Plaintiff, vs. CYBER-CARE INC., and MICHAEL F. MORRELL,
Defendants.
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF FLORIDA
TIMOTHY J. GRAF, On Behalf of Himself and All Others Similarly Situated,
Plaintiff,
vs.
CYBER-CARE INC., and MICHAEL F. MORRELL,
Defendants.
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) No. 00-8404
CIV-RYSKAMP
CLASS ACTION
COMPLAINT
JURY TRIAL DEMANDED
Plaintiff, by and through his attorneys, alleges the following upon the investigation of counsel, except as to those allegations concerning plaintiff, which are alleged upon personal knowledge, including, among other things, the investigation of his attorneys, including without limitation: (a) review and analysis of public filings made by Cyber-Care, Inc. ("Cyber-Care," or the "Company"), with the Securities and Exchange Commission (the "SEC"); (b) review and analysis of securities analysts' reports concerning Cyber-Care; (c) review and analysis of press releases and other publications disseminated by defendants; and (d) other publicly available information about Cyber-Care.
1. This action is brought as a class action on behalf of all persons who purchased the common stock of Cyber-Care from November 4, 1999 through May 12, 2000 (the "Class Period"). Plaintiffs' claims arise under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5 promulgated thereunder and pursuant to Section 20(a) of the Exchange Act.
JURISDICTION AND VENUE
2. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. ?78aa and pursuant to 28 U.S.C. ??1331 and 1337. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act and present federal questions.
3. Venue is proper in this judicial district pursuant to Section 27 of the Exchange Act and pursuant to 28 U.S.C. ?1391(b). At all times relevant to the complaint, the Company maintained its principal executive offices in Boynton Beach, Florida, in this judicial district. In addition, a substantial number of the false and misleading statements complained of were prepared and disseminated to the investing public from offices within this district.
4. In connection with the violations of law alleged herein, the defendants used the means and instrumentalities of interstate commerce including the United States mail, interstate wire and telephone facilities, the facilities of the national securities markets and the Internet to distribute the false and misleading statements complained of herein.
PARTIES
5. Plaintiff purchased shares of Cyber-Care at artificially inflated prices during the Class Period, and has been damaged thereby. Plaintiff's purchases of the Company's common stock are set forth in the accompanying Certification.
6. Defendant Cyber-Care is a technology assisted health management company with four business lines. The Company operates physical, occupational and speech therapy centers, an e-pharmacy, and an air ambulance transport service. In addition, during the Class Period, defendants were developing the Electronic HouseCall System, a patented Internet-based technology system that provides remote monitoring of individuals for health care purposes.
7. Defendant Michael Morrell ("Morrell") has, at all material times, been the Company's Chairman, and Chief Executive Officer. Defendant Morell personally prepared and disseminated many of the false and misleading statements complained of herein, and directed the Company's campaign of false and misleading statements regarding its product and the Company's sales, as more fully alleged herein.
SUMMARY OF ACTION
8. Cyber-Care was started in 1989, and went public in 1992 under the name "Heart Labs of America." In 1996, the Company became known as "Medical Industries of America", and changed its name to Cyber-Care in 1999 after buying an Atlanta firm that developed the EHC. The EHC was designed to enable a medical practitioner to obtain medical information from a patient, such as blood pressure, EKG and temperature on a real-time, remote basis.
9. The claims asserted herein arise out of the defendants' false and misleading statements regarding the development and sale of its Electronic HouseCall System (hereinafter the "EHC"). During the summer of 1999, Cyber-Care stock traded at between 66 and 75 cents per share, reflecting the uncertainty of FDA approval as well as recognition of a highly-competitive market which included a rival product already approved, marketed and sold by Eastman Kodak.
10. During the Class Period, defendants issued a series of public statements touting the new EHC system as well as numerous contracts which had been entered into for the sale of the EHC. After numerous repeated public announcements emphasizing the Company's successful marketing of the EHC as well as positive analyst reports issuing "BUY" ratings for the Company, Cyber-Care stock soared from below $1 to over $37 per share on February 22, 2000.
