In Re: Odyssey Healthcare, Inc. Securities Litigation 04...

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXA S

DALLAS DIVISION

In re ODYSSEY HEALTHCARE, INC .SECURITIES LITIGATION

§ Civil Action No . 3 :04-CV-0844-N

§ CLASS ACTION

§ DEMAND FOR JURY TRIAL

This Document Relates To :

ALL ACTIONS.

AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF §§10(b) AND 20(a)OF THE SECURITIES EXCHANGE ACT OF 1934

INTRODUCTION

1 . This is a class action brought on behalf of all persons who purchased Odysse y

HealthCare, Inc. ("Odyssey" or the "Company") common stock between May 5, 2003 an d

October 8, 2004, inclusive (the "Class Period") . This case is about defendants engaging in Medicar e

fraud to create the appearance of profitability and rapid growth at Odyssey while at the same tim e

selling off their own stock at record high prices . Odyssey and the defendants publicly issued fals e

and misleading statements to the investment community about Odyssey's earnings, compliance wit h

applicable Medicare laws, rules and regulations and prospects for future growth. The information

provided by defendants to investors was knowingly false and misleading when issued and had th e

purpose and effect of artificially inflating the market price of Odyssey common stock during th e

Class Period .

2 . Odyssey provides hospice care services to terminally-ill patients and their families .

During 2001 and 2002, Odyssey grew rapidly acquiring existing and opening new hospice car e

centers in several states, which resulted in Odyssey reporting increased revenues, net income an d

earnings per share ("EPS") . As a result, Odyssey stock was a strong performer .

3 . However, by early 2003, Odyssey's business had begun to slowdown as competitio n

in the hospice care sector increased . To overcome this situation, defendants began committin g

Medicare fraud to falsely inflate Odyssey's earnings. Defendants embarked upon a scheme tha t

involved the adoption of a number of unlawful and improper patient admissions, patient retentio n

and billing practices . For example, to artificially inflate the Company's revenues , Odyssey billed

Medicare for services that were never rendered to hospice patients and their families, thereb y

artificially inflating Odyssey's revenues and drastically decreasing its expenses . Odyssey also

routinely admitted patients who were not eligible for hospice care because theyhad a life expectancy

of more than six months . Similarly, when doctors refused to recertify admitted patients as eligibl e

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for hospice care, Odyssey refused to timely discharge them, thereby allowing the Company to bil l

for and receive payment for services rendered to patients who were not eligible for hospice care .

Moreover, since Odyssey recognized revenue on hospice care services in the first month received ,

the Company was able to retain the improper payments for at least 30-90 days, thereby artificially

inflating the Company's revenues and financial results in violation of GAAP .

4. To mask the Medicare fraud and paint a legitimate face on the Company's illega l

earnings, defendants accelerated Odyssey's expansion program and stepped up its patient referra l

and retention efforts. Notwithstanding the fact that this expansion was riddled with operationa l

challenges, defendants falsely represented that Odyssey was pursuing a well-planned strategy o f

expansion, which would result in steady revenue, net income and EPS growth. Additionally,

defendants represented to investors that Odyssey's centralized operations and information system s

were robust enough to sustain the Company's rapid growth without compromising the quality of it s

hospice services or patient care; that Odyssey was successfully integrating the acquisitions that i t

was making into its business without any problems ; and that Odyssey had professionally traine d

community education representatives who specialized in educating the medical community about th e

benefits hospice care and Odyssey services, thereby increasing patient referrals to Odyssey an d

increasing its revenues and earnings . Thus, according to defendants, Odyssey's expansion program

and highly centralized and closely monitored business model would contribute significantly t o

Odyssey reporting annual earnings growth of 30+%, and FY03 EPS of $1 .20-$1 .25 per share and

FY04 EPS of $ 1 .50-$1 .60 per share , respectively.

As a result of the positive image created by defendants of the Company's illegal

earnings and business prospects, securities analysts repeatedly issued "strong buy," "buy," "marke t

overweight," and "market outperform" recommendations emphasizing Odyssey's ongoing growt h

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and strong growth prospects . For example, a Stifel, Nicolaus & Company analyst, based o n

information provided by defendants and with their approval, stated on May 6, 2003 :

Odyssey exceeds our March quarter estimates on every front, with EPS $0 .03better at $0.29 vs. $0.16 prior . Importantly, staffing utilization remains excellent,and the company is on track with its 2003 expansion plans . Strong Buy, $37 [price]target .

We like Odyssey's balanced approach to growth, with a steady blend of smallacquisitions and new office openings, never biting off more than they canchew. We see this strategy as an effective way to maintain momentum in therace for new patients and in maintaining strong operating margins .

At 22x 2003 estimates , and with more than a 25% discount to its growth rate , ODSY shares remain

attractively priced . Strong Buy.

6 . Similarly, based on information provided by defendants and with their approval, S G

Cowen wrote on November 5, 2003 :

Odyssey Health Care : Strong BuyAcquisition Pace Running Ahead Of Our 2003 Thinkin g

Odyssey has completed seven acquisitions this year with ADC of 517, wellahead of the 300 ADC we expected initially this year. The largest, Heritage Hospicein Utah, had ADC of 280 . Management continues to seek acquisitions of many sizes .On the development side, Odyssey has received Medicare certifications for seven ofthe eight offices planned for 2003 : Cleveland, OH; Toledo ; OH, Cincinnati, OH ;Philadelphia, PA; Mobile, AL; Memphis, TN; Portland, OR and Richmond, VA.

Further, a SunTrust Robinson Humphrey analyst, based on information provided b y

defendants and with their approval, stated on December 19, 2003 :

ODSY : Initiating Coverage with Overweight Rating

Initiating coverage with Overweight rating and establishing a valuation rangeof $35-$36 . Our positive investment thesis is underscored by our belief thatODSY is poised to grow EPS 20%-25%, with the potential for 30%+ growthduring FY04 and FY05 .

Importantly, we believe ODSY's highly-evolved corporate /divisionalin frastructure should position it well to exploit both inte rnal growth

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opportunities, as well as acquisition opportunities in the highly fragmentedhospice sector .

8 . The false image of Odyssey created by defendants ' statements to investors and

securities analysts drove Odyssey's stock price to a Class Period high of $37 .35, while Odyssey' s

insiders sold 969,526 shares of Odyssey stock, reaping more than $24 .1 million in unlawful insider

trading proceeds for themselves. In fact, defendant Richard R. Burnham, Odyssey's Chairman an d

CEO (until January 1, 2004), sold 628,769 shares of his personal Odyssey stock, for proceeds o f

$14.8 million, while Odyssey's next two highest ranking officers, David C . Gasmire (President and

CEO (from January 1, 2004 - October 15, 2004)), and Douglas C . Cannon (Senior Vice President

and CFO), sold 277,011 and 63,746 shares of their personal Odyssey stock, for proceeds of $7 . 7

million and $1 .6 million, respectively .

9. Odyssey' s earnings and defendants ' positive statements , creating the impression that

Odyssey was successfully pursuing an aggressive expansion program which would lead to solid an d

dependable revenue and earnings growth, were false and misleading when made, because defendant s

only achieved these earnings through illegal conduct . Defendants misrepresented and failed to

disclose the material facts detailed in ¶¶47-50, 53-54, 56-59, 62-64, 66-68, 71-72, 74-77, 79- 80, 82-

89, 91-92, 94-98 and 104-107 . In particular, Odyssey was, during the Class Period, experiencing

substantial difficulties in profitably integrating the hospice care centers it was acquiring into

Odyssey's business . Again, to make it appear that Odyssey's business was more profitable than i t

actually was, before and during the Class Period, Odyssey engaged in unlawful patient admission ,

patient retention and billing practices which violated Medicare and Medicaid laws, rules and

regulations . Asa result of these practices, Odyssey has been the subject of a federal investigation b y

the Civil Division of the U .S. Department of Justice ("DOJ") under the False Claims Act for wel l

over a year, rendering defendants' statements about Odyssey's compliance with applicable federa l

and state laws, rules and regulations false and misleading when made .

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10. During the Class Period, defendants were acquiring hospice after hospice and valuing

goodwill and other intangibles at inflated p rices in violation of GAAP to hide operational problem s

they were experiencing with their rapid growth, at the same time they were violating Medicare law s

by admitting patients and retaining patients that did not meet Medicare guidelines and double-billin g

to attain their projected earnings. All this had to stop when the DOJ began its investigation into thi s

very activity. Therefore, without the ability to continue their fraudulent course of conduct (becaus e

the DOJ was on defendants' trail), Odyssey was forced to reveal the true condition of its business .

On October 18, 2003 , Odyssey revealed that its 3rd quarter FY04 EPS would be only $0 .24 per

share, sharply below the levels that defendants had previously misled the market to expect . In

revealing this earnings decline, Odyssey also slashed its EPS estimates for 2004 to $0 .94-$0.96 from

$1 .03-$1 .05 . The Company also announced that Odyssey's President and CEO, defendant Gasmire ,

had abruptly resigned and that Odyssey's Chairman, defendant Burnham, would assume the

additional duties of President and CEO. Additionally, defendants acknowledge on October 18, 2004 ,

that due to the Company's patient admission, patient retention and billing practices since 2000 ,

Odyssey was now under investigation for violations of the False Claims Act by the DOJ . As a result

of these shocking revelations, Odyssey's stock price collapsed, falling nearly 48%, to as low a s

$8 .80 per share, on extraordinarily heavy volume of 22 .4 million shares thereby damaging th e

plaintiff stockholders . Clearly, after the revelation of these facts, investors and analysts believed that

the value of the Company's stock was only half of what it was worth when they were not privy t o

this information.

11 . While defendants profited handsomely from their fraudulent scheme, selling 969,526

shares of their personal Odyssey stock , for $24 .1 million in unlawful insider trading proceeds, Lea d

Plaintiffs and the Class did not . Instead, they suffered tens of millions of dollars in damages as a

result of defendants' alleged misconduct . By this action, Lead Plaintiffs and the Class seek to

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recover damages against defendants for their violations of §§10(b) and 20(a) of the Securitie s

Exchange Act of 1934 (the "1934 Act") and Rule lOb-5 promulgated thereunder by the Securitie s

and Exchange Commission (the "SEC") .

JURISDICTION AND VENU E

12 . This Court has jurisdiction over the subject matter of this action under §27 of the

1934 Act . The claims alleged herein arise under §§10(b) and 20(a) of the 1934 Act, 15 U .S .C .

§§78j(b) and 78t-1, and Rule lOb-5 promulgated thereunder by the SEC .

13. Venue is proper in this District under §27 of the 1934 Act, as many of the false and

misleading statements and omissions allegedly made by defendants were made in or issued from thi s

District . Additionally, Odyssey's principal executive offices are in Dallas, Texas, where defendant s

managed and oversaw Odyssey's daily operations .

THE PARTIES

Lead Plaintiffs

14. (a) Lead PlaintiffMassachusetts Laborers Annuity Fund purchased Odyssey

common stock and was damaged thereby.

(b) Lead PlaintiffAlaska Electrical Pension Fundpurchased Odyssey common

stock and was damaged thereby .

Defendants

15. Defendant Odyssey Healthcare, a Delaware corporation, is headquartered and may

be served at 717 N . Harwood , Suite 1500, Dallas, Texas 75201 . Odyssey's common stock trades i n

an efficient market on the NASDAQ National Market System .

16 . Defendant Richard R. Burnham ("Burnham") was, during the Class Period ,

Chairman and CEO (until January 1, 2004) of Odyssey . Prior to joining Odyssey, Burnham was a

Vice President for Vitas Healthcare, Inc., a hospice care provider . Burnham , as a member of th e

Odyssey's small, insular senior management team , personally guided the Company's expansion-6-

program and oversaw Odyssey's business and financial affairs on a daily basis . Burnham sold

628,769 shares of Odyssey common stock that he owned during the Class Period for prices as hig h

as $32 .56 per share, reaping proceeds of $14 .8 million from insider trading activity . These sale s

were unusual in timing and amount in that they came on the heels of Odyssey's positive earning s

announcements, reporting strong 1st, 2nd and 3rd quarter FY03 results, and while Odyssey stock

traded at prices near its then Class Period highs . Burnham maybe served at 2505 Woodbridge Trail,

Mansfield, Texas 76063 .

