1 Consolidated Class Action Complaint for Violations of Federal ...

I 4,7

UNITED STATES DISTRICT COURT FEB

09SOUTHERN DISTRICT OF NEW YORK

Li

liSDIIN RE ADVANCED HEALTH CORPORATION : Master File ' vd.'—- -SECURITIES LITIGATION

•98 Civ. 4647 (BDP)

THIS FILING RELATES TO: CONSOLIDATED CLASSALL CLASS ACTIONS ACTION COMPLAINT FOR

VIOLATIONS OFFEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Plaintiffs, individually and on behalf of all others

similarly situated, by and through their undersigned attorneys,

make the following allegations upon information and belief,

except as to allegations specifically pertaining to plaintiffs

and their counsel which are based upon personal knowledge.

Plaintiffs' information and belief is based on, among other

things, the investigation made by and through plaintiffs'

attorneys, which includes, among other things, a review and

analysis of the public filings of Advanced Health Corporation

("Advanced Health" or the "Company"), as well as press releases,

reports, and articles issued by or about Advanced Health.

Plaintiffs believe that further substantial evidentiary support

will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action on behalf of

all persons, other than defendants and their affiliates, who

PP

purchased or acquired the common stock of Advanced Health during

the period from May 7, 1997 through August 5, 1993, inclusive

(the "Class Period"), and sustained damages as a result of those

1 transactions (the "Class") seeking to pursue remedies under the

Securities Exchange Act of 1934 (Lhe "Exchange Act"). During the

Class Period, defendants issued to the investing public a series

of materially false and misleading financial statements, press

releases, and other statements concerning, among other things,

Advanced Health's operations, performance, and financial

condition. As a result, the price of Advanced Health common

stock was artificially inflated throughout the Class Period,

thereby damaging plaintiffs and other purchasers of such stock.

2. As hereinafter alleged, during the Class Period,

Advanced Health and the Individual Defendants, as identified

below in paragraph 16, who were senior executive officers and

directors, major shareholders, and controlling persons of

Advanced Health, knowingly or recklessly, dratted, reviewed,

approved and/or disseminated materially false and misleading

statements, press releases, reports, and other public

representations of and about Advanced Health. Among other

things, defendants concealed from the investing public that

certain of the Company's accounting practices were improper and

in violation of Generally Accepted Accounting Principles

("GAAP"), and that, as a result, the Company's reported financial

results were materially misstated.

3. For example, in violation of GAAP, Advanced Health (a)

improperly recorded at least $2.5 million in revenue in the first

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1p-

quarter of fiscal 1997 in connection with a software license

agreement, prior to completion of the earnings process with

respect to the software; (b) improperly permitted $3.6 million of

forgiven accounts receivable to be recorded as revenue in the

second quarter of fiscal 1997; (c) improperly recorded $3.5

million in revenue in the fourth quarter of fiscal 1997 from a

purported "sale" to a sham entity ; and (d) improperly recorded

$2.5 million in revenue in the fourth quarter of fiscal 1997

which was actually the return of an investment made by the

Company. The effect of these and other deceptive practices was

to overstate the Company's operating results reported during the

Class Period. in particular, among other things, defendants

overstated the Company's reported revenue for fiscal 1997 by a

total of at least $11.6 million -- almost 20% of the reported

revenue for the fiscal year.

4. In addition, during the Class Period, defendants sought

to profit by using almost $9,000,000 in shares of artificially

inflated Advanced Health stock as consideration for the

acquisition of two other companies. Defendants also profited

from the artificial inflation of the Company's stock price

through the secondary public offering of 2,500,000 shares of

Advanced Health common stock by the Company and certain selling

shareholders in October 1997_ Advanced Health and the selling

shareholders reaped total proceeds of approximately $5b million

from this offering.

S. The Individual Defendants also reaped significant

personal financial windfalls through lucrative insider sales of

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more than 337,000 shares, at prices ranging from $12.54 to $21.25

per share, yielding total proceeds of more than $6.6 million.

The Individual Defendants' insider sales were particularly

suspicious because they were well-coordinated, as two or more of

the Individual Defendants typically sold stock on the same day.

By virtue of their insider sales of Advanced Health's stock at

artificially inflated prices, defendants had a duty to

disseminate promptly truthful information that would be material

to investors in compliance with the integrated disclosure

provisions of the SEC as embodied in SRC Regulation S-X (17

C.F.R. Sections 210.01 et seq.) and S-K (17 C.F.R. Sections

229.10 et seq.) and other SEC regulations, including accurate and

truthful information with respect to the Company's operations,

financial condition and earnings so that the market price of the

Company's common stock would be based on truthful, complete and

accurate information.

6. As a result of defendants' successful efforts to

obscure and conceal the truth concerning Advanced Health's

financial performance, the Company was able to keep its true

financial condition hidden from investors throughout the Class

Period. On June 30, 1998, the Company suddenly announced that it

anticipated an operating loss of $3-4 million -- in contrast to

the previous five quarters of the Class Period, during each of

which the Company had reported increasing profits. The Company

also reported that it anticipated one-time charges totalling

approximately $8 million (on a pre-tax basis), which included,

among other things, the write-off of approximately $5 million in

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certain accounts receivable for sales prior to 1998. Defendants

still failed to disclose, however, the true extent to which the

Company's financial performance had been misrepresented.

7. Finally, on August 6, 1998, the Company announced that

revenues for the second quarter of 1998 were only $16.8 million,

that the Company had experienced an operating loss of $16.3

million, and that one-time charges for the quarter were $9.6

million.

8. Market reaction to these revelations, which

contradicted defendants' previous representations during the

Class Period of continued revenue growth and increasing

profitability, was immediate and devastating. On June 30, 1998,

the closing price of Advanced Health common stock fell more than

40%, from $9.25 per share (the previous day's closing price) to

$5.50 per share. By August 6, 1998, the stock had fallen even

further to just $2.50 per share -- a decline of more than 90%

from the Class Period high of $27.375 per share (on October 16,

1997). Advanced Health common stock currently trades in the

range of $2-$3 per share.

JURISDICTION AND VENUE

9. This Court has jurisdiction over the subject matter of

this action pursuant to 28 U.S.C. §§ 1331 and 1337 and Section 27

of the Exchange Act [15 U.S.C. § 78aa].

10. The claims asserted herein arise under and pursuant to

Sections 10(b) and 20(a) of the Exchange Act [15 U.S.C. §§ 78j(b)

and 78t(a)1 and Rule 10b-5 promulgated thereunder [17 C.F.R. §

240.10b-5].

