Larry Elam, et al. v. Centene Corporation, et al. 06-CV-1142...

Case 4:06-cv-01 142-CDP Document 24 Filed 01/17/2007 of

UNITED STATES DISTRICT COURTEASTERN DISTRICT OF MISSOURI

Eastern Division

LARRY ELAM and WAYNE STOLTE,Individually and on Behalf of All OthersSimilarly Situated,

Plaintiff,CASE NUMBER 4: 06 CV 01142 CDP

vs.JURY TRIAL DEMANDED

MICHAEL NEIDORFF, J. PER BRODINKAREY D. WITTY, AND CENTENECORPORATION,

Defendants.

CONSOLIDATED AMENDEDCLASS ACTION COMPLAINT

Lead Plaintiff Wayne Stolte and plaintiff Larry Elam, by and through their attorneys,

allege the following upon information and belief, except as to those allegations concerning

Plaintiffs, which are alleged upon personal knowledge. Plaintiffs' information and belief are

based upon, among other things, their counsel's investigation, which includes without limitation:

(a) review and analysis of regulatory filings made by Centene Corporation. ("Centene or the

"Company ) with the United States Securities and Exchange Commission ("SEC ); (b) review

and analysis of securities analysts' reports concerning Centene; (c) review and analysis of press

releases and media reports issued by and disseminated by Centene; and (d) review of other

publicly available information concerning Centene including copies of Centene's publicly

available response to the State of Tennessee's Request for Proposal, Centene's Indiana provider

manual, and Centene's Texas provider manual.


1. This is a class action against Centene and certain of its officers and directors for

violation of the federal securities laws. Plaintiffs bring this action on behalf of themselves and all

other persons or entities, except for Defendants and certain of their related parties as described

below, who purchased Centene securities (the "Class ) during the period April 25, 2006 through

July 17, 2006, inclusive (the "Class Period ).

2. This action involves a fraudulent scheme whose goal was to conceal adverse

developments from the investing public concerning Centene's escalating medical costs , and other

internal problems, for so long as it took for insiders to sell off their personally-owned shares at

artificially high prices. The defendants' fraudulent scheme artificially inflated the price of

Centene's common stock during the Class Period.

3. The scheme allowed Company insiders to manipulate their sales under an

"automatic selling program purportedly adopted December 15, 2005. Under this program, CEO

Neidorff, who traditionally derived a substantial portion of his income through the sale of

Centene shares, was selling shares approximately every two months: for example, sales were

automatically effectuated in February 2006 and April 2006. The April 2006 sales allowed

Neidorff to realize sales proceeds of $1,100,858. At the time of this April sale, Neidorff knew the

Company had experience a serious setback in the months of February and March 2006 and that

that Centene's stock price would drop sharply if the adverse news was promptly revealed to

shareholders. Instead of fulfilling his disclosure obligations, Neidorff did not promptly announce

the February and March 2006 setback, and did not withdraw earnings projections that could not

be fulfilled in light of the events in February and March 2006. Rather, he represented subsequent

to February and March and before the end of the Class Period that Centene faced no "big issues

with which shareholders should be concerned. During this time, after the April 2006 insider sales

2


were done, Neidorff halted his "automatic sales program. This creates a strong inference that

Neidorff knew what the stockholders did not. That a major stock decline would soon devastate

the stock price upon the belated announcement of the bad news regarding the first quarter 2006

numbers . Tellingly, the shares Neidorff sold in April 2006 were shares obtained by him through

the simultaneous exercise of options that were granted to him largely on July 24, 2002. This

grant date coincided with the lowest closing price of Centene shares in the entire month of July

2002 (a pre-split closing price of $22.71 on July 23, 2002, which was also the lowest closing

price in over four months),' suggesting that the options Neidorff exercised in order to dump

shares in April 2006 had been manipulatively priced in 2002 to provide Neidorff with illicit

profits . Neidorff therefore had a strong motive to exercise these options , and sell the underlying

shares, before it was discovered that their grant date had been manipulated so as to select an

artificially low exercise price. The widespread and unlawful practice by certain companies of

backdating or manipulating option grant dates was first exposed in a Wall Street Journal article

dated March 18, 2006 entitled, "The Perfect Payday. This has led to a widespread financial

scandal that has rattled many companies, leading to criminal actions, SEC complaints, and

shareholder lawsuits across the nation. Many companies, upon revelation of this practice, have

cancelled options grants that were backdated or manipulated before insiders could exercise the

options and sell off the underlying shares. Neidorff's April 2006 selling prices were slightly

above $25 per share . When the fraud was disclosed, Centene shares dropped to $13. 60 a share, a

decline of almost 50 per cent . Thus, Neidorff unlawfully gained hundreds of thousands of dollars

1 The stock had not closed at such a low price since March 10, 2002.

3


by exercising apparently manipulated options, and selling 40,000 underlying shares, while in

possession of undisclosed material adverse information.

4. Centene ' s earnings are largely a function of the Company' s ability to manage

medical costs. Medical costs include payments to physicians, hospitals, and other providers for

healthcare and specialty services claims , as well as estimates of medical claims incurred by not

reported ("IBNR ). IBNR is essentially an estimate of claims liability, representing medical

events that occurred before the end of a given reporting period, but which had not yet been

formally billed to the Company. An important measure of how the Company is doing financially

is its Health Benefits Ratio ("HBR ), which represents medical costs (including the IBNR) as a

percentage of premium revenues. According to Centene's Form 10-Q for the first quarter ended

March 31, 2006 ("First Quarter Form 10-Q ), Centene's HRB was 82 . 8% (i.e., costs were 82.8%

of premium revenues).

5. On April 25, 2006, Centene issued its First Quarter 2006 earnings release which

painted a rosy picture of the situation and was in line with analyst estimates for the quarter. Two

days later, on April 27, 2006, Neidorff exercised options and sold 13,400 shares at $25.21 per

share for a total of $337,814 through his lOb5-1 automatic trading plan. On April 28, 2006,

Neidorff exercised options and sold 26,600 shares at $25. 34 per share for a total of $674,044.

After that, the selling stopped. Defendant Neidorff had continuously sold shares , either pursuant

to his lOb5- 1 automatic selling plan or by some other means , since November 2003. After April

27 and April 28, 2006, however, the stopped the sales because Neidorff knew that as weeks

passed, it would become more and more implausible for him to deny knowledge of the

Company's setbacks in February and March 2006. Moreover, as discussed above, Neidorff had

reason to "squeeze in one more sale of shares, as the particular he chose to sell were those he

4


obtained by means of a 2002 options grant made at a suspiciously low strike price. As the option

pricing scandal began to unfold in March 2006, Neidorff had reason to fear that his 2002 options

would be investigated, and taken away from him before exercise.

6. Unbeknownst to the investing public, $9.7 million of medical costs attributed to

the First Quarter more than Centene 's net earnings for the First Quarter of 2006 - had

simply not been recognized in that quarter, and was not made the subject of the required account-

ing reserve. Centene's reported net earnings for its first quarter ended March 31, 2006, were only

$8,766,000, substantially less than Centene' s net earnings for its first quarter of 2005. In

addition, defendants' failure to account for $9.7 million in medical costs attributable to the First

Quarter caused Centene's HBR percentage to appear lower than it really was. Defendants knew

or recklessly disregarded that Centene was experiencing higher medical costs during the First

Quarter. In fact, defendants only first revealed this materially adverse information after they had

one last opportunity to sell significant amounts of their personal holdings of Centene common

stock.

