florence cole, et al. v. health management associates, inc...

Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 of 29

FII:_ED

UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA

FORT MYERS DIVISION

FLORENCE COLE, on Behalf of Herselfand All Others Similarly Situated,

Plaintiff,

V.

HEALTH MANAGEMENT ASSOCIATES,INC., WILLIAM J. SCHOEN, JOSEPH V.VUMBACCO and ROBERT E.FARNHAM,

Defendants.

2001 AUG -2 AM Ii: 42

MIDDLE DISTR IICTOFFLORIDAFORT MYERS. FLORIDA

2: C ( -pt - 411yyf

Plaintiff, by and through her attorneys, alleges the following upon information and belief,

except as to those allegations concerning Plaintiff, which are alleged upon personal knowledge.

Plaintiffs information and belief are based upon, among other things, counsel's investigation,

which includes without limitation: (a) review and analysis of regulatory filings made by Health

Management Association, Inc. ("Health Management" or the "Company") with the United States

Securities and Exchange Commission ("SEC"); (b) review and analysis of securities analysts'

reports concerning Health Management; (c) review and analysis of press releases and media

reports issued by and disseminated by Health Management; and (d) review of other publicly

available information concerning Health Management.

INTRODUCTION

1. This is a class action against Health Management and certain of its officers and

directors for violation of the federal securities laws. Plaintiff brings this action on behalf of

Civil Action No.

himself and all other persons or entities, except for Defendants and certain of their related parties


as described below, who purchased Health Management securities (the "Class") during the

period from January 17, 2007 through July 30, 2007, inclusive (the "Class Period")

2. On December 31, 2006, Health Management operated 60 general acute care

hospitals with a total of 8,589 licensed beds in non-urban communities in Alabama, Arkansas,

Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania,

South Carolina, Tennessee, Texas, Virginia, Washington and West Virginia. During the fourth

quarter of 2006 Health Management took a $200 million one-time charge related to a change in

its policy for doubtful accounts. After this charge the company revised its reserve policies for

self pay receivables and charity/indigent care policy.

3. Self-Pay receivables are receivables from patients who are uninsured or have a

co-pay or deductible. In December 2006 Health Management transitioned from reserving 100%

of self-pay receivables after 120 days to reserving 75% against self-pay receivables immediately

and 100% after the account ages 300 days. Effective February 1, 2007, the Company again

changed the amount reserved against self pay receivables from 75% immediately to 60% and

100% after almost one year. In addition, the Company began discounting the gross billed charge

to uninsured patients by 40%-60%. Defendants ignored the fact that many uninsured and charity

patients cannot pay their medical bills even at a discounted rate. In its look back review, Health

Management now admits that many uninsured patients - despite new discounts - could not find a

way to pay their bills.

4. On January 17, 2007, Health Management announced a major recapitalization to

be effectuated in March 2007 in which the company borrowed $3.25 billion of new debt to

refinance existing debt and pay shareholders a special one-time cash dividend of $10.00. In this

same January 17, 2007 announcement the Company provided its strategic outlook for 2007. As a

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result of defendant's new policies, Health Management claimed that it expected bad debt

expensed to be in the range of 5% to 6% versus 10.0% in 2006.

5. In addition, during the first quarter of 2007 Health Management revised its

charity/indigent care policy such that beginning in or about January 2007, only those uninsured

accounts for which the patient meets poverty guidelines are being written off as charity/indigent.

6. Defendants modified and manipulated Health Management's reserve policies in

order to present the Company as healthy and soon to experience declining bad debt rates so that

it could borrow additional money, and effect the dividend payment, which brought substantial

sums to the Board Chairman, and the now-former CEO. Defendants knew that it was necessary

to show that Health Management had its bad debt expenses under control in order to borrow

additional money, and to win Board approval of the Recapitalization. With the $3.25 billion

borrowed defendants issued a one time $10.00 per share special cash dividend to all shareholders

of record as of February 27, 2007. The Individual Defendants benefited substantially from this

one time dividend. Given their large stock holdings as set forth below each defendant walked

away with large sums of money.

7. As revealed on July 31, 2007, Health Management, throughout the Class Period,

was experiencing a deterioration in the collectibility of its accounts receivable from uninsured

patients. The deterioration noted relates to the overall collectibility of receivables from uninsured

patients, and to patients billed at discounted amounts who may have been written off as charity

care under the Company's previous policy. In addition, Health Management announced that for

its second quarter of 2007 it took a $39.0 million charge, recorded as an additional reserve to

reflect a recent decline in collectibility of accounts receivable from uninsured patients.

Moreover, HMA announced that it was "updating" is guidance for the entirety of fiscal 2007:

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HMA updated its fiscal 2007 diluted EPS from continuing operations objectiverange to be between $0.45 and $0.50 to reflect increased uninsured volumes, adeterioration in the collectibility of accounts receivable related to those uninsuredvolumes, and lower than anticipated overall paying volumes. This new EPSobjective is based on a net operating revenue objective range of $4.3 to $4.5billion, same hospital admissions from continuing operations experiencing nogrowth from 2006 and bad debt expense as a percentage of net operatingrevenue of approximately 12% for the remainder offiscal year 2007. [Emphasissupplied].