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11. Venue is proper in this District pursuant to Section 27

of the Exchange Act [15 U.S.C. 78aa1 and 28 U.S.C. § 1391(b)

and (c). The acts charged herein, including the preparation and

dissemination of materially false and misleading information,

occurred in substantial part in this District and Advanced Health

maintains its principal executive offices in this District.

12. In connection with the acts, conduct, and other wrongs

complained of herein, defendants, directly or indirectly, used

the means and instrumentalities of interstate commerce,

including, but not limited to, the United States mails,

interstate telephone communications, and the facilities of the

national securities markets.

PARTIES

The Plaintiffs

13. The representative plaintiffs listed below, who

ourchascd Advanced Health stock during Lhe Class Period, seek

appointment as Lead Plaintiffs in this consolidated action. A

proposed Order desi gnating the following plainLiffs as

representative plaintiffs has been submitted to the Court for its

approval:

(a) Plaintiff Donald Aboussclman made the following

purchases of Advanced Health common stock during The Class Period

at prices that were artificially inflated by defendants'

wrongdoing, and has been damaged thereby:

No. of Shares Date Price Per Share

1,000 06/01/98 $12.625

1,000 06/15/98 $12.000

500 07/01/98 $5.375

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(b) Plaintiff Michael R. Angel purchased 1,500 shares

of Advanced Health common stock on or about May 15, 1998 at a

price of $15.25 per share, which was artificially inflated by

defendants' wrongdoing, and has been damaged thereby.

(c) Plaintiff David Bookstaber purchased 200 shares of

Advanced Health common stock on or about May 15, 1998 ar_ a price

of $18.00 per share, which was artificially inflated by


(d) Plaintiff Andrew Feldman purchased 400 shares of

Advanced Health common stock on or about October 7, 1997 at a



(e) Plaintiff Ross Feldman purchased 300 shares of

Advanced Health common stock on or about October 7, 1997 at a



(f) Plaintiff Leonard GutfleLsch made the following

purchases of Advanced Health common stock during the Class Perio




100 10/30/97 $18.206100 11/12/97 $15,78

(g) Plaintiff Jason Handwerker made the following

purchases of Advanced Health common stock during the Class Period



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350 05/18/98 $14.625400 05/29/98 $12.625500 06/29/98 $ 9.3125

(h) Plaintiff George Hideq purchased 900 shares at

Advanced Health common stock on June 5, 1998 at a price of $13.65

per share, which was artificially inflw.:.ed by defendants'

wrongdoing, and has been damaged thereby.

(i) Plaintiff Kenneth Kress made the following


at prices tha.'7, were artificially inflated by defendants'



1,000 05/26/96 $14.00

1,000 06/29/98 $ 9.2187

1,000 06/30/98 $ 6.625

2,000 06/30/98 $ 5.75

Plaintiff John Melnick made the following


at prices that were artificially inflazed by defendants'



1,000 04/13/98 $13.553

500 05/12/98 $13.566

500 05/13/98 $12.816

SOO 05/15/98 $15,066

500 06/11/98 $12.253

1,000 06/29/98 $ 9.064

1,000 06/29/98 $ 9.967

(k) Plaintiff Russell Peters purchased 100 shares of

Advanced Health common stock on or about_ May 15, 1998 at a price

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of $14.8125 per share, which was artificially inflated by


(l) Plaintiff Saverio Saccone made the following





1,000 11/14/97 512,25

1,350 11/14/97 $12.125

1,430 11117/97 $14.375

1,500 11/17/97 $14.25

300 11/23/97 $16.375

1,000 03/09/98 $14.375

1,000 03/11/98 $16.50

1,000 03/19/98 $13.75

1,000 04/15/98 $12.937

4,000 04/17/98 $13.125

500 06/02/98 $12,4375

575 06/02/98 $12.50

(m) Plaintiff John Westnedge purchased 3300 shares of

Advanced Health common stock on or about May 14, 1998 at a price

of $13,50 per share, which was artificially inflated by


14. Other plaintiffs who have filed complaints in this

consolidated action, or indicated a willingness to serve as Lead

Plaintiffs, but were not named as Lead Plaintiffs are: Frank

Acampora, Chris Adams, Mamdouh O. Ahmed, Shahab Ajmal, Raja Al-

Khomiri, Ali Allahiari, Robert Allen, Masoud Almasi, Michael

Alpert, Holly J. Angel, Roni Appel, Cheryl E. Arnold, Leslie E.

Arnold, Michael Arnold, Thomas Baker, Anthony H. Ball; Ronald, D.

Barrick, Frank Beaton, Robert J. Beauchesne, Therese Beckett,

Shlomo Beckett, Gary Beltrani, Howard Bernstein, Howard Beutei,

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Yurij Beznos, Nailesh Bhvaser, Robert F. Bielenda, Lin Bin,

Michael H. Blum, Barry & Doris Bowers, Jamison Braddock, Kathy

Braden, Alan P. Braun, Jeffrey Brigatino, Scott Brill, Charles

Brokop, Erich C. Bruckenmaier, Victoria Brown, Bukstel &

Halfpcnncy Inc., David Bukstel, Edward Bukstel, James Bruce

Buell, Kristen Busko, Joseph James Buzon, Nathan Caplan, Nathan

Caplan--JMN Assoc., Carmody Entrprs, Inc., Tomas Carranza, Gerard

Chan, Leslie Chang, Cheng-Nan Chen, Henry Chen, Yudong Chen (•n

behalf of W. Chen and C. Chen), Thomas Cheung, Auguste Chiou,

Brad S. Chipman, Nawal Choucair, Edwin Chow, Gary & Aasc

Christensen, Chan I. Chu, Kam-Hong Ramb Chu, Paula Chuchvara--

Administrator on behalf of Webster City Med. Servs., Suntae Chun,

Wen-Cheng Chung, Wen-Shuo Chung, Robert Church, John Churinskas,

Salvador Cicala, Steven Clayton, Jennifer Clupper, Elizabeth

Cooper, Stephen Costello, Bernard Crawford, Thomas F. & Mary Ann

Creavin, Valentin Dela Cruz, Wejil Cu!, Wojciech Czerw, W.J.

