larry elam, et al. v. centene corporation, et al. 06-cv-1142...
TRANSCRIPT
Case 4:06-cv-01 142-CDP Document 24 Filed 01/17/2007 Page 1 of
UNITED STATES DISTRICT COURTEASTERN DISTRICT OF MISSOURI
Eastern Division
LARRY ELAM and WAYNE STOLTE,Individually and on Behalf of All OthersSimilarly Situated,
Plaintiff,CASE NUMBER 4: 06 CV 01142 CDP
vs.JURY TRIAL DEMANDED
MICHAEL NEIDORFF, J. PER BRODINKAREY D. WITTY, AND CENTENECORPORATION,
Defendants.
CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT
Lead Plaintiff Wayne Stolte and plaintiff Larry Elam, by and through their attorneys,
allege the following upon information and belief, except as to those allegations concerning
Plaintiffs, which are alleged upon personal knowledge. Plaintiffs' information and belief are
based upon, among other things, their counsel's investigation, which includes without limitation:
(a) review and analysis of regulatory filings made by Centene Corporation. ("Centene or the
"Company ) with the United States Securities and Exchange Commission ("SEC ); (b) review
and analysis of securities analysts' reports concerning Centene; (c) review and analysis of press
releases and media reports issued by and disseminated by Centene; and (d) review of other
publicly available information concerning Centene including copies of Centene's publicly
available response to the State of Tennessee's Request for Proposal, Centene's Indiana provider
manual, and Centene's Texas provider manual.
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1. This is a class action against Centene and certain of its officers and directors for
violation of the federal securities laws. Plaintiffs bring this action on behalf of themselves and all
other persons or entities, except for Defendants and certain of their related parties as described
below, who purchased Centene securities (the "Class ) during the period April 25, 2006 through
July 17, 2006, inclusive (the "Class Period ).
2. This action involves a fraudulent scheme whose goal was to conceal adverse
developments from the investing public concerning Centene's escalating medical costs , and other
internal problems, for so long as it took for insiders to sell off their personally-owned shares at
artificially high prices. The defendants' fraudulent scheme artificially inflated the price of
Centene's common stock during the Class Period.
3. The scheme allowed Company insiders to manipulate their sales under an
"automatic selling program purportedly adopted December 15, 2005. Under this program, CEO
Neidorff, who traditionally derived a substantial portion of his income through the sale of
Centene shares, was selling shares approximately every two months: for example, sales were
automatically effectuated in February 2006 and April 2006. The April 2006 sales allowed
Neidorff to realize sales proceeds of $1,100,858. At the time of this April sale, Neidorff knew the
Company had experience a serious setback in the months of February and March 2006 and that
that Centene's stock price would drop sharply if the adverse news was promptly revealed to
shareholders. Instead of fulfilling his disclosure obligations, Neidorff did not promptly announce
the February and March 2006 setback, and did not withdraw earnings projections that could not
be fulfilled in light of the events in February and March 2006. Rather, he represented subsequent
to February and March and before the end of the Class Period that Centene faced no "big issues
with which shareholders should be concerned. During this time, after the April 2006 insider sales
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were done, Neidorff halted his "automatic sales program. This creates a strong inference that
Neidorff knew what the stockholders did not. That a major stock decline would soon devastate
the stock price upon the belated announcement of the bad news regarding the first quarter 2006
numbers . Tellingly, the shares Neidorff sold in April 2006 were shares obtained by him through
the simultaneous exercise of options that were granted to him largely on July 24, 2002. This
grant date coincided with the lowest closing price of Centene shares in the entire month of July
2002 (a pre-split closing price of $22.71 on July 23, 2002, which was also the lowest closing
price in over four months),' suggesting that the options Neidorff exercised in order to dump
shares in April 2006 had been manipulatively priced in 2002 to provide Neidorff with illicit
profits . Neidorff therefore had a strong motive to exercise these options , and sell the underlying
shares, before it was discovered that their grant date had been manipulated so as to select an
artificially low exercise price. The widespread and unlawful practice by certain companies of
backdating or manipulating option grant dates was first exposed in a Wall Street Journal article
dated March 18, 2006 entitled, "The Perfect Payday. This has led to a widespread financial
scandal that has rattled many companies, leading to criminal actions, SEC complaints, and
shareholder lawsuits across the nation. Many companies, upon revelation of this practice, have
cancelled options grants that were backdated or manipulated before insiders could exercise the
options and sell off the underlying shares. Neidorff's April 2006 selling prices were slightly
above $25 per share . When the fraud was disclosed, Centene shares dropped to $13. 60 a share, a
decline of almost 50 per cent . Thus, Neidorff unlawfully gained hundreds of thousands of dollars
1 The stock had not closed at such a low price since March 10, 2002.
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by exercising apparently manipulated options, and selling 40,000 underlying shares, while in
possession of undisclosed material adverse information.
4. Centene ' s earnings are largely a function of the Company' s ability to manage
medical costs. Medical costs include payments to physicians, hospitals, and other providers for
healthcare and specialty services claims , as well as estimates of medical claims incurred by not
reported ("IBNR ). IBNR is essentially an estimate of claims liability, representing medical
events that occurred before the end of a given reporting period, but which had not yet been
formally billed to the Company. An important measure of how the Company is doing financially
is its Health Benefits Ratio ("HBR ), which represents medical costs (including the IBNR) as a
percentage of premium revenues. According to Centene's Form 10-Q for the first quarter ended
March 31, 2006 ("First Quarter Form 10-Q ), Centene's HRB was 82 . 8% (i.e., costs were 82.8%
of premium revenues).
5. On April 25, 2006, Centene issued its First Quarter 2006 earnings release which
painted a rosy picture of the situation and was in line with analyst estimates for the quarter. Two
days later, on April 27, 2006, Neidorff exercised options and sold 13,400 shares at $25.21 per
share for a total of $337,814 through his lOb5-1 automatic trading plan. On April 28, 2006,
Neidorff exercised options and sold 26,600 shares at $25. 34 per share for a total of $674,044.
After that, the selling stopped. Defendant Neidorff had continuously sold shares , either pursuant
to his lOb5- 1 automatic selling plan or by some other means , since November 2003. After April
27 and April 28, 2006, however, the stopped the sales because Neidorff knew that as weeks
passed, it would become more and more implausible for him to deny knowledge of the
Company's setbacks in February and March 2006. Moreover, as discussed above, Neidorff had
reason to "squeeze in one more sale of shares, as the particular he chose to sell were those he
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obtained by means of a 2002 options grant made at a suspiciously low strike price. As the option
pricing scandal began to unfold in March 2006, Neidorff had reason to fear that his 2002 options
would be investigated, and taken away from him before exercise.
6. Unbeknownst to the investing public, $9.7 million of medical costs attributed to
the First Quarter more than Centene 's net earnings for the First Quarter of 2006 - had
simply not been recognized in that quarter, and was not made the subject of the required account-
ing reserve. Centene's reported net earnings for its first quarter ended March 31, 2006, were only
$8,766,000, substantially less than Centene' s net earnings for its first quarter of 2005. In
addition, defendants' failure to account for $9.7 million in medical costs attributable to the First
Quarter caused Centene's HBR percentage to appear lower than it really was. Defendants knew
or recklessly disregarded that Centene was experiencing higher medical costs during the First
Quarter. In fact, defendants only first revealed this materially adverse information after they had
one last opportunity to sell significant amounts of their personal holdings of Centene common
stock.