11. On May 2, 2000, Wall Street Journal columnist Herb Greenberg published an article on TheStreet.com, questioning whether Cyber-Care was complying with FDA rules for the marketing and selling of products which had not yet been approved by the FDA. Subsequently, several articles were published questioning the business of Cyber-Care, sales of EHC, and the financial stability of its purported customers. In response, the price of Cyber-Care common stock fell from $15.125 on May 1, 2000, to $13 per share on May 3, 2000, and continued to drop as additional information regarding the falsity of defendants' Class Period statements was revealed, reaching $6.8125 on May 15, 2000 - - a far cry from the Class Period high of nearly $38 per share.
12. Throughout the Class Period, the Company and Defendant Morrell made a series of false and misleading statements regarding the successful sales of the EHC, which statements caused Cyber-Care's stock price to be artificially inflated. Those statements appeared in public filings with the SEC and in Cyber-Care press releases. In addition, the misleading representations were disseminated by defendants to the public through press reports and securities analysts' reports as a result of statements defendants made to reporters and securities analysts intending that their misleading statements would be published or otherwise passed on to the public by those reporters and analysts.
13. Defendants' fraud consisted of touting the EHC and the rapidly increasing demand for the EHC. In fact, as defendants knew, or recklessly disregarded, Cyber-Care was violating FDA rules regarding the sale and marketing of products which had not yet received FDA approval. In addition, several of the multi-million dollar sales which defendants boasted of during the Class Period were sales entered into with "customers" who were either bordering on bankruptcy, or were clearly without the financial means to enter into such significant sales contracts.
14. Defendants' fraud was not limited to its own publicly issued statements. Defendants touted a "STRONG BUY" rating received from Connecticut Capital Markets, which predicted that Cyber-Care stock would reach $52 per share. Defendants went so far as to publish the analyst report on their own website. What defendants failed to disclose, as revealed in a May 14, 2000 article published in the Sun-Sentinel, was that the analyst, Paul Bornstein, was employed by Cyber-Care's own publicity firm. When confronted with the truth, defendant Morrell claimed he was "too busy" to notice that Bornstein was working for him.
SCIENTER ALLEGATIONS
15. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements, issued or disseminated by or in the name of defendants or the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws. Defendants, by virtue of their receipt of information reflecting the true facts regarding Cyber-Care, their control over Cyber-Care's allegedly materially misleading misstatements and/or their control over and close association with the Company which make him privy to confidential information concerning all of Cyber-Care's activities and operations, were active and culpable participants in the fraudulent scheme alleged herein. Defendant Morrell, and, through Morrell, Cyber-Care, knew and/or recklessly disregarded the falsity and misleading nature of the information which they caused to be disseminated to the investing public. This case does not involve allegations of false forward-looking statements or projections but instead involves false statements concerning Cyber-Care's ongoing activities in connection with the EHC, the product Cyber-Care and defendants identified as central to the Company's business. The ongoing fraudulent scheme described in this complaint could not have been perpetrated over a substantial period of time, as has occurred, without the knowledge and complicity of Morell, who was, and is Cyber-Care's top executives and hands-on managers.
16. The defendants also had the motive and opportunity to commit the fraud alleged herein. Defendants' fraud: (a) raise money to fund and protect the continued operations of Cyber-Care, upon which defendants depended for their substantial compensation and prestige; (b) personally benefit defendants by enhancing the value of their personal holdings of Cyber-Care common stock; (c) to allow defendants to raise additional capital needed to consumate the production of the EHC through the resale of millions of shares underlying convertible debentures in February, 2000, at artificially inflated prices; and (d) sell 1.5 million new shares of Cyber-Care at $16.30 per share, totaling $24.5 million to Shanghai Industrial Limited in February, 2000. As a result of the fraudulent statements, the price of Cyber-Care common stock reached a high of over $37.00 per share during the Class Period. By the end of the Class Period on May 15, 2000, Cyber-Care common stock was trading at $6.182 per share.
NO SAFE HARBOR
17. 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. To the extent any of the specific statements pleaded herein were identified as "forward-looking statements", there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements.
18. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time of each of those forward-looking statements were made, the speaker knew that the particular forward-looking statement was false, and/or the forward looking statement was authorized and/or approved by an executive officer of Cyber-Care who knew that those statements were false when made.
