard , a former Sun Chief financial officer
as noting "Sun gambled and lost. They didn't think the changes in Medicare would be as great as
they are ."
47.
The Conklin Article additionally noted that Sun's decisions had "peeved" its
investors, stating:
To make matters worse, Sun doesn't have a lot it can
sell to reduce debt. Most of its nursing homes are
already leveraged or leased from others. Because of
reimbursement changes, its once valuable ventilator
and therapy services divisions aren't worth much.
48.
Thus, the Conklin Article renders it plainly apparent that Omega was aware
or recklessly disregarded that Sun, as Omega's principal client, faced not only charges related to
Medicare reimbursement, but also had problems which were either tangential, or predominantly
unrelated to the changes in Medicare reimbursement, but which nevertheless posed serious risks to
Omega. The Conklin Article rendered it clear that, as ofthe end of June, Sun was firmly set on a path
for disaster.
49.
Nevertheless, as demonstrated below, Omega did not reveal to the market the
impact of Sun ' s financial problems on the Company , nor did it discuss the full scope of the problems
which Sun faced. Instead, Omega, in an Orwellian twist, attempted to portray Sun's misfortunes as
Omega's bounty.
50.
In anticipation of the market' s reaction , to, among other things, Omega's
exposure to clients such as Sun, Omega had previously commenced a campaign to prime and reassure
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the market that Omega could sustain the negative impact of its operator's financial troubles. A July
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1, 1999 article in Institutional Investor , authored by Howard Rudnitsky, entitled " Share the Pain",
exemplified the degree to which defendants convinced the market that Omega would be fine in the
long run, noting:
Another REIT, Omega Healthcare Investors ... finds itself in similar
straits. Because about 25 percent of its properties are leased to Sun,
Omega's shares have fallen nearly 15 percent this year. Still, investors
may be overreacting . Philip Martin, a REIT analyst at Everen
Securities in Chicago, points out that Omega has enough cash flow to
cover Sun's rent payments twice over . "These are pretty heathy
facilities," Martin says. "Even if rent coverage were to fall to 1.7
times and Sun were forced to file for Chapter 11, it could still
restructure around its strongest assets." But that would be a messy
process, Martin adds, "and Wall Street hates a mess."
51.
The July 1, 1999 Institutional Investor article did note that other analysts were
"less sanguine" regarding the impact of Medicare reimbursements upon REIT's such as Omega. The
article cited on analyst , Green Street Advisors' Greg Andrews, as noting:
In the future ... nursing home operators will experience increased cost
pressures and face intensified competition from assisted-living
facilities. As a group, these alternative operations have a relatively
upscale image, and in recent years they have attracted more and more
customers. As a result, occupancy rates at nursing homes have fallen,
from 93 percent five years ago to 90 percent last year, according to
the American Health Care Association. And as their landlords know
very well, every percentage point hurts .
52.
The concerns noted by Mr. Andrews began to make themselves known later
in July of 1999. In a July 14, 1999 report, Duff & Phelps Credit Rating Co.("DCR") downgraded
Omega's debt rating., DCR noted in pertinent part:
Our negative outlook reflects changes in Medicare
reimbursement rates that have placed pressure on
many public nursing homes operators. Omega's
largest operator, Sun Healthcare Group, has
experienced more significant liquidity issues ...
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Omega's financial profile remains satisfactory for the
current ratings , yet leverage has increased to 50% of
adjusted total capital (Including depreciation addback) as of March 31, 1999, from the 35 -45% range
historically. Reliance on bank debt has increased over
the last six months .
In January 1999, revised medicare reimbursement
rates were introduced nationwide, which has
negatively impacted the profitability of many nursing
home chains and resulted in more significant liquidity
concerns for Sun Healthcare Group, an operator that
leases approximately 26% ofOmega's facilities. While
Omega is one step removed from these issues in its
role as either property owner of first mortgage holder,
DCR believes the risk of property-level payment
DCR is also
default has increased somewhat.
concerned that, unless operator profitability levels
improve, current rental rates may come under pressure
as operators seek to lower their occupancy cost when
leases expire .
53.
As a result of such general concerns, the price of Omega common stock
drifted down to approximately $23 per share by mid-July 1999.
54.
However, in a Company press release dated July 19, 1999, announcing second
quarter results , defendant Bailey , instead of squarely addressing the concerns raised by DCR's July
14, 1999 downgrade, instead decided to again assure the investing public that the new Medicare
funding system was having no material impact upon Omega's financial position, as follows:
Regarding the results, Essel W. Bailey, Jr.,
commented: "We had an excellent quarter with
improved diversification stemming from the assisted
living assets we acquired. Skilled nursing facilities
now represent just under 90% of our total
investments. We are pleased with the very strong
performance of our existing investments. Based on
the financial data we have developed during the last
six months, our operators have shown a growing
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capacity to deal with the new Medicare PPS funding
system, and rent coverages dipped only slightly during
the recent quarter . Tenants and borrowers continue to
report solid earnings and cash flow at the facility level.
We have good capacity to deal with investment
opportunities in the near term and are optimistic about
the investment opportunities we see."
55.
Omega's comments in paragraph 54 above were false and misleading, because
Omega knew or recklessly disregarded that its clients, in fact had not developed a "growing capacity"
to deal with the new Medicare reimbursement system, but had instead come under severe financial
pressure that would ultimately lead to severe financial distress.
56.
As a result of these comments, which reflected Omega 's assurances that it's
the financial data Omega internally developed that demonstratively proved that Omega's clients were
not only tolerating the new Medicare funding system, but in fact had increased their ability to deal
with the changes. the price of Omega common stock stabilized at approximately $23 per share.
