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IN RE OLSTEN CORP. SECS. LITIG

May 4, 1998

IN RE OLSTEN CORP. SECURITIES LITIG.


The opinion of the court was delivered by: BOYLE

ORDER

 The present motions involve issues of consolidation and appointment of lead plaintiff and lead counsel with regard to four separate actions - Weichman v. Olsten Corp., et al. (97-CV-1946 (DRH)), Goldman v. Olsten Corp., et al. (97-CV-4501 (DRH)), Waldman v. Olsten Corp., et al. (97-CV-5056 (DRH)), and Cannold v. Olsten Corp., et al. (97-CV-5408 (DRH)). Pending before the court are the motions of plaintiffs Weichman, Goldman, Waldman and Cannold, as well as defendant Olsten to consolidate, and the motions of Weichman, Goldman and Waldman for appointment of lead plaintiff and lead counsel in any consolidated actions. For the reasons stated below, the four actions are hereby consolidated, the Waldman Plaintiffs Group is appointed lead plaintiff for the consolidated action, and the law firms of Wechsler Harwood Halebian & Feffer and Faruqi & Faruqi are approved as co-lead counsel.

 I. BACKGROUND

 The four within actions involve claims that are brought under the Securities Exchange Act of 1934 against defendant Olsten Corporation ("Olsten"), as well as against several officers and directors of Olsten. The plaintiffs in the four actions are individuals who purchased Olsten common stock during the class periods as set forth in their complaints. The defendant Olsten is a Delaware Corporation with its principal executive offices in Melville, New York. See Weichman Cplt. P 11(a). Olsten provides home health care and related services, as well as staffing services to business, industry and government, see id., and is the largest provider of home healthcare and staffing services in North America. See Waldman Cplt. P 25.

 A. The Weichman Action

 Plaintiff Gail Weichman filed an action against Olsten Corporation, Miriam Olsten, William Olsten, Anthony J. Puglisi and Frank Ligouri on April 17, 1997 ("Weichman Action"). This is the earliest filing of the four actions before the court. On June 26, 1997, Judge Hurley appointed Weichman as lead plaintiff, and the Milberg Weiss Bershad Hynes & Lerach ("Milberg Weiss") and Schiffrin & Craig firms were approved as lead counsel under the Private Securities Litigation Reform Act of 1995 ("PSLRA"). See Order of the Hon. Denis R. Hurley, dated June 26, 1997.

 The Weichman Action asserts violations of federal securities law on behalf of the purchasers of Olsten common stock issued during the period from May 31, 1996 through November 21, 1996 under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Weichman Cplt. PP 1, 68, 77, 82, 92. On June 1, 1996, plaintiff Weichman received 116 Olsten shares in exchange for 200 shares of Quantum Health Resources, Inc., which she held prior to the merger of the two companies. On September 4, 1996, plaintiff Gail Weichman purchased .2796 shares of Olsten Corporation. Plaintiff alleges that the value of Olsten shares has declined substantially as a result of the defendants' violations. See id. at P 65.

 Weichman alleges that on November 21, 1996, Olsten announced for the first time that it was "the victim of ongoing margin pressures in its home healthcare business, staffing business and Medicare business which had eroded its earnings and income." Id. at P 2. Weichman asserts that "the very margin pressures that [Olsten] publicly revealed for the first time on November 21, 1996 had been in existence and severely negatively impacting Olsten's business at all prior times during the class period." Id.

 The Weichman complaint asserts that the defendants failed to disclose problems with the contract between Olsten and CIGNA Healthcare ("CIGNA"), pursuant to which Olsten was to provide home healthcare to CIGNA members. Id. at P 5. Specifically, Weichman claims that Olsten's bid for the CIGNA contract was extremely low and that Olsten "was required to invest certain upfront costs to develop the infrastructure necessary to perform under the CIGNA contract." Id. As a result, Weichman alleges that "by the first day of the Class Period, defendants knew, or recklessly disregarded," the fact that "the CIGNA contract would materially negatively impact [Olsten's] revenues, earnings and income for the foreseeable future." Id. Weichman alleges that the CIGNA contract and its implementation eroded the Company's margins and caused the Company to expend capital, which decreased earnings and income. Id. at 49.