APPLICABILITY OF FRAUD-ON-THE-MARKET
PRESUMPTION OF RELIANCE
19. At all relevant times, the market for Cyber-Care common stock was in an efficient market for the following reasons:
(a) Cyber-Care common stock met the requirements for listing and was listed on the NASDAQ automated market system;
(b) As the Company registered pursuant to the provisions of the Exchange Act, Cyber-Care filed periodic public reports with the SEC and the NASD and was subject to the requirements for providing timely and accurate information to the investing public pursuant to the rules and regulations of the SEC and the NASD;
(c) Cyber-Care regularly communicated with public investors, analysts and market professionals generally regarding the release of current information, and generally assured that information was released over major newswire services on a current basis;
20. The market price for Cyber-Care common stock reflected the information publicly available about the Company, its results of operations and its potential products and development of those products throughout the Class Period. Thus, all purchasers of Cyber-Care common stock during the Class Period are entitled to rely on the "fraud-on-the-market" doctrine which doctrine presumes reliance on the fraudulent statements alleged herein because the market price established in an open, developed and efficient market reflects those false and misleading statements. Accordingly, reliance on the false and misleading statements alleged herein is presumed.
CLASS ACTION ALLEGATIONS
21. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of all persons who purchased the common stock of Cyber-Care from November 4, 1999 through and including May 12, 2000. (the "Class Period"). Excluded from the Class are the defendants, members of the defendants' immediate families, their legal representatives, heirs, successors and assigns and any person acting in concert with or under the control of any defendant.
22. Members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class Members is unknown to plaintiffs at the present time, plaintiffs reasonably believe that there are hundreds, if not thousands, of members of the Class throughout the United States. As of March 24, 2000, there were approximately 57 million shares outstanding of Cyber-Care common stock. The members of the Class are geographically dispersed throughout the United States and can be determined by the records maintained by the transfer agent for Cyber-Care. According to the Company's quarterly report on Form 10-Q filed with the SEC on November 15, 1999, there were approximately 5,200 Cyber-Care shareholders of record.
23. Plaintiff's claims are typical of the claims of other Class Members because the damage suffered by plaintiff and all members of the Class arise from the same conduct. Specifically, plaintiff's claims and the claims of members of the Class arise out of the misrepresentations and omissions made by the defendants regarding the successful sales of the EHC, as more fully alleged herein. Plaintiff has no claims which are antagonistic to, or in conflict with, the members of the Class.
24. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the common questions of fact are:
a) whether the federal securities laws were violated by reason of the false and misleading statements described herein;
b) whether defendants misrepresented or failed to disclose material facts regarding the EHC, sales of the EHC and the true status of Cyber-Care's business and operations as more fully particularized herein;
c) whether defendants are "controlling persons" as that term is defined in Section 20(a) of the Exchange Act;
d) whether the price of Cyber-Care's common stock was artificially inflated during the Class Period due to the material misrepresentations and omissions complained of herein; and
e) whether the members of the Class have been damaged as a result of the conduct alleged herein and, if so, the proper measure of such damages.
25. Plaintiff will fairly and adequately protect the interests of other members of the Class, and plaintiffs has retained counsel competent and experienced in class and securities litigation to prosecute the claims of the Class. Plaintiff intends to prosecute the claims asserted herein vigorously.
26. A class action is superior to the other available methods for the fair and efficient adjudication of this controversy. The Class is so numerous and geographically dispersed throughout the United States that it would be impractical for each member of the Class to bring separate actions or be joined in one individual action. In addition, the individual damages suffered by members of the Class may be relatively small when measured against the potential costs of bringing this action, thus, making the expense and burden of litigation appropriate for class action treatment. Also, the adjudication of this controversy through a class action will avoid the possibility of inconsistent and possibly conflicting adjudications of the claims asserted herein.
27. There will be no difficulty in the management of this litigation as a class action. The names and addresses of record owners of the shares of the Company's common stock may be determined through the transfer agent, and notice can be provided to such persons through appropriate means of notice through publication, mailing and notices over business wire services in a form similar to those customarily used in class action litigation arising under the federal securities laws.
THE FALSE AND MISLEADING
STATEMENTS DURING THE CLASS PERIOD
28. On November 4, 1999, the commencement of the Class Period, Cyber-Care issued a press release announcing "significant increases in revenue and profitability in the 1999 third quarter." Defendants reported revenues for the third quarter ended September 30, 1999, totalling $10,849,000, a 189% increase over the third quarter of 1998. Defendants also reported a 133% increase in operations, and a 42% increase in revenues for the nine months ending September 30, 1999.