However, on August 3, 1999, Standard & Poors revised its "Outlook" on Omega from "stable" to
"negative", and on August 17, 2000, Moody's Investors Service, following its previously announced
review, reduced the ratings of Omega' s senior unsecured debt. Moody 's again cited financial stress
caused by the new Medicare payment plan, noting that "Omega's operator tenant base is highly
concentrated, with approximately half of the REIT's assets occupied by three tenants, which are
experiencing varying degrees of financial stress."
57.
In a press release on October 14, 1999, Omega announced that it had entered
into an agreement with Sun - "in anticipation of and in connection with Sun's filing today for
Chapter 11 reorganization " - to forbear from taking action against Sun for Sun' s default, in
exchange for the transfer of certain properties operated by Sun. Again reassuring the investing public
about Omega's financial position, defendant Bailey commented:
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The present operating environment is a challenge to all
operators and investors in the healthcare industry. To
illustrate the turmoil, two ofthe re-acquired properties
operated profitably with satisfactory coverages prior
to the implementation of PPS rates in January. Our
ability to quickly bring matters to closure with Sun will
benefit the company and free Omega executives to
concentrate on other opportunities and challenges,
avoiding time-consuming litigation.
58.
In a press release on October 19, 1999, defendant Stover gave further
assurance that the Sun problem had created an "opportunity" for Omega to stabilize its financial
position:
David A. Stover, chief financial officer, commented:
"Difficult capital markets continue to limit our access
to growth capital, and we are considering alternatives
to improve liquidity and strengthen our balance sheet.
The recovery of leased properties from Sun through
the rejection of leases provided an opportuni for a
careful look at our portfolio and the consideration of
other sales ; we also looked at the obligations coming
due in the next twelve months with a view to
addressing those issues. Moreover, as the business
climate for healthcare improves, we want to have the
liquidity necessary to provide financing and other
capital to our customers. We think prudent pruning of
assets with limited upside potential from time to time
is an appropriate way to manage investments and, in
this period of limited access to capital markets, a
sound way to reposition our balance sheet."
59.
Omega's statements set forth in paragraph 58 above were false and misleading,
because they failed to reveal the scope and impact of its client's problems that had forced Sun into
bankruptcy, several of which went beyond the changes in the Medicare reimbursement system, and
the impact ofthose problems on Omega's financial picture. Omega's statements also failed to address
that Omega was aware, based on its own internal analysis, that the changes in the Medicare
reimbursement system was seriously affecting clients like Sun's ability to deal with the changes
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60.
Analysts' reactions to Omega's assurances reflected the confidence Omega was
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able to convey to the investing public regarding the Company's future stability. An October 20, 1999
report issued by SG Cowen Securities Corp. ("SG Cowen") is one such example . SG Cowen's
report noted:
Omega recently announced a restructuring agreement
with Sun that reduces the uncertainty relating to
[Omega's] future cash flow stream with a reduction of
only $0.03 -.06 [Omega's] annual FFO per share.
Omega still faces some uncertainty relating to tenants
Integrated health and Mariner Post-Acute Networks,
which may file for bankruptcy. Given the generally
good performance ofthe facilities that omega leases to
these two operators and [Omega's] strong
underwriting provisions, we do not expect any
material losses related to these facilities.
[Omega ' s] dividend yield is a generous 13.7%,
reflecting the stock ' s expressed valuation due to the
uncertainty related to the struggling nursing home
operators . With a conservative payout ratio of 81 %
and $55M available on the company's revolver,
[Omega ' s] dividend is well protected .
61.
On November 12, 1999, the Company announced that Moody's had again
lowered Omega' s debt rating . However, in making the announcement, the Company assured the
investing public that Moody's had acted erroneously, as follows:
The Company has advised Moody's it believes
Moody's press release concerning the Company's
portfolio and debt maturities does not accurately
reflect or acknowledge information recently provided
to Moody's.
David A. Stover, chief financial officer, stated: "We
were baffled by Moody's action. They shared their
proposed press release with us as the market closed on
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November 10. We offered to meet with them but they
declined."
Stover stated: "We met with Standard and Poors,
Duff and Phelps Credit Rating Company and Moody's
in mid-October to discuss the Company's agreement
with Sun, our accomplishments related to mortgage
repayments and asset dispositions, and our approach
to repayment of term debt due in 2000. We are
disappointed that Moody's has not acknowledged any
of our significant accomplishments since its initial
action in August. The prompt resolution of Sun's
leases and progress on mortgage payoffs/asset sales
are positive developments since August. We have
good liquidity through our lines of credit and a well
conceived plan dealing with debt maturities."
These and the other foregoing comments kept the price of Omega's stock significantly inflated,
despite market doubts that the Company was in a position sound enough to maintain its dividend
level.
62.
On December 1,1999-two weeks after plaintiff LeBorys' purchase of Omega
common stock in reliance upon the integrity of its market price-defendant Kellman, the Company's
Chief Operating Officer, sold 18,157 shares of Omega common stock (at a price of $16.31 per share),
thus dumping approximately 55% of his Omega common holdings at the time.
63.
On December 14, 1999, Raymond James & Associates , Inc. ("Raymond
James") issued a report, in which Raymond James maintained its "Neutral" rating on Omega's stock.
The Raymond James report raised several issues with the fundamentals ofOmega's business - - issues
which Omega ultimately failed to adequately address and advise the market of.
64.