7. Defendants continued to mislead the public about the level of medical costs

incurred in the First Quarter and about the Company's outlook for its Second Quarter. On June

20, 2006, Neidorff point blank misled the Company's investors at an analyst meeting that took

place only ten days before the close of the Second Quarter 2006 and only one month before

Centene shocked the market by announcing drastically lower-than-expected earnings in its July

18, 2006 press release due to large adjustments relating to the first quarter, which ended

almost four months earlier. On June 20, 2006 at the Wachovia Securities investor summit on

Nantucket Island, defendant Neidorff affirmatively stated that, despite ongoing cost pressures,

there were no problems with Centene's finances. Neidorff stated that Centene doesn't comment

5


on guidance unless there is a material change, and in that context, he wasn't commenting on

guidance. "We're not projecting anything that is devastating or any devastation out there,

Neidorff said in remarks that were carried over Internet . "I'm not worried about big issues or big

blowups. I'm worried about little things like I'm talking to you about, our ability to fix them in a

timely enough fashion that it doesn't impact one quarter or another. (Emphasis added).

8. On July 18, 2006, less than one month after the Wachovia summit, Centene

shocked the market by announcing that its Second Quarter earnings would be substantially lower

than expected due to large adjustment relating to medical care provided or begun in the First

Quarter. The stock price dropped dramatically as a direct result of Centene's disclosure closing

at $13.60 per share, a drop of $7.44 per share in a single day. Trading volume exceeded 20

million shares.

9. In stark contrast to the Company' s unremittingly positive statements , however,

Centene was plagued by serious problems of which Defendants were aware. Specifically,

Defendants knew that adverse medical costs were negatively impacting the Company's financial

results . While in possession of the undisclosed materially adverse information about the

Company, defendants Neidorff and Senior VP Witty (who is also a CPA and who was Centene's

CFO through most of April 2006) sold large blocks of their personal holdings of Centene

common stock. Then, and still, prior to revealing the devastating adverse news, these same

individual defendants halted further sales of their stock by discontinuing their long-standing

automatic stock sales plans.

6


JURISDICTION AND VENUE

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

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

"Exchange Act ) (15 U.S.C. § 78aa).

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

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

240. l Ob-5.

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

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

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

its principal executive offices in this District.

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

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

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

the national securities markets.

PARTIES

15. By order dated November 17, 2006, Wayne Stolte was appointed by the Court as

Lead Plaintiff. Plaintiff Larry Elam filed the first action against defendants. Plaintiffs purchased

Centene common stock during the period April 25, 2006 through and including July 17, 2006

(the "Class Period ), as described in their certifications previously submitted to the Court.

16. Centene is organized under the laws of the State of Delaware and is headquartered

in St. Louis, Missouri. Centene common stock is traded in an efficient market on the New York

Stock Exchange under the symbol "CNC . Centene is a leading multi-line healthcare enterprise

7


that provides programs and related services to individuals receiving benefits under Medicaid and

Medicaid-related programs, including Supplemental Security Income ("SSI ) and the State

Children's Health Insurance Program ("SCHIP ). In addition, the Company contracts with other

healthcare organizations to provide specialty services including behavioral health, disease

management, nurse triage, pharmacy benefit management, and treatment compliance.

17. According to Centene's 2005 Form 10-K for its year ended December 31, 2005,

the Company operates health plans in Indiana, Kansas , Missouri, New Jersey, Ohio, Texas, and

Wisconsin.

18. Michael Neidorff has served as Centene's Chairman and Chief Executive Officer

since May 2004. From May 1996 to May 2004, Neidorff served as President, Chief Executive

Officer and as a member of the Company's board of directors. From May 1996 to November

2001, Neidorff also served as Centene's Treasurer. According to the Company's 2005 Form 10-

K, Neidorff's salary and bonus for 2005 was $1,850,000 and as of the end of last year he held

restricted stock valued at $26 million. The Company also recorded $135,547 last year in

compensation for Neidorff representing the value of personal trips he took on the corporate jet.

Neidorff augmented his 2005 earnings by approximately $8.33 million through the exercise of

stock options and the sale of Centene shares.

19. J. Per Brodin has served as Centene's Senior Vice President and Chief Financial

Officer since April 24, 2006. Prior to that, from November 2005 to April 2006, Brodin served as

Centene's Vice-President and Chief Accounting Officer.

20. Karey L. Witty has served as Centene's Senior Vice President and Chief Executive

Health Plan Business since April 25, 2006. He served as the Company's Senior Vice President

and Chief Financial Officer from August 2000 to April 24, 2006. From March 1999 to August

8


2000, Witty served as Centene's Vice President of Health Plan Accounting. From 1996 to March

1999, Witty was Controller of Heritage Health Systems, Inc., a healthcare company in Nashville,

Tennessee.

21. On April 24, 2006, just one day before Centene announced its financial results for

the First Quarter 2006 Centene announced that it had moved Defendant Witty from his position

as CFO to Senior Vice President and Chief Executive of Centene's Health Plan Business Unit. In

this same announcement , Centene stated that Defendant Brodin would replace Defendant Witty

as CFO.

22. Defendants Michael Neidorff, J. Per Brodin and Karey Witty are herein collectively

referred to as the "Individual Defendants .

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

Centene and its public disclosures. Each of them made false and misleading statements or failed

to disclose material adverse information concerning the Company's business and operations

during the Class Period, as detailed herein. Because of the Individual Defendants' positions with

the Company, they had access to the adverse undisclosed information about its business,

operations, products, operational trends, financial statements, markets, and present and future

business prospects via access to internal corporate documents (including the Company's operat-

ing plans, budgets, and forecasts and reports of actual operations compared thereto), conversa-

tions and connections with other corporate officers and employees , attendance at management or

Board of Directors meetings and committees thereof, and by reports and other information

provided to them in connection therewith.

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

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

9


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

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

of the above officers or directors of Centene, who by virtue of their high level positions with the

Company directly participated in the management of the Company, were directly involved in the

day-to-day operations of the Company at the highest levels , and were privy to confidential

proprietary information concerning the Company and its business, operations, products, growth,

financial statements , and financial condition, as alleged herein. The Individual Defendants were

involved in drafting, producing, reviewing or disseminating the false and misleading statements

and information alleged herein, were aware or deliberately disregarded that the false and

misleading statements were being issued regarding the Company, and approved or ratified these

statements in violation of the federal securities laws.

25. As officers or directors and controlling persons of a publicly held company whose

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

New York Stock Exchange, and governed by the provisions of the federal securities laws, the

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

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

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

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

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

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

the Class Period violated these specific requirements and obligations.

26. The Individual Defendants participated in the drafting, preparation or approval of

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

10


herein, and were aware of, or deliberately disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

their Board membership or executive and managerial positions with Centene, each of the

Individual Defendants had access to the adverse, undisclosed information about the Company's

operations, the financial condition and performance of the Company as particularized herein and

knew (or deliberately disregarded) that these adverse facts rendered the positive representations

made by or about Centene and its business issued or adopted by the Company materially false

and misleading.

27. The Individual Defendants, because of their positions of control and authority as

officers or directors of the Company, were able to and did control the content of the various SEC

filings , press releases and other public statements pertaining to the Company during the Class

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

be misleading prior to or shortly after their issuance or had the ability or opportunity to prevent

their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and are therefore

primarily liable for the representations contained therein.

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

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

Centene common stock during the Class Period by disseminating materially false and misleading

statements or concealing material adverse facts. The scheme deceived the investing public about

Centene's business, operations, and the intrinsic value of the Company's common stock, and

caused plaintiffs and other members of the Class to purchase Centene common stock at

artificially inflated prices.