29. With respect to the EHC, defendant Morrell stated:
"We anticipate sufficient revenue from the sales of the EHC System and recurring network ffes in the year 2000 to generate profitability in the CyberCare Technology subsididary. We are on target for our base business to achieve $40 million in revenue in 1999.
30. On November 15, 1999, defendants filed a quarterly report signed by Morrell repeating the financial results detailed in ? 28, above.
31. On November 29, 1999, defendants issued a press release announcing the launch of Cyber-Care's Internet pharmacy to the general public. The Internet was heralded as a "linkage to patients [connected] to the company's [EHC] System." Commenting on the new Internet pharmacy and its application to the EHC, Cyber-Care's president, John Haines, stated:
"As this pharmacy service is linked to our EHC System, it will add tremendous value to our target customers, such as managed care and large provider organizations, and give them the ability to contain pharmaceutical costs in the future. For the patient, it will allow them to consult directly, on-line, with their care-giver with regards to their pharmaceutical needs, and give them a level of choice that they never had before."
32. On December 1, 1999, Taylor Stuart Financial issued a press release reiterating a "Strong Buy" rating for Cyber-Care stock. The report noted in a section titled "[r]ecent developments", that: "[the] Electronic House Call System Technology [is] validated by early orders (Cambridge Medical Center) and system wide test by Sheppard Spinal Center as well as other healthcare providers and payors."
33. In response to the positive news concerning the EHC, new sales and testing, the price of Cyber-Care stock doubled from $2 per share on November 17, 1999, to $4 per share, after the analyst report detailed in ? 32, above, was issued.
34. On December 8, 1999, defendants issued a press release announcing a contract with AmeriChoice Health Services. According to defendants, the agreement would demonstrate the "viability of a risk-sharing model for its Electronic Housecall System." Defendants touted the cost-saving benefits of the EHC, because of its ability to deter "costly interventions such as emergency room visits."
35. On December 20, 1999, defendants announced publicly that Cyber-Care had reached an agreement with HomeTown Neighborhoods, Inc., to provide the EHC to residents of one of HomeTown's developments, Amelia Park. Commenting on the agreement, a spokesman for the Company stated:
"This is the first application in the country where an entire community will be equipped with this revolutionary technology in their homes. It will change the way health care is delivered with the return of the old-fashioned doctor's house call; except, now it can be done much more conveniently and cost-effectively."
36. In response to the news of additional contracts for the EHC, the price of Cyber-Care common stock rose steadily throughout the month of December, reaching $11.175 on December 20, 1999. Had the truth concerning Cyber-Care's flaunting of FDA rules and the financial condition of its purported "customers" been known to the investing public, the stock would not have traded at such artificially inflated prices.
37. On January 6, 2000, defendants issued a press release announced that the Company signed an agreement with Health-Link Group, LLC, of Atlanta, Georgia, a provider of services to assisted living facilities, to begin offering EHC to residents of assisted living facilities in twelve major markets across the United States. A spokesman for Cyber-Care commented on the deal, stating:
"The Electronic Housecall technology was designed to use the power of the Internet to deliver real healthcare services, not just information. We have been focused in the past on meeting the special needs of the highest cost chronically ill patients. This alliance shows that the technology is very well suited for patients with less critical needs as well. The innovative programs of Health-Link Group will allow us to efficiently serve both markets."
38. On January 13, 2000, Cyber-Care announced that it had signed "major contracts" with Health System One, Inc., a Florida corporation headquartered in Fort Lauderdale that provides programs and services to healthcare payors and providers, including a contract for the sale of the EHC.
39. On January 14, 2000, Cyber-Care stock reached $14.25 per share.
40. On February 2, 2000, defendants issued a press release touting yet another contract for the sale of the EHC. Defendants announced that Cyber-Care had signed a letter of intent to form a joint venture with SIIC Medical Science and Technology Group Limited, a publicly owned subsidiary of Shanghai Industrial Holdings Limited. The agreement included a plan to market and sell, over the next four years, more than 60,000 of the Company's EHC systems in Japan, Taiwan, Australia, and New Zealand.