The Raymond James report noted that the 1999 Balanced Budgeting Act
would be likely to provide some overdue relief to the nursing home sector late in the first quarter of
2000. However, Raymond James tempered its optimism in noting that "while many operators appear
to have stopped the downward spiral in operating performance, the fear is that several have already
19
crossed the abyss, leaving bankruptcy as their only viable option." Raymond James further noted that
"[h]erein lies the area of concern for [Omega]", because, despite the arrangement Omega had
reached with Sun, the Company was still exposed to its other clients, namely Integrated, Mariner, and
Advocat., all of whom were in shaky financial straits.
65.
Raymond James further noted that recent developments at the above listed
companies "has only heightened the Street's concerns regarding the long term care provider industry,
and [Omega] in particular." Raymond James further noted:
Management indicated that each provider's lease
However, absent prepayments were current.
bankruptcy property agreements similar to the Sun
deal, [Omega] may be forced to take back certain
facilities followed by the decision to release or sell the
properties. In addition, [Omega] has approximately
$130 million of mortgage exposure, or roughly $13
million in annual cash flow, with [Inte rgated] and
[Mariner]. Depending on the magnitude and timing of
such events, coupled with the company's liquidity
situation and planned asset sales, [Omega's] cash flow
could be negatively impacted .
66.
Raymond James concluded its report by noting in pertinent part:
The situation surrounding [Omega] continues to be
very fluid, as we believe management is in negotiations
with various operators to shore up lease agreements
prior to potential bankruptcy filings . During our recent
dialogue with management, they reiterated their
comfort with the current dividend payout , consistent
with the views they expressed following Q3 :99 results.
In management's opinion, the only change since then
has been Advocat's indication that they may need to
restate their financial results, with the implications to
[Ome al being unknown . On the other hand, with
[Omega] trading at a current yield north of 20%, the
market appears skeptical of the company's ability to
maintain its current dividend.
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0
67.
The "management opinion" as set forth in Raymond James' report in paragraph
66 above was, in fact, false and misleading, because, as noted below, Omega was well aware that
Advocat's financial problems would have a deleterious impact upon Omega.
68.
On January 13, 2000, SG Cowen issued a report which noted that "[w]ith a
likely downward revision in the earnings outlook, there is an increased possibility that [Omega] may
reduce its common stock dividend in the coming months." SG Cowen lowered its investment rating
from "Buy" to "Neutral" noting that Omega faced concerns regarding its tenants and bank
refinancing. Nevertheless, despite SG Cowen' s hesitations , SG Cowen noted that "[a] s [Omega] and
its tenants report Q4 earnings, we will update our FFO estimates and should gain a clearer view of
the company's prospects over the coming year." Thus, SG Cowen expected Omega's future
guidance to be forthright and honest.
69.
On January 18, 2000 Mariner, one of Omega ' s principal clients , filed a
bankruptcy petition. Mariner had 16 properties secured by a $64 million mortgage from Omega.
70.
In a press release on January 21, 2000, despite the Company's prior assurance,
Omega announced that for the first quarter of 2000, it was reducing its quarterly dividend to 500 per
share. The company also announced a one-time charge of $10.5 million resulting from the sale of
assets as well as an asset impairment reserve of $19.5 million. Nevertheless, instead of addressing
the concerns that had been raised in reports such as Raymond James, defendants Bailey and Stover
instead once again sought to assure the investing public that the new dividend level would be
maintained:
Essel W. Bailey, Jr., chief executive officer, stated:
"We remain committed to the elderly and to providing
capital support for the elderly and will continue
throughout 2000 to observe a prudent dividend level,
consistent with our customers' ability to sustain their
operations and make their payments to us. Our
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historical policy has been to distribute approximately
80% of FFO in dividends and this will continue as a
policy of the company. Given the uncertainty of lease
and mortgage revenues in 2000, dividends will be set
by directors quarterly, based upon cash flow and FFO
in the prior quarter, but we presently expect that we
will be able to maintain dividends at least at the level
of the first quarter ." [emphasis added]
David A. Stover, chief financial officer, commented:
"Difficult capital markets reflecting the uncertainty of
Federal actions have limited our access to capital, but
we have in place a solid plan to improve liquidity
through limited assets sales and to strengthen our
balance sheet. We have initiated the extension of our
banking agreements now due to expire in September,
and our banking group has been supportive."
71.
Defendants' statements in paragraph 70 above were false and misleading
because, in fact, defendants knew or recklessly disregarded that Omega's clients' financial situations
would place Omega in the position where it could not maintain dividends at the level they had been
in during the first quarter.
72.
Analysts reactions to Omega's January 21, 2000 press release revealed that
the market had serious reservations concerning Omega ' s future financial prospects . A January 24,
2000 Legg Mason Wood Walker, Inc. report noted in pertinent part:
Generally, we view this management team positively
but the company's exposure to a number of the large,
financially troubled public nursing home operators
creates problems for the company that will likely take
most of 2000 to work out. In addition to the
companies noted above [Omega] has exposure to
other troubled skilled nursing operators including
Advocat and RainTree, which account for 11% and
8% of the portfolio, respectively.
73.
On January 25, 2000 in a Form 10-K filing with the SEC for the period ending
December 31, 1999 (The "1999 10-K"), signed by defendants Bailey and Stover, the Company
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further stated that it received a waiver for non-compliance with a tangible net worth covenant under
a $200 million unsecured revolving credit facility led by FleetBoston Financial . As of December 31,
1999, Omega had borrowings of roughly $166.6 million under its $250 million revolving credit
facilities.
74.
Omega further announced in the 1999 10-K that it might be required to
liquidate investments in properties at times that would not permit Omega to obtain the maximum
return on the Company 's investments.
