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TRANSCRIPT
tL'TED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
DENNIS CHU, AMBASSADOR WINDOWAND DOOR CO . PENSION PLAN ANDTRUST, BRUCE BRAVE RMAN, GLENNCHENOT, CHRISTINE DAVID, SUSANDORMAN, JAMES ANTHONY DOUCETTE,STEVE HILL, JEFFREY MAHLER, HUGHESSCHREPFER, KEN SCHUTZ, et al .,Individually AndOn Behalf Of All Others SimilarlySituated,
Plaintiffs ,
VS .
SABRATEK CORPORATION ,K . SHAN PADDA, ANIL K . RASTOGI,STEVEN L . HOLDEN, DORON C . LEVITAS,VINCENT J . CAPPONI, STEPHEN L .AXEL, ALAN E . JORDAN, STEPHAN C .BEAL, ELLIOTT R. MANDELL, SCOTT P .SKOOGLUND, PETER L . SMITH, WILLIAMD . LAUTMAN, WILLIAM H . LOMICKA andKPMG LLP
Defendants .
NOTICE OF FILING
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CL ; U c L. f̀r
To : Counsel On The Attached Certificate of Servic e
PLEASE TAKE NOTICE that on Wednesday, November 17, 1999,we filed with the Clerk of the United States District Court for theNorthern District of Illinois, Eastern Division, 219 South DearbornStreet, Chicago, Illinois, the Third Amended Class Action Complaintfor Violations of Federal Securities Laws, a copy of which ishereby served upon you .
DATED : November 17, 1999MILLER FAUCHER CAFFERTY and
WEXLER LLPs 4 h
M ±vin A. MillerAdam J . Levitt30 No . LaSalle St ., Suite 3200Chicago, Illinois 6060 2(312) 782-4880
L v
CASE NO . 99C-035 1
Judge CastilloMagistrate Judge Nolan
)CERTTFICATE OF SERVICE\'\r 1
I, Marvin A. Miller, one of plaintiff's attorneys, herebycertify that I caused the Third Amended Class Action Complaint forViolations of Federal Securities Laws to be served upon thefollowing by hand delivery this 17th day of November, 1999 :
Jerold S . SolovyRonald L . MarinerDaniel LynchC . John KochJenner & BlockOne IBM Plaza
Chicago, Illinois 6061 1
rvin . Mil er
Z
-"r < IN 1 ITED STATES DISTRICT COURT {FOR THE NGRTHERN DISTRICT OF ILLINO I
EASTERN DIVISION
DENNIS CHU, AMBASSADOR WINDO WAND DOOR CO. PENSION PLAN AND }TRUST, BRUCE BRAVERMAN, GLENN ) CASE NO. 99C-0351CHENOT, CHRISTINE DAVID, SUSANDORMAN, JAMES ANTHONY DOUCETTE, ) Judge CastilloSTEVE HILL, JEFFREY MAHLER, HUGHES ) Magistrate Judge NolanSCHREPFER, KEN SCHUTZ, et al ., }Individually And )r4 "}On Behalf Of All Others Similarl ySituated, 8 1999
}Plaintiffs, ) JURY TRIAL DEMANDED
}vs .
SABRATEK CORPORATION ,K . SHAN PADDA, ANIL K . RASTOGI ,STEVEN L . HOLDEN, DORON C . LEVITAS, }VINCENT J . CAPPONI, STEPHEN L .
A E DA E NH} f ?;
794AXEL, AL . JOR P AN N, ST C . ,) n, : .,BEAL, ELLIOTT R. MANDELL, SCOTT P . . .
, ,f},_1 !) .
1SKOOGLUND, PETER L . SMITH, WILLIAM } "' ~~• ~!cr "" `~D . LAUTMAN, WILLIAM H . LOMICKA and
,, ,) v `'' ~,c !
KPMG LLPDefendants .
THIRD AMENDED CLASS ACTION COMPLAINT FORVIOLATIONS OF FEDERAL SECURITIES LAWS
~,4
} BASIS OF ALLEGATIONS
1 . Plaintiffs, by their undersigned attorneys, on
behalf of themselves and the class they seek to represent, fo r
their Third Amended Class Action Complaint (the "Complaint"), make
the following allegations against defendants based upon the
investigation conducted by and under the supervision of plaintiffs '
counsel, which included reviewing and analyzing information an d
financial data relating to the relevant time period obtained from
numerous public and proprietary sources (such as LEXIS-NEXIS, Dow
Jones and Bloomberg), including, inter alia , United States
Securities and Exchange Commission ("SEC") filings, other
regulatory filings reports (including documents pared by the
Federal Food and Drug Administration (the "FDA")), publicly
available annual reports, press releases, published interviews,
news articles and other media reports (whether disseminated in
print or by electronic media), and reports of securities analysts
and investor advisory services, in order to obtain the information
necessary to plead plaintiffs' claims with particularity .
Plaintiffs' investigation also included interviewing or consulting
with numerous individuals -- including former Sabratek employees
who worked at the Company during the Class Period and current and
former employees of entities that did business with the Company
during the Class Period -- who are knowledgeable about defendant
Sabratek's business, operations and business practices, and/or
about the industry and markets in which Sabratek operates . Except
as alleged herein, the underlying information relating to
defendants' misconduct and the particulars thereof are not
available to plaintiffs and the public and lie within the
possession and control of defendants or other Sabratek insiders,
thus preventing plaintiffs from further detailing defendants'
misconduct . Plaintiffs believe that substantial additional
evidentiary support will exist for the allegations set forth herein
after a reasonable opportunity for discovery .
SUMMARY OF THE COMPLAINT
2 . This is a class action brought by plaintiffs under
the Securities Exchange Act of 1934 (the "Exchange Act") on behalf
of themselves and all other persons or entities other than
defendants and certain related parties (the "Class") who purchased
the securities of Sabratek Corporation ("Sabratek" or the
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_"Company") between ruary 25, 1997 and October 6, 19, inclusive
(the "Class Period") . Plaintiffs complain of a fraudulent scheme
and deceptive course of business, described in detail beginning at
¶ 46 below, that injured purchasers of Sabratek securities during
the Class Period .
3 . Defendant Sabratek develops, produces and market s
interactive therapeutic and diagnostic medical systems designed
specifically to meet the needs of the alternate-site healthcare
market . The Company claims that its systems and products reduce
operating costs while improving the delivery and quality of care,
thereby allowing high-acuity patients to be treated in alternate-
site settings (such as long-term care facilities, outpatient
centers and patients' homes) At all material times, Sabratek's
two major product lines were its infusion pumps (which accounted
for more than 500 of the Company's revenue) and its Rocap line of
medication-filled syringes (which accounted for more than 250 of
its revenue by November 1998) .
4 . Prior to and during the Class Period, the Company
reported exceptional revenue growth which resulted in a dramatic
increase in the price of its common stock, and throughout the Class
Period the Sabratek defendants portrayed Sabratek as a leader in
its industry and as a company that was experiencing and would
continue to experience rapidly rising sales and profits on its core
products and new product offerings .
5 . However, as Sabratek's officers and directors knew
but did not disclose, during the Class Period the infusion pump
side of the Company's business was experiencing a number of
material adverse problems . These problems included, inter alia ,
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the following : (a)L significant percentage of ne Company's
infusion pumps were suffering from certain manufacturing defects
and design problems , (b) demand for its pump products was weakening
in the face of increasing competition and a shrinking market for
pumps, and (c) the Company ' s revenue growth could not be sustained
in the face of these problems . As a result of these adverse facts
-- and as defendants also knew but did not disclose -- the level o f
unsold Sabratek pumps and related products both within the Sabratek
organization and at Sabratek's distributors ( i .e . within Sabratek's
"distribution channels") was rising to damagingly high levels .
6 . To conceal these sales-related problems, Sabratek
engaged in a variety of grossly improper revenue-inflating and
expense-deflating practices during and immediately prior to the
Class Period that enabled the Company to artificially deflate its
reported expenses and to artificially inflate its reported
revenues, income and earnings per share at the end of the Company's
quarterly reporting periods, thereby rendering Sabratek's publicly-
filed financial statements and other communications regarding the
Company's financial performance complained of herein materially
false and misleading .
7 . Sabratek's improper accounting for expenses
(detailed herein at ¶1 53-60 and It 176-183) included, inter alia ,
classifying millions of dollars worth of expenses as "intangible
assets," and accounting for millions of dollars that had been
advanced to affiliated companies as "loans" rather than expenses .
Indeed, as the Company itself was forced to disclose on October 7,
1999, these improper accounting machinations alone caused
Sabratek's reported pre-tax earnings for the period April 1, 199 7
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S33 million ,through March 31, 1 to be inflated by approximateily-i
and will require each of Sabratek ' s previously reported quarterly
and annual financial statements covering this two year period to be
restated .%
8 . In addition to its improper accounting of expenses ,
intangible assets and loans receivable, Sabratek also engaged in a
wide variety of improper and patently fraudulent revenue
recognition activities and other related misconduct to inflate its
reported financial performance . These practices (which are
described in detail below at 11 48-52 and ¶¶ 167-184), included,
inter alia , (a) reporting revenue on "sales" of products to
entities that had not ordered Sabratek products ; (b) engaging in
fraudulent "inventory parking" arrangements, whereby Sabratek
reported revenue on phony "sales" to distributors or bogus
"dealers" who, as part of defendants' fraudulent scheme, placed
"orders" for Sabratek products and/or accepted the receipt of (or
"parked") Sabratek inventory which they had not, in fact, bona fide
ordered; (c) improperly reporting revenue on consignment sales ; and
(d) improperly reporting the full "invoice value" of product sales
on transactions where Sabratek had granted the buyer undisclosed
credits, discounts and/or rebates .
9 . Because the Company had a general practice of
recognizing revenue upon shipment of product to its distributors
and institutional customers, the Sabratek defendants were also able
to -- and did -- help conceal the increasing weakness in the demand
for Sabratek's pump products by inducing the Company's distributors
and institutional customers to purchase more product than they
needed and for which they had no current demand . These improper
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"channel stuffing" 'Livities included, inter alia,promising its
distributors that they could return their shipments of Sabratek
product if they were not sold, and significantly reducing prices
and/or offering its customers rebates or unusual extended payment
terms on pumps in a concerted effort to further inflate its
reported Class Period sales figures . Indeed, Sabratek's desire to
"goose" its reported sales was so great that it even violated its
distributorship arrangements by, inter alia , stuffing large
quantities of product into newly "authorized" distributors who --
in consideration for taking this product -- were then allowed to
sell into territories of pre-existing Sabratek distributors who had
been given exclusive sale rights in such territories .
10 . The foregoing improper revenue recognition
practices, which were not publicly disclosed, effectively permitted
Sabratek to convert what would otherwise have been sharply
increasing levels of unsold inventory into millions of dollars of
"sales" that Sabratek reported as revenue, thereby artificially
inflating Sabratek's reported revenue, income and earnings per
share during the Class Period . Through these and other fraudulent
practices (including the Sabratek defendants' deliberate
manipulation of the Company's publicly reported expense and
inventory figures) defendants manipulated Sabratek's true operating
results to "achieve" or "beat" Company-generated Wall Street
expectations regarding the Company's financial performance, and to
artificially inflate the price of Sabratek's publicly traded
securities, all to the detriment of unsuspecting investors .
11 . Moreover, as the Sabratek defendants also knew but
did not disclose, during the Class Period the Company's Rocap
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division was at seri cius risk of being shut down by th~FDA because,
inter alia, the Company was selling its Rocap line of syringes
without a valid pre-market 510(k ) approval from the FDA, as
required by federal law . Rocap's operations also had a long
history of FDA compliance problems that rendered the Company's
ability to obtain the requisite 510 (k ) approvals highly problematic
and doubtful . For example , in August 1997 the FDA informed
Sabratek that it had placed a "hold" on its 510 (k) application for
Rocap syringes -- and in December 1997 the FDA sent a Warning
Letter ( the "December 1997 Warning Letter" ) to Sabratek's CEO
(defendant Shan Padda) informing the Company that it was
manufacturing Rocap syringes in violation of federal law and FDA-
mandated safety and quality- control requirements, and that the
Company was at risk of, inter alia , having its facilities seized if
it continued to violate applicable laws and regulations . However,
rather than disclose the true nature and extent of the adverse
facts relating to the Company ' s Rocap operations, during the Class
Period the Sabratek defendants repeatedly misled the investing
public by misrepresenting , inter alia , that Sabratek was in
compliance with applicable FDA regulations , that it maintained
"comprehensive quality assurance program[s]," that the FDA had no
ongoing concerns about the safety of its Rocap products, and that
the Company's Rocap revenues would steadily increase .
12 . Meanwhile , without publicly disclosing the true and
adverse material facts regarding the Company ' s prospects,
regulatory compliance , financial performance, fraudulent revenue-
recognition practices and other accounting improprieties, the
Individual Defendants did not hesitate to take advantage of th e
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lack of public discure of the truth by selling ov? $17 million
of their personal holdings of Sabratek common stock to members of
the Class at artificially inflated prices during the Class Period .
13 . Although Sabratek embarked on its fraudulent scheme
to conceal its Rocap-related regulatory problems and its
deteriorating sales and other problems by no later than the
beginning of the Class Period (February 25, 1997), the market did
not begin to learn of the extent of Sabratek's severely weakened
financial condition and deteriorating value until the second half
of November 1998, when (a) a market analyst published a report
questioning the Company's financial performance (including its
declining gross margins, high level of . receivables, questionable
accounting of certain licensing transactions, and high inventory
levels) ; and (b) the Company announced that it was suspending the
distribution of its Rocap flush syringe product line following
"discussions" with the FDA regarding the status of Sabratek's
pending 510(k) application for FDA approval of these products .
14 . As a result of the negative analyst commentary
questioning the Company's financial performance (which caused the
price of Sabratek common stock to fall from $30 .25 on Friday,
November 20, 1998 to only $23 .25 at the close on Tuesday, November
24 in heavy trading -- a two-day decline of over 23%), and as a
result of Sabratek's subsequent disclosure mere hours after the
close of trading on November 24, 1998 that the Company was
suspending Rocap shipments as a result of "discussions" with the
FDA and that Sabratek's 4th quarter performance would fall well
short of analysts' expectations (which caused Sabratek common stock
to fall another $9 .125 per share to $14 .125 the following day),
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Sabratek common sto~u, suffered a total three -day los̀ in value of
over 53-4.,, and an overall decline of over 63o from its inflated
Class Period high of $38 .75 Per share . However, the full truth
remained concealed by defendants, and far worse was yet to come .
15 . As a result of defendants' efforts to obscure, deny
and conceal the true state of Sabratek's deteriorating affairs, the
extent of Sabratek's diminishing value was not revealed until, at
the earliest, the late summer and early Fall of 1999, when the
Company made the following series of disclosures, each more
stunning than the last :
• On August 2, 1999, the Company -- while falselyassuring investors that there was "no need torevise its previously stated earnings results" --announced that its earnings for the second quarterof 1999 would be "significantly" lower than WallStreet estimates because of "weaker demand" for itsinfusion pumps, and that it would report itsresults for the second quarter on August 12 . In
response to this disclosure, Sabratek stock fell$6 .28, from $20 .75 to $14 .47 -- a one day decline
of over 300 .
• On August 13, 1999, the Company announced --contrary to its prior assurances -- that it woulddelay the release of its second quarter resultspast the previously announced August 12 filing date"pending completion of a review with itsindependent auditors ." In response to thisdisclosure, Sabratek stock fell a further $4 .03,
from $11 .00 to $6 .97 -- a further one day decline
of over 360 ;
• On August 23, 1999, the Company again stunnedfinancial markets by announcing that (a) it hadretained the management consulting firm of Jay Alix& Associates to develop a "restructuring plan" forthe Company, (b) that defendant Shan Padda had"resigned" as Sabratek's President, CEO andChairman of the Board, and (c) that defendant DoronLevitas had similarly "resigned" as Vice Chairmanof Sabratek's board .l In response to thi s
I Two days later, the Company also announced that
defendant L . Peter Smith had also resigned from the board t o
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discsure, Sabratek stock fell a tTrther $3 .72,from $6 .47 to $2 .75 -- a further one day decline ofover 57 .5% ; and finally
On October 7, 1999, the Company announced that itwould be restating its previously reportedfinancial results for the reporting periods betweenApril 1, 1997 and March 31, 1999 , and that therestatement would reduce previously reported pre-tax earnings for this two-year period byapproximately $39 million . In addition, theCompany announced that it would continue to delaythe release of its second quarter financialstatements, and that Sabratek's Board was alsoconsidering certain unspecified "other accountingissues" that had been "raised by the Company'sChief Financial Officer ." In response to thisdisclosure, Sabratek stock fell a further $1 .13,from $2 .16 to $1 .03 -- a further one day decline ofover 52-0t .
The closing price for Sabratek common stock of $1 .03 per share on
October 7, 1999 represented a stunning decline of more than $19 per
share from the inflated levels it had traded at only ten weeks
earlier, and an incredible and near-total collapse of $37 .72 per
share -- or more than 97 .3a -- from its inflated Class Period high
(in September 1997) of $38 .75 per share .
16 . In the wake of these disclosures, Sabratek has been
reduced to the status of a penny stock, two additional directors
(defendants William H . Lomicka and William D . Lautman) have
resigned from Sabratek's board, and, following a hearing before the
Nasdaq Listing Qualifications Panel in early October, its common
stock (which last traded on the Nasdaq at $0 .55 per share on
November 2) was delisted effective November 3, 1999 . The Company
also announced on October 15, 1999 that it would not be making a
$2 .4 million semi-annual interest payment due on its outstanding 60
Sabratek Convertible Notes (with a face value of $85 million), an d
pursue "other endeavors ."
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that an Event of Delt under the note indenture wou d take place
if this interest payment was not made by November 15, 1999 . By
this Complaint , plaintiffs now seek recovery for themselves and all
other class members to compensate for the severe and substantial
losses and damages that they have suffered as a result of
defendants ' fraudulent scheme and their repeated violations of the
securities laws and their disclosure obligations thereunder .
JURISDICTION AND VENU E
17 . The claims asserted herein arise under and pursuant
to Sections 10(b) and 20(a) of the Exchange Act [15 U .S .C .
§§ 78j(b ) and 78t (a)] and Rule 10b-5 promulgated thereunder [SEC
[17 C .F .R . § 240 . l0b-51 .
18 . This Court has jurisdiction over the subject matter
of this action pursuant to 28 U .S .C . §§ 1331 and 1337 and § 27 of
the Exchange Act 115 U .S .C . § 78aa] .
19 . Venue is proper in this District pursuant to Section
27 of the Exchange Act and 28 U .S .C . § 1391 ( b) . Sabratek maintains
its principal executive offices in this District and the acts
charged here in, including the preparation and dissemination of
materially false and misleading information, occurred in
substantial part in this District . , ,
20 . In connection with the acts alleged in this com-
plaint, 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 .
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PARTIES
Plaintiffs
21 . Lead Plaintiffs . Lead plaintiffs Dennis Chu,
Ambassador Window and Door Co . Pension Plan and Trust, Bruce
Braverman, Glenn Chenot, Christine David, Susan Dorman, James
Anthony Doucette, Steve Hill, Jeffrey Mahler, Hughes Schrepfer and
Ken Schutz purchased the common stock'of Sabratek at artificially
inflated prices during the Class Period, as set forth in their
previously filed certifications in connection with their motions
for appointment as Lead Plaintiffs, and were damaged thereby . The
Court has previously designated these individuals to serve as Lead
Plaintiffs pursuant to an Order dated April 28, 1999 . 2
22 . Additional Plaintiffs . Plaintiffs Muna Addallah,
Jim Adams, Jonathan Adenuga, Albert Albite, Carmelina Amato,
Timothy E . Armstrong, Konstantine C . Berdusis, Cindy Berghoff,
James R . Blackert, Charles Branham, Jeff Briggs, Gary Brisker,
Edward Britton, Robert 1 . Brown, George W . Broxton, Anthony
Caccuri, Enrique Cannata, Larry Clark and Teresa S . Clark, Benny
Collesano, Doru Culiac, Earle Covil, Michael Creegan, Tod Curtis,
Jeff J. Dakkuliak, Jason Dombroski, Ed Dubay, Kira W . Eggleston,
Jerald Ehrlich, Pamela Elgar, Joel Feltenberger, Michael F . Fink,
Marie Folts, Angela Franzoni, Russell Friedenberg, Michael T .
Glassco, Brian Glynn, Kevin M . Goldstein, Klemme Golf, LLC, Daniel
Gorman, GPZ Trading L .L .C ., John Grimes, James E . Grissom, Merlin
Hedtke, Gerard Heege, Jr ., Paul Hermann, Gary Hinnenkamp, Timothy
2 Plaintiffs also presently intend to seek to designateone or more of the additional plaintiffs listed below asadditional Lead Plaintiffs .
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Hodory, Michael Horner, William Hoffman, Tina ~olloway, Al
Horowitz, Kathy Hu, Ty Hyderally, Ignacio Imaz, Mary Ann Jacobs,
Lori Jones, Raymond C . Jones, William W . Keller, Timothy E . Kloenne
and Janice M . Kloenne as Trustees of the Kloenne Family Revocable
Living Trust dated 9/29/98, David and Gail Kolasinski, Doug
Kruidener, Nicholas Lapke, Steve Laudick, Kenneth Lebow, Eugene R .
Lebrenz, Ojingwa LeClair, Jerry T . Lee, Bernard Leeds, Charlie Lin,
Craig Lindelow, Steven A . MacHutta, Margaret B . MacLean, Abraham
Maimon, Lorenz Manochio, Ryan McDaniel, Jay Medalian, Jeffrey
Meenes, Robert Miller, Carnell Mitchell, David Modrowski, Paul
Monaco, Helen Oberlander, Ted Orzehoskie, A . Lawrence Ossias, M .D .,
Cheryl Ostfeld, Thomas Scott Pakenham, William Palmer, Carl L .
Palmquist, Rey Pangilinan, Jeff Pappas, Yong Hak Park, Thomas E .
Pollock, Tom Reisner, Mozam Qutab, Retlen Corp ., Inc ., Jay Russo,
John R. Sacchetti, Lucy San Georgio, Robert Sanchez, Dr . Joseph
Scannell, Richard F . Schemeling, Andre Shaw, Yushan Shi, Randall
Shilmann, George Sides, Sara Beth Sides, Jasmir Singh, Norman
Shore, Bernard L . Smith, Mark Spektor, Carole Spivack, James
Stamatis, Mark R. Staven, David R . Staven, Kevin Steele, Beth
Stenger, Tom Stenger, Webb Stevens, Andrew Stevenson, Steven Stoll,
Shari Taub, Mathew D . Thomas, Dan Valter, Jean-Martin Verreault,
Dennis Vrettos, Kathleen Weisgable, Maidie G . Westlie, Sandra E .
Wick, Donald Witten, Selbert M . Wood, Donna Woods, Steven Yamamoto,
Sameeh Zaloum and Helen Zaremski, purchased Sabratek common stock,
and/or bought call options or sold put options in Sabratek common
stock, and/or bought Sabratek Convertible Notes, during the Class
Period as set forth in the schedules previously filed with the
Court, and were damaged thereby .
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23 . Coll tively, plaintiffs herein suffed investment
losses of approximately $8 .0 million as a result of the fraudulent
conduct alleged herein .
Defendants
A . The Sabratek Defendant s
24 . Defendant Sabratek is a Delaware corporation with
its principal executive offices located at 8111 North St . Louis
Avenue, Skokie, Illinois . According to the Company' s press
releases, Sabratek develops, manufactures and markets interactive
therapeutic and diagnostic medical systems designed specifically to
meet the needs of the alternate-site healthcare market . Sabratek's
proprietary health care information systems reportedly provide
remote programming as well as real-time diagnostic and therapeutic
data capture capabilities, allowing care-givers to monitor patient
compliance more effectively and allowing providers to develop
outcome analysis and optimal clinical protocols . During the Class
Period, one of Sabratek's publicly stated goals was to provide a
so-called "Virtual Hospital Room (TM)," which it described as a
"seamless system that is designed to surround the patient at any
point of care [including alternate site settings] with the
technology required to clinically manage the patient's condition . "
25 . The individual defendants identified below (the
"Individual Defendants") served, at all times material to the
claims set forth herein, as senior officers and/or directors of
Sabratek in the positions set forth opposite their names :
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1 `
Name Position
K. Shan Padda("Padda") Chief Executive Officer and
Chairman of the Board (untilhis resignation on August 23,1999 )
Anil K . Rastogi("Rastogi") President and Chief Operating
Officer (until July 1998) 3
Steven L . Holden("Holden") President and Treasurer
(Senior Vice President andChief Financial Officer priorto July 1998 )
Doron C . Levitas("Levitas'") Vice President, Chief Adminis-
trative Officer, Secretary,and Vice Chairman of the Board(until his resignation onAugust 23, 1999 )
Vincent J. Capponi("Capponi") Vice President and Chief
Operating Officer (VicePresident of operations prio rto July 1998) .
Stephen L . Axe l("Axel") Vice President of Marketing
(since November 1997 )
Alan E . Jordan("Jordan") Senior Vice President of
Sales and Marketing (untilJuly 1998) 4
Stephan C . Beal("Beal") Vice President of Sales
3 Defendant Rastogi served as President and ChiefOperating officer until July 1998, at which time he left theCompany and was replaced as President by defendant Holden and wasreplaced as Chief Operating Officer by defendant Capponi .
4 The Company announced on July 8, 1998 that Mr . Jordanhad "stepped down" as a Senior Vice President, but that he wouldcontinue to serve as a consultant to the Company .
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Elliott R~Mandel l("Mandell") Vice President and President
of Rocap Division
Scott P . Skooglund("Skooglund") Vice President of Finance and
Principal Accounting Office r
L . Peter Smith("Smith") Director (until August 25,
1999) and member of theBoard's Compensation Committee(until April 1999 )
William H. Lomicka("Lomicka") Director and one of two
members of the Board's AuditCommittee (until hisresignation on October 19,1999 )
William D . Lautman("Lautman") Director and one of two
members of the Board's AuditCommittee (until hisresignation on October 19,1999 )
Defendant Sabratek and the Individual Defendants are from time to
time collectively referred to herein as the Sabratek defendants .
26 . Because of the Individual Defendants' positions wit h
the Company, they had access to the adverse undisclosed information
about its business, operations, products, operational trends,
financial condition, markets and present and future business
prospects via access to internal corporate documents (including the
Company's operating plans, budgets and forecasts and reports of
actual operations compared thereto), conversations and connections
with other corporate officers and employees, attendance at
management and Board of Directors meetings and committees thereof
and via reports and other information provided to them in
connection therewith . For example, defendants Padda, Jordan and
Beal, among others, participated in weekly conference calls with
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the Company 's salesorce, at which the Company ' s progress towards
meeting its quarterly sales goals was discussed ( including the
status of all major accounts and prospects) and notes of these
conference calls were typed up and distributed to senior Sabratek
management .
27 . It is appropriate to treat the Individual Defendant s
as a group for pleading purposes and to presume that the false,
misleading and incomplete information conveyed in the Company's
public filings, press releases and other publications as alleged
herein are the collective actions of the narrowly defined group of
defendants identified above . Each of the above officers of
Sabratek, by virtue of their high-level positions with the Company,
directly participated in the management of the Company, was
directly involved in the day-to-day operations of the Company at
the highest levels and was privy to confidential proprietary
information concerning the Company and its business, operations,
products, growth, and financial condition, as alleged herein . Said
defendants were involved in drafting, producing, reviewing and/or
disseminating the false and misleading statements and information
alleged herein, were aware or recklessly disregarded that the false
and misleading statements were being issued regarding the Company,
and approved or ratified these statements, in violation of the
federal securities laws .