41. Commenting on the agreement, defendant Morrell stated:
"This new marketing and manufacturing agreement with SIIC Medical is extremely exciting. The opportunity to begin selling the EHC globally is very significant for Cyber-Care and presented itself quicker than we expected, but it validates our expectations that the EHC product will revolutionize health care throughout the world via the Internet. Our patents give us exclusive rights to use the Internet for this purpose."
42. On February 4, 2000, defendants issued a press release announcing that Connecticut Capital Markets issued an updated research report on Cyber-Care reiterating a previous "Strong Buy" rating, and setting a new 12 month price target of $52 per share. The press release attributed the reason for the "Strong Buy" rating to "the faster market acceptance and more widespread demand for the company's Electronic Housecall System, a patented Internet-based technology that allows a health care provider to remotely monitor individuals." The press release indicated that the purported research report was available for public viewing under the Company's website, at "www.cyber-care.net."
43. In response to the extremely favorable analyst report issuing a price target of $52 per share, the price of Cyber-Care stock skyrocketed from $15.937 on February 3, 2000, to $19.312 on February 7, 2000, after the analyst report was disseminated to the market. The price of Cyber-Care stock continued to climb in anticipation of the stock's imminent increase forecasted by Connecticut Capital Markets, reaching over $37 per share on February 22, 2000.
44. The press release issuing a price target of $52 per share and reiterating a "Strong Buy" rating for Cyber-Care stock was materially false and misleading, in that it purported to come from an independent analyst, Connecticut Capital Markets. In fact, as revealed in a May 14, 2000 article published in the Sun-Sentinel, the analyst doing the promoting was in fact working for Cyber-Care. Paul Bornstein, research director of Connecticut Capital Markets, was actually an employee of Cyber-Care's publicity firm. When confronted with the truth by a concerned investor, defendant Morrell stated that he was busy, and did not notice that the very same analyst who issued a "Strong Buy" rating for his Company's stock - - and drove the stock price to its Class Period high - - was in fact employed by Cyber-Care.
45. On February 14, 2000, defendants issued a press release announcing that Cyber-Care was cancelling a $25 million equity line with Swartz, Inc., and filed a registration statement with the SEC for the resale of up to 4,111,087 shares underlying convertible debentures and up to 8,430,061 shares issued in connection with the acquisition of the EHC. The Company also registered for resale 5,812,615 shares for the exercise of warrants relating to debt financing received in connection with EHC. The reason for the cancellation of the equity line was due to the "numerous financing opportunities available to the Company."
46. Defendant Morrell stated:
"The proceeds from our recent financings allowed us to finish the initial development of our exciting new health care Internet product, the Electronic Housecall System. Preliminary order indications for this product are coming in at a much faster pace than we expected, demonstrating the desire and need for this unique product in the marketplace, both inside and outside the United States."
47. On February 18, 2000, defendants announced that a definitive agreement had been signed between Cyber-Care and a subsidiary of Shanghai Industrial Holdings Limited, a deal which was disclosed earlier in the Class Period. The deal was again touted as an entry for EHC into major Asian markets such as China, with estimated revenue of $500 million over the next four years. In addition, defendants disclosed that Shanghai Industrial agreed to buy 1.5 million new shares of Cyber-Care at $16.30 per share, totaling $24.5 million.
48. On February 24, 2000, defendants announced that the results of a recent clinical review completed by resourceLink of Iowa, a joint project with the University of Iowa using the EHC, found that the Company's system reduced health care costs significantly over traditional methods. The press release quoted Dr. Michael Kienzle, Director of Telemedicine for the University of Iowa, as stating:
"We are seeing significant benefits both in terms of cost and clinical outcomes. In fact, based on a 2-year study that will soon be released, overall healthcare costs related to patients in the study have been reduced by as much as 36%."
49. Michael Lemnitzer, Cyber-Care's Vice President for Business Development stated, on behalf of defendant Cyber-Care:
"I am pleased that the statistical results illustrate how such a program can develop substantial savings and improve clinical outcomes for providers that utilize our system. These results are consistent with other sites and validate that a provider can change the delivery of healthcare and reduce costs while improving the patient's outcome and satisfaction of care."
50. In response to the news validating the cost-reductions, and therefore commercial appeal, of the EHC, Cyber-Care stock traded at the artificially inflated price of over $28 per share on February 24, 2000.