7. Defendants continued to mislead the public about the level of medical costs
incurred in the First Quarter and about the Company's outlook for its Second Quarter. On June
20, 2006, Neidorff point blank misled the Company's investors at an analyst meeting that took
place only ten days before the close of the Second Quarter 2006 and only one month before
Centene shocked the market by announcing drastically lower-than-expected earnings in its July
18, 2006 press release due to large adjustments relating to the first quarter, which ended
almost four months earlier. On June 20, 2006 at the Wachovia Securities investor summit on
Nantucket Island, defendant Neidorff affirmatively stated that, despite ongoing cost pressures,
there were no problems with Centene's finances. Neidorff stated that Centene doesn't comment
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on guidance unless there is a material change, and in that context, he wasn't commenting on
guidance. "We're not projecting anything that is devastating or any devastation out there,
Neidorff said in remarks that were carried over Internet . "I'm not worried about big issues or big
blowups. I'm worried about little things like I'm talking to you about, our ability to fix them in a
timely enough fashion that it doesn't impact one quarter or another. (Emphasis added).
8. On July 18, 2006, less than one month after the Wachovia summit, Centene
shocked the market by announcing that its Second Quarter earnings would be substantially lower
than expected due to large adjustment relating to medical care provided or begun in the First
Quarter. The stock price dropped dramatically as a direct result of Centene's disclosure closing
at $13.60 per share, a drop of $7.44 per share in a single day. Trading volume exceeded 20
million shares.
9. In stark contrast to the Company' s unremittingly positive statements , however,
Centene was plagued by serious problems of which Defendants were aware. Specifically,
Defendants knew that adverse medical costs were negatively impacting the Company's financial
results . While in possession of the undisclosed materially adverse information about the
Company, defendants Neidorff and Senior VP Witty (who is also a CPA and who was Centene's
CFO through most of April 2006) sold large blocks of their personal holdings of Centene
common stock. Then, and still, prior to revealing the devastating adverse news, these same
individual defendants halted further sales of their stock by discontinuing their long-standing
automatic stock sales plans.
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JURISDICTION AND VENUE
10. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331, and 1367, and Section 27 of the Securities Exchange Act of 1934 (the
"Exchange Act ) (15 U.S.C. § 78aa).
11. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15
U.S.C. §§ 78j(b) and 78t(a)) and Rule lOb-5 promulgated under Section 10(b) 17 C.F.R. §
240. l Ob-5.
12. Venue is proper in this District pursuant to Section 27 of the Exchange Act
(15 U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged
fraud or the effects of the fraud, have occurred within this District, and the Company maintains
its principal executive offices in this District.
13. In connection with the acts and omissions 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
15. By order dated November 17, 2006, Wayne Stolte was appointed by the Court as
Lead Plaintiff. Plaintiff Larry Elam filed the first action against defendants. Plaintiffs purchased
Centene common stock during the period April 25, 2006 through and including July 17, 2006
(the "Class Period ), as described in their certifications previously submitted to the Court.
16. Centene is organized under the laws of the State of Delaware and is headquartered
in St. Louis, Missouri. Centene common stock is traded in an efficient market on the New York
Stock Exchange under the symbol "CNC . Centene is a leading multi-line healthcare enterprise
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that provides programs and related services to individuals receiving benefits under Medicaid and
Medicaid-related programs, including Supplemental Security Income ("SSI ) and the State
Children's Health Insurance Program ("SCHIP ). In addition, the Company contracts with other
healthcare organizations to provide specialty services including behavioral health, disease
management, nurse triage, pharmacy benefit management, and treatment compliance.
17. According to Centene's 2005 Form 10-K for its year ended December 31, 2005,
the Company operates health plans in Indiana, Kansas , Missouri, New Jersey, Ohio, Texas, and
Wisconsin.
18. Michael Neidorff has served as Centene's Chairman and Chief Executive Officer
since May 2004. From May 1996 to May 2004, Neidorff served as President, Chief Executive
Officer and as a member of the Company's board of directors. From May 1996 to November
2001, Neidorff also served as Centene's Treasurer. According to the Company's 2005 Form 10-
K, Neidorff's salary and bonus for 2005 was $1,850,000 and as of the end of last year he held
restricted stock valued at $26 million. The Company also recorded $135,547 last year in
compensation for Neidorff representing the value of personal trips he took on the corporate jet.
Neidorff augmented his 2005 earnings by approximately $8.33 million through the exercise of
stock options and the sale of Centene shares.
19. J. Per Brodin has served as Centene's Senior Vice President and Chief Financial
Officer since April 24, 2006. Prior to that, from November 2005 to April 2006, Brodin served as
Centene's Vice-President and Chief Accounting Officer.
20. Karey L. Witty has served as Centene's Senior Vice President and Chief Executive
Health Plan Business since April 25, 2006. He served as the Company's Senior Vice President
and Chief Financial Officer from August 2000 to April 24, 2006. From March 1999 to August
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2000, Witty served as Centene's Vice President of Health Plan Accounting. From 1996 to March
1999, Witty was Controller of Heritage Health Systems, Inc., a healthcare company in Nashville,
Tennessee.
21. On April 24, 2006, just one day before Centene announced its financial results for
the First Quarter 2006 Centene announced that it had moved Defendant Witty from his position
as CFO to Senior Vice President and Chief Executive of Centene's Health Plan Business Unit. In
this same announcement , Centene stated that Defendant Brodin would replace Defendant Witty
as CFO.
22. Defendants Michael Neidorff, J. Per Brodin and Karey Witty are herein collectively
referred to as the "Individual Defendants .
23. The Individual Defendants, who were the Company's principal officers, controlled
Centene and its public disclosures. Each of them made false and misleading statements or failed
to disclose material adverse information concerning the Company's business and operations
during the Class Period, as detailed herein. 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 operat-
ing plans, budgets, and forecasts and reports of actual operations compared thereto), conversa-
tions and connections with other corporate officers and employees , attendance at management or
Board of Directors meetings and committees thereof, and by reports and other information
provided to them in connection therewith.
24. 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
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Company's public filings, press releases and other publications, as alleged herein, were the
collective actions of the narrowly defined group of Individual Defendants identified above. Each
of the above officers or directors of Centene, who by virtue of their high level positions with the
Company directly participated in the management of the Company, were directly involved in the
day-to-day operations of the Company at the highest levels , and were privy to confidential
proprietary information concerning the Company and its business, operations, products, growth,
financial statements , and financial condition, as alleged herein. The Individual Defendants were
involved in drafting, producing, reviewing or disseminating the false and misleading statements
and information alleged herein, were aware or deliberately 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.
25. As officers or directors and controlling persons of a 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, and governed by the provisions of the federal securities laws, the
Individual Defendants each had a duty to promptly disseminate 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 common stock would be based upon truthful
and accurate information. The Individual Defendants' misrepresentations and omissions during
the Class Period violated these specific requirements and obligations.
26. The Individual Defendants participated in the drafting, preparation or approval of
the various public, shareholder and investor reports and other communications complained of
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herein, and were aware of, or deliberately disregarded, the misstatements contained therein and
omissions therefrom, and were aware of their materially false and misleading nature. Because of
their Board membership or executive and managerial positions with Centene, each of the
Individual Defendants had access to the adverse, undisclosed information about the Company's
operations, the financial condition and performance of the Company as particularized herein and
knew (or deliberately disregarded) that these adverse facts rendered the positive representations
made by or about Centene and its business issued or adopted by the Company materially false
and misleading.
27. The Individual Defendants, because of their positions of control and authority as
officers 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 or had the ability 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 are therefore
primarily liable for the representations contained therein.
28. Each of the Defendants is liable as a participant in a wrongful scheme and course of
business that operated as a fraud or deceit on those who purchased or otherwise acquired
Centene common stock during the Class Period by disseminating materially false and misleading
statements or concealing material adverse facts. The scheme deceived the investing public about
Centene's business, operations, and the intrinsic value of the Company's common stock, and
caused plaintiffs and other members of the Class to purchase Centene common stock at
artificially inflated prices.
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29. Under the rules and regulations promulgated by the SEC under the Exchange Act,
specifically Item 303 of Regulations S-K, the Individual Defendants also had a duty to report all
trends, demands or uncertainties that were reasonably likely to impact Centene's revenue,
expenses and of previously-reported financial information such that they would be indicative of
future operating results . The representations of the Individual Defendants during the Class Period
violated these specific requirements and obligations.