8. On this unexpected news the price of Health Management stock drop almost 25%

to close at $8.06 on July 31, 2007.

9. For the foregoing reasons, Plaintiff seeks damages for himself and for the Class

for violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule

I Ob-5 thereunder.

JURISDICTION AND VENUE

10. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331, and 1367, and Section 27 of the Securities Exchange Act of 1934 (the

"Exchange Act") (15 U.S.C. § 78aa).

11. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.

§§ 78j(b) and 78t(a)) and Rule lob-5 promulgated under Section 10(b) (17 C.F.R. § 240.10b-5).

12. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15

U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged

fraud and/or its effects have occurred within this District, and the Company maintains its

principal executive offices in this District.

13. In connection with the acts and omissions alleged in this Complaint, Defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, but

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not limited to, the mails, interstate telephone communications, and the facilities of the national

securities markets.

PARTIES

14. Plaintiff purchased Health Management common stock during the Class Period,

as set forth in the certification attached hereto.

15. Defendant Health Management owns and operates general acute care

hospitals in non-urban communities located throughout the United States. Upon completion of

the sale of Mountain View Regional Medical Center and Lee Regional Medical Center, HMA

will operate 59 hospitals in 15 states with approximately 8,500 licensed beds. Health

Management's executive offices are located at 5811 Pelican Bay Boulevard, Naples, Florida.

The Company's shares are registered and trade on the New York Stock Exchange under the

symbol HMA. As of February 23, 2007, there were 242,115,863 shares of our common stock

held by approximately 955 record holders

16. Defendant William J. Schoen has served as Chairman of the Board of Directors

since April 1986. He joined Board of Directors in February 1983, became President and Chief

Operating Officer in December 1983, Co-Chief Executive Officer in December 1985 and Chief

Executive Officer in April 1986. He served as President until April 1997 and Chief Executive

Officer until January 2001. According to the 2007 Proxy Statement filed with the SEC on April

13, 2007, as of March 23, 2007 Defendant Schoen beneficially owned 10,455,484 shares of the

company's common stock. According to that Proxy Statement, this amount includes: (a)

4,026,340 shares issuable upon exercise of presently exercisable options; (b) an aggregate of

6,055,837 shares held by various trusts of which Mr. Schoen is settlor, trustee and/or beneficiary;

(c) 7,519 shares held in Mr. Schoen's account under the company's Retirement Savings Plan, as

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to which shares he has investment power only; and (d) 365,788 shares held by the Schoen

Foundation, of which Mr. Schoen is Chairman.

17. Defendant Joseph V. Vumbacco became Chief Executive Officer and Vice

Chairman in January 2001 and January 2006, respectively. On May 29, 2007, the Company

announced that defendant Vumbacco had been replaced as CEO, and would thereafter be serve

as Vice Chairman of the board and "assume new responsibilities including consulting on

construction projects, legal issues and Federal and state governmental relations." He was

President from April 1997 to December 2005. He also previously served as our Chief

Administrative Officer and our Chief Operating Officer. According to the 2007 Proxy Statment

filed with the SEC on April 13, 2007, as of March 23, 2007 Defendant Vumbacco beneficially

owned 1,500,212 shares of the company's common stock. That number includes: (a) 629,116

shares issuable upon exercise of presently exercisable options; (b) 23,064 shares held in Mr.

Vumbacco's account under the company's Retirement Savings Plan, as to which shares he has

investment power only; (c) 236,634 shares held by Mr. Vumbacco individually; and (d) 611,398

shares held jointly by Mr. Vumbacco and his wife, except for a small portion of shares within a

self-directed IRA in which Mr. Vumbacco has the sole power of disposition. Defendant

Vumbacco sold 862,165 shares on Feb. 5, 2007 for proceeds of $17 million.

18. Defendant Robert E. Farnham became Senior Vice President and Chief Financial

Officer in March 2001. He joined the Company in 1985 and previously served as our Senior

Vice President and Controller. According to the 2007 proxy statment filed with the SEC on

April 13, 2007, as of March 23, 2007 Defendant Farnham beneficially owned 607,082 shares of

the company' s common stock This number includes: (a) 503,294 shares issuable upon exercise

of presently exercisable options; (b) 76,502 shares held by Mr. Farnham individually ; (c) 8,739

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shares held jointly by Mr. Farnham and his wife; and (d) 18,547 shares held in Mr. Farnham's

account under the company's Retirement Savings Plan, as to which shares he has investment

power only.

19. Defendants Vumbacco, Schoen, and Farnham are herein collectively referred to as

the "Individual Defendants." Each of the Individual Defendants is or was a member of Health

Management's Executive Committee.