51. Defendants' statements detailed in ?? 48 and 49, above, were materially false and misleading. As revealed in a May 8, 2000, column published by Herb Greenberg on TheStreet.com, Kienzle's comments on the cost-effectiveness of Cyber-Care's product had nothing to do with the EHC. In fact, Kienzle never authorized the press release that was issued. As stated in the May 8, 2000, column:
"[Kienzle's comments] referred to a study using another Cyber-Care product that, like Kodak's uses telephone lines - - a product for which Cyber-Care has not yet even applied for FDA approval."
52. The column detailed in ? 51 above quoted Kienzle as stating:
"We have never used [Cyber-Care's] Internet-based product...[o]ur experience is with the POTS (plain old tele-phone service)...I do not want to misrepresent our experience and say this is an Internet program. This is a POTS program."
53. Defendants knowingly or recklessly utilized Kienzle's statements about another product to convey the false impression that the EHC - - the product with Internet and therefore investor appeal - - had been tested and found cost-effective.
54. On March 21, 2000, defendants issued a press release announcing a strategic alliance with Metropolitan Health Networks (MetCare), a Florida provider of health care services. According to the press release, MetCare agreed to purchase 2,500 units of the EHC in the next 12 to 18 months and an additional 10,000 units over 24 to 36 months. Commenting on the new deal, defendant Morrell stated:
"Our technology and provider network will allow MetCare to integrate real time referrals, payment of claims, and patient information. Cyber-Care will be able to bring operating efficiencies via the Internet to MetCare, streamlining their services and lowering costs. Cyber'Care's technology is only beginning to skim the surface in bringing operating efficiencies and lower costs to the health care industry."
55. In response to the news of another contract for EHC, the price of Cyber-Care rose to over $24 per share on March 21, 2000.
56. Defendants' statements detailed in ? 54 above, were materially false and misleading in that they failed to disclose necessary information regarding the financial condition of MetCare - - information necessary to evaluate the merit of the announced sale and the value to investors. As disclosed in a May 8, 2000 article published on TheStreet.com:
"[MetCare] said it will buy up to 12,500 Cyber-Care units over the next 36 months. The cost of each unit, the company has said, is around $5,000, which means that Metropolitan Health could be on the hook for at least $60 million. Why worry? Because in 1998 Metropolitan's auditors raised doubts about its ability to continue as a "going concern;" Metropolitan was delisted from the Nasdaq on May 20, 1999. Then, four weeks ago, Metropolitan filed an 8K with the SEC disclosing that it cannot file its 10K and 10Q, citing "insufficient cash flow" as one of the reasons. What's more...Metropolitan is behind on at least four separate lease payments. It's also behind in payments to its largest customers. Our question: If it has insufficient cash flow to file an SEC document and has been behind on payments to its largest customers, what makes Metropolitan Health think that it can buy $60 million of Cyber-Care's product?"
57. On April 3, 2000, Cyber-Care issued a press release announcing year end financial results. The Company had revenues of $39,156,000 compared to $13,431,000 in 1998, an increase of 192%. Operating income was $1,490,000, compared to a loss of $1,765,000. Commenting on the financial results, defendant Morrell stated:
"Cyber-Care continues to maintain its profitability during the development of our Electronic HouseCall System. Currently our Electronic HouseCall business is expanding extremely rapidly. We continue to focus on its development."
58. John Haines, President of Cyber-Care added:
"Interest for the Electronic HouseCall System continues to be overwhelming. We currently have orders and committments for over 100,000 Electronic HouseCall Systems worldwide and should begin to place these units in the marketplace during the second half of the year."
59. On the same day, defendants filed their annual report on Form 10-K for the fiscal year ended December 31, 1999, signed by defendant Morrell. In the annual report, defendants represented that Cyber-Care had received commitments for over 36,000 units to be sold over the next three years - - translating to $180 million in sales. Defendants also predicted even larger sales in the Far East.
60. Defendants' statements detailed above in ?? 58 and 59 were materially false and misleading. As detailed herein, defendants' numerous statements touting the company's significant sales to new customers failed to disclose the truth concerning those customers - - specifically that the customers lacked the financial capability to enter into contracts as large as those announced by Cyber-Care, and defendants had no reasonable basis to believe that the "36,000" units would actually result in consumated sales.