CLASS ACTION ALLEGATIONS
30. Plaintiffs bring this as a class action pursuant to Federal Rule of Civil Procedure
23(a) and (b)(3) on behalf of all persons who purchased Centene securities during the Class
Period of April 25, 2006 through July 17, 2006, inclusive. Excluded from the Class are
Defendants , officers and directors of the Company, members of the immediate families of the
Individual Defendants, and each of their legal representatives , heirs, successors or assigns and,
any entity in which any Defendant has or has had a controlling interest.
31. This action is properly maintainable as a class action because:
a. the members of the proposed Class in this action are dispersed
throughout the United States and are so numerous that joinder of all Class members is impractic-
able. While the exact number of Class members is unknown to Plaintiffs at this time and can
only be ascertained through appropriate discovery, Plaintiffs believe that Class members number
in the thousands. Millions of Centene shares are traded publicly on the New York Stock
Exchange ("NYSE ) under the symbol "CNC . As of December 31 , 2005 , Centene had
42,988,230 shares of common stock outstanding.
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b. Plaintiffs' claims are typical of those of all members of the Class
because all have been similarly affected by Defendants' conduct in violation of federal securities
laws as alleged herein;
c. Plaintiffs will fairly and adequately represent and protect the
interests of the Class and have retained counsel competent and experienced in class action
litigation. Plaintiffs have no interests antagonistic to, or in conflict with, the Class that Plaintiffs
seek to represent;
d. A class action is superior to other available methods for the fair
and efficient adjudication of the claims asserted herein because joinder of all members is
impracticable. Furthermore, because the damages suffered by individual members of the Class
may be relatively small, the expense and burden of individual litigation make it virtually
impossible for Class members to redress the wrongs done to them. The likelihood of individual
Class members prosecuting separate claims is remote;
e. Plaintiffs anticipate no unusual difficulties in the management of
this action as a class action; and
f. the questions of law and fact common to the members of the Class
predominates over any questions affecting individual members of the Class.
Among the questions of law and fact common to the Class are:
i. whether Defendants' acts and/or omissions as alleged
herein violated the federal securities laws;
ii. whether the Company's Class Period public statements and
filings misrepresented or omitted material facts;
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iii. whether Defendants acted with knowledge or with reckless
disregard for the truth in misrepresenting or omitting material facts;
iv. whether Defendants participated in and pursued the
common course of conduct complained of herein;
v. whether the market price of Centene securities was inflated
artificially as a result of Defendants' material misrepresentations or omissions during the Class
Period; and
vi. to what extent the members of the Class have sustained
damages and the proper measure of damages.
BACKGROUND
32. Medicaid covers approximately 55 million poor and disabled Americans.
According to the Wall Street Journal, Medicaid is one of the largest government programs, with
an annual price tag over $300 billion.
33. Medicaid provides a lucrative business opportunity for many companies like
Centene that act as middlemen between the government and Medicaid recipients. Essentially,
the government outsources the function of paying for the medical treatment of Medicaid
recipients to these Medicaid HMOs. The government pays each Medicaid HMO a fixed monthly
amount for each Medicaid recipient on its plan, and the HMO then pays for that recipient's
healthcare needs.
34. The Medicaid HMO business is a low-margin business. Centene's, profit margins
are in the low single-digits . In 2005, on revenue of $1.5 billion, Centene's net earnings were
$55.6 million, for a profit margin of 3.6%. Thus, the incentive to monitor and address cost issues
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is high a slight increase in cost can easily wipe out profits and have a material impact on the
share price.
35. Medical costs include payments to physicians, hospitals , and other providers for
healthcare and specialty services claims. Medical costs are Centene's single biggest operating
expense. Defendants have repeatedly assured the investing public of their ability to monitor
medical cost trends to ensure and enhance the "predictability and consistency of [Centene's]
financial results. In fact, in September 2005, Centene held a "contracting and claims liability
accounting methodology seminar to help participants understand key factors necessary for
"consistent control over costs and reduc[ing] volatility by focusing on "claims processing and
system reporting, sound contracting, consistent claims liability reserving and provider relation-
ships .
36. Medical costs also include estimates of medical expenses incurred but not yet
reported ("IBNR ) and estimates of the cost to process unpaid claims. Defendants affirmatively
represented that Centene estimated its IBNR on a monthly basis based on a number of factors,
including in-patient hospital utilization data and prior claims experience. As part of the review,
defendants also represented that they considered the "costs to process medical claims, and
estimates of amounts to cover uncertainties related to fluctuations in provider billing patterns,
membership, products and inpatient trends. Defendants used independent actuaries to review
the Company's quarterly estimates.
37. IBNR is essentially an estimate of claims liability. Even though medical events may
have occurred before the end of a given reported period, claims for the expenses may not have
been submitted to the Company. As a result, the Company must estimate its claims liability, and
is required under accounting rules to do so fairly and conservatively, so as not to underestimate.
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An important measure of how the Company is doing is its HBR, which represents medical costs,
including the IBNR, as a percentage of premium revenues. For the First Quarter of 2006,
Centene's HRB was 82.8%.
38. On February 24, 2006, Centene filed with the SEC its Annual Report on Form 10-K
for the period ending December 31, 2005. With that report, the Company submitted to the SEC
the certifications of its principal executive officer (Neidorff) and principal financial officer
(Witty) as required by to 18 U.S.C. 1350, adopted as Section 906 of the Sarbanes-Oxley Act of
2002.
39. According to the Company's 2005 Form 10-K, most of Centene's revenues are
derived from Medicaid, SCHIP, and SSI premiums. In the Company's Medicaid Managed Care
segment, revenues are generated by premiums consisting of fixed monthly payments per
member. The base premium rate paid by each state differs, depending on a combination of
factors. In 2005, operations in Arizona, Indiana, Kansas, Missouri, New Jersey, Ohio, Texas, and
Wisconsin accounted for most of the Company's revenues.
40. According to the 2005 Form 10-K, medical costs include payments to physicians,
hospitals, and other providers for healthcare and specialty services claims. The 2005 Form 10-K
stated that on a monthly basis the Company estimates IBNR based on a number of factors,
including inpatient hospital utilization data and prior claims experience . As part of this review,
Centene considers the cost to process medical claims and estimates amounts needed to cover
uncertainties related to fluctuations in physician billing patterns, membership, products and in-
patient hospital trends. According to the 2005 10-K, defendants used the services of independent
actuaries who are contracted to review Centene's estimates on a quarterly basis.
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41. In the 2005 10-K, Centene highlighted the "efficiency of its business model:
We have designed our business model to allow us to readily add new members inour existing markets, expand into new regions in which we choose to operate andmore fully develop our services. The combination of our decentralized localapproach to operating our subsidiaries and our centralized finance, informationsystems and claims processing allows us to quickly and economically integratenew business opportunities in both our Medicaid Managed Care and SpecialtyServices segments. (Emphasis added)
42. A few months before filing its 2005 10-K, in response to a Request for Information
issued by the State of Tennessee dated December 12, 2005 (the "Tennessee RFI ), Centene's
submission to Tennessee details the Company's "approach to operating [its] subsidiaries and [its]
centralized finance, information systems and claims processing systems and its consistent
control over medical costs to reduce volatility. Centene represented to Tennessee its ability to
track costs as a result of its "prior authorization system. In the Tennessee RFI response, Centene
stated that it has "extensive experience in implementing prior authorization processes as a
mechanism to authorize services that may be in excess of benefit limits or that qualify for
coverage if medically necessary.
43. Throughout the Tennessee RFI response which is available to the public
Centene indicated that it gathered contemporaneous information related to a member's hospital
stay and other medical treatment. Centene represented that its staff "conducts early and ongoing
reviews of all in-patient admissions, among other things. (Emphasis added).