DeFrates, Paul A. DeJesus, Valet!n DelaCruz, Michael Demasco,

Qanbin Deng, Gary A. DeRosa, Ravi Devesetti, Lee Donald, Thomas

G. Doyle, Tim Drapcau, Steve Duchi, Christopher Duey, Jon E.

Dunning, Michael Dussault, Joseph K. East, David A. Ellis, Scott

M. Engel, Tadesse D. Faleke, Darrell Faylo, Gun Hua Feng, Stephen

Flaherty, Arthur Fleischer, James R. Flowers, Matte° Ficco,

Franck FonmarLy, Barry Font', Mark E. Forte, Kathleen Fraga,

Nicholas J. Franco, Herbert Freeman, Louie J. Frucci, Theodore M.

Gavriel, Nabil Gazaha, Hubert Gee, Wayland Gee, Steven R.

Gilbert, Donnie Gill, Thomas R. Gillenwater, Gary Goedken, Joe

Gould, Kenneth A. Grabinski, Stan Graitz, Glynn Lamar Grisham,

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Steven Grossberg, Zeren Gu, Willy Gun, Rick Gutierrez, Poh Kim

Hagelbach, Ali Haldar, Troy Hale, Robert Halstead, Jason

Handwerker, James L. lierrmann, Alisa Aideg, Robert J. Hill, Nhan

D. Hoang, John E. Hoeksema, Kevin R. Hoist, Warren Holland, Otis

Holt, John W. Hormann, Mohammad Houshiar, Keith A. Howard, Greg

Howe, Pave Hrkac, Diane Hudson, Don Huggins, Steven R. Hunger,

Theresa Hunger, Scott Huskinson, Brandon Hutchinson, David

Hutchinson, Tracy Hutchinson, David Huynh, Lap Huynh, Jamal

Ibrahim, Najah Ibrahim, Michael Immke, Alan Ingram, Michael Ike,

Artur Irla, John Izydorczyk, Sunil Jain, Luis Jalenszky, Mark

Jensen, Dwight Jereczek, Peter Jones, Lollie R. Joyner, David

Kaiser, Range Katti, Eliot 'Katz, James P. Kellis, Thomas R.

Kennedy, Rahia Khan, Saeed Kharazi, John F. King, Donald L.

Kiwor, Anthony Kleb, Richard Kloslewicz, Donald T. Kiwor, Leo

Knittel, Nicholas Konz, Gary Kress, Eleftherios & Aurideke V.

Kryoneris, Mark E. Kuester, Dave Kuketz, David Kuliner, Robert C.

Lahiere, David S. Lake, Robert L. Lancaster, Steven Lane, Victor

C. Lanier, Patricia Latona, Robert J. Lauria, Jeff Lee, John M.

Lee, Travis W. Lewis, LiJ1i Li, Min Lin, James Linder, Laurie

Lipman, Kathleen Lopez, Xing Lu, Yi Rong Lu, Ming Jeffrey Lum,

LaVerne Lund, Stanley H. Lundgaard, Barry T. Luong, James

Lyttleton, Michael Maddox, Salvatore & Nicola Maganuco, Thomas

Mal000f, Peter A. Marcano, Romas Marcinkevici, Warren

Marmorstein, Peter J. Maturi, Richard McArthur, Eric R. & Holly

v. McClendon, Rick McCormick, Tim E. E, Michelle D. McElderry,

Jerry Kellen McCrackent, Theodore E. McDaniel, Brooks B.

McFeeley, Shannon R. McKay, Mitchell G. McQueen, Ken Meadows,

11

Michael Meltser, Richard Merrill, Jeanmarie Meyer, Jerome C.

Meyer, Richard A. Miller, Thomas P. Miller, Thomas M. Milo, Piotr

Mlynaryk, Alex Mojsin, Fatima V. Moiling, Manus Monroe, Joseph C.

Montgomery, Harry B. Moore, Joseph Moyles, Philip Mueller, Mahtab

A. Mufti, Eric Mui, David Mulkey, David S. Murphy, Jamison E.

Murray, Mwaura Mwembu, Josh Myers, Robert Nabasnv, Robert M.

Nall, Arthur Natsis, Kathleen J. & Stacy J. Nelson, John Nemcek,

Paris Neofotistos, Frank Nguyen, Maureen Nicholas, Pekka

Nordmark, William & Bobbette Nugent, Ed Oblow, Kilia Ok, Tom B. &

Linda M. Olson, David Omasta, Anthony J. Orr, Jr., Emily 0-

Young-Lui, Vlado Ozvacic, Bonnie Padlo, Greg Palony, AnLhony J.

Panuccio, Alda Patel, Dhruti Patel, Shailfesh R. & Sita S. Patel,

Suryakant Patel, Vinod Patel, Samuel & Gomez - Ana Maal Paul,

Steven Payne, Kyle Peavy, Penguin Mechanical Contractors/Timothy

Clemons, Lee Roy H. Petersen, Deiter Phillip, Stephen C.

Piacentini, Laszlo L. Pinter, Joey Planey, Quinn & Betty Plyete,

Judy Pohera, Robert Powell, Michael Prouix, Ben Rafal, Malkit

Rai, John Austin Randolph, Tamah Rasker, Andrew & Carla Reid,

Zhaohiu Ren, Kenneth L. Rethmeier, Kenneth Reust, Omar Reza, Eric

P. Rhea, Ronald E. Ricker, Billy Alan Roberts, Stephen E.

Robinson, Stephen W. Robinson, Tim Rachel, Michael J. Rochon,

Deborah S. Rogers, Scott Rogers, Tamah Rocker, Gerald I. & Selma

B. Ro-:_h, Michael K. Ruhl, Nicholas Rutha, Randolph Ryan, Maria

Sandoval, William A. Sanuck, Robert W. Schaefer, Jeffrey B.

Schaub, Robert A. Schleiger, Jeffrey Schnipper, James Schweitzer,

Xavier J. Sebastian, Scott P. Selitsky, Alex Seriy, Sudhir Setia,

Lloyd C. Shackelford, Joseph Shain, Linda Sharp, David Shaw,

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Jonah Shen, Ira Siegel, Sherry Simons, Bernie Blenders, Craig

Smith, Ernesto Sobrevilla, Mark S. Sonderhy, Insop Song, Rattan

Seed, Stephen Barbara, Ernest J. Soriano, Peter Spagnoli, James

F. Spallen, Thomas R. Spencer, Gerald Spraggins, David C.

Stanley, Jonathan Starr, Daniel Steinitz, Larry Stevens, Charles

A. Stoarz, Timothy L. Stoltz, Richard Strain, Russ Strouse,

Patrick B. Sturm, Joe Su, Ruben Kathleen Sullivan, Sumoba, Paul

M. Swenson, John W, Swycer,'=, Jr., Allen Tai, Cary Tam, Brian

Shinbaw Tang, Carmello Terrasi, Russell Thibodeaux, Keith Thomas,

Leonard E. Thomas, Joseph Brad Thorton, Brian Tortorella, John D.