11


29. Under the rules and regulations promulgated by the SEC under the Exchange Act,

specifically Item 303 of Regulations S-K, the Individual Defendants also had a duty to report all

trends, demands or uncertainties that were reasonably likely to impact Centene's revenue,

expenses and of previously-reported financial information such that they would be indicative of

future operating results . The representations of the Individual Defendants during the Class Period

violated these specific requirements and obligations.

CLASS ACTION ALLEGATIONS

30. Plaintiffs bring this as a class action pursuant to Federal Rule of Civil Procedure

23(a) and (b)(3) on behalf of all persons who purchased Centene securities during the Class

Period of April 25, 2006 through July 17, 2006, inclusive. Excluded from the Class are

Defendants , officers and directors of the Company, members of the immediate families of the

Individual Defendants, and each of their legal representatives , heirs, successors or assigns and,

any entity in which any Defendant has or has had a controlling interest.

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

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

throughout the United States and are so numerous that joinder of all Class members is impractic-

able. While the exact number of Class members is unknown to Plaintiffs at this time and can

only be ascertained through appropriate discovery, Plaintiffs believe that Class members number

in the thousands. Millions of Centene shares are traded publicly on the New York Stock

Exchange ("NYSE ) under the symbol "CNC . As of December 31 , 2005 , Centene had

42,988,230 shares of common stock outstanding.

12


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

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

laws as alleged herein;

c. Plaintiffs will fairly and adequately represent and protect the

interests of the Class and have retained counsel competent and experienced in class action

litigation. Plaintiffs have no interests antagonistic to, or in conflict with, the Class that Plaintiffs

seek to represent;

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

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

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

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

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

Class members prosecuting separate claims is remote;

e. Plaintiffs anticipate no unusual difficulties in the management of

this action as a class action; and

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

predominates over any questions affecting individual members of the Class.

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

i. whether Defendants' acts and/or omissions as alleged

herein violated the federal securities laws;

ii. whether the Company's Class Period public statements and

filings misrepresented or omitted material facts;

13


iii. whether Defendants acted with knowledge or with reckless

disregard for the truth in misrepresenting or omitting material facts;

iv. whether Defendants participated in and pursued the

common course of conduct complained of herein;

v. whether the market price of Centene securities was inflated

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

Period; and

vi. to what extent the members of the Class have sustained

damages and the proper measure of damages.

BACKGROUND

32. Medicaid covers approximately 55 million poor and disabled Americans.

According to the Wall Street Journal, Medicaid is one of the largest government programs, with

an annual price tag over $300 billion.

33. Medicaid provides a lucrative business opportunity for many companies like

Centene that act as middlemen between the government and Medicaid recipients. Essentially,

the government outsources the function of paying for the medical treatment of Medicaid

recipients to these Medicaid HMOs. The government pays each Medicaid HMO a fixed monthly

amount for each Medicaid recipient on its plan, and the HMO then pays for that recipient's

healthcare needs.

34. The Medicaid HMO business is a low-margin business. Centene's, profit margins

are in the low single-digits . In 2005, on revenue of $1.5 billion, Centene's net earnings were

$55.6 million, for a profit margin of 3.6%. Thus, the incentive to monitor and address cost issues

14


is high a slight increase in cost can easily wipe out profits and have a material impact on the

share price.

35. Medical costs include payments to physicians, hospitals , and other providers for

healthcare and specialty services claims. Medical costs are Centene's single biggest operating

expense. Defendants have repeatedly assured the investing public of their ability to monitor

medical cost trends to ensure and enhance the "predictability and consistency of [Centene's]

financial results. In fact, in September 2005, Centene held a "contracting and claims liability

accounting methodology seminar to help participants understand key factors necessary for

"consistent control over costs and reduc[ing] volatility by focusing on "claims processing and

system reporting, sound contracting, consistent claims liability reserving and provider relation-

ships .

36. Medical costs also include estimates of medical expenses incurred but not yet

reported ("IBNR ) and estimates of the cost to process unpaid claims. Defendants affirmatively

represented that Centene estimated its IBNR on a monthly basis based on a number of factors,

including in-patient hospital utilization data and prior claims experience. As part of the review,

defendants also represented that they considered the "costs to process medical claims, and

estimates of amounts to cover uncertainties related to fluctuations in provider billing patterns,

membership, products and inpatient trends. Defendants used independent actuaries to review

the Company's quarterly estimates.

37. IBNR is essentially an estimate of claims liability. Even though medical events may

have occurred before the end of a given reported period, claims for the expenses may not have

been submitted to the Company. As a result, the Company must estimate its claims liability, and

is required under accounting rules to do so fairly and conservatively, so as not to underestimate.

15


An important measure of how the Company is doing is its HBR, which represents medical costs,

including the IBNR, as a percentage of premium revenues. For the First Quarter of 2006,

Centene's HRB was 82.8%.

38. On February 24, 2006, Centene filed with the SEC its Annual Report on Form 10-K

for the period ending December 31, 2005. With that report, the Company submitted to the SEC

the certifications of its principal executive officer (Neidorff) and principal financial officer

(Witty) as required by to 18 U.S.C. 1350, adopted as Section 906 of the Sarbanes-Oxley Act of

2002.

39. According to the Company's 2005 Form 10-K, most of Centene's revenues are

derived from Medicaid, SCHIP, and SSI premiums. In the Company's Medicaid Managed Care

segment, revenues are generated by premiums consisting of fixed monthly payments per

member. The base premium rate paid by each state differs, depending on a combination of

factors. In 2005, operations in Arizona, Indiana, Kansas, Missouri, New Jersey, Ohio, Texas, and

Wisconsin accounted for most of the Company's revenues.

40. According to the 2005 Form 10-K, medical costs include payments to physicians,

hospitals, and other providers for healthcare and specialty services claims. The 2005 Form 10-K

stated that on a monthly basis the Company estimates IBNR based on a number of factors,

including inpatient hospital utilization data and prior claims experience . As part of this review,

Centene considers the cost to process medical claims and estimates amounts needed to cover

uncertainties related to fluctuations in physician billing patterns, membership, products and in-

patient hospital trends. According to the 2005 10-K, defendants used the services of independent

actuaries who are contracted to review Centene's estimates on a quarterly basis.

16


41. In the 2005 10-K, Centene highlighted the "efficiency of its business model:

We have designed our business model to allow us to readily add new members inour existing markets, expand into new regions in which we choose to operate andmore fully develop our services. The combination of our decentralized localapproach to operating our subsidiaries and our centralized finance, informationsystems and claims processing allows us to quickly and economically integratenew business opportunities in both our Medicaid Managed Care and SpecialtyServices segments. (Emphasis added)

42. A few months before filing its 2005 10-K, in response to a Request for Information

issued by the State of Tennessee dated December 12, 2005 (the "Tennessee RFI ), Centene's

submission to Tennessee details the Company's "approach to operating [its] subsidiaries and [its]

centralized finance, information systems and claims processing systems and its consistent

control over medical costs to reduce volatility. Centene represented to Tennessee its ability to

track costs as a result of its "prior authorization system. In the Tennessee RFI response, Centene

stated that it has "extensive experience in implementing prior authorization processes as a

mechanism to authorize services that may be in excess of benefit limits or that qualify for

coverage if medically necessary.

43. Throughout the Tennessee RFI response which is available to the public

Centene indicated that it gathered contemporaneous information related to a member's hospital

stay and other medical treatment. Centene represented that its staff "conducts early and ongoing

reviews of all in-patient admissions, among other things. (Emphasis added).