28 . As officers 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 Nasdaq National
Exchange , and governed by the provisions of the federal securities
laws, the Individual Defendants each had a duty to disseminate
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promptly, accurate nd truthful information with respect to the
Company's financial condition and performance, growth, operations,
financial statements, business, products, markets, management,
earnings and present and future business prospects, and to correct
any previously-issued statements that had become materially
misleading or untrue, so that the market price of the Company's
publicly-traded securities would be based upon truthful and
accurate information. The Individual Defendants'
misrepresentations and omissions during the Class Period violated
these specific requirements and obligations .
29 . The Individual Defendants participated in the
drafting, preparation, and/or approval of the various public and
shareholder and investor reports and other communications
complained of herein and were aware of, or recklessly disregarded,
the misstatements contained therein and the omissions therefrom,
and were aware of their materially false and misleading nature .
Because of their Board membership and/or executive and managerial
positions with Sabratek, each of the Individual Defendants had
access to the adverse undisclosed information about Sabratek's
business prospects and financial condition and performance as
particularized herein and knew (or recklessly disregarded) that
these adverse facts rendered the positive representations made by
or about Sabratek and its business issued or adopted by the Company
materially false and misleading .
30 . The Individual Defendants, because of their
positions of control and authority as officers and/or directors of
the Company, were able to and did control the content of the
various SEC filings, press releases and other public statements
- 18 -
pertaining to the Co any during the Class Period . E h Individual
Defendant was provided with copies of the documents alleged herein
to be misleading prior to or shortly after their issuance and/or
had the ability and/or opportunity to prevent their issuance or
cause them to be corrected . Accordingly , each of the Individual
Defendants is responsible for the accuracy of the public reports
and releases detailed herein and is therefore primarily liable for
the representations contained therein .
B . Defendant KPMG, LLP
31 . Defendant KPMG LLP, formerly known as KPMG Peat
Marwick LLP ("KPMG"), is a worldwide firm of certified public
accountants, auditors and consultants that provides a variety of
accounting, auditing and consulting services . KPMG, through its
Chicago, Illinois office, served as Sabratek's auditor and
principal accounting firm -- and as a paid consultant to Sabratek
on certain suspect transactions noted below -- commencing prior to
the Class Period herein and continuing at all relevant times . KPMG
acted in these capacities pursuant to the terms of contracts it had
with Sabratek that required, inter alia , KPMG to audit Sabratek's
financial statements in accordance with generally accepted auditing
standards ("GARS") and to report the results of those audits to
Sabratek, its board of directors and the members of the investing
public, including plaintiffs and the members of the Class . With
knowledge of SabratekIs true financial condition, as alleged below,
or in reckless disregard thereof, KPMG certified the false and
misleading financial statements of Sabratek described below and
provided unqualified Independent Auditors Reports, dated March 17,
1998 and March 12, 1999, which were included in various of th e
- 19 -
k1
Company's SEC filinand public disseminations . Thed unqualified
audit opinions and reports greatly enhanced and facilitated the
fraud alleged below and violated GARS and GAAP , which KPMG was
obliged to observe .
32 . In addition, pursuant to defendants' scheme, KPMG,
jointly with the Sabratek defendants, arranged for and facilitated
several of the fraudulent accounting practices utilized by Sabratek
during the Class Period . For example, KPMG's participation in the
fraudulent scheme included consulting on and facilitating the
structuring of various transactions involving the transfer of tens
of millions of dollars from Sabratek to certain third parties,
which represented expenditures by Sabratek for research and
development that were required to be recorded as expenses on
Sabratek's income statement, but which, with the connivance and
participation of KPMG, were instead improperly capitalized and
recorded as assets on Sabratek's balance sheet . The net effect of
the accounting machinations that flowed just from these
transactions, which KPMG both helped to structure and also
subsequently "audited," was to improperly eliminate tens of
millions of dollars of research and development expenses from
Sabratek's operating results and move them "off the books" of the
Company, thereby artificially and materially inflating Sabratek's
reported income and earnings by comparable amounts for the years
ended December 31, 1997 and December 31, 1998, all in violation of
GAAP .
33 . In return for providing these various auditing,
consulting and accounting services, despite KPMG's persistent
violations of its contractual and other legal obligations to
- 20 -
Sabratek and Sabra ek's investors, KPMG received" substantial
compensation from Sabratek, the exact amount of which is unknown at
this time . Sabratek was a KPMG -- and the income of the KPMG
partners responsible for the Sabratek account -- benefitted
substantially from KPMG's ongoing relationship with Sabratek .
34 . Defendant KPMG, by virtue of its position as
independent accountant and auditor of Sabratek, and as a paid
consultant to the Company, had access to the files and key
employees of the Company at all relevant times . As a result of the
auditing and other services it provided to Sabratek, KPMG personnel
were frequently present at Sabratek's corporate headquarters
throughout each year, and had continual access to and knowledge of
Sabratek's confidential internal corporate, financial, operating
and business information, and had the opportunity to observe and
review the Company's business, business practices, sales cycles and
material corporate transactions, and to test the Company's internal
and publicly reported financial statements as well the Company's
internal controls and structures . KPMG knew or recklessly
disregarded KPMG's true financial and operating situation, and
intentionally or recklessly failed to take steps which, as
Sabratek's auditor, KPMG could and should have taken to fully and
fairly disclose that situation to the investing public . KPMG
falsely represented that its audits of Sabratek's 1997 and 1998
financial statements had been conducted in accordance with "GARS,"
and wrongfully issued "clean" or unqualified opinions or
certifications that those financial statements fairly presented
Sabratek's financial condition and results of operations in
conformity with GAAP .
- 21 -
35 . KPMG, Xnowingly participated in and acquiesced in the
presentation by its audit client of false and misleading financial
information to the investing public which materially misstated,
among other things, the Company's reported revenues and expenses,
and which overstated the Company's reported assets by tens of
millions of dollars . As a result of KPMG's knowing misconduct and
participation in Sabratek's fraudulent scheme, KPMG is jointly and
severally liable to plaintiffs and the other members of the Class .
36 . Each of the defendants is liable as a participant in
a fraudulent scheme and course of business that operated as a fraud
or deceit on purchasers of Sabratek securities, by disseminating
materially false and misleading statements and/or concealing
material adverse facts . The scheme : (i) deceived the investing
public regarding Sabratek's business, financial condition,
products, growth, operations, assets and the intrinsic value of
Sabratek securities ; and (ii) caused plaintiffs and other members
of the Class to purchase Sabratek securities at artificially
inflated prices .
PLAINTIFFS ' CLASS ACTION ALLEGATIONS
37 . Plaintiffs bring this action as a class action
pursuant to Federal Rule of Civil Procedure 23(a) and'(b)(3) on
behalf of a Class, consisting of all persons who purchased Sabratek
common stock, or bought call options or sold put options in
Sabratek common stock, or bought Sabratek 6% convertible notes due
2005 ("Convertible Notes") between February 25, 1997 and October 6,
1999, inclusive (the "Class Period") and who were damaged thereby .
Excluded from the Class are defendants, the officers and directors
- 22 -
of the Company at a relevant times, members of thei r immediate
families and their legal representatives, heirs, successors or
assigns, and any entity in which defendants have or had a
controlling interest .
38 . The members of the Class are so numerous that
joinder of all members is impracticable . Throughout the Class
Period, Sabratek's common stock was actively traded on the Nasdaq
National Exchange (the "Nasdaq") . As of April 30, 1999, there were
approximately 9 .89 million shares of Sabratek common stock issued
and outstanding, as well as $85 million in principal amount of SEC-
registered convertible notes issued and outstanding . While the
exact number of Class members is unknown to plaintiff at this time
and can only be ascertained through appropriate discovery,
plaintiffs believe that there are hundreds or thousands of members
in the proposed Class . Record owners and other members of the
Class may be identified from records maintained by Sabratek or its
transfer agent and may be notified of the pendency of this action
by mail, using the form of notice similar to that customarily used
in securities class actions .
39 . Plaintiffs' claims are typical of the claims of the
members of the Class as all members of the Class are similarly af-
fected by defendants' wrongful conduct in violation of federal law
that is complained of herein .
40 . Plaintiffs will fairly and adequately protect the
interests of the members of the Class and have retained counsel
competent and experienced in class and securities litigation .
41 . Common questions of law and fact exist as to all
members of the Class and predominate over any questions solel y
- 23 -
affecting individua~~/members of the Class . Among the uestions of
law and fact common to the Class are :
(a) whether the federal securities laws were viola-
ted by defendants' acts as alleged herein ;
(b) whether defendants participated in and pursued
the common course of conduct complained of herein ;
(c) whether statements made by defendants to the
investing public during the Class Period misrepresented material
facts about the business, operations, prospects and financial
performance of Sabratek; and
(d) to what extent the members of the Class have
sustained damages and, if so, the proper measure of damages .
42 . A class action is superior to all other available
methods for the fair and efficient adjudication of this controvers y
since joinder of all members is impracticable . Furthermore, as the
damages suffered by individual Class members may be relatively
small, the expense and burden of individual litigation make it
impossible for members of the Class to individually redress the
wrongs done to them . There will be no difficulty in the management
of this action as a class action .
FACTUAL ALLEGATIONS
The Nature of Sabratek's Busines s
43 . Sabratek, which was founded in 1990, develops,
manufactures and markets therapeutic and diagnostic medical system s
designed specifically to meet the unique needs of the alternate-
site healthcare market . This market includes, inter alia , long-
term care facilities, doctors' offices, outpatient centers, and the
home . Sabratek's principal products include infusion pumps for the
- 24 -
delivery of therap utic agents, along with diagnostic and
information systems for data-capture , patient monitoring, and
remote therapy adjustment . At all material times, Sabratek has had
the stated goal of becoming a comprehensive solution provider to
the alternate site healthcare market, and of creating a so-called
'"virtual hospital room" that would enable patients to be treated
and monitored at alternate site facilities .
44 . As part of its growth strategy , in February 1997 the
Company acquired all of the assets of Rocap, Inc . (" Rocap'"), a
company that manufactured and marketed pre-packaged injectable
prescription pharmaceuticals and pre-filled syringes . Thereafter,
Sabratek began producing and marketing prepackaged injectable
prescription products and pre - filled intravenous ('" I .V .") tubing
flush syringes through its Rocap operating division . The Company's
adoption of the Rocap product line was central to the Company's
growth strategy because it expanded the scope of the Company's
product offerings to alternate and acute care providers . Wall
Street analysts generally hailed the acquisition , noting that
Rocap's infusion therapy products (in particular its pre-filled
syringes ) appeared to complement Sabratek ' s existing product lines,
and fit into Sabratek ' s strategy of trying to develop an alternate
site "virtual" hospital room .
45 . After Sabratek acquired Rocap and up to and
throughout the Class Period, the Sabratek defendants continued to
portray Sabratek as a leader in the alternate site healthcare
industry and as a company that was experiencing and would continue
to experience strong and rapidly-increasing sales and profits on
its core products and new product offerings . As noted earlier,
- 25 -
Sabratek's two most mnportant product lines were (Y its line of
infusion pumps, sales of which accounted for at least 50a of the
Company's revenue at all material times ; and (b) its Rocap line of
saline-filled and heparin-filled syringes, which accounted for more
than 25% of the Company's revenue by November 1998 .
Undisclosed Adverse Factors ImpactingSabratek ' s Business During The Class Period
46 . However, immediately before and during the Class
Period, Sabratek was experiencing serious problems that undermined
its ability to attain growth in line with public expectations that
the Sabratek defendants had formulated in their budgetary process
and caused or encouraged analysts to incorporate into their
estimates . These problems, which affected both of Sabratek's
primary product lines -- namely, its infusion pump and Rocap
syringe product lines -- included the following :
(a) Regulatory compliance problems . Although Sabratek
repeatedly touted the benefits of Rocap products and conditioned
the market to believe that Rocap products would make ever-
increasing contributions to the Company's financial performance and
growth, the Rocap operating unit had a long history of safety and
other regulatory compliance problems, lacked adequate oversight and
compliance procedures, and, at all material times, was
manufacturing flush syringes without the required FDA approvals .
In fact, since its inception in mid-1995, it appears that the Rocap
operating unit has never been in full compliance with federal
regulations . As detailed in ¶¶ 48-59 below, among the many
violations and "Objectionable Conditions" that FDA inspectors noted
in Rocap's operations prior to the Class Period were the following :
26 -
• lackf a validated aseptic I .V . fiYl process toensure production of sterile final product ;
• inadequate environmental and bioburden monitoring ;
• failure to maintain adequate documentation ofmaster production records in the production of T .V .drug admixtures ;
• failure to maintain adequate batch productions,including failure to adequately identify theprocesses by which I .V. drug admixtures areprepared and numerous instances of unexplained anduninitialed "write-overs" and "cross-outs" in batchproduction records ;
• lack of validated cleaning and disinfectionprocedures for laminar flow hoods and clean rooms ;
• distribution of out-of-specification and/ormisbranded saline flush syringes ;
• lack of adequate stability data to support statedexpiration dates for syringe products ;
• failure to perform periodic testing on finishedproduct ;
• failure to perform periodic testing of rawmaterials ;
• failure to perform periodic audits of Rocap's rawmaterial suppliers ;
• lack of calibrated measurement gauges fortemperature, humidity, etc . ; and
• failure to explain out-of-range cleanroomtemperature and pressure readings .
As a result of these and other regulatory problems, the FDA
ultimately warned Sabratek in December 1997 that its Rocap I .V .
flush syringes were being manufactured in violation of federal law,
and the these products were also "adulterated" within the meaning
of Section 501(f) (1) (B) of the federal Food, Drug and Cosmetics Act
(the "FDCA") inasmuch as they were being distributed without an
approved application for FDA pre-market approval ;
- 27 -
1 l `
(b) 510 ( approval problems . Moreover`CCCYoy the end of
1997, the Company's 510(k) request for premarket approval of its
Rocap flush syringe products (which had been filed in May 1997) had
already been pending for nearly 8 months -- substantially longer
than the 130 day (or four to five month) that was the average
period of time for obtaining such approval -- and far longer than
the 90 day period in which most 510(k) premarket approvals are
granted . Moreover, in the Fall of 1997, the FDA had informed
Sabratek that the FDA's Center for Devices and Radiographical
Health (the "CDRH") had placed a "hold" on Sabratek's 510(k)
application for Rocap syringes pending receipt of further
information regarding the Company's compliance with federal
regulations . These facts, particularly in conjunction with Rocap's
laundry list of regulatory compliance problems, raised serious
questions as to whether Sabratek would ever be able to obtain
approval of its pending 510(k) application for Rocap syringes, at
least in the absence of spending millions of dollars to upgrade
their safety and monitoring procedures .
(c) Market saturation . in addition, during the Class
Period, Sabratek was experiencing increased saturation in its
markets because the need, and resulting demand, for Sabratek's
infusion pumps was diminishing as the principal end-users of
Sabratek's pumps had either already acquired them or were acquiring
competitive systems from other manufacturers (such as Abbott
Laboratories, SIMS Deltec, Baxter International, and B . Braun
Melsungen AG) which offered similar or better quality products,
frequently at better prices .
- 28 -
(d) Detec orating demand. Further exacerbating the
Company's difficult competitive and operational circumstances,
during the Class Period -- while the Company was leading investors
to believe that it was continuing to experience strong growth in
demand for all of its products -- Sabratek was not enjoying strong
growth in demand for its infusion pump products, and the growth in
demand for these products was, in fact, deteriorating .
(e) ualit control problems . Sabratek was also
experiencing significant quality control problems with its pump
product line . For example, as many as 5-o-10'-. of Sabratek pumps
develop cracked housings by the time they are delivered, and as
many as 50a will crack within a year . In addition, Sabratek's
30/30 pumps suffered from static electricity problems, which caused
the pumps' alarms to go off . Furthermore, there have also been
programming problems with Sabratek's 60/60 pumps (which are
apparently now the subject of additional FDA scrutiny) .
(f) Design problems . Sabratek pumps also suffer from
certain design problems . For example, although it is normal to
clean I .V . pumps with either alcohol or a bleach/water solution --
and virtually every other pump on the market can be safely cleaned
by these methods -- these cleaning agents have a corrosive effect
on the contacts on Sabratek pumps . Accordingly, purchasers of
Sabratek pumps have to be prepared to train and condition their
personnel to avoid using standard industry procedures to clean
their pumps . Moreover, although Sabratek represented that its
pumps were compatible with tubing made by other manufacturers, such
as Baxter, in fact its pumps worked reliably only with Sabratek's
own proprietary brand of tubing .
- 29 -
(g) Lossdf supplier for critical componex£ part . One
of Sabratek's most highly touted products, its proprietary
"MediView" medical software system, purportedly allowed data from
Sabratek pumps to be remotely monitored from a central location by
modem, even if the patients using the pumps were at different
off site locations (such as at their homes) . The system, which also
purportedly allowed the monitoring medical professional to adjust
their patient's i .v . settings on the pump via modem from offsite,
used an AT&T modem to transmit this information remotely . However,
after the Mediview product was introduced in August 1996, AT&T
discontinued the particular modem model upon which the MediView
system relied . Although Sabratek tried to use a variety of other
modems as replacements, none of these other models worked with the
MediView system -- a fact which was deliberately concealed from
both investors and customers . Sabratek also declined to acquire
the rights to the AT&T model that did work, since it would have
cost them several million dollars in licensing fees . Nonetheless,
during the Class Period Sabratek continued to market and sell the
MediView product with its infusion pumps as a way to enhance its
pump sales (the remote technology was purportedly cutting edge),
even though it knew that it lacked the ability to provide a modem
that was compatible with the system. This practice generated
numerous additional customer complaints, caused Sabratek to lose
market share to Sims Deltec (the maker of a competing product) , and
further eroded Sabratek's credibility with end-users .
(h) Customer complaints and product servicing problems .
As a result of these and other quality problems, Sabratek and its
distributors began to experience a growing level of customer
- 30 -
complaints . For example, in addition to the cracked housing
problems noted above, Sabratek has received customer complaints fo r
shipping "stale" pumps that were not of recent manufacture (which
is a problem because of maintenance issues and because the internal
batteries have run down), and for shipping non-complying goods
which ultimately had to be returned . Moreover, far from developing
a reputation for handling its customer complaints in a responsive
and responsible fashion, Sabratek exacerbated its customer
relations problems by, inter alia , having an extremely slow turn-
around time for pump repairs (one to two months, compared to 5-10
days for most manufacturers), and by frequently refusing to even
honor its warranty on its pumps on the purported grounds that the
pump failures or defects brought to its attention were attributable
to end-user abuse . As an example of Sabratek's declining
reputation, although Sabratek recently won a contract with Kaiser-
Permanente to supply pumps, Kaiser- Permanente's Virginia operations
have refused to switch to Sabratek pumps because of their poor
quality and service . Sabratek's product servicing problems have
also been exacerbated by poor record keeping, in violation of FDA
mandates relating to the tracking of medical equipment . For
example, a Sabratek customer in Ohio, Cleveland Clinic, shipped
pumps to Sabratek for repairs and got back pumps that belonged to
someone else -- a potentially serious problem since the Clinic had
specific programming on its pumps and the use of a differently
programmed pump could have caused serious problems for patients .
47 . Notwithstanding these material adverse problems and
trends, throughout the Class Period defendants actively concealed
these problems and the adverse effect that they had (and wer e
- 31 -
4
likely to have) one Company 's business . Instea as detailed
below, the Sabratek defendants continued to portray Sabratek in
highly positive terms throughout the relevant period, and the
partial disclosures of certain of these problems that they did make
were materially incomplete and calculated to deceive investors as
to the true nature and extent of the problems facing the Company .
Sabratek ' s Fictitious Sales, Inventory Parking ,Channel Stuffing And Other Improper Revenue-InflatingActivities Prior To And During The Class Period
48 . Due to the pressures created by the foregoing litany
of problems (including, inter alia , regulatory compliance problems,
510(k) approval problems, the increasing saturation of the markets
for Sabratek's pump, and problems relating to the quality,
servicing and design of Sabratek products), immediately prior to
and during the Class Period Sabratek engaged in a variety of
improper revenue recognition and other revenue-inflating practices
that were designed to (and did) artificially and materially inflate
its reported revenues, income and earnings per share . These
practices, none of which was disclosed publicly, included, but were
not limited to, the following :
(a) Fraudulent _Reporting of Income on Phony
"Sales" . Throughout the Class Period, Sabratek reported
significant amounts of revenue on phony "sales" of products to
entities which either did not exist or which had not ordered
Sabratek products . For example :.
(i) On the next to last day of the second
quarter of 1996 ( i .e . June 29, 1996), Sabratek shipped at
least 55 pumps, worth at least $100,000, to Medical
Specialized Systems, Ltd . ("MSS") of Birmingham, Alabama ,
- 32 -
even thou MSS had never ordered the pump and had not
submitted a purchase order for the product . Sabratek
ultimately induced MSS to keep the pumps only by (a)
assuring MSS that there were several clients in the
region which Sabratek was about to close deals with and
which MSS could then sell some or all of the pumps to,
and (b) assuring MSS that, notwithstanding the nominal
30-day payment terms contained on the invoice, MSS had no
obligation to pay for the pumps before they were sold to
an ultimate end-user ( i .e . , MSS could treat the shipment
from Sabratek as a consignment sale) . When Sabratek
ultimately failed to deliver the promised assistance in
selling these pumps (and instead sold directly to
regional accounts and prospects that Sabratek had
repeatedly promised to offer to MSS) , in October 1996 MSS
informed Sabratek of its intention to return the pumps .
In response, Sabratek asked MSS to delay returning the
pumps until after December 31, 1996 because they didn't
want to "screw up their 1996 numbers ." The pumps were
ultimately returned in early, 1997 -- although not before
Sabratek had tried to induce MSS to take 125 new pumps a t
year end with further promises of extended payment term s
and help with finding customers for the pumps .
(ii) In the last two weeks of the first quarter
of 1998 ( i .e . late March 1998), Sabratek shipped
approximately $1 million worth of inventory (including
400 of Sabratek's 6060 pumps @ $2095 .00 each and 100 of
Sabratek's 3030 pumps @$1495 .00 each) to Tacy Medical o f
- 33 -
s a l
Fernandin Beach, Florida even though Taffy Medical (a
medical goods distributor) had never ordered the product,
had not submitted a purchase order for the product, and
had no agreement with Sabra tek at that time to distribute
its pumps . Sabratek ultimately induced Tacy Medical to
keep the pumps only by agreeing to give it the right to
distribute Sabratek products in Florida and by agreeing
that its acceptance of the product was on an "on
consignment" basis only ( i .e . , Tacy Medical had no
obligation to pay for the product unless it was able to
sell them to an ultimate end-user) . The terms of this
deal are reflected, inter alia , in a letter from
Sabratek's Eastern Divisional Sales Manager to Tacy
Medical dated March 31, 1998 .
(b) Improper Recognition of Revenue On Phony
"Sales" Pursuant to Fraudulent "Inventor Parkin «
Arrangements . The Sabratek defendants also caused Sabratek to
engage in fraudulent "inventory parking" arrangements, whereby
the Company reported revenue on phony "sales" to certain of
its distributors or to "friendly" warehouse operators who, as
part of defendants' fraudulent scheme, placed phony "orders"
for Sabratek products and/or accepted the receipt of (or
"parked") Sabratek inventory which they had not, in fact, bona
fide ordered .
(i) For example, during the second quarter of
1998, defendant Stephan Beal (Sabratek's Vice president
of Sales) personally arranged to ship at least several
dozen 60/60 pumps (worth at least $150,000, and in all
- 34
likelihooc~substantially more than that) to a "front"
dealer in Ohio . Although recorded as "sales" and
reported as revenue on Sabratek's books in order to help
Sabratek's quarterly sales numbers, in fact these pumps
simply sat in the Ohio warehouse of Sabratek's "dealer"
pending further instruction from Sabratek as to how to
ultimately dispose of these "parked" goods .
(c) Improper Recognition of Revenue on Products
Shipped Subject to Unlimited Rights of Return (booking revenue
on "consignment" sales) . Because the Company had a general
practice of recognizing revenue upon shipment of product to
its distributors, the Sabratek defendants were able to -- and
did -- help conceal the increasing weakness in the demand for
Sabratek products by inducing the Company's distributors and
resellers to purchase more product than they needed .
Throughout the Class Period, one of Sabratek's favorite
tactics to increase its reported "sales" was to induce its
distributors to accept shipments of product "on consignment"
( i .e . , with the promise that the distributors could return
their shipments of Sabratek products at any time and for any
reason if they were not sold) . For example :
(i) Throughout the Class Period, Sabratek used
its relationships with distributors -- such as Amtec
Medical (of Texas), Healthcare Tech (of Massachusetts),
CoMedical Inc . (of Seattle, WA), and Clinical
Technologies (of Ohio) -- to dump excess inventories of
Sabratek products for which there was no present demand
by shipping them large amounts of products under terms
- 35 -
which gred them essentially unlimited rights o f
return .
(ii) Similarly, beginning in late 1996,
Sabratek began to extend various special incentives,
including discounts and the right to return unsol d
product, to Medical Specialties, Inc . (formerly I .V .
Support Systems, Inc .) of South Easton, Massachusetts in
exchange for their placing large end-of-quarter orders
for Sabratek products . In one such notable transaction,
in the last two weeks of December 1997, Sabratek induced
Medical Specialties, Inc . to "order" 500 Sabratek 606 0
pumps (worth $1 .2 million) by promising it a special
discount and that it could return the pumps at the end of
1998 for full credit . A written memorandum documenting
the terms of this consignment deal, dated December 16,
1997, was signed by defendant Alan Jordan on behalf of
Sabratek in his capacity as Sabratek's Senior Vice
President for Sales and Marketing .
(iii) Similarly, during the Class Period (an d
extending back to at least the second half of 1996) ,
Sabratek regularly approached Amtec -- whose president,
Dick Jones, was a close friend of defendant Alan Jordan
-- to "order" additional pumps that Amtec had no present
demand for with the understanding that Amtec would hav e
no obligation to pay for the product unless it was
eventually sold to an ultimate end-user . Sabratek
advised Amtec personnel that they needed the orders t o
"make SabratekIs stock look good ." Although the precis e
- 36 -
1 \eed to "park"amount of xcess inventory that Amtec agr
`
for Sabratek is presently unknown, it is estimated to be
in the millions of dollars range ; indeed, during the
Class Period, Amtec had so many excess Sabratek pumps
that they used them as impromptu workspace dividers .
(iv) Such practices enabled the Company to
improperly book millions of dollars of sales and revenues
on transactions as to which there were no real purchases
and as to which Sabratek held a continuing and
substantial risk of loss . Although defendants knew or
recklessly disregarded at all relevant times that these
transactions were not in fact bona fide sales and were
improperly reported as bona fide sales in violation of
GAAP, defendants failed to disclose these facts to the
unwitting investing public, and instead affirmatively and
repeatedly misrepresented that Sabratek's published
financial results were prepared in accordance with GAAP .
(d) Improper Recognition of Revenue on Shipment of
Non-Conforming, Defective or Stale Product . Sabratek has also
inflated its reported revenue by recognizing revenue on the
shipment on product that it knew was non-conforming, defective
or stale . For example, in or around October of 1998, Sabratek
shipped approximately 70 pumps (worth approximately $150,000)
to Coram Healthcare, even though the stickers on the pumps
were dated "4/98", indicating that they had not been inspected
for six to seven months . (Federal regulations mandate that
every pump have a valid Preventive maintenance or "PM"
certification ; pumps are required to be "stickered" with a
- 37 -
i y
f 1
valid certifi tion when it is first man -̀factured and
certified , and thereafter the pump must be re - certified at
least annually) . However , when this problem was brought to
the attention of defendant Beal at Sabratek, instead of
sending freshly certified replacement pumps or taking steps to
have the pumps re-certified (which would have cost $100-$150
per pump ), Beal arranged to send Coram new stickers -- a "fix"
that is illegal . Nor was Sabratek's practice of shipping
"short - stickered" pumps confined to Coram ; to the contrary, it
went on all over the country .