20. The Individual Defendants, who were the Company's principal officers,

controlled Health Management and its public disclosures. Each of them made false and

misleading statements and/or failed to disclose material adverse information concerning the

Company's business and operations during the Class Period, as detailed herein. Because of the

Individual Defendants' positions with the Company, they had access to the adverse undisclosed

information about its business, operations, products, operational trends, financial statements,

markets, and present and future business prospects via access to internal corporate documents

(including the Company's 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/or Board of Directors meetings and committees thereof, and via

reports and other information provided to them in connection therewith.

21. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false, misleading and incomplete information conveyed in the

Company's public filings, press releases and other publications, as alleged herein, were the

collective actions of the narrowly defined group of Defendants identified above. Each of the

above officers and/or directors of Health Management, by virtue of their high level positions

with the Company, directly participated in the management of the Company, was directly

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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, financial statements, and financial condition, as alleged herein. Said

Defendants were involved in drafting, producing, reviewing and/or disseminating the false and

misleading statements and information alleged herein, were aware or deliberately disregarded

that the false and misleading statements were being issued regarding the Company, and approved

or ratified these statements in violation of the federal securities laws.

22. As officers and/or directors and controlling persons of a publicly held company

whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded

on the NYSE, and governed by the provisions of the federal securities laws, the Individual

Defendants each had a duty to disseminate promptly accurate and truthful information with

respect to the Company's financial condition and performance, growth, operations, financial

statements, business, products, markets, management, earnings, and present and future business

prospects, and to correct any previously issued statements that had become materially misleading

or untrue, so that the market price of the Company's common stock would be based upon truthful

and accurate information. The Individual Defendants' misrepresentations and omissions during

the Class Period violated these specific requirements and obligations.

23. The Individual Defendants participated in the drafting, preparation and/or

approval of the various public, shareholder and investor reports and other communications

complained of herein, and were aware of, or deliberately disregarded, the misstatements

contained therein and omissions therefrom, and were aware of their materially false and

misleading nature. Because of their Board membership and/or executive and managerial

positions with Health Management, each of the Individual Defendants had access to the adverse,

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undisclosed information about the Company's operations, the financial condition and

performance of the Company as particularized herein and knew (or deliberately disregarded) that

these adverse facts rendered the positive representations made by or about Health Management

and its business issued or adopted by the Company materially false and misleading.

24. 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 pertaining to the Company during the

Class Period. Each Individual Defendant was provided with copies of the documents alleged

herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the

Individual Defendants is responsible for the accuracy of the public reports and releases detailed

herein and are therefore primarily liable for the representations contained therein.

25. Each of the Defendants is liable as a participant in a wrongful scheme and course

of business that operated as a fraud or deceit on those who purchased or otherwise acquired

Health Management common stock during the Class Period by disseminating materially false

and misleading statements and/or concealing material adverse facts. The scheme deceived the

investing public regarding Health Management's business, operations, and the intrinsic value of

the Company's common stock, and caused plaintiff and other members of the Class to purchase

Health Management common stock at artificially inflated prices.

CLASS ALLEGATIONS

26. Plaintiff brings this as a class action pursuant to Federal Rule of Civil Procedure

23(a) and (b)(3) on behalf of all persons who purchased Health Management securities during

the Class Period. Excluded from the Class are Defendants, officers and directors of the

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Company, members of the immediate families of the Individual Defendants and each of their

legal representatives, heirs, successors or assigns and any entity in which any Defendant has or

has had a controlling interest.

27. This action is properly maintainable as a class action because:

a. the members of the proposed Class in this action are dispersed throughout

the United States and are so numerous that joinder of all Class members is impracticable. While

the exact number of Class members is unknown to Plaintiff at this time and can only be

ascertained through appropriate discovery, Plaintiff believes that Class members number in the

thousands. Millions of Health Management common stock is traded publicly during the Class

Period on the NYSE under the symbol "HMA". As of February 23, 2007, there were

242,115,863 shares of our common stock held by approximately 955 record holders, and many

more beneficial owners.

b. Plaintiffs claims are typical of those of all members of the Class because

all have been similarly affected by Defendants' actionable conduct in violation of federal

securities laws as alleged herein;

c. Plaintiff will fairly and adequately protect the interests of the Class and

has retained counsel competent and experienced in class action litigation. Plaintiff has no

interests antagonistic to, or in conflict with, the Class that Plaintiff seeks to represent;

d. A class action is superior to other available methods for the fair and

efficient adjudication of the claims asserted herein because joinder of all members is

impracticable. Furthermore, because the damages suffered by individual members of the Class

may be relatively small, the expense and burden of individual litigation make it virtually

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impossible for Class members to redress the wrongs done to them. The likelihood of individual

Class members prosecuting separate claims is remote;

e. Plaintiff anticipates no unusual difficulties in the management of this

action as a class action; and

f. The questions of law and fact common to the members of the Class

predominates over any questions affecting individual members of the Class.

