Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance

Updated at bottom of article

Last week, Pomerantz Haudek Grossman & Gross LLP filed a class action lawsuit against Amedisys (NASDAQ: AMED) charging the company, its CEO William F. Borne and its CFO Dale E. Redman with securities fraud.  In the next few days, Bernstein Liebhard LLP and Finkelstein Thompson LLP filed similar class action lawsuits against the company. The lawsuits allege that Amedisys abused Medicare's reimbursement system for at-home therapy care based on a compelling analysis of company revenues in an April 27 Wall Street Journal article.

In addition, the lawsuits innovatively utilize a provision under Section 406 of the Sarbanes-Oxley Act 2002 which provides a back-door way for investors to force ethical corporate governance and sue public companies for malfeasance. That provision requires Senior Financial Officers, such as the CEO and CFO of public companies, to abide by a strict code of ethics which broadly defines corporate malfeasance and effectively makes it easier for defrauded investors to prove misconduct by certain senior executives. Suing public companies for code of ethic violations can be a potent tool to insure good corporate governance and conduct.

Allegations that Amedisys intentionally increased patient visits to trigger higher Medicare reimbursements

According to the Pomerantz press release:

Specifically, the Complaint alleges that defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company's reported sales and earnings growth were materially impacted by a scheme whereby the Company intentionally increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under the Medicare home health prospective payment system, as those excess visits were not always medically necessary; (2) that the Company's reported sales and earnings were inflated by said scheme and subject to recoupment by Medicare; (3) that the Company was in material violation of its Code of Ethical Business Conduct and compliance due to the scheme to inflate Medicare revenues; and (4) based on the foregoing, defendants lacked a basis for their positive statements about the Company, its prospects and growth.

On April 27, 2010, The Wall Street Journal ("WSJ") reported that Amedisys has been taking advantage of the Medicare reimbursement system by increasing the number of in-home therapy visits in order to trigger additional reimbursements.

The alleged scheme whereby Amedisys "intentionally increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under the Medicare home health prospective payment system" is based on a troubling pattern of Medicare reimbursements detailed by the Wall Street Journal below:

Medicare reimbursements are determined in part by the number of at-home therapy visits each patient receives, with an extra fee kicking in as soon as a patient hits a certain number of visits. Between 2000 and 2007, Medicare paid companies a flat fee of about $2,200 for up to nine home therapy visits. It paid an additional reimbursement of roughly $2,200 if the therapy surpassed nine visits. That incentive was designed so that agencies didn't "stint" on therapy visits, says Laurence Wilson, the director of chronic-care policy group at the Centers for Medicare and Medicaid Services, the agency that runs Medicare.

According to The Journal analysis, which was based on publicly available Medicare records, Amedisys provided many of its patients just enough therapy visits to trigger the extra $2,200 payment. In 2005, 2006 and 2007, very few Amedisys patients received nine therapy visits while a much higher percentage got 10 visits or more. In 2007, for instance, only 2.88% of patients got nine visits, while 9.53% of patients got 10 visits.

"I was told 'we have to have ten visits to get paid,'" says Tracy Trusler, a former Amedisys nurse for two years in Tennessee, who has since left the company. Her supervisors, she says, asked her to look through patients' files to find those who were just shy of the 10-visit mark and call their assigned therapists to remind them to make the extra appointment.

"The tenth visit was not always medically necessary," Ms. Trusler says.

In other words, Amedisys had a financial incentive to increase the number of patient visits from 9 to 10 "to trigger the extra $2,200 payment." The Wall Street Journal’s analysis shows that number of patients getting 10 visits far outnumbered the number of patients getting just 9 visits by a relative factor of 3.5!

Lightening Never Strikes Twice in the Same Place

In January 2008, Medicare changed its reimbursement rules and according to the Wall Street Journal the pattern of patient visits likewise changed to maximize reimbursements to Amedisys. It was as if lightening stuck twice in the exact same place on different dates!  See below:

Medicare changed its reimbursement rules in January 2008 in an attempt to blunt the incentive for home health-care visits it created. It eliminated the $2,200 bonus payment at 10 visits and now pays an extra fee of a couple of hundred dollars at six, 14 and 20 therapy visits. "What we felt we could do is try to create some better incentives in the system for providing the level of service that beneficiaries actually needed," says Mr. Wilson from Medicare.

[Snip]

The Journal analysis found a similar pattern: In 2008, the percentage of Amedisys patients getting 10 visits dropped by 50%, while the percentage that got six visits increased 8%. The percentage of patients getting 14 visits rose 33% and the percentage getting 20 visits increased 41%.