61. On April 3, 2000, Cyber-Care stock traded at over $16 per share.
The Truth Begins To Unfold
62. On May 2, 2000, Wall Street Journal columnist Herb Greenberg published a column on TheStreet.com entitled "Is Cyber-Care Abiding by the Rules of the FDA?". The column noted that Cyber-Care has issued "no fewer than 10 press releases touting its new Electronic Housecall System...which represents much of the hype that has driven the company's market value in recent months to $875 million, or a robust 22-times sales on no profit." The column further stated:
"Just one problem for Cyber-Care: Its heavily promoted version of the product hasn't been approved by the FDA, which means Cyber-Care isn't supposed to be promoting it - - or at least not promoting it the way it has been."
***
"So, the question is: If Cyber-Care shouldn't be promoting a product that hasn't yet received FDA approval, why are sales of the product being promoted in press releases? One recent release, for example said that Metropolitan Health Networks "has agreed to purchase, pending FDA approval, 2,500 [EHC] units in the next 12 to 18 months and an additional 10,000 units over 24 to 36 months". FDA regulations require what's known as 510K marketing approval before any medical device is sold, marketed or publicized."
63. When confronted with the FDA requirements, a spokesman for Cyber-Care revealed that the press release touting the MetCare sale was not, actually for the sale of the EHC. According to Cyber-Care, the press release - - the same one in which defendants boasted of a huge impending sale of thousands of EHC units over the next three years - - was for a "low-end" product, not the EHC. Cyber-Care referred to the press release as a "misunderstanding."
64. As revealed in the May 2, 2000 column detailed above, Cyber-Care was questioned whether all of the press releases touting the pending sales of EHC were for a low-end product. According to the Company, the press releases were all for low-end products - - not the EHC which defendants claimed the sales were for, and touted as the cornerstone of the Company's future profitability.
65. On May 8, 2000, Herb Greenberg published another column on TheStreet.com revealing material, previously undisclosed facts about some of the customers defendants claimed were ordering mass quantities of the EHC, including facts surrounding the financial instability of MetCare, as detailed above, and the falsity of defendants' statements with respect to the University of Iowa study.
66. On May 12, the close of the Class Period, Cyber-Care stock was trading at $8.50 per share, after steadily dropping in response to the news revealing the truth about the Company's EHC sales and its customers.
67. On May 14, 2000, an article was published in the Sun-Sentinel, which announced that Cyber-Care was being investigated by the FDA for possible violations of federal rules for taking orders and announcing sales for EHC, even though the agency had not granted approvalfor the product.
68. The Sun-Sentinel article also revealed that two key executives, the Company's Chief Technology Officer and marketing Vice President, had resigned in April for "undisclosed reasons." In addition, the article noted that the company's press release touting the sale of EHC units to Health System One, a Plantation, Florida company, was also in question. Health System One was a relatively unknown company, open less than a year. Health System One was formed in a management buy-back of a failed physician management company, whose ability to close on a $5 million dollar purchase was seriously questioned by analysts.
69. In effect, the articles detailed above disclosed the falsity of defendants' Class Period statements - - calling into question both defendants' practice of taking orders for its key product (and the reason for the stock's massive price climb) as well as the customers to which those orders were placed. Accordingly, Cyber-Care stock was grossly inflated during the Class Period, as the stock would never have reached such high levels without the excitement generated by defendants' repeated statements concerning its new Internet product, the viability of that product, and its numerous sales contracts.
FIRST CLAIM FOR RELIEF UNDER SECTION 10(b)
OF THE EXCHANGE ACT AND RULE 10b-5
70. Plaintiff repeats and realleges each and every allegation as if set forth in full herein.
71. Throughout the Class Period, defendants, singly and in concert, directly or indirectly, engaged in a common plan, scheme and course of conduct described herein, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and a course of business which operated as a fraud upon plaintiff and other members of the Class; made various false statements of material facts and omitted to stated materials to make the statements made not misleading to plaintiff and the other members of the Class; and employed manipulative or deceptive devices and contrivances in connection with the purchase and sale of Cyber-Care stock.
72. The purpose and effect of defendants' plan, scheme, and course of conduct was to artificially inflate the price of Cyber-Care stock and to artificially maintain the market price of Cyber-Care securities.