17. Defendant David C. Gasmire ("Gasmire") was, during the Class Period, President,

CEO (from January 1, 2004 to October 15, 2004) and Director of Odyssey . Prior to joining

Odyssey, Gasmire was the General Manager and Director of Business Development for Vist a

Healthcare , Inc., a hospice care provider . Gasmire , as a member of Odyssey's small , insular senio r

management team, personally guided the Company's expansion program and oversaw Odyssey' s

business and financial affairs on a daily basis . Gasmire sold 277,011 shares of Odyssey commo n

stock that he owned during the Class Period for prices as high as $30 .68 per share, reaping proceeds

of $7.7 million from insider trading activity . These sales were unusual in timing and amount in that

they came on the heels of Odyssey' s positive earnings announcements , repo rting strong 1st, 2nd and

3rd quarter results, and while Odyssey stock traded at prices near its then Class Period highs .

Gasmire maybe served at 5504 Wilts Court, Plano, Texas 75093 .

18 . Defendant Douglas B. Cannon ("Cannon") was, during the Class Period, Senio r

Vice President, CFO, Assistant Secretary and Treasurer of Odyssey . Prior to joining Odyssey,

Cannon was the CFO of Cornerstone Health Management Company, a specialty provider of geriatri c

services to hospitals and operator of long-term acute hospitals . Cannon, as a member of Odyssey' s

small, insular senior management team, personally guided the Company's expansion program an d

oversaw Odyssey's business and financial affairs on a daily basis . Cannon sold 63,746 shares o f

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Odyssey common stock that he owned during the Class Period for prices as high as $34 .70 per share,

reaping proceeds of $1 .6 million from insider trading activity . These sales were unusual in timing

and amount in that they came on the heels of Odyssey's positive earnings announcements, reportin g

strong 1st, 2nd and 3rd quarter results, and while Odyssey stock traded at near its then Class Perio d

highs. Cannon maybe served at 4728 Yorkshire Trial, Plano, Texas 75093 .

19. Burnham, Gasmire and Cannon were the top executives of Odyssey and members o f

its senior management group . They ran Odyssey as "hands -on" managers , dealing with important

issues facing Odyssey's business and representing to the investing public that they were :

(i) successfully managing its expansion program; (ii) profitably growing Odyssey's business by

providing superior patient care and assistance services ; and (iii) complying with all applicable

Medicare and Medicaid laws, rules and regulations ; thereby enabling the Company to continue t o

report 30% - 33% annual revenue and 35% - 40% net income growth in FY03 and beyond .

20. A key factor in the Odyssey "story" was its ability to expand rapidly by opening new

or acquiring and integrating other hospice care companies, while sequentially reporting strong

revenue and earning growth . As defendants stated in Odyssey's 2003 Report on Form 10-K, "[w] e

intend to expand our business by actively pursuing strategic acquisitions of other hospices in new

and existing markets throughout the United States . We believe that significant opportunities exis t

for growth through acquisitions of hospices . . . . We believe that the fragmented nature of th e

hospice industry, combined with these other factors, provides us with significant opportunities to

grow our business through acquisitions . . . ." To capitalize on these opportunities, defendant s

closely monitored and managed every material aspect of Odyssey's expansion program . As a resul t

of this intense focus, defendants knew or recklessly disregarded that, by the beginning of the Clas s

Period, the Company's earlier growth had overwhelmed the Company's infrastructure and

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management capabilities such that its expansion program would have to be curtailed, if no t

abandoned, leading to lower revenue and earnings growth on a going forward basis .

21 . Nevertheless, at every opportunity during the Class Period, defendants flooded the

market with false positive statements about Odyssey's expansion program and their own ability to

successfully open and/or integrate newly acquired hospice care centers into Odyssey's business ,

thereby increasing Odyssey's overall revenues and earnings . Defendants likewise misrepresented ,

for example, in Odyssey's 2003 report on Form 10-K, dated March 11, 2004, that Odyssey was i n

compliance with all applicable Medicare and Medicaid laws, rules and regulations, stating tha t

Odyssey is "in material compliance with all conditions of participation for the Medicare program s

and all eligibility requirements for the Medicard program," as well as "all applicable federal an d

state fraud and abuse laws," when they knew they were committing Medicare violations .

22. Each defendant is liable for making false statement and for failing to disclose advers e

material facts while selling Odyssey stock or for participating in a fraudulent scheme which operate d

as a fraud or deceit on purchasers of Odyssey common stock . They are also liable for the false

statements pled at ¶¶47, 53-54, 56-57, 62, 66, 71-74, 79, 85-86, 94-95 and 100, as those statements

were each collectively-published information for which defendants were collectively responsible as

officers and directors of the Company, as well as for the false statements pled at ¶¶48, 50, 58-59, 67-

68, 76-77, 80, 83-84, 87-89, 92 and 96-98, as those statements were made by defendants to securities

analysts for the purpose of artificially inflating Odyssey's stock price during the Class Period .

23 . In addition to knowing that their Class Period statements were actually false whe n

made, defendants also had the motive and opportunity to perpetrate the fraudulent scheme an d

course of conduct detailed in ¶¶1-11, 24-103 . Specifically, by artificially inflating Odyssey's stock

price by making it appear that Odyssey was a fast growing company with sustainable growth ,

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Odyssey insiders were able to sell 969,526 shares of their personal Odyssey stock during the Class

Period, pocketing over $24 .1 million in unlawful insider trading proceeds .

DEFENDANTS' FRAUDULENT SCHEME TO DEFRAUDINVESTORS AND SCIENTER

24. Formed in 1996 by defendants Burnham and Gasmire, Odyssey grew rapidly during

the late 1990s and the early 2000s and enjoyed steady growth in revenues and earn ings . Through a

series of acquisitions and the development of new hospices, Odyssey grew from a single hospice

program to over 50 Medicare-certified hospice programs to serve patients and their families in mor e

than 20 states . Today, although headquartered in Dallas, Texas, Odyssey 's operations stretch from

coast-to-coast, and involve more than 25,000 patients, nurses, doctors and other healthcare provider s

and suppliers .

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25 . To effectively oversee and manage Odyssey's far-flung operations on a daily basis ,

defendants invested in and developed a centralized operations and division structure within the

Company. The hub of Odyssey's "centralized operations" is its corporate office in Dallas, Texas .

The Dallas office supports each of the Company's hospice programs by providing coordination ,

centralized resources and corporate services to each of its hospice programs . These include, among

other things: (i) financial accounting systems, including billing, accounts receivable, account s

payable and payroll ; (ii) information and telecommunication systems ; (iii) clinical support services ;

(iv) human resource administration; (v) regulatory compliance and quality assurance ; (vi) marketing

and educational materials; (vii) training and development ; and (viii) centralized cash management

and account payable and payroll processing .

26. In addition, Odyssey processes all billings to the United States, private insurers an d

patients electronically at its corporate office in Dallas . Under the oversight of the defendants, th e

Dallas office bills Medicare monthly and generally receives payment electronically within 1 4

working days . The corporate offices accounting personnel prepare monthly operating statements for

each of the hospice programs and review these statements for operating trends and variances t o

budget forecasts. Defendants, at all relevant times, received the monthly operating statements

mentioned above in parallel with the individual hospice programs .

27. Under defendants' supervision , the Dallas corporate office also prepared annua l

operating budgets for each of the Company's hospice programs, which defendants reviewed and

approved before each fiscal year, as well as used throughout the fiscal year to monitor th e

performance of individual hospice programs, groups of hospice programs, and the Company as a

whole versus its annual budgets and forecasts .

28 . To manage, monitor and oversee Odyssey's daily operations on a real-time basis ,

defendants also developed an extensive information management system . The information system

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known, in part, as MUMMS within the Company utilizes multiple server-based systems with lapto p

and desktop computers to connect all of Odyssey 's hospice programs to one another electronically,

and to allow defendants to monitor the performance of individual hospice programs or groups of

hospice programs on demand . To accelerate the payment for services rendered, billings are als o

handled through a centralized server-based systems located at Odyssey's Dallas headquarters . Under

this system, each local office enters all initial patient registration information and updates into th e

billing status through the Company's intranet systems, supposedly resulting in greater accuracy an d

more rapid collections . Through the use of the Company's intranet site, defendants are also able to

facilitate communications and enhance standardization of all of Odyssey's operations throug h

publication and dissemination of a standard vision and a consistent, comprehensive corporat e

direction .

29. Moreover, through the use of the Company's centralized operating model and

information system, defendants were able to, and did in fact, "monitor and manage" the most critica l

and essential elements of Odyssey' s business , i.e ., "admissions , discharges by type of discharge and

admission conversions," on a daily and regular basis, to control costs and thereby maintain or

increase profitability . As defendants stated in Odyssey's 2003 Report on Form 10-K, dated

March 11, 2004 :

We actively manage and monitor several day-to-day indicators, includingadmissions , discharges by type of discharge and admission conversions on a dailybasis . We also track on a regular basis various key measures of our costs per day ofcare, including costs of labor , medications , durable medical equipment, medicalsupplies and mileage expense incurred by our caregivers . . . .

In the same report, regarding their habit of monitoring and managing Odyssey's business an d

progress towards its financial objectives throughout the Class Period, defendants stated: "We

actively manage and monitor several indicators to track performance across our multiple hospic e

programs, which enables us to develop best practices, improve efficiencies and manage costs . . . . "

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30. The centralized and standardized operations and information system developed b y

defendants served Odyssey well during the early phases of its rapid growth . However, by early

2003, Odyssey's expansion had overwhelmed the Company's internal controls and corporate

infrastructure, i.e ., its centralized operations and information systems, thereby impairing th e

Company's ability to profitably expand in existing and new markets via new developments and/o r

acquisitions. As Odyssey's business expanded into new markets and areas, the Company' s

operational challenges grew exponentially, resulting in significant declines in the quality of hospic e

care delivered to patients and their families, and material increases in the Company's drug costs ,

labor costs and associated operating expenses .

31 . For example, former Odyssey staffers complained to management about lack o f

access to supplies and caseload that are heavier than industry norms . In one instance, the lack of

access to supplies was so bad that the attending nurse was unable to give the patient over-the-counte r

Robitussin. And Odyssey's 55-to-1 patient-to-nurse ratio exceeded industry norms by a wide

margin . Although former Odyssey nurses and supervisors reported these problems to defendants ,

they persisted throughout the Class Period unabated .

32 . Patients and their families also reported incidents where Odyssey's rapid growth

resulted in the Company providing a level of care and service below the standards set forth unde r

government guidelines. As Barron's reported on April 12, 2004, a son of an Odyssey patient tol d

"of Odyssey's ignoring calls from a nursing home as the staff sought the assistance of the hospic e

firm [Odyssey] with which he'd contacted ." "Byron `Pat' Connelly hired Odyssey to provide

hospice care for his mother, who [in the summer of 2003] was a patient in Vista Knoll Specialize d

Care Facility in Vista, Calif., dying of congestive heart failure . When her condition began to

deteriorate, Connelly adds, nurses at Vista Knoll said that Odyssey ignored their repeated calls t o

come and care for the 86-year-old woman . `We felt she was not getting the care she should b e

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getting,' Connolly remembers . "I wasn't mad . I was upset." He says that his mother died within a

week of being transferred to another hospice program . "

33 . As a result of this and other reports, in September 2003, the California Department of

Health Services found Odyssey's San Diego hospice program to violate certain patient care

standards after conducting a routine rece rtification survey. The 33-page repo rt detailed numerou s

instances of patients in severe discomfort and distress being cut from the program inappropriately

and without consultation involving all members of the medical team . Drugs, including simple items

such as cough syrup, were not immediately available because the hospice had not contracted with a

pharmacy to pay for them . Volunteer services were not provided and other treatments and services

typically covered were not provided . The California report also found that a lack of communicatio n

and documentation had led to misguided care, because, among other things, Odyssey's clinica l

records were in disarray.