44. In its response to Tennessee, Centene also touted its expertise in providing medical
management services for Medicaid enrollees. Centene represented to Tennessee that it uses a
combined approach of enrollee education, prior authorization, and intensive case management to
manage enrollee benefits. On page 26 of its response Centene represents that it does "not rely on
catastrophic or benefit exhaustion to identity and manage enrollees at high risk. Specifically, the
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Company claimed that: "[Centene's] health plan approach is focused on proactive recognition
and management of all plan benefits by providing active case management services andfocused
assistance through our extensive provider networks. Our care management programs do not rely
on catastrophic or benefit exhaustion to identity and manage enrollees at high risk. Our robust
reporting capabilities enable us to identifyenrollees early in the care process and to ensure that
services are delivered at the appropriate level. (Emphasis added)
45. Regarding its ability to monitor hospital admissions, Centene represented to the
state of Tennessee the following:
Centene realizes that we cannot prevent all inpatient admissions, and thatinevitably, some enrollees will require hospitalization . At such a time, ourexperienced Case Management staff conducts early and ongoing reviews of allinpatient admissions , which allow for rapid feedback regarding inappropriateadmissions and appropriate length ofstay, and which acts as a sentinel for futureadmissions . These ongoing reviews provide an opportunity to build strongrelationships with hospital Case Managers . A regular internal concurrent reviewor "rounds process is conducted on all "at risk cases , to ensure that each patientis being managed without delays . Peer collaboration occurs in order to determineeffective ways to intervene as necessary to improve quality or to reduceunnecessary costs.
Our talented Case Management team is also involved in discharge planning at orbefore the inpatient admissions, in order to remove barriers and to arrange for anyservices that may be required for a successful timely discharge. (Emphasis added)
46. In response to Tennessee's inquiry regarding Centene's ability to provide data and
reports to the State and the capacity to use data for ongoing program monitoring and quality
assurance Centene made the following representations regarding it data management:
Centene views effective Data Management as a core strategic capability foreffective managed care. Centene recognized the significance of structured,expertly-operated and well maintained Management Information Systems (MIS).Technology investment in this area has been an executive management priority.
Centene's multi-line business model provides an integrated framework forviewing enrollee utilization and clinical data across multiple areas of care.
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Medical, Pharmacy, Behavioral Health and Disease Management data areavailable to form a single view of enrollee reporting.
This concept gives Centene clinical staff (to gain) immediate insight into patternsand trends [sic].
47. When discussing its ability to evaluate its own performance, Centene provided a
lengthy explanation of the tools and software products it uses to gather, track, maintain and
review client volume and claims payment data. Centene represented to the State of Tennessee
that it has the capacity and ability to "successfully integrate claims, enrollee and provider data
into a single repository by applying a series of clinical rules and algorithms that automatically
convert raw data into statistically meaningful information. The result is quick access to [the]
provider's client volume and claims payment patterns. (Emphasis added)
48. Centene stated that it loads all data into an integrated suite of software products that
"creates a sophisticated database merging clinical and claims payment patterns . This database is
called CareEnhance Resource Management ("CRMS ). According to defendants CRMS gives
"Centene quick access to core managed-care measures . This application tracks financial and
clinical information over time so that Centene can develop targeted interventions and qualify the
impact they have on quality outcomes. High-level reports are available directly to desktop for
managers . CRMS also has sophisticated, built in reporting tools for analysts.
49. The undisclosed material, adverse information concealed by Defendants during the
Class Period is the type of information which, because of SEC regulations, regulations of the
national stock exchanges and customary business practice, is expected by investors and securities
analysts to be disclosed, and is known by corporate officials and their legal and financial
advisors to be the type of information which is expected to be and must be disclosed. As seen
from the response to Tennessee, Centene must be deemed to have known all material
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information on a contemporaneous basis, as it had the systems in place to monitor admissions,
patient care, medical costs, and pharmacy costs on a constant and current basis.
50. Given the representations Centene made in its response to Tennessee regarding its
"active case management , "early and ongoing reviews of all inpatient admissions, which allow
for rapid feedback regarding inappropriate admissions and appropriate length of stay, and
"robust reporting capabilities, defendants knew but failed to disclose that the costs accruing in
the First Quarter would have an negative impact on the Company's medical costs . Defendants
blamed the majority of additional medical costs on the growth in membership from additional
physicians added in 2005, hospital rate changes, an additional 913 days of inpatient hospital
days, including 165 admissions not accrued for at all, 394 days attributed to only 13 cases in
Indiana, and an increase in NICU cases. These were significant liabilities that were occurring
throughout the First Quarter and defendants' explanations lack credibility given the severity of
the problem, and the Company' s extensive monitoring system, including prior authorization
requirements and active case management systems.
51. Defendants were aware long before they disclosed the additional medical costs that
Centene was experiencing these ongoing events and that these would result in additional medical
costs attributable to events that occurred in the First Quarter. There is no honest explanation as to
why the Company remained silent about this situation , and continued to assure investors all was
well, through April, May and June, not revealing the true situation until almost the end of July
2006. The Company's insiders knew the truth, but had strong incentive to seize one last lucrative
sale of shares, and then create "distance between this insider trading and the eventual revelation
of the truth.
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SUBSTANTIVE ALLEGATIONS COMMON TO ALL COUNTS
52. On February 7, 2006, Centene filed with the SEC a Form 8-K, preliminarily
announcing its results for the year 2005. Neidorff was quoted extensively in the 8-K, and he
stated with confidence that Centene's "information systems, among other things, give Centene
"ongoing visibility and confidence in the stability and predictability of [its] business model.
53. On April 25, 2006, Centene announced its financial results for the quarter ended
March 31, 2006. For the First Quarter 2006, revenues increased 36.9% to $455.1 million from
$332.4 million in the first quarter of 2005.
54. The April 25, 2006 press release highlighted the Company's earnings as follows:
For the first quarter of 2006, revenues increased 36.9% to $455.1 million from$332.4 million in the first quarter of 2005. The increase in service revenues forthe first quarter of 2006 reflects the acquisitions of both AirLogix and US Script.
The HBR for Centene's Medicaid and SCHIP populations, which reflects medicalcosts as a percent of premium revenues, was 82.8% for the first quarter of 2006,compared to 80.6% for the same period in 2005. The results for the first quarter of2006 reflected: (1) higher utilization trends in certain markets, especially inJanuary 2006; (2) an increase in pharmacy related costs in Centene's Indiana andOhio markets; and (3) Centene's earlier expansion into new unmanaged markets.The HBR for the SSI category was 87.6% for the first quarter of 2006 comparedto 94.6% for the first quarter of 2005 and, while approaching Centene's targetrange, may be volatile given the small member base. For the Specialty Servicessegment, the HBR was 84.1% in the first quarter of 2006 versus 133.5% in thefirst quarter of 2005. The Specialty Services HBR for 2006 included thebehavioral health contracts in Arizona and Kansas, while the 2005 resultsincluded only the first three months of the behavioral health contract in Kansas.
Medicaid Managed Care general and administrative (G&A) expenses as a percentof revenues was 11.9% in the first quarter of 2006 compared to 10.8% in the firstquarter of 2005, mainly reflecting Georgia start-up costs and the expensing ofstock-based compensation as the result of Centene's adoption of SFAS No. 123R.In addition, concurrent with the closing of the US Script acquisition, the Companyaltered its corporate function allocation methodology to more closely align thoseallocations to the proportion of costs required to support each business segment.The effect of this change added 0.7% in G&A expenses to the Medicaid ManagedCare G&A ratio for the first quarter of 2006.
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Earnings from operations of $12.6 million in the first quarter of 2006 compared to$21.3 million in the first quarter of 2005, inclusive of Georgia start-up costs.