(e) Improper Revenue Recognition on Backdated
Invoices . Sabratek also improperly inflated its reported
revenue and earnings and violated its own publicly-stated
revenue recognition policies by back-dating invoices so that
it could recognize the revenue .. on certain transactions
prematurely . For example, if product ordered in the latter
portion of a quarter could not be shipped before the quarter
ended, Sabratek routinely back - dated the invoices on the
product when it was shipped in the subsequent quarter so that
the Company could improperly record the revenue associated
with those transactions in the earlier quarter, rather than in
the quarter when it was actually shipped .
(f) Miscellaneous "Channel Stuffing" Activi ties,
Including Use of Extended Payment Terms . Undisclosed Rebates,
and Abuse of Distributorship Relationships . As noted above,
because the Company had a general practice of recognizing
revenue upon shipment of product to its distributors, the
Sabratek defendants were able to -- and did -- help conceal
- 38 -
the increasingc~akness in the demand for Sabrat products by
inducing the Company's distributors and resellers to purchase
more product than they needed . In addition to improperly
reporting revenue on consignment sales, the Sabrate k
defendants also resorted to the following array of classi c
"channel stuffing" schemes during and immediately precedin g
the Class Period, including the following :
(i) significantly increasing the pressure on
its distributors to increase their purchases of Sabratek
products, particularly at the ends of quarters .
(ii) offering excessive or unusual product
discounts, rebates, credits, payments or other
promotional terms on Sabratek products . For example :
a . In December 1997, defendant Beal (Sabratek'sVice President of Sales) offered to give itsthen-exclusive Florida distributor -- BimecoInc . -- extended payment terms of 90 days ormore if it would agree take an additional 600pumps (worth over $1 .2 million) before the endof the year . Beal also promised Bimeco thatSabratek would assist it with leads in sellingthese additional pumps . However, not only didSabratek fail to provide the promisedassistance, less than three months laterSabratek violated Bimeco's exclusive Floridadistributorship arrangements by putting 400pumps into Tacy Medical, thereby flooding theFlorida marketplace .
b . Sabratek distributors including, inter alia ,Clinical Technologies, MSS and AdvancedMedical Systems, have also been promisedrebates or credits on pump sales pursuant toundisclosed side agreements . This has furtherinflated Sabratek's reported revenue, asdistributors have thereafter deducted theamounts of these undisclosed rebates fromtheir Sabratek invoices . (In an effort toforestall having to deduct amounts owed to itsdistributors, Sabratek has also tried torenegotiate or simply cancel these rebates ;for example, Sabratek has tried to refuse MS S
- 39 -
`-Znd Advanced Medical Systems ,mong others,credits that they were owed) .
c . secretly granting stock options to certainselect distributors (including Dick Jones ofAmtec), in the aggregate amount of tens orhundreds of thousands of dollars, as aninducement for placing orders for Sabratekproduct . See also § (iv)b below .
(iii) improperly interfering with or violatin g
its distributorship arrangements to generate new "sales . "
For example :
a . As noted above, Sabratek's desire to inflateits reported sales was so great that it didnot hesitate to violate its exclusive Floridadistributorship arrangements with Bimeco by"stuffing" 400 pumps -- on a consignmentbasis, no less -- to another Florida medicalsupplies dealer (Tacy Medical) at the end ofthe first quarter of 1998 and by permittingthat dealer to sell in Bimeco's Floridaterritory .
b . Indeed, defendants Beal and Jordan (Sabratek'sVice Presidents for Sales and Marketing)regularly engaged in the practice of goinginto a particular geographic area, offeringexclusive distributorships in exchange for theplacement of orders for large quantities ofproduct, and then sending in Sabratek's ownsales people into the area to make directcustomer contacts and undercut their owndistributors on price . For example, duringthe Class Period Sabratek flooded what wassupposed to be the exclusive territories oftwo of Sabratek's major -- and supposedlyexclusive -- distributors in the Eastern halfof the country with well over $1 million worthof additional pumps .
c . By way of further example, in a letter datedSeptember 26, 1997 from the president ofAdvanced Medical Systems, Inc . ("AMS") ofHorsham, PA (a Sabratek distributor) todefendant Shan Padda, AMS recited Sabratek'snumerous breaches of its distributorshipagreement with AMS since 1996, including :
• Sabratek's failure to provide promisedleads ;
- 40 -
Sabratek's appointment of an outsideagency within AMS's territory, which, inconcert with Sabratek, proceeded to"squeeze" AMS out of customer accounts inAMS's territory ;
• Sabratek ' s active efforts to encouragecustomers and prospects within AMS'sterritory to buy directly from Sabratek ;
• Sabratek's failure to correct thesebreaches, despite repeated pastcomplaints by AMS to Sabratek management,including defendant Steve Beal .
As AMS's letter to defendant Padda concluded :
"By denying us [AMS] critical informationand by squeezing us out of key contactswith our customers, Sabratek manipulatedthe flow of pumps to deny us the profitson sales that should have been ours .Sabratek was then able to enjoy not onlythe profit on sales of hundreds of pumpsto us, but also the profits that we wouldhave made by filling those orders to ourcustomers with those pumps . In effect,you filled the same orders twice . "[]Emphasis added] .
d . Similarly, although Sabratek granted MSS anexclusive distributorship for Alabama,Mississippi and parts of Louisiana, MSSdiscovered that virtually every potentialaccount they tried to contact had already beencontacted directly by a Sabratek salesrepresentative .
e . In another instance, Sabratek intervened toprevent Medical Specialties of Massachusetts-- one of Sabratek's national distributors --from selling 10'0 pumps to a customer in Texasin 1998 . Instead, Sabratek arranged to haveanother of its distributors fill the order .As noted above, Sabratek had induced MedicalSpecialties to accept an additional 500 pumpsat the end of 1997, and it was obvious toMedical Specialties management that Sabratekhad intervened on behalf of the otherdistributor because Medical Specialties wasalready "stuffed" with hundreds of pumps'worth of excess inventory, whereas if the salewent through the rival distributor it wouldlikely result in that dealer placing a
- 41 -
eplacement order with Sabratek for additionalpumps .
(iv) relying on "special relationships" t o
generate orders for product for which there was no
current demand .
a . For example, defendant L . Peter Smith -- whoserved as a Sabratek director until his sudden"resignation" on August 25, 1999 -- used hisinfluence with Coram -- where Smith was also adirector -- to get Coram to accept between $1and $1 .5 million worth of excess inventory inearly 1998 for which it had no current demand .(Indeed, a substantial portion of Sabratek'soutstanding "accounts receivable" areattributable to uncollected amounts on excessinventory that was "parked" at Coram -- whenin fact no revenue should ever have beenrecognized on the "sale" of this product) .
b . The Company has also offered highly unusualinducements to Dick Jones of Amtec, one ofSabratek's distributors, to place large"orders" for Sabratek products . Unbeknownstto the public, . Mr ., Jones, who has been afriend of defendant Al Jordan (Sabratek'sformer Senior Vice President of Sales andMarketing) for over 20 years and who used towork for him, was apparently given theopportunity to acquire interests in Sabratekcommon stock on favorable terms pursuant tolucrative stock option grants in exchange forhis willingness to help park inventory forSabratek . Jones reportedly sold most or allof his substantial interests in Sabratek whenthe stock was trading in the $30's .
49 . As a .matter of Sabratek policy and practice, th e
granting of broad rights of return, special extended payment term s
or other unusual discounts or incentives (including in one case the
payment of $10,000 as an inducement to a customer in Florida t o
place a large order for pumps that Steve Beal had helped arrange )
typically had to be authorized and appxoved by defendant Padda o r
(before he retired) by defendant Jordan . Indeed, Sabratek sales
persons were repeatedly admonished that failure to meet th e
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Company's establish i1' sales goals for each quarte"was not an
option," and were actively encouraged to try to develop special
end-of-quarter deals -- subject to approval by the Company's senior
management -- to avoid a sales shortfall . Sales personnel were
also specifically advised by defendant Jordan, among others, that
a sales shortfall had to be avoided to prevent the Company's stock
price from suffering .
50 . The foregoing improper and fraudulent revenue-
inflating practices, which were not publicly disclosed, effectively
permitted Sabratek to convert what would otherwise have been
sharply increasing levels of unsold inventory into tens of millions
of dollars worth of phony "sales" that Sabratek reported as
revenues, thereby artificially inflating Sabratek's reported income
and earnings per share . Indeed, the magnitude of Sabratek's
improper revenue recognition and "channel stuffing" activities was
so great that by 1998 there was increasing discussion within the
sales department about how Sabratek would never make their sales
targets in the future because of all the pumps that were in their
distribution pipeline, and how Sabratek's "pyramiding" sales
practices had reached the point where the Company was robbing sales
a year or more into the future (i .e .,, the Company could have shut
down pump production for a year or more before the existing backlog
of pump inventory in Sabratek's distribution channels cleared) .
Through the fraudulent practices described above, defendants
manipulated Sabratek's true operating results to "achieve" Company-
generated Wall Street expectations regarding the Company's
financial performance -- thereby artificially inflating the pric e
- 43 -
r..of Sabratek securit s -- all to the detriment ot'`Junsuspecting
investors .
51 . Sabratek also used its control of certain affiliated
companies to artificially generate "consulting fee" revenues for
Sabratek .
(a) For example, in 1998, on four separate
occasions Sabratek wired an aggregate total amount of $2 .7
million -- $650,000 on March 31, 1998, $650,000 on July 9,
1998, $1 .2 million on October 29, 1998 and $200,000 on
November 4, 1998 -- to Unitron Communications, Inc .
("Unitron'") . The payments were made pursuant to a so-called
"exclusive sales and marketing agreement" with Unitron signed
in January 1998 whereby (according to Sabratek's 1998 10-K)
Sabratek had "acquired certain rights to access Unitron's
customer database in exchange for the payment of an aggregate
of $2 .7 million by Sabratek over the course of 1998 .
However, according to several sources, Unitron had virtually
no customers and its customer list, according to one former
Moon employee, "could have been comfortably written on the
back of a candy bar wrapper" and was not remotely worth $2 .7
million . Moreover, on each of the four occasions noted above
when Sabratek "paid" Unitron under this agreement, Sabratek
wired the funds to a bank account that was registered in
Unitron's name but which was in reality controlled by Sabratek
-- and on each occasion when the funds were transferred to the
Uni trop Sabratek caused the monies to be wired back to
Sabratek that same day, wi thout even informin Unitron that
the funds had ever been in the account . Sabratek then
- 44 -
recognized rev iue on all (or substantially all)----Jof the money
that had wired back to itself by characterizing the funds as
payments to Sabratek for "consu lting services ;" however, no
such services were ever provided to Unitron and no invoices
for such "services" were ever issued to Unitron during 1998 .
(b) Similarly , in the first quarter of 1999,
Sabratek "loaned" $1 .8 million to Unitron by wiring the funds
to the same Sabratek - controlled account at Unitron's bank,
only to immediately wire the money back to itself . Sabratek
then apparently once again reported the money "received" as
"revenue" for "consulting services" provided to Unitron --
even though no such services were provided .
Accordingly, not only did defendants use these transactions to
artificially inflate Sabratek ' s reported assets (since the loans
and "exclusive rights" associated with these transactions were
improperly listed as "assets" on Sabratek's books) ( see ¶1 53-60
below ), they also occasionally used them to artificially inflate
Sabratek ' s reported revenues .
52 . Tellingly , Sabratek also engaged in accounting
machinations to manipulate its reported inventory .
(a) For example , at the end of the third quarter of
1998, in an apparent effort to deceive ( inter alia) certain
analysts who had expressed concerns relating to Sabratek's
high inventory levels, senior Sabratek management implemented
a scheme to reduce Sabratek ' s reported inventory of raw
materials and component parts (such as motors and frames) by
temporarily shipping these materials back to its vendors . To
induce its vendors to participate in this scheme , Sabratek
- 45 -
agreed to pay &..Ie costs of shipping these materi is both ways
( i .e . it paid to ship the goods back to the vendors just prior
to the close of the quarter, and it paid for the cost of
shipping them back to Sabratek immediately after the quarter
had ended) . To evade detection of this blatant accounting
manipulation, the "returns" of these component parts were made
without the standard paperwork and documents itemizing the
contents of the returns ; however, to prevent the vendor from
cheating the Company by returning different or fewer goods
than had been "returned," Sabratek sealed the containers of
"returned" products with special tape to prevent tampering and
to assure that the identical product would be coming back
after the quarter ended and the goods were shipped back .
(b) Pursuant to this multi-million dollar inventory
manipulation scheme, at the instigation of defendant Vincent
Capponi (Sabratek's Chief Operating Officer), Sabratek vendor
Bull Electronics was persuaded to temporarily take back
approximately $1 million of materials, and Scientific Molding
Corporation (of Somerset, Wisconsin) was persuaded to
temporarily take back 30 or 40 boxes of component parts worth
$200,000 to $300,000 . Other vendors who were persuaded to
take back comparable amounts of inventory included PTI (of
Clinton Township, Michigan) and Schultes Precision
Manufacturing (of Buffalo Grove, Illinois) .
Sabratek ' s Improper Under statement Of ItsExpenses -- And Resulting Further Infl ation ofReported Earnings -- During the Class Period
53 . Moreover, in furtherance of their scheme to inflate
Sabratek's operating results during the Class Period, the Compan y
46 -
also improperly rep?ed tens of millions of dollars rth of cash
disbursements as intangible assets, or as notes receivable, when
such disbursements were -- as the Company has now admitted --
actually expenses of Sabratek . Indeed, as the Company announced on
October 7, 1999, the Company's improper accounting of expenses as
intangible assets or as loans "would reduce previously reported
pre-tax earnings for the reporting periods April 1, 1997 through
March 31, 1999 by approximately $39 million ." As the Company's
October 7, 1999 press release also stated, these reclassifications
"relate primarily to reclassifying intangible assets as expenses
and accounting for amounts advanced to affiliated companies as
expenses rather than as loans . "
54 . A review of Sabratek's 1997, 1998 and 1999 Forms 10-
Q and 1997 and 1998 Forms 10-K reveal that Sabratek's increase in
reported intangible assets and loans (reported as notes receivable)
during the April 1, 1997 through March 31, 1999 period were
primarily the result of licensing and loan transactions with four
entities : Unitron Medical Communications, Inc . ("Unitron," a/k/a
Moon Communications), GDS Technology, Inc . ("GDS'"), Healthmagic,
Inc . ("Magic") and Collaborations in Healthcare, LLC ('"Heathcare") .
(Unitron, GDS, Magic and Healthcare are sometimes collectively
referred to herein as the "R&D Satellite Entities .") Indeed, the
total amount that Sabratek reportedly transferred to these entities
under the guise of "licensing fees," "loans" or (to a much lesser
extent) "marketing fees" totaled approximately $41 .5 million
between 4/1/97 and 3/31/99 .5 This $41 .5 million sum -- after
5 Based on information pieced together from Sabratek'sSEC filings, the amounts paid to these four entities can b e
- 47 -
taking into account-" approximately $2 million in amortization
writedowns on the portion of Sabratek ' s reported intangible asset s
attributable to its capitalized "licensing fee" arrangements with
the four R&D Satellite Entities -- essentially equals the
"approximately $39 million" in accounting restatements that the
Company announced on October 7, 1999 .
55 . Each of the four R&D Satellite Entities wa s
purportedly involved in developing products that Sabratek hoped to
integrate into its interactive, intranet-based remote medical
monitoring "Virtual Hospital Room" network system, or into a later,
internet-based version of the same concept known as
"OneMedPlace .com" . For example, as described by various Sabratek
press releases and SEC filings :
(a) Unitron is a Florida corporation that had purportedlydeveloped a proprietary clinical patient informationmanagement network known as MOON (short for "MedicallyOriented Operating Network") that provides continuous,real-time monitoring and reporting of clinical patientinformation from remote sites, including a patient'shome . In July 1997, Sabratek entered into a "licensingagreement" with Unitron whereby Sabratek agreed to payUnitron up to $7 million for a 15 year technology for"the use of the continuous, real-time monitoring andreporting software which is a component of MOON ;
broken down as follows :
(a) Unitron : $18 .5 million (consisting of $7 million in"license fee" payments, $2 .7 million under a "sales andmarketing agreement," and $8 .8 million in loans ordraws under various credit facilities extended bySabratek) ;
(b) GDS : $10 .4 million (breakdown unclear, but consistingof at least $6 .5 million for certain "exclusive productrights") ;
(c) magic : $10 million (for "license fees") ; and
(d) CIH : $2 .7 million (for draws. under a credit facilityextended by Sabratek )
- 48 -
simultanea-dsly therewith, Sabratek also acquired anoption to buy MOON beginning in 1999 . In January 1998,Sabratek also entered into an "Exclusive Sales andMarketing Agreement" whereby Sabratek purportedly"acquired certain rights to access Unitron's customerdatabase" for $2 .7 million . In addition to various loansextended to Unitron by Sabratek in 1997 and 1998, inOctober 1998 the parties entered into a Standby SeniorCredit Facility whereby Unitron, subject to variousconditions, could borrow up to $10 million from Sabratekat an interest rate of 80 .
(b) GDS is a medical device company that purportedly developsand manufactures advanced point -of -care blood diagnosticproducts . In August of 1997, Sabratek entered into a"Supply and Distribution Agreement" with GDS, wherebySabratek agreed to pay GDS $4 million (later increased toat least $6 .5 million) for the 10-year exclusive right tocertain diagnostic products, including the GDS Stat-Sitediagnostic testing device and related disposable testsfor use in the alternate site health care market .Simultaneously therewith, Sabratek also acquired anoption to acquire GDS beginning in 1999 . Sabratek alsoextended various loans to GDS during the Class Period .
(c) Magic is purportedly a developer of innovative managementtools that feature intranet technology, which providesmedical staff access to key medical information fromremote locations . In November 1998, Sabratek enteredinto a Software License and Marketing Agreement withMagic, under which Sabratek paid Magic $10 million "forthe exclusive rights to certain software applications andrelated documentation ." Simultaneously therewith,Sabratek also acquired an option to acquire up to 11 .11%of Magic .
(d) CIH purportedly provides'consulting services for supplychain management for integrated delivery networks . InNovember 1998, Sabratek entered into a Standby SeniorCredit Facility with CIH, whereby CIH, subject to variousconditions, could borrow up to,$4 million from Sabratekat an interest rate of 80 . Simultaneously therewith,Sabratek also acquired a five year option to acquire CIHat any time up to November 23, 2003 .
56 . Additional publicly-available information concerning
the details of the transactions between Sabratek and the four R&D
Satellite Entities is limited because, inter alia , Sabratek failed
to disclose copies of the various transaction documents in
violation of Item 601 of Regulation S-K, which requires copies of
- 49 -
material contracts itered i nto during a reporting period to be
attached as exhibits to the Form 10-Q or Form 10-K covering that
period. However , available information shows that Sabratek's
dealings and relationships with each of these entities shares a
common pattern : namely, in each case (a) Sabratek paid millions of
dollars to the entity pursuant to "license agreements," "exclusive
supply agreements ," "marketing agreements " and/or access to loans
or cred it facilities ; (b) Sabratek , in conjunction with these
agreements, acquired an option to buy all (or in the case of Magic,
11%) of the entity ; and (c) each entity was involved in developing
products that Sabratek hoped to integrate into its intranet-based
"Virtual Hospital Room" concept . or its internet-based
" OneMedPlace . com" concept .
57 . Under GAAP, loans receivable and the cost of
licensing rights are generally considered assets . For example,
licensing rights are generally considered assets because they
generally represent probable future economic benefits obtained or
controlled by a particular entity as a result of a past
transaction . In contrast , R&D expenditures are generally not
considered assets and must generally be expensed as incurred, since
the uncertainty about the capacity of the R &D project to provide
economic benefits generally precludes recognizing such expenditure s
as an asset .
58 . Sabratek' s admission that virtually all of the
approximately $41 .5 million paid to the four R&D Satellite Entities
should have been expensed -- instead of being recorded on
Sabratek' s books as assets -- shows that
- 50 -
(a) Sabratek er acquired the licensing righs referencedin its public statements -- or the licensing rights itdid receive were for rights to products that were stillin development (or which needed to be incorporated intoas yet undeveloped products to have economic value), sothat the "licensing rights" Sabratek obtained did notprovide a reasonably probable future economic benefitunder GAAP ; and
(b) the R&D Satellite Entities were not obligated to repaySabratek for the loans it . received from the Company, orthey lacked the financial wherewithal to repay Sabratek,and/or that the reality of the relationship was thatSabratek controlled these entities and was using itsloans to these entities to fund "off-the-books" R&Dprojects for Sabratek's own .behalf .
59 . The foregoing facts -- especially when combined with
the fact that Sabratek intended to "integrate" these entities'
various "technologies" and "products" into the much broader
"Virtual Hospital Room" or "OneMedPlace .com" system -- compels the
conclusion that Sabratek's agreements with the four R&D Satellite
Entities were, in substance, research and development arrangements
whereby Sabratek arranged for these entities to conduct R&D on
Sabratek's behalf . However, rather than disclose the true natur e
of its various transactions with these four R&D Satellite Entities,
defendants used these transactions as window-dressing t o
fraudulently capitalize R&D expenditures that should have been
reported as expenses on Sabratek's own financial statements at the
time the funds were expended , thereby materially inflating
Sabratek's reported earnings and profits .
(a) Indeed, as defendant Sean Padda told one of the
Company's shareholders in the Spring of 1999, Sabratek and its
accountants -- defendant KPMG -- had developed a "brilliant
strategy" to fund Sabratek's networking research & development
costs "off the balance sheet" by advancing funds to Unitron ,
- 51 -
GDS, and MagicY As Padda explained to the Share holder, the
networking side of Sabratek's business was losing money, and
he did not want to fund those costs on Sabratek's balance
sheet because Wall Street "punished" companies for falling
just a few pennies short on its earnings . As Padda further
stated, Sabratek and KPMG had developed a plan that permitted
Sabratek to fund its networking projects (e .g. the virtual
Hospital Room system) by advancing money to "separate
companies," including Unitron, Magic and GDS, which would then
spend the money on R&D relating to the various networking
system projects . Padda also told this shareholder that these
deals had also been structured so that Sabratek had an option
to buy Unitron and GDS as soon as the networking projects were
accretive to earnings, at which point (according to Padda) the
impact of eliminating any assets recorded on Sabratek's books
in connection with these transactions (such as loan
receivables) would be negligible compared to the benefits of
the earnings from the networking product ; Padda further
indicated that Sabratek definitely intended to exercise the
purchase options at such time as the networking products were
ready .
(b) Similarly, according to a former Unitron
employee, it was understood from the beginning of the parties'
relationship that basically all of the money Unitron received
from Sabratek -- whether characterized as loans or license
fees - - was to be used to fund the research and development of
various products for Sabratek . Indeed, at all material times,
Unitron was a developmental stage company with basically no
- 52 -
customers and marketable products in 1997, ana accordingly
Sabratek "wouldn't have gotten all that much" for it s
"licensing fees" at the time the licensing agreement was
signed . For example, although Unitron had developed an early
version of the MOON system by mid-1997, at that time the
initial version of the system was just entering beta testing
at a single site in Florida, and would not be ready for
market, if at all, for at least 18 months . Moreover, numerous
other product applications that were to be developed and
integrated into the MOON system using funds provided by
Sabratek -- including the Video Nurse Visits product (which
would allow a nurse to view the patient by television), the
Virtual Hospital Room Communicator (a clinical data collection
product), the Customized Interactive Voice Response product
(which allowed nurses to adjust medical devices by touch-tone
phone) and the Longitudinal Patient Record product (a birth to
death patient record system) -- were simply ideas on the
drawing board or products in development during 1997 and 1998,
and none of these products would have been ready to go to
market until 1999 at the earliest .
(c) Indeed, the riskiness of this type of softwar e
development -- and hence the inappropriateness of capitalizing
amounts spent to "license" products that are still in
development -- is well illustrated by the fact that the MOON
operating network technology, which basically covered all of
the specific product applications noted in the preceding sub-
paragraph, had to be completely re-written twice before
finding a version of the product that was ready even for bet a
- 53 -
testing . The skiness of such development ventures is also
illustrated by the fact that it appears that neither the MOON
system nor any of the product applications noted above have
ever been sold to or installed by any paying customers .
60 . As a result of defendants ' fraudulent reporting of
Sabratek ' s assets and their corresponding failure to properly
record amounts advanced by Sabratek to the four R&D Satellite
Entities as expenses , Sabratek ' s Class Period financial statements
-- as a result of just these transactions alone -- knowingly or
recklessly overstated the Company ' s pre-tax earnings by
approximately $39 million over the period April 1, 1997 through
March 31, 1999 .
Additional Background Facts Relatingto Sabratek ' s Roca O erations
61 . In February 1997, the Company acquired all of the
assets of Rocap, Inc . ("Rocap"), a manufacturer and marketer of
pre-packaged injectable prescription pharmaceuticals and pre-filled
syringes . Thereafter, Sabratek began producing and marketing
prepackaged injectable prescription products and pre-filled
intravenous ("I .V .") tubing flush syringes through the operation of
Rocap. The Company's adoption of the Rocap product line was
central to the Company's growth strategy because Rocap expanded the
scope of the Company's product offerings to alternate and acute
care providers .
62 . While Sabratek touted the benefits of Rocap products
and conditioned the market to believe that Rocap products were
central to the Company's growth prospects, the Company never
disclosed Rocap's history of federal regulatory violations . Even
- 54 -
before Sabratek acqu ed Rocap6, the FDA had already made clear it s
concern regarding Rocap's procedures . A mere six months after
Rocap began operations, the FDA first cited Rocap for problems
regarding product sterility and record keeping :
Process Validation
1 . The firm has relied upon the periodic sterilitytesting of individual finished products to establishprocess validation . There has been no use of consecutiveruns of a microbi ological growth nu trient medium ("mediafill") to demonstrate the validation of the aseptic IVadmixture process .
Environmental Monitoring
2 . The firm does has not [sic] established a programdesigned to monitor biological activity wi thin themanufacturing areas. As such, no environmental bioburdenbaseline studies, nor periodic biological monitoring hasbeen performed to date .
Master Production Records
3 . The master production records used in the manufacturer ofIV drug admixtures have not been dated and signed by thepreparing individual, nor do they document an independentreview by the firm's quality group, as required in section VI,Part A of the firm's SOPs .
4 . Part B of Section VI ("Master Control and BatchRecords") of the firm's SOPs does not completely and
° For the purposes of this Complaint, it is fair to chargeSabratek with full knowledge of the problems that existed at Rocaprelating to its inability to obtain 510(k) approval because,according to the Asset Purchase Agreement under which Sabratekacquired Rocap ( see Form 8-K was filed by Sabratek with the SEC onMarch 12, 199 7), Rocap had delivered to Sabratek "any and allinformation and documents which [Rocap] has received or collectedor is otherwise in its possession regarding any changes proposed orcontemplated by the FDA to the 510(k) clearance approvalrequirements for medical device products . . ." (Asset PurchaseAgreement §3 (q) (vii) ) , and had "made available to [Sabratek] copiesof any and all reports of inspection observations, establishmentinspection reports, warning letters and any other documentsreceived by Rocap from the FDA since the initial incorporation ofRocap that indicate of suggest any lack of compliance with the FDAregulatory requirements by Rocap or any Person otherwise performingmanufacturing operations for the benefit of Rocap ." (AssetPurchase Agreement §3 (q) (iii) . )
- 55 -
accurately re-4ct the firm's practice of ratingMaster Production Records .