44. In its response to Tennessee, Centene also touted its expertise in providing medical

management services for Medicaid enrollees. Centene represented to Tennessee that it uses a

combined approach of enrollee education, prior authorization, and intensive case management to

manage enrollee benefits. On page 26 of its response Centene represents that it does "not rely on

catastrophic or benefit exhaustion to identity and manage enrollees at high risk. Specifically, the

17


Company claimed that: "[Centene's] health plan approach is focused on proactive recognition

and management of all plan benefits by providing active case management services andfocused

assistance through our extensive provider networks. Our care management programs do not rely

on catastrophic or benefit exhaustion to identity and manage enrollees at high risk. Our robust

reporting capabilities enable us to identifyenrollees early in the care process and to ensure that

services are delivered at the appropriate level. (Emphasis added)

45. Regarding its ability to monitor hospital admissions, Centene represented to the

state of Tennessee the following:

Centene realizes that we cannot prevent all inpatient admissions, and thatinevitably, some enrollees will require hospitalization . At such a time, ourexperienced Case Management staff conducts early and ongoing reviews of allinpatient admissions , which allow for rapid feedback regarding inappropriateadmissions and appropriate length ofstay, and which acts as a sentinel for futureadmissions . These ongoing reviews provide an opportunity to build strongrelationships with hospital Case Managers . A regular internal concurrent reviewor "rounds process is conducted on all "at risk cases , to ensure that each patientis being managed without delays . Peer collaboration occurs in order to determineeffective ways to intervene as necessary to improve quality or to reduceunnecessary costs.

Our talented Case Management team is also involved in discharge planning at orbefore the inpatient admissions, in order to remove barriers and to arrange for anyservices that may be required for a successful timely discharge. (Emphasis added)

46. In response to Tennessee's inquiry regarding Centene's ability to provide data and

reports to the State and the capacity to use data for ongoing program monitoring and quality

assurance Centene made the following representations regarding it data management:

Centene views effective Data Management as a core strategic capability foreffective managed care. Centene recognized the significance of structured,expertly-operated and well maintained Management Information Systems (MIS).Technology investment in this area has been an executive management priority.

Centene's multi-line business model provides an integrated framework forviewing enrollee utilization and clinical data across multiple areas of care.

18


Medical, Pharmacy, Behavioral Health and Disease Management data areavailable to form a single view of enrollee reporting.

This concept gives Centene clinical staff (to gain) immediate insight into patternsand trends [sic].

47. When discussing its ability to evaluate its own performance, Centene provided a

lengthy explanation of the tools and software products it uses to gather, track, maintain and

review client volume and claims payment data. Centene represented to the State of Tennessee

that it has the capacity and ability to "successfully integrate claims, enrollee and provider data

into a single repository by applying a series of clinical rules and algorithms that automatically

convert raw data into statistically meaningful information. The result is quick access to [the]

provider's client volume and claims payment patterns. (Emphasis added)

48. Centene stated that it loads all data into an integrated suite of software products that

"creates a sophisticated database merging clinical and claims payment patterns . This database is

called CareEnhance Resource Management ("CRMS ). According to defendants CRMS gives

"Centene quick access to core managed-care measures . This application tracks financial and

clinical information over time so that Centene can develop targeted interventions and qualify the

impact they have on quality outcomes. High-level reports are available directly to desktop for

managers . CRMS also has sophisticated, built in reporting tools for analysts.

49. The undisclosed material, adverse information concealed by Defendants during the

Class Period 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 be disclosed, and is known by corporate officials and their legal and financial

advisors to be the type of information which is expected to be and must be disclosed. As seen

from the response to Tennessee, Centene must be deemed to have known all material

19


information on a contemporaneous basis, as it had the systems in place to monitor admissions,

patient care, medical costs, and pharmacy costs on a constant and current basis.

50. Given the representations Centene made in its response to Tennessee regarding its

"active case management , "early and ongoing reviews of all inpatient admissions, which allow

for rapid feedback regarding inappropriate admissions and appropriate length of stay, and

"robust reporting capabilities, defendants knew but failed to disclose that the costs accruing in

the First Quarter would have an negative impact on the Company's medical costs . Defendants

blamed the majority of additional medical costs on the growth in membership from additional

physicians added in 2005, hospital rate changes, an additional 913 days of inpatient hospital

days, including 165 admissions not accrued for at all, 394 days attributed to only 13 cases in

Indiana, and an increase in NICU cases. These were significant liabilities that were occurring

throughout the First Quarter and defendants' explanations lack credibility given the severity of

the problem, and the Company' s extensive monitoring system, including prior authorization

requirements and active case management systems.

51. Defendants were aware long before they disclosed the additional medical costs that

Centene was experiencing these ongoing events and that these would result in additional medical

costs attributable to events that occurred in the First Quarter. There is no honest explanation as to

why the Company remained silent about this situation , and continued to assure investors all was

well, through April, May and June, not revealing the true situation until almost the end of July

2006. The Company's insiders knew the truth, but had strong incentive to seize one last lucrative

sale of shares, and then create "distance between this insider trading and the eventual revelation

of the truth.

20


SUBSTANTIVE ALLEGATIONS COMMON TO ALL COUNTS

52. On February 7, 2006, Centene filed with the SEC a Form 8-K, preliminarily

announcing its results for the year 2005. Neidorff was quoted extensively in the 8-K, and he

stated with confidence that Centene's "information systems, among other things, give Centene

"ongoing visibility and confidence in the stability and predictability of [its] business model.

53. On April 25, 2006, Centene announced its financial results for the quarter ended

March 31, 2006. For the First Quarter 2006, revenues increased 36.9% to $455.1 million from

$332.4 million in the first quarter of 2005.

54. The April 25, 2006 press release highlighted the Company's earnings as follows:

For the first quarter of 2006, revenues increased 36.9% to $455.1 million from$332.4 million in the first quarter of 2005. The increase in service revenues forthe first quarter of 2006 reflects the acquisitions of both AirLogix and US Script.

The HBR for Centene's Medicaid and SCHIP populations, which reflects medicalcosts as a percent of premium revenues, was 82.8% for the first quarter of 2006,compared to 80.6% for the same period in 2005. The results for the first quarter of2006 reflected: (1) higher utilization trends in certain markets, especially inJanuary 2006; (2) an increase in pharmacy related costs in Centene's Indiana andOhio markets; and (3) Centene's earlier expansion into new unmanaged markets.The HBR for the SSI category was 87.6% for the first quarter of 2006 comparedto 94.6% for the first quarter of 2005 and, while approaching Centene's targetrange, may be volatile given the small member base. For the Specialty Servicessegment, the HBR was 84.1% in the first quarter of 2006 versus 133.5% in thefirst quarter of 2005. The Specialty Services HBR for 2006 included thebehavioral health contracts in Arizona and Kansas, while the 2005 resultsincluded only the first three months of the behavioral health contract in Kansas.

Medicaid Managed Care general and administrative (G&A) expenses as a percentof revenues was 11.9% in the first quarter of 2006 compared to 10.8% in the firstquarter of 2005, mainly reflecting Georgia start-up costs and the expensing ofstock-based compensation as the result of Centene's adoption of SFAS No. 123R.In addition, concurrent with the closing of the US Script acquisition, the Companyaltered its corporate function allocation methodology to more closely align thoseallocations to the proportion of costs required to support each business segment.The effect of this change added 0.7% in G&A expenses to the Medicaid ManagedCare G&A ratio for the first quarter of 2006.