Net earnings were $8. 8 million, or $0.20 per diluted share, for the first quarterof 2006, compared to $14.4 million, or $0.32 per diluted share, for the firstquarter of2005. (Emphasis added)
55. In the April 25 press release , Neidorff minimized the impact of the very issue that
would later cause Centene to report earnings far below Wall Street expectations higher
pharmacy costs in Indiana . Specifically, Neidorff stated:
The first quarter of 2006 met our expectations, although our results were affectedby some market specific factors. In particular, higher pharmacy costs in Indiana,and to a limited degree in Ohio, impacted our overall medical costs, adding 70basis points to our Medicaid and SCHIP HBR. We have been actively working toaddress these issues and are confident that the pharmacy costs will normalize inthe short-term. Importantly, our purchase of US Script has provided us with animportant vehicle to mitigate and positively influence our pharmacy costs. Indianaand Ohio will be transitioned to US Script in May. Wisconsin was converted tothe US Script platform in March, and we are already seeing the benefit of thisimplementation.
56. In addition , Witty reaffirmed the Company's guidance for the second quarter. t
Witty was quoted as stating:
For the second quarter of 2006, we expect revenue in the range of $495 million to$500 million and earnings per diluted share of $0.25 to $0.30. For the full-year2006, we anticipate revenue in the range of $2.08 billion to $2.16 billion andearnings per diluted share of $1.53 to $1.70. This guidance excludes our recentlyannounced acquisition of MediPlan Corporation, which we expect to close duringthe second quarter of 2006.
57. On April 25, 2006, Centene filed with the SEC its Form 10-Q for the first quarter
ended March 31, 2006 ("First Quarter Forml0-Q ). The First Quarter Form 10-Q reiterated the
financial results previously announced.
58. Neidorff and Witty each signed certifications pursuant to Securities Exchange Act
Rule 13A-14 and 15D-14 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
and Certification Pursuant to 18 U.S.C Section 1350, falsely certifying that they reviewed the
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First Quarter Form 10-Q; that the report did not contain any untrue statements of material fact;
and that the financial statements fairly presented in all material respects the financial condition,
results of operations and cash flows of the Company.
59. Neidorff and Witty' s certifications that Centene ' s financial statements contained in
the First Quarter Form 10-Q were fairly presented were untrue when issued because as later
revealed on July 18, 2006, Centene failed to account for $9.7 million of medical costs
attributable to the First Quarter which, had they been properly reported in the First Quarter,
would have essentially wiped out the reported net earnings and earnings per share for that
period oftime. This amount was highly material to Centene , and its shareholders.
60. The undisclosed material, adverse information concealed by defendants during the
Class Period is the type of information which, because of SEC regulations, regulations of the
national stock exchanges and customary business practice, is expected by investors and securities
analysts to be disclosed, and is known by corporate officials and their legal and financial
advisors to be the type of information which is expected to be and must be disclosed. As seen
from the response to Tennessee, Centene must be deemed to have known all material informa-
tion on a contemporaneous basis, as it had the systems in place to monitor admissions, patient
care, medical costs , and pharmacy costs on a constant and current basis.
61. Given the representations Centene made in its response to Tennessee regarding
its "active case management , "ongoing reviews of all inpatient admissions , and "robust report-
ing capabilities , defendants knew but failed to disclose the multiple events that were occurring
in the First Quarter that would have a material negative impact on the Company's medical costs.
Defendants' reasons for the additional medical costs, including, the growth in membership from
additional physicians added in 2005, hospital rate changes, an additional 913 days of inpatient
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hospital days, including 165 admissions not accrued for at all, 394 days attributed to only 13
cases in Indiana, and an increase in NICU cases is implausible. These adverse events would have
been detected by Centene's systems when they occurred, or very shortly thereafter.
62. Moreover, in Centene's Managed Health Service's ("MHS ) manual for
providers in Indiana, MHS requires that "special care nursery and NICU level care of services
require MHS authorization within 2 business days of the start of the services. Since MHS
requires authorization within 2 business days of the start of the services, defendants knew that
there was in an increase in "admissions for NICU births (at least in Indiana where they claim
that the adverse medical costs were the result of increased admissions for NICU births).
63. Immediately after the April 25, 2006, press release and the materially false and
misleading First Quarter Form 10-Q were disseminated , on April 27, 2006 and April 28, 2008,
Neidorff sold 40,000 shares of his personal holdings of Centene common stock at $25.21 and
$25.35 per share, respectively, pursuant to his lOb5-1 automatic trading plan. After these sales,
Neidorff did not sell any more shares in the year 2006.
64. Witty also sold thousands of shares of his personal holdings on April 28, 2006.
Witty sold 5,000 shares at $25.00 per share for proceeds of $125,000 pursuant to his lOb5-1
automatic trading plan. After this sale Witty did not sell any stock until well into October 2006
well after the Company had revealed the adverse information on July 18, 2006.
65. The statements relating to the Company's financial condition described above
were materially false and misleading when made, in violation of Section 10(b) and Rule lOb-5,
because Centene falsely reported its financial results in its April 25, 2006 press release and First
Quarter Form 10-Q. In fact, Centene has now admitted that it failed to accrue costs of at least
$9.7 million in the first quarter.
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66. The April 25, 2006 press release and the First Quarter Form 10-Q were materially
false and misleading and omitted material facts. Defendant's statements described in paragraphs
53 to 58 above were materially false and misleading or omitted material facts because: (1)
Centene failed to accrue $9.7 million medical costs in the First Quarter; (2) defendants knew but
failed to disclose that the Company was experiencing increasing medical costs and thus misled
investors about its Second Quarter projections; and (3) the non disclosure of the additional
accrued medical costs for the First Quarter caused the Company's HBR percentage to appear
lower than it was, thereby deceiving the investing public about the Company's true financial
status. For the same reasons, Defendants had no reasonable basis to believe that Centene could
meet its 2006 Second Quarter guidance
67. Due to the failure to properly report the additional $9.7 of medical cost in the First
Quarter, the Company presented its financial results and statements in a manner that violated
GAAP, which are those principles recognized by the accounting profession as the conventions,
rules, and procedures necessary to define accepted accounting practice.
68. SEC Regulation S-X states that financial statements filed with the SEC which are
not prepared in compliance with GAAP are presumed to be misleading and inaccurate, notwith-
standing footnotes or other disclosures. Regulation S-X requires that interim financial statements
also must comply with GAAP, with the exception that interim financial statements need not
include disclosures that duplicate disclosures accompanying annual financial statements.
69. Specifically, GAAP requires accrual of an expense in the current period when it is
probable and estimable that such cost has been incurred. Statement of Financial Accounting
Standards ("FAS ) No. 5: "Accounting for Contingencies provides the guidance for the record-
ing of loss contingencies . FAS No.5 states, in relevant part:
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As estimated loss from a loss contingency... shall be accrued by a charge toincome if both the following conditions are met: (i) Information available prior tothe issuance of the financial statements indicates that it is probable that an assethad been impaired or a liability had been incurred at the date of the financialstatements...; and (ii) The amount of loss can be reasonably estimated.
70. Furthermore, FAS No.5 states that if no accrual is made for a loss contingency
because one or both of the aforementioned conditions are not met, or if an exposure to loss exists
in excess of the amount accrued, disclosure of the contingency shall be made where there is at
least a reasonable possibility that a loss or an additional loss may have been incurred.
71. Defendants have admitted that the $9.7 million in medical costs incurred but not
recorded in the First Quarter would have adversely affected Centene's First Quarter financial
results. The magnitude of the additional medical costs and the affect they would have had on the
First Quarter had they been properly reported was material to the First Quarter financial results.
Defendants' failure to disclose these additional medical costs prior to selling large quantities of
stock gives rise to an inference of a deliberate understatement of expenses.