34. Additionally, as Barron's reported, former Odyssey nurses and marketin g

representative told them of patients being kicked out of Odyssey's program after 90 days upon bein g

"reevaluated" or because they required hospital care . According to persons familiar with Odyssey,

this raises the possibility that the patients should not have been admitted into Odyssey's hospic e

program in the first place . In fact, the DOJ is currently looking into this issue as a part of its

investigation under the False Clams Act into Odyssey' s patient admission, patient retention an d

billing practices since 2000 .

35. The increase in Odyssey's operational problems, coupled with the slowdown in it s

business, presented defendants with a desperate situation . On the one hand, to increase Odyssey' s

revenues the Company needed to grow rapidly . However, to grow rapidly, the Company needed to

attract capital by continuing to report strong revenue and earnings growth . Thus, to overcome thi s

situation, as early as 2000, defendants embarked upon a scheme that involved the adoption of a

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number of unlawful and improper patient admissions, patient retention and billing practices . For

example, to artificially inflate the Company's revenues, Odyssey routinely admitted patients wh o

were not eligible for hospice care because they had a life expectancy of more than six months .

Similarly, when doctors refused to recertify admitted patients as eligible for hospice care, Odysse y

refused to timely discharge them, thereby allowing the Company to bill for and receive payment fo r

services render to patients who were not eligible for hospice care . Since Odyssey recognized

revenue on hospice care services in the first month received, the Company was able to retain th e

improper payments for at least 30-90 days, thereby artificially inflating the Company's revenues an d

financial results in violation of GAAP . Moreover, and, perhaps, even worse, Odyssey bille d

Medicare for services that were never rendered to hospice patients and their families, thereb y

artificially inflating Odyssey's revenues and drastically decreasing its expenses .

36. Although defendants succeeded in concealing these unlawful practices and violation s

of the federal securities laws, Medicare laws and state and federal abuse laws from investors and

regulators alike for several years, in September 2004, the DOJ notified the Company that it wa s

under investigation under the False Claims Act for acts and omissions concern ing its patien t

admissions, patient retention and billing practices from January 2001 to September 2004 . 1

37 . Defendants' knowledge of Odyssey's patient admission, retention and billin g

practices, as well as the fact that they violated the applicable Medicare laws, is in little doubt .

According to a former general manager of Odyssey's Oklahoma City hospice center, defendant

Gasmire and others were responsible for the Medicare cap issues and unqualified patient problems i n

Odyssey because Gasmire not only imposed what were unreasonable census goals, but he knew tha t

' Subsequently, the Company announced that two qui tam whistleblower actions relating tothis investigation have been filed and that the DOJ is considering taking those actions over .

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the census results being reported back from the various hospice facilities were inflated wit h

inappropriate admissions . The general manager was aware of instances during a major admissions

campaign when nurses protested directly to defendants and other company officers . According to

the general manager, they were told to "admit them anyway ."

38. Moreover, as defendants stated in Odyssey's 2003 Report on Form 10-K, Odysse y

"actively manage and monitor several day-to-day indicators, including admissions, discharges b y

type of discharge and admission conversions on a daily basis ." Further, as a part of the Company' s

internal auditing and monitoring programs, Odyssey conducted "periodic , at least annual , internal

regulatory audits and mock surveys at each of [its] hospice programs," as well as, "quarterl y

comprehensive audits of patient charts performed by each of [the Company's] hospice programs," as

required under Medicare conditions of participation. In addition, "at least once a year, a

comprehensive audit of patient charts [was] performed on each of [Odyssey's] hospice programs b y

[its] corporate staff. "

39. In light of the Company's "comprehensive" and redundant regulatory complianc e

auditing and monitoring programs, defendants knew, or were reckless in not knowing, tha t

Odyssey's patient admission, patient retention and billing practices violated applicable Medicare an d

federal and state false claims and abuse laws, as well as resulted in the Company materially

overstating its revenues by improperly recognizing revenues on hospice services rendered to patient s

who were ineligible .

40. More particularly, during the Class Period, Odyssey reported as revenue unlawfu l

billings to Medicare and p rivate insurers to which Odyssey was not entitled . In violation of GAAP ,

Odyssey reported revenues that were non-existent and that they knew would have to be returned t o

Medicare or the insurance companies . This was accomplished by means of double billing, billing for

services not rendered, and recognizing revenue that exceeded Medicare caps for reimbursement .

-16-

These revenues had no justification but were made so that defendants could artificially inflat e

Odyssey's publicly reported financial results and financial statements .

41 . For example, during the Class Period, Odyssey routinely billed both Medicare and th e

patients' insurance carriers for the full amount of services rendered to hospice patients and thei r

families . According to a former billing supervisor at Odyssey's headquarters in Dallas who oversa w

all of the hospice programs , the double billing occurred at several of Odyssey' s hospice care centers,

including its hospice center in Detroit . According to the billing supervisor, Odyssey's Detroi t

hospice center was "thriving" because of the improper double billing . In Detroit, there is a large

population of retired auto-workers which comprises the majority of Odyssey's hospice patients . The

auto-workers had Blue Cross/Blue Shield which would supplement Odyssey for whatever amount

that exceeded the patient's allowable Medicare reimbursement . However, Odyssey frequently billed

both Blue Cross/Blue Shield and Medicare for the entire amount, instead of billing the reduced

amount to both, allowing Odyssey to collect reimbursement for the full amount owed from both

Medicare and Blue Cross/Blue Shield. Senior management knew about this practice because th e

billing supervisor reported this activity to senior management and recommended that Odysse y

reimburse Blue Cross/Blue Shield. After senior management failed to take corrective steps, th e

billing supervisor reported Odyssey's double billing to Blue Cross/Blue Shield, which demanded a

refund. Ultimately, Odyssey was forced to reimburse Blue Cross/Blue Shield for the over-payments .

However, Odyssey's practice of double billing Medicare and private insurers continued unabated a t

other hospice sites .

42 . During the Class Period, Odyssey billed for patient services that had not actually been

rendered. In fact, defendants would intimidate the hospice staff with the threat of termination if the y

did not improperly bill the insurance carriers . According to a former reimbursement coordinator ,

he/she was fired because he/she refused to bill for services that had not been rendered in Odyssey' s

-17-

Orange County hospice facility . The root of this activity was that the hospices were understaffe d

and did not have enough resources to provide the proper amount of care . According to a former

Odyssey billing supervisor, the bills generated through Odyssey's MUMMS system which woul d

ultimately reach the insurance companies did not match the "service notes" that had been input b y

nurses at the hospices for the care they had administered to each specific patient . The MUMMS

system electronically linked billing and collections of every Odyssey hospice in the United States t o

the corporate headquarters in Dallas . Odyssey hospice staff would enter patient information and

updates daily into the MUMMS system regarding what kinds of services that had been performed .

The services that had been performed for each patient were compiled at the end of the month b y

billing supervisors at the Dallas headquarters in order to bill Medicare, Medicaid or private insuranc e

companies . The billing supervisors were supposed to also verify the services with patient "servic e

notes ." According to the billing supervisor, often times the "service notes" did not match MUMMS .

This was because the hospices were actually billing for these missing services because they wer e

required to perform them, whether they actually did so or not . The hospices were so understaffed

because of managements' efforts to cut costs and increase profit, that many nurses simply did no t

have the time to see all their patients every day .

43 . For example, Aetna Insurance Company would pay for hospice services for their

insureds for every day in the week, but the "service notes" indicated that Odyssey staff was onl y

providing services a few days out of the week . According to a billing supervisor, one of the hospic e

patients informed Aetna of the situation and this caused Aetna to demand reimbursement, whic h

Odyssey fought but eventually had to give back the fees for that patient . However, Odyssey rarely

got caught and ended up improperly recognizing the improperly obtained revenue .

44 . Odyssey also put a stop to billing supervisors having access to "service notes" after

several of them pointed out the improper billing practices to senior management . This put a stop to

-18-

billing mangers' ability to match services to bills . According to one billing supervisor, a member o f

senior management stated that billing for services not rendered made Odyssey's reported revenu e

"look good . "

45 . Also, during the Class Period the Oklahoma State Attorney's Office was investigatin g

the Oklahoma hospice for Medicare billing fraud as well . According to a former general manager o f

the Oklahoma City hospice , during the investigation it was determined that numerous patients ha d

been admitted in p rior periods were ineligible under Medicare to receive hospice care . This facility

was forced to payback Medicare at least $770,000 . Apparently, this was not unique to Oklahoma, a s

numerous other facilities, including Colorado Springs, Colorado and Wichita, Kansas, were forced t o

pay back millions of dollars to Medicare thus far . Defendants were well aware of this activity yet

hid this information from the public .

46. In addition to the above, Burnham, Gasmire and Cannon each knew about o r

recklessly disregarded the problems with Odyssey's expansion program, patient care, financial

statements, patient admission, patient retention and billing practices alleged in the Complaint an d

were motivated to conceal such problems . As Odyssey's three highest ranking corporate officers ,

and the leaders of its senior management team, Burnham, Gasmire and Cannon were responsible for

Odyssey's financial report ing and communications with the market . They knew or recklessly

disregarded the adverse facts then impacting Odyssey's business detailed in the Complaint . But

nonetheless , they flooded the market with positive statements about Odyssey, its business , expansio n

program, hospice care services , compliance with applicable Medicare requirements, earnings and

prospects for future growth . Defendants did so to demonstrate that they could lead the Compan y

successfully and generate the growth expected by the market, as well as to unload their persona l

Odyssey shares .

-19-

DEFENDANTS' FALSE AND MISLEADING STATEMENT S

1st Quarter FY03

47. On May 5, 2003, Odyssey announced its 1st quarter FY03 results, ended March 31 ,

2003, reporting a 79% increase in net income to $7 .2 million , or $ .29 per share , on a 50% increase in

revenue to $60 .1 million . The Company also announced that its average daily census for the 1s t

quarter FY03 increased 45% to 5,363 patients, days of care for the quarter increased by 44% to

5,533, and that net cash provided by operations for the quarter was $12 .3 million . In the Company' s

1st quarter FY03 earnings release, Burnham, with the approval of Gasmire and Cannon, attribute d

Odyssey's strong performance to the success of its expansion program and the Company's ability to

provide excellent hospice care services to patients, stating :

"Our goal of providing excellent service to an increasing number of patientsand their families and leveraging our existing infrastructure to produce strongfinancial performance is showing very good results," . . . . "As is typical in ourcompany, the increase in days of patient care is primarily attributable to growth inour existing locations . In addition to this internal growth, during the quarter, weacquired a hospice south of Dallas, which complements our Dallas/Fort Worthservice area . "

"We expect revenue growth in 2003 of 30 to 33 percent over 2002 and an increase of35 to 40 percent in net income over 2002," he said. The company had previouslyprovided guidance of 30 percent growth in revenue and 30 to 35 percent growth innet income year over year . "

48. Following the release of the Company's 1st quarter FY 03 earnings press release ,

securities analysts issued reports on Odyssey which were based on and repeated the fals e

information provided by Odyssey 's senior management . For example , on May 5, 2003, CIBC World

Markets issued a report in which it recommended the purchase of Odyssey stock based largely upo n

the Company' s representation of strong revenue and earning growth. The report written by Charle s

W. Lynch stated :

-20-

Odyssey Health Care, Inc.Strong Start to 2003 ; Raising Estimates on IQ Upside

• ODSY reported 1Q:03 EPS of $.029, $0.02 ahead of our estimate and up animpressive 73% y-y. The quarter was of high quality, with virtually allfinancial metrics ahead of our estimates, strong cash flow generation, and no-one time items .