21


Earnings from operations of $12.6 million in the first quarter of 2006 compared to$21.3 million in the first quarter of 2005, inclusive of Georgia start-up costs.

Net earnings were $8. 8 million, or $0.20 per diluted share, for the first quarterof 2006, compared to $14.4 million, or $0.32 per diluted share, for the firstquarter of2005. (Emphasis added)

55. In the April 25 press release , Neidorff minimized the impact of the very issue that

would later cause Centene to report earnings far below Wall Street expectations higher

pharmacy costs in Indiana . Specifically, Neidorff stated:

The first quarter of 2006 met our expectations, although our results were affectedby some market specific factors. In particular, higher pharmacy costs in Indiana,and to a limited degree in Ohio, impacted our overall medical costs, adding 70basis points to our Medicaid and SCHIP HBR. We have been actively working toaddress these issues and are confident that the pharmacy costs will normalize inthe short-term. Importantly, our purchase of US Script has provided us with animportant vehicle to mitigate and positively influence our pharmacy costs. Indianaand Ohio will be transitioned to US Script in May. Wisconsin was converted tothe US Script platform in March, and we are already seeing the benefit of thisimplementation.

56. In addition , Witty reaffirmed the Company's guidance for the second quarter. t

Witty was quoted as stating:

For the second quarter of 2006, we expect revenue in the range of $495 million to$500 million and earnings per diluted share of $0.25 to $0.30. For the full-year2006, we anticipate revenue in the range of $2.08 billion to $2.16 billion andearnings per diluted share of $1.53 to $1.70. This guidance excludes our recentlyannounced acquisition of MediPlan Corporation, which we expect to close duringthe second quarter of 2006.

57. On April 25, 2006, Centene filed with the SEC its Form 10-Q for the first quarter

ended March 31, 2006 ("First Quarter Forml0-Q ). The First Quarter Form 10-Q reiterated the

financial results previously announced.

58. Neidorff and Witty each signed certifications pursuant to Securities Exchange Act

Rule 13A-14 and 15D-14 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,

and Certification Pursuant to 18 U.S.C Section 1350, falsely certifying that they reviewed the

22


First Quarter Form 10-Q; that the report did not contain any untrue statements of material fact;

and that the financial statements fairly presented in all material respects the financial condition,

results of operations and cash flows of the Company.

59. Neidorff and Witty' s certifications that Centene ' s financial statements contained in

the First Quarter Form 10-Q were fairly presented were untrue when issued because as later

revealed on July 18, 2006, Centene failed to account for $9.7 million of medical costs

attributable to the First Quarter which, had they been properly reported in the First Quarter,

would have essentially wiped out the reported net earnings and earnings per share for that

period oftime. This amount was highly material to Centene , and its shareholders.

60. The undisclosed material, adverse information concealed by defendants during the

Class Period 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 be disclosed, and is known by corporate officials and their legal and financial

advisors to be the type of information which is expected to be and must be disclosed. As seen

from the response to Tennessee, Centene must be deemed to have known all material informa-

tion on a contemporaneous basis, as it had the systems in place to monitor admissions, patient

care, medical costs , and pharmacy costs on a constant and current basis.

61. Given the representations Centene made in its response to Tennessee regarding

its "active case management , "ongoing reviews of all inpatient admissions , and "robust report-

ing capabilities , defendants knew but failed to disclose the multiple events that were occurring

in the First Quarter that would have a material negative impact on the Company's medical costs.

Defendants' reasons for the additional medical costs, including, the growth in membership from

additional physicians added in 2005, hospital rate changes, an additional 913 days of inpatient

23


hospital days, including 165 admissions not accrued for at all, 394 days attributed to only 13

cases in Indiana, and an increase in NICU cases is implausible. These adverse events would have

been detected by Centene's systems when they occurred, or very shortly thereafter.

62. Moreover, in Centene's Managed Health Service's ("MHS ) manual for

providers in Indiana, MHS requires that "special care nursery and NICU level care of services

require MHS authorization within 2 business days of the start of the services. Since MHS

requires authorization within 2 business days of the start of the services, defendants knew that

there was in an increase in "admissions for NICU births (at least in Indiana where they claim

that the adverse medical costs were the result of increased admissions for NICU births).

63. Immediately after the April 25, 2006, press release and the materially false and

misleading First Quarter Form 10-Q were disseminated , on April 27, 2006 and April 28, 2008,

Neidorff sold 40,000 shares of his personal holdings of Centene common stock at $25.21 and

$25.35 per share, respectively, pursuant to his lOb5-1 automatic trading plan. After these sales,

Neidorff did not sell any more shares in the year 2006.

64. Witty also sold thousands of shares of his personal holdings on April 28, 2006.

Witty sold 5,000 shares at $25.00 per share for proceeds of $125,000 pursuant to his lOb5-1

automatic trading plan. After this sale Witty did not sell any stock until well into October 2006

well after the Company had revealed the adverse information on July 18, 2006.

65. The statements relating to the Company's financial condition described above

were materially false and misleading when made, in violation of Section 10(b) and Rule lOb-5,

because Centene falsely reported its financial results in its April 25, 2006 press release and First

Quarter Form 10-Q. In fact, Centene has now admitted that it failed to accrue costs of at least

$9.7 million in the first quarter.

24


66. The April 25, 2006 press release and the First Quarter Form 10-Q were materially

false and misleading and omitted material facts. Defendant's statements described in paragraphs

53 to 58 above were materially false and misleading or omitted material facts because: (1)

Centene failed to accrue $9.7 million medical costs in the First Quarter; (2) defendants knew but

failed to disclose that the Company was experiencing increasing medical costs and thus misled

investors about its Second Quarter projections; and (3) the non disclosure of the additional

accrued medical costs for the First Quarter caused the Company's HBR percentage to appear

lower than it was, thereby deceiving the investing public about the Company's true financial

status. For the same reasons, Defendants had no reasonable basis to believe that Centene could

meet its 2006 Second Quarter guidance

67. Due to the failure to properly report the additional $9.7 of medical cost in the First

Quarter, the Company presented its financial results and statements in a manner that violated

GAAP, which are those principles recognized by the accounting profession as the conventions,

rules, and procedures necessary to define accepted accounting practice.

68. SEC Regulation S-X states that financial statements filed with the SEC which are

not prepared in compliance with GAAP are presumed to be misleading and inaccurate, notwith-

standing footnotes or other disclosures. Regulation S-X requires that interim financial statements

also must comply with GAAP, with the exception that interim financial statements need not

include disclosures that duplicate disclosures accompanying annual financial statements.

69. Specifically, GAAP requires accrual of an expense in the current period when it is

probable and estimable that such cost has been incurred. Statement of Financial Accounting

Standards ("FAS ) No. 5: "Accounting for Contingencies provides the guidance for the record-

ing of loss contingencies . FAS No.5 states, in relevant part:

25


As estimated loss from a loss contingency... shall be accrued by a charge toincome if both the following conditions are met: (i) Information available prior tothe issuance of the financial statements indicates that it is probable that an assethad been impaired or a liability had been incurred at the date of the financialstatements...; and (ii) The amount of loss can be reasonably estimated.

70. Furthermore, FAS No.5 states that if no accrual is made for a loss contingency

because one or both of the aforementioned conditions are not met, or if an exposure to loss exists

in excess of the amount accrued, disclosure of the contingency shall be made where there is at

least a reasonable possibility that a loss or an additional loss may have been incurred.