72. In addition, the Company' s presentation of its financial results and statements in a
manner that violated GAAP, including the following fundamental accounting principles:
(a) The principle that interim financial reporting should be based upon the same
accounting principles and practices used to prepare annual financial statements was violated
(APB No. 28, ¶10);
(b) The principle that financial reporting should provide information that is useful
to present and potential investors and creditors and other users in making rational investment,
credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);
(c) The principle that financial reporting should provide information about the
economic resources of an enterprise, the claims to those resources and effects of transactions,
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events and circumstances that change resources and claims to those resources was violated
(FASB Statement of Concepts No. 1, ¶40);
(d) The principle that financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stock-
holders) for the use of enterprise resources entrusted to it was violated. To the extent that
management offers securities of the enterprise to the public, it voluntarily accepts wider
responsibilities for accountability to prospective investors and to the public in general (FASB
Statement of Concepts No. 1, ¶50);
(e) The principle that financial reporting should provide information about an
enterprise's financial performance during a period was violated. Investors and creditors often use
information about the past to help in assessing the prospects of an enterprise. Thus, although
investment and credit decisions reflect investors' expectations about future enterprise perform-
ance, those expectations are commonly based, at least partly, on evaluations of past enterprise
performance (FASB Statement of Concepts No. 1, ¶42);
(f) The principle that financial reporting should be reliable in that it represents what
it purports to represent was violated. That information should be reliable as well as relevant is a
notion that is central to accounting (FASB Statement of Concepts No. 2, ¶158-59);
(g) The principle of completeness, which means that nothing is left out of the
information that may be necessary to insure that it validly represents underlying events and
conditions was violated (FASB Statement of Concepts No. 2, ¶79); and
(h) The principle that conservatism be used as a prudent reaction to uncertainty to try
to ensure that uncertainties and risks inherent in business situations are adequately considered
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was violated. The best way to avoid injury to investors is to ensure that what is reported
represents what it purports to represent (FASB Statement of Concepts No. 2, ¶195, 97).
73. On June 6, 2006, Centene hosted an upbeat investor day in New York City with
Neidorff touting the Company's growth opportunities . At this meeting, Centene management
reiterated its guidance for the Second Quarter 2006 and the full year 2006, with earnings per
share estimated at $1.53-$1.70.
74. In an investment comment by Wachovia Securities the same day, June 6, 2006,
Wachovia stated the Centene management ran a version of its regular internal staff meeting at
the "Informative Investor Day event. Wachovia stated:
The "Staff Meeting included informal presentations and a back-and-forthbetween executives on topical issues such as the Georgia implementation, costtrends in Indiana, updates on several state RFPs and an updated on the SpecialtySegment, among other things.
75. In the same comment, Wachovia reported that Centene's management stated that
in the First Quarter of 2006 medical cost trends were improving in Indiana and Ohio. It reported
that "management stated that [medical cost] trends have begun to improve in Q2 2006, driven in
part by the transition in each state to CNC's in-house PBM.
76. The reported statement was false and misleading . Medical cost trends were not
improving in Indiana, as Centene would later admit. Defendants either knew that the statement
was untrue or were reckless in failing to discover this fact.
77. On June 14 2006, Centene announced that it would present at the Wachovia
Securities 16th Annual Nantucket Equity Conference, to held June 19-22, 2006, at the Harbor
House Village in Nantucket, Massachusetts . Defendant Neidorff was present on Tuesday, June
20, 2006.
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78. On June 20, 2006-just ten days before the close of the Second Quarter 2006,
Neidorff continued to mislead Centene's investors . Neidorff discussed the ongoing cost
pressures, notably drug costs in Indiana, citing figures reflecting activity from May. He added
that Centene doesn't comment on guidance unless there is a material change, and in that context,
he wasn't commenting on guidance. The purpose of this statement was to convey that there were
no material changes. "We're not projecting anything that is devastating or any devastation out
there. "I'm not worried about big issues or big blowups. I'm worried about little things like I'm
talking to you about, our ability to fix them in a timely enough fashion that it doesn't impact one
quarter or another. Neidorff said in these remarks that were carried over Internet.
79. Neidorff falsely assured the investing public through his comments at the
Wachovia Securities investor summit that there were no material changes to report regarding the
Company's financial results . Neidorff knowingly misled the investing public when he stated that
he would not comment on guidance because Centene only comments on guidance when there is
a material change, in that he knew or was reckless in not knowing that less than one month later
the Company would preliminarily announce materially revised earnings based on events that
occurred in the First Quarter of 2006.
80. Neidorff knew or recklessly disregarded that his June 20, 2006, statement was
materially false and misleading . As chief executive officer and chairman of the board represent-
ing the Company at an investor summit just 10 days prior to the end of the second quarter,
Neidorff knew the true financial condition of Centene. Certainly as of June 20, 2006, Neidorff
had all necessary financial information available to him as it related to the First Quarter and the
Second Quarter and knew that additional medical costs accrued in the First Quarter were going
to negatively impact the Company's financial results. As a result of his false and misleading
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statements, many analysts and the investing public were assured that Centene was well
positioned to continue its earnings growth, causing analysts to reaffirm the Company's second
quarter earnings estimates and continued to tout the Company and recommend its stock.
81. Given Centene's assurance that there were no surprises, many analysts expressed
confidence in the Company's stated guidance. For example, on June 21, 2006, Goldman Sachs
issued the following statement regarding Centene.
We are publishing this brief note in response to Centene intraday decline of 6%following yesterdays decline of 4% on comments from the CEO at a competitorconference yesterday that the company saw some cost trend pressures in its Mayutilization driven by pharmacy costs in Indiana and a higher level of OB cases.While cost trend issues bear close monitoring, we think the company's commentswere an attempt to provide greater granularity on market specific trends and not awarning that the company would fall short of its 2Q and full year 2006 guidance.Furthermore, we spoke to management and they expressed strong confidence intheir stated guidance and that the cost trend issues remain manageable. Wemaintain our OP rating at 11.3X our 2007 EPS of $2.20. (Emphasis added)
82. According to William D. Georges, an analyst at JPMorgan, Neidorff represented
"the company's medical cost concerns are being driven by only a small portion of its total
medical membership. While this indeed may have been true, it was false and misleading
because it omitted to state that this small portion of Centene's membership had run up costs of
$9.7 million months before, in February and March 2006, and that this amount was highly
material to Centene.
83. On July 18, 2006, less than one month after Neidorff assured investors that there
were no "big issues or big blowups and that there was no devastating news, Centene shocked
the market by announcing that its second quarter earnings would be substantially lower than
expected.
84. On July 18, 2006, Centene announced what Defendants knew would be
devastating news. The Company announced lowered guidance, stating that its second-quarter
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earnings will be in a range of 10 cents to 12 cents a share, including an adjustment of 14 cents a
share relating to additional medical costs in Indiana and Texas. These numbers were far below
expectations on average, analysts surveyed by Thomson Financial were looking for quarterly
profit of 28 cents per share. The July 18, 2006 press release then dropped a bombshell,
announcing "preliminary earnings per diluted share of $0.10-$0.12 for the second quarter of
2006, which includes an adjustment ofapproximately $9.7 million , or $0.14 per diluted share, for
additional medical costs primarily related to March 2006 in Indiana and Texas. (Emphasis
added).
85. Centene also announced that it is cutting its 2006 earnings guidance to a range of
95 cents to $1.04 a share on adverse medical cost trends, from a range of $1.53 to $1.70 a share.
Neidorff stated "We are truly disappointed and are working to resolve the factors which
impacted our second quarter results and will provide additional details in our conference call
next week.
86. On this news, the price of Centene stock dropped from $21.04 to $13.60 or
approximately 35%, on volume of over 20 million shares, compared with an average daily
volume of 745,430 shares . The $13. 60 closing price on July 18 was the lowest price of the year
for Centene, and Centene was the biggest percentage loser on the NYSE that day. The decline in
Centene's stock price was a direct result of the nature and extent of defendants' false statements
being revealed to investors and the market.