73. Defendants, who include the top officer of the Company, had actual knowledge of the material omissions and/or the falsity of the material statements set forth above, and intended to deceive plaintiff and the other members of the Class, or, in the alternative, acted with reckless disregard for the truth when they failed to ascertain and disclose the true facts in the statements made by them or other Cyber-Care personnel to the SEC, securities analysts and members of the investing public, including plaintiff and the Class.
74. As a result of the foregoing, the market price of Cyber-Care securities was artificially inflated during the Class Period. In ignorance of the falsity of the reports and statements, and, the material misstatements by Morrell regarding the EHC and sales of the EHC during the Class Period, and the deceptive and manipulative devices and contrivances employed by defendants, plaintiff and the other members of the Class relied, to their damage, on the reports and statements described above and/or the integrity of the market price of Cyber-Care stock during the Class Period in purchasing Cyber-Care common stock at prices which were artificially inflated as a result of defendants' false and misleading statements.
75. Had plaintiff and the other members of the Class known of the material adverse information which defendants did not disclose, they would not have purchased Cyber-Care common stock at the artificially inflated prices that they did.
76. Defendants' concealment of this material information served only to harm plaintiff and the other members of the class who purchased Cyber-Care common stock in ignorance of the financial risk to them as a result of such non-disclosures.
77. As a result of the wrongful conduct alleged herein, plaintiff and other members of the Class have suffered damages in an amount to be established at trial.
78. By reason of the foregoing, defendants have violated Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 promulgated thereunder and are liable to the plaintiff and the other members of the Class for the substantial damages which they suffered in connection with their purchase of Cyber-Care common stock during the Class Period.
SECOND CLAIM FOR RELIEF FOR VIOLATION
OF SECTION 20(a) OF THE EXCHANGE ACT
79. Plaintiff repeats and realleges each and every allegation set forth in full herein.
80. Defendant Morrell, by virtue of his office, directorship and specific acts was, at the time of the wrongs alleged herein, a controlling person of Cyber-Care within the meaning of Section 20(a) of the Exchange Act. Defendant Morrell had the power and influence and exercised the same to cause Cyber-Care to engage in the illegal conduct and practices complained of herein by causing the Company to disseminate to the public, or through analysts, the materially false and misleading information referred above.
81. Defendant Morrell's position made him privy to and provided him with actual knowledge of the material facts concealed from plaintiff and the Class by Cyber-Care during the Class Period.
82. By reason of the conduct alleged in the First Claim for Relief, Defendant Morrell is liable for the aforesaid wrongful conduct and is liable to the plaintiff and the members of the Class for the substantial damages which they suffered in connection with their purchases of Cyber-Care common stock during the Class Period.
WHEREFORE, Plaintiff, on his own behalf, and on behalf of the other members of the Class, pray for judgment as follows:
1) Declaring this action to be a proper class action, certifying the Plaintiff as a Class representative and his counsel as Class Counsel;
2) Declaring and determining that the defendants violated the federal securities laws by reason of their conduct as alleged herein;
3) Awarding money damages against the defendants, jointly and severally, in favor of the plaintiff and the other members of the Class for all losses and injuries suffered as a result of the acts and transactions complained of herein, together with prejudgment interest on all of the aforesaid damages which the Court shall award from the date of said wrongs to the date of judgment herein at a rate the Court shall fix;
4) Awarding plaintiff his costs and expenses incurred in this action, including reasonable attorneys', accountants' and experts' fees; and
5) Awarding such other relief as may be just and proper.
Dated: May 19, 2000.
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
BY:__________________________
Kenneth J. Vianale
E-Mail: kjv@mwbhlny.com
Fla. Bar No. 169668
Maya Saxena
Fla. Bar No. 0095494
E-Mail: ms@mwbhlny.com
5355 Town Center Road
Suite 900
Boca Raton, Florida, 33486
Tel:(561) 361-5000
Fax: (561) 367-8400
CAULEY & GELLER, LLP
Paul J. Geller
7200 West Camino Real, Suite 203
Boca Raton, Fl 33433
Tel:(561) 750-3000
Fax: (561) 750-3364
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
Steven J. Toll
1100 New York Avenue, N.W.
West Tower, Suite 500
Washington, DC 20005-3934
Tel: (202) 408-4600
Fax: (202) 408-4699
Attorneys for Plaintiff
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