28. Among the questions of law and fact common to the Class are:

a. whether Defendants' acts and/or omissions as alleged herein violated the

federal securities laws;

b. whether the Company's Class Period public statements and filings

misrepresented and/or omitted material facts;

c. whether Defendants acted with knowledge or with reckless disregard for

the truth in misrepresenting and/or omitting material facts;

d. whether Defendants participated in and pursued the common course of

conduct complained of herein;

e. whether the market price of Health Management securities was inflated

artificially as a result of Defendants' material misrepresentations and/or omissions during the

Class Period; and

f, to what extent the members of the Class have sustained damages and the

proper measure of damages.

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SUBSTANTIVE ALLEGATIONS COMMON TO ALL COUNTS

29. On January 17, 2007 Health Management announced a recapitalization of its

balance sheet designed to deliver immediate value to its shareholders while enabling them to

participate in the Company's future growth. The press release stated as follows:

As part of the recapitalization, HMA will return approximately $2.4 billion toshareholders through a $10.00 per share one-time special cash dividend.

The special dividend is payable on March 1, 2007 to shareholders of record onFebruary 27, 2007, and HMA's common stock will start trading on the ex-dividend basis beginning on March 2, 2007, the date after the payment date, inaccordance with NYSE listing rules. Shareholders who sell their shares prior to oron the payment date of March 1, 2007 will also be selling their right to receive thespecial cash dividend. Shareholders are advised to contact their financial advisorbefore selling their shares.

30. Defendant Vumbacco said, "The recapitalization we are initiating today enables

HMA to deliver value to shareholders, while continuing to fulfill our commitment to invest in

our hospitals to ensure their ability to provide the highest quality of care to patients and service

to our physicians and communities. We are capitalizing on current capital market conditions,

which. present attractive debt financing options for strong, well-managed companies. We believe

our plan represents a prudent and efficient use of our balance sheet capacity that will enable

HMA to continue generating sustainable free cash flow to meet our capital needs and growth

objectives."

31. The January 17, 2007 press release further stated that Health Management would

recapitalize its balance sheet through $3.25 billion of new senior secured credit facilities,

including the refinancing of amounts outstanding under the Company's current revolving line of

credit.

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32. William J. Schoen, Chairman of the Board, said, "Our Board of Directors and

executive leadership have been engaged in a thoughtful, strategic process to explore a number of

alternatives designed to consider the current realities of the capital marketplace and to determine

how best to deliver value to our shareholders while best positioning our hospitals and our

company for future success - clinically, operationally, and financially. We ultimately reached

three central conclusions: (1) We will shift our sources of capital away from equity and toward

debt, because the debt capital markets currently comprise a more attractive source. (2) We will

reinforce and strengthen our ability to meet all existing commitments and known future

opportunities to invest capital in our hospitals and communities; this will ensure that we continue

to provide the best possible care to patients, service to our physicians, and growth for our

organization. (3) We will issue a one-time dividend as our means of returning excess capital to

the shareholders; this will give our existing shareholders the opportunity to continue participating

in the Company's future performance and growth. We believe the transaction we have chosen

will best support these central conclusions and thus best benefit our patients, our physicians, and

the communities we serve, as well as our shareholders and employees."

33. As part of this announcement to show how the Company and its prospects had

improved, the press release detailed "preliminary financial objectives" which included bad debt

expense as a percentage of revenue in the 5-6% range, and earnings per share of 61-71 cents.

Defendants knew that such rosy numbers were essential to its ability to borrow to effect the

Recapitalization, but that the assumptions underlying such numbers could not possibly be met.

Such stated goals could only be achieved through accounting sleight-of-hand and, as will be

shown, the facade created by defendants lasted for a single fiscal quarter (that ending March 31,

2007), and collapsed completely in the next fiscal quarter, ending June 30, 2007.

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34. In February 2007, Health Management began reserving discounted self-pay

receivables at 60%. Prior to this time is reserved 75% of uninsured amounts. Also, on Feb. 22,

2007, the Company reiterated its "objectives" for 2007, including bad debt expense of 5-6%, and

earnings now increased to 71-81 cents per share.

35. As of March 31, 2007, $2.75 billion of the new $3.25 billion senior secured credit

facilities was outstanding.

36. On April 24, 2007 Health Management announced its consolidated financial

results for the three months ended March 31, 2007. For the period, HMA reported net operating

revenue of $1,143.5 million; earnings before interest, income taxes, depreciation, amortization,

refinancing and debt modification costs and after minority interest ("EBITDA") of $193.9

million ; net income of $65. 0 million; income from continuing operations of $65. 7 million; and

both diluted earnings per share ("EPS") and diluted EPS from continuing operations of $0.27.