75.
However, the 199910-K also contained yet another reassurance by defendants
that Omega's dividend level would be maintained at its historic rates, stating in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations":
The Company distributed a large portion of the cash
available from operations. The Company's historical
policy has been to make distributions on the common
stock of approximately 80% of FFO. Cash dividends
paid totaled $2.80 per share for 1999, compared with
$2.68 per share for the year ended December 31,
1998. The dividend payout ration, that is the ratio of
per share amounts for dividends pais to the diluted per
share amounts for approximately 84.3% for 1999 and
1998. The Company believes that cash provided from
quarterly operating activities at current levels will
continue to be sufficient to fund normal working
capital requirements and common stock dividends .
76.
As a result ofthese disclosures , the price of Omega common stock , which had
gradually declined to the range of $10-12 per share by January 24, declined to close at $5-13/16 per
share on February 9, 2000, losing approximately 50% of its value in a two-week period.
77.
In addition , defendants' statement in the 1999 10-K concerning Omega's
ability to fund Omega's common stock dividends was materially false and misleading, because Omega
was aware or recklessly disregarded that the Company's largest clients had been financially harmed
23
0
0
by, inter alia, the changes in the Medicare reimbursement system, tying up millions of dollars of
0
payments due and owing to Omega under the aegis of the federal bankruptcy courts, and thereby
seriously threatening Omega's ability to pay common stock dividends in line with Omega's historic
levels.
78.
Although the 199910-K included a boilerplate " safe harbor statement" under
the Private Securities Litigation Reform Act of 1995, warning, inter alia, that the financial strength
of Omega's clients might be a factor causing actual results to materially differ from those projected
by Omega, the "safe harbor statement" failed to contain any meaningful, significant discussion ofthe
specific problems which Omega's clients were facing, and which Omega either knew of, or recklessly
disregarded.
79.
On February 2, 2000 , Integrated , another one of Omega's principal clients,
filed a bankruptcy petition. Integrated owed Omega nearly $55 million in payments, owing 11
properties subject to mortgages Omega had invested in. Interest payable by Integrated amounted to
roughly $5.5 million annually. Omega also held $1.25 million in letters of credit from Integrated.
Adding to Omega's woes, Lyric Healthcare LLC, a subsidiary of Integrated, leased two properties
from Omega.
80.
The impact of the multiple bankruptcies had a palpable impact on Omega's
liquidity, insofar as it resulted in nearly $110 million ofthe Company' s loans entangled in bankruptcy
court proceedings.
81.
Because of the Poison Pill the Company issued in May 1999, the ability of
Omega shareholders to be "bailed out" by any third party funds was severely compromised, as the
exercise rights could nearly quadruple the cost to an outside party seeking to buy the Company's
shares and displace management.
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0
82.
Moreover, because the properties Omega leased were special use properties
0
that could not be easily converted to other uses, the value of Omega's real estate faced a threat of
significant reduction in the value of their assets. Thus, Omega's awareness of its clients inability to
make their respective facilities operate properly would have meant that Omega knew or recklessly
disregarded that the bankruptcy filings yielded Omega's assets of limited value.
83.
On March 14, 2000, the Company issued a press release announcing that it had
taken possession of 30 properties operated by RainTree, which had filed for bankruptcy protection
on February 29, 2000. The removal of this uncertainty over the solvency of one of the Company's
primary clients resulted in an increase of the Company's stock price from approximately $6 to $9 per
share, but the price fell again to approximately $7 per share at the end of March when two additional
clients , Integrated and Advocat, suspended their lease payments.
84.
Omega's method of addressing RainTree's problems illuminated
the
Company's problems. At the behest of Omega, Vencor, a national chain based out of Louisville,
Kentucky, itself in bankruptcy, stepped in to manage most of the RainTree facilities.
85.
Vencor was a "case study" in the impact the Medicare reimbursement changes
could have upon REITs. In April 1998, Vencor spun off Ventas , a health care REIT. As of July 1,
1999, approximately 95 percent of Ventas' rents had come from Vencor, its former parent. In the
first quarter of 1999, Vencor missed both an interest payment and a rent payment and reported a
$12.4 million operating loss. In order to preserve a $70 million cash position, Ventas eliminated its
quarterly dividend. As noted in the July 1, 2000 Institutional Investor article quoted above, the culprit
was Medicare reimbursement cuts.
86.
Thereafter, Ventas attempted to negotiate a commercial restructuring of
Vencor's balance sheet. Ventas offered what it termed "meaningful rental concessions to help restore
25
Vencor's financial health". Investors, however, were not convinced. Ventas shares plunged by over
50 percent during the course of 1999, and Vencor ultimately filed a bankruptcy petition.
87.
Defendant Kellman, responding to inquiries as to the wisdom of employing
Vencor to manage the RainTree sites stated that Vencor's "bankruptcy has more to do with their
capital structure and government issues than it does with their operational capabilities."
88.
Keller's statement was misleading because it belied the fact that, because
Omega was familiar was Vencor's background and history in the health care REIT industry, Omega
would have undoubtedly noted that Vencor 's experience with Ventas presented startling similarities
to Omega's then-current situation.
89.
Advocat's collapse would have been even less of a surprise to the defendants.
In an April 1, 2000 article in The Tennessean , authored by Rose French entitled "Advocat Seeks Help
From Woes: Nursing Home Operator Pursues Restructured Deals" noted:
"It's really not a surprise," said analyst James Baker, managing
director for SunTrust Equitable Securities. "Long-term care is
definitely in troubled times. Advocat has had some difficulties for
some time . Plenty of other companies like them are in the same
boat."