87. Analysts expressed surprise at the revised guidance by Centene and the charge
relating to events that occurred many months before. For example on July 18, 2006, a JPMorgan
analyst wrote: "[M]anagement's conviction in the quarter's results just last week raises concerns
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that top management is not in touch with operations. For management to be so wrong so close to
2Q reporting is perplexing at best.
88. Also on July 18, 2006, brokerage firm Stifel, Nicolaus & Co. blasted Neidorff,
labeling him "cocksure" and questioning his management abilities. The report followed
Centene's announcement earlier in the day that Centene was taking a $9.7 million charge relating
to first quarter events, lowering its earnings guidance for the second-quarter and 2006 earnings.
Only one week before, Neidorff stood before investors in California to deliver a rosier financial
outlook, according to Thomas Carroll, who wrote the Stifel Nicolaus report. Thomas Carroll
wrote:
The CEO was so noticeably cocksure in his recent investor communications ...that the downward revision ... seems to at the very least indicate a lack ofmanagement insight into the operations of the company. Management credibilitydeterioration must be factored into valuation.
Post-Class Period Statements
89. On July 25, 2006, Centene issued a press release announcing its financial results for
its second quarter ended June 30, 2006. In this press release the Company attempted to explain
the adverse medical cost developments. Centene revealed further dismaying details regarding the
adverse events that were first announced on July 18, 2006 but which had actually occurred
four to five months earlier, in February and March. The press release stated that:
The 2006 second quarter results include approximately $9.7 million of adversemedical cost development in estimated claims liabilities from the 2006 firstquarter. The adverse development was largely attributable to: (1) increasedmedical expense for maternity related cases , including NICU, (2) increasedphysician costs, (3) increased costs associated with injectibles such as Synagisand Somatropin, and (4) increases in the estimated days for members hospitalizedas of March 31, 2006. Approximately $3.7 million of the development occurred inIndiana and $2.2 million occurred in Texas. There has been a slight positivedevelopment for 2005 claims. Approximately $7.1 million of the developmentsrelated to March claims and $2.5 million wasfor February claims.
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In Indiana, there were a number of factors which affected our results . We saw acontinuation of increased medical expenses associated with the members added inlate 2005, higher percentage of admissions for NICU births and increased Synagisand Somatropin utilization. In addition , our estimated hospital inpatient daysincreased significantly primarily because of the deteriorating condition of severalcomplex and high-cost cases and missed patient bed-day estimates. Pharmacycosts stabilized in the 2006 second quarter and are expected to decrease in the2006 third quarter.
In Texas , we are currently experiencing higher costs because of a case mix shift toa higher percentage of members in the pregnant women and newborn categoriesdriving increases in related costs such as NICU, radiology and Synagis, and frommembers moving out of Primary Care Case Management into a managed careenvironment . We also had several deteriorating complex and high cost cases.(Emphasis added)
90. Defendants did not even attempt to paint the additional costs as having only recently
come to their attention, and any effort by them to do so would be implausible. According to
Centene's Managed Health Service's ("MHS ) manual for the Company' s contract in Indiana,
Centene encouraged all providers to submit claims to MHS electronically. MHS requires "prior
authorization for injectible medications over $100.00. Further, MHS requires that "special care
nursery and NICU level care of services require MHS authorization within 2 business days of the
start of the services. Since MHS requires authorization within 2 business days of the start of the
services, defendants knew that there was in an increase in "admissions for NICU births at least
in Indiana where they claim that the adverse medical costs were the result of increased admis-
sions for NICU births. Even if claims were not submitted for these admissions during the first
quarter of 2006, the fact that authorization from MHS is required put defendants on notice that
the additional medical cost would be incurred and proper reserves should have then been set for
the additional costs.
91. In addition, according to Centene's Superior HealthPlan Network ("SHN ) provider
manual for the Company's contract in Texas, SHN has the "capability to perform the ANSI
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X12N 278 referral certification and authorization transaction through Centene Corporation,
Superior's parent organization. SHN encourages providers to participate in SHN's "Electronic
Claims/Encounter Filing Program through Centene.
92. Throughout the Tennessee RFI Centene represented it had a clear grip on all
information related to a member's hospital stay and other medical treatment. Centene stated that
its staff "conducts early and ongoing reviews of all inpatient admissions, among other things.
93. Regarding its ability to monitor hospital admissions, Centene represented to the
state of Tennessee:
Centene realizes that we cannot prevent all inpatient admissions, and thatinevitably, some enrollees will require hospitalization. As such a time, our experi-enced Case Management staff conducts early and ongoing reviews of all inpatientadmissions, which allow for rapid feedback regarding inappropriate admissionsand appropriate length of stay, and which acts as a sentinel for future admissions.These ongoing reviews provide an opportunity to build strong relationships withhospital Case Managers. A regular internal concurrent review or `rounds' processis conducted on all "at risk cases, to ensure that each patient is being managedwithout delays. Peer collaboration occurs in order to determine effective ways tointervene as necessary to improve quality or to reduce unnecessary costs.
Our talented Case Management team is also involved in discharge planning at orbefore the inpatient admissions, in order to remove barriers and to arrange for anyservices that may be required for a successful timely discharge.
94. Instead of fulfilling his disclosure obligations, Neidorff did not promptly announce
the February and March 2006 setback, and did not withdraw earnings projections that could not
be fulfilled in light of the events in February and March 2006. Rather, he brazenly represented
subsequent to February and March and before the end of the Class Period that Centene faced no
"big issues with which shareholders should be concerned. During this time, after the April 2006
insider sales were done, Neidorff halted his "automatic sales program . This creates a strong
inference that Neidorff knew what the stockholders did not that a major stock decline would
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soon devastate the stock price upon the belated announcement of the bad news about the March
2006 numbers.
ADDITIONAL ALLEGATIONS OF SCIENTER
95. 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 decried elsewhere herein in detail, defendants, by virtue of their receipt of information
reflecting the true facts about Centene, their control over, or receipt or modification of Centene
allegedly materially misleading misstatements or their associations with the Company, which
made them privy to confidential proprietary information concerning Centene, participated in the
fraudulent scheme alleged herein.
96. Neidorff was motivated to conceal the truth regarding the adverse medical costs
as they related to the First Quarter of 2006 in order to keep Centene stock price inflated as he
sold thousands of shares of his personal holding of stock. These shares were acquired through the
exercise of options whose strike prices seem to have been manipulated. Giving the growing stock
price manipulation scandal that began in the First Quarter of 2006, Neidorff had a reasonable
fear that he would lose these options if he didn't exercise them, and sell the underlying shares.
His automatic stock sale plan abruptly and suspiciously was halted just prior to the revelation
that defendants had failed to account for increased medical cost incurred in the first quarter.
97. Between February 9, 2006 and April 28, 2006 and prior to the revelations on July
18, 2006 that the Company would be reporting devastating Second Quarter earnings, Defendant
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Neidorff sold 80,000 shares of Centene common stock for proceeds totaling $2,079,558. These
sales were accomplished pursuant to an automatic trading plan. However, Neidorff s automatic
trading abruptly stopped prior to the beginning of Centene's Second Quarter. By contrast, in
2005, Neidorff continued to sell his personally holdings in May 2005, July 2005 and December
2005. Neidorff stopped the sales of his automatic trading plan during the 2006 second quarter
because he knew that the Company did not have its medical costs under control, had under-
reported costs, and that Centene was not going to meet analysts expectations for the second
quarter and therefore if he continued to sell his stock it would be at a substantially reduced price
once the true information about the Company was disclosed to the investing market. Neidorff
also wanted to distance his sales from the revelation on July 25, 2006 that problems had occurred
in February and March 2006 that had not been disclosed.