71. Defendants have admitted that the $9.7 million in medical costs incurred but not

recorded in the First Quarter would have adversely affected Centene's First Quarter financial

results. The magnitude of the additional medical costs and the affect they would have had on the

First Quarter had they been properly reported was material to the First Quarter financial results.

Defendants' failure to disclose these additional medical costs prior to selling large quantities of

stock gives rise to an inference of a deliberate understatement of expenses.

72. In addition, the Company' s presentation of its financial results and statements in a

manner that violated GAAP, including the following fundamental accounting principles:

(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,

credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);

(c) The principle that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources and effects of transactions,

26


events and circumstances that change resources and claims to those resources was violated

(FASB 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 (stock-

holders) 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 for accountability to prospective investors and to the public in general (FASB

Statement of Concepts 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 use

information about the past to help in assessing the prospects of an enterprise. Thus, although

investment and credit decisions reflect investors' expectations about future enterprise perform-

ance, those expectations are commonly based, at least partly, on evaluations of past enterprise

performance (FASB Statement of Concepts No. 1, ¶42);

(f) The principle that financial reporting should be reliable in that it represents what

it purports to represent was violated. That information should be reliable as well as relevant is a

notion that is central to accounting (FASB Statement of Concepts No. 2, ¶158-59);

(g) The principle of completeness, which means that nothing is left out of the

information that may be necessary to insure that it validly represents underlying events and

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 considered

27


was violated. The best way to avoid injury to investors is to ensure that what is reported

represents what it purports to represent (FASB Statement of Concepts No. 2, ¶195, 97).

73. On June 6, 2006, Centene hosted an upbeat investor day in New York City with

Neidorff touting the Company's growth opportunities . At this meeting, Centene management

reiterated its guidance for the Second Quarter 2006 and the full year 2006, with earnings per

share estimated at $1.53-$1.70.

74. In an investment comment by Wachovia Securities the same day, June 6, 2006,

Wachovia stated the Centene management ran a version of its regular internal staff meeting at

the "Informative Investor Day event. Wachovia stated:

The "Staff Meeting included informal presentations and a back-and-forthbetween executives on topical issues such as the Georgia implementation, costtrends in Indiana, updates on several state RFPs and an updated on the SpecialtySegment, among other things.

75. In the same comment, Wachovia reported that Centene's management stated that

in the First Quarter of 2006 medical cost trends were improving in Indiana and Ohio. It reported

that "management stated that [medical cost] trends have begun to improve in Q2 2006, driven in

part by the transition in each state to CNC's in-house PBM.

76. The reported statement was false and misleading . Medical cost trends were not

improving in Indiana, as Centene would later admit. Defendants either knew that the statement

was untrue or were reckless in failing to discover this fact.

77. On June 14 2006, Centene announced that it would present at the Wachovia

Securities 16th Annual Nantucket Equity Conference, to held June 19-22, 2006, at the Harbor

House Village in Nantucket, Massachusetts . Defendant Neidorff was present on Tuesday, June

20, 2006.

28


78. On June 20, 2006-just ten days before the close of the Second Quarter 2006,

Neidorff continued to mislead Centene's investors . Neidorff discussed the ongoing cost

pressures, notably drug costs in Indiana, citing figures reflecting activity from May. He added

that Centene doesn't comment on guidance unless there is a material change, and in that context,

he wasn't commenting on guidance. The purpose of this statement was to convey that there were

no material changes. "We're not projecting anything that is devastating or any devastation out

there. "I'm not worried about big issues or big blowups. I'm worried about little things like I'm

talking to you about, our ability to fix them in a timely enough fashion that it doesn't impact one

quarter or another. Neidorff said in these remarks that were carried over Internet.

79. Neidorff falsely assured the investing public through his comments at the

Wachovia Securities investor summit that there were no material changes to report regarding the

Company's financial results . Neidorff knowingly misled the investing public when he stated that

he would not comment on guidance because Centene only comments on guidance when there is

a material change, in that he knew or was reckless in not knowing that less than one month later

the Company would preliminarily announce materially revised earnings based on events that

occurred in the First Quarter of 2006.

80. Neidorff knew or recklessly disregarded that his June 20, 2006, statement was

materially false and misleading . As chief executive officer and chairman of the board represent-

ing the Company at an investor summit just 10 days prior to the end of the second quarter,

Neidorff knew the true financial condition of Centene. Certainly as of June 20, 2006, Neidorff

had all necessary financial information available to him as it related to the First Quarter and the

Second Quarter and knew that additional medical costs accrued in the First Quarter were going

to negatively impact the Company's financial results. As a result of his false and misleading

29


statements, many analysts and the investing public were assured that Centene was well

positioned to continue its earnings growth, causing analysts to reaffirm the Company's second

quarter earnings estimates and continued to tout the Company and recommend its stock.

81. Given Centene's assurance that there were no surprises, many analysts expressed

confidence in the Company's stated guidance. For example, on June 21, 2006, Goldman Sachs

issued the following statement regarding Centene.

We are publishing this brief note in response to Centene intraday decline of 6%following yesterdays decline of 4% on comments from the CEO at a competitorconference yesterday that the company saw some cost trend pressures in its Mayutilization driven by pharmacy costs in Indiana and a higher level of OB cases.While cost trend issues bear close monitoring, we think the company's commentswere an attempt to provide greater granularity on market specific trends and not awarning that the company would fall short of its 2Q and full year 2006 guidance.Furthermore, we spoke to management and they expressed strong confidence intheir stated guidance and that the cost trend issues remain manageable. Wemaintain our OP rating at 11.3X our 2007 EPS of $2.20. (Emphasis added)

82. According to William D. Georges, an analyst at JPMorgan, Neidorff represented

"the company's medical cost concerns are being driven by only a small portion of its total

medical membership. While this indeed may have been true, it was false and misleading

because it omitted to state that this small portion of Centene's membership had run up costs of

$9.7 million months before, in February and March 2006, and that this amount was highly

material to Centene.

83. On July 18, 2006, less than one month after Neidorff assured investors that there

were no "big issues or big blowups and that there was no devastating news, Centene shocked

the market by announcing that its second quarter earnings would be substantially lower than

expected.

84. On July 18, 2006, Centene announced what Defendants knew would be

devastating news. The Company announced lowered guidance, stating that its second-quarter

30


earnings will be in a range of 10 cents to 12 cents a share, including an adjustment of 14 cents a

share relating to additional medical costs in Indiana and Texas. These numbers were far below

expectations on average, analysts surveyed by Thomson Financial were looking for quarterly

profit of 28 cents per share. The July 18, 2006 press release then dropped a bombshell,

announcing "preliminary earnings per diluted share of $0.10-$0.12 for the second quarter of

2006, which includes an adjustment ofapproximately $9.7 million , or $0.14 per diluted share, for

additional medical costs primarily related to March 2006 in Indiana and Texas. (Emphasis

added).

85. Centene also announced that it is cutting its 2006 earnings guidance to a range of

95 cents to $1.04 a share on adverse medical cost trends, from a range of $1.53 to $1.70 a share.

Neidorff stated "We are truly disappointed and are working to resolve the factors which

impacted our second quarter results and will provide additional details in our conference call

next week.

86. On this news, the price of Centene stock dropped from $21.04 to $13.60 or

approximately 35%, on volume of over 20 million shares, compared with an average daily

volume of 745,430 shares . The $13. 60 closing price on July 18 was the lowest price of the year

for Centene, and Centene was the biggest percentage loser on the NYSE that day. The decline in

Centene's stock price was a direct result of the nature and extent of defendants' false statements

being revealed to investors and the market.