Batch Production Records
5 . The batch production records do not fully identifythe [process] in which I .V . drug admixtures are prepared .
6 . The batch production records do not identify the "Pharm-Assist" peristaltic pump used in the manufacture of the drugadmixture .
7 . Review of all batch production records . . . revealednumerous instances of data write-over and cross-outwithout initials and/or reason . [Emphasis added . ]
63 . The FDA report made clear that Rocap was informe d
that these violations were not "all-inclusive" because the scope of
the FDA's inspection was limited to the Company's compliance with
GMPs for I .V . drug admixtures . The report also made clear that
Rocap was put on notice of the FDA's continued oversight :
[FDA Inspector McCann] reminded the firm that they couldassure Rocap's compliance with [current GoodManufacturing Practices ("cGMPS")] by examining theentirety of its operations . . . . Mr. McCann remindedthe firm of their statutory obligation to adhere tocGMPs, and described the regulatory tools available forFDA in dealing with non-compliance . Mr. Hamer asked ifFDA has a set schedule for inspecting firms, to which Mr .Lookabaugh responded that routine unannounced inspectionsare conducted biennially . [Emphasis added . ]
64 . While the specific problems revealed by the FDA i n
February 1996 were resolved by the FDA's follow-up inspection in
September 1996, the FDA warned Rocap at the follow-up inspection of
the serious consequences of failing to comply with the law . In a
follow up report dated October 3, 1996, New England FDA District
Investigator, John M . McCann, Jr ., reported the following :
On September 26, 1996, at the conclusion of thisinspection, I held final discussions with [Rocapmanagement] . I reminded them that as management ofRocap, a registered Drug Establishment, they wereobligated to assure that the firm's products andoperations conform to the cGMPs promulgated in 21 CFR
- 56 -
§211 . 1 furthL~admonished them that failure to conformto cGMPs could result in an adulterated and/or misbrandedproduct which is a violation of the Federal Food, Drugand Cosmetic Act, as amended (The Act) . I informed themthat they are prohibited from violating any provision ofThe Act, and apprised them of the various regulatory andadministrative instruments available to FDA in dealingwith non-compliant/violative firms .
. . . I stated that since the firm's current operationsmore closely resemble traditional pharmaceuticalmanufacturing than what was previously observed, Rocapshould acquire a copy of 21 CFR Parts 300-399 . Iexplained that those regulations, in part, addressinvestigational drug studies, product approvalapplications, filing requirements, and other requirementsspecific to individual types of drug products, such asantibiotics and parenterals . [Emphasis added . ]
65 . At its follow-up inspection in September 1996, th e
FDA noted that Rocap had initiated production of a new line of I .V .
flush syringes without prior pre-market approval from the FDA, or
even filing a 510(k) application with the FDA requesting such
approval . At that time the FDA did not inspect Rocap' s processes .
66 . Even though the FDA's non-inspection should not have
given Rocap comfort as to its compliance with proper procedures,
Rocap aggressively marketed its purported compliance wit h
applicable FDA regulations and its "state-of-the-art quality
assurance protocols in every phase of [Rocap's] operation," a s
follows :
Assurance of Quality
ROCAP is a F .D .A . regulated company, employing state-of-the-art quality assurance protocols in every phase of ouroperation .
All I .V .'s mixed and final-filtered in a Class-100environment .
Sterility testing of end products and at all phases inthe process .
Independent Laboratory monitoring .
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All pharmacy sff are certified professionals, trainedin parenteral technology .
All operations are validated , documented and have aminimum double-check system .
All other programs and services have been designed toprovide reliable results with documented pathways andquality control measures . [Emphasis added . ]
67 . Sabratek, upon its acquisition of Rocap in February 1 997 ,
continued this pattern of marketing Rocap's quality contro l
processes . In a "ROCAP Information. Sheet" provided to potential
customers, the Company listed the following questions and answers :
Q . Who regulates Rocap?
A : ROCAP is registered with the Food and DrugAdministration (FDA) who recently completed(September 96) a routine inspection of ourfacility, quality plan, manufacturing practices andall standard operating procedures . ROCAP, as amanufacturer, is required to comply with allCurrent Good Manufacturing Practices (cGMP)regulations related to material control and processvalidation . . . .
Q : What quality control elements are in place at ROCAP ?
A: ROCAP has a quality control plan which includes aroutine list of quality control activities designedto insure the integrity . of our products . Thequality plan includes, but is not limited to, inprocess quality checks, end product sterilitytesting, environmental biological testing,environmental controls and environmentalmonitoring . Operator technique and equipmentfunction are continuously validated through growthmedia validation runs . Fluid transfer equipment isfurther validated by volumetric testing . Thecontent of the quality plan is based on USP and FDArecommendations .
68 . Despite the Company's repeated attempts to creat e
the illusion that it was in compliance with FDA regulations and ha d
proper safety procedures in place, by August 1997, an inspection o f
the pre-filled flush syringe operations revealed significant an d
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material problems a the Company . The FDA Form issued in
connection with this inspection listed seventeen separate
violations . Like the first inspection for the I .V . admixture
products , the inspection of the flush syringe operations revealed,
among other things, a failure to validate the aseptic process to
ensure sterility , a failure to conduct adequate environmental
monitoring of the manufacturing areas, and a failure to control
product quality in a meaningful way .
69 . Following the August 1997 investigation, the FDA pu t
a "hold" on Sabratek's 510(k) pre-market application for its I .V .
syringe flushes pending the receipt of information confirming the
Company's conformity with federal regulations . Although the FDA's
Center for Devices and Radiographical Health ("CDRH") advised the
Company that the Rocap syringes could not be commercially
distributed until the FDA gave its approval, the Company, in
violation of the CDRH's specific instructions, continued commercial
distribution of the Rocap I .V . flush syringes .
70 . The Company's violations revealed during the Augus t
1997 inspection were sufficiently serious to warrant a warning
letter from the FDA dated December 12, 1997, stating that the
Company's manufacture of pre-filled intravenous flush syringes was
in violation of federal law . The FDA Warning Letter stated, in
part, the following :
The above-stated inspection revealed that thesedevices are adulterated within the meaning ofSection 501(h) of the Act, in that the methods usedin, or the facilities or controls used for themanufacturing, packaging, storage, or installationof theses devices are not in conformance with theQuality System Regulation for Medical Devices, asspecified in Title 21 of the Code of FederalRegulations, Part 820 (21 CFR 820) . You must
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comply w- allrequirements applicable to theoperations in which you are engacred . [Emphasisadded . ]
71 . Additionally, the December 1997 Warning Lette r
noted, among other things, the following violation at the Rocap
facilities :
Within the last six months, there have beenmultiple instances of temperature and pressurereadings beyond specified ranges, withoutdocumented explanations or corrective actions .
The FDA warning letter continued, in part, as follows :
These devices are also adulterated within themeaning of Section 501(f)(1)(B) of the Act in thatthey are class III devices under Section 513(f) anddo not have an approved application for premarketapproval in effect pursuant to Section 515(a), oran approved application for investigational deviceexemption under Section 520(g) .
This letter is not intended to be an all-inclusivelist of deficiencies at your facility . . . Thespecific violations noted in this letter and theForm FDA 483 issued at the close of the inspectionmay be indicative of serious underlying problems inyour firm's manufacturing and quality assurancesystems . You are responsible for investigating anddetermining the causes of the violations identifiedby the FDA . If the causes are determined to besystems-related, you must promptly initiatepermanent corrective actions .
You should take prompt action to correct thesedeviations . Failure to promptly correct thesedeviations may result in regulatory action beinginitiated by the FDA without further notice . Theseactions include, but are not limited to, seizure,injunction, and or civil penalties . [Emphasisadded . ]
72 . The problems faced by the Company in receiving FD A
approval of its 510(k) request for its Rocap pre-filled flus h
products were unusually severe . In fact, according to FDA data ,
during 1997 fully 700 of 510(k) clearances were completed (meaning
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that the applicax~r " had met all review step , addressed
deficiencies, and obtained a final decision) within three months,
and 95-.' of the 510 (k) clearances were completed within nine months .
MATERIALLY FALSE AND MISLEADINGSTATEMENTS DURING THE CLASS PERIO D
73 . On February 25, 1997, the first day of the Class
Period, Sabratek announced that it had purchased substantially all
of the assets of Rocap, Inc . As subsequently disclosed in
Sabratek's Form 10-K for the year ended December 31, 1996, the
consideration paid by Sabratek for Rocap consisted of a mixture of
$100,000 in cash, assumption or forgiveness of approximately
$961,000 in Rocap debt, and $2,900,000 in cash or Sabratek stock .
The stock value for payment in shares was preliminarily set at
$22 .0375 per share, and accordingly 131,593 shares of Sabratek
common stock were placed in escrow towards the Rocap purchase .
However, the Rocap asset purchase agreement provided that the final
number of Company shares deliverable to Rocap would be determined
by Sabratek's stock price at July 1, 1997 .
74 . Also on February 25, 1997, the Company issued a
press release published on PR Newswire entitled "Sabratek Reports
Record Sales and Net Income in 1996 Fourth Quarter," in which it
announced results for the fourth quarter and year ended December
31, 1996 . According to the press release, the Company announced
purported net sales of $6 .1 million reported for the fourth quarter
of 1996, compared with net sales of $1 .4 million for the same
period the prior year, an increase of 334% year-over-year . The
Company reported net income for the quarter of $482,000, or $0 .05
per share, compared to a loss of $1 .6 million or ($0 .24) per share
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for the fourth quarter of 1995 . For the year, Sabratek reporte d
that net sales in 1996 had increased 339% to $17 .7 million ,
compared to $4 .0 million the prior year .
75 . The February 25, 1997 press release further stated :
These results (for the fourth quarter] mark the Company'sfourth consecutive quarter of record sales and operatingprofitability and its second quarter of netprofitability . The strong increase in sales is primarilydue to the steady growth in market acceptance of theCompany's product line which includes patient infusionmanagement and monitoring devices and telemedicinesoftware .
The release also quoted defendant Padda as stating that Sabratek's
acquisition of the Rocap business "will help us extend the scope of
our products and services in the area of T .V . delivery systems in
order to fulfill our vision of providing a 'virtual' hospital room
to alternate site providers . "
76 . In response to this positive earnings announcements ,
which exceeded Wall Street's consensus expectations of earnings of
$0 .03 for the quarter, the price of Sabratek common stock closed at
$24 .125, up $1 .875 (or more than 8 *1) from the previous day's close .
77 . However, as detailed herein, Sabratek's February 25,
1997 press release was materially "'false and misleading because,
inter alia, it failed to disclose that the Company's reported
earnings, sales and revenue figures for the fiscal year. and fiscal
quarter ending December 31, 1996 were materially and artificially
inflated as a result of Sabratek's undisclosed and improper revenue
recognition practices and other improprieties described at ¶¶ 48-60
and ¶¶ 167-184 .
78 . On or about March 26, 1997, Sabratek filed its Form
10-K for its fiscal year ended December 31, 1996 with the SEC .
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ti\ LThis Form 10-K, wh ' i was signed by defendants PaZ~da, Rastogi,
Levitas , Holden, Skooglund and Smith , among others, reported that :
Net sales increased to $17 .7 million for the year endedDecember 31, 1996 from $4 .0 million for the year endedDecember 31, 1995, an increase of $13 .7 million or 343% .The increase is primarily attributable to an increase insales volume of the 3030 Stationery Pump, the 6060Ambulatory Pump and their respective disposables, to thealternate-site healthcare market . Also contributing tothe increase was the introduction of MediVIEW andPumpMaster products .
However, as detailed herein, Sabratek's FY 1996 Form 10-K was
materially false and misleading because, inter alia , it failed to
disclose that the Company's reported earnings, sales and revenue
figures for the fiscal year and fiscal quarter ending December 31,
1998 were materially and artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition practices
and other improprieties described at 11 48-60 and 11 167-184 .
79 . On or about March 30, 1997, the Company filed an S- 1
registration statement with the SEC (which was signed by defendants
Padda, Rastogi, Levitas, Holden, Skooglund and Smith) to register
the sale by the Company of a secondary offering of 1,700,000 shares
of Sabratek common stock, and the sale by certain selling
shareholders -- including defendants Padda, Levitas, Rastogi and
Jordan -- of 478,493 shares of Sabratek common stock . However, the
registration statement and prospectus for this offering, which was
completed on or about April 4, 1997, was materially false and
misleading because, inter alia , it contained the same false and
misleading financial statements for the year ending December 31,
1996 as were contained in the Company's Form 10-K filed on Marc h
26, 1997 .
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80 . On A it 30 , 1997, Sabratek issued aTess release
published on PR Newswire entitled " Sabratek Reports Record Sales
and Net Income in 1997 First Quarter, " in which it announced
results for the first quarter ended March 31, 1997 . According to
the press release, the Company had purported net sales of $7 .5
million for the first quarter, compared with net sales of $2 .9
million reported in the same period the prior year, a purported
increase of 154% year - over-year . The Company reported that its net
income for the quarter was $1,046,000 , compared to a loss of $1 .7
million for the same quarter in 1997, and that earnings per share
for the quarter had increased to $0 .11 per share compared to a per
share loss of $0 .25 in the year - earlier quarter . Commenting on
these results, the release also quoted defendant Padda as stating :
We are pleased to begin 1997 with continued strong salesmomentum, the signing of several major home healthcareproviders and the completion of our first acquisition,Rocap . The market continues to validate Sabratek'sSeamless Delivery Systems (TM) approach which nowincludes MediVIEW (TM), PumpMaster (TM) and RocapDivision products in addition to infusion devices anddisposables .
81 . However, Sabratek's April 30, 1997 press release wa s
materially false and misleading because it failed to disclose that
the Company's reported financial results for the first quarter
ended March 31, 1997 were artificially inflated as a result of
Sabratek's undisclosed and improper revenue-recognition practices
and other improprieties discussed in ¶¶ 48-60 and ¶¶ 167-184 .
82 . On or about May 14, 1997, Sabratek filed its Form
10-Q for the first quarter ended March 31, 1997 with the SEC . This
Form 10-Q was signed by defendants Padda, Holden and Skooglund, and
reported the same false and misleading financial information a s
- 64 -
• t ~
previously report e - n April 30, 1997 . However as detailed
herein, Sabratek's first quarter 1997 Form 10-Q was materiall y
false and misleading because, inter alia , it failed to disclose
that the Company's reported earnings, sales and revenue figures for
the quarter ended March 31, 1997 were materially and artificially
inflated as a result of Sabratek's undisclosed and improper revenue
recognition practices and other improprieties described at ¶¶ 48-60
and 11 167-184 .
83 . In an effort to further inflate the price o f
Sabratek common stock prior to the July 1, 1997 date on which the
number of shares payable to Rocap shareholders would be determined
based on the market price of Sabratek stock, Sabratek management
gave market analysts comfort that the Company would meet or exceed
Wall Street expectations for the second quarter ended June 30,
1999 . For example, in an analyst report dated June 6, 1997,
Jefferies & Co . reported that :
We spoke with Company management and remain confidentthat Sabratek will continue to meet or exceed our revenueand earnings expectations going forward . For its secondquarter ending in June, we expect Sabratek to reportrevenues that exceed our $8 million estimate and reportearnings per share at or slightly above out $0 .12estimate versus $0 .00 the prior year .
In response to this positive commentary, Sabratek common stock
closed at $30 .00 per share on June 6, 1997 (up $1 .25 from the
previous day's close) . On. July 1, 1997, the price of Sabratek
common stock closed at $28 .00 per share .
84 . On August 5, 1997, Sabratek issued a press release
published on PR Newswire entitled "Sabratek Reports Record Sales
and Net Income in 1997 Second Quarter," in which it announced
results for the second quarter ended June 30, 1997 . According to
- 65 -
the press release,'- ie Company had purported net sales of $9 .8
million for the second quarter, compared with net sales of $3 .8
million reported in the same period the prior year, a purported
increase of 161% year-over-year . The Company reported that its net
income for the quarter was $1,627,000, compared to a reported loss
of $14,000 for the same quarter in 1997, and that earnings per
share for the quarter had increased to $0 .15 per share compared to
$0 .00 per share, or break-even, in the year-earlier quarter .
Commenting on these results, the release also quoted defendant
Padda as stating :
These results reflect the steady acceptance of theCompany's product line . . .
85 . In response to this positive earnings announcement,
Sabratek's common stock approached a new all-time high and closed
at $29 .125 later that day, up $1 .375 (or 5%) from its closing price
the previous day .
86 . However, Sabratek's August 5, 1997 press release was
materially false and misleading because it failed to disclose that
the Company's reported financial results for the second quarter
ended June 30, 1997 were artificially' inflated as a result of
Sabratek's undisclosed and improper revenue-recognition and income-
inflating practices and other improprieties discussed in ¶1 48-60
and $$ 167-184 . The release was also materially false and
misleading because, notwithstanding defendant Padda's assertions
regarding the "steady acceptance of the Company's product line,"
the release failed to disclose any of the adverse factors set forth
in $ 46 .
- 66 -
87 . Follt ing this positive -- but materia ly false and
misleading -- announcement concerning the Company's purported
financial performance for second quarter, the price of Sabratek's
common stock continued to climb to new highs, with its closing
prices during the balance of the month ranging between a low of
$29 .125 on August 5, 1997 and a high of $36 .25 on August 29, 1997 .
Meanwhile, several of the individual defendants (including
defendants Padda, Holden, Levitas and Mandell) did not hesitate to
exploit this run up in the price of Sabratek's common stock by
selling over 126,000 shares of their Sabratek stock to members of
the Class at artificially inflated prices -- sales which permitted
these defendants to reap insider selling proceeds of nearly $3 .9
million in the month of August alone .
88 . On or about August 14, 1997, Sabratek filed its Form
10-Q for the second quarter ended June 30, 1997 with the SEC . This
Form 10-Q was signed by defendants Padda, Holden and Skooglund, and
reported the same false and misleading financial information as
previously reported on August 5, 1997 . However, as detailed
herein, Sabratek's second quarter 1997 Form 10-Q was materially
false and misleading because, inter alia , it failed to disclose
that the Company's reported earnings, sales and revenue figures for
the quarter ended June 30, 1997 were materially and artificially
inflated as a result of Sabratek's undisclosed and improper revenue
recognition and income inflating practices and other improprieties
described at 1 1 48-60 and 11 167-184 .
89 . On November 5, 1997, Sabratek issued a press releas e
published on PR Newswire entitled "Sabratek Reports Sixth
Consecutive Quarter of Record Sales .and Net Income," in which i t
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announced results fb2the third quarter ended Septe er 30, 1997 .
According to the release , the Company had purported net sales of
$11 .8 million for the third quarter, compared with net sales of
$4 .9 million reported in the same period the prior year, a
purported increase of 161%; year-over-year . The Company reported
that its net income for the quarter was $2 .1 million , compared to
$394,000 for the same quarter in 1997, an increase of 4280, and
that earnings per share for the quarter had increased to $0 .18 per
share compared to $0 .04 per share in the year-earlier quarter .
The release also quoted defendant Padda as stating :
During the third quarter, we continued to see strongdemand from the alternate-site marketplace for ourexisting line of interactive medical devices, reflectingthe significant benefits our Seamless System of productsoffers healthcare providers . At the same time, Sabratekhas continued to strategically build its Virtual HospitalRoom . During the quarter, the Company signed a licensingagreement with MOON Communications (Unitron), aspreviously announced. Unitron's Medical OrientedOperating Network (MOON (tm)) augments Sabratek'sMediVIEW (R) system with provider management and real-time monitoring and administration of patient compliance,clinical response and outcomes data . In addition, werecently completed a supply and distribution agreementwith GDS Technology, Inc . for a rapid point of carediagnostic testing system . Through GDS we will be ableto offer a point of care blood testing device whichprovides easy to use, quantitative results and is fullycompatible with our other remotely manageable products .These components together accelerate the Company'srealization of the Virtual Hospital Room .
90 . However, Sabratek's November 5, 1997 press release
was materially false and misleading, because it failed to disclose
that the Company's reported financial results for the third quarter
ended September 30, 1997 were artificially inflated as a result of
Sabratek's undisclosed and improper revenue-recognition and income-
inflating practices and other improprieties discussed in ¶¶ 48-60
and ¶ 1 167-184 . The release was also materially false an d
- 68 -
misleading because , notwithstanding defendant Padda}`s assertions
regarding the "strong demand" for the Company ' s products and the
contribution of the MediView product to the "accelerat[ing] the
Company's realization of the Virtual Hospital Room," it failed to
disclose any of the adverse factors set forth in ¶ 46 .
91 . On or about November 12, 1997, Sabratek filed it s
Form 10-Q for the third quarter ended September 30, 1997 with the
SEC . This Form 10-Q was signed by defendants Padda, Holden and
Skooglund, and reported the same false and misleading financial
information as previously reported on November 5, 1997 . However,
as detailed herein, Sabratek's third quarter 1997 Form 10-Q was
materially false and misleading because, inter alia , it failed to
disclose that the Company's reported earnings, sales and revenue
figures for the quarter ended September 30, 1997 were materially
and artificially inflated as a result of Sabratek's undisclosed and
improper revenue recognition and income-inflating practices and
other improprieties described at ¶¶ 48-60 and ¶¶ 167-184 .
92 . On January 13, 1998, Bloomberg news service reported
an FDA announcement that a Sabratek facility in Woburn, Mass .,
failed to properly test its drug infusion systems during
manufacturing and had received an FDA warning letter (the "December
1997 Warning Letter") . According to Bloomberg , the FDA said it
found several testing problems during the inspection of the plant
between Aug . 29 and Sept . 29 . Agency inspectors cited the company
specifically for failing to test incoming products used in the
infusion systems, failing to assure that the products were sterile
and for failing to do a final test on its finished products .
However, in response to the government's announcement of the
- 69 -
issuance of the Decehier 1997 Warning Letter, the Company reassured
the investing community that it had already addressed all of the
issues raised by the FDA, and that the Company was operating in
accordance with all applicable federal regulations :
"We are frankly surprised when we got this warningletter," said [defendant] Rastogi . "The issues hadall been addressed before we got the letter . "
[Defendant] Rastogi said there were "absolutely" noconcerns about the safety of the products and thatall of the company's contacts with the FDA havebeen "very cordial ." [Emphasis added . ]
93 . However, the foregoing statements of defendant
Rastogi regarding Rocap and the FDA's purported lack of concerns
about the safety of Rocap products, were materially false and
misleading because they failed to disclose the material adverse
facts set forth in 1 1 46(a) and (b) above, including the facts that
(a) Sabratek was selling Rocap pre-filled flush syringes without a
valid pre-market 510(k) approval, and in violation of FDA
regulations ; (b) that the December 1997 Warning Letter had cited
many instances of safety and manufacturing deficiencies and
violations which were directly related to the safety of the Com-
pany's manufacturing processes and the products created thereby,
and that the Company had yet to address all of the issues raised in
that Letter ; and (c) that, at that time, almost 8 months had passed
since the Company had submitted its 510(k) application (an
application which the Company knew was._ordinarily ruled on by the
FDA within 90 days), and the Company knew or recklessly disregarded
that material problems existed regarding this application and that
the application or material portions thereof were not likely to b e
- 70 -
approved by the F64and (d) the Company knew, or recklessly
disregarded , that it lacked the oversight procedures and processes
necessary to ensure that federal regulations would be complied with
or that internal manufacturing operations would be properly
monitored , and that the Company did not have procedures in place
that would allow it to properly address the problems which it knew
persisted , or which it recklessly disregarded .
94 . In early February 1998, the FDA followed up its
December 1997 Warning Letter with another inspection of the
Company's Woburn facility . According to the FDA report issued to
the Company at the conclusion of this inspection , the FDA informed
the Company that, inter alia , it had failed to correct the
previously cited problems regarding out-of-specification and
omitted data for the facility ' s temperature/cleaning logs and
refrigerator temperature log, and had also (a) failed to establish
"a procedure for handling Corrective and Preventive Action that
would describe how sources of Quality data will be analyzed,
investigated , forwarded for management, review and documented ;" (b)
failed to follow the Company's own standard operating procedures
for quality control, and ( c) "could not demonstrate that personnel
had received training on how to use the new labeling machines or
that personnel were trained on the procedures that they use to
perform their duties ." Thus, the Company was aware that, despite
its assertions to the contrary , the Company remained in non-
compliance with FDA requirements .
95 . On February 18, 1998, the Company reported "record"
financial results for the fourth quarter and fiscal year ended
December 31, 1997 . The Company reported net sales for the fourth
- 71 -
quarter of $ 14 millon, a 129% increase over the'd6 .1 million
reported in the same period in the prior year . The Company also
reported net income for the quarter of $2 .5 million , or $0 .22 per
share, compared to net income of $477,000, or $0 .05 per share, in
the same period in the prior year . The Company also reported net
sales for the year ending December 31, 1997 of $ 43 .1 million, a
143% increase over the $ 17 .7 million reported in fiscal 1996 .
Reported net income for fiscal 1997 was $7 .2 million, or $0 .67 per
share, compared to a net loss of $858,000, or $0 .12 per share,
reported in the previous year . The Company's February 18 press
release also quoted defendant Padda, Sabratek ' s CEO, as stating :
We are extremely pleased with our results for fiscal1997, representing the first full year that our completeSeamless System of I .V. products has been in themarketplace . . . . Our strong financial performance can beattributed to the successful implementation of contractswe have entered into with healthcare providers for ourremotely managed infusion therapy systems and interactivemedical devices . During 1997, Sabratek also expanded thebreadth of solutions that we bring to alternative sitehealthcare providers . The acquisition of Rocap addedprefilled flush syringes and I .V . admixture products . . .[that] round [ed] out our T .V . product line .
96 . However, Sabratek's February 18, 1998 press release
was materially false and misleading because it failed to disclose
that the Company's reported financial results for the fourth
quarter and fiscal year ending December 31, 1997 were artificially
inflated as a result of Sabratek's undisclosed and improper
revenue-recognition and income-inflating practices and other
improprieties discussed in 1' 48-60 and 1 1 167-184 .
97 . Sabratek's February 18, 1998 press release was also
materially false and misleading because, notwithstanding Padda's
assertions regarding the Company's "expanded breadth of solutions "
- 72 -
and how its acquisit~ of Rocap purportedly added sy ra.ge products
that " rounded out [Sabratek ' s] product line," it failed to disclose
the material adverse facts set forth in ¶¶ 46 and 93 above,
including the fact that the December 1997 Warning Letter and
subsequent February 1998 inspection had cited many instances of
safety and manufacturing deficiencies and violations which were
directly related to the safety of the Company's manufacturing
processes and the products created thereby, and that remained
unaddressed .
98 . The February 18, 1998 report of fourth quarter an d
FY 1997 earnings and related commentary sent the price of Sabratek
common stock up to a closing price of $35 .00 per share that day, a
gain of $3 .50 from the previous day's pre-earnings announcement
close of $31 .50 .
99 . Market analysts following Sabratek quickly responded
with favorable reports on the Company . For example :
(a) On or about February 19, 1998, Jefferies &
Company ("Jefferies") issued a report on Sabratek that strongly
advised customers to "buy" Sabratek common stock . The report,
which was based on detailed information provided to Jefferies by
the Company, stated, inter alia s
We reiterate our BUY rating . Sabratek reported fourthquarter earnings in line with expectations, with bothsales and cost totals exceeding our estimates . Revenuemomentum is exce llent and the Company has a strong newproduct pipeline . . . .