With the Recapitalization behind it, the Company now admitted that its previously announced

bad debt reduction goals would not completely be met, that bad debt would be 7.5% to 8.5% of

revenues, but that-happily-"All remaining fiscal year 2007 objectives previously announced

on February 22, 2007 remain unchanged," and that new bad debt policies would nonetheless

reduce bad debt expense by $100-150 million . With earning projections unchanged and

substantial bad debt reduction still expected, the stock remained at artificially inflated prices.

37. During the first quarter of 2007 Health Management revised its charity/indigent

care policy such that beginning in January 2007, only those uninsured accounts for which the

patient meets poverty guidelines are being written off as charity/indigent . Charity/indigent care

writeoffs for the first quarter ended March 31, 2007 were $26.2 million compared to $142.4

million for the same quarter o the previous year.

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38. During January 2007 Health Management continued its newly implemented bad

debt reserve policy of reserving 75% of uninsured accounts. In February 2007, in conjunction

with the adoption of its discount program, HMA began reserving discounted self-pay receivables

at 60%. Bad debt expense for the first quarter increase to $121.5 million compared to $82.7

million for the same quarter a year ago. The sum of uninsured discounts, charity/indigent

writeoffs and bad debt expense, as a percent of the sum of net operating revenue, uninsured

discounts and charity/indigent write-offs, totaled 20.6% for the first quarter ended March 31,

2007 compared to 19.5% for the same quarter a year ago, and 20.7% for the quarter ended

December 31, 2006.

39. On July 31, 2007 , Health Management announced its consolidated financial

results for the second quarter ended June 30, 2007. For the second quarter ended June 30, 2007,

HMA reported net operating revenue of $1,099.2 million ; earnings before interest , income taxes,

depreciation, amortization, refinancing and debt modification costs and after minority interest

("EBITDA") of $137.0 million; net income of $11.9 million ; income from continuing operations

of $13.1 million; and both diluted earnings per share (`BPS") and diluted EPS from continuing

operations of $0.05. Included in these results is approximately $39.0 million, or approximately

$0.10 per diluted share, of bad debt expense recorded as an additional reserve to reflect a recent

decline in collectibility of accounts receivable from uninsured patients, and a $2.9 million, or

approximately $0.01 per diluted share, gain on the sale of certain home health assets.

40. The July 31, 2007 press release stated as follows (emphasis supplied):

NAPLES, Fla.--(BUSINESS WIRE)--July 31, 2007--Health Management

Associates, Inc. (NYSE:HMA) announced its consolidated financial results for

the second quarter ended June 30, 2007. For the second quarter ended June 30,

2007, HMA reported net operating revenue of $1,099.2 million; earnings before

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interest, income taxes, depreciation, amortization, refinancing and debtmodification costs and after minority interest ("EBITDA") of $137.0 million; netincome of $11.9 million; income from continuing operations of $13.1 million; andboth diluted earnings per share ("EPS") and diluted EPS from continuingoperations of $0.05. Included in these results is approximately $39.0 million, orapproximately $0.10 per diluted share, of bad debt expense recorded as anadditional reserve to reflect a recent decline in collectibility of accountsreceivable from uninsured patients, and a $2.9 million, or approximately $0.01per diluted share, gain on the sale of certain home health assets.

HMA updated its fiscal 2007 diluted EPS from continuing operations objectiverange to be between $0.45 and $0.50 to reflect increased uninsured volumes, adeterioration in the collectibility of accounts receivable related to those uninsuredvolumes, and lower than anticipated overall paying volumes. This new EPSobjective is based on a net operating revenue objective range of $4.3 to $4.5billion , same hospital admissions from continuing operations experiencing nogrowth from 2006 and bad debt expense as a percentage ofnet operating revenueofapproximately 12%for the remainder offiscal year 2007.

Compared to the same quarter a year ago , net operating revenue and net operatingrevenue per adjusted admission from continuing operations at hospitals ownedand operated by HMA for one year or more, referred to as same hospitals,increased 7.1% and 5 . 0%, respectively . Compared to the same quarter a year ago,same hospital admissions from continuing operations increased 0.4%, samehospital adjusted admissions from continuing operations increased 2.0%, samehospital surgeries from continuing operations decreased 1.6% and same hospitalemergency room visits from continuing operations increased 2.0%.

HMA's same hospital EBITDA from continuing operations for the second quarterwas $164.3 million and HMA's same hospital EBITDA margin from continuingoperations was 16.0%. Consolidated EBITDA from continuing operations for thesecond quarter was $137.0 million, and cash flow from continuing operatingactivities was $146.9 million, which includes cash interest and cash tax paymentsaggregating $75.0 million. Excluding the additional bad debt reserve and the gainon sale of assets described previously, same hospital EBITDA from continuingoperations for the second quarter would have been $198.3 million and samehospital EBITDA margin from continuing operations would have been 19.3%.Additional disclosure regarding EBITDA follows the financial statementsincluded with this press release.