Traut, Cheng-Lan EL Melodic Tsai, Ming-Cheng Tseng, Dean M.

Tutunji, Neil E. Tzinberg, Marco G. Ventura, Joe B. Vereen, Verus

Corp., Peter Volta, Dennis W. Wade, Richard Waldo, Olivaire R.

Walter, Robert M. Wanuga, Jennifer and William Ward, Joe Way,

Nathan D. Webb, III, Logan Weems, Deborah S. Welch, Kipton R.

Wells, Kirk White, Virginia Whitten, Digby Williams, Paul A.

Williams, III, Thomas Williams, Grzegorz Wojtulewski, Gary

Wolter, Jim Wong, Pamela Wood, Mili Wu, Xiaobin Wu, Tom Xanthos,

Guanhong Xu, De-Geng Yao, Nikolay Yatsenko, Anthony Yeamams,

Edward Yih, Mehmet Yildz, Sherry Yip, Fang Yu, Jing Zhanci, Walter

Ziarko, Jens Zinke, Marc A. Zuckerman.

The Defendants

15. Defendant Advanced Health is incorporated under the

laws of the State of Delaware with its principal place of

business at 555 White Plains Road, Tarr y town, NY 10591. Advanced

Health is a physician management company that provides physician

oriented products and clinical information systems. As of March

13

25, 1998, Advanced Health, which was traced on the NASDAQ Stock

Market's National Market under the symbol "ADVH", had over nine

million shares of common stock outstanding. On January 13, 1999,

the Company issued a press release announcing that, effective

February 1, 1999, it would change its name to "Al-IT Corporation"

and would begin trading under the symbol "AHTC".

16. The following defendants are collectively referred to

herein as the "Individual Defendants":

(a( Defendant Jonathan Edelson, one of the founders of

the Company, has served as the Company's Chairman of the Board

and Chief Executive Officer, and as a Director since its

inception in August 1993. During the Class Period, defendant

Edelson sold at least 85,000 shares of Advanced Health common

stock owned by him at artificially inflated prices while in

possession of undisclosed, materially adverse information about

the Company, and derived total proceeds of at least $1,605,900

from those insider sales. Additionally, according to the

Company's Proxy Statement dated June 26, 1998 (the "1998 Proxy

Statement"), as of that date, defendant Edelson was the

beneficial owner of at least 582,320 shares of Advanced Health

common stock, representing approximately 5.8%. of all shares then

outstanding. Among other things, defendant Edelson signed each

of Lhe Company's SEC filings during the Class Period, that are

complained about herein.

(b) Defendant Steven -Aochberg, a co-founder of the

Company with defendant Edelson, served as the Company's President

and as a Director from the Company's inception in August 1993 to

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September 15, 1997. As of September 15, 1997, defendant Hochberg

became the Company's Vice Chairman, while continuing as a

Director. During the Class Period, defendant Hochberg sold at

least 230,000 shares of Advanced Hea]th common stock awned by him

at artificially inflated prices while in possession ot

undisclosed, materially adverse information about the Company,

and derived total proceeds of at least $4,793,800 from those

insider sales. In addition, as of April 7, 1998, defendant

Hochberg was the beneficial owner of more than 368,000 shares of

Advanced Health common stock, representing more than 3 9g of all

shares then outstanding. Among other things, defendant Hochberg

signed the Form 5-1 Registration Statement filed with the SEC on

September 8, 1997 in connection with the Company's secondary

public offering, and the Company's annual report on Form 10-K for

the year ended December 31, 1997.

(c) Defendant Allan B. Masarek has served as the

Company's President and Chief Operating Officer since September

1997. Defendant Masarek served as the Company's Chief Operating

Officer and Chief Financial Officer from November 1995, when he

joined the Company, to September 1997. Prior to joining the

Company, defendant Masarek, a certified public accountant, worked

for five years in the audit division of Arthur Andersen & Co., a

major accounting firm, and therefore is particularly

knowledgeable and experienced concerning the matters which give

rise to this action. During the Class Period, defendant Masarek

sold at least 15,000 shares, representing virtually his entire

holdings of Advanced Health common stock (not including options)

at artificially inflated prices while in possession of

undisclosed, materially adverse information about the Company,

and derived total proceeds et more than $188,000 from those

insider sales. Additionally, according to the 1998 Proxy

Statement, as of June 26, 1998, defendant Masarek was the

beneficial owner of at leas.': 62,981 shares of Advanced Health

common stock, including options. Among other things, defendant

Masarek signed the following SEC filings by the Company during

the Class Period: (1) the quarterly reports on Form 10-Q for the

quarters ended March 31, dune 30 and September 30, 1997; (2) the

Form 3-1 Registration Statement filed with the SEC on September

8, 1997 in connection with the Company's secondary public

offering; and (3) the annual report on Form 10-K for the year

ended December 31, 1997. On January 13, 1999, the Company

announced, without explanation, defendant Masarek's resignation,

effective March 31, 1999.

(d) Defendant Robert Alger has served as the Company's

Executive Vice President and Chief Information Officer since

March 1998. Defendant Alger served as the Company's Vice

President and Chief Information Officer from February 1995 until

assuming the title of Executive Vice President and Chief

Information Officer in March 1998. During the Class Period,

defendant Al g er sold at least 7,500 shares of Advanced Health

common stock owned by him at artificially inflated prices while

in possession of undisclosed, materially adverse information

about the Company, and derived total proceeds of more than

$94,000 from those insider sales. Additionally, according to the

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1998 Proxy Statement, as of June 26, 1998, defendant Alger was

the beneficial owner of at least 44,223 shares of Advanced Health

common stock.

(e) Defendant Michael W. Ropers joined the Company in

February 1998 and served as the Company's Executive Vice

President, Chief Financial Officer and Corporate Development

Officer. On June 30, 1998, the day the Company began to reveal

its financial difficulties, defendant Rogers resigned from the

Company purportedly to v pursue other interests," although he

remained with the Company as a consultant. Defendant Rogers

signed the Company's annual report on Form 10-K for the year

ended December 31, 1997 and the Company's quarterly report on

Form 10-Q for the quarter ended March 31, 1998.