87. Analysts expressed surprise at the revised guidance by Centene and the charge

relating to events that occurred many months before. For example on July 18, 2006, a JPMorgan

analyst wrote: "[M]anagement's conviction in the quarter's results just last week raises concerns

31


that top management is not in touch with operations. For management to be so wrong so close to

2Q reporting is perplexing at best.

88. Also on July 18, 2006, brokerage firm Stifel, Nicolaus & Co. blasted Neidorff,

labeling him "cocksure" and questioning his management abilities. The report followed

Centene's announcement earlier in the day that Centene was taking a $9.7 million charge relating

to first quarter events, lowering its earnings guidance for the second-quarter and 2006 earnings.

Only one week before, Neidorff stood before investors in California to deliver a rosier financial

outlook, according to Thomas Carroll, who wrote the Stifel Nicolaus report. Thomas Carroll

wrote:

The CEO was so noticeably cocksure in his recent investor communications ...that the downward revision ... seems to at the very least indicate a lack ofmanagement insight into the operations of the company. Management credibilitydeterioration must be factored into valuation.

Post-Class Period Statements

89. On July 25, 2006, Centene issued a press release announcing its financial results for

its second quarter ended June 30, 2006. In this press release the Company attempted to explain

the adverse medical cost developments. Centene revealed further dismaying details regarding the

adverse events that were first announced on July 18, 2006 but which had actually occurred

four to five months earlier, in February and March. The press release stated that:

The 2006 second quarter results include approximately $9.7 million of adversemedical cost development in estimated claims liabilities from the 2006 firstquarter. The adverse development was largely attributable to: (1) increasedmedical expense for maternity related cases , including NICU, (2) increasedphysician costs, (3) increased costs associated with injectibles such as Synagisand Somatropin, and (4) increases in the estimated days for members hospitalizedas of March 31, 2006. Approximately $3.7 million of the development occurred inIndiana and $2.2 million occurred in Texas. There has been a slight positivedevelopment for 2005 claims. Approximately $7.1 million of the developmentsrelated to March claims and $2.5 million wasfor February claims.

32


In Indiana, there were a number of factors which affected our results . We saw acontinuation of increased medical expenses associated with the members added inlate 2005, higher percentage of admissions for NICU births and increased Synagisand Somatropin utilization. In addition , our estimated hospital inpatient daysincreased significantly primarily because of the deteriorating condition of severalcomplex and high-cost cases and missed patient bed-day estimates. Pharmacycosts stabilized in the 2006 second quarter and are expected to decrease in the2006 third quarter.

In Texas , we are currently experiencing higher costs because of a case mix shift toa higher percentage of members in the pregnant women and newborn categoriesdriving increases in related costs such as NICU, radiology and Synagis, and frommembers moving out of Primary Care Case Management into a managed careenvironment . We also had several deteriorating complex and high cost cases.(Emphasis added)

90. Defendants did not even attempt to paint the additional costs as having only recently

come to their attention, and any effort by them to do so would be implausible. According to

Centene's Managed Health Service's ("MHS ) manual for the Company' s contract in Indiana,

Centene encouraged all providers to submit claims to MHS electronically. MHS requires "prior

authorization for injectible medications over $100.00. Further, MHS requires that "special care

nursery and NICU level care of services require MHS authorization within 2 business days of the

start of the services. Since MHS requires authorization within 2 business days of the start of the

services, defendants knew that there was in an increase in "admissions for NICU births at least

in Indiana where they claim that the adverse medical costs were the result of increased admis-

sions for NICU births. Even if claims were not submitted for these admissions during the first

quarter of 2006, the fact that authorization from MHS is required put defendants on notice that

the additional medical cost would be incurred and proper reserves should have then been set for

the additional costs.

91. In addition, according to Centene's Superior HealthPlan Network ("SHN ) provider

manual for the Company's contract in Texas, SHN has the "capability to perform the ANSI

33


X12N 278 referral certification and authorization transaction through Centene Corporation,

Superior's parent organization. SHN encourages providers to participate in SHN's "Electronic

Claims/Encounter Filing Program through Centene.

92. Throughout the Tennessee RFI Centene represented it had a clear grip on all

information related to a member's hospital stay and other medical treatment. Centene stated that

its staff "conducts early and ongoing reviews of all inpatient admissions, among other things.

93. Regarding its ability to monitor hospital admissions, Centene represented to the

state of Tennessee:

Centene realizes that we cannot prevent all inpatient admissions, and thatinevitably, some enrollees will require hospitalization. As such a time, our experi-enced Case Management staff conducts early and ongoing reviews of all inpatientadmissions, which allow for rapid feedback regarding inappropriate admissionsand appropriate length of stay, and which acts as a sentinel for future admissions.These ongoing reviews provide an opportunity to build strong relationships withhospital Case Managers. A regular internal concurrent review or `rounds' processis conducted on all "at risk cases, to ensure that each patient is being managedwithout delays. Peer collaboration occurs in order to determine effective ways tointervene as necessary to improve quality or to reduce unnecessary costs.

Our talented Case Management team is also involved in discharge planning at orbefore the inpatient admissions, in order to remove barriers and to arrange for anyservices that may be required for a successful timely discharge.

94. Instead of fulfilling his disclosure obligations, Neidorff did not promptly announce

the February and March 2006 setback, and did not withdraw earnings projections that could not

be fulfilled in light of the events in February and March 2006. Rather, he brazenly represented

subsequent to February and March and before the end of the Class Period that Centene faced no

"big issues with which shareholders should be concerned. During this time, after the April 2006

insider sales were done, Neidorff halted his "automatic sales program . This creates a strong

inference that Neidorff knew what the stockholders did not that a major stock decline would

34


soon devastate the stock price upon the belated announcement of the bad news about the March

2006 numbers.

ADDITIONAL ALLEGATIONS OF SCIENTER

95. Defendants acted with scienter in that defendants knew that the public documents

and statements issued or disseminated in the name of the Company were materially false and

misleading; knew that such statements or documents would be issued or disseminated to the

investing public; and knowingly and substantially participated or acquiesced in the issuance or

dissemination of such statements or documents as primary violations of the federal securities

laws. As decried elsewhere herein in detail, defendants, by virtue of their receipt of information

reflecting the true facts about Centene, their control over, or receipt or modification of Centene

allegedly materially misleading misstatements or their associations with the Company, which

made them privy to confidential proprietary information concerning Centene, participated in the

fraudulent scheme alleged herein.

96. Neidorff was motivated to conceal the truth regarding the adverse medical costs

as they related to the First Quarter of 2006 in order to keep Centene stock price inflated as he

sold thousands of shares of his personal holding of stock. These shares were acquired through the

exercise of options whose strike prices seem to have been manipulated. Giving the growing stock

price manipulation scandal that began in the First Quarter of 2006, Neidorff had a reasonable

fear that he would lose these options if he didn't exercise them, and sell the underlying shares.

His automatic stock sale plan abruptly and suspiciously was halted just prior to the revelation

that defendants had failed to account for increased medical cost incurred in the first quarter.