During the second quarter, the results of operations from four hospitals(Southwest Regional Medical Center, located in Little Rock, Arkansas; Summit

Medical Center, located in Van Buren, Arkansas; Lee Regional Medical Center,

located in Pennington Gap, Virginia and Mountain View Regional Medical

Center, located in Norton, Virginia) were accounted for as assets held-for-sale and

prior periods have been reclassified. After-tax losses from assets held-for-sale

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Case 2 : 07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 of 29

totaled $1.2 million during the second quarter of 2007. The results of operationsfrom Williamson Memorial Hospital, located in Williamson, West Virginia hadpreviously been accounted for as an asset held-for-sale. As of June 30, 2007, theresults of operations from Williamson are included in continuing operations andits results in prior periods have been reclassified.

Net operating revenue from all continuing operations for the second quarterincreased 10.3%, total admissions from continuing operations grew 2.8%, andtotal adjusted admissions from continuing operations grew 4.0%, in each case ascompared to the same quarter a year ago, reflecting the admissions contributionfrom hospitals acquired by HMA during fiscal year 2006, as well as thecommencement of operations at HMA's de novo general acute care hospital,which opened during the first quarter ended March 31, 2007.

For the six months ended June 30, 2007, HMA reported net operating revenue of$2,237.0 million; EBITDA of $328.8 million; net income of $76.9 million;income from continuing operations of $78.0 million; and both diluted EPS anddiluted EPS from continuing operations of $0.31.

Commencing in February 2007, HMA began discounting its gross charges fornon-elective services by 60% for uninsured patients. Uninsured discounts for thequarter ended June 30, 2007 approximated $153.3 million compared to $117.1million for the quarter ended March 31, 2007.

HMA's charity/indigent care write-offs for the second quarter ended June 30,2007 were $18.5 million compared to $140.4 million for the same period a yearago, and $26.2 million for the first quarter ended March 31, 2007.

During January 2007, HMA continued its newly implemented bad debt reservepolicy of reserving 75% of uninsured accounts. In February 2007, in conjunctionwith the adoption of its 60% discount program, HMA began reserving thosediscounted self-pay receivables at 60%. The combination of the 60% discountpolicy and the 60% bad debt reserve on the discounted self-pay receivablesresulted in an overall discount/reserve of 84% of gross charges. Both policies

were based on the current collection experience at the time.

HMA has performed a look-back analysis since the new discount policy went intoeffect in February 2007. The results of this look-back analysis now indicate that

HMA is experiencing a deterioration in the collectibility of its accounts receivable

from uninsured patients. The deterioration noted relates to the overall

collectibility of receivables from uninsured patients, and to patients billed at

discounted amounts who may have been written off as charity care under the

Company's previous policy, based on their inability to pay the previouslyundiscounted gross charges.

Effective July 1, 2007, HMA has updated its existing bad debt reserve policy to

reflect a change in estimate of the collectibility of its self-pay receivables. The

Company will now record incremental reserves as the receivables age, until they

are fully reserved or collected. HMA believes that updating its bad debt reserve

17


policy and adding additional bad debt reserves is prudent given the results of itsrecent look-back review.

Bad debt expense for the second quarter was $150.6 million compared to $90.1million for the same period a year ago, and $121.2 million for the first quarterended March 31, 2007.

The sum of uninsured discounts, charity/indigent write-offs and bad debt expense,as a percent of the sum of net operating revenue, uninsured discounts andcharity/indigent write-offs, totaled 25.4% for the second quarter ended June 30,2007 compared to 20.3% for the same quarter a year ago and 20.6% for the firstquarter ended March 31, 2007.

41. The Company now expects 2007 earnings from continuing operations of 45 cents

to 50 cents per share on revenue of $4.3 billion to $4.5 billion, versus a prior profit range of 71

cents to 81 cents per share on revenue of $4.1 billion to $4.3 billion. The guidance assumes no

growth in same hospital admissions from 2006 and bad debt expense as a percentage of net

operating revenue of approximately 12 percent for the rest of 2007, up from a prior range of 7.5

percent to 8.5 percent of revenue.

42. In reaction to these unexpected revelations, Health Management stock fell to

$10.65, from $8.06 just a one day with over 31 million traded. An article in TheStreet.com on

July 31, 2007, described the harm defendants' machinations had caused the Company, noting

that: "experts calculate, HMA has a cash balance of just $110 million -- with earnings on the

decline -- and a huge long-term debt balance totaling some $3.7 billion." CRT Capital Group

Sheryl Skolnick questioned whether Health Management's claimed results for the second quarter

were real, or reflected yet further manipulation of cash flow from operation (CFFO), a vital

measure of the financial viability of a highly-leveraged company. In that same article in

TheStreet.com, analyst Skolnick was quoted as observing:

"As we examined the 2Q07 results, we noted extensive use of the balance sheet tocreate cash flow from operations - something we have been very concerned aboutin the past," wrote Skolnick, whose firm also makes a market in HMA's securities.