[Emphasis added . ]
(b) Similarly, on or about February 19, 1998, Bear
Stearns issued a report entitled "SBTK 4Q : Great Quarter and a
Bright 1998 Outlook," which stated, inter alia :
- 73
We contin&to rate Sabratek ATTRACTIVE (2) . We continueto believe that our numbers could prove conservative asthe company 's excellent sales performance continues tovalidate management's vision of offering alternate siteproviders a broad system of I .V . therapy/ informationdelivery systems and enabling the creation of a virtualhospital room . Over the next twelve months, Sabratekshares could trade up to the $50 range assuming a P/Emultiple of about 40x our 1999 estimate, in line with thecompany's growth rate .
[Emphasis added] .
100 . On April 8, 1998, the Company made an offering o f
$85 million in convertible 6 .0 06 notes due 2005 . The offering
materials issued by the Company in connection with this offering
stated that the notes were not callable for three years, and were
convertible into Sabratek common stock at a price of $40 .46 per
share . in conjunction with the sale of these convertible notes,
the Company also issued a registration statement and a prospectus
that made no mention of the significant delays or the problems that
the Company was experiencing with its 510(k) application for Rocap
products . Moreover, while the Company went to some lengths to
describe in general terms the consequences of failing to comply
with federal regulations, the Company's April 8, 1998 offering
materials and subsequent registration statement and prospectus
(signed by defendants Padda, Holden, Skooglund, Rastogi Levitas and
Smith) were also materially false and, misleading because, inter
alia , they (a) failed to disclose that the Company was selling its
Rocap products without an approved 510(k) application and in
violation of federal law, and (b) contained the same materially
false and misleading financial statements for the year ended
December 31, 1997 as were contained in the Company's Form 10-K
filed on April 26, 1998 .
- 74 -
101 . On off--about April 26, 1998, Sabratek led its Form
10-K for its fiscal year ended December 31, 1997 with the SEC .
This Form 10-K, which was signed by defendants Padda, Rastogi ,
Levitas, Holden, Skooglund and Smith, among others, reported that :
Net sales increased $25 .4 million to $43 .1 million forthe year ended December 31, 1997 as compared to $17 .7million for the year ended December 31, 1996, an increaseof 143% . The increase is attributable to severalfactors : incremental unit volume sales of the 3030Stationery Pump and 6960 Ambulatory Pump and theirrespective disposables into the alternate-site healthcaremarket including national homecare companies, an increasein the average per unit selling price due to a higherratio of direct sales versus dealer sales, the additionof the Rocap product line of pre-filled flush syringes inFebruary, 1997, the addition of MediVIEW and PumpMasterproducts, and the addition of certain licensed productsfrom GDS Technology, Inc .
However, as detailed herein, Sabratek's FY 1997 Form 10-K was
materially false and misleading because, inter alia , it failed to
disclose that the Company's reported earnings, sales and revenue
figures for the fiscal year and fiscal quarter ending December 31,
1997 were materially and artificially inflated as a result of
Sabratek's undisclosed and improper" revenue recognition and income
inflating practices and other improprieties described at ¶¶ 48-60
and 1$ 167-184 .
102 . Rather than disclose the December 1997 Warning
Letter, received during the fourth quarter of 1997, or the results
of the most recent February 1998 FDA inspection, or the fact that
the Company was selling its Rocap products without an approved
510(k) pre-market application, the Company's Form 10-K also stated
the following :
Quality Assuranc e
The Company maintains a comprehensive qualityassurance program . The quality assurance program
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begins wi\s' the components* and other mate' als theCompany purchases from vendors . Vendors arerequired to supply materials which meet statedqualifications . The Company monitors vendors'compliance with the stated specifications through aprogram of on site surveys, audits and producttesting . . . All finished products are tested by theCompany's separate quality assurance department toensure that the Company maintains its qualitystandards . . . . [Emphasis added . ]
However, notwithstanding the comments regarding the Company's
purported quality assurance programs, the Company's Form 10-K was
also materially false and misleading because it failed to disclose
the material adverse facts set forth in ¶ 46 above, including (a)
the fact that, at that time, almost 12 months had passed since th e
Company had submitted its 510(k) application (an application which
the Company knew was ordinarily ruled on by the FDA within 9 0
days), and the Company knew or recklessly disregarded that material
problems existed regarding this application and that th e
application was not likely to be approved by the FDA ; and (b) the
other adverse facts referenced in ¶¶ 93 and 97 above .
103 . Sabratek's Form 10-K also reflected a clea r
understanding of the Company's regulatory obligations :
Pursuant to the FFDCA, medical devices intended forhuman use are classified into three categories,Classes I, II and III, on the basis of the controlsdeemed necessary by the FDA to assure their safetyand effectiveness . Class I devices are subject togeneral controls (for example, labeling, premarketnotification and adherence to good manufacturingpractice ('"GMP") requirements) and Class II devicesare subject to general and special controls (forexample, performance standards, postmarketsurveillance, patent registries, and FDAguidelines) . Class III devices are those whichmust receive premarket approval ("PMA") from theFDA to ensure their safety and effectiveness . . .Electronic infusion devices and disposable tubingsets are classified by the FDA as Class II medicaldevices .
- 76 -
If a Cla - II medical device is substantiallyequivalent in terms of safety and effectiveness toa medical device already legally marketed in theUnited States , the FDA requirements may besatisfied through a procedure known as a "510(k)Submission ," in which the applicant providesproduct information supporting its claim ofsubstantial equivalency . . .
Commercial distribution of a device for which a510(k) Submission is required can begin only afterthe FDA issues an order finding the device to be"substantially equivalent" to a legally marketeddevice . . . It generally takes from four to twelv emonths from submission to obtain 510(k) clearance ,but it may take longer . . .
The Company's Rocap division is registered with theFDA as a drug manufacturer and repackager and as adevice manufacturer, and its products are requiredto be manufactured according to current GMPs andQuality Service Regulations (QSRs) which imposecertain process, procedures and documentationrequirements upon the Company with respect todesign manufacturing and quality assuranceactivities .
[Emphasis added . ]
104 . In addition, Sabratek's 1997 10-K described the
Company's varying levels of compliance with these requirements a s
they pertained to several Sabratek products, such as its Medivie w
software system . However, the report failed to even mention the
pre-market clearance requirements for Rocap's I .V . flush syringe
products . The failure to include such information could not have
been inadvertent, since Sabratek disclosed information about the
uncertain FDA status of several of its other products (or proposed
products) in the same SEC filing . Nonetheless, the Form 10-K did
not disclose that its Rocap I .V . syringe flush products had not
been cleared, or that the 510(k) application was delayed and
unlikely to be approved .
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105 . The atements contained in the April, 1998 press
release and the 1997 Form 10-K cited . above were materially false
and misleading , and were known by defendants to be materially false
and misleading at the time of their publication, or were recklessly
disregarded as such for the reasons stated herein in 1' 100 to 104 .
Additionally, such statements were material ly false and misleading,
and were known by defendants to be materially false and misleading
at the time of their publication , or were recklessly disregarded as
such for the following reasons, among others :
(i) The statements made by the Company which
affirmatively represented that the. Company and its subsidiaries
maintain " comprehensive quality assurance program [ s]" was
materially false and misleading , and were known by the Sabratek
defendants to be materially false and misleading at the time of
their publication , or were recklessly disregarded as such since the
Sabratek defendants knew, or recklessly disregarded , that the
Company was not diligent in maintaining such a program and had been
repeatedly reprimanded by the FDA for not maintaining a "comprehen-
sive," adequate program ;
(ii) The statements made by the Company which
affirmatively represented that the Company and its subsidiaries
"monitor vendors ' compliance" was materially false and misleading,
and was known by the Sabratek defendants to be materially false and
misleading at the time of publication , or was recklessly
disregarded as such since these defendants knew, or recklessly
disregarded , that the Company was not diligent in monitoring its
vendors and had been , and would continue to be, repeatedly
- 78 -
reprimanded by the xA for not monitoring such vendor compliance ;
and
(iii) The statements made by the Company whic h
affirmatively represented that the Company and its subsidiaries
test all finished products was materially false and misleading, and
was known by the Sabratek defendants to be materially false and
misleading at the time of publication, or was recklessly
disregarded as such since these defendants knew, or recklessly dis-
regarded, that the Company did not test all finished products due
to the high cost involves, and that the Company had been, and would
continue to be, repeatedly reprimanded by the FDA for not testing
all products .
106 . On May 5, 1998, Sabratek issued a press release ,
published on PR Newswire, in which it announced results for the
first quarter ended March 31, 1998 . According to the press
release, the Company had purported net sales of $15 .2 million for
the first quarter, compared with net sales of $7 .5 million reported
in the same period the prior year, a purported increase of 103
year-over-year . The Company reported that its net income for the
quarter had increased 179a to $2 .97 million, compared to reported
net income of $1 .067 million for the same quarter in 1997, and that
earnings per share for the quarter had increased to $0 .17 per share
compared to $0 .11 per share in the year-earlier quarter .
Commenting on these results, the press release quoted defendant
Padda as stating :
We are pleased with our results for the firstquarter of 1998 . During the quarter westrengthened our infrastructure with the additionof Vice Presidents of Sales and of Marketing . Theaddition of these individuals will help us t o
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continue r penetration of the alternate siteinfusion therapy market . . . [Emphasis added . ]
107 . However, Sabratek's May 5, 1998 press release wa s
materially false and misleading because it failed to disclose that
the Company's reported financial results for the first quarter
ended March 31, 1998 were artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition and income
inflating practices and other improprieties discussed in ¶¶ 48-60
and ¶¶ 167-184 .
108 . Sabratek's May 5, 1998 press release was als o
materially false and misleading because, notwithstanding Padda's
assertions regarding the Company's "continue[d] penetration of the
alternate site infusion therapy market," it failed to disclose the
material adverse facts set forth in ¶ 46 above, including the fact s
that (a) at that time, almost 12 months had passed since the
Company had submitted its 510(k) application (an application whic h
the Company knew was ordinarily ruled on by the FDA within 90
days) , and the Company knew or recklessly disregarded that material
problems existed regarding this application and that the
application was not likely to be approved by the FDA; and (b) the
other adverse facts referenced in ¶¶ 93, 97, and 102 .
109 . Market analysts following Sabratek quickly responde d
to the Company's earnings announcement with favorable reports o n
the Company . For example :
(a) On or about May 6, 1998, Wheat First Union ("Firs t
Union") issued a report on Sabratek that strongly advised it s
customers to "buy" Sabratek common stock, and stated, inter alia :
Q1 highlights : (1) 103 . revenue growth ; (2) 55 .0gross margin, aided by increasing disposable s
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revenues 'mod some gross margin gain at Roap ; and(3) 18 .28 EBIT margin, 110 bp ahead of our estimateand up 320 bp sequentially from Q4 .
With another strong in-line quarter and what appears tobe some "irons in the fire," we reiterate our BUY ratingand $39 price target on shares of SBTK .
. . . Rocap sales continued to remain strong, withthe company announcing its intention to, yet again,double the capacity of its Orlando facility by yearend . [Emphasis added .] .
(b) On or about may 5, 1998, Credit Suisse First Bosto n
"Credit Suisse") issued a report on Sabratek, entitled "SBTK Again
Beats Earning Estimates in 1Q98 -- Outlook Bright," that reiterate d
the firm's recommendation that its customers "BUYS" Sabratek commo n
stock, and stated, inter alia :
1Q98 financial results again beat expectations handily .Sales grew 103s to $15 .2 million, ahead of our $14 .2million estimate . Diluted earnings topped consensus bya penny at $0 .17 per share .
Although the report noted that Sabratek's reported inventories and
accounts receivable had risen in the quarter, and had thus
"sparked" some concern, the report explained that the Company had
provided explanations for these increases (namely, a purported need
to increase inventory prior to an anticipated move of pump
manufacturing facilities, and the alleged "timing" of certain large
payments that were reportedly received "just after" the quarter ha d
ended . The report also set forth a twelve month target price o f
$42 per share and gave the following earnings estimates , based in
large part on Company guidance :
I 92 23 24 Total
1998E 0 .16 0.19 0.21 0 .24 $0 .8 0
- 81 -
110 . On o-about May 14 , 1998, Sabratek i ed its Form
10-Q for the first quarter ended March 31, 1998 with the SEC . This
Form 10-Q was signed by defendants Padda, Holden and Skooglund, and
reported the same false and misleading financial information as
previously reported on May 5, 1998 . The Form 10 -Q also stated that
[T]he Company believes that the disclosures in thesefinancial statements are adequate to make the informationpresented not misleading . These financial statementsshould be read in conjunction with the Company'sfinancial statements and the notes thereto included inthe Company's Form 10-K filed by the Company with theSecurities and Exchange Commission for the year endedDecember 31, 1997 . . . . [Emphasis added . ]
However, as detailed herein, Sabratek's first quarter 1998 Form
10-Q was materially false and misleading because, inter alia , it
failed to disclose that the Company's reported earnings, sales and
revenue figures for the fiscal year and fiscal quarter ending March
31, 1998 were materially and artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition and income-
inflating practices and other improprieties described at ¶f 48-60
and 1 1 167-184 .
111 . The Company's Form 10-Q was also materially fals e
and misleading because it failed to disclose the material adverse
facts set forth in $ 46 above, including the facts previously
referenced at $1 93, 97 and 108 above .
112 . During the second quarter of 1998, Sabratek
continued its efforts to materially mislead the marketplace as to
the true state of the Company's financial condition and
performance . For example, on May 27, 1998, Credit Suisse issued an
analyst report based on detailed information provided to it by the
Company which stated in part as follows :
- 82 -
Phone chew with management suggests business is strong .We recently spoke with Sabratek management and werepleased that the tone of business continues to bepositive . Sales appear to be tracking well during thequarter, new products are proceeding through theregulatory pathway as expected, and the company isoptimistic about the prospects of additional, nationalT .V . infusion therapy contracts over the near term .
The report also reiterated Credit Suisse's "BUY" recommendation for
Sabratek common stock, and its 12-month target of $42 per share .
113 . On July 6, 1998, Sabratek issued a press release ,
published on PR Newswire , in which it again touted the expansion of
its Rocap division . In this press release, the Company announced
that it had signed a two-year agreement with Premier, the nation's
largest group purchasing organization, to supply Rocap products to
Premier's members . The Company also used this opportunity to
further condition the market to expect significant revenue growth
as a result of the Premier contract, stating :
Since Premier represents approximately one third ofthe nearly 700 million unit acute flush market, weare obviously very excited about the revenuepotential this contract award creates for theCompany . . .
114 . A week later, on July 13, 1998, Sabratek issue d
another press release, published on PR Newswire , in which it again
touted the expansion of its Rocap division . In this press release,
the Company announced that Omnicare, Inc . ("Omnicare"), the
nation's largest provider of pharmacy services to long-term care,
assisted living and institutional health care providers, had
awarded the Company a three-year prime vendor agreement for its
Rocap flush product line . The Company again used this opportunity
to condition the market to expect significant revenue growth as a
result of the Omnicare contract, stating :
- 83 -
This contct allows Sabratek to further capitalizeon the institutional pharmacy market, providing afurther growth in revenue . potential . In addition,this signifies an expansion of our existingrelationship with Omnicare realizing our strategyto grow current customer business as we expand ourproduct lines and provide the full spectrum of IVtherapy [ . . . ] systems .
115 . On August 6, 1998, Sabratek issued a press release ,
published on PR Newswire, in which it announced its financial
results for the second quarter ended June 30, 1998 . According to
the press release, the Company reported net sales of $16 .3 million
for the second quarter, compared with net sales of $9 .8 million for
the same period in the prior year (a 66% increase) . The Company
also reported that net income for the quarter increased 108% to
$3 .45 million, compared with net income of $1 .66 million reported
in the same quarter in 1997, and thateaxnings per share during the
period had increased to $0 .20 per share from $0 .15 per share in the
second quarter of 1997 . The Company's August 6, 1998 press release
also quoted defendant Padda as stating :
This is a very positive quarter for Sabra tek . TheCompany posted another record financial quarterwhile both expanding the markets we serve andcontinuing to build our existing customer base . Weare delighted to establish and strengthenrelationships with prominent organizations, such asPremier and Omnicare . They mark the acceleratedacceptance of the Rocap product line within theacute and subacute markets and we are very pleasedwith the revenue potential each contractrepresents . . . We are pleased to report recordfinancial results in the second quarter . [Emphasisadded . ]
116 . However, Sabratek's August 6, 1998 press release wa s
materially false and misleading because it failed to disclose tha t
the Company's reported financial results for the second quarter
ending June 30, 1998 were artificially inflated as a result o f
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Sabratek's undisclo~ and improper revenue recogniti~ and income-
inflating practices and other improprieties discussed in ¶¶ 48-60
and ¶¶ 167-184 .
117 . Sabratek' s August 6, 1998 press release was als o
materially false and misleading because, notwithstanding Padda's
assertions regarding the "expanding markets we serve," its
purportedly expanding "customer base" and the "accelerated
acceptance of the Rocap product line," it failed to disclose the
material adverse facts set forth in ¶ 46 above, including the facts
that (a) at that time, almost 15 months had passed since the
Company had submitted its 510 (k) application (an application which
the Company knew was ordinarily ruled on by the FDA within 90
days), and the Company knew or recklessly disregarded that material
problems existed regarding this application and that the
application was not likely to be approved by the FDA ; and (b) the
other facts referenced above at ¶¶ 93, 97 and 108 .
118 . The August 6, 1998 report of second quarter earning s
and related commentary sent the price of Sabratek common stock up
to a closing price of $21 .875 per share that day, a gain of $2 .06
from the previous day's close of $19 .8125 .
119 . Market analysts following Sabratek quickly responde d
with very favorable reports on the Company . For example, on August
13, 1998, based substantially upon the Company's representations
regarding its "record results" and continuing growth prospects,
First Union issued a report on Sabratek which continued to strongly
advised its customers to "buy" Sabratek common stock, and stated :
. . . Rocap sales should continue to display stronggrowth as Omnicare and (potentially) Premie r
- 85 -
hospitals 'becomeproduct . . .
major purchasers o thi s
. . .02disposable revenues (pump disposables andRocap flush disposables) were 33°s of total revenues(Rocap sales were up 200-* from O1, continuing atrend of strong growth) . Rocap sales shouldzont i nue todisplav strong growth as Omnicare and(potentially) Premier hospitals become majorpurchasers of this product . . .
Managing Growth . With targeted, continued strongcontract and revenue flow, SBTK . . . continues tohighlight expansion activity in its Rocap business .[Emphasis added . ]
120 . In early July 1998, the FDA conducted anothe r
inspection of the Company's Rocap facilities . This inspection
again concluded that Rocap's I .V . flush products were adulterated
within the meaning of section 501(h) of the Federal Food, Drug and
Cosmetic Act, and that Rocap's methods were not in conformance with
established QSRs for medical devices .
121 . The July 1998 inspection turned up so many " seriou s
underlying problems in [Rocap's] manufacturing and quality
assurance systems" that on August 10, 1998 the FDA issued another
warning letter (the "August 10, 1998 Warning Letter") . In no
uncertain terms, the August 10 Warning Letter stated that the July
1998 inspection "revealed serious regulatory problems involving
sterile saline and heparin intravenous flush syringes which are
manufactured and distributed by [Rocap] ." As the August 10 Warning
Letter also stated : "The inspection revealed that the devices are
adulterated within the meaning of section 501(h) of the Act, in
that the methods used in, or the facilities or controls used for
the manufacture, processing, packaging, storage or distribution are
not in conformance with the requirements of the Quality System (QS)
- 86 -
regulation . "' [EmpltAis added] . The violations ii uded, inter
alia , the following :
Failure to identify complaints and implementcorrective action required to correct and preventthe recurrence of non-conforming product , e .g ., nocorrective or preventive action taken in responseto confirmed reports of particulate matter found inin-process rejects and finished products . . .
Failure to conduct finished product testing priorto release of product for distribution to ensureeach production run or lot meets acceptancecriteria , e .g . no finished product testing fordevices from September 4, 1997 to November 3, 1997and finished product testing is not conductedroutinely to assure release criteria are met priorto distribution .
Failure to establish and document purchasingcontrols that verify component suppliers ability tomeet specified requirements , e .g ., no verificationthat incoming components meet specifications exceptfor receipt of a certificate of conformance ; noevaluation of incoming syringes ; no inspection forproduct dimension or particulates ; no documentationof component supplier evaluations or audits ; andagreements with suppliers are not always obtained .
Failure to follow [the Company's] own writtenproduction and process control procedures formonitoring and controlling process parameters withrespect to sterility failures and media fills ,e .g ., investigations of sterility failures are notconducted in a timely manner ; data from Rodac platesamples taken on December 20, 1997 were notreviewed and compared with findings revealed duringfailure investigations conducted in November 1997and May 1998, which revealed the same bacteriafound in the gown room near, the sink ;, and mediafill procedures are not followed, or adequately
Under the Federal Food, Drug, and Cosmetic Act, theseproducts are considered to be medical devices because they areused to treat a medical condition or to affect the structure orfunction of the body. The law requires that manufacturers ofmedical devices conform with the requirements of the QualitySystem (QS) regulation as specified in Title 21, Code of FederalRegulations (CFR), part 820 . The 1978 Good ManufacturingPractice (GMP) for Medical Devices regulation was superseded onJune 1, 1997, by the Quality Systems regulation, whichincorporates the device GMP .
- 87 -
documented to assure that all manufacturingcriteria and specifications are met .
Failure to establish and maintain adequateenvironmental monitoring and controls , e .g ., nosampling of personnel gowns and gloves ; no actiontaken when bacterial counts from Rodac plates takenunder hoods exceed [the Company's StandardOperating Procedures levels] and alert limits ; nomonitoring of environmental trends on a routinebasis ; inadequate documentation of all proceduresconducted during air sampling for particulates ; nodocumentation showing resolution of deviations inpressure between the clean room and [other rooms],as measured by the Magnehelic Gauges on [numerousdates between December 1997 and June 1998] .
Failure to assure that stability testing isadequate to support assignment of a one yearexpiration date , e .g ., stability studies for allcontainer/closure systems are incomplete .
[Emphasis added] . The August 10 Warning Letter also again reminded
the Company that it did not have a valid 510 (k) approval and as
such was not permitted to sell or market its pre-filled syringes :
Finally, you should understand that there are manyFDA requirements pertaining to the manufacture andmarketing of medical devices . This letter pertainsonly to the requirements for the conformance ofyour devices with the Quality System Regulationsand does not necessarily address other obligationsyou have under the law, e .g ., your 510 (k) premarketsubmission currently pending in the Center forDevices and Radiological Health (CDRH) has not beencleared permi tting commercial distribu tion of yourproducts . Any further distribution of theseproducts is at your own risk . . . [Emphasis added] .
122 . On or about August 14, 1998, Sabratek filed its For m
10-Q for the second quarter ended June 30, 1998 with the SEC . Thi s
1 0-Q, which was signed by defendants Padda, Holden and Skooglund ,
reported the same false and misleading financial information as
previously reported on August 6, 1998, and also stated :
[T] he Company believes that, the disclosures inthese financial statements are adequate to make theinformation presented not misleading . Thesefinancial statements should be read in conjunctio n
- 88 -
with the "-,-~mpany's fiinotes thereto includedfiled by the CompanyExchange Commission for1997 . . . .
iancial statement and thein the Company's Form 10- Kwith the Securities andthe year ended December 31 ,
However, as detailed herein, Sabratek's second quarter 1998 Form
10-Q was materially false and misleading because, inter alia, it
failed to disclose that the Company's reported earnings, sales and
revenue figures for the fiscal year and fiscal quarter ending June
30, 1998 were materially and artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition and income-
inflating practices and other improprieties described at ¶¶ 48-60
and 167-184 .
123 . The Company's second quarter Form 10-Q was als o
materially false and misleading because it failed to disclose the
material adverse facts set forth in ¶ 46 above, including that (a)
the December 1997 Warning Letter, the February 1998 inspection, the
July 1998 inspection and the resulting August 10, 1998 Warning
Letter had cited many instances of safety and manufacturing
deficiencies and violations which were directly related to the
safety of the Company's manufacturing processes and the products
created thereby, and that remained unaddressed ; and (b) the other
facts referenced in ¶¶ 93 and 117 above .
124 . On August 19, 1998, the Company received its thir d
warning letter in less than 9 months (the "August 19 Warning
Letter") . The August 19 Warning Letter concerned quality contro l
issues relating to the software in the Company's ambulatory pumps .
125 . Knowing that it was probably only a matter of tim e
before the FDA disclosed the August 10 and August 19 Warnin g
Letters, the Company hastily authorized a one million share
- 89 -
repurchase program,...hereby the Company attempted t1support it s
artificially inflated common stock by authorizing open market
purchases up to 1,000,000 shares . The Company announced this Share
Repurchase program on August 31, 1998 .
126 . The Company did not disclose the August 10 or Augus t
19, 1998 Warning Letters . However, on September 8, 1998, Bloomberg
reported that the FDA had announced that Sabratek's Rocap unit
"didn't do enough to assure the quality of its drug-filled
syringes," adding :
The FDA's Aug . 10 letter cited the unit for failingto properly handle reports about products thatdidn't meet specifications, failing to properlytest finished products and failing to properlymonitor potential contamination, among otherthings .
The Bloomberg report, however, did not report the Company's
continuing failure to acquire 510(k) pre-market approval .
127 . Moreover, the Company did its best to continue to
downplay the seriousness of the August 1998 Warning Letters . For
example, the September 8 Bloomberg report quoted defendant Holden
as stating :
"[The findings are] primarily of an administrativenature" . . . We have addressed all of them and putprocedures in place to address those points . "
There were no safety concerns abou t the company'sproducts, which include heparin and saline-filledsyringes, Holden said . . . .
"We have taken to heart the changes we need to maketo our procedures," he said . [Emphasis added . ]
128 . The statements of defendant Holden regarding th e
Company's Rocap products, as reported in the September 8, 1998
Bloomberg report, were materially false and misleading because they
failed to disclose the material adverse facts set forth in 1 4 6
- 90 -
above, including t1'r1facts that (a) Sabratek's Roc pre-filled
flush syringes were being sold without a valid pre-market 510(k)
approval, and in violation of FDA regulations ; (b) that the
December 1997 Warning Letter, the February 1998 inspection, the
July 1998 inspection and the resulting August 10 and August 19,
1998 Warning Letters had cited many instances of safety and manu-
facturing deficiencies and violations which were directly related
to the safety of the Company's manufacturing processes and the
products created thereby, and that remained unaddressed ; (c) that,
at that time, almost 16 months had passed since the Company had
submitted its 510(k) application (an application which the Company
knew was ordinarily ruled on by the FDA within 90 days), and the
Company knew or recklessly disregarded that material problems
existed regarding this application and that the application was not
likely to be approved by the FDA ; and (d) that the Company knew, or
recklessly disregarded, that it lacked the oversight procedures and
processes necessary to ensure that federal regulations would be
complied with, that internal manufacturing operations would be
properly monitored, and that the Company had procedures in place
that would allow it to properly address the problems which it knew
persisted, or which it recklessly disregarded .
129 . In late September and early October, senior Sabratek
management gave highly upbeat presentations before two analyst-
sponsored healthcare conferences .
(a) For example, according to a Bear Stearns
analyst report, on September 28, 1998 defendants Padda and
Holden gave a presentation at the Eleventh Annual Bear Stearns
healthcare Conference, at which they represented, inter alia ,
- 91 -
that (1) the a"ernate healthcare market "cone ues to show
dramatic growth of 21% annually, and (ii) that the Company's
Rocap syringes and other products have the "potential to open
new market opportunities ." Based largely on these and other
comments by these individual defendants, the Bear Stearns
report also added that "we are comfortable with our 1998 and
1999 earnings estimates of $0 .83 and $1 .13 per share
respectively . "
(b) Similarly, according to a First Union report,
on October 8, 1998 Sabratek management made another upbeat
presentation at First Union's 1998 Healthcare Conference .
