Robert E Lifson, et al. v. Assisted Living Concepts, Inc., et al. 12-CV-00884-Amended Complaint

113 Pages·2013·5.17 MB·English

by  Robert E Lifson

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
ROBERT E. LIFSON, individually and on Case No. 12-C-884
behalf of all others similarly situated,
CLASS ACTION
Plaintiff,
v. AMENDED COMPLAINT FOR
VIOLATION OF THE FEDERAL
ASSISTED LIVING CONCEPTS, INC SECURITIES LAWS
and LAURIE A. BEBO,
Defendants. DEMAND FOR JURY TRIAL
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TABLE OF CONTENTS
Page
I. �INTRODUCTION .............................................................................................................. 1
II. �NATURE AND SUMMARY OF THE ACTION .............................................................. 2
III. �JURISDICTION AND VENUE ......................................................................................... 7
IV. �THE PARTIES.................................................................................................................... 8
A. Lead Plaintiff .......................................................................................................... 8
B. Defendants .............................................................................................................. 8
V.� CONFIDENTIAL WITNESSES ........................................................................................ 9
VI. DEFENDANTS’ VIOLATIONS OF THE FEDERAL SECURITIES
LAWS............................................................................................................................... 14
A. �Company Background .......................................................................................... 14
B. �ALC Adopts Aggressive “Private Pay” And Expansion Strategy
While Simultaneously Slashing Costs .................................................................. 15
C. �The CaraVita Lease With Ventas Realty .............................................................. 18
D. �Violations Of The CaraVita Lease Covenants ...................................................... 19
1. �The State Regulatory Violations ............................................................... 19
a) Tara Plantation (Georgia) ..............................................................20
b) Peachtree Estates (Georgia) ...........................................................22
c) CaraVita Village (Alabama) ..........................................................26
d) Highland Terrace (Florida) ............................................................28
e) Winterville (Georgia) .....................................................................33
f) Greenwood Gardens (Georgia) ......................................................37
g) The Sanctuary At Northstar (Georgia) ...........................................38
h) Additional Pervasive Regulatory Violations .................................40
2. �Defendants’ Additional CaraVita Lease Violations ................................. 49
E. �Investors Begin To Learn The Truth .................................................................... 54
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VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING
STATEMENTS AND OMISSIONS ................................................................................ 60
A. Fourth Quarter and Year-End 2010 ...................................................................... 61
B. First Quarter 2011 ................................................................................................. 65
C. July 21, 2011 SEC Correspondence Regarding ALC’s Compliance
With CaraVita Lease Covenants ........................................................................... 68
D. Second Quarter 2011............................................................................................. 70
E. Third Quarter 2011 ............................................................................................... 73
F. Fourth Quarter and Year-End 2011 ...................................................................... 76
VIII. �ADDITIONAL SCIENTER ALLEGATIONS ................................................................. 79
A. The 2011 SEC Correspondence ............................................................................ 79
B. State Inspection Reports, Citations, And Notices Of Revocation ........................ 79
C. Termination Of Bebo “For Cause” ....................................................................... 82
D. The Ventas Litigation And $100 Million “Settlement” ........................................ 83
E. Defendants Closely Monitored Regulatory Violations At ALC
Facilities................................................................................................................83
F. Defendants Closely Monitored Occupancy Levels As One Of
ALC’s “Most Important Key Performance Indicators” ........................................ 90
IX. �LOSS CAUSATION ......................................................................................................... 95
X. �CLASS ACTION ALLEGATIONS ............................................................................... 101
XI. THE APPLICABILITY OF PRESUMPTION OF RELIANCE: THE
FRAUD ON THE MARKET DOCTRINE .................................................................... 103
XII. �CLAIMS FOR RELIEF .................................................................................................. 106
FIRST CLAIM FOR RELIEF For Violation Of Section 10(b) Of The Exchange
Act And Rule 10b-5(b) Against ALC And Bebo............................................................ 106
SECOND CLAIM FOR RELIEF For Violation Of Section 20(a) Of The
Exchange Act Against ALC And Bebo .......................................................................... 108
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I.� INTRODUCTION
Court-appointed Lead Plaintiff, the Pension Trust Fund For Operating Engineers (“The
Pension Trust Fund” or “Lead Plaintiff”), brings this action individually and on behalf of all
persons and entities who purchased or otherwise acquired the publicly-traded Class A common
stock of Assisted Living Concepts, Inc. (“ALC” or the “Company”) between March 4, 2011 and
August 6, 2012, inclusive (the “Class Period”), and were damaged thereby (collectively, the
“Class”). Excluded from the Class are Defendants (as set forth herein), present or former
executive officers of ALC and their immediate family members (as defined in 17 C.F.R.
§ 229.404, Instructions (1)(a)(iii) and (1)(b)(ii)).