90.
SG Cowen issued another report on April 4, 2000, in which SG Cowen
maintained its "Neutral" rating on Omega stock. SG Cowen pointed out that Advocat and Integrated
had suspended their lease payments to Omega, and that the Company was in negotiations with both
tenants. SG Cowen also noted that "[i]n our conversation today, management did not provide much
insight on [Omega's] fundamentals since the company is in the quiet period following the close of Q I
on Friday."
26
•
91.
In a press release on April 25, 2000, the Company announced that it was
delaying the second quarter announcement of its dividend policy pending discussions with its lenders
and other capital sources.
92.
Finally, in a press release on May 11, 2000, the Company announced that it
had entered into an agreement with Explorer Holdings , L.P., a private equity firm, providing a $200
million capital infusion , which Omega needs to stave off insolvency . The Company further announced
that-subject to the closing of this transaction-the dividend would be reduced to 250 per quarter,
or $1.00 per year. However, no dividend is being paid in the second quarter.
93.
As a result of these announcements of the delay in announcing the dividend
and the prospective establishment ofthe new dividend policy, the price of Omega common stock fell
from the range of $6-7 per share in mid-April to the late-May range of $4-5 per share.
94.
Defendants ' foregoing public statements , beginning on April 13, 1999,
materially misled the investing public about the Company's financial position and its ability to maintain
its dividends, and failed to disclose material facts necessary to accurately assess the Company's
financial position and its ability to maintain its dividends in light ofthe disclosures that defendants did
make, in at least the following respects:
i)
As admitted by defendant Bailey in the July 19, 1999 press release, the
Company had been engaged in a review of their clients' non-public
nte alia, the effects of the new
financial information concerning, jr
Medicare funding system since January 1999. Contrary to defendants'
public statements, this data would have had to reveal a significant and
worsening negative effect upon the ability of the Company's major
clients to make their payments to Omega.
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0
ii)
After the first quarter of 1999 and until the first quarter of 2000,
defendants failed to disclose the likelihood that the dividend would be
reduced;
iii)
Defendants failed to disclose their clients' financial difficulties until
they were already in default or bankruptcy; and
iv)
Defendants failed to disclose the Company's own liquidity crisis and
need for a capital infusion to stave off bankruptcy.
95.
The market for Omega's common stock was open, well-developed and efficient
at all relevant times. As a result of these materially false and misleading statements and failures to
disclose, Omega's common stock traded at artificially inflated prices during the relevant period. The
artificial inflation continued until the time that the Company canceled its dividend for the second
quarter of 2000 and announced its deal with Explorer Holdings, and this information was
communicated to, and/or digested by, the securities markets. Plaintiffs and others purchased or
otherwise acquired Omega securities during the relevant period relying upon the integrity of the
market price of Omega's securities and market information relating to Omega, and have been
damaged thereby.
96.
At all relevant times , the material misrepresentations and omissions
particularized in this Complaint directly or proximately caused or were a substantial contributing
cause of the damages sustained by plaintiff and other purchasers of Omega common stock. As
described herein, during the relevant period, defendants made or caused to be made a series of
materially false or misleading statements about Omega's business, prospects and operations. These
material misstatements and omissions had the cause and effect of creating in the market an
unrealistically positive assessment of Omega and its business, prospects and operations, thus causing
28
•
•
the Company' s securities to be overvalued and artificially inflated at all relevant times. Defendants'
materially false and misleading statements during the relevant period resulted in plaintiffs (and others)
purchasing the Company's securities at artificially inflated prices, thus causing the damages
complained of herein.
SCIENTER ALLEGATIONS
97.
As alleged herein, defendants acted with scienter in that defendants knew that
the public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of
information reflecting the true facts regarding Omega, their control over, and/or receipt and/or
modification of Omega's allegedly materially misleading misstatements and/or their associations with
the Company which made them privy to confidential proprietary information concerning Omega,
participated in the fraudulent scheme alleged herein.
98.
Defendants actions in knowingly issuing materially misleading statements, or
recklessly disregarding the falsity and misleading nature of their statements, was undertaken for the
following reasons:
a.
Defendants' stated desire to improve Omega's debt ratings in the face
of continual downgrading from debt ratings agencies as described
above.
b.
Defendants wanted to sell their stock in the open market at inflated
prices, a motive specifically evidenced by defendant Kellman's sale of
29
his Omega common stock at inflated prices, shortly before the release
of information causing its further decline.
c.
Defendants wanted to avoid defaulting on Omega's bank loans. As
noted above, as of January 25, 2000, the Company failed to meet the
tangible net worth covenant required under its $200 million revolving
unsecured credit facility led by FleetBoston Financial. The risk of a
default by Omega with respect to its credit facilities presented
defendants with the risk of commencing a bankruptcy proceeding or
other form of relief on behalf of Omega, the impact of which
defendants were quite familiar with in the face of the multiple
bankruptcy filings by Omega' s clients . Correspondingly, a bankruptcy
filing by Omega threatened the security of defendants' personal
finances.
d.
Defendants sought to avoid the ability of a third party to assume
control over Omega, which would thereby threaten defendants
salaries, bonuses, and other perquisites, accordingly defendants
instituted a shareholder rights anti-takeover plan on May 12, 1999,
at a time when Omega's stock was still trading in the upper 20s.
Thus, defendants actions indicate that they were aware that price of
Omega stock was likely to fall and make the Company a potential
takeover target.
e.
Similarly defendants wished to continue to personally profit from the
future increase in the Company's common stock price to obtain both
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cash and stock incentive awards. On March 31, 2000, Omega filed a
Schedule 14A Information Statement (the "Omega Proxy Statement").