Based on comments made by Sabratek management at that
conference, First Union reiterated its "BUY" recommendation,
adding "we see indications of strong growth in the Rocap
business" and "SBTK [management] seems quite confident about
its product positioning and growth prospects ; remain BUY
rated . "
Although the representations made at these healthcare conferences
and the resulting analyst commentary were materially false and
misleading for the reasons set forth in ¶¶ 105 and 128 above, the
Company's comments had the desired effect of helping to move the
price of the Company's stock from $22 .125 on September 28 to the
$27-30 range by the latter half of October .
130 . On November 5, 1998, Sabratek issued a press
release, published on PR Newswire, in which it announced results
for the third quarter ended September 30, 1998 . According to the
press release, the Company announced purported net sales of $18 .8
million reported for the third quarter, compared with net sales of
- 92 -
$11 .8 million for tr1same period the prior year , an ?.crease of 60
o year - over-year . The Company ' s reported net income for the quarter
increased 80o to $3 .8 million, compared with net income of $2 . 1
million reported in the same quarter in 1997 . Reported earnings
per share during the period increased to $0 .23 per share from $0 .18
per share in the prior year period . Sabratek continued to condition
the market by again touting the recent contracts for its Rocap
flush product line . Commenting on these results, the press release
quoted defendant Padda stating, in part, the following :
'This was certainly an exciting quarter forSabratek . The FDA approvals for our vital signsmonitor and the Virtual Hospital Room Communicatorare true milestones for our Company . Our strategyof a virtual hospital room is no longer a concept,it is becoming a reality,' said [defendant] Padda .'Our record financial results continue todemonstrate the value our products bring to ourclientele and we express our gratitude to ourexpanding roster of customers,' Padda continued .
In later discussions with analysts following this announcement the
Company did note that its inventories were still high and had
increased sequentially from the prior quarter, but attributed this
rise to, amongst other things, Sabratek's having been "more lenient
than usual" to their materials vendors who were, Sabratek claimed,
trying to make their own numbers for the third quarter .
131 . However, Sabratek's November 5, 1998 press release
and subsequent comments to analysts referenced above were
materially false and misleading because they failed to disclose
that the Company's reported financial results for the third quarter
ending September 30, 1998 were artificially inflated as a result of
Sabratek's undisclosed and improper revenue-recognition and income
- 93 -
inflating practices d other improprieties discuss' in ¶¶ 48-6 0
and ¶¶ 167-184 .
132 . Sabratek's November 5, 1998 press release was also
materially false and misleading because, notwithstanding Padda's
positive assertions that the Company's strategy of a virtual
hospital room "is becoming a reality," it failed to disclose the
material adverse facts set forth in ¶ 46 above, including the facts
set forth in ¶ 128 .
133 . Market analysts following Sabratek responded to thi s
earnings announcement with enthusiasm . For example, on November 6,
1998, Credit Suisse issued a report, entitled "Sabratek Pumps Out
Another Positive Surprise ; Price Target Raised," in which the firm
reiterated its "BUY" recommendation for Sabratek common stock,
raised its price target for the stock from $35 to $40, and stated :
The tone of business is extremely upbeat with pumpplacements growing faster than expected andalready-signed Rocap contracts being implemented ascapacity constraints ease . Working capitalmanagement is also improving .
In the wake of this and other favorable commentary, Sabratek commo n
stock rose 5/8 to close at $33 .125 on November 16 .
134 . On November 16, 1998, the Company filed its Form 10-
Q for the third quarter ended September, 1998 with the SEC . This
10-Q, which was signed by defendants Padda and Skooglund, reported
the same false and misleading financial information as previously
announced on November 5, 1998, and also stated :
[T1he Company believes that the disclosures inthese financial statements are adequate to make theinformation presented not misleading . Thesefinancial statements should be read in conjunctionwith the Company's financial statements and thenotes thereto included in the Company's Form 10-Kfiled by the Company with the Securities and
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Exchange 6 emission for the year ended December 31,1997 . . . . [Emphasis added] .
However, as detailed herein, Sabratek's third quarter 1998 Form
10-Q was materially false and misleading because, inter alia , it
failed to disclose that the Company's reported earnings, sales and
revenue figures for the fiscal year and quarter ending September
30, 1998 were materially and artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition and income-
inflating practices and other improprieties described at 11 48-60
and 167-184 .
135 . The Company's third quarter Form 10-Q was als o
materially false and misleading because it failed to disclose the
material adverse facts set forth in ¶11 46 and 128 above, including
the fact that, at that time, almost 18 months had passed since the
Company had submitted its 510(k) application, and the Company knew
or recklessly disregarded that material problems existed regarding
this application and that the application was not likely to be
approved by the FDA .
The Events of November 199 8
136 . On or about November 19, 1998, an investmen t
research firm, the Center For Financial Research and Analysis
("CFRA"), mailed a research report by next-day delivery to its
clients that raised serious questions about Sabratek's reported
financial performance, including concerns relating to revenue
recognition issues and the Company's "unusual transactions" with
certain strategic partners, as well as the Company's high level of
receivables and inventories . For example, the CFRA report stated :
CFRA believes that SBTK's unusual transactions with itsstrategic partners may have created an opportunity fo r
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the Compa ` to obtain an ongoing artifal boost torevenue and earnings . We further note that the recentexplosive growth of SBTK's notes receivables account mayindicate that the Company used that opportunity to boostits September quarter earnings .
Transaction and CFRA . Commentary, SBTK purchases from itspartners licenses and marketing rights for certainproducts , and accounts for the cost of such purchases bycapitalizing them as intangible assets . The Companysubsequently generates revenue by selling these productsto third parties . Historically , SBTK has also providedits partners with loans , recording a note receivable inconnection with this financing transaction . In addition,SBTK has licensed its own products to its partners,recording a note receivable in connection with itsrecognition of licensing revenue .
CFRA lacks full assurance about the legitimacy of revenuethat SBTK recognizes from licensing transactions with itsstrategic partners because of the possible two-way natureof those transactions, which appear to involve the saleof licensing rights not only by SBTK to its partners, butalso by its partners to SBTK . We also lack fullassurance about the cost of goods sold recorded (and thusthe resulting gross margin) in connection with sales tothird parties because of the opportunity that may existfor SBTK to bundle in an inappropriate manner the cost ofthese goods, the license payments made to its strategicpartners, and the loan payments received from thosepartners . CFRA notes that the sharp growth in notesreceivable that SBTK experienced in the September quarterexacerbates our concern about both of these potentialproblems because that increase results directly from oneor both of the following : the Company's recording oflicensing revenues from its partners ; or its extension ofloans to those partners .
As word of these concerns began to circulate, Sabratek stock began
to fall, closing down $ .25 on Friday, November 20 to $30 .25, and
falling a combined total of $7 .00 in heavy trading during the next
two trading days to close at $23 .25 on November 24 -- a two-day
decline of over 23* . However, the disclosures contained in the
CFRA report amounted to no more than a partial disclosure of
regarding the actual state of Sabrat,ek's financial performance and
prospects, and, as shown below, defendants' fraudulent conduct an d
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their scheme toLificially
securities continued .
inflate the price - f Sabratek
137 . On November 24, 1998, the market received even more
stunning news when Sabratek issued a press release that announced
it was indefinitely suspending the manufacture and distribution of
its Rocap flush product line following "discussions" with the FDA,
and that it expected its earnings to be sharply below analyst
expectations for the fourth quarter :
Sabratek Corporation announced that it hassuspended distribution of its Rocap flush productline . The suspension was a' result of discussionsand meetings with the Food and Drug Administration(FDA) regarding the status of Rocap's 510ksubmission which was filed with the agency in May1997 . The halt in shipping is not the result ofany quality, safety or effectiveness problems withthe product . Sabratek has agreed with the FDA toresubmit 510k's for its Rocap flush products .Sabratek is taking actions to focus all necessaryresources on complying with 510(k) requirements assoon as possible . . . Sabratek anticipates filingnew 510k's within the next few weeks . It isuncertain as to when Sabratek will be able toresume shipments .
While it is uncertain how long this suspension willlast, we hope that its financial impact will onlyaffect results for the fourth quarter, 1998 . Atthis point we anticipate that the suspension willnegatively impact financial results of the fourthquarter, 1998 by $5-6 million in sales and $2-2 .5million in pretax income, which is a material shortfall to consensus analyst estimates for the fourthquarter,' said [defendant] Padda . [Emphasisadded . ]
138 . Financial analysts were stunned , with several
predicting that the Company's revenue,' earnings and financial
performance would suffer even an even greater negative impact than
the Company had indicated . For example, in a report issued on or
about November 25, 1998, Salomon Smith Barney stated :
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We are use. g the scenario that production besuspended until the device receives 510(k)clearance . This could take up to 90 days undernormal circumstances, although it is impossible topredict when the FDA will act . We are anticipatingSabratek will get clearance to resume production bythe end of 1Q99 and require about two weeks to rampup production again . Using this worst casescenario, we estimate that Sabratek could drop $16-$17 million from the top line and about $5-$6million in pretax earnings before resumingproduction in 3Q98 . [Emphasis added] .
139 . When the markets opened the following day (Novembe r
25, 1998), the price of Sabratek common stock fell $9 .125 to clos e
at $13 9/16 -- for a further one day decline of more than 39 .2 . .
And on November 25, 1998, CBS MarketWatch reported that :
Investors ran screaming from Sabratek after thecompany said Wednesday it stopped shipments of itssyringe line, lowering pretax profits by at least$2 million in its fourth quarter .
The CBS Marketwatch report also added :
The company said it is putting new management incharge of Rocap . The company plans to file a new510(k) application in the next few weeks but saidit wasn't sure when it 'would be able to put theproduct back on the market . [Emphasis added . ]
Defendants ' Renewed Efforts to Reassure Investorsand Inflate the Price of Sabratek Common Stock
140 . In the aftermath of the adverse events of Novembe r
1998, Sabratek submitted new 510k applications for its saline, 10-
unit heparin and 100 unit heparin flush syringes (while incurring
considerable expense in connection with those submissions and other
regulatory activities relating to Rocap), and the defendants also
took various steps to distract the investment community from
further scrutiny of its infusion pump business by, inter alia ,
continuing to conceal the Company's improper accounting practices
and other revenue and income inflating' activities, and by embarkin g
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on a series of signi'i-2cant corporate acquisitions - - paid for using
primarily inflated Sabratek common stock as currency -- as part of
Sabratek's previously announced goal of becoming a pioneer in the
creation of a "virtual hospital room" for the alternate-site
healthcare market .
141 . On March 16, 1999, the Company issued a pres s
release published on PR Newswire entitled "Sabratek Reports 1998
Increases in Sales and Operating Profits," in which it announced
results for the fourth quarter and year ended December 31, 1998 .
According to the press release, the Company announced purported net
sales of $ 1 6 .6 million reported for the fourth quarter, compared
with net sales of $14 .0 million for the same period the prior year,
an increase of 19% year-over-year . As adjusted to eliminate the
effect of a one-time reserve for Rocap inventory of $2 .1 million
and $1 .3 million of expenses related to regulatory activities at
Rocap, the Company reported a net income for the quarter of $1 .9
million . For the year, Sabratek reported that net sales in 1998
had increased 55% to $66 .9 million, compared to $43 .1 million in
1997 .
142 . However, as detailed herein, Sabratek's March 16 ,
1999 press release was materially false and misleading because,
inter alia , it failed to disclose that the Company's reported
earnings, sales and revenue figures for the fiscal year and fiscal
quarter ending December 31, 1998 were materially and artificially
inflated as a result of Sabratek's undisclosed and improper revenue
recognition and income-inflating practices and other improprieties
described at ¶¶ 48-60 and ¶J 167-184 .
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143 . On o't bout March 25, 1999, Sabratek -fed its Form
10-K for its fiscal year ended December 31, 1998 with the SEC .
This Form 10-K, which was signed by defendants Padda, Levitas,
Holden, Skooglund and Smith, among others, reported that :
Net sales increased $23 .8 million to $66 .9 million forthe year ended December 31, 1998 as compared to $43 .1million for the year ended December 31, 1997, an increaseof 550 . The increase is attributable to several factors :incremental unit volume-sales of the 3030 Stationery Pumpand 6060 Ambulatory Pump and their respective disposablesinto the alternate-site healthcare market includingnational homecare companies, an increase in the averageper unit selling price due, : to a higher ratio of directsales versus dealer sales, in increase in unit salesvolume of the Rocap pre-filled flush syringe productline, the addition of MediVIEW and PumpMaster products,in increase in unit sales volume of certain licensedproducts from GDS Technology, Inc ., and the addition ofrevenues from marketing and clinical consulting services .
However, as detailed herein, Sabratek's FY 1998 Form 10-K was
materially false and misleading because, inter alia , it failed to
disclose that the Company's reported earnings, sales and revenue
figures for the fiscal year and fiscal quarter ending December 31,
1998 were materially and artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition and income
inflating practices and other improprieties described at 11 48-60
and 1 1 167-184 .
144 . On or about March 31, 1999, the Company announced
that it had entered into a letter of intent to acquire the
LifeWatch Inc . subsidiary of privately held Ralin Medical, Inc .
According to the press release, LifeWatch is a leading provider of
telephonic arrythmia monitoring services, and utilizes "smart"
devices to monitor patients transtelephonically in alternate site
settings . The Company later disclosed in its Form 10Q for the
first quarter of 1999 and in a subsequently filed Form 8-K date d
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June 1, 1999, that t purchase price for Lifewatch was expected to
be approximately $28 million, consisting of a cash payment of $12
million and 900 , 000 shares of Sabratek common stock . The
transaction closed on June 2, 1999 . Defendant L . Peter Smith is
and was the chief executive, director and board chairman, and a
controlling shareholder of Ralin Medical .
145 . On May 11, 1999, Sabratek issued a press release ,
published on PR Newswire , in which it announced results for the
first quarter ended March 31, 1999 . According to the press
release, the Company had purported net sales of $13 .6 million for
the first quarter, compared with net sales of $15 .2 million
reported in the same period the prior year, a purported decrease of
10% year-over-year . The Company reported that its net income fo r
the quarter was $726,000, compared to reported net income of $2 .0
million for the same quarter in 1997, and that earnings per share
for the quarter had decreased to $0 .07 per share compared to $0 .17
per share in the year-earlier quarter . Commenting on these
results, the press release stated :
The Company attributes the decline in first quarter 1999results from the same period last year to the suspensionof production and sale of the Rocap product line . Rocaprevenue for the first quarter of 1999 was zero, ascompared to $3 .2 million in the first quarter of 1998 .The first quarter 1999 results also include approximately$1 .6 million of ongoing expenses relating to the Rocapfacilities .
The release also quoted defendant Padda as stating :
We met our internal forecast for the first quarter of1999, and believe that the fundamentals of Sabratekremain consistent and strong . During the first quarterof 1999, we continued to gain momentum in our plannedfocus on providing advance technology based products andservices to our customers : examples include the recentlyannounced USA/MCO contract and our impending acquisitionsof LifeWatch and SRS .
- 101 -
146 . Howet , Sabratek's May 11, 1999 pres`,~,- release was
materially false and misleading because it failed to disclose that
the Company's reported financial results for the first quarter
ended March 31, 1999 were artificially inflated as a result of
Sabratek's undisclosed and improper revenue recognition and income
inflating practices and other improprieties discussed in ¶¶ 48-60
and ¶¶ 167-184 . The release was, also materially false and
misleading because, notwithstanding defendant Padda's assertions
that "the fundamentals of Sabratek remain consistent and strong,"
Sabratek failed to disclose any of the adverse factors set forth in
¶ 46 .
147 . On or about May 14, 1999, Sabratek filed its Form
10-Q for the first quarter ended March 31, 1999 with the SEC . This
Form 10-Q was signed by defendants Padda, Holden and Skooglund, and
reported the same false and misleading financial information as
previously reported on May 11, 1999 . However, as detailed herein,
Sabratek's first quarter 1999 Form 10-Q was materially false and
misleading because, inter alia , it . failed to disclose that the
Company's reported earnings, sales and revenue figures for the
fiscal year and fiscal quarter ending March 31, 1999 were
materially and artificially inflated as a result of Sabratek's
undisclosed and improper revenue recognition and income inflating
practices and other improprieties described at ¶¶ 48-60 and ¶¶ 167-
184 .
148 . Although analysts expressed some disappointment wit h
the Company's first quarter results, overall the investment
community was reassured by the Company's reported 13% growth in
sales in its core pump business and the Company's previousl y
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announced plans to a,,_ .duire several corporations (inching Unitron
Medical Communications, Inc ., LifeWatch and SRS) in connection with
its efforts to develop "virtual hospital room" technology and
products . For example , on May 11, 1999 , . Credit Suisse issued an
analyst report captioned "Upbeat Long - term Outlook Not Derailed by
Disappointing 1Q99," which reiterated the firm's '"BUY"
recommendation for Sabratek stock . In response to such positive
analyst commentary, the price of Sabratek common stock rose from
$ 14 .125 on May 10, 1999 to $22 .44 on May 27, 1999 .
149 . On May 28, 1999, the Company announced that the FDA
had approved its revised 510k application for its Rocap normal
saline I .V . flush syringe . However, the FDA has yet to approve --
or give any indication that it will ever approve -- Sabratek's 510k
applications for its Rocap 10-unit heparin and 100-unit heparin
flush syringes, which products had accounted for the majority of
the Company's Rocap-related revenue and earnings prior to November
1998 .
150 . On June 16, 1999, the Company filed a Form 8-K wit h
the SEC which noted that it had been served with the Amended
Complaint in this action on June 7, 1999 . Shortly thereafter, as
part of its continuing efforts to mislead the market as to its true
financial condition, Sabratek issued the following press release,
disseminated on the PR Newswire, on June 21, 1999 :
Sabratek Corporation (Nasdaq : SBTK) announced today thatit has been made aware of certain spurious accusationsregarding Sabratek's business conduct, apparently arisingfrom the claims asserted in the amended complaint thatwas recently filed against the Company and certainofficers and directors .
In response, Sabratek Corporation's Chairman and CEO, K .Shan Padda, said : "We must keep in mind that the amended
- 103 -
complaint contains nothing but allegations which, webelieve, are wholly without merit . Our audited financialstatements were prepared in accordance with generallyaccepted accounting principles and were audited by aninternational accounting firm . We stand by thosefinancial statements . "
However, these statements were materially false and misleading
because the Company's reported financial results during the Class
Period asserted in the Amended Complaint were artificially inflated
as a result of Sabratek's undisclosed and improper revenue-
recognition and income inflating practices and other improprieties
discussed in ¶¶ 48-60 and ¶¶ 167-184 ; indeed, as the Company has
now admitted, the Company's improper accounting of expenses alone
caused the Company's earnings to be overstated by approximately $39
million between April 1, 1997 and March 31, 1999 .
151 . On June 30, 1999, Sabratek issued a press release
announcing that it had acquired all of the outstanding stock of
Strategic Reimbursement Services, Inc . ("SRS'"), which was described
as "a leading provider of consulting services to healthcare
providers and is nationally recognized for its comprehensive, high
quality, cost effective services," in a pooling of interests
transaction . As later disclosed in a July 17, 1999 filing with the
SEC, Sabratek paid for this acquisition with 1,636,359 shares of
Sabratek common stock .
152 . On July 6, 1999, Sabratek announced that it had
acquired Unitron Medical Communications, Inc . d/b/a moon
Communications, Inc . ("MOON"), which Sabratek's press release
described as a clinical information management system provider .
The release also quoted defendant Padda as stating : "Our goal
through MOON is the creation of the first ever all-encompassing ,
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interactive, web-ene Zed, on-line medical network whei' by patients,
physicians, clinical providers, payors and all other constituents
in healthcare are linked together ." Padda further stated :
Sabratek was founded with the vision of providing toolsto facilitate high quality care, at reasonable cost, tothe greatest possible population . The healthcare marketneeded tools that would allow the patient point of care("POC") to be almost anywhere, and interactiveinformation systems to capture and convey POC patientstatus to all of the various constituencies . Our smartdevices facilitate the first part of this market need andMOON the second part . From the start, we built ourmedical devices with communication capabilitiessupporting the real-time capture and transmission ofclinical data which enables physicians not only tomonitor, but to treat, patients anywhere in the world viaa standard telephone line . The acquisition of MOONfulfills the connectivity aspect of that vision .
The release also noted that Sabratek would pay for this acquisition
by issuing existing MOON shareholders 550,000 shares of Sabratek
common stock .
153 . On July 12, 1999, Sabratek issued a press release
announcing that it had acquired all of the outstanding stock of GDS
Technology, Inc . "for approximately' 17,000 shares of Sabratek
stock and repayment of $750,000 in debt ." The release stated that
GDS "develops, manufactures and markets advanced point-of-care
blood diagnostic tests and instruments" which help enable doctors
to manage the care of their patients "anywhere there is a telephone
line ." The release also quoted defendant Holden, Sabratek's
president, as stating that "[t]he acquisition of GDS adds a
significant component to our system of clinical connectivity
devices ."
154 . In the following two'weeks , Sabratek also issued a
number of other pres releases announcing, inter alia , (a) that its
CMS Healthcare subsidiary had been awarded a contract by MultiPlan
- 105 -
PPO to provide in-pci~'ent and out-patient services fMultiPlan's
one million subscribers in Florida (announced July 13, 1999) ; (b)
that its newly acquired MOON subsidiary had entered into a multi-
year strategic licensing agreement to permit MOON to integrate
ProxyMed's electronic prescription services on online healthcare
information network into MOON's healthcare application services
portal, OneMedPlace .com (announced July 15, 1999) ; and (c) that its
CMS Healthcare subsidiary had entered into patient-management
contract with Managed Care of America/PPO, Inc ., a Florida based
provider organization serving approximately 200,000 people
(announced July 21, 1999) .
155 . The market reacted favorably to these announcements ,
and the price of Sabratek stock -- which had closed at $20 .25 on
June 15, 1999, rose to over $25 .50 per share by July 21, 1999 .
THE TRUTH EMERGES
156 . However, despite Sabratek's emphatic denials of the
allegations of the Amended Complaint filed in this action on
June 7, 1999, and despite its efforts to create positive publicity
for its efforts to expand the Company through strategic corporate
acquisitions and partnerships between March and the end of July,
beginning in early August 1999 defendants were forced to gradually
disclose the extent to which Sabratek's financial condition had
deteriorated .
157 . On August 2, 1999, the Company -- while falsel y
assuring investors that there was "no need to revise its previously
stated earnings results" -- issued a press release announcing that
its earnings for the second quarter of 1999 would be lower than
Wall Street estimates, and that it report its results for th e
- 106 -
second quarter on 3,-,,gust 12 . A news story entit ed "Sabratek
Expects 2nd-Quarter Shortfall Because of Pump Demand," disseminated
by Bloomberg Business News the following day, further reported that
defendant Padda had attributed the second quarter earnings
shortfall to "weaker demand for its pumps ." In response to this
disclosure, on August 2, 1999, Sabratek stock fell $6 .28, from
$20 .75 to $14 .47 -- a one day decline of over 300 .
158 . Contrary to its prior assurances, on August 12,
1999, the Company failed to release its second quarter 1999
financial statements and failed to file its Form 10-Q for the
second quarter with the SEC .
159 . On August 13, 1999, the Company announced --
contrary to its prior assurances -- that it would delay the release
of its second quarter results past the previously announced August
12 filing date "pending completion of a review with its independent
auditors ." In response to this disclosure, on August 13, 1999,
Sabratek stock fell a further $4 .03, from $11 .00 to $6 .97 -- a
further one day decline of over 360 .
160 . On August 23, 1999, the Company again stunned
financial markets by announcing that (a) it had retained the
management consulting firm of Jay Alix & Associates to develop a
"restructuring plan" for the Company, (b) that defendant Shan Padda
had "resigned" as Sabratek's President, CEO and Chairman of the
Board, and (c) that defendant Doron Levitas had similarly
"resigned" as Vice Chairman of Sabratek's board . As the Company's
press release stated :
The Board of Directors of Sabratek Corporation (Nasdaq :SBTK) today announced that Sabratek has retained thenationally-recognized restructuring firm of Jay Alix &
- 107 -
AssociateLJo develop and implement a plan ~l restructurethe Company's operation. The Board of Directors isconcerned about the Company's low cash position andliquidity, and has authorized Jay Alix to take all stepsnecessary to improve the Company's cash position andliquidity .
The Board of Directors has accepted offers to step downfrom K . Shan Padda, Chairman and Chief Executive Officer,and Doron C. Levitas, Vice Chairman and Secretary of theCompany. Mr . Padda will remain a director of the Companyand will support and assist Jay Alix as a strategicadviser in the restructuring of the Company's operations .Mr . Levitas also will remain a director of the Companyand will retain his position as Chief AdministrativeOfficer and President of International Operations . Arepresentative of Jay Alix will be appointed as ActingChief Executive Officer of Affinity Capital Management,Inc ., a Minneapolis, Minnesota-based healthcare venturecapital firm, has been a director of Sabratek since 1993 .
Sabratek also announced that it was unable to file itsQuarterly Report on Form 10-Q by the extended Friday,August 20, 1999, deadline . Sabratek will report secondquarter earnings as soon as practicable after thecompany's auditors complete a previously announcedreview . Sabratek's inability to file its Form 10-Q on atimely basis will prevent the Company from registeringthe resale of its securities by means of RegistrationStatements on Form S-3 . This may lead to a default underthe indenture relating to the Company's 6°s ConvertibleNotes due 2005 and may prevent the Company fromsatisfying its obligations under the Registration RightsAgreements relating to certain acquisitions . Sabratek isin the process of implementing a plan to address theseissues .
In response to this disclosure, on August 23, 1999, Sabratek stock
fell a further $3 .72, from $6 .47 to $2 .75 -- a further one day
decline of over 57 .50 .
161 . Two days later, on August 25, 1999, the Company
announced that defendant L . Peter Smith and another individual had
"resigned" from the board, effectively immediately . According to
the press release, "[defendant] Smith and [the other former
director, Mark Lampert] cited the need to devote their ful l
- 108 -
business attention J other endeavors as the rea r for their
decisions to leave . "
162 . On August 31, 1999, the Company announced that i t
had been served with a notice of potential delisting by the NASDAQ
listings Qualifications Panel based on the Company's failure to
timely file its quarterly Form 10-Q for the second quarter .
163 . On October 7, 1999, the Company announced that i t
would be restating its previously reported financial results for
the reporting periods between April 1, 1997 and March 31, 1999 , and
the restatement would reduce previously reported pre-tax earnings
for this two-year period by approximately $39 million . In
addition, the Company announced that it would continue to delay the
release of its second quarter financial statements, and that
Sabratek's Board was also considering certain unspecified "other
accounting issues" that had been "raised by the Company's Chief
Financial Officer ." As the release stated :
Sabratek Corporation (Nasdaq : SBTKE) announced that itwill further delay the filing of its Quarterly Report onForm 10-Q for the period ended June 30, 1999 until itsBoard of Directors reviews recently proposed adjustmentsto certain previously reported financial results . TheBoard of Directors is also considering other accountingissues raised by the Company's Chief Financial Officer .
The Company will not file its June 30, 1999 Form 10-Qbefore meeting with NASDAQ today to determine Sabratek'scontinued eligibility to remain listed on the NASDAQNational Market, If the NASDAQ listing QualificationsPanel does not grant Sabratek's request for additionaltime in which to file its June 30, 1999 Form 10-Q,Sabratek's Common Stock may be delisted .
The proposed adjustments would reduce previously reportedpre-tax earnings for the reporting periods April 1, 1997through March 31, 1999 by approximately $39 million andrelate primarily to reclassifying intangible assets asexpenses and accounting for amounts advanced toaffiliated companies as expenses rather than as loans .