17. It is appropriate to treat the Individual Defendants as

a group for pleading purposes and to presume that the materially

false and misleading information conveyed in the Company's public

filings, press releases, and other public statements as alleged

herein is the collective actions of the narrowly defined group of

Individual Defendants identified above. The above-named senior

officers and directors of Advanced Health, by virtue of their

hi gh 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 as alleged herein. Said defendants were involved in

drafting, producing, reviewing, and/or disseminating the

materially false an:i misleading statements alleged herein. Said

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defendants were aware (or recklessly disregarded) that materially

false and misleading statements were being issued regarding the

Company and nevertheless approved, ratified and/or failed to

correct those statements, in violation of the federal securities

laws.

18. As senior officers and directors of a publicly-held

company whose shares were registered with the SEC pursuant to the

Exchange Act, and governed by the provisions of the federal

securities laws, the Individual Defendants had a duty to

disseminate promptly accurate and truthful information with

respect to the Company's financial condition, operations,

business, products, performance, and prospects, and to correct

any previously issued statements that were or had become

materially misleading or untrue, so that the market price of the

Company's publicly traded securities would be based upon truthful

and accurate information. Under rules and regulations

promulgated by the SEC under the Exchange Act, including Item 303

of Regulation S-K, defendants also had a duty to report, among

ether things, all trends and uncertainties that were reasonably

likely to affect (i) Advanced Health's net sales, revenues, or

income, or (ii) previously-reported financial information such

that it would not be indicative of future operating results.

Defendants' wrongdoing during the Class Period, as alleged

herein, violated these specific rec_luirements and obligations.

19. The Individual Defendants, by reason of, among other

things, their hi gh-level positions with Advanced Health and their

substantial holdings of Advanced Health common stock, at all

15

relevant times, were "controlling persons" of Advanced Heath

within the meaning of Section 20(a) of the Exchange Act and had

the power and influence, which they exercised, to control

Advanced Health and to cause it to engage in the acts and

oractices complained of herein.

20. Throughout the Class Period, the Individual Defendants

were able to and did control the conduct of the Company's

business and the contents of the Company's SEC filings, press

releases, and other public statements. The Individual Defendants

were provided with copies of, reviewed and approved, and/or

signed such filings, press releases, and other statements prior

to or shortly after their issuance and had the ability and

opportunity to prevent_ their issuance or to cause them to be

corrected. Moreover, the Individual Defendants made affirmative

statements to securities analysts and the investing public at

large, and participated in meetings and discussions concerning

such statements.

21. Because of, among other things, their executive,

managerial and directoral positions with Advanced Health, the

Individual Defendants, on a current basis, had access to adverse,

nonpublic information concerning matters alleged in this

Complaint, through access to internal corporate documents,

conversations and other communications and contacts with

corporate officers and employees, attendance at meetings of

Advanced Health's Board of Directors and committees thereof, and

periodic and other reports and other information provided to

them. Except to the extent set forth in this complaint,

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plaintiffs and other members of the Class had no access to such

information, which was and remains solely under the control of

defendants.

22. Each of the defendants is liable as a primary

participant in the fraudulent scheme and course of business that

operated as a fraud and deceit on purchasers of Advanced Health

common stock and the market, by disseminating materially false

and misleading statements and concealing material adverse facts.

The scheme: (i) deceived the investing public and the market

regarding Advanced Health's business, performance, financial

condition, operations, and the true value of Advanced Health

common stock; and (ii) caused plaintiffs and other members of the

Class to purchase Advanced Health common stock at artificially

inflated prices that did not reflect its true value.

BACKGROUND

2. Advanced Health was, at all relevant times, a health

care management company which provides physician oriented

products and services through its two wholly-owned subsidiaries,

Advanced Health Management (AHM) and Advanced Health Med-E

Systems (AHMES). AHM primarily provides physician practice and

network management services. AHMES is a clinical information

systems provider. At all relevant times, the Company represented

that it managed several physician group practices comprised ot

hundreds ot physicians in the New York metropolitan area and

multiple physician networks with thousands of affiliated

physicians and network enrollees in the New York, Philadelphia,

and A=lanta metropolitan areas.

20

24. According to the Company's Form 10-K for the year ended

December 31, 1997, anproximately 80% of the Company's operating

revenues were generated from fees for non-medical and

administrative services that the Company provided to member

physician group practices and physician networks. The remainder

of the Company's revenues were generated from licensing fees for

the Company's information systems and network management services

rendered to non-member third-parties.

The Synetic Agreement

25. On or about March 31, 1997, Advanced Health and

Synetic, Inc. ("Svnetic") executed a Software License Agreement

(the "Agreement") for the provision of certain existing software

(mainly, The Company's Med-E-Practice 3.1 software) and certain

software that was then under development (including amon g others,

the Company's Internet Script Writer). The Agreement obligated

Advanced Health to license, deliver, install, test, and interface

the existing software "promptly after the execution of this

Agreement." The Agreement provided that Synetic would pay the

Company $2.5 million only after successful deliver y of the

existing software and completion of Advanced Health's obligations

with respect to the installation thereof. However, as detailed

herein, prior to delivery and installation of the existing

software, and in direct violation of the Company's stated policy

for recording such software licensing fees and GAAP, defendants

improperly recognized as revenue the full $2.5 million.

26. Further, the Agreement provided that upon completion of

Internet Script Writer, the Company would deliver and install it

21

at •ynetic's premises. The Agreement provided that Synetic would

pay the Company an additional $1 million upon "Installation and

Acceptance of Internet Script Writer ..., provided, however, that

such amount shall be reduced $100,000 for every month or portion

thereof past July 1, 1997 that Internet Script Writer remains

undelivered or unsuccessfully installed." Notwithstanding the

foregoing, as detailed herein, and in contravention ot the

Company's stated Policy for recording such software licensing

fees and GAAP, defendants recognized as revenue the full $1

million on or before June 30, 1997, even though the Company had

failed to meet its contractual obligations regarding Internet

Script Writer.

27. Synetic received incomplete and operationally flawed

portions of the Internet Script Writer in July and August 1997.

Because of the software's failure to conform to the requirements

of the Agreement, Synetic was, under the terms of the Agreement,

excused from any obligation to pay for it, and gave Advanced

Health prompt not:ice of its failure.