Lead Plaintiff alleges the following based upon personal knowledge as to itself and its
own acts and upon information and belief as to all other matters. Lead Plaintiff’s information
and belief is based on, inter alia, the independent investigation of Court-appointed Lead
Counsel, Bernstein Litowitz Berger & Grossmann LLP. Lead Counsel’s investigation included
but was not limited to, a review and analysis of: (i) public filings with the Securities and
Exchange Commission (“SEC”) by ALC; (ii) research reports by securities and financial analysts
regarding ALC; (iii) transcripts of ALC investor conference calls; (iv) press releases and media
reports; (v) economic analyses of the historical movement, pricing and trading data for publicly-
traded ALC common stock; (vi) publicly-available filings in legal actions brought against and
among ALC and Bebo; (vii) consultations with relevant experts; (viii) interviews with former
employees of ALC; and (ix) other publicly-available material and data identified herein. Lead
Counsel’s investigation into the factual allegations contained herein is ongoing, and many of the
relevant facts are known only by the Defendants named herein, or are exclusively within their
custody or control. Lead Plaintiff believes that substantial additional evidentiary support will
exist for the allegations set forth herein after a reasonable opportunity for discovery.
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II. NATURE AND SUMMARY OF THE ACTION
1. This is a securities fraud class action against one of the nation’s largest senior
assisted living providers, Assisted Living Concepts, Inc., and its former President and Chief
Executive Officer (“CEO”), Laurie A. Bebo (“Bebo”). According to the Company, ALC operates
more than 200 assisted living facilities with over 9,000 units in 20 states, and provides housing
and assistance with residents’ daily living needs, such as eating, bathing, dressing, and
medication management. ALC operates within a highly-regulated industry and its facilities are
subject to numerous health, safety and other code requirements, as well as frequent and regular
inspections by state regulators. Certain of ALC’s facilities also include a special unit known as
“memory care” unit, which provides more intensive services and security for residents with
Alzheimer’s disease, dementia and other mental impairments and, accordingly, are subject to
even stricter regulatory requirements.
2. This action arises from Defendants’ false and misleading statements regarding
ALC’s compliance with state regulatory and other requirements, as well as certain occupancy
and operating covenants in a master lease agreement between ALC and Ventas Realty, Limited
Partnership (“Ventas”), governing eight separate ALC-operated senior living facilities located in
Georgia, Alabama, South Carolina and Florida, which collectively accounted for approximately
15% of the Company’s entire business (the “CaraVita Lease”). Although Defendants repeatedly
assured investors that ALC was in compliance with all terms of the master lease agreement with
Ventas – including, in particular, ALC’s compliance with state and federal regulations sufficient
to maintain its operating licenses for all Ventas-leased facilities – in truth, health department
officials in those states found serious and systematic health and safety code violations warranting
permanent revocation of ALC’s operating licenses. Unbeknownst to investors (or to Ventas),
ALC’s facilities were subject to numerous undisclosed and uncorrected citations for serious
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regulatory violations prior to and throughout the Class Period. Alabama regulators, for example,
found that deficiencies at one ALC facility – which were detailed in an 85-page narrative listing
numerous, repeated willful violations dating back to 2009 – put “residents at serious risk for
physical and emotional harm” such that ALC’s operating license should be revoked. Georgia
regulators also notified the Company that it intended to revoke its operating license after
determining that ALC’s practices, which had led to at least one death, posed “ an imminent and
serious threat to the physical and emotional safety to persons in care. ”
3.� Defendants also made false and misleading statements about the success of the
Company’s aggressive “private pay” strategy, adopted in 2006, to shift its customer base from
residents participating in subsidized care programs (such as Medicaid) to “private pay” residents,
increase ALC’s capacity through acquisition and expansion, and improve margins by
dramatically cutting costs. Throughout the Class Period, Defendants repeatedly touted the
Company’s strong financial performance and quarter-over-quarter growth, including ALC’s
“record” operating margins for the fourth quarter of 2011, which led to the Company reporting
net income of $7.3 million, a 35% increase over earnings reported just one year earlier.
Defendants attributed ALC’s financial performance to the success of the private pay strategy,
which Defendants repeatedly assured investors would achieve costs savings in a manner that
would “maintain or improve the quality of care ” provided at ALC facilities. Indeed,
Defendants claimed in SEC filings that one of ALC’s primary competitive advantages, was that
“the staffing model of our residences . . . emphasizes the importance we place on delivering
quality care to our residents, with a particular emphasis on preventive care and wellness .”
Similarly, throughout the Class Period, Defendants touted the Company’s reported occupancy
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data, including the percentage of private pay residents, information the Company deemed one of
the “most important key performance metrics” for ALC executives and investors.
4. In truth, ALC’s private pay strategy was an abysmal failure. Practically all of
ALC’s regulatory violations – and violations of the Ventas lease covenants – were driven by the
Company’s corporate-level directive to reduce costs. For example, in citing to inadequate
staffing levels that endangered resident welfare, state inspection reports recounted statements
from ALC employees who explained, for example, that “they [ALC’s corporate office] are so
concerned about the hours worked” that “the corporate office does not allow [the facility] chef
sufficient man hours to clean up” after meals, and that “the Regional Director of Operations for
the Alabama facility refused to provide CPR training for facility staff, and required that
employees pay for such training out of their own pockets.”