- 109 -
The Board" Directors began its review andnsiderationpromptly following notification of these matters .However, due to the magnitude and complexity of theproposed adjustments and other accounting issues, theBoard of Directors has determined that additional time isneeded before it can recommend releasing financialstatements," said Edson W . Spencer, Jr ., Sabratek'sChairman .
The Company is making every effort to resolve theseissues expeditiously and report to shareholders promptly .
In response to these disclosures, Sabratek stock fell a furthe r
$1 .13, from $2 .16 to $1 .03 -- a further one day decline of over
52a .
164 . The closing price for Sabratek common stock of $1 .0 3
per share on October 7, 1999 represented a stunning decline of mor e
than $19 per share from the inflated levels it had traded at onl y
ten weeks earlier, and an incredible and near-total collapse of
$37 .72 per share -- or more than 97 .3 -- from its inflated Class
Period high (in September 1997) of $38 .75 per share .
165 . As of the filing of the date hereof, Sabratek has
been reduced to the status of a penny stock, two more directors
(William H. Lomicka and William D . Lautman) have resigned from
Sabratek's Board of Directors, and, following a hearing before the
Nasdaq Listing Qualifications Panel in early October, was delisted
from the Nasdaq effective November 3, 1999 . The last quoted price
for Sabratek common stock before it was delisted was $0 .55 per
share . Moreover, on October 15, 1999, the Company announced that
it would not be making its scheduled $2 .4 million semi-annual
interest payment that was due that day on its Convertible Notes
(with a face value of $85 million), and that if the interest
payment was not made within the 30-day cure period ( i .e . by
November 15, 1999) then an Event of Default would take place unde r
- 110 -
the note indenture .~s of the filing hereof, the intYrest paymen t
has not been made, raising the specter of imminent default and
bankruptcy .
166 . At all relevant times, the materia l
misrepresentations and omissions particularized in this Complaint
directly or proximately caused or were a substantial contributing
cause of the damages sustained by plaintiff and other members of
the Class . As described herein, during the Class Period,
defendants made or caused to be made a series of materially false
or misleading statements about Sabratek's business, prospects,
operations and financial condition . These material misstatements
and omissions had the cause and effect of creating in the market an
unrealistically positive assessment of Sabratek 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 .
SABRATEK'S MATERIALLY FALSE AND MISLEADING FINANCIAL STATEMENT S
167 . At all relevant times during the Class Period ,
Sabratek represented that its Class Period financial statements
were prepared in accordance with GAAP . GAAP are those principles
recognized by the accounting profession as the conventions, rules,
and procedures necessary to define accepted accounting practice at
a particular time . As set forth in Financial Accounting Standards
Board ("FASB") Statement of Concepts ("Concepts Statement") No . 1 ,
- 111 -
one of the fundament L)obj ectives of financial report tg is that it
provide accurate and reliable information concerning an entity's
financial performance during the period being presented . Concepts
Statement No . 1, ¶ 42, states :
Financial reporting should provide informationabout an enterprise's financial performance duringa period. Investors and creditors often useinformation about the past to help in assessing theprospects of an enterprise . Thus, althoughinvestment and credit decisions reflect investors'and creditors' expectations about future enterpriseperformance, those expectations are commonly basedat least partly on evaluations of past enterpriseperformance .
168 . Although Sabratek's Class Period financial
statements were each represented to have been prepared in
accordance with GAAP, in reality these representations were
materially false and misleading as defendants knowingly or
recklessly caused Sabratek to issue (or, in the case of KPMG,
knowingly and/or recklessly acquiesced in the issuance of)
financial statements that were predicated on fraudulent financial
manipulations . In particular, Sabratek's financial statements
artificially and improperly inflated the Company's operating
results by employing fraudulent revenue recognition practices --
including the recognition of millions of dollars of revenue on
phony "sales" and "shipments" of product, and by improperly
deferring the recognition of research and development expenses --
which caused Sabratek's reported revenues, income and earnings per
share during the Class Period to be materially overstated .
169 . GAAP is a term used to encompass the principles
recognized by the SEC and the accounting profession as the
conventions, rules and procedures necessary to define accepte d
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accounting practice 2t a particular time . Financill statements
filed with the SEC which do not conform to the requirements of GAAP
are presumptively misleading and inaccurate pursuant to Regulation
S-X, 17 CFR 210 .4-01(a)(1) .
170 . FASB Concept Statement No . 5 generally provides that
revenues should not be recognized, until they are (a) realized or
realizable, and (b ) earned . These conditions for revenue
recognition ordinarily are met when assets or services are
exchanged for cash or claims to cash, and when the entity has
substantially performed the obligations which entitle it to the
benefits represented by the revenue . Concepts Statement No . 5,
¶ 83 . Generally , a transfer of risk must occur in order to effect
an "exchange " for purposes of revenue recognition under GAAP . In
addition , GAA.P provides that profit is deemed to be realized when
the collection of the sales price is reasonably assured .
Accounting Principles Board ("APB" ) Opinion No . 10, 1 12 . Further,
revenue which arises from circumstances involving uncertainty as to
possible gains should not be recognized since to do so may result
in gains being recognized on revenue prior to its realization .
FASB Statement of Financial Accounting Standards (" SFAS") No . 5,
12 .
171 . Sabratek's Form 10-K for the fiscal year ended
December 31, respectively, discloses that the Company recognizes
revenue upon shipment . However, defendants knew or recklessly
ignored that these representations were materially false and
misleading as Sabratek recognized revenue on phony transactions
and/or upon the shipment of Sabratek product to certain of its
distributors who never agreed to purchase Sabratek's product or
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were merely "parkin inventory for Sabratek . In, addition, as
defendants knew or recklessly disregarded, Sabratek recognized and
reported revenue on shipments to customers who had not agreed to
purchase or accept the merchandise at the time of shipment .
172 . Sabratek's recognition and reporting of revenue on
the above transactions violated GAAP as such "revenue" was not
realized or realizable nor was Sabratek reasonably assured of
collecting on the "sale" of the products at the time of delivery .
The above "shipments," which typically occurred at or near the end
of the Company's fiscal quarters, were made for the purpose of
allowing defendants to manipulate Sabratek's reported operatin g
results in a given fiscal quarter . Defendants knew or recklessly
ignored that Sabratek's recognition and recognition of revenue on
these shipments violated GAAP .
173 . In furtherance of the scheme to overstat e
Sabratek's operating results, the Sabratek defendants also
improperly recorded revenue on de facto consignment sales promising
its customers that they could return their shipments of Sabratek
products and/or would not have to pay for those products unless and
until they were sold to a bona fide purchaser or end-user . These
consignment shipments should not have been recorded as revenues
because an "exchange" for purposes of revenue recognition under
GAAP was not met at the time of shipment . In addition, because th e
product was sold on a de facto consignment basis, Sabratek was not
reasonably assured of collecting on any sale of the products at th e
time of delivery .
174 . At all relevant times, defendants knew o r
recklessly disregarded that the above transactions were not in fac t
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bona fide sales, wou--~ probably not result in bona fi_e sales, and
were improperly reported as bona fide sales in violation of GAAP .
These practices enabled the Company to improperly report revenues
on "sales" transactions for which there were no real purchasers and
as to which Sabratek held a continuing and substantial risk o f
loss .
175 . Nonetheless, defendants failed to disclose any of
these facts to the unwitting investing public, and instead
affirmatively and repeatedly misrepresented that the Company' s
published financial results were prepared in accordance with GAAP .
Sabratek's fraudulent revenue recognition practices mislead
investors about the true demand for Sabratek's products in a
blatant attempt to manipulate Sabratek's reported operating results
to bolster the market price of its shares .
176 . The Sabratek Defendants , with the participation and
advice of defendant KPMG, also employed at least two additional
accounting stratagems in violation of GAAP to improperly understate
Sabratek's reported expenses for the reporting periods between
April 1, 1997 and March 31, 1999, in order to permit the Company to
artificially inflate its reported net income, earnings and earnings
per share . These additional accounting violations included (1)
improperly capitalizing cash disbursements as intangible license
and marketing right assets, and (2) improperly capitalizing cash
disbursements as notes receivable . In this way, defendants
improperly deferred the recognition of expenses, thereby inflating
the Company's operating results during the Class Period .
177 . GAAP generally defines an asset as a probable future
economic benefit obtained or controlled by a particular entity a s
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a result of a past t\-nsaction . FASB's Concept Statement No . 6,
25 . Paragraph 175 of Concept Statement No . 6 indicates that
uncertainty about the capacity of a transaction to provide future
economic benefits may preclude its recognition as an asset . If the
above criteria cannot be satisfied , the amount should be reflected
as an expense in the period in which the expense was incurred .
Since , among other things, there is normally a high degree of
uncertainty about the future benefits of R&D efforts, GAAP provides
that R&D costs shall be charged to expensed when incurred . SFAS
No . 2 . SFAS No . 2 also provides that an entity ' s financial
statements disclose the total R&D costs charged to expense for each
period .
178 . In assessing the propriety of a particular
accounting method, GAAP generally requires that the economic
substance , rather than the form, of a transaction determines the
appropriate accounting treatment . See , e .g. , Concept Statement No .
2 .
179 . However, in their October 7, 1999 press release, the
Company has effectively admitted that during the Class Period
Sabratek improperly capitalized and reported cash disbursements as
assets ( i .e . either as notes receivable or as intangible licensing
and marketing rights) . Because licenses and marketing rights
generally have terms in excess of one year -- thereby providing a
future economic benefit -- expenditures made to acquire licenses
and marketing rights are normally classified as intangible assets .
Sabratek's reclassification of its . licenses and marketing rights
assets as expenses is, in essence, an admission that such
expenditures were never licensing rights in the first instance, nor
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did such expenditure )provide a probable future eco-bm is benefit .
Therefore, such expenditures could not, under GAAP, have been
assets as Sabratek originally reported .
180 . Similarly, the reclassification of various "loans "
as "expenses" is, in essence, also an admission that the payments
originally classified as "loans" were never in fact loans ( i .e . ,
that the R&D Satellite Entities that received funds from Sabratek
never had a substantive and genuine obligation to repay Sabratek,
or were payments to entities that lacked the financial wherewithal
to repay them . Accordingly, such payments did not represent a
probable future economic benefit and could not, under GAAP, have
been validly classified as an asset, as Sabratek originally
reported .
181 . Nonetheless, as evidenced by Sabratek's October 7 ,
1999 announcement, Sabratek improperly reported such expenditures
as notes receivable and licenses and marketing rights, thereby
improperly deferring the recognition of expense -- and improperly
inflating the Company's operating results -- during the Class
Period, all in violation of GAAP . 8
8 Alternatively, based on Sabratek's control over Unitron(and perhaps one or more of the other Satellite R&D Entities),the financial statements of Sabratek acid Unitron (and possiblythe other Satellite R&D Entities) should have been consolidatedfor financial reporting purposes, which would have similarlyprecluded Sabratek from capitalizing amounts advanced or paid toUnitron -- and forced Sabratek to recognize such expenditures asexpenses . Pursuant to SFAS 94, 1 13, the usual condition forconsolidation is a controlling ownership interest in votingshares, and therefore, as a general rule, ownership by onecompany of over fifty percent of the outstanding voting shares ofanother company is a condition pointing toward consolidation offinancial statements . However, as noted in Article 3A-02 ofRegulation S-X [17 C .F .R . 5 210-3A-02], all facts andcircumstances should be analyzed carefully to evaluate whetherthe existence of a controlling financial interest equivalent t o
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182 . Unde-AAP , the restatement of prev-dusty issued
financial statements is a most serious step, reserved only for
situations in which no lesser remedy is available . Indeed, under
Statement of Financial Accounting Standard No . 16 ("Prior Period
Adjustments "), and Accounting Principles Board Opinion No . 20,
("Accounting Changes" ), restatements are permitted -- and required
-- only for material accounting errors or irregularities that
existed at the time the financial statements were prepared . Thus,
the Company ' s announcement that it will restate its previously
reported financial statements for the periods April 1, 1997 through
March 31, 1999 is an admission that the financial results
previously reported for those periods were materially misstated
when issued .
183 . The foregoing accounting improprieties caused
Sabratek to present its financial results during the Class Period
in a manner which violated numerous provisions of GAAP . As a
result , Sabratek ' s Class Period financial statements concealed the
truth of the Company's growth, business , operations and financial
performance to detriment of unsuspecting investors . Moreover, in
addition to the accounting violations noted above, Sabratek
presented its financial statements in a manner which also violated
at least the following provisions of GAAP :
(a) GAAP's requirement that revenue is not to be
recognized before buyer is obligated to pay the seller and th e
majority ownership of voting stock exists, notwithstanding theabsence of legal ownership of a majority of voting stock . Asshown in the Section below entitled "KPMG's Participation in theFraud," Sabratek obtained and exercised virtually completecontrol over Unitron by no later than. October 1998, when Sabratekand Unitron entered into the Standby Credit Facility .
118
obligation is not tingent on resale of the prouct . FASB's
Statement of Financial Accounting Standards No . 48, ¶ 6 ;
(b) The concept 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 (Concepts Statement No . 1, ¶ 34) ;
(c) The concept that financial reporting should provide
information about the economic resources of an enterprise, the
claims to those resources, and the effects of transactions, events
and circumstances that change resources and claims to those
resources (Concepts Statement No . 1, ¶ 40) ;
(d) The concept that financial reporting should provide
information about how management of an enterprise has discharged
its stewardship responsibility to owners (stockholders) for the use
of enterprise resources entrusted to it . 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 (Concepts
Statement No . 1, ¶ 50) ;
(e) The concept that financial reporting should provide
information about an enterprise's financial performance during a
period . 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 performance, those
expectations are commonly based at least partly on evaluations of
past enterprise performance (Concepts Statement No . 1, ¶ 42) ;
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(f) The g4nciple that financial report g should be
reliable in that it represents what it purports to represent . That
information should be reliable as well as relevant is a notion that
is central to accounting (Concepts Statement No . 2, ¶¶ 58-59) ;
(g) The concept of completeness, which means that
nothing is left out of the information that may be necessary to
ensure that it validly represents underlying events and conditions
(Concepts Statement No . 2, ¶ 79) ;
(h) The concept 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 .
The best way to avoid injury to investors is to try to ensure that
what is reported represents what it purports to represent (Concepts
Statement No . 2, ¶¶ 95, 97) .
184 . In addition, the defendants falsely failed to
disclose the existence of known trends, events or uncertainties
that they reasonably expected would have a material unfavorable
impact on its operating results or that were reasonably likely to
result in the Company's liquidity decreasing in a material way, in
violation of Item 303 of Regulation S-K under the federal
securities laws (17 C .F .R . 229 .303) . These failures rendered the
Company's Class Period financial statements and Forms l0-Q
materially false and misleading .
KPMG'S PARTICIPATION IN THE FRAUDAND ITS KNOWING OR RECKLESS DEPARTURES FROM GAR S
185 . Generally Accepted Auditing Standards ("GARS")
provide that an audit report state whether a company's financial
statements are presented in conformity with GAAP . AU § 110 .01 .
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The Sabratek audit imports issued and signed by KL'L for fiscal
1997 and 1998 during the Class period stated that Sabratek's
financial statements for those reported periods were presented in
conformity with GAAP when, as noted above, such financial
statements violated GAAP in a myriad of ways . Had these financial
statements been prepared in accordance with GAAP, Sabratek's
revenues, net income, earnings per share, accounts receivable,
total assets and stockholder's equity would have substantially and
materially reduced .
186 . Defendant KPMG either knew or, at a minimum,
recklessly disregarded the facts which showed that Sabratek's
financial statements for fiscal 1997 and 1998 were materially false
and misleading . As a result, KPMG issued unqualified opinions on
Sabratek's fiscal 1997 and 1998 financial statements when such
financial statements materially overstated Sabratek's revenues, net
income, earnings per share, accounts receivable, total assets and
stockholders equity .
KPMG's Active Involvement in Structuring the SuspectTransactions With The R&D Satellite Entities
187 . As noted above, KPMG has served as Sabratek's
independent auditor at all material times . However, in addition to
serving as KPMG's "independent" auditor, KPMG also acted as a paid
consultant to Sabratek . Moreover, in its capacity as a paid
consultant, KPMG was actively involved in consulting on the
structuring of many of the suspect transactions with the R&D
Satellite Entities and in advising Sabratek that it could use such
transactions as devices to shift its R&D expenses "off the
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Company's books" --' en though such accounting artifices were in
blatant contravention of GAAP .
188 . KPMG's active participation in structuring the
suspect transactions and opining on the "permissible" accountin g
treatment of those transactions has been confirmed by severa l
sources . For example ,
(a) As noted earlier, defendant Sean Padda told on e
of the Company's shareholders in or around March of 1999 that
Sabratek and KPMG had developed a "brilliant strategy" to fund
Sabratek's networking research and development costs "off the
balance sheet" by advancing funds to Unitron, GDS and Magic .
As Padda explained to the shareholder, the networking side of
Sabratek's business was losing money, and he did not want to
fund those costs on Sabratek's balance sheet because Wall
Street "punished" companies for falling just a few pennies
short on its earnings . As Padda further stated, Sabratek and
KPMG had developed a plan that permitted Sabratek to fund its
networking projects (e .g . the Virtual Hospital Room system) by
advancing money to "separate companies," including Unitron,
Magic and GDS, which would then spend the money on R&D
relating to the various networking system projects . Padda
also told this shareholder that these deals (which also
included loan transactions) had also been structured so that
Sabratek had an option to buy Unitron and GDS as soon as the
networking projects were accretive to earnings, at which point
(according to Padda) the impact of eliminating any assets
recorded on Sabratek's books in connection with these
transactions (such as loan receivables) would be negligibl e
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%
compared to th enefits of the''earnings from t'Uie networking
product ; Padda further indicated that Sabratek definitely
intended to exercise the purchase options at such time as th e
networking products were ready .
(b) Similarly, defendant Padda has represented to
other Sabratek shareholders that KPMG worked as a pai d
"consultant" on at least the suspect Unitron and GDS licensin g
agreements, and that KPMG's consulting and accounting advice
in connection with those transactions is a "cause" of the $39
million accounting restatement that Sabratek announced o n
October 7, 1999 .
(c) Moreover, according to a former Unitro n
employee who is familiar with the events that led up to th e
signing of the July 1997 licensing agreement between Unitron
and Sabratek, Sabratek informed Unitron during the
negotiations that it would not do the deal "until its auditor s
[KPMG] signed off on it ." For example, defendant Steven
Holden -- Sabratek's CFO at the time -- told Unitron
management during the negotiations that any agreement would be
submitted to KPMG for its review, and that Sabratek "couldn't
do the deal as a licensing agreement until its auditors said
it was kosher ." Holden thereafter informed Unitron that KPMG
had in fact "signed off" on the deal, and that the parties
could therefore "do [the deal] as a licensing agreement . "
189 . Given that KPMG actively participated in reviewing
the structure of the 1997 Unitron license agreement and 1997
exclusive rights agreement with GDS -- and was paid as a
"consultant" for its work on the transactions and opinions as t o
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the permissible accdting treatments of these deals - it defies
credulity to believe that the facts which have since forced
Sabratek to restate its accounting treatment of these transactions
were not available to KPMG at the time it was acting as a paid
"consultant" on those deals . Moreover, there were various "red
flags" and other factors which would have caused all but the most
reckless auditor --- or an auditor willing to participate in a
fraudulent scheme -- to subject these transactions to heightened
and thorough scrutiny . For example :
(a) As of December 31, 1997, Sabratek's reported
intangible assets were only $8,302,000, and the Company's
total reported assets were only $71,157,000 . Accordingly, the
July 1997 Unitron agreement and August 1997 GDS agreement were
significant and material transactions to Sabratek ; for
example, the capitalization of license fees pursuant to the
Unitron agreement and the capitalization of "exclusive rights"
fees pursuant to the GDS agreement represented approximately
12% of the Company's total assets at December 31, 1997 .
Similarly, any decision not to expense these items was also
highly material, inasmuch as Sabratek's reported net income
for all of 1997 was only $7 .2 million .
(b) As a reasonable inquiry into Unitron's business
and operations would have quickly shown, Unitron was a
developmental stage company with basically no marketable
products and virtually no customers -- indeed, according to
Unitron financial statements, the company had only $12,936 in
total sales for the eleven months ended November 30, 1997,
compared to operating expenses of $3,565,942 for the same
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period. Moreo J, as noted at 1 59 (b) above, ih ron' s major
product, the MOON network system, was only just beginning beta
testing at a single site and was at least 18 months away from
going to market, and numerous planned improvements to the MOON
system were only on the drawing board or in the very early
stages of development .
(c) As Sabratek's auditors, KPMG knew (o r
recklessly ignored) that at the time of these transactions,
the Company's stated goal wa s
. . . to continue to develop and market interactivetherapeutic and diagnostic medical systems designed toimprove the delivery of high quality, cost effectivehealth care at alternate sites . The Company intends toachieve its goal by pursuing the following businessstrategies : (i) to continue to develop advanced medicalproducts and related software systems that maximize thecost-effective provision of alternate-site health care ;(ii) develop a system of diagnostic information-basedmedical products supported by the Company's proprietaryhealth care information system platform, and (iii) createa proprietary outcomes database through the Company'sproducts and software platform .
See Sabratek's Form 10-K for 1996, dated April 22, 1997
(emphasis added) . In such circumstances, KPMG should have
been especially sensitive to the accounting treatment of any
transactions which appeared to provide all, or substantially
all, of the financing for ongoing research and development
activities by "third parties" -- particularly where the terms
of the transactions simultaneously gave Sabratek the option to
acquire 100% of those "third parties . "
(d) Sabratek had had previous dealings with GDS ,
and possibly with Unitron, which suggested an unusually close
relationship between these parties . For example, according to
Sabratek's 1996 10-K, in December 1996 Sabratek issued a
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$200,000 note LADS, due on demand after Februa 1999, which
carried a substantially below-market interest rate of only
$200,000 . Similarly, Sabratek's 1st and 2d quarter 1997 Form
10-Q's disclose that Sabratek had lent $1 million of notes at
5 .5% and $482,000 worth of notes at below market rates to two
undisclosed entities -- one which was apparently GDS and the
other of which may well have been Unitron .
Nonetheless, in the face of these numerous red flags and the facts
and circumstances that KPMG was fully aware of or recklessly
disregarded, KPMG falsely advised Sabratek that it could capitalize
the $11 million it paid to Unitron and GDS under the 1997 licensing
and "exclusive rights" transactions -- as well as the millions of
dollars that Sabratek lent to these entities during the Class
period -- when GAAP required that these expenditures be expensed .
190 . For substantially similar reasons, including KPMG's
involvement in consulting on the transactions and the nature of the
R&D Satellite Entities involved, KPMG also willfully ignored known
facts and circumstances (or at best reckless ignored significant
red flags) in falsely advising Sabratek that it could capitalize
the $10 million it paid to magic under a purported "license
agreement" in 1998 and the $2 .7 million it "loaned" to CIH under
its November 1998 "credit facility." Indeed, as shown below, by
the time those transactions were consummated there were even more
red flags that KPMG ignored .
RPMG's Reckless or Knowingly Inadequate AuditsAnd Its False Audits Opinions on Sabratek's1997 and 1998 Financial Statements
191 . In certifying Sabratek's fiscal 1997 and 199 8
financial statements, KPMG also falsely represented that it s
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examination was ~•, e in accordance with Gd. Those
representations , which were contained in its unqualified audi t
opinion letters issued in connection with the respective financial
statement for those years, were materially false and misleading in
that the audits conducted by KPMG were, as KPMG knew or recklessly
ignored, not performed in accordance with GARS in the following
respects :
(a) KPMG violated GAAS Standard of Reporting No . 1 ,
which requires the audit report to state whether the financial
statements are presented in accordance with GAAP . KPMG's opinion
falsely represented that Sabratek's fiscal 1998 and 1997 financial
statements were presented in conformity with GAAP when they were
not for the reasons herein alleged .
(b) KPMG violated GARS Standard of Reporting No . 4
which requires that, when an opinion on the financial statements as
a whole cannot be expressed, the reasons therefor must be stated .
KPMG should have stated that no opinion could be issued by it on
Sabratek's 1998 and 1997 financial statements or issued an adverse
opinion stating that the 1998 and 1997 financial, statements were
not fairly presented . KPMG also failed to require Sabratek to
timely restate its previously issued materially false and
misleading class period financial statements and allowed Sabratek
to make material misrepresentations regarding the Company to its
shareholders and to the investing public during the Class Period .
The failure to make such a qualification, correction, modification
and/or withdrawal was a violation of GAAS, including the Standard
of Reporting No . 4 .
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(c) CMG violated GAAS General Sta~idard No . 2,
which requires an auditor to maintain an independence in mental
attitude in all matters related to the assignment . As noted above,
KPMG advised Sabratek on the accounting for its transactions wit h
the R&D Satellite Entities . KPMG's audit of the accounting
treatment of such transactions impaired its independence as KPMG,
in essence, audited its own judgement as to the propriety of
Sabratek's accounting the transactions .
(d) KPMG violated GARS and the standards set forth
in SAS No . I and SAS No . 53 by, among other things, failing to
adequately plan its audit and properly supervise the work of
assistants and to establish and carry out procedures reasonably
designed to search for and detect the existence of errors an d
irregularities which would have a material effect upon th e
financial statements .
(e) KPMG violated GAAS General Standard No . 3 that
requires that due professional care must be exercised by the
auditor in the performance of the audit and the preparation of th e
report .
(f) KPMG violated GAAS Standard of Field Work No .
2 which requires the auditor to make a proper study of existing
internal controls, including accounting, financial and managerial
controls, to determine whether reliance thereon was justified, and
if such controls are not reliable, to expand the nature and scope
of the auditing procedures to be applied .
(g) In the course of auditing Sabratek's 1996
financial statements, KPMG either knew or recklessly disregarded
facts which evidenced that it either failed to sufficientl y
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understand Sabratek_d internal control structu and/or it
disregarded weaknesses and deficiencies in Sabratek's internal
control structure , and failed to adequately plan its audit or
expand its auditing procedures .
(h) KPMG violated Standard of Field Work No . 3,
which requires sufficient competent evidential matter to be
obtained through inspection, observation, inquiries and
confirmations to afford a reasonable basis for an opinion regarding
the financial statements under audit . As described above and
below, KPMG knew or recklessly disregarded that it could not obtain
sufficient competent evidential matter as to Sabratek ' s revenue
recognition , licensing rights, notes receivable , and research and
development costs .
192 . For example , in addition to all of the facts,
circumstances and "red flags " referenced under the immediately
preceding section entitled "KPMG's Active Involvement in
Structuring the Suspect Transactions . With The R&D Satellite
Entities ," the following additional "red flags " evidence KPMG's
knowing or reckless violations of these GAAS standards :
(a) the sheer pervasiveness and materiality of
Sabratek ' s improper revenue recognition practices in
connection with its sales of pump-related products, as set
forth in 11 48-50 above ;
(b) the fact that Sabratek , in violation of Item
601 of SEC Regulation S-K (requiring the filing of material
contracts ), failed to file copies of the July 1997 Unitron or
August 1997 GDS agreements with the SEC, indicating that the
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Company wanted minimize public disclosure o and analysi s
of, the details of these agreements ;
(c) the fact that, as of ICPMG's March 17, 199 8
audit report on Sabratek's 1997 financial statements, at leas t
one of the R&D Satellite Entities with which Sabratek ha d
signed a licensing agreement Unitron - - still had no paying
customers and no marketable products . Indeed, at that time --
as KPMG could have easily verified by contacting Unitron
management -- all of Unitron's products were still i n
development or, at best (in the case of its most basic MOON
system) still in beta testing, and were all at least 12 months
away from any possible product launch . However, at no time
during the Class Period did KPMG ever contact senior Unitron
management to inquire into the state of Unitron's business or
the true nature of its relationship with Sabratek ;
(d) the fact that Sabratek's capitalized loan ,
licensing fee and other transactions with the R&D Satellite
Entities, which already involved highly material amounts as of
the end of 1997, had grown to even larger levels by the end of
1998, thus warranting an even higher level of heightened
scrutiny of such transactions . For example, as of December
31, 1998, Sabratek's notes receivable and intangible assets
recorded in connection with transactions involving the four
R&D Satellite Entities accounted for approximately 21%s of
Sabratek's total assets, compared to approximately 120 of
Sabratek's total assets as of December 31, 1997, and
approximately 1- of the Company's total assets as of December
31, 1996 .