28. Thereafter, in September 1997, the Company iniilated an

action against Synetic in the Supreme Court of the State of New

York. in support of certain counterclaims asserted by Synetic,

Synetic submitted the affidavit of Anthony Vuolo, its Chief

Financial Officer, which included the following assertions

relating to defendants' premature recognition of revenue:

"[Advanced Health] also reported income from the firstdeliverable product under the agreement known as Med-E-Practice 3.1. Med-E-Practice 3.1 was delivered to Synetic in the beginning of April 1997, and payment was made by Synetio for this software on April 8, 1997.

22

Althouch delivery and payment occurred in the quarterended June 30, 1997, it appears that revenues and the related profits from such delivery were recorded in [Advanced Health's] financial statements for the quarter ended March 31, 1997. This conclusion isreached based upon a review of revenues reported by[Advanced Health] for its clinical information businessfor applicable quarters." [Emphasis added.]

29. According to a press release dated January 14, 1999,

the Company and Synetic have agreed to settle the litigation.

MATERIALLY FALSE AND MISLEADING STATEMENTSMADE BY DEFENDANTS DURING THE CLASS PERIOD

30. The Class Period begins on May 7, 1997. On that date,

Advanced Health issued a press release, published on Business

Wire, announcing purportedly record positive results for the

first quarter of 1997, the period ending March 31, 1997. The

Company reported net revenues of $10.0 million and net income of

$0.66 million, or $0.08 per share, compared to net revenues of

$3.7 million and a net loss of $1.2 million, or a less of $0.27

per share, for the same period in 1996. Defendant Edelson

commented on the results as follows:

We are very pleased with cur performance and theresults that we achieved. These results reflect the growing momentum of our practice and network management contracts as well as the market penetration of ourclinical information tools for physicians. OUragreemenLs with Physicians' Online, Synetic, Inc., andRush-Presbyterian-St. Luke's Medical Center areextremely important in that they provide furthervalidation of our clinical applications. [Emphasesadded.]

31. The May 7, 1997 report of first quarter earnings and

defendants' comments sent the price of Advanced Health common

stock up $.75 per share to close at $18.75 per share on May 7,

23

1997, an increase ot more than 4% from the previous day's closing

price of S18.00 per share.

32. Market analysts following Advanced Health stock quickly

responded with favorable reports on the Company. For example:

(a) On or about May 7, 1997, following the Company's

press release, Cowen & Co. analyst Kathy Miner issued a report

maintaining the firm's "STRONG BUY u rating for Advanced Health

common stock and extolling the Company's growth potential. As

the Cowen report noted:

The growth potential is enormous.... New practice andnework affiliations, along with strategic HCISalliances (like the recent Synetic deal) will enhanceinvestor confidence in the strong earnings prospects.[Emphasis added.]

(b) Smilarly, on May 8, 1997, Hambrecht & Quist

analyst Ken R. Laudan issued a report heralding Advanced Health's

"szrong" March quarter results, reiterating the firm's "BUY"

rating for Advanced Health common stock, and raising the firm's

earnings per share estimates for the fiscal years 1997 and 1998,

$0.04 and $0.05 respectively. As the Hambrecht & Quist report

also noted:

Advanced Health continues to successfully execute insstated business strategy. The company is building itsphysician base nicely, both with groups and networks,and is signing significant software licensingagreements which validate its information technology inthe marketplace.

33. The results announced by the Company on May 7, 1997

were repeated in the Company's quarterly report on Form 10-Q, for

the quarterly period ended March 31, 1997 the "First Quarter

1997 10- 1 ), which was signed by defendants Edelson and Masarek

24

and filed with the SEC on or about May 15, 1997_ The Notes To

Condensed Consolidated Financial Statements, contained in the

First Quarter 1997 10-Q, stated with res-oecL to the interim

financial statements:

In the opinion of Management, the interim unauditedfinancial statements included herein reflect alladjustments necessary, consisting of normal recurringadjustments, for a fair presentation of such data on abasis consistent with that of the audited datapresented therein.

34. Included in "Management's Discussion and Analysis of

Financial Condition and Results of Operations"in the First

Quarter 1997 10-Q were the following statements relating to fees

purportedly earned by the Company from licensing agreements:

The Company earned fees for the use and support of itsclinical information systems, including the recognitionof license revenues and software training revenues, ofapproximately $3.4 million for the three months endedMarch 31, 1997, as compared to $0.8 million in thecomparable period ended March 31, 1996.

35. In truth and in fact, the reported financial results

and other representations referred to in 30, 33 and 34 above

were materially false and misleading, in that, among other

things:

(a) The Company's software licensing revenues for the

first quarter of 1997 were materially overstated by at least $2.5

million -- more than 73% of licensing revenue and more than 25%

of total revenues reported for the quarter -- which the Company

improperly recorded as revenue under the Agreement with Synetic

described in 1 41 25 through 28 above;

(b) The Company's revenues for the first quarter of

fiscal 1997 were also inflated because of a deceptive

25

transaction, which was not disclosed, pursuant to which the

Company advanced or purported to "loan" $2,000,000 to Madison

Medical - The Private Practice Group of New York, L.L.P.

("Madison"), a physician practice group that supposedly accounted

for 46k of Advanced Health's revenues during 1996_ The loan

proceeds were then used by Madison to pay the Company's

management fees which were then improperly recognized as revenue

by the Company, when they were really a return of loan proceeds.

Without the loan, Madison never could have paid those fees, and

the Company never could have expected to have been paid.

Defendants also failed to disclose that, in addition to the loan,

the Company had provided Madison with a $1.7 million letter of

credit by depositing restricted cash with a lending institution.

Recently. on January 15, 1999, the Company issued a press release

announcing that it had terminated its contract with Madison due

to Madison's failure to pay to Advanced Health 'contractually

obligated management fees"; and

(c) For the reasons set forth herein the Company's

financial statements violated GAAP and the Company's financial

statements failed Lo contain all necessary adjustments for a fair

presentation of the Company's operating results, as defendants

represented.

36. On or about August 7, 1997, Advanced Health issued a

press release, published on Business Wire, announcing purportedly

record results for the second quarter ended June 30, 1997. The

Company reoorted net revenues of $13.0 million and net income of

$1.2 million, or $0.14 per share, compared to net revenues of

26

$3.9 crillion and a net loss of $655,000, or a loss of $0.15 per

share, for the same period the prior year. Commenting on the

results, defendant Edelson stated:

We are extremely pleased with the tremendous growthAdvanced Health experienced during the quarter whichreflects the successful implementation of ourstrategy.... We continue to build up new physicianpractice and network management contracts and furtherpenetrate the untapped East Coast health caremarketplace. This growth reflects increasedrecognition of Advanced Health's strategy to partnerwith physician practices rather than purchase them.