• The company's EPS growth remains primarily top-line driven (1Q revs . up50%), but also from margin leverage to this top-line growth . . . .

• We are raising 2003E EPS to $1 .20 (up 39%) from $1 .16 and 2004E EPS to$1 .50 (up 25%) from $1 .45. Our 2003 estimates are within management'starget growth ranges, but we believe further upward revisions are possiblethrough the remainder of the year .

• We are also raising our price target modestly, to $33 from $32, and reiterateour Sector Outperformer rating .

49. Similarly, after discussions with Odyssey's CEO (Burnham) and CFO (Cannon), in a

report dated May 6, 2003, the investment firm of SG Cowen recommended the purchase of Odyssey

stock, based largely upon the Company's representation that its acquisition program was on-trac k

and succeeding . The report written by Kemp Dolliver stated :

Odyssey Health CareStrong Buy

ACQUISITION PACE TRACKING OUR MODEL YEAR-TO-DATE .Odyssey has grown rapidly through a focused strategy of acquisitions, thedevelopment of new hospice locations , and the expansion of existing locations . Thecompany bought a 100-ADC in Washatchie , TX (Southern Dallas County) in Januaryand acquired two small hospices with combined ADC of 40 in Valdosta, GA andMemphis, TN effective May 1 . For 2003 , we expect the company to develop and/oracquire fourteen locations , adding average daily census (ADC) of approximately600-700. Acquired hospices have added ADC of 140 YTD . . . .

RAISE 2003E AND 2004E EPS OUTLOOK . We are raising our 2003E EPSfrom $1 .16 (+35%) to $1 .20 (+40%) and our 2004E EPS from $1 .48 (+27%) to $1 .52(+27%). For 2003, revenue estimate is $260MM (+34%) - the upper end ofmanagement's +30-35% guidance .

50 . Further, on May 6, 2003, the investment firm of Stifel, Nicolaus & Company, after

discussions with defendants, issued a favorable report on Odyssey rating the Company' s commo n

stock a "Strong Buy." The report written by Chris Sergeant stated :

-21-

Odyssey exceeds our March quarter estimates on every front, with EPS $0 .03better at $0.29 vs. $0 .16 prior. Importantly, staffing utilization remains excellent,and the company is on track with its 2003 expansion plans . Strong Buy, $37 target .

In the break-neck race for territory and patient flow in the for-profit hospicearena, Odyssey kept up the pace in the first quarter . They again exceeded ourestimates on every measure .

Odyssey is on track for its 2003 expansion plans, and they continue to deliveragainst plan .

We like Odyssey's balance approach to growth, with a steady blend of smallacquisitions and new office openings, never biting off more than they canchew. We see this strategy as an effective way to maintain momentum in therace for new patients and in maintaining strong operating margins .

51 . After these announcements, Odyssey's stock price advanced to its then Class Perio d

high of over $22 per share. While Odyssey stock traded at artificially inflated prices, defendan t

Burnham sold 300,000 shares of Odyssey stock that he owned, for prices between $17 .20 and $22 .02

per share, pocketing $5 .4 million in unlawful insider trading proceeds . Defendant Gasmire sol d

69,596 shares of Odyssey stock that he owned , for prices between $19.79 and $22 .80 per share,

pocketing $1 .4 million in unlawful insider trading proceeds . And defendant Cannon sold 19,49 2

shares of Odyssey stock that he owned, for prices between $19 .86 and $20 .16 per share, pocketing

$387,341 in unlawful insider trading proceeds. Defendants' stock sales were both suspicious in

amount and in timing as they were large in amount and occurred on the heels of Odyssey 's positive

earnings announcement, reporting strong revenue and earnings for the 1st quarter of FY03, at price s

approaching Odyssey's then Class Period high .

52. The statements in ¶¶47-50 were false and misleading when made. At the time

defendants knew that these financial results were false because Odyssey was violating federa l

Medicare and Medicaid laws by admitting patients who did not qualify for hospice care, billing th e

government for services rendered to hospice patients that were not actually provided, and failing to

timely discard patients who no longer qualified for hospice treatment under federal Medicare laws-22-

and guidelines, all for the purpose of artificially inflating the Company's publicly reported revenues ,

net income and earnings . Moreover, defendants continued to conceal the fact that the Company wa s

continuing to submit false claims to the United States for payment under Medicare and that it s

patient admissions, patient retention and billing practices violated applicable federal and state laws .

In addition, when these statements were made defendants actually knew that Odyssey's expansio n

program was not succeeding and could not be sustained because the Company's expansion activity

had overwhelmed Odyssey's infrastructure and resources and, as a result, the Company was

experiencing serious problems integrating newly acquired hospice centers, as detailed above .

53. Odyssey's artificially inflated stock p rice enabled the Company to acquire othe r

hospice care centers on more favorable terms by offering the acquiring company the opportunity to

join Odyssey's allegedly rapidly growing enterprise . For example, on May 6, 2003, Odyssey

announced a deal to acquire Mahogany Hospice Care, Inc ., based in Memphis, Tennessee

("Mahogany"), and another deal to acquire Home Care Hospice, Inc., based in Valdosta, Georgia .

Commenting on the Mahogany acquisition, a senior Odyssey official stated :

Odyssey's services are provided in patient homes, long-term care facilities,nursing homes or hospitals . . . . "We are pleased that with the acquisition ofMahogany we will begin providing our high-quality service to Memphis-areapatients immediately ." Odyssey, headquartered in Dallas, Tex ., currently has 67hospice locations in 26 states, including the Mahogany location . During 2003, thecompany has provided care to approximately 5,400 patients . The company provideshospice care in many major metropolitan areas, including Nashville .

54. Based on Odyssey's strong financial performance, on June 27, 2003, it wa s

announced that Odyssey had been added to the S&P 500 stock index . Three weeks later, on July 18 ,

2003, Odyssey announced a "a three-for-two stock split payable in the form of a fifty percent stock

dividend to be distributed on August 12, 2003, to stockholders of record at the close of business o n

July 28, 2003 ." Commenting on the dividend and Odyssey's "strong" operating performance ,

Burnham, with the approval of Gasmire and Cannon, stated :

-23-

"The company has a record of strong operating performance which themarket has recognized," said . Richard R . Burnham, chairman and chief executiveofficer . "We believe the three-for-two split will further improve trading liquidity andbroaden ownership of the company's common stock . "

55. On news of these developments, Odyssey's stock price advanced to over $25 per

share .

2nd Quarter FY03

56. On August 4, 2003, Odyssey announced its 2nd quarter FY03 results, ended June 30 ,

2003, reporting a 60% increase in net income to $7 .6 million, or $0.20 per share (post split), on a

39% increase in revenue to $64 .9 million . The Company also announced that its average daily

census for the 2nd quarter FY03 increased 34% to 5,758 patients, days of care for the quarter

increased 34% to 5,239, and net cash provided by operations for the quarter was $15 .1 million. In

the Company's earnings release, Burnham, with the approval of Gasmire and Cannon, attributed th e

Company's strong performance to the success of its aggressive expansion program, stating :

"We are very pleased with our continued strong financial performance," saidRichard R. Burnham, chairman and chief executive officer. "More importantly, ourexisting programs continue to reach more patients and families, and we are creatingadditional platforms for growth by expanding our programs into new communitiesaround the country."

Because of increased visibility into the remainder of the year, the companynoted that it was increasing its guidance for net income growth in 2003 to 40 to 43percent over 2002 results . The company had previously provided guidance of 35 to40 percent net income growth in 2003 over 2002 .

57 . Following the release of Odyssey's 2nd quarter FY03 results, defendants hosted a

conference call for investors and securities analysts on August 5, 2003 . Commenting on the succes s

of Odyssey's expansion program and the Company's strong performance, Burnham, with the

approval of Gasmire and Cannon, stated :

We are pleased to report very good second-quarter results - a 34 percentincrease in average daily census over second quarter of 2002, a 39 percent increase inrevenues and 60 percent increase in net income . Our margins were 11 .7 percentcompared to 10.1 percent in the second quarter of 2002 .

-24-

All these results I believe continue to show that we are making very goodprogress on our goals . By that I mean our existing programs are growing, we areaggressively expanding into new service areas, and therefore, we continue toleverage our corporate infrastructure across a large number of patients and programs .As you know, approximately 94 percent of our revenue is attributable to Medicare .Each summer the Centers for Medicare and Medicaid Services or CMS as it is knownannounces rate increases . The announcement was made in early July . Hospiceswere provided a 3 .4 percent increase effective October 1, 2003 . However, based onthe information we have now and the growth we are experiencing, we are raising ourbottom-line guidance . Previously we had guided you to a 35 to 40 percent increasein net income for 2003 as compared to 2002 . We are now comfortable with raisingour estimate for our 2003 bottom-line growth to 40 to 43 percent over 2002 results .

58 . Analyst immediately repeated this false information to the market in analysts' reports ,

projecting FY03 and FY04 earnings for Odyssey of $1 .25 and $1 .60, respectively. For example, o n

August 5, 2003, CIBC World Markets issued a report, written by Charles W . Lynch, which stated :

• ODSY reported 2Q :03 EPS of $0 .31, two pennies ahead of our estimate andup 58% y-y . This growth, and the upside to our expectation, was primarilytop-line driven, with patient volumes ahead of our model .

• Based on 2Q : 03 results and increased management guidance, we are raising2003E/04E to $1 .25/$1 .60 from $1 .20/$1 .50 .

• We view our new estimates as a conservative outlook of potential growthover the next two years, given ODSY's patient -volume growth as well as asupportive governmental stance toward Medicare hospice services .

• We continue to view ODSY as an attractive small-cap growth investment andare raising our price target to $45. Reiterate Sector Outperformer rating .

59. Similarly, on August 20, 2003, Stifel, Nicolaus & Company issued a report, writte n

by Chris Sergeant, based on his conversations with Burnham and Cannon du ring Odyssey' s

August 5, 2003 conference call, recommending the purchase of Odyssey stock as a "Buy," an d

noting that "Odyssey is strongly cash flow positive , enjoying a ` self-sustaining growth equation ." '

Stifel, Nicolaus & Company also wrote: "Hospice is a very young and consolidating space - there i s

plenty of green-field and acquisition opportunity out there - and we see continued above averag e

growth at Odyssey for years ahead ."

-25-

60. After these announcements, Odyssey's stock price soared to over $29 per share.

While Odyssey stock traded at artificially inflated prices, defendant Burnham sold 150,500 shares o f

Odyssey stock that he owned, for prices between $30.00 and $32 .56 per share, pocketing $4 . 6

million in unlawful insider trading proceeds . Defendant Gasmire sold 157,416 shares of Odyssey

stock that he owned, for prices between $30 .00 and $30.68 per share, pocketing $7 .5 million in

unlawful insider trading proceeds . And defendant Cannon sold 29,579 shares of Odyssey stock that

he owned, for prices between $28 .90 and $29 .90 per share, pocketing $855,644 in unlawful insider

trading proceeds . Defendants' stock sales were both suspicious in amount and in timing as the y

were large in amount and occurred on the heels of Odyssey's positive earnings announcement ,

reporting strong revenue and earnings for the 2nd quarter of FY03, at prices approaching Odyssey' s

then Class Period high .

61 . The statements in ¶¶53-54, 56- 59 were false and misleading when made . At the time



government for services rendered to hospice patients that were not actually provided, and failing t o

timely discard patients who no longer qualified for hospice treatment under federal Medicare law s


net income and earnings . Moreover, defendants continued to conceal the fact that the Company was



In addition, when these statements were made, defendants actually knew that Odyssey's expansio n

program was not succeeding and could not be sustained because the Company's expansion activit y



-26-

62 . As FY03 unfolded, Odyssey's stock price continued to advance to higher levels and

defendants continued to acquire additional hospice care centers on favorable terms . For example, on

September 2, 2003, Odyssey announced a deal to acquire Grace Incorporated ("Grace"), an Omaha ,

Nebraska based hospice program operator, and a second deal to form Odyssey HealthCare of Uta h

by acquiring Heritage Hospice, L.L.C. ("Heritage") based in Utah . Commenting on the Grace an d

Heritage acquisitions, the Company stated :

The Utah hospice program provides care to approximately 280 patients fromSalt Lake City, Ogden and St . George and the surrounding areas . Odyssey, whichoperates in 27 other states, has not previously provided care in Utah .