As set forth in the Omega Proxy Statement, Omega executive
compensation consists ofbase salary , annual incentives (ire. bonuses),
and long term incentives, including shares of performance based
restricted stock and options to purchase Omega stock. As the Omega
Proxy Statement states:
[C]ompensation to the Company's executive
officers should achieve the following
objectives:
1) Assist the Company in attracting and
retaining talented and well-qualified
executives.
2) Reward performance and initiative.
3) Be competitive with other healthcare real
estate investment trusts.
4) Be significantly related to accomplishments
and the Company's short-term and long-term
successes, particularly measured in terms of
growth in Funds from Operations.
5) Encourage executives to achieve meaningful
levels of ownership of the Company's stock .
The Company's compensation practices
embody the principle that annual bonuses
should be based primarily on achieving
Company objectives that enhance long-term
shareholder value, and that meaningful stock
ownership by management, including
participation in various benefit plans providing
for stock options, restricted stock and
retirement , is desirable in aligning shareholder
and management interests.
31
•
The Committee evaluates executive officer
salary decisions in connection with an annual
review and input from the Chief Executive
Officer .
In determining the compensation of the
Company's Chief Executive Officer, as well as
the other Executive Officers, the Committee
takes into account various qualitative and
quantitative indicators of corporate and
individual performance in determining the level
and the composition of compensation. While
the Committee considers such performance
measures as growth in assets, market
capitalization, dividends, earnings and funds
from operations, the Committee does not
apply any specific quantitative formula in
making compensation decisions. The
Committee also values the importance of
achievements that may be difficult to quantify
and recognizes such qualitative factors .
The compensation for Essel W. Bailey, Jr., the
Company's Chief Executive Officer, was
established at $440,000 in January 1999, and
a cash bonus for 1999 performance of $66,000
was awarded in January 2000. In addition, in
January 2000 Mr. Bailey was granted 8,516
shares ofrestricted stock under the Company's
Amended and Restated Stock Option and
Restricted Stock Plan. The award vests onehalf in July 2000 and one-half in January 2001.
Mr. Bailey's base salary and bonus were
established in light of his duties and the scope
of his responsibilities in the context of the
policies and guidelines enumerated above. In
the Committee's evaluation of total
compensation for Mr. Bailey, it gives
appropriate weight to his leadership in the
growth of the Company's assets, in obtaining
that growth, and in
financing for
32
accomplishing the Company's short-term and
long-term objectives .
99.
Defendants' scienter is specifically evidenced by defendant Kellman's sale of
his Omega common stock at inflated prices, shortly before the release of information causing its
further decline.
100.
Defendants scienter is further evidenced by the fact that defendants admitted
in July 1999 they had conducted an internal analysis of the effect of the new Medicare payment plan
on their clients' financial position beginning in January 1999. Although the specific results of Omega's
internal analysis were never disclosed to the investing public, Omega clearly conveyed to the market
that it had, in fact, intimate familiarity with its clients' then-current ability to adapt to th new Medicare
reimbursement program. However, Omega's major clients, including Sun, Integrated, Mariner and
RainTree, subsequently filed bankruptcy petitions under the United States Bankruptcy Code (1 I
U.S.C. § 101 et al.) (the "Bankruptcy Code"). Under § 521 of the Bankruptcy Code, upon filing their
petitions for relief, Omega's clients were required to file schedules of assets and liabilities, schedules
of executory contracts and leases, a statement of affairs which contained the debtors financial history
and prior transactions, and schedules relating to income and expenditures.
101.
The disparity between Omega 's July 19, 1999 statement that "[b]ased on the
financial data we have developed during the last six months, our operators have shown a growing
capacity to deal with the new Medicare PPS funding system . . ." and the timing of the resultant
bankruptcies of Omega's clients provides strong circumstantial evidence that defendants knew or
recklessly disregarded that its statements to the market concerning its client's capacities were false
and misleading. Specifically, on October 14, 1999 just slightly under two months after the July 19,
1999 statement, Omega announced that it had entered into an agreement with Sun to forbear from
taking action against Sun in exchange for the transfer ofcertain properties. Accordingly, a reasonable
33
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•
inference can be drawn that well prior to the October 14, 1999 announcement, in the course of its
discussions with Sun, Omega's largest client, Omega was well aware that Sun, in fact, had not'
developed a growing capacity to deal with the changes the new Medicare reimbursement system had
wrought.
APPLICABILITY OF PRESUMPTION OF
RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
102.
At all relevant times, the market for Omega's securities was an efficient market
for the following reasons, among others:
i)
Omega's stock met the requirements for listing, and was listed and
actively traded on the NYSE, a highly efficient market;
ii)
as a regulated issuer, Omega filed periodic public reports with the
SEC and the NYSE;
iii)
Omega regularly communicated with public investors via established
market communication mechanisms, including through regular
disseminations of press releases on the national circuits of major
newswire services and through other wide-ranging public disclosures,
such as communications with the financial press and other similar
reporting services; and
iv)
Omega was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales
force and certain customers of their respective brokerage firms. Each
of these reports was publicly available and entered the public
marketplace.
34
103.
As a result of the foregoing, the market for Omega' s securities promptly
digested current information regarding Omega from all publicly available sources and reflected such
information in Omega's stock price. Under these circumstances, all purchasers of Omega's securities
during the relevant period suffered similar injury through their purchase of Omega's securities at
artificially inflated prices and a presumption of reliance applies.
104.