18

Case 2 :07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 of 29

"The 'delta' of balance sheet items this year versus last year was a cash inflow of$62 million . As liabilities can be used to create cash flows ONLY in the shortterm , we deem the reported CFFO for 2Q07 of poor and unsustainable quality."

43. For the foregoing reasons, Plaintiff seeks damages for himself and for the Class

for violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule

IOb-5 thereunder.

19


ADDITIONAL SCIENTER ALLEGATIONS

44. As alleged herein, Defendants acted with scienter in that Defendants knew that

the public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of the

federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their

receipt of information reflecting the true facts regarding Health Management, their control over,

and/or receipt and/or modification of Health Management's allegedly materially misleading

misstatements and/or their associations with the Company which made them privy to

confidential proprietary information concerning Health Management, participated in the

fraudulent scheme alleged herein.

LOSS CAUSATION/ECONOMIC LOSS

45. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the price of Health

Management stock and operated as a fraud or deceit on Class Period purchasers of Health

Management stock by concealing the true facts concerning the bad debt reserves. When

Defendants' prior misrepresentations and fraudulent conduct were disclosed and became apparent

to the market, the price of Health Management stock fell precipitously as the prior artificial

inflation came out. As a result of their purchases of Health Management stock during the Class

Period, Plaintiff and the other Class members suffered economic loss, i.e., damages under the

federal securities laws.

20


46. Defendants' false and misleading statements had the intended effect and caused

Health Management common stock to trade at artificially inflated levels throughout the Class

Period.

47. As a direct result of the announcements in July 31, 2007, the price of Health

Management stock price fell precipitously. These stock price drops removed the inflation from

the price of Health Management stock causing real economic loss to investors who had

purchased the Company's common stock during the Class Period.

48. The over 25% decline in the price of Health Management common stock after

these disclosures and partial disclosures came to light was a direct result of the nature and extent

of Defendants' fraud finally being revealed to investors and the market. The timing and

magnitude of Health Management stock price decline negates any inference that the loss suffered

by Plaintiff and the other Class members was caused by changed market conditions,

macroeconomic or industry factors or Company-specific facts unrelated to the defendants'

fraudulent conduct.

49. Plaintiff and the other Class members was a direct result of Defendants'

fraudulent scheme to artificially inflate the prices of Health Management stock and the

subsequent significant decline in the value of Health Management stock when Defendants' prior

misrepresentations and other fraudulent conduct were revealed.

APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE

50. The market for Health Management ' s securities was open, well-developed and

efficient at all relevant times. As a result of these materially false and misleading statements and

failures to disclose, Health Management's securities traded at artificially inflated prices during

21


the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired

Health Management securities relying upon the integrity of the market price of Health

Management's securities and market information relating to Health Management, and have been

damaged thereby.

51. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of Health Management ' s securities , by publicly issuing false and

misleading statements and omitting to disclose material facts necessary to make defendants'

statements, as set forth herein, not false and misleading. Said statements and omissions were

materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about the Company, its business and operations, as alleged herein.

52. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiff and other 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 Health Management's business, prospects and operations. These material

misstatements and omissions had the cause and effect of creating in the market an unrealistically

positive assessment of Health Management 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

plaintiff and other members of the Class purchasing the Company's securities at artificially

inflated prices, thus causing the damages complained of herein.

53. At all relevant times, the market for Health Management's securities was an

efficient market for the following reasons, among others:

22


(a) Health Management's stock met the requirements for listing, and was

listed and actively traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, Health Management filed periodic public reports

with the SEC; and

(c) Health Management regularly communicated with public investors by

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. Health Management also was a frequent presented at conferences attended

and monitored by stock analysts in the United States.

54. As a result of the foregoing, the market for Health Management's securities

promptly digested current information regarding Health Management from all publicly available

sources and reflected such information in Health Management's stock price. Under these

circumstances, all purchasers of Health Management's securities during the Class Period

suffered similar injury through their purchase of Health Management's securities at artificially

inflated prices and a presumption of reliance applies.

COUNT I

For Violations of Sections 10(b) ofThe Exchange Act And Rule 10b-5

55. Plaintiff repeats and realleges paragraphs 1 through 59 as if set forth fully herein.

56. In connection with the sale of Health Management securities throughout the Class

Period, Defendants participated, directly or by acquiescence, despite a duty to act, in the

preparation and/or issuance of materially false and misleading statements and omissions.

23


57. Defendants knew, or were reckless in not knowing, that the statements contained

in Health Management public filings and press releases were materially false and misleading.

Plaintiff and the Class relied, directly or indirectly by reliance on the integrity of the market, on

Defendants' misstatements and/or omissions and were damaged as a result. But for Defendants'

misrepresentations and/or omissions, Plaintiff and the Class would not have purchased Health

Management securities or would have purchased them at non-artificially inflated prices.

COUNT II

For Violation Of Section 20(a) Of The Exchange Act(Against the Individual Defendants, as defined below)

58. Plaintiff repeats and realleges each of the preceding paragraphs 1 through 62 as if

fully set forth herein.