Defendant Masarek, attributed the increase in revenue and

earnings to:

[Lhe Company's] continued growth in practice managementaffiliations and software sales in our Advanced HealthMed-E-Systems clinical information services subsidiary.

The August, 7, 1997 press release also highlighted a new softwaxe

product named H Med-E-Practice Intake", stating:

Product development announcements include theinstallaLion of Med-E-Practice intake, (TM) a newelectronic too] that aids physicians in monitoring andevaluating patients' risks and health status throughsurveys and on-line systems.

37. Market analysts once again reacted favorably. For

example, Hambrecht & Quist analyst Richard Lee issued a report

reiterating the firm's previously-issued "STRONG BUY" rating for

Advanced Health common stock. According to the report, "the

information technology business sill contributed $3 million to

revenues, mostly from existing contracts with Synetic and Rush

Presbyterian."

38. The results announced on August 7, 1997 were repeated

in the Company's quarterly report on Form 10-Q for the quarterly

period ended June 30, 1997 (the "Second Quarter 1997 10-Qn),

27

which was signed by defendants Edelson and Masarek and filed with

the SEC on or about August 14, 1997. The Notes To Condensed

Consolidated Financial Statemenus contained in the Second Quarter

1997 10-0 stated with respect to the financial statements:

Reference is made to the Notes to ConsolidatedFinancial Statements contained in the Company'sDecember 31, 1996 audited consolidated financialstatements as filed with the Securities and ExchangeComm*ssion on Form 10-K. In the opinion of Management,the interim unaudited financial statements includedherein reflect all adjustments necessary, consisting ofnormal recurring adjustments, for a fair presentationof such data on a basis consistent with that of theaudited data presented therein. ... Amounts advanced to an affiliate during the current period have been classified as an investment in such affiliate andincluded in other assets in the accompanying balance sheet at June 30, 1997 under the terms and conditions of the applicable agreement. {Emphasis added.]

In addition, defendants commented on the Company's investing

activities as follows:

Net cash provided by (used in) investing activities was($7.9) million for the six months ended June 30, 1997compared with ($.2) million for the comparable periodended June 30, 1996, primarily relating to a minorityinvestment in Caresoft, a developer of diseasemanagement tools, advances to, and investments in, affiliates and purchases of fixed assets. [Emphasisadded.]

39. In truth and in fact, the reported financial results and

other representations referred to in 36 and 38 above were

materially false and misleading in that, among other things:

(a) Defendants failed to disclose that Synetic had

advised the Company that its Internet Script Writer was plagued

with defects and required substantial reformulation and

reconfiguration in order to cure these problems and that, in

accordance with the terms of the Agreement, Synetic was

28

withholding payment of $1 million until the problems were

resolved. As a result, the Company's software licensing revenues

for the second quarter and six months ended June 30, 1997 were

materially overstated by at least $1.0 million which the Company

recorded as revenue under the Agreement with Synetic;

(b) During June 1997, the Company forgave $3.6 million

in receivables due from its largest customer, Madison, which

previously were recorded by the Company as revenue. Rather than

reversing the previously recorded revenue as required by GAAP,

defendants capitalized as an intangible asset, $3.6 million, the

face amount of the receivables, thereby overstating revenue, net

income, and assets for the second quarter as follows:

Reported Second Second QuarterQuarter Results Results (Not(Including Madison including Madison PercentageRevenue) Revenue) Overs[atement Overstatement

Revenue $13,021,000 $9,421,000 $3,600,000 27.6%

Intan g ible 55,259,000 51,659,000 $3,600,000 68.5%Assets

Net Income 51,151,000 (52,419,000) 53,570,000 310%

EPS $0.14 ($0,29) 50,43 307%

Thus, instead of reporting net income of over $1 million for the

second quarter, the Company should have reported a not loss of

more than $2.4 million;

(c) The Med-E-Practice program was defective, did not

work properly, and was being used in a limited fashion by only a

small number of physicians. Moreover, defendant Masarek admitted

29

to Advanced Health employees thaL Med-F.-Practice was not ready

tor market;

(d) Advanced Health falsely claimed that its Ned E-

Practice program included "NOQA data collection". In fact, in an

e-mail dated January 21, 1998, defendant Alger stated, "we don't

have a NCQA reporting module anywhere that I know of ... so we

should not claim this"; and

(e) For the reasons set forth herein, the Company's

financial statements for the second quarter and six months ended

June 30, 1997 did not comply with GAAP, and did not contain all

necessary adjustments for a fair presentation of the Company's

operating results, as defendants affirmatively represented.

40. On or about September 8, 1997, the Company filed with

The SEC a registration statement (the "Registration Statement")

which incorporated a prospectus (the "Prospectus") relating to a

secondary public offering of 2,500,000 shares of its common

stock, of which 2,000,000 were being offered by the Company and

500,000 by selling shareholders. The Registraion Statement was

signed by, among others, defendants Edelson, Hochberg, and

Masarek. The Registration Statement was declared effective on or

about October 8, 1.997 and Advanced Health and the selling

shareholders successfully sold 2.5 million shares of Advanced

Health common stock, at a price of $22.25 per share, yielding

total proceeds of more than $55 million.

41. The Prospectus, under the sections entitled "Summary

Consolidated Financial Data" and "Selected Consolidated Financial

Data", incorporated the information from the consolidated

30

financial statements contained in the Second Quarter 10-Q for the

six months ended June 30, 1997.

42. The Prospectus, under the section entitled

"Management's Discussion and Analysis of Financial Condition and

Results of Operations", confirmed that the Company had recognized

as revenue in the quarter ended June 30, 1997, the $1 million due

from Synetic under the Agreement. The Prospectus further stated

that, in September 1997, the Company had commenced an action

against Synetic to collect the $1 million, which never had been

paid, and that Synetic had answered and counterclaimed.

43. The "Notes To Consolidated Financial Statements"

included in the Prospectus purported to describe the Company's

policy regarding revenue recognition and compliance with

accounting standards:

The Company recognizes revenue from the sale of itsinformation systems and services (upon installation andacceptance), and from the licensing of its software tothird parties (upon delivery)._ The Company's revenuerecognition policy is in compliance with the provisionsof [SOP 91-1]. [Emphases added.]