In addition, plaintiffs individually relied on some or all ofdefendants' materially
misleading statements alleged herein.
NO SAFE HARBOR
105.
The statutory safe harbor provided for forward-looking statements under
certain circumstances does not apply to any ofthe allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking statements"
when made. To the extent there were any forward-looking statements, there were no meaningful
cautionary statements identifying important factors that could cause actual results to differ materially
from those in the purportedly forward-looking statements. Alternatively, to the extent that the
statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are
liable for those false forward-looking statements because at the time each of those forward-looking
statements was made, the particular speaker knew that the particular forward-looking statement was
false, and/or the forward-looking statement was authorized and/or approved by an executive officer
of Omega who knew that those statements were false when made.
VIOLATIONS OF SEC REPORTING RULES
106.
During the Class Period, defendants materially misled the investing public,
thereby inflating the price of the Company' s securities , by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make defendants' statements, as set
35
•
•
forth herein, not false and misleading. Said statements and omissions were materially false and
misleading in that they failed to disclose material adverse information and misrepresented the truth
about the Company, its financial performance, accounting, reporting, and financial condition in
violation of the federal securities laws.
107.
SEC Rule 12b-20 requires that periodic reports contain such further
information as is necessary to make the required statements, in light ofthe circumstances under which
they are made, not misleading.
108.
In addition, Item 303 of Regulation S-K requires that the Management
Discussion and Analysis Section ("MD&A") must include, among other things, a discussion of any
material changes in the registrant's results of operations with respect to the most recent fiscal
year-to-date period for which an income statement is provided. Instructions to Item 303 require that
this discussion identify any significant elements of the registrant's income or loss from continuing
operations that do not arise from or are not necessarily representative of the registrant's ongoing
business. Item 303(a)(2)(ii) to Regulation S-K requires the following discussion in the MD&A of a
company's publicly filed reports with the SEC:
Describe any known trends or uncertainties that have
had or that the registrant reasonably expects will have
a material favorable or unfavorable impact on net sales
or revenues or income from continuing operations. If
the registrant knows of events that will cause a
material change in the relationship between costs and
revenues (such as known future increases in costs of
labor or materials or price increases or inventory
adjustments), the change in relationship shall be
disclosed.
Paragraph 3 of the Instructions to Item 303 states in relevant part:
The discussion and analysis shall focus specifically on
material events
and uncertainties known to
management that would cause reported financial
36
information not to be necessarily indicative of future
operating results or of future financial condition. This
would include descriptions and amounts of (A)
matters that would have an impact on future
operations and have not had an impact in the past ...
109.
During the Class Period, defendants violated SEC disclosure rules. Defendants
failed to disclose the existence ofknown trends, events or uncertainties that they reasonably expected
would have a material , unfavorable impact on net revenues or income or that were reasonably likely
to result in the Company's liquidity decreasing in a material way, in violation of Item 303 of
Regulation S-K under the federal securities laws (17 C.F.R. § 229.303), and that failure to disclose
the information rendered the statements that were made during the Class Period materially false and
misleading.
110.
Defendants were required to disclose, in the Company's SEC filings, the
existence of the material facts described herein. The Company failed to make such disclosures.
Defendants knew, or were reckless in not knowing, the facts which indicated that all of the
Company' s press releases , public statements, and filings with the SEC, which were disseminated to
the investing public during the Class Period, were materially false and misleading for the reasons set
forth herein. Had the true position of the Company and its tenants in the wake of the Medicare
reimbursement changes been disclosed during the Class period, the Company' s common stock would
have traded at prices well below that which it did.
FIRST CLAIM
Violation Of Section 10(b) Of The Exchange Act Against And
Rule 10b-5 Promulgated Thereunder Against All Defendants
111.
Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.
37
112.
During the period beginning on April 13, 1999, Omega and the Individual
Defendants, and each of them, carried out a plan, scheme and course of conduct which was intended
to and, throughout the period beginning April 13, 1999, did: (i) deceive the investing public, including
plaintiffs, as alleged herein; (ii) artificially inflate and maintain the market price of Omega's securities;
and (iii) cause plaintiffs and other members of the investing public to purchase Omega's securities at
artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct,
defendants, and each of them, took the actions set forth herein.
113.
Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course ofbusiness which operated
as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain
artificially high market prices for Omega's securities in violation of Section 10(b) ofthe Exchange Act
and Rule I Ob-5. All defendants are sued either as primary participants in the wrongful and illegal
conduct charged herein or as controlling persons as alleged below
114.
In addition to the duties of full disclosure imposed on defendants as a result
of their making of affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, defendants had a duty to promptly disseminate truthful
information that would be material to investors in compliance with the integrated disclosure
provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections 210.01 et seq.) and
Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations, including accurate
and truthful information with respect to the Company's operations, financial condition and earnings
so that the market price of the Company's securities would be based on truthful, complete and
accurate information.
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115.
Omega and the Individual Defendants, individually and in concert, directly and
indirectly, by the use, means or instrumentalities of interstate commerce and/or ofthe mails, engaged'
and participated in a continuous course of conduct to conceal adverse material information about the
business, operations and future prospects of Omega as specified herein.
116.
These defendants employed devices, schemes and artifices to defraud, while
in possession ofmaterial adverse non-public information and engaged in acts, practices, and a course
of conduct as alleged herein in an effort to assure investors of Omega's value and performance and
continued substantial growth, which included the making of, or the participation in the making of,
untrue statements of material facts and omitting to state material facts necessary in order to make the
statements made about Omega and its business operations and future prospects in the light of the
circumstances under which they were made, not misleading, as set forth more particularly herein, and
engaged in transactions, practices and a course of business which operated as a fraud and deceit upon
the purchasers of Omega's securities during the relevant period.