5. Additionally, while Defendants claimed that ALC was increasing its private pay
occupancy rates throughout the Class Period, in fact, Defendants were deliberately and
systematically overstating and falsifying ALC’s occupancy data by including rooms occupied by
employees and third-parties as bona fide rentals, and other misconduct that inflated and falsified
ALC’s occupancy information provided to Ventas, the SEC, and investors. Moreover, as ALC
later admitted in its 2011 Annual Report on Form 10-K filed with the SEC on March 12, 2012,
the “private pay strategy” actually “ resulted in a significant number of unoccupied units .”
6. Numerous former ALC employees who were interviewed by Lead Counsel as
confidential witnesses (as described below) in connection with this Complaint confirm that, as a
direct and foreseeable result of the Company’s private pay strategy, cost-cutting measures and
staff reductions, ALC received hundreds of citations for health and safety code violations, notices
of license revocation and rising consumer complaints, which were not promptly addressed. ALC
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ultimately was subject to state regulatory actions and citations in seventeen of the twenty states
in which it operates, an SEC investigation, a lawsuit by Ventas and other civil litigation. The
Company was forced to buy out all of the properties previously leased from Ventas – paying
150% more than ALC’s own estimated fair market value for the properties – plus $3 million
and Ventas’ litigation expenses, for a total of more than $100 million , to resolve the Ventas
lawsuit, effectively wiping out ALC’s profits for the entire prior year.
7. On May 3, 2012, the Company launched an internal investigation into reports that
ALC had submitted fraudulent occupancy information and other “irregularities with the
Company’s lease with Ventas.” Shortly thereafter, ALC’s Vice President and Medical Director,
Dr. Mark Schaten, who reported directly to Bebo and described himself as a “key member of
[ALC’s] Senior Leadership Team,” together with an ALC Corporate Nurse, shredded resident
treatment records at the ALC/Ventas facility, Peachtree Estates, in Georgia. According to a
former Peachtree Estates employee, another ALC employee notified Georgia regulators of the
shredding.
8. Just weeks later, on May 29, 2012, ALC’s Board fired its President and CEO,
Bebo, “for cause.” According to former ALC employees, Bebo was abruptly “escorted” out of
the Company’s Menomonee Falls headquarters the same day she was fired. One analyst who
followed ALC throughout the Class Period cited Bebo’s departure, the “negative image” of the
Ventas lawsuit and “related improprieties” as reasons for downgrading the Company, writing the
“sudden departure of CEO is never a good thing and it is unlikely near term performance will
1
exceed expectations.” Dr. Schaten was also fired by ALC in June 2012, shortly after Bebo.
1
Emphasis added throughout unless otherwise specified.
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9.� Bebo has since sued the Company seeking more than $2.4 million in severance
pay and other termination payments, as well as indemnification and payment of defense costs in
this and other pending litigation and proceedings. In its SEC filings, ALC has explicitly reserved
its rights to file a counterclaim against Bebo , “including for matters related to her conduct and
performance in her capacity as CEO of ALC .” Bebo also filed a complaint with the U.S.
Department of Labor against ALC under the “whistleblower” provisions of the Sarbanes-Oxley
Act of 2002, claiming her “termination was in retaliation for her suggestion that the Company
disclose that the reason for the delay in its earnings report and earnings call, announced on
May 3, 2012 [sic], was the . . . litigation with Ventas.”
10. As the market began to learn the truth about Defendants’ Class Period
misstatements regarding ALC’s compliance with the Ventas lease, the failure of its private pay
strategy, and the Company’s true financial and operating condition, ALC’s stock price
2
plummeted more than 64% from its Class Period high of $19.57 to a low of $7.89 on August 7,
2012, following the Company’s announcement of the SEC investigation – causing a total market
capitalization loss of $233 million .
11. The market’s response to revelations of Defendants’ misconduct is demonstrated
graphically below.
2
Adjusted for two-for-one stock split on May 2, 2011.
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�
Assisted Living Concepts Inc.
P.4*0 10, lOU M6y 1G47. 2011
(NYSE: ALC) ALC rnhm 1deadIIn MC lips 10-Q In, Cli 2012.
forOl 2012cusIn0 stuck netepling 06W deiiIi but Venial
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causing 1(01k i0i 0 dodIne $202
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Cline $1-Q per share Sr
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Share or12.3S%oe Prior dde.
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ALConQurrc5o 2Cl/2011
s's results, reporting net lOSS
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III. JURISDICTION AND VENUE
12. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and SEC
Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.
13. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. Section 1331 and Section 27 of the Exchange Act.
14. Venue is proper in this District pursuant to 28 U.S.C. Section 1391(b) and Section
27(a) of the Exchange Act because, at all relevant times, ALC has conducted business in this
District and has maintained its principal executive office in this District at W140 N8981 Lilly
Road, Menomonee Falls, Wisconsin, and because many of the false and misleading statements
were made in or issued from this District.
15. In connection with the acts alleged in this Amended Complaint For Violation Of
The Federal Securities Laws (“Complaint”), defendants, directly or indirectly, used the means
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