"Historically, about one-third of Odyssey's annual growth is a result ofacquisitions, and two-thirds is a result of growth in our existing hospice programsand expansion into communities not previously served by the company," notedRichard R. Burnham, chairman and chief executive officer . "We are very pleased tohave the caregivers and staff of Utah's Heritage Hospice join the Odyssey team .They have established a well-respected hospice program, providing compassionateand high-quality care in the major population centers of the state," notedMr. Burnham .

Odyssey's services are provided in patient homes, long-term care facilities,nursing homes or hospitals . The newly acquired healthcare provider will be calledOdyssey HealthCare of Utah .

Separately, the company announced the acquisition of the Omaha, Neb .,hospice program of Grace Incorporated . The acquisition will be merged withOdyssey's current hospice program in Omaha . The Grace hospice program has 35patients .

Including the Utah and Omaha acquisitions, Odyssey has acquired sevenhospice programs in 2003 . The acquired programs had a total of 517 patients at thetime of their purchase .

63 . On September 16, 2003, Burnham appeared on Bloomberg television's "Mornin g

Call" program and, with the approval of Gasmire and Cannon, reaffirmed Odyssey's prior 2003 ne t

income growth stating that the Company expected 2003 net income growth of 40% to 43% ove r

FY02 results . Burnham also confirmed during the program, with Gasmire and Cannon's approval ,

that Odyssey "was comfortable with the First Call Consensus estimate of 83 cents for 2003 ."

-27-

64. After Burnham's appearance on the "Morning Call" program, Odyssey's stock pric e

increased to nearly $35 per share . While Odyssey stock traded at artificially inflated prices ,

defendant Burnham sold 75,000 shares of Odyssey stock that he owned, for prices between $31 .58

and $32 .56 per share, pocketing $2 .4 million in unlawful insider trading proceeds . Defendant

Cannon sold 4,372 shares of Odyssey stock that he owned, for prices between $33 .60 and $34 .80 per

share, pocketing $149,793 in unlawful insider trading proceeds . Defendants' stock sales were both

suspicious in amount and in timing as they were large in amount and occurred on the heels of

Odyssey's positive announcements concerning the Grace and Heritage acquisitions, and Burnham' s

positive statements about the Company's business and FY03 earnings on Bloomberg television's

"Morning Call" program, at prices approaching Odyssey's then Class Period high .

65 . The statements in ¶162-64 were false and misleading when made . At the time







continuing to submit false claims to the United States for payment under Medicare and that its




had overwhelmed Odyssey's infrastructure and resources and, as a result , the Company was


-28-

3rd Quarter FY03

66. On November 3, 2003, Odyssey announced its 3rd quarter FY03 results, ended

September 30, 2003, repo rting a 45% increase in net income of $7.8 million, or $0.21 per share, on a

40% increase in revenue to $71 .0 million. The Company also announced that its average dail y

census for the 3rd quarter FY03 increased 34% to 6,198 patients, and days of care for the quarte r

increased 34%, to 570,233 . In the Company's earnings release , Burnham , with the approval of

Gasmire and Cannon, attributed the Company's strong performance to the success of its aggressiv e

expansion program, stating :

To date, the company has opened seven start-up programs . During the nine-month period, the company has acquired seven hospices that were servingapproximately 500 patients at the time of their acquisition, including fouracquisitions in the third quarter, as previously announced .

"We are very pleased to repo rt strong growth in revenue and net income" "We have also made excellent progress in expanding into new communitie s

and increasing the number of patients in our existing programs . To continue ourstrong growth, we have accelerated our time frame for new programs and arecurrently working on seven new locations scheduled to open in 2004 . "

67. Following the release of the Company's November 3, 2003 earnings press release ,


information provided by Odyssey's senior management . For example, on November 5, 2003, S G

Cowen issued a report, written by Kemp Dolliver, in which it recommended the purchase of Odyssey

stock as a "Strong Buy," stating :

Q3 EPS of $0 .21 were essentially in line with consensus and our $0.20E. Odysseyhad announced in September that the month 's average daily census (ADC) wouldexceed 6 ,500. Asa result , revenue of $71 .0MM (+40%) was on target with ADC of6,198 (+34%) below our 6 ,330E, but revenue /day of $125 (+4%) came in above our$123E (+3%) .

The hospice industry's fundamentals are positive with favorable Medicare policy ;roughly 35% market penetration; increasing awareness ; and (for ODSY) a highly-fragmented market . Q3's results were clean without any signs of stress, suggestingour above-consensus 2004E EPS of $1 .11 is achievable . The stock trades at 25x2004E EPS of $1 .11, so we would wait for weakness to add to positions .

-29-

Acquisition Pace Running Ahead Of Our 2003 Thinkin g

Odyssey has completed seven acquisitions this year with ADC of 517, wellahead of the 300 ADC we expected initially this year . The largest, Heritage Hospicein Utah, had ADC of 280 . Management continues to seek acquisitions of many sizes .On the development side, Odyssey has received Medicare certification for seven ofthe eight offices planned for 2003 . . . .

68. Likewise, on November 5, 2003, Jefferies & Company issues a report, written by

Frank G . Morgan , in which it recommended the purchase of Odyssey stock following meetings with

Odyssey senior management (Burnham and Cannon), stating :

ODSY: Solid Third Quarter Results in Line with Consensus

Net patient service revenue increased 40% to $71 .0 million from $50 .7million in 3Q02 . Average daily census for the quarter grew 34%, to 6,198 .Average length of stay increased 14.7 days year over year, to 77 .8 days .After evaluating the wage index factors for Medicare reimbursement in 2004,the company feels confident that it will benefit from a reimbursementincrease of 3 .4% for fiscal 2004 .

Strong revenue growth and same-store maturation resulted in year-over-yearconsolidated EBITDA margin growth of 80 basis points, to 19 .1 % .

We are raising our 2003 EPS estimate, to $0.84 (+47%) from $0.83 . We arealso raising our 2004 EPS estimate, to $1 .09 from $1 .07. Management statedthat it would not give 2004 guidance until the company reports 4Q03 results,but given operating trends, we believe there is good visibility in our estimate .

69. After these announcements, Odyssey's stock continued to trade at artificially inflate d

p rices. During this period, defendant Burnham sold 103 ,269 shares of Odyssey stock that he owned,

for prices between $28 .08 and $31 .06 per share, pocketing $3 million in unlawful insider tradin g

proceeds . Defendant Gasmire sold 50,000 shares of Odyssey stock that he owned, for prices

between $30 .00 and $30.25 per share, pocketing $1 .5 million in unlawful insider trading proceeds .

And defendant Cannon sold 10,304 shares of Odyssey stock that he owned, for prices betwee n

$29.26 and $31 .10 per share, pocketing $306,115 in unlawful insider trading proceeds . Defendants '

stock sales were both suspicious in amount and in timing as they were large in amount and occurre d

-30-

on the heels of Odyssey's positive earnings announcement, reporting strong revenue and earnings fo r

the 3rd quarter of FY03 .

70. The statements in ¶¶66-68 were false and misleading when made . At the time






net income and earnings . Moreover, defendants continued to conceal the fact that the Company wa s

continuing to submit false claims to the United States for payment under Medicare and that its






71 . As Odyssey's stock price continued to trade at art ificially inflated levels , defendants

continued to acquire other hospice care centers on favorable terms . For example, on November 17 ,

2003, Odyssey announced the acquisition of Hospice Home Care , a hospice provider based in San

Antonio, Texas ("Hospice Home"), and on January 4, 2004, Odyssey announced another deal to

acquire Crown of Texas Hospice, a hospice program then currently serving approximately 40 0

patients and their families in 20 counties in the Texas Panhandle and nine counties surrounding

Conroe, Texas, north of Houston . Commenting on the Hospice Home acquisition, Gasmire, with th e

approval of Burnham and Cannon, stated :

Hospice Home Care is providing care to approximately 100 patients .Odyssey, which provides hospice services in 28 states, including locations

-31-

throughout Texas, will integrate Hospice Home Care into its existing San Antoniohospice program .

The San Antonio acquisition is Odyssey's eighth in 2003 . Including the San Antonioacquisition, the acquired programs had a total of approximately 600 patients at thetime of their purchase .

"We are very pleased to have the caregivers and staff of Hospice Home Carejoin the Odyssey team . . .," noted Mr. Gasmire . "By combining our twoorganizations, we believe we can reach even more patients and families who carebenefit from our services ."

72. Commenting on the Crown of Texas acquisition, defendants Gasmire, with th e

approval of Burnham and Cannon stated :

"Crown of Texas has provided outstanding care to patients and families in theTexas Panhandle and in the counties surrounding Conroe," said David C . Gasmire,president and chief executive officer of Odyssey . "We are pleased to be able tocontinue this strong legacy of care and look forward to being an important part of thehealthcare community in these areas . "

Prior to the acquisition, Odyssey did not have a hospice program in the TexasPanhandle . Odyssey has existing hospice programs along the Texas Gulf Coast,including Houston, however the newly acquired Conroe will continue to be operatedas separate programs .

Odyssey noted that the acquisition is expected to be accretive beginningapproximately mid 2004, following the company's historic pattern of implementingits operating model in newly acquired programs in approximately 90 to 120 days ."While this acquisition is the largest in our history, our focus will remain on organicgrowth," noted Mr. Gasmire .

73 . As a result of these positive announcements , Odyssey's stock price continued to trade

at artificially inflated prices .

4th Quarter and FY03

74. On February 23, 2004, Odyssey announced its year-end FY03 results, ended

December 31, 2003, reporting a 48% increase in net income to $31 .2 million, or $0.84 per share, on

a 41 % increase in revenue to $274 .3 million . In the Company' s earnings release, Gasmire , with the

-32-

approval of Burnham and Cannon, attributed the Company's strong performance to its successfu l

expansion into new communities via start-ups and strategic acquisitions, stating :

For the 2003 fiscal year ended Dec. 31, 2003, net patient service revenuegrew 41 percent to $274.3 million compared to $194 .5 million in 2002 . Net incomein 2003 was $31 .2 million, a 48 percent increase over the $21 .1 million for 2002 .Earnings per diluted share were $0 .84, an increase of 45 percent over the $0 .58 forthe 2002 fiscal year . (Per share information for 2002 has been restated to reflect thecompany's 50 percent stock dividends on Feb . 21 and Aug. 12, 2003 . )

"Our earnings per share for the year exceeded our guidance, and we havemade good progress in expanding into new communities through start-ups andstrategic acquisitions," said David C . Gasmire, president and chief executive officer."The demand for our services remains strong, and we look forward to reaching anever increasing number of patients and their families in 2004 . "

The company noted that it expects its 2004 earnings per share results toreflect a 23 to 25 percent increase over 2003, or $1 .03 to $1 .05 for the year . For thefirst quarter of 2004, the company expects earnings per share of $0.20 to $0.22,compared to $0 .19 for the first quarter of 2003 .

75 . On this news that the Company 's 1st quarter 2004 earnings would be below analysts '

estimates, the Company's stock price declined to $20 .32 per share . However, to maintain Odyssey' s

artificially inflated stock price and to allay investors' concerns that Odyssey's growth had out pace d

the Company's infrastructure, defendants quickly reassured investors and securities analysts tha t

Odyssey's expansion program was still on track and that the Company would continue to gro w

rapidly .