117.
Each of the Individual Defendants' primary liability, and controlling person
liability, arises from the following facts: (i) the Individual Defendants were high-level executives
and/or directors at the Company during the relevant period and members of the Company's
management team or had control thereof, (ii) each ofthese defendants , by virtue ofhis responsibilities
and activities as a senior officer and/or director of the Company was privy to and participated in the
creation , development and reporting of the Company 's internal budgets, plans , projections and/or
reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the
other defendants and was advised of and had access to other members of the Company' s management
team , internal reports and other data and information about the Company 's finances , operations, and
sales at all relevant times ; and (iv) each of these defendants was aware of the Company's
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0
0
dissemination of information to the investing public which they knew or recklessly disregarded was
materially false and misleading.
118.
The defendants had actual knowledge ofthe misrepresentations and omissions
of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. Such defendants'
material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose
and effect of concealing Omega' s operating condition and future business prospects from the investing
public and supporting the artificially inflated price of its securities. As demonstrated by defendants'
overstatements and misstatements of the Company's business, operations and earnings throughout
the relevant period, defendants, if they did not have actual knowledge of the misrepresentations and
omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from
taking those steps necessary to discover whether those statements were false or misleading.
119.
As a result of the dissemination of the materially false and misleading
information and failure to disclose material facts, as set forth above, the market price of Omega's
securities was artificially inflated during the relevant period . In ignorance of the fact that market
prices of Omega's publicly-traded securities were artificially inflated, and relying directly or indirectly
on the false and misleading statements made by defendants, or upon the integrity of the market in
which the securities trade, and/or on the absence of material adverse information that was known to
or recklessly disregarded by defendants but not disclosed in public statements by defendants during
the relevant period, plaintiffs and other investors acquired Omega securities during the relevant period
at artificially high prices and were damaged thereby.
120.
At the time of said misrepresentations and omissions, plaintiffs and other
investors were ignorant of their falsity, and believed them to be true.
40
Had plaintiffs and the
0
0
marketplace known ofthe true financial condition and business prospects of Omega, which were not
disclosed by defendants, plaintiffs and other investors would not have purchased or otherwise
acquired their Omega securities, or, if they had acquired such securities during the relevant period,
they would not have done so at the artificially inflated prices which they paid.
121.
By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule I Ob-5 promulgated thereunder.
122.
As a direct and proximate result of defendants' wrongful conduct, plaintiffs
and other investors suffered damages in connection with their respective purchases and sales of the
Company' s securities during the relevant period.
SECOND CLAIM
Violation Of Section 20(a) Of The Exchange Act
Against The Individual Defendants
123.
Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.
124.
The Individual Defendants acted as controlling persons of Omega within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, and their ownership and contractual rights, participation in and/or awareness of the
Company' s operations and/or intimate knowledge of the false statements filed by the Company with
the SEC and disseminated to the investing public, the Individual Defendants had the power to
influence and control and did influence and control, directly or indirectly, the decision-making of the
Company, including the content and dissemination ofthe various statements which plaintiff contends
are false and misleading . The Individual Defendants were provided with or had unlimited access to
copies of the Company's reports, press releases, public filings and other statements alleged by
41
plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability
to prevent the issuance of the statements or cause the statements to be corrected.
125.
In particular, each ofthese defendants had direct and supervisory involvement
in the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged herein,
and exercised the same.
126.
As set forth above, Omega and the Individual Defendants each violated Section
10(b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint. By virtue of their
positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) ofthe
Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other
investors suffered damages in connection with their purchases ofthe Company's securities during the
relevant period.
WHEREFORE, plaintiffs pray for relief and judgment , as follows:
a.
awarding compensatory damages in favor of plaintiffs against all
defendants, jointly and severally, for all damages sustained as a result
of defendants' wrongdoing , in an amount to be proven at trial,
including interest thereon;
b.
awarding plaintiffs their reasonable costs and expenses incurred in this
action, including counsel fees and expert fees; and
c.
such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
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s
Dated: New York, New York
January 4 , 2001
WECHSLER HARWOOD HALEBIAN
& FEFFER LLP
By:
Robert I. Harwood (RH-3286)
Matthew M. Houston (MH-2218)
Joshua D. Glatter (JG-01 84)
488 Madison Avenue
New York, New York 10022
Telephone: (212) 935-7400
Facsimile: (212) 753-3630
Lead Counsel for Plaintiffs
WOLF HALDENSTEIN ADLER FREEMAN
& HERZ LLP
Lawrence P. Kolker (LK6432)
Robert Abrams (RA7559)
270 Madison Avenue
New York, NY 10016
(212) 545-4600
LAW OFFICES OF CHARLES J. PIVEN
Charles J. Piven, Esq.
401 East Pratt Street, Suite 2525
Baltimore, MD 21202
(410) 332-0030
Counsel for Plaintiffs
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CERTIFICATE OF SERVICE
I, Cary Savitz, hereby certify that I am not a party to the action, am over the age of
eighteen years, am employed by the law firm of Wechsler Harwood Halebian & Feffer LLP, and that
on January 4,20011 served the foregoing PLAINTIFFS' FIRST AMENDED CONSOLIDATED
CLASS ACTION COMPLAINT by causing a true and correct copy of the same to be delivered
by messenger to:
Scott D. Musoff, Esq.
SKADDEN ARPS SLATE
MEAGHER & FLOM LLP
4 Times Square
New York, NY 10036
Cary Savitz