44. The "Notes To Consolidated Financial Statements

included in the Prospectus further represent:

The unaudited consolidated financial informationincluded herein for the six months ended June :=30, 1996and 1997 has been prepared in accordance with generallyaccepted accounting principles for interim financialinformation_ In the opinion of the Company, theseunaudited consolidated financial statements reflect alladjustments necessary, consisting of normal recurringadjustments, for a fair presentation of such data on abasis consistent with that of the audited datapresented herein.


other representations in the Prospectus referred to in 41-44

31

above were materially false and misleading in that, among other

things:

(a) Contrary to defendants' representations that the

Company recognized revenue from The sale at its information

systems and services upon installation and acceptance, and from

the licensing of its software to third parties upon delivery, it

was defendants' policy and practice to recognize revenue upon the

signing of a contract; and

(b) For the reasons set forth in 11 39 above, the

Company's financial statements were not prepared in accordance

with GAAP and it was not true that the financial statements

reflected all necessary adjustments for a fair presentation of

such data.

46. On September 18, 199?, Advanced Health issued a press

release, published on Business Wire, announcino. its acquisition

of Bukstel & Halfpenny Incorporated, a computer software company

that creates and markets products allowing doctors and healthcare

organizations to exchange individual patients' healthcare

information with other healthcare providers via computer. The

total consideration for the acquisition was over $4,500,000,

comprised of $1,444,000 in shares of Advanced Health common

stock, $250,000 in non qualified options for the purchase of

Advanced Health common stock, $2,500,000 in additional shares of

Advanced Health common stock, contingent upon the achievement of

certain performance goals, and $306,000 in cash. The share

amounts were each calculated based on the average daily closing

price of Advanced Health common stock for the thirty days

32

preceding September 17, 1997 (the date of the merger agreement),

which was $21.8125. The wrongdoing described herein enabled

defendants to use artificially inflated shares of Advanced Health

stock as consideration for this and other acquisitions. Bukstel

& Halfpenny has since commenced an action in the Supreme Court of

The State of New York against the Com'oany and the Individual

Defendants seeking damages tor, among other things, fraud and

breach of contract.

47. On or about October 7, 1997, defendants Hochberg and

Edelson sold 65,000 and 10,000 shares, respectively, of Advanced

Health common stock for $20.97 per share.

48.. On or about October 24, 1997, a Bloomberg News Service

article reported that The Company had defended its forgiveness of

the Madison receivables discussed in 1 39(b) above_

Specifically, the Bloomberg article quoLed defendant Masarek, who

stated:

We simply made an investment in the account and inexchange for that investment, we got a very significantextension of the term of our contract as well as asignificant increase in our management fees.

The article further reported that the Company "expects to meet

earnings estimates for this year and next".

49. Defendant Masarek's statement in the Bloomberg article

was materially false and misleading in that the Company's

revenues remained overstated due to the failure to reverse the

revenue relating to the forgiven Madison receivables as described

in 11 39(b) above.

33

50. On or about November 10, 1997, Advanced Health issued a

press release, published on Business Wire, announcing puportedly

record results for the third quarter ended September 30, 1997.

The Company reported net revenues of $16.7 million and net income

of $1.8 million, or $0.21 per share compared to net revenues of

$4.6 million and a net loss of $1.0 million, or a loss of $0.20

per share tor the same period the previous year Defendant

Edelson commented on the results, stating:

We are very pleased with the results for the quarter.Revenues are up 28 95 and earnings are up 50 aver theprevious auarter. Our current strategy continues toprovide value to our physicians both through ourpractice management services and informationtechnology.

51. The resulLs announced by the Company on November 10,

1997 were repeated in the Company's quarterly report on Form 10-0

for the quarterly period ended September 30, 1997 (the "Third

Quarter 1997 10-Q"), which was signed by defendants Edelson and

Masarek and filed with the SEC an or about November 14, 1997.

The Notes To Consolidated Financial Statements, contained in the

Third Quarter 1997 10-Q, stated:

Reference is made to the Notes to ConsolidatedFinancial Statements contained in the Company'sDecember 31, 1996 audited consolidated financialstatements as filed with the Securities and ExchangeCommission on Form 10-K. In the opinion of Management,the interim unaudited financial statements includedherein reflect all adjustments necessary, consisting ofnormal recurring adjustments, for a fair presentationof such data on a basis consistent with that of theaudited data presented therein....


other representations referred to in ¶T and 51 above were

materially false and misleading, in that, among other things:

34

(a) The Company's revenues and net income for the nine

months ended September 30, 1997 were mauerially overstated for

the reasons set forth in 1 39 above;

(h) Defendants violated GAP by improperly recognizing

revenue of $2 million in the third quarter of fiscal year 1997 in

connection with a purported 'sale ° of software to Horizon Family

Medical Group, P.C. ;"HorLzon"), a physician practice group. The

recognition of revenue in connection with this transaction was

improper because the delivery of the software did not occur until

after the end of the third quarter. Thus, the Company's revenue

for the third quarter of fiscal year 1997 and nine months ended

September 30, 1997 was overstaI:ed by at least $2 million; and

(c) For the reasons set forth herein, the Company's

financial statements violated GAAP and the Company's financial

statements failed to contain all necessary adjustments for a fair

presentation of the Company's operating results as defendants

represented.

53. On or about December 4, 1997, defendant d& son made a

presentation at the Robertson Stephens 1997 Medical Conference at

the Pierre Hotel in New York City. Seeking to reassure

investors, defendant Edelson stated, among other things:

Synetic is a company with whom Advanced Health has asoftware contract. The rumors circulating with regardto Synetic are that non-payment by Synetic through thecontract is going to impact company revenues andearnings going forward.

And the fact that this contract has concluded -- it wasa tour phase software contract, the last phase has beensuccessfully completed, and this contract has no impacton future earnings.

35

The second rumor that's been circulating regardingSynetic has been raising questions about the softwarefunctionality. The essence of the issue is thatSynetic didn't pay us, and the question arose in themarket place. . . does Advanced Health software notwork? And there could be nothing further from the truth. In fact, our software works, we use it ourselves , we have many users who use it today and are very satisfied.... And in fact, sales are growing at anunprecedented pace within the Company with nationalcustomers who have looked nationally for the sorts ofsolutions that we offer, and have gone on to select us.[Emphasis added.]

54. In truth and in fact, defendant Ecelson's statements

were materially false and :lisleading as the Internet Script