76 . Defendants' scheme succeeded and securities analysts issued favorable reports o n

Odyssey stock. For example, on February 25, 2004, Jefferies & Company issued a report, written b y

Frank G. Morgan, noting that the sell-off of Odyssey stock was "over-done" and increasin g

Odyssey's investment to "Buy," stating :

ODSY: Sell-Off Overdone ; Rating Raised to Buy from Hold

We are raising our rating on shares of Odyssey HealthCare, Inc., to Buy fromHold with a price target of $26. The company reported 4Q03 EPS of $0 .23compared to $0 .19 in 4Q02 . Results were in line with consensus and our

-33-

estimate . . . . In our opinion, yesterday's sell-off in the stock creates an interestingnear-term buying opportunity . Odyssey's fourth quarter results and initial 2004guidance reflect the impact of growth outpacing the company's corporateinfrastructure .

Strong revenue growth of 37.5% was driven by same-store maturation,acquisitions , and de novo development .

77 . Similarly, on February 24, 2004, SG Cowen issues a report, written by Kem p

Dolliver, in which it continued to rate Odyssey stock a "Strong Buy," stating :

• Stay with Strong Buy Rating, But This Stock Will Require Patience .

We expect the stock to drop sharply, discounting this news quickly. Demandacross the industry is solid, so ODSY should continue to post good organic growth .The balance sheet is debt-free and capital needs are minimal .

78. The statements in ¶¶71-72 and 74-77 were false and misleading when made . At the

time defendants knew that these financial results were false because Odyssey was violating federa l


government for services rendered to hospice patients that were not actually provided, and failing to






In addition, when these statements were made, defendants actually knew that Odyssey' s expansio n




79. On March 3, 2004, Lehman Brothers convened its "Seventh Annual Globa l

Healthcare Conference" at the Loews Miami Beach Hotel in Miami, Florida, at which securities-34-

analysts covering Odyssey heard a presentation from Odyssey's President and CEO Gasmire . At

this meeting, Gasmire, with the approval of Burnham and Cannon, endorsed prevailing revenu e

estimates which were $1 .03-$1 .05 for FY04 . He also assured the investment community that

Odyssey's expansion program was succeeding and that Odyssey was profitably integrating newl y

acquired hospice programs into its business and, as a result , Odyssey expected to achieve annual

earnings growth of 23%-25% in FY 04 and beyond .

80. Following Odyssey's presentation at the Lehman Brothers conference, on March 17 ,

2004, Stifel, Nicolaus & Company issued an analyst report initiating coverage of Odyssey stock with

a "Market Outperform" rating. The report, written by Bilal Basrai, stated :

Initiating Coverage of ODSY With a Market Outperform Rating and $26 Price Target

• We are initiating coverage of Odyssey HealthCare with a Market Outperformrating and a 12-month target price of $26 .

• We believe Odyssey should benefit from the aging of the population,increased recognition and availability of hospice services, as well as industryfragmentation .

• The company will seek to increase its share of the existing hospice marketthrough new openings and acquisitions, targeting mid and larger sizedmarkets across the country, while at the same time expanding its revenuebase through aggressive marketing of end-of-life services .

• ODSY shares recently (2/24/04) stumbled 25% as the company announcedthis 2004 EPS guidance for the first time in conjunction with its 4Q03earnings release . The 23%-25% expected EPS growth, or $1 .03-$1 .05, wasbelow the previous Street consensus estimate of $1 .09. We believe the sell-off in the shares was overdone.

81 . The statements in ¶¶79-80 were false and misleading when made . At the time thes e

statements were made defendants actually knew that Odyssey's expansion program was no t

succeeding and could not be sustained because the Company's expansion activity had overwhelme d

Odyssey's infrastructure and resources and, as a result , the Company was experiencing serious

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problems integrating newly acquired hospice centers, as detailed above . In addition, defendant s

knew that Odyssey was violating federal Medicare and Medicaid laws by admitting patients who di d

not qualify for hospice care, billing the government for services rendered to hospice patients tha t

were not actually provided, and failing to timely discard patients who no longer qualified for hospic e

treatment under federal Medicare laws and guidelines, all for the purpose of artificially inflating th e

Company's publicly reported revenues, net income and earnings . Moreover, defendants continued to

conceal the fact that the Company was continuing to submit false claims to the United States fo r

payment under Medicare and that its patient admissions, patient retention and billing practices

violated applicable federal and state laws .

82 . On April 12, 2004, Barron's published an article entitled "Troubling Odyssey:

Questions Arise About Hospice Company's Patient Care, Level of Medicare Payments ." The article,

based on "conversations with dozens of people around the country who are familiar with th e

company," stated, in relevant part, as follows :

When a company is in the business of comforting dying patients, whose care can becostly, and it depends heavily on Medicare for revenues, achieving profit margins of18%-20% and annual earnings gains of 40% or so would seem too good to be true .Yet those are the kinds of numbers that Dallas-based Odyssey Healthcare, thenation's second-largest for-profit hospice provider, has routinely churned out sinceissuing shares to the public in October 2001 . The nation's first hospice provider togo public has expanded its programs to 68 from the 33 that existed in 2001, mainlythrough acquisitions . And it's expected to show "same-store sales growth" - revenuefrom facilities open more than a year - of 13%-15% this year. Its average "dailycensus" - the number of patients it cares for - rose to 6,019 in 2003 from 4,407 ayear earlier . Its profit margins are more than double those of its competitors .

An impressive performance, indeed. But there are signs the company can't keep upwith its heady growth. Higher labor costs - especially in California, which represents13%-15% of its revenues - as well as higher drug costs hurt Odyssey's margins inlast year's fourth quarter . In reporting those results on Feb . 23, the company forecastlower-than-expected earnings for this year . Another red flag : Odyssey disclosed that,in its most recent quarter, six of its programs exceeded the amounts they wereentitled to receive in Medicare reimbursements, raising questions about whetherpatients admitted to its programs are truly eligible .

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In a business almost entirely dependent on Medicare reimbursement for revenues,adherence to guidelines is crucial . People familiar with the Medicare system say thatexceeding the reimbursement cap is very unusual and is considered a serious breachof accepted practices by the Centers for Medicare and Medicaid Services, as well asby the insurance intermediaries who handle Medicare claims . Such breaches raisered flags about admittance procedures and the possibility that ineligible patients arebeing accepted into hospice programs, which are supposed to admit only those whomdoctors believe have no more than six months to live .

In a business expanding as fast as the hospice industry and at a company expandingas quickly as Odyssey, growing pains are to be expected .

Nonetheless, there is mounting concern within the industry that the quest to showprofit growth and stock-price gains can sometimes conflict sharply with the needs ofdying patients and their families .

83 . Following the Barron's article, and after discussions with Odyssey's senio r

management, securities analysts issued reports on Odyssey designed to rebut the potentially advers e

impact of the Barron's article . For example, on April 12, 2004, Stifel, Nicolaus & Company issued

an analysts report rating Odyssey stock "Market Outperform" and stating that the "[n]egativ e

Barron's article [c]ould [p]resent [a] [b]uying [o]pportunity" for investors looking to obtain o r

increase their positions in Odyssey stock . The report, written by Bilal Basrai, stated :

The April 12th issue ofBarron's implied that ODSY's service practices andstandards, particularly at its San Diego, CA hospice site, are below industry norms .The article only cited deficiencies at its hospice site in San Diego, with all thecritical violations having been corrected in December 2003 . Importantly, the articledoes not make mention of any of its other 67 hospice sites throughout the country.

Healthcare is an industry that always has and probably always will undergo alot of scrutiny, much more than other industries . One rarely hears of 100%efficiency and 100% satisfaction as its relates to patient care in the healthcare system .Being the 2nd largest provider of hospice services in the country and servingalmost 7,000 patients, complaints will arise from time-to-time, especially in a sub-sector that treats patients on the verge of dying . . . .

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At 20.Ox 2004 EPS estimates, ODSY shares are trading at a 25% discount to itsgrowth rate and a 40% discount to its closest comparable . We would use anyweakness in ODSY shares a buying opportunity.

84. Similarly, on April 12, 2004, after discussions with Odyssey's senior management,

SG Cowen issued an analyst report, written by Kemp Dolliver, stating that "[t]he [p]roblems [a] t

[t]he San Diego [p]rogram [f]it [w]ith Q4 's [d]isappointing [t]rends," but noting that "management

has indicated that census growth has not slowed and that labor rates have stabilized ." These positive

but false reports, feed to the market by defendants via analyst's reports, blunted the impact of the

Barron's article and propelled Odyssey's stock price to higher levels .

1st Quarter FY04

85 . On May 3, 2004, Odyssey announced its 1st quarter FY04 results, ended March 31 ,

2004, reporting a 10% increase in net income to $7 .9 million , or $0.21 per share, on a 41 % increase

in revenue to $84 .7 million . The Company also announced that its average daily census for the 1s t

quarter of FY04 increased 37% to 5,363 patients, while the average length of stay for the quarte r

increased to 75 days , compared to 69 days in the 1st quarter of FY03 . In the Company's earnings

release, Gasmire, with the approval of Burnham and Cannon, attributed the Company's results to the

success of Odyssey's business model and the Company's strong reputation in the medica l

community for providing quality care to hospice patients and their families, stating :

"During the quarter we admitted 8,723 patients and on average cared for7,330 patients and their families per day," said David C . Gasmire, president and chiefexecutive officer . "This marks the second consecutive quarter that these metricshave reached record highs, which we believe illustrates the confidence and respectthat our referral sources in the medical community have in the quality of our care,which they see exhibited every day . "

86. Commenting on Odyssey's expansion program, defendants further stated that th e

Company had "acquired Crossroads Hospice of Oklahoma, L.L.C., which has operations in Tulsa ,

Oklahoma, effective May 1, 2004," and that, "[d]uring the first quarter the company's Arlington, Va.

hospice program was certified to accept Medicare patients ."

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87 . Following the release of the Company's 1st quarter FY04 earnings press release,


information provided by Odyssey' s senior management . For example , on May 4, 2004, SG Cowen

issued a report, written by Kemp Dolliver, which stated :

Odyssey Health Care: Showing First Signs of Progress

Conclusion: ODSY's Ql EPS were in line with expectations . Underlyingexpenses trends (labor and drugs) were stable with Q4 . Some improvement in drugcosts in March were encouraging . DSO was inflated by an acquisition, and shouldstart to improve in Q2 . . . .

• Q 1's Results Were In Line : No Change to Our EPS Estimates. EPS of $0 .21matched our estimate . Organic ADC growth of 18% was just below our+19%E with acquisitions and start-ups slightly ahead . . . .

• Getting Some Movement On Operating Challenges . Labor inflation wasstable sequentially. Drug costs/patient day were $9 .85 in Q1, but $9.00 forMarch. Holding costs at March's level would lead to 70bp sequentialimprovement. . . .

• Quality Measures Encouraging Too . State health departments audited 17locations in Q1, and all passed . This disclosure will help address concernedraised by recent negative publicity.

88 . Similarly, on May 4, 2004, after discussions with Odyssey's Gasmire and Cannon ,

Stifel, Nicolaus & Company issued a report, written by Bilal Basrai , which rated Odyssey "Market

Outperform," stating :

ODSY:1 Q04 Conference Call Highlights; Management Executing on Initiatives

BOTTOM LINE: ODSY's IQ04 conference call was upbeat and bodylanguage by management was positive . Company reaffirmed full year 2004EPS guidance of $1.03-$1.05; did not provide 2Q04 guidance, but expectsEPS to be up sequentially from IQ04. We expect 2Q04 EPS of $0.24.Back -to-back good quarters should result in ODSY shares trading in themid-$20 's as we believe the company will then have shown clear signs ofprogress in its initiatives and the ability to grow EPS by 25%.

During the quarter , 17 of ODSY' s hospice sites were reviewed by Medicarefiscal intermediaries , with ODSY passing all 17 reviews. Reviews of hospicesites by intermediaries are common practice in the industry , especially whenthe cancer mix is low and ALOS is high at a particular site.

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89. Likewise, on May 5, 2004, Jefferies & Company issued a report, written by Frank G .