 Weichman also argues that in the stock for stock merger agreement with Quantum Health Resources, Inc. ("Quantum"), the defendant misrepresented the business, operations, and financial condition of Olsten, by failing to disclose in the agreement Olsten's problems with CIGNA, and the margin pressures that it faced. Id. at P 31.

 Weichman further asserts claims regarding an undisclosed Medicare audit. Weichman alleges that Olsten's Form 10-K, for the period ending December 31, 1995, as well as its Form 10-Q, for the periods ending June 30, 1996 and September 29, 1996, failed to disclose the medicare audit. Id. at PP 35, 39, 41. Weichman argues that "even though Olsten had been notified by the federal government that it would be subjected to a Medicare audit for the years 1994 and 1995, . . . defendants failed to disclose the impending audit, and instead publicly issued a Prospectus that falsely represented that [Olsten] (1) was not the subject of any pending or threatened governmental investigation or proceeding, and (2) was, to [Olsten's] knowledge, in compliance in all material respects with all laws, regulations and governmental payor and/or program requirements." See Weichman Brief in Supp. Mot. to Consol., at 6; see also Weichman Cplt. PP 32, 33. Moreover, while Olsten disclosed that it "would be taking an after-tax charge to its earnings of up to $ 45 million to cover merger, integration and related costs resulting from the Quantum acquisition and 'certain allowances related to Olsten's home healthcare business,'" it did not disclose that $ 18 million of the $ 45 million charge related to an assessment arising from the Medicare audit. Weichman Cplt. P 38.

 Weichman also claims that the individual defendants engaged in insider trading "by issuing false favorable statements about the Company's business . . . without disclosing the material adverse facts about [Olsten] to which they were privy." Id. at P 53. Weichman alleges that the defendants engaged in a scheme in order to protect their executive positions, to enhance the value of their personal Olsten securities, and to maintain the inflated price of Olsten common stock to use it as currency for the merger between Olsten and Quantum. Id. at P 52. Weichman also asserts that Miriam and William Olsten reaped proceeds in excess of $ 10.25 million. In sum, Weichman alleges that "defendants' materially false and misleading statements during the Class period resulted in plaintiff and other members of the Class purchasing the Company's common stock at an artificially inflated price . . . ." Id. at P 50.

 B. The Goldman Action1

 On August 5, 1997, plaintiff Esta Goldman, as co-trustee for the trust established by the will of Irwin Goldman, filed an action against Olsten Corporation, Miriam Olsten, William Olsten, Frank Liguori, and Anthony Puglisi ("Goldman Action"). The Goldman Action asserts that defendants violated of Sections 10(b) and 20 of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, on behalf of all persons and entities who purchased Olsten Common Stock between March 6, 1996 and July 16, 1997. Goldman Cplt. P 17. Goldman purchased 300 shares of Olsten common stock on July 23, 1996, at $ 28 1/2 per share, and 100 shares of Olsten common stock on September 18, 1996, at $ 22 per share. Goldman alleges that as a result of Olsten's fraudulent practices, Olsten's common stock, which closed on July 16, 1997, at $ 21 5/8 per share, fell to $ 20 5/8 per share on July 17, 1997, and continued to fall to $ 17 13/16 on July 30, 1997. Id. at 55.

 Goldman alleges that the defendants deceived the investing public "concerning Olsten's operations and controls, and the fact that significant and material portions of its income were derived [from] . . . improper preparation and filing of materially inaccurate and inflated cost reports for reimbursement by Medicare and the improper structuring of transactions with healthcare providers to increase the amount of expenses reimbursable by the government." Id. at P 6. Goldman alleges that Olsten's Form 10-K, for the period ending December 31, 1995, as well as its Form 10-Q, for the periods ending June 30, 1996 and September 29, 1996, failed to disclose material facts regarding Medicare fraud and improper Medicare reimbursement. Id. at PP 27, 28, 29, 33, 34.

 Specifically, Goldman alleges that Quantum -- the company that Olsten acquired -- was engaged in an ongoing fraudulent practice of providing inducements and gifts to its patients, relatives and physicians to accept more product than required. Id. at P 31. Goldman states that "not only did defendants know about, and fail to disclose, the pervasiveness of these fraudulent practices at Quantum but they allowed them to continue unabated and left plaintiff, Class members and the investing public in the dark as to these practices." Id. at P 32.