98. Witty also sold 5,000 shares of his personal holdings of Centene common stock
for proceeds of $125,000 prior to the Second Quarter devastating disclosures. Between February
9, 2006 and April 28, 2006 and prior to the revelations on July 18, 2006 that the Company would
be reporting devastating Second Quarter earnings, Defendant Witty sold 15,000 shares of
Centene common stock for proceeds totaling $386,500. Just like Neidorff defendant Witty had
continued to sell his stock into the second and third quarter of 2005. However, in 2006, Witty
also abruptly stopped his automatic sale plan so as to not sell his personal holdings once the truth
about Centene medical costs was disclosed to the public.
PROXIMATE LOSS CAUSATION/ECOMONIC LOSS
99. Each defendant is liable for (i) making false statements, or (ii) failing to disclose
adverse facts known to him about Centene. Defendants' fraudulent scheme and course of
business that operated as a fraud or deceit on purchasers of Centene common stock was a
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success, as it: (i) deceived the investing public regarding Centene's prospects and business; (ii)
artificially inflated the prices of Centene common stock; (iii) allowed defendants to sell
thousands of dollars worth of Centene shares at artificially inflated prices; and (iv) caused
plaintiffs and other members of the class to purchase Centene common stock at artificially
inflated prices. Plaintiffs and the class suffered market losses and were damaged as the truth was
revealed and the inflation came out of Centene's stock price.
100. 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 plaintiffs and other members of the Class. During the Class Period,
defendants made or caused to be made a series of materially false or misleading statements about
Centene's business, prospects and operations. These material misstatements and omissions had
the effect of creating in the market an unrealistically positive assessment of Centene and its
business, prospects and operations, thus causing the Company's securities to be overvalued and
artificially inflated at all relevant times. Defendants' materially false and misleading statements
during the Class Period resulted in plaintiffs and other members of the Class purchasing the
Company's securities at artificially inflated prices, thus causing the damages complained of
herein. When the adverse information was finally revealed at the end of the Class Period,
Centene shares dropped materially.
101. As a result of their purchases of Centene stock at artificially inflated prices
during the Class Period, plaintiffs and the other class members suffered damages as defendants'
fraudulent conduct was revealed to the public, which in turn caused the Company's stock price
and value of Class members' investments in Centene stock to decline.
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102. Defendants' wrongful conduct directly and proximately caused the financial
damages suffered by plaintiffs and the Class.
APPLICABILITY OF PRESUMPTION OFRELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
103. The market for Centene 's securities was open, well-developed and efficient at all
relevant times. As a result of these materially false and misleading statements and failures to
disclose, Centene's securities traded at artificially inflated prices during the Class Period.
Plaintiffs and other members of the Class purchased or otherwise acquired Centene securities
relying upon the integrity of the market price of Centene' s securities and market information
relating to Centene, and have been damaged thereby.
104. During the Class Period, defendants materially misled the investing public, thereby
inflating the price of Centene 's securities , by publicly issuing false and misleading statements
and omitting to disclose material facts necessary to make defendants' statements not false and
misleading. The 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 business and operations, as alleged herein
105. At all relevant times, the market for Centene's securities was an efficient market for
the following reasons, among others:
(a) Centene's stock met the requirements for listing, and was listed and
actively traded on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer , Centene filed periodic public reports with the SEC
and the NYSE;
(c) Centene regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases
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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
(d) Centene 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.
106. As a result of the foregoing, the market for Centene 's securities promptly digested
current information regarding Centene from all publicly available sources and reflected such
information in Centene's stock price. Under these circumstances, all purchasers of Centene's
securities during the Class Period suffered similar injury through their purchase of Centene's
securities at artificially inflated prices and a presumption of reliance applies.
COUNT I
For Violations of Sections 10(b) ofThe Exchange Act And SEC Rule 10b-5 Promulgated Thereunder Against All Defendants
107. Plaintiff repeats and reallege paragraphs 1 through 106, as if restated fully herein.
108. In connection with the sale of Centene securities throughout the Class Period,
Defendants participated, directly or by acquiescence, despite a duty to act, in the preparation or
issuance of materially false and misleading statements and omissions.
109. Defendants knew, or were reckless in not knowing, that the statements contained in
Centene public filings were materially false and misleading. Plaintiffs and the Class relied,
directly or indirectly by reliance on the integrity of the market, on Defendants' misstatements or
omissions and were damaged as a result . But for Defendants' misrepresentations or omissions,
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Plaintiffs and the Class would not have purchased Centene securities or would have purchased
them at non-artificially inflated prices.
COUNT II
For Violation Of Section 20(a) Of The Exchange Act(Against The Individual Defendants)
110. Plaintiffs repeat and reallege each of the preceding paragraphs 1 through 109 as if
fully set forth herein.
111. This claim is brought against the Individual Defendants.
112. The Individual Defendants were control persons within the meaning of the
Exchange Act.
113. As set forth above, Defendants violated Section 10(b) of the Exchange Act, and
Rule IOb-5 promulgated thereunder, by their acts and omissions as alleged in this complaint. By
virtue of their positions as control persons , the Individual Defendants, each of whom violated
Section 10(b) and Rule I Ob-5, are liable pursuant to Section 20(a) of the Exchange Act.
114. As a direct and proximate result of the Individual Defendants' wrongful conduct,
Plaintiffs and the Class suffered damages in connection with their purchases of the Company's
securities during the Class Period.
NO SAFE HARBOR
115. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
The statements alleged to be false and misleading herein all relate to then-existing facts and
conditions. In addition, to the extent certain of the statements alleged to be false may be
characterized as forward looking, they were not identified as "forward-looking statements" when
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made, there was no statement made with respect to any of those representations forming the basis
of this Complaint that actual results "could differ materially from those projected," and there
were no meaningful cautionary statements identifying important factors that could cause actual
results to differ materially from those in the purportedly forward-looking statements. In the
alternative, to the extent that the statutory safe harbor is intended to 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 speaker had actual
knowledge that the forward-looking statement was materially false or misleading, or the
forward-looking statement was authorized or approved by an executive officer of Centene who
knew that the statement was false when made.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, on behalf of themselves and all other Class members, pray
for judgment as follows:
A. A determination that this action is a proper class action and a
certification of the Class under Rule 23 of the Federal Rules of Civil Procedure;
B. An award of compensatory damages in favor of Plaintiffs and the
other Class members against all Defendants for damages sustained as a result of
Defendants' wrongdoing, including interest thereon;
C. An award to Plaintiffs and the Class of their reasonable costs and
expenses incurred in this action, including counsel fees, expert fees and other disburse-
ments; and
D. A grant of such other relief as the Court may deem just and proper.
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JURY DEMAND
Plaintiffs demand a trial by jury.
Dated : January 17, 2007
By:
PASKOWITZ & ASSOICATESLaurence D. Paskowitz, Esq.Roy L. Jacobs, Esq60 East 42nd Street, 46th FloorNew York, New York 10016Tel: (212) 685-0969Fax: (212) 685-2306
Respectfully submitted,
GREEN JACOBSON & BUTSCH, P.C.
Joe D. Jacobson #3471Jonathan F. Andres #737637733 Forsyth Blvd., Suite 700Clayton, MO 63106Tel: (314) 862-6800Fax: (314) 862-1606Email:[email protected]
Liaison Counsel for Lead Plaintiff Wayne Stolteand plaintiff Larry Elam and the Class
ABBEY SPANIER RODD ABRAMS &PARADIS, LLPNancy KaboolianOrin Kurtz212 East 39th StreetNew York, New York 10016Tele:(212) 889-3700Fax: (212) 684-5191
Attorneys for Lead Plaintiff Wayne Stolte andplaintiff Larry Elam and the Class
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CERTIFICATE OF SERVICE
The filing attorney certifies that on January 17, 2007January 17, 2007, the foregoing was
filed electron-ically with the Clerk of the Court to be served by operation of the Court's
electronic filing system.
The filing attorney certifies that on the same day, copies of the foregoing were served by
mailing the same by U. S. Mail , first-class postage prepaid, to each of the following named non-
participants in Electronic Case Filing at the most recent addresses provided by these persons:
None.
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