Morgan , which recommended the purchase of Odyssey stock with a "Buy" rating, stating :

ODSY.• Reports In-Line I Q04 EPS; Operations Show Signs of Stabilizing

We maintain our rating of Buy on shares of Odyssey HealthCare, Inc ., with aprice target of $26 . First quarter EPS of $0 .21 versus $0.20 a year ago ($0 .23 in4Q03) were in line with consensus and $0 .01 better than our estimate .

Strong revenue growth of 41 .0% was driven by acquisitions, same-storematuration, and de novo developments . . . .

Odyssey acquired two hospice programs with an ADC of approximately 400in one acquisition in January, and the company completed an acquisition with anADC of approximately 100 on May 1 . On May 1, Odyssey acquired CrossroadsHospice of Oklahoma in Tulsa, Oklahoma, for $6 million . The program's censuswill be admitted into and billed by the company's existing program, which willprevent the billing delay and increase in DSOs associated with acquiring a newprovider number. The acquisition should be accretive in 3Q04 after some costs inthe second quarter for closing the office, transferring patients, and employee bonuses .

Cash flow improved in the quarter . As of March 31, Odyssey hadapproximately $21 .4 million in cash and short-term investments . Cash flow fromoperations was $6 .1 million in the quarter . Cash flow should benefit in subsequentquarters as the company receives payment on unbilled Medicare revenue for the SaltLake City acquisition ($4 million in unbilled revenue) and the Brownsville, Texasacquisition for which provider numbers have been received and from delayedpayments . . . .

We are maintaining our 2004 and 2005 EPS estimates of $1 .03 and $1 .25,respectively. We expect the company to meet our second quarter EPS estimate of$0.25 with sequential margin improvement of 70 basis points related tounemployment taxes paid only in the first quarter, 40 basis points improvement fromthe reduction in pharmacy costs to $9 per patient day (the March level), and accretionrelated to acquisitions. Management reiterated its guidance of 2004 EPS of $1 .03-$1 .05 .

90. As a result of these positive statements , Odyssey's stock p rice continued to trade at

artificially inflated prices. However, the statements in ¶¶83-89 were false and misleading when

made. At the time these statements were made defendants actually knew that Odyssey's expansio n


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experiencing serious problems integrating newly acquired hospice centers, as detailed above . In

addition, defendants knew that Odyssey was violating federal Medicare and Medicaid laws by

admitting patients who did not qualify for hospice care, billing the government for services rendere d

to hospice patients that were not actually provided, and failing to timely discard patients who n o

longer qualified for hospice treatment under federal Medicare laws and guidelines, all for th e

purpose of artificially inflating the Company's publicly reported revenues, net income and earnings .

Moreover, defendants continued to conceal the fact that the Company was continuing to submit fals e

claims to the United States for payment under Medicare and that its patient admissions, patient

retention and billing practices violated applicable federal and state laws .

91 . On June 15, 2004, Jefferies & Company convened its "Specialty & Post-Acut e

Services Conference" at the St . Regis Hotel in New York City, at which securities analysts coverin g

Odyssey heard presentations from members of Odyssey' s senior management team (Gasmire and

Cannon). At this meeting, Odyssey's senior management endorsed prevailing EPS estimates whic h

were $1 .03-$1 .05 and $1 .25-$1 .26 for FY04 and FY05, respectively. They also assured the

investment community that Odyssey's expansion program was succeeding and that Odyssey wa s

profitably integrating newly acquired hospice care programs into its business and, as a result ,

Odyssey expected to achieve annual ea rnings growth of over 20% in FY 04 .

92 . Following defendants' false statements at the Jefferies & Company Conference, on

June 15, 2004, Piper Jaffray issued an analyst report, written by Darren Lehrich, upgradin g

Odyssey's stock to "Market Perform," stating "we believe ODSY is executing reasonably well o n

the expense side during 2Q and is likely on pace to restore 1500-200-bps of EBITA margin vs . the

depressed 1 Q04 16.3% level ." In response to defendants' positive statements, Odyssey's stock pric e

continued to trade at artificially inflated prices .

-41-

93 . The statements in ¶¶91-92 were false and misleading when made . At the time these

statements were made defendants actually knew that Odyssey 's expansion program was not

succeeding and could not be sustained because the Company' s expansion activity had overwhelme d

Odyssey's infrastructure and resources and, as a result, the Company was experiencing . serious

problems integrating newly acquired hospice centers, as detailed above . In addition, defendants

knew that Odyssey was violating federal Medicare and Medicaid laws by admitting patients who di d

not qualify for hospice care, billing the government for services rendered to hospice patients that

were not actually provided, and failing to timely discard patients who no longer qualified for hospic e

treatment under federal Medicare laws and guidelines, all for the purpose of artificially inflating th e

Company's publicly reported revenues, net income and earnings . Moreover, defendants continued to

conceal the fact that the Company was continuing to submit false claims to the United States fo r

payment under Medicare and that its patient admissions, patient retention and billing practices

violated applicable federal and state laws .

2nd Quarter FY04

94. On August 2, 2004, Odyssey announced its 2nd quarter FY04 results , ended June 30 ,

2004, reporting a 23% increase in net income to $9 .3 million, or $0 .25 per share, on a 34% increas e

in revenue to $86 .8 million . The Company also announced that its average daily census for the 2n d

quarter of FY04 increased 34% to 5,758 patients, while the average length of stay for the quarte r

increased to 79 days, compared to 74 days in the 2nd quarter of FY03 . In the Company' s earnings

release, Gasmire, with the approval of Burnham and Cannon, attributed the Company' s results to the

success of Odyssey's business model, expansion strategy and reputation in the medical community

for providing excellent care to hospice patients and their families, stating :

"We are pleased with Odyssey's operational and financial performance in thesecond quarter of 2004," said David C. Gasmire, president and chief executiveofficer . "We achieved strong revenue growth while also improving our operationalefficiency, which was our most significant goal as we entered the year . In addition ,

-42-

cash flows from operations were strong as we began collecting from Medicare forservices associated with acquisitions made in the past ten months . The credit forthese results, and more importantly the excellent care we provide to patients andfamilies every day, goes to our staff across the country . We deeply appreciateeverything they do . "

95 . Commenting on Odyssey' s expansion program , defendants further stated that "the

company's Athens, Ga ., hospice program was certified to accept Medicare patients . "

96. Following the release of the Company's 2nd quarter FY04 earnings press release ,


information provided by Odyssey's senior management. For example, on August 4, 2004, Jefferies

& Company issued a report, written by Frank G. Morgan, which recommended the purchase o f

Odyssey stock as a "Buy," stating :

We maintain our rating of BUY on shares of Odyssey HealthCare , Inc ., with ap ri ce target of $26 . Second quarter ESP of $0 . 25 versus $ 0.20 a year ago were inline with consensus and our estimate . . . . Admissions increased 26 .2% year overyear, to 7,726 . . . . At the end of the quarter for the twelve -month period, thecompany's average daily census increased by 31 .5 %, or 1,850 patients , to 7,717 . . . .Cash flow from operations demonstrated a second quarter of sequential improvementand increased significantly, to $10 . 2 million, up from $6.1 million in the first quarter,and is expected to improve further over the next few quarters. The company hadreceived Medicare provider numbers tie-in notices and was able to bill for its SaltLake City (September 2003) and Brownsville , Texas (November 15, 2003)acquisition in the quarter . Receipt of tie-in notices in 3Q04 for the 1Q04 Ama rilloand Conway acquisition as well as for an early 2Q04 acquisition should fu rtheraugment cash flow growth in 3Q04 .

We are maintaining our 2004 and 2005 EPS estimates of $1 .03 and $1 .25,respectively. Management reiterated its guidance for 2004 EPS of $1 .03-$1 .05 . . . .Management anticipates continued margin improvement throughout the year withsome additional expense associated with de novo development and strategicinitiatives in the second half of the year. . . . We continue to believe that the generalindustry outlook, particularly the Medicare environment for hospice providers,remains favorable . We maintain our Buy rating and $26 price target .

97. Similarly, on August 3, 2004, after discussions with Odyssey's Gasmire and Cannon ,

Stifel, Nicolaus & Company issued a report, written by Bilal Basrai, which rated Odyssey stoc k

"Market Outperform," stating :

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2Q04 Results Should Please the Street; Expect Positive Industry Catalyst OverNext 2 Weeks

BOTTOM LINE: 2Q04 was the second consecutive quarter that ODSYposted good and "clean" results, and we would expect the company to reaffirm 2004guidance on its conference call this morning . . . . We believe the company is makingsolid progress and is moving in the right direction and continue to think that 2H04 iswhen the company will have resolved most issues, financial results will exceedexpectations , and valuations will move higher accordingly . We continue torecommend purchase of ODSY shares .

98 . Likewise, on September 14, 2004, after meeting with Odyssey senior management ,

SG Cowen issued a report which noted that Odyssey's "[n]ear-[t]erm [e]arn ings [o]utlook [was ]

[o]kay." The report, written by Kemp Dolliver, stated :

We recently met with several members of senior management includingPresident and CEO David Gasmire, CFO Doug Cannon and VP-InvestorRelations/Corporate Communications Jenny Haynes . The discussion covered severalareas - competitive environment, strategy, and 2004/2005 earnings drivers .

Despite the issues discussed above, management reports that labor and drugcosts remain under control . Drug costs/day in Q2 were $8 .16 with prospects formodest improvement. Labor cost/day remains $38-39 with 3-4% wage inflation, butturnover is modestly higher this year . . . . For now, our EPS estimate of $1 .03(+23%) in 2004 and $1 .25 (+21%) in 2005 look achievable .

99. In response to these positive statements, Odyssey's stock price surged higher an d

continued to trade at artificially inflated prices . In fact, however, the statements in ¶¶91-95 wer e

false and misleading when made. At the time these statements were made defendants actually kne w

that Odyssey's expansion program was not succeeding and could not be sustained because th e

Company's expansion activity had overwhelmed Odyssey's infrastructure and resources and, as a

result, the Company was expe riencing se rious problems integrating newly acquired hospice centers ,

as detailed above . In addition, defendants knew that Odyssey was violating federal Medicare an d

Medicaid laws by admitting patients who did not qualify for hospice care, billing the government fo r

services rendered to hospice patients that were not actually provided, and failing to timely discar d

patients who no longer qualified for hospice treatment under federal Medicare laws and guidelines,

-44-

all for the purpose of artificially inflating the Company's publicly reported revenues, net income an d

earnings. Moreover, defendants continued to conceal the fact that the Company was continuing t o

submit false claims to the United States for payment under Medicare and that its patient admissions ,

patient retention and billing practices violated applicable federal and state laws .

The Truth Is Revealed AboutOdyssey's Financial Condition

100. Suddenly, on October 18, 2004, Odyssey shocked the market by announcing that it s

FY04 EPS would fall below forecasts, and that the DOJ had commenced an investigation of the

Company under the False Claims Act for Odyssey's claims for payment submitted to the United

States dating from January 1, 2000 to the present . The Company also announced that Gasmire ha d

"decided to leave the company" and that Burnham , Odyssey's Chairman, will resume the "additional

duties of president and chief executive officer" of the Company "effective immediately . "

"We greatly appreciate and respect David's contributions to the companyover the past eight years, including the past nine months as president and CEO," saidMr. Burnham. "However, in light of the operational challenges we haveexperienced, all parties agreed that it was best to take quick action to put us back on asteady track . "

The company also announced that it expects to report earning per share of$0.24 for the 2004 third quarter, which ended September 30, due to weak admissionsand patient census in selected markets . . . .

The company also said its estimates earnings per share for the 2004 fiscalyear to be $0 .94 to $0.96 . . . . The company's previous guidance for the 2004 fiscalyear was $1 .03 to $1 .05 earning per share .

In an unrelated announcement[ sic], the company said the Civil Division ofthe U.S. Department of Justice (DOJ) informed the company in September that it hasbegun an investigation of the company under the False Claims Act . In itsnotification to the company, the DOJ said the investigation relates to the company'sclaims for payment submitted to the United States dating from Jan . 1, 2000, to thepresent, and covers the company's conduct with respect to patient admissions, patientretention and billing practices .