 Goldman also alleges that Olsten was engaged in undisclosed fraudulent practices regarding Columbia/HCA Healthcare Corporation, a company managed by an Olsten subsidiary, for shifting non-reimbursable hospital expenses to reimbursable home care expenditures. Id. at PP 53-54.

 With regard to the scienter allegations, Goldman claims that the defendants (1) artificially inflated the market price of Olsten common stock during the Class Period, and (2) caused plaintiff and other members of the class to purchase Olsten common stock at inflated prices. Id. at P 6. In addition, Goldman argues that the individual defendants generated huge insider trading profits -- in excess of $ 10.25 million -- during the Class period. Id. at P 57.

 C. The Waldman Action

 Plaintiff Elliott Waldman, as trustee for the Elliott Waldman Pension Trust, filed an action against Olsten Corporation, Frank Liguori, Miriam Olsten, William Olsten, Stuart Olsten and Anthony Puglisi on August 29, 1997 ("Waldman Action"). The Waldman Action asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, on behalf of a class of persons and entities who purchased Olsten stock between March 6, 1996 and August 25, 1997. Waldman Cplt. PP 5, 16. On March 25, 1996, plaintiff Waldman purchased 500 shares of Olsten common stock at $ 32 3/8 per share. Waldman alleges that as a result of Olsten's fraudulent practices, Olsten's common stock, which closed on July 16, 1997, at $ 21 5/8 per share, fell to $ 20 5/8 per share on July 17, 1997, and continued to fall to $ 17 13/16 on July 30, 1997. Id. at P 55.

 Waldman claims that the defendants "failed to disclose that significant and material portions of its income were derived by engaging in a course of business operations based on the filing of materially inaccurate and inflated Medicare cost reports, the wrongful provision of inducements of gifts to patients, relatives and their physicians to accept more product than required, and the improper structuring of transactions from as early as 1994 with healthcare providers . . . to improperly increase the expenses reimbursable by the government." Id. at P 28. Waldman alleges that Olsten's Form 10-K, for the period ending December 31, 1995, as well as its Form 10-Q, for the periods ending June 30, 1996 and September 29, 1996, failed to [ILLEGIBLE WORD] material facts regarding Medicare fraud and improper Medicare reimbursement. Id. at PP 27, 28, 29, 33, 34.

 Waldman also alleges that Quantum -- the company that Olsten acquired -- was engaged in fraudulent practices, and that "defendants knew or should have known of the pervasiveness of these fraudulent practices at Quantum but they allowed them to continue unabated and left plaintiff, Class members and the investing public in the dark as to these practices." Id. at PP 31, 32.

 In addition, Waldman alleges that Olsten was engaged in undisclosed fraudulent practices regarding Columbia/HCA Healthcare Corporation, a company managed by an Olsten subsidiary, for shifting non-reimbursable hospital expenses to reimbursable home care expenditures. Id. at PP 53-54.

 Waldman further claims that the defendants engaged in a scheme of insider selling "in order to (i) protect and enhance their executive positions; and (ii) enhance the value of their personal Olsten securities and allow for profitable insider sales yielding proceeds in excess of $ 10.25 million, generating huge insider trading profits during the Class period." Id. at P 61.

 Based upon the above-referenced non-disclosures and/or misrepresentations, Waldman asserts that the market price of Olsten common stock was artificially inflated, thereby damaging the members of the Waldman class. Id. at PP 39, 40.

 D. The Cannold Action

 On September 19, 1997, plaintiff Cannold filed an action against Olsten, Frank Liguori, Miriam Olsten, Stuart Olsten and Anthony Puglisi, on behalf of all persons who purchased Olsten Common stock during the period March 6, 1996 through July 16, 1997 ("Cannold Action"). Cannold Cplt. P 1. Plaintiff Cannold asserts that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On September 30, 1996, Cannold purchased 500 shares at $ 24 per share. Cannold alleges that as a result of Olsten's fraudulent practices, Olsten's common stock, which ...


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