In other words, Amedisys no longer had a $2,200 financial incentive to give 10 at-home therapy patient visits, so that number dropped by 50%. The company received a financial incentive from Medicare at 6, 14, and 20 visits and the patient's getting such number of visits rose dramatically.

On May 12, 2010, the Senate Finance Committee started an investigation questioning whether Amedisys "intentionally increased utilization for the purpose of triggering higher reimbursements" and cited the Wall Street Journal article above.

Stuck Between a Rock and a Hard Place

Amedisys is stuck between a rock and a hard place. If the same patterns of Medicare reimbursements continue in Q2 2010, the company will be accused of continuing to abuse Medicare's reimbursement system. If those Medicare reimbursement patterns don’t continue, the critics will claim that the company changed its behavior after getting exposed by the Wall Street Journal.

Allegations that Amedisys violated its Code of Ethical Business Conduct

Perhaps the most interesting aspect of the class action lawsuits are allegations that Amedisys "was in material violation of its Code of Ethical Business Conduct and compliance due to the scheme to inflate Medicare revenues."

Under Section 406 of the Sarbanes-Oxley Act 2002, public companies are required to have a strict code of ethics covering its senior financial officers (principal executive officer, principal financial officer, principal accounting officer) and such companies must disclose any changes, waivers, or violations of their codes of ethics.

SEC rules broadly define the term “code of ethics” as:

… written standards that are reasonably designed to deter wrongdoing and to promote:

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant;
Compliance with applicable governmental laws, rules and regulations;

The prompt internal reporting to an appropriate person or persons identified in the code of violations of the code; and

Accountability for adherence to the code.

An article entitled “Corporate Ethics and Sarbanes-Oxley” (article first appeared in Wall Street Lawyer – July 2003) by Frank Navran and Edward L. Pittman, re-published on Ethics.org, explained how Sarbanes-Oxley broadly expanded the scope of unacceptable corporate behavior under securities laws:

Of the five elements of the Commission's code, the only one that is specific to public companies relates to accuracy and timeliness of disclosure in public filings and other public communications. A more general statement of the requirement may be expressed as the value of "honesty." Honesty, for example, includes being candid, open, truthful, and free from deception and deceit--telling the truth, even when doing so may be difficult, and being forthcoming with all relevant facts and information. The core principle of telling the truth and coming forward with information in internal discussions is important.

SEC rules require public companies to promptly disclose any "amendments to, and waivers from, their ethics codes." If a public company fails to take prompt action regarding any possible material departures from its code of ethics by senior financial officers, SEC rules call it an "implicit waiver" which also must be disclosed to investors. See below:

2. For purposes of this Item:

a. The term "waiver" means the approval by the registrant of a material departure from a provision of the code of ethics; and

b. The term "implicit waiver" means the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer, as defined in Rule 3b-7 (§240.3b-7 of this chapter) of the registrant

As I detailed above, SEC rules define, "code of ethics" as “…written standards that are reasonably designed to deter wrongdoing and to promote Honest and ethical conduct…” If a senior financial officer (CEO or CFO) of a public company is dishonest or engages in unethical conduct and the company fails to act on such misconduct, it is considered an “implicit waiver.” Any waivers, even “implicit waivers” from a public company’s code of ethics by such officers are considered material reportable events.  A failure to report any such waivers violates securities law.

The SEC rules under Sarbanes-Oxley for public company codes of ethics broadly define corporate malfeasance by senior financial officers, requires such companies to promptly report any misconduct, prohibits companies from ignoring any misconduct, and makes it relatively easy for investors to sue for misconduct.

In the past, I’ve advocated holding Overstock.com (NASDAQ: OSTK) and its CEO Patrick Byrne accountable under Sarbanes-Oxley corporate governance rules for documented lies to investors, perennial GAAP violations, and stalking of critics. The SEC can take a lesson from the Amedisys complaint, too.

Hopefully, more lawsuits will cite code of ethics violations by public company senior financial officers in the future.

Written by:

Sam E. Antar

Update:

July 7, 2010: Open Letter to the Securities and Exchange Commission: Investigate Troubling Issues at Amedisys Missed by Wall Street Journal

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

Recently, I exposed financial reporting violations by Overstock.com (NASDAQ: OSTK) as an independent whistleblower. The Securities and Exchange Commission is investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here). In addition, the SEC is investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them the company's inventory accounting practices.

I do not own Overstock.com or Bidz.com securities long or short. My exposure of confirmed financial reporting violations by Overstock.com and possible financial reporting violations by Bidz.com was a freebie to securities regulators to get me into heaven, though I doubt that I will ever get there.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time. Lawsuits citing code of ethics violations will help me find plenty of company in hell.

I do not own any Amedisys securities long or short.