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101 . Following the release of Odyssey's 3rd quarter FY04 results, securities analysts

issued repo rt s on Odyssey in which they slashed their investment ratings and FY04 and FY0 5

earnings estimates . Legg Mason, for example, on October 19, 2004, issued a report, written by Eri c

T. Gommel, lowering FY04 and FY05 EPS estimates for Odyssey "from $1 .02 to $0.94" and "$1 .26

to $0.96," respectively. JP Morgan also issued a report, written by Andreas J . Dirnagl, downgradin g

Odyssey stock to "Underweight," citing the "the sudden departure of CEO David Gasmire" and the

Company's disclosure of the U .S . Department of Justice's investigation of Odyssey under the Fals e

Claims Act for "conduct with respect to patient admissions , patient retention and billing practices "

dating from "2000 to the present ." Likewise, on October 18, 2004, Jefferies & Company issued a

report, written by Frank G . Morgan, downgrading Odyssey stock from "Buy" to "Hold," stating :

We are lowering our rating on shares of Odyssey HealthCare, to Hold fromBuy, and we are lowering our price target, to $12 from $26 . Odyssey has pre-announced 3Q04 EPS of $0 .24, representing a $0.03 shortfall to the consensusestimate of $0 .27. The shortfall was caused by weakness in admissions and patientcensus in certain markets . . . . In addition, Odyssey has announced that theDepartment of Justice (DOJ) has launched a civil investigation into the company'sbilling practices for claims from January 2000 until present . We see no catalyst forthe stock given the weakness in company operating fundamentals and the onset of agovernment investigation .

We are lowering our 2004 EPS estimate, to $0.94 from $1.03.

102 . On this news, Odyssey's stock price collapsed by nearly 48%, falling to as low as

$ 8 .80 per share , on extraordinarily heavy volume of 24 . 2 million shares .

103 . As a result of defendants' misconduct, Lead Plaintiffs and the Class suffered tens o f

millions of dollars in damages . By contrast, however, defendants' profited handsomely from thei r

fraudulent scheme to artificially inflate the price of Odyssey common stock during the Class Period ,

selling 969,526 shares of their Odyssey stock, for $24 .1 million in unlawful insider trading proceeds .

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ODYSSEY 'S FALSE FINANCIAL STATEMENT S

104 . In order to overstate its revenues , net income and EPS during the Class Period,

Odyssey violated GAAP and SEC rules by failing to properly repo rt its Class Period financial

results . These financial statements and the statements about them were false and misleading, as such

financial information was not prepared in conformity with GAAP , nor was the financial information

a fair presentation of the Company 's operations due to the Company's improper accounting for its

revenues and receivables , in violation of GAAP and SEC rules . Defendants manipulated Odyssey's

financial statements and falsified the doubtful account allowance which a rtificially inflated

Odyssey's revenue, income and receivables by generating artificial Medicare revenue in several of

the Company's programs . Specifically, the Company was admitting ineligible Medicare patients to

its hospice programs and failing to discharge patients who had become ineligible for its hospice

programs and billing Medicare regardless .

105 . GAAP are those principles recognized by the accounting profession as the

conventions , rules and procedures necessary to define accepted accounting practice at a part icular

time. Regulation S-X (17 C .F . R. §210.4-01 (a) (1)) states that financial statements filed with the

SEC which are not prepared in compliance with GAAP are presumed to be misleading and

inaccurate . Regulation S-X requires that interim financial statements must also comply with GAAP,

with the exception that interim financial statements need not include disclosure which would be

duplicative of disclosures accompanying annual financial statements . 17 C.F.R. § 210.10-01(a) .

106 . Due to these accounting improprieties , the Company presented its financial results

and statements in a manner which violated GAAP, including the following fundamental accounting

principles :

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(a) The principle that interim financial reporting should be based upon the same

accounting principles and practices used to prepare annual financial statements was violated (APB

No. 28, ¶10) ;

(b) The principle that financial reporting should provide information that is useful

to present and potential investors and creditors and other users in making rational investment, credi t

and similar decisions was violated (Financial Accounting Standards Board ("FASB") Statement o f

Concepts No. 1, ¶34) ;

(c) The principle that financial reporting should provide information about th e

economic resources of an enterprise, the claims to those resources, and effects of transactions, event s

and circumstances that change resources and claims to those resources was violated (FAS B

Statement of Concepts No . 1, ¶40) ;

(d) The principle that financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it was violated . To the extent that management offers

securities of the enterprise to the public, it voluntarily accepts wider responsibilities fo r

accountability to prospective investors and to the public in general (FASB Statement of Concept s

No. 1, ¶50) ;

(e) The principle that financial reporting should provide information about an

enterprise's financial performance during a period was violated . Investors and creditors often us e

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 performanc e

(FASB Statement of Concepts No . 1, ¶42) ;

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(f) The principle that financial repo rting should be reliable in that it represent s

what it purports to represent was violated . That information should be reliable as well as relevant i s

a notion that is central to accounting (FASB Statement of Concepts No . 2, ¶¶58-59) ;

(g) The principle of completeness, which means that nothing is left out of th e

information that may be necessary to insure that it validly represents underlying events an d

conditions was violated (FASB Statement of Concepts No. 2, ¶79) ; and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to

try to ensure that uncertainties and risks inherent in business situations are adequately considere d

was violated . The best way to avoid injury to investors is to try to ensure that what is reporte d

represents what it purports to represent (FASB Statement of Concepts No . 2, ¶¶95, 97) .

107. Further, the adverse information concealed by defendants during the Class Period i s

the type of information which, because of SEC regulations, regulations of the national stoc k

exchanges and customary business practice, is expected by investors and securities analysts to b e

disclosed and is known by corporate officials and their legal and financial advisors to be the type o f

information which is expected to be and must be disclosed .

STATUTORY SAFE HARBOR

108. The statutory safe harbor provided for forward-looking statements ("FLS") does no t

apply to the false FLS pleaded . The safe harbor does not apply to Odyssey's false financial

statements . None of the specific oral FLS were identified as "forward-looking statements" whe n

made, it was not stated that actual results "could differ materially from those projected," nor di d

meaningful cautionary statements identifying important factors that could cause actual results t o

differ materially from those in the FLS accompany those FLS. Defendants are liable for the false

FLS pleaded because at the time each FLS was made, the speaker knew the FLS was false, and th e

FLS was authorized and/or approved by an executive officer of Odyssey who knew that the FLS wa s

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false. None of the historic or present-tense statements made by defendants were assumptions

underlying or relating to any plan, projection or statement of future economic performance, as the y

were not stated to be such assumptions underlying or relating to any proj ection or statement of futur e

economic performance when made nor were any of the projections or forecasts made by defendant s

expressly related to or stated to be dependent on those historic or present tense statements when

made .

CLASS ACTION ALLEGATION S

109 . This is a class action on behalf of all persons who purchased Odyssey common stock

between May 5, 2003 and October 18, 2004, inclusive, excluding defendants (the "Class") . Class

members are so numerous that joinder of them is impracticable .

110 . Common questions of law and fact predominate and include whether defendants :

(i) violated § § 10(b) and 20(a) of the 1934 Act ; (ii) violated SEC Rule I Ob-5 ; (iii) omitted and/o r

misrepresented material facts ; (iv) knew or were reckless in disregarding that their statements wer e

false ; and (v) artificially inflated Odyssey's stock price and the extent of and appropriate measure of

damages.

111 . Lead Plaintiffs' claims are typical of those of the Class . Prosecution of individual

claims would create a risk of inconsistent adjudications . Lead Plaintiffs will adequately protect th e

interest of the Class. A class action is superior to other available methods for the fair and efficien t

adjudication of this controversy .

CLAIMS FOR RELIEFFIRST CLAIM FOR RELIE F

(Against All Defendants Violations of §10(b) of the 1934 Actand Rule 10b-5 Promulgated Thereunder)

112 . Lead Plaintiffs incorporate ¶¶1-112 .

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113 . Defendants violated § 10(b) and Rule I Ob-5 by : ( i) employing devices, schemes and

artifices to defraud ; (ii) making untrue statements of material fact and omitting to state material fact s

necessary in order to make the statements made, in light of the circumstances under which they were

made, not misleading ; and (iii) engaging in acts, practices and a course of business that operated as a

fraud or deceit upon the Class in connection with their purchases of Odyssey common stock .

114. The undisclosed adverse information concealed by defendants during the Class Perio d

is the type of information which, because of SEC regulations, regulations of the national stock

exchanges and customary business practice, is expected by investors and securities analysts to b e

disclosed and is known by corporate officials and their legal and financial advisors to be the type o f

information which is expected to be and must be disclosed .

115 . Lead Plaintiffs and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for Odyssey common stock . Lead

Plaintiffs and the Class would not have purchased Odyssey common stock at the prices they paid, o r

at all, if they had been aware that the market price had been artificially inflated by defendants' false

and misleading statements detailed herein .

SECOND CLAIM FOR RELIE F

(Against All Defendants for Violations of §20 (a) of the 1934 Act)

116. Lead Plaintiffs incorporate ¶¶1-115 .

117. Defendants Bumham, Gasmire and Cannon acted as control persons of Odyssey

within the meaning of §20(a) of the 1934 Act . Odyssey is a control person of its employees . By

virtue of their executive positions, Board membership, and/or stock ownership, Burnham, Gasmire ,

Cannon and Odyssey each 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 disseminatio n

of the various statements which Lead Plaintiffs and the Class contend are false and misleading .

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Burnham , Gasmire , Cannon and Odyssey each had unlimited access to Odyssey's press releases ,

public filings and other statements alleged by Lead Plaintiffs and the Class to be false prior to and/o r

shortly after these statements were issued and had the ability to prevent the issuance of th e

statements or cause the statements to be corrected .

118. Burnham, Gasmire and Cannon were the three highest ranking members of Odyssey' s

small, insular senior management team . At all relevant times, they each had direct involvement i n

the daily operations of the Company' s business and financial affairs and, therefore, are presumed to

have had the power to control or influence the acts and material omissions giving rise to the

securities violations alleged herein and exercised the same. Odyssey, at all relevant times, controlle d

Burnham, Gasmire, Cannon and each of its officers, directors and employees .

119. By reason of such wrongful conduct, Burnham, Gasmire, Cannon and Odyssey ar e

liable as control persons under §20(a) of the 1934 Act . As a direct and proximate result of thes e

defendants' wrongful conduct, Lead Plaintiffs and the Class suffered damages in connection wit h

their purchases of Odyssey' s common stock du ring the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiffs and the Class pray for judgment as follows: (i) declaring thi s

action to be a proper class action ; (ii) awarding damages, including interest ; and (iii) such other relie f

as the Court may deem just and proper .

JURY DEMAND

Lead Plaintiffs and the Class demand a trial by jury.

DATED: October 31, 2005 PROVOST & UMPHREY LAW FIRM, LLPJOE KENDALLState Bar No . 11260700

JOE ENDALL

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3232 McKinney Avenue, Suite 700Dallas, TX 75204Telephone : 214/744-3000214/744-3015 (fax )

Liaison Counse l

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

WILLIAM S . LERACHDARREN J. ROBBINSTRAVIS E. DOWNS IIIVALERIE L . McLAUGHLIN655 West Broadway, Suite 1900San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax)

Lead Counsel for Plaintiffs

CERTIFICATE OF SERVIC E

I hereby certify that on October 31, 2005, I electronically filed the foregoing document wit h

the clerk of the court for the U.S . District Court, using the electronic case filing system of the court .

The electronic case filing system sent a "Notice of Electronic Filing" to all attorneys of record who

have consented in writing to accept this Notice as service of documents by electronic means . I

hereby certify that I have served the foregoing document on all individuals who have not consented

to electronic notification by mail .

WILLIE C . BRISCOE

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