59. This claim is brought against the Individual Defendants.

60. The Individual Defendants were control persons within the meaning of the

Exchange Act.

61. As set forth above, these Defendants violated Section 10(b) of the Exchange Act,

and Rule 10b-5, by their acts and omissions as alleged in this complaint . By virtue of their

positions as control persons, the Section 20(a) Defendants, each of whom violated Section 10(b)

and Rule I Ob-5, are liable pursuant to Section 20(a) of the Exchange Act.

62. As a direct and proximate result of the Individual Defendants' wrongful conduct,

Plaintiff and the Class suffered damages in connection with their purchases of the Company's

securities during the Class Period.

NO SAFE HARBOR

63. 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.

24


The statements alleged to be false and misleading herein all relate to then-existing facts and

conditions. In addition, to the extent certain of the statements alleged to be false may be

characterized as forward looking, they were not identified as "forward-looking statements" when

made, there was no statement made with respect to any of those representations forming the basis

of this Complaint that actual results "could differ materially from those projected," and there

were no meaningful cautionary statements identifying important factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements. In the

alternative, to the extent that the statutory safe harbor is intended to apply to any forward-looking

statements pleaded herein, Defendants are liable for those false forward-looking statements

because at the time each of those forward-looking statements was made, the speaker had actual

knowledge that the forward-looking statement was materially false or misleading, and/or the

forward-looking statement was authorized or approved by an executive officer of Health

Management who knew that the statement was false when made.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff, on behalf of himself and all other Class members, prays for

judgment as follows:

A. A determination that this action is a proper class action and a

certification of the Class under Rule 23 of the Federal Rules of Civil Procedure;

B. An award of compensatory damages in favor of Plaintiff and the

other Class members against all Defendants for damages sustained as a result of

Defendants' wrongdoing, including interest thereon;

25


C. An award to Plaintiff and the Class of their reasonable costs and

expenses incurred in this action, including counsel fees, expert fees and other

disbursements; and

D. A grant of such other relief as the Court may deem just and proper.

JURY DEMAND

Plaintiff demands a trial by jury.

Dated : August 2, 2007

SAXENA WHITE P.A.

By: H Ot..s ?Maya S enaFla. B No . [email protected] E . White IIIFla. Bar No . [email protected] N. Federal Highway, Suite 257Boca Raton, FL 33431Tel.: 561-394-3399Fax: 561-394-3382

ABBEY SPANIER RODD & ABRAMS, LLPNancy Kaboolian, Esq. (NK 6346)212 East 39th StreetNew York, NY 10016Tel: 212 889-3700Fax: 212 684-5191

PASKOWITZ & ASSOCIATESLaurence D. Paskowitz, Esq. (LP-7324)60 East 42nd St., 46th FloorNew York, NY 10016Tel: 212 685-0969Fax: 212 685-2306

ROY JACOBS & ASSOCIATESRoy L. Jacobs

26


60 East 42nd Street ; 46th FloorNew York, NY 10165Tel: 212 867-1156Fax: 212 504-8343

27


CERTII{ICATION OF LEAD PLAINTIFFP_ITRSIIANT TO FEDTJAL SWIJRITIWS LAWS

I Florence G. Cole , declare as follows:

1. T have reviewed a copy of the complaint filed in this action.

2. I did not purchase the security that is the subject of this action [Health Management Associates Inc.: NYSE: HMA] at the directionof counsel or in order to participate in any private action arising under the Private Securities Litigation Reform Act (the "PSLRA").

3. [am willing to serve as a representative party on behalf of a class and will testify at deposition and trial, ifnecessary.

4. My transactions in the security that is the subject of this litigation during the class period set forth in the complaint are as follows;

Security

(Conunon stock, Call,

Put Bonds

Transaction

(Purchase/Sale)Quantity Trade Date Price Per Share/

Security

IIMA PURCHASE 500 02112/2007 $19.97

*List additional transactions on a separate sheet of paper, if necessary. If the securities were purchased by joint owners, please providethe above information for the co-owner.

5. I have not served as or sought to serve as a representative party on behalf of a class during the last three years, except as stated herein:

6. 1 will not accept any payment for serving as a representative party, except to receive my pro rata share of any recovery or as ordered orapproved by the court or any award to me by the Court of reasonable costs and expenses (including lost wages) directly relating to myrepresentation of the class.

I declare under penalty ofperjury that the foregoing is true and correct.

Dated: August t, 2007 Signed : XIV/ Flnr .nee G. Cole

Print Name: FLORENCE G. COLE


Address, City, State, Zip Code: 10050 Hollowbrook Drive, Pensacola , FL 32514

Telephone No.: 850-316-8577

Business 'Telephone No. (if applicable):

Telecopier No. (if applicable):

]-mail address (if applicable): [email protected]

If the securities were purchased by joint owners, please provide the above information for the co-owner.

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florence cole, et al. v. health management associates, inc...

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