97. Between February 9, 2006 and April 28, 2006 and prior to the revelations on July

18, 2006 that the Company would be reporting devastating Second Quarter earnings, Defendant

35


Neidorff sold 80,000 shares of Centene common stock for proceeds totaling $2,079,558. These

sales were accomplished pursuant to an automatic trading plan. However, Neidorff s automatic

trading abruptly stopped prior to the beginning of Centene's Second Quarter. By contrast, in

2005, Neidorff continued to sell his personally holdings in May 2005, July 2005 and December

2005. Neidorff stopped the sales of his automatic trading plan during the 2006 second quarter

because he knew that the Company did not have its medical costs under control, had under-

reported costs, and that Centene was not going to meet analysts expectations for the second

quarter and therefore if he continued to sell his stock it would be at a substantially reduced price

once the true information about the Company was disclosed to the investing market. Neidorff

also wanted to distance his sales from the revelation on July 25, 2006 that problems had occurred

in February and March 2006 that had not been disclosed.

98. Witty also sold 5,000 shares of his personal holdings of Centene common stock

for proceeds of $125,000 prior to the Second Quarter devastating disclosures. Between February

9, 2006 and April 28, 2006 and prior to the revelations on July 18, 2006 that the Company would

be reporting devastating Second Quarter earnings, Defendant Witty sold 15,000 shares of

Centene common stock for proceeds totaling $386,500. Just like Neidorff defendant Witty had

continued to sell his stock into the second and third quarter of 2005. However, in 2006, Witty

also abruptly stopped his automatic sale plan so as to not sell his personal holdings once the truth

about Centene medical costs was disclosed to the public.

PROXIMATE LOSS CAUSATION/ECOMONIC LOSS

99. Each defendant is liable for (i) making false statements, or (ii) failing to disclose

adverse facts known to him about Centene. Defendants' fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of Centene common stock was a

36


success, as it: (i) deceived the investing public regarding Centene's prospects and business; (ii)

artificially inflated the prices of Centene common stock; (iii) allowed defendants to sell

thousands of dollars worth of Centene shares at artificially inflated prices; and (iv) caused

plaintiffs and other members of the class to purchase Centene common stock at artificially

inflated prices. Plaintiffs and the class suffered market losses and were damaged as the truth was

revealed and the inflation came out of Centene's stock price.

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

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

damages sustained by plaintiffs and other members of the Class. During the Class Period,

defendants made or caused to be made a series of materially false or misleading statements about

Centene's business, prospects and operations. These material misstatements and omissions had

the effect of creating in the market an unrealistically positive assessment of Centene and its

business, prospects and operations, thus causing the Company's securities to be overvalued and

artificially inflated at all relevant times. Defendants' materially false and misleading statements

during the Class Period resulted in plaintiffs and other members of the Class purchasing the

Company's securities at artificially inflated prices, thus causing the damages complained of

herein. When the adverse information was finally revealed at the end of the Class Period,

Centene shares dropped materially.

101. As a result of their purchases of Centene stock at artificially inflated prices

during the Class Period, plaintiffs and the other class members suffered damages as defendants'

fraudulent conduct was revealed to the public, which in turn caused the Company's stock price

and value of Class members' investments in Centene stock to decline.

37


102. Defendants' wrongful conduct directly and proximately caused the financial

damages suffered by plaintiffs and the Class.

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

103. The market for Centene 's securities was open, well-developed and efficient at all

relevant times. As a result of these materially false and misleading statements and failures to

disclose, Centene's securities traded at artificially inflated prices during the Class Period.

Plaintiffs and other members of the Class purchased or otherwise acquired Centene securities

relying upon the integrity of the market price of Centene' s securities and market information

relating to Centene, and have been damaged thereby.

104. During the Class Period, defendants materially misled the investing public, thereby

inflating the price of Centene 's securities , by publicly issuing false and misleading statements

and omitting to disclose material facts necessary to make defendants' statements not false and

misleading. The statements and omissions were materially false and misleading in that they

failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as alleged herein

105. At all relevant times, the market for Centene's securities was an efficient market for

the following reasons, among others:

(a) Centene's stock met the requirements for listing, and was listed and

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

(b) As a regulated issuer , Centene filed periodic public reports with the SEC

and the NYSE;

(c) Centene regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

38


on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and other similar reporting services;

and

(d) Centene was followed by several securities analysts employed by major

brokerage firms who wrote reports, which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

106. As a result of the foregoing, the market for Centene 's securities promptly digested

current information regarding Centene from all publicly available sources and reflected such

information in Centene's stock price. Under these circumstances, all purchasers of Centene's

securities during the Class Period suffered similar injury through their purchase of Centene's

securities at artificially inflated prices and a presumption of reliance applies.

COUNT I

For Violations of Sections 10(b) ofThe Exchange Act And SEC Rule 10b-5 Promulgated Thereunder Against All Defendants

107. Plaintiff repeats and reallege paragraphs 1 through 106, as if restated fully herein.

108. In connection with the sale of Centene securities throughout the Class Period,

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

issuance of materially false and misleading statements and omissions.

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

Centene public filings were materially false and misleading. Plaintiffs and the Class relied,

directly or indirectly by reliance on the integrity of the market, on Defendants' misstatements or

omissions and were damaged as a result . But for Defendants' misrepresentations or omissions,

39


Plaintiffs and the Class would not have purchased Centene securities or would have purchased

them at non-artificially inflated prices.

COUNT II

For Violation Of Section 20(a) Of The Exchange Act(Against The Individual Defendants)

110. Plaintiffs repeat and reallege each of the preceding paragraphs 1 through 109 as if

fully set forth herein.

111. This claim is brought against the Individual Defendants.

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

Exchange Act.

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

Rule IOb-5 promulgated thereunder, by their acts and omissions as alleged in this complaint. By

virtue of their positions as control persons , the Individual Defendants, each of whom violated

Section 10(b) and Rule I Ob-5, are liable pursuant to Section 20(a) of the Exchange Act.

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

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

securities during the Class Period.

NO SAFE HARBOR

115. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

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

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

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

40


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

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

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

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

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

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

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

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

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

knew that the statement was false when made.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on behalf of themselves and all other Class members, pray

for judgment as follows:

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

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

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

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

Defendants' wrongdoing, including interest thereon;

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

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

ments; and

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

41


JURY DEMAND

Plaintiffs demand a trial by jury.

Dated : January 17, 2007

By:

PASKOWITZ & ASSOICATESLaurence D. Paskowitz, Esq.Roy L. Jacobs, Esq60 East 42nd Street, 46th FloorNew York, New York 10016Tel: (212) 685-0969Fax: (212) 685-2306

Respectfully submitted,

GREEN JACOBSON & BUTSCH, P.C.

Joe D. Jacobson #3471Jonathan F. Andres #737637733 Forsyth Blvd., Suite 700Clayton, MO 63106Tel: (314) 862-6800Fax: (314) 862-1606Email:[email protected]

Liaison Counsel for Lead Plaintiff Wayne Stolteand plaintiff Larry Elam and the Class

ABBEY SPANIER RODD ABRAMS &PARADIS, LLPNancy KaboolianOrin Kurtz212 East 39th StreetNew York, New York 10016Tele:(212) 889-3700Fax: (212) 684-5191

Attorneys for Lead Plaintiff Wayne Stolte andplaintiff Larry Elam and the Class

42


CERTIFICATE OF SERVICE

The filing attorney certifies that on January 17, 2007January 17, 2007, the foregoing was

filed electron-ically with the Clerk of the Court to be served by operation of the Court's

electronic filing system.

The filing attorney certifies that on the same day, copies of the foregoing were served by

mailing the same by U. S. Mail , first-class postage prepaid, to each of the following named non-

participants in Electronic Case Filing at the most recent addresses provided by these persons:

None.

43

Larry Elam, et al. v. Centene Corporation, et al. 06-CV-1142...

Documents

Transcript of Larry Elam, et al. v. Centene Corporation, et al. 06-CV-1142...