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(e) de fact that KPMG never inqu r d into, or
deliberately ignored, the numerous " red flags" associated with
Sabratek ' s January 1998 so-called " exclusive sales and
marketing agreement" with Unitron, including, inter alia , the
following :
(i) the fact that the existence of this
agreement, which purportedly required Sabratek to pay
Unitron $2 .7 million to "acquire[] certain rights to
access Unitron's customer base," was not publicly
disclosed until March 25, 1999 when Sabratek filed its
10-K for 1998, even though the agreement had allegedly
been signed 14 months earlier ;
(ii) the fact that Sabratek agreed to pay $2 .7
for access to Unitron's customer list when Unitron had
no, or virtually no, customers ; and
(iii) the fact that the "payments" that
Sabratek made under this agreement constituted of a
series of wire transfers into a Unitron bank account that
Sabratek controlled, each of which was then promptly
reversed so that 100% of the funds "deposited" were
immediately returned to Sabratek ;
(f) the fact that KPMG never inquired into, or
deliberately ignored, numerous "red flags" associated with the
$10 million Standby Senior Credit Facility that Unitron
entered into with Sabratek in November 1998, including, inter
alia, the following :
(i) the fact the terms of this Standby Senior
Credit facility imposed numerous onerous terms on Unitron
- 131 -
that gran L---d Sabratek sweeping control oar virtually
every aspect of Unitron's business, including terms that
provided that Unitron's failure to obtain Sabratek's
prior consent to any meaningful management decisions --
such as decisions to hire or fire personnel, enter into
contracts, etc . -- would constitute events of default ;
(ii) the fact that by the end of 1998, Sabratek
completely dominated and controlled Unitron's business
and operations, to the extent that it was dictating to
Unitron which of Unitron's bill's would be paid, and
which would not .
(iii) the fact that although Sabratek's 1998
10-K states that Unitron drew down $3 .1 million in 1998
under the Standby Credit Facility, according to former
Unitron management Sabratek actually allowed Unitron to
draw down only about $1 million during 1998, which was
used to fund Unitron's operations (including vendor
obligations and payroll) ;
(iv) the fact that Unitron, given its financial
dependence on Sabratek, had no apparent financial
wherewithal -- or at best only speculative prospects --
for repaying the substantial amounts that Sabratek claims
to have loaned to Unitron as of December 31, 1998 ;
(v) the fact that KPMG never made inquiries of
former Unitron management of any of these or other
Unitron-related matters in the course of its audit of
Sabratek's 1998 financial statements, even though
Sabratek had effectively forced out Unitron's management
- 132 -
and board directors and replaced them wh Sabratek's
own nominees pursuant to a January 1999 renegotiation of
the parties' 1997 option agreement -- an renegotiation
which also resulted in accelerating Sabratek's option to
acquire Unitron by permitting it to exercise its option
as early as July 15, 1999 ; and
(vi) the fact that, as a result of the
foregoing, Sabratek's financial statements should have
been consolidated with Unitron's for purposes of
Sabratek's financial reporting, assuming that KPMG did
not otherwise require Sabratek to restate the amounts
advanced by Sabratek to Unitron as expenses, rather than
capitalize them and record them as assets .
193 . KPMG's audit opinions, which represented that
Sabratek's 1997 and 1998 financial statements were presented in
conformity with GAAP, were materially false and misleading because
KPMG knew (or was reckless in not knowing) that Sabratek's 1997 and
1998 financial statements violated numerous principles of fair
reporting and GAAP . In the course of rendering its unqualified
audit opinions on Sabratek's 1997 and .1998 financial statements,
KPMG knew it was required to adhere to each of the standards and
principles of GARS described herein, including the requirement that
the financial statements comply in all material respects with GAAP ;
in addition, KPMG knew or recklessly disregarded facts which
indicated that it should have (a) disclaimed or issued an adverse
opinion on Sabratek's 1997 and 1998 financial statements, and (b)
withdrawn, corrected or modified its opinion for the years ende d
- 133 -
December 31, 1997 d 1998 to identify and corre~--? Sabratek' s
improper accounting as set forth above .
194 . In sum, KPMG, in issuing its unqualified opinions ,
knew or recklessly disregarded that by doing so it was engaging in
gross and extreme departures from GARS, thus rendering its audit s
opinions materially false and misleading .
195 . As a result of its failure to properly opine o n
Sabratek's 1996 and 1997 financial statements, KPMG also utterly
failed in its role as an auditor as defined by the SEC . As stated
in SEC Accounting Series Release No . 296, Relationships Between
Registrants and Independent Accountants , Securities Act Release No .
6341, Exchange Act Release No . 18044 :
[T1 he capital formation process depends in large part onthe confidence of investors in financial reporting . Aninvestor's willingness to commit his capital to animpersonal market is dependent on the availability ofaccurate, material and timely information regarding thecorporations in which he has invested or proposes toinvest . The quality of information disseminated in thesecurities markets and the continuing conviction ofindividual investors that such information is reliableare thus key to the formation and effective allocation ofcapital . Accordingly, the audit function must bemeaningfully performed and the accountants' independencenot compromised . The auditor must be free to decidequestions against his client's interests if hisindependent professional judgment compels that result .
[Emphasis added .]
ADDITIONAL SCIENTER ALLEGATIONS
196 . As alleged herein, defendants acted with scienter i n
that defendants knew that the public documents and statement s
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 o r
134 -
dissemination of sum -Jtatements or documents as prim̀ violations
of the federal securities laws . As set forth elsewhere herein in
detail, defendants, by virtue of their receipt of information
reflecting the true facts regarding Sabratek, their control over,
and/or receipt and/or modification of Sabratek's allegedly
materially misleading misstatements and/or their associations with
the Company which made them privy to confidential proprietary
information concerning Sabratek, participated in the fraudulent
scheme alleged herein . With respect to non-forward-looking
statements and/or omissions, defendants knew and/or recklessly
disregarded the falsity and misleading nature of the informatio n
which they caused to be disseminated to the investing public .
197 . The Individual Defendants engaged in this scheme t o
inflate the price of Sabratek's securities in order : (i) to protect
and enhance their executive positions and the substantial
compensation and prestige they obtained thereby, (ii) to earn
lucrative bonuses under the Company's bonus plan for "achieving"
certain performance levels ; and (iii) to enhance the value of their
personal Sabratek stock holdings, and to, allow for their profitabl e
insider sales of over 990,000 shares of their privately held
Sabratek common stock at artificially inflated prices which yielded
them total proceeds in excess of $17 .4 million .
198 . In addition, the Company and the Individua l
Defendants were further motivated to engage in this scheme in order
to enable the Company to raise over $115 million in capital through
the $30 million secondary offering of common stock in April 1997,
and the issuance of $85 million in convertible notes in April 1998,
all at artificially inflated prices . Moreover, by maintaining an
135 -
artificially inflatE,. price for the Company's stock, -r-zr Defendants
were better able to utilize Sabratek stock as currency in several
significant corporate acquisitions which closed during the Clas s
Period .
199 . As set forth above, while defendants were issuing
materially false favorable statements about the Company's
regulatory compliance, financial performance and business
prospects, and concealing or obscuring negative information and
trends, the Individual Defendants, who had access to confidential
information and were aware of the truth about the Company and its
products, were benefitting from the illegal course of business or
course of conduct described in this complaint by selling large
blocks of the Company's stock at artificially inflated prices
without disclosing the material adverse facts about the Company to
which they were privy . Such sales were unusual in their amount and
in their timing . The numerous and repeated insider sales of
Sabratek common stock by the Individual Defendants imposed upon
them additional duties of full disclosure of all of the material
facts alleged in this complaint .
- 136 -
200 . The r Blowing tables show the heavy ider selling
of the Individual Defendants during the Class Period :
NO .SHARE S
NAME DATE SOLD PRICE TOTAL
Padda, K . Shan 04/09/97 30,906 $17 .01 $525,711 .0 6
05/30/97 10,000 $26 .25 $262,500 .0 0
05/30/97 15,000 $26 .00 $390,000 .0 0
05/30/97 20,000 $26 .38 $527,600 .0 0
08/13/97 2,500 $31 .63 $ 79,075 .0 0
08/13/97 3,000 $30 .81 $ 92,430 .0 0
08/13/97 27,000 $31 .27 $844,290 .0 0
08/29/97 4,000 $36 .25 $145 ,000 .0 0
12/31/97 35,000 $28 .75 *$1,006,250 .0 0
147,406 $3,872,856 .0 6
Rastogi, Anil K . 04/09/97 8,242 $17 .01 $140,196 .42
05/05/97 8,500 $21 .88 $185,980 .0 0
05/14/97 3,258 $21 .63 $ 70,470 .54
05/29/97 4,000 $26 .38 $105,520 .00
05/29/97 6,000 $26 .13 $156,780 .0 0
08/15/97 4,250 $30 .37 $129,072 .5 0
08/18/97 5,750 $30 .62 $176,065 .00
02/24/98 1,000 $33 .13 $ 33,130 .0 0
02/24/98 9,000 $32 .25 $290,250 .0 0
05/28/98 10,000 $26 .25 $262,500 .0 0
05/29/98 10,000 $26 .25 $262,500 .0 0
06/05/98 10,000 $24 .06 $240,600 .00
07/17/98 15,000 $26 .77 $401,550 .00
95,000 $2,777,994 .4 6
Holden, Stephen L . 05/29/97 1,000 $26 .50 $ 26,500 .00
08/13/97 1,000 $30 .38 $ 30,380 .00
08/13/97 1,000 $30 .75 $ 30,750 .00
02/20/98 3,000 $34 .13 $102,390 .00
6,000 $190,020 .00
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O .SHARES
NAME DATE SOLD PRICE TOTAL
Levitas, Doron C . 04/09/97 24,321 $17 .01 $413,700 .2 1
08/07/97 5,000 $30 .44 $152,200 .0 0
08/07/97 10,000 $30 .81 $308,100 .0 0
08/07/97 15,000 $30 .69 $460,350 .0 0
12/31/97 35,000 $28 .75 *$1,006,250 .0 0
02/18/98 12,500 $35 .00 *$437,500 .0 0
02/20/98 2,500 $35 .13 $ 87,825 .00
02/20/98 2,000 $35 .00 $ 70,000 .00
02/20/98 500 $34 .50 $ 17,250 .00
02/24/98 4,000 $34 .50 $138 ,000 .00
02/26/98 500 $34 .56 $ 17,280 .00
08/23/99 147,500 $ 2 .97 $438,075 .00
08/24/99 217,691 $ 2 .21 $481,097 .00
476,512 $3,259,772 .21
Capponi, Vincent J . 05/07/98 2,952 $31 .00 $ 91,512 .0 0
06/04/98 2,953 $24 .00 $ 70,872 .00
5,905 $162 ,384 .0 0
Axel, Stephen L . 11/09/98 4,000 $31 .98 5127,920 .00
4,000 $127,920 .00
Jordan, Alan E . 04/09/97 30,000 $17 .01 $510,300 .0 0
05/05/97 8,000 $22 .00 $176,000 .00
05/05/97 17,500 $21 .88 $382,900 .0 0
05/07/97 3,000 $21 .63 $ 64,890 .00
05/08/97 8,600 $21 .88 $188,168 .0 0
05/09/97 3,000 $21 .63 $ 64,890 .0 0
05/13/97 2,701 $21 .63 $58,422 .6 3
05/13/97 .13 ,000 $21 .63 $281,190 .0 0
05/13/97 15,000 $21 .88 $328,200 .0 0
05/14/97 7,500 $21 .63 $162,225 .0 0
05/15/97 8,594 $21 .63 $185,888 .2 2
05/29/97 2,000 $26 .38 $ 52,760 .0 0
- 138 -
NAME
Jordan, Alan E . [con't ]
Mandell, Elliott R
DATE
05/29/97
05/29/97
11/07/97
11/07/97
11/07/97
02/20/98
02/20/98
02/20/98
02/20/98
02/20/98
05/20/98
05/27/98
05/27/98
10/21/98
08/26/97
08/26/97
08/26/97
08/26/97
08/26/97
08/26/97
08/27/97
08/27/97
08/27/97
08/29/97
08/29/97
09/02/97
03/17/98
03/18/98
03/19/98
03/20/98
Or- JNo .
SHARESSOLD PRICE TOTAL
4,500 $26 . 13 $117 , 585 .0 0
30,559 $26 .25 $802 ,1 73 .75
2,454 $30 . 00 $ 73 , 620 .0 0
3,000 $29 . 38 $ 88 , 140 .0 0
4,000 $25 .13 $100,520 .0 0
2,500 $35 .1 3 $ 87,825 .0 0
500 $35 . 50 $ 17,750 .0 0
25, .000 $34 .88 $872 , 000 .0 0
2,000 $35 .75 $ 71,500 .00
728 $34 . 13 $ 24,846 .64
5,000 $28 .13 $140,650 .00
5,000 $25 . 75 $128 , 750 .00
5,000 $ 26 .13 $130,650 .00
10,000 $28 . 75 $287 , 500 .00
219,136 $5,399,344 .2 4
1,000 $29 . 13 $ 29,130 .00
1,000 $29 .81 $ 29,810 .0 0
3,000 $29 . 25 $ 87 , 750 .0 0
7,000 $29 . 75 $208 , 250 .0 0
8,000 $29 .00 $232,000 .0 0
10,000 $29 .88 $298,800 .0 0
3,000 $29 .63 $ 88,890 .0 0
7,000 $29 .38 $205,660 .0 0
10,000 $29 . 00 $290,000 .00
2,928 $ 35 .13 $102,860 .64
5,000 $34 . 50 $172,500 .00
4,560 $35 .00 $159,600 .0 0
5,000 $ 29 .63 $148,150 .00
5,000 $ 29 .00 $145,000 .0 0
5,000 $29 .63 $148,150 .00
10,000 $ 29 .63 $296,300 .0 0
87,488 $2 , 642,850 .64
- 139 -
NAME
Skooglund, Scott
Smith, L . Peter
William H . Lomicka
William D . Lautman
DATE
05/02/97
05/02/97
05/14/97
02/20/9 8
05/07/98
01/25/9 9
02/20/98
02/20/98
02/25/9 8
05/29/97
08/11/97
08/12/97
08/13/97
08/28/97
08/28/97
08/29/97
08/29/97
NO .SHARESSOLD
600
4 ;127
7,879
4,334
16,940
11,030
7,87 9
18,90 9
1,200
3,800
5,00 0
10,00 0
10,000
8,000
5 ;000
5,000
2,700
1,500
1,00 0
17,500
50,700
PRICE
$21 .25
$21 .00
$22 .00
$35 .5 0
$30 .68
$22-49
$34 .19
$34 .13
$33 .25
$26 .75
$30 .86
$31 .80
$31 .94
$33 .81
$34 .31
$36 .19
$35 .61
TOTALS FOR ALL 990,590
* Represents fair market value of shares disposed of by gift .
rt
1I
TOTAL
$ 12,750 .00
$ 86,667 .00
$173,338 .00
$153,857 .00
$426,612 .00
$338,400 .40
$177,277 .00
$515,677 .4 0
$41,028 .00
$129,694 .00
$166,250 .00
$336,972 .00
$267,500 .00
$246,880 .00
$159,000 .00
$159,700 .0 0
$91,287 .00
$51,465 .00
$36,190 .00
$ 623,175 .00
$1,635,197 .00
$17,474,743 .9 5
APPLICABILITY OF PRESUMPTION OF RELIANCE :FRAUD -ON-THE -MARKET DOCTRINE
201 . At all relevant times, the market for Sabratek's
common stock was an efficient market` for the following reasons,
among others : (a) Sabratek's stock met the requirements for
- 140 -
listing, and was li; J,d and actively traded on the"`rs aaq National
Exchange, a highly efficient and automated market ; (b) as a
regulated issuer, Sabratek filed periodic public reports with the
SEC and the Nasdaq National Exchange ; (c) Sabratek regularly
communicated with public investors via established market
communication mechanisms, including through regular disseminations
of press releases on the national circuits of major newswire
services and through other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting
services ; and (d) Sabratek 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, and which were publicly available and
entered the public marketplace .
202 . As a result of the foregoing, the market for
Sabratek's stock promptly digested current information regarding
Sabratek from all publicly available sources and reflected such
information in Sabratek'sI stock price . Under these circumstances,
all purchasers of Sabratek's common stock during the Class Period
suffered similar injury through their purchase of Sabratek's common
stock at artificially inflated prices, and a presumption of
reliance applies .
NO SAFE HARBOR
203 . 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 .
Many of the specific statements pleaded herein were not identified
as "forward-looking statements" when made . To the extent there
- 141 -
s 4
were any forward-ling statements, there were meaningful
cautionary statements identifying important factors that could
cause actual results to differ materially from those in the
purportedly forward-looking statements . Alternatively, to the
extent that the statutory safe harbor does apply to any forward-
looking statements pleaded herein, defendants are liable for those
false forward-looking statements because at the time each of those
forward-looking statements was made, the particular speaker knew
that the particular forward-looking statement was false, and/or the
forward-looking statement was authorized and/or approved by an
executive officer of Sabratek who knew that those statements were
false when made .
FIRST CLAIM
Violation Of Section 10(b) O fThe Exchange Act Against And Rule 1Ob-5
Promulgated Thereunder Against All Defendant s
204 . Plaintiffs repeat and reallege each and every
allegation contained above as if fully set forth herein .
205 . During the Class Period, Sabratek and the Individual
Defendants, and each of them, carried out a plan, scheme and course
of conduct which was intended to and, throughout the Class Period,
did : (i) deceive the investing public, including plaintiffs and
other Class members, as alleged herein ; (ii) artificially inflate
and maintain the market price of Sabratek's securities ; and (iii)
cause plaintiffs and other members of the Class to purchase
Sabratek's securities at artificially inflated prices . In
furtherance of this unlawful scheme, plan and course of conduct,
defendants, and each of them, took the actions set forth herein .
- 142 -
206 . Defe A is (a) employed devices, hemes, and
artifices to defraud ; (b) made untrue statements of material fact
and/or omitted to state material facts necessary to make the
statements not misleading ; and (c) engaged in acts, practices, and
a course of business which operated as a fraud and deceit upon the
purchasers of the Company's securities in an effort to maintain
artificially high market prices for Sabratek's securities in
violation of Section 10 (b) of the Exchange Act and Rule 10b-5 . All
defendants are sued either as primary participants in the wrongful
and illegal conduct charged herein or as controlling persons as
alleged below .
207 . In addition to the duties of full disclosure imposed
on defendants as a result of their making of affirmative statements
and reports, or participation in the making of affirmative
statements and reports to the investing public, defendants had a
duty to promptly disseminate truthful information that would be
material to investors in compliance with the integrated disclosure
provisions of the SEC as embodied in SEC Regulation S-X (17 C .F .R .
Sections 210 .01 et se .) and Regulation S-K (17 C .F .R . Sections
229 .10 et se .) and other SEC regulations, including accurate and
truthful information with respect to the Company's operations,
financial condition and earnings so that the market price of the
Company's securities would be based on truthful, complete and
accurate information .
208 . Sabratek and the Individual Defendants, individually
and in concert, directly and indirectly, by the use, means or
instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct t o
- 143 -
conceal adverse mate,,cl information about the busin operations
and future prospects of Sabratek as specified herein .
209 . These defendants employed devices, schemes and artifices
to defraud, while in possession of material adverse non-public
information and engaged in acts, practices, and a course of conduct
as alleged herein in an effort to assure investors of Sabratek's
value and performance and continued substantial growth, which
included the making of, or the participation in the making of,
untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Sabratek
and its business operations and future prospects in the light of
the circumstances under which they were made, not misleading, as
set forth more particularly herein, and engaged in transactions,
practices and a course of business which operated as a fraud and
deceit upon the purchasers of Sabratek's securities during the
Class Period .
210 . Each of the Individual Defendants' primary
liability, and controlling person liability, arises from the
following facts : (i) the Individual Defendants were high-level
executives and/or directors at the Company during the Class Period
and members of the Company's management team or had control
thereof ; (ii) each of these defendants, by virtue of his or her
responsibilities and activities as a senior officer and/or director
of the Company was privy to and participated in the creation,
development and reporting of the Company's internal budgets, plans,
projections and/or reports ; (iii) each of these defendants enjoyed
significant personal contact and familiarity with the other
defendants and was advised of and had access to other members o f
- 144
the Company' s mana .. at team, internal reports an& -4 er data and
information about the Company's finances, operations , and sales at
all relevant times ; and (iv) each of these defendants was aware of
the Company' s dissemination of information to the investing public
which they knew or recklessly disregarded was materially false and
misleading .
211 . The defendants had actual knowledge of the
misrepresentations and omissions of material facts set forth
herein, or acted with reckless disregard for the truth in that they
failed to ascertain and to disclose such facts, even though suc h
facts were available to them . Such defendants' material
misrepresentations and/or omissions were done knowingly or reck-
lessly and for the purpose and effect of concealing Sabratek's
operating condition and future business prospects from the
investing public and supporting the artificially inflated price of
its securities . As demonstrated by defendants' overstatements an d
misstatements of the Company's business, operations and earnings
throughout the Class Period, defendants, if they did not have
actual knowledge of the misrepresentations and omissions alleged,
were reckless in failing to obtain such knowledge by deliberately
refraining from taking those steps necessary to discover whether
those statements were false or misleading .
212 . As a result of the dissemination of the materially
false and misleading information and failure to disclose material
facts, as set forth above, the market price of Sabratek's
securities was artificially inflated during the Class Period . In
ignorance of the fact that market prices of Sabratek's publicly-
traded securities were artificially inflated, and relying directly
- 145 -
or indirectly on false and misleading statc _,-Ats made by
defendants, or upon the integrity of the market in which the
securities trade, and/or on the absence of material adverse
information that was known to or recklessly disregarded by
defendants but not disclosed in public statements by defendants
during the Class Period, plaintiffs and the other members of the
Class acquired Sabratek ' s securities during the Class Period at
artificially high prices and were damaged thereby .
213 . At the time of said misrepresentations and
omissions , plaintiffs and other members of the Class were ignorant
of their falsity , and believed them to be true . Had plaintiffs and
the other members of the Class and the marketplace known of the
true financial condition and business prospects of Sabratek, which
were not disclosed by defendants , plaintiffs and other members of
the Class would not have purchased or otherwise acquired their
Sabratek securities , or, if they had acquired such securities
during the Class Period , they would not have done so at the
artificially inflated prices which they paid .
214 . By virtue of the foregoing, defendants have violated
Section 10 (b) of the Exchange Act, and Rule 10b-5 promulgated
thereunder .
215 . As a direct and proximate result of defendants'
wrongful conduct, plaintiffs and the other members of the Class
suffered damages in connection with their respective purchases and
sales of the Company's securities during the Class Period .
- 146 -
SECOND CLAIM _.1
Violation Of Section 20(a) OfThe Exchange Act Against Individuals Defendant s
216 . Plaintiffs repeat and reallege each and every
allegation contained above as if fully set forth herein .
217 . The Individual Defendants acted as controlling
persons of Sabratek within the meaning of Section . 20(a) of the
Exchange Act as alleged herein . By virtue of their high-level
positions, and their ownership and contractual rights,
participation in and/or awareness of the Company's operations
and/or intimate knowledge of the Company's acquisition integration
problems, the Individual Defendants had the power to influence and
control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and
dissemination of the various statements which plaintiff contends
are false and misleading . The Individual Defendants were provided
with or had unlimited access to copies of the Company's reports,
press releases, public filings and other statements alleged by
plaintiff to be misleading prior to and/or shortly after these
statements were issued and had the ability to prevent the issuance
of the statements or cause the statements to be corrected .
218 . In particular, each of these defendants had direct
and supervisory involvement in the day-to-day operations of the
Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the
securities violations as alleged herein, and exercised the same .
219 . As set forth above, Sabratek and the Individual
Defendants each violated Section 10 (b) and Rule 1 0b-5 by their acts
- 147 -
and omissions as a, ged in this Complaint . By v4_ue of their
positions as controlling persons, the Individual Defendants are
liable pursuant to Section 20(a) of the Exchange Act . As a direct
and proximate result of defendants' wrongful conduct, plaintiffs
and other members of the Class suffered damages in connection with
their purchases of the Company's securities during the Class
Period .
WHEREFORE, plaintiffs pray for relief and judgment, as
follows :
(a) Determining that this action is a proper class
action, and certifying plaintiffs as class representatives under
Rule 23 of the Federal Rules of Civil Procedure and plaintiffs'
counsel as Lead Counsel ;
(b) Awarding compensatory damages in favor of
plaintiffs and the other Class members against all defendants,
jointly and severally, for all damages sustained as a result of
defendants' wrongdoing, in an amount to be proven at trial,
including interest thereon ;
(c) Awarding plaintiffs and the Class their
reasonable costs and expenses incurred in this action, including
counsel fees and expert fees ; and
(d) Such other and further relief as the Court ma y
deem just and proper .
- 148 -
JURY TRIAL DEMANDED '._.
Plaintiffs hereby demand a trial by jury .
DATED : Chicago, IllinoisNovember 16, 1999
MILLER FAUCHER CAFFERTY andWEXLER LL P
Mervin A .' MillerAdam J . Levit t30 North LaSalle StreetSuite 320 0Chicago, IL 60602(312) 782-488 0
Liaison Counsel for Plaintiff s
MILBERG WEISS BERSHADHYNES & LERACH LLP
David J . BershadWilliam C . FredericksClifford S . GoodsteinOne Pennsylvania Plaza49th FloorNew York, NY 10119-0165(212) 594-530 0
Lead Counsel for Plaintiff s
WOLF POPPER LLPLester L . LevyCarl L . Stine845 Third AvenueNew York, New York 10022(212) 759-460 0
COHEN MILSTEIN HAUSFELD &TOLL, P .L .L .C .Steven J . TollLori Feldman999 Third AvenueSuite 3600Seattle, WA 98104(206) 521-008 0
- 149 -
Y
WOLF HALDEN ,.k- 5"1 i LER FREEMAN& HERZ, LLPFred T . IsquithGregory Nespole270 Madison AvenueNew York, NY 10016(212) 545-4600
Counsel for Plaintiffs andMembers of ProposedPlaintiffs ' ExecutiveCommittee
MUCH SHELIST FREED DENENBERGAMENT & RUBENSTEIN, P .C .Joseph D . Ament200 North LaSalle StreetSuite 210 0Chicago, IL . 60601(312) 346-3100
LAW OFFICE OFBRUCE G . MURPHY
~.I Bruce 'G. Murphy265 Llwyd's LaneVero Beach, FL 3296 3(561) 231-420 2
LAW OFFICES OF TERRYROSE SAUNDERSTerry Rose Saunders30 North LaSalle StreetSuite 320 0Chicago, IL 60602(312) 346-445 6
HOFFMAN & EDELSONMarc H . Edelson45 West Court StreetDoylestown, PA 1890 1
Attorneys for Plaintiff s
C:\Core1\Suite8\DOCUMENTS\SABRATEK\Third Amended Complaint .wpd -. November 16, 1999 (2 :47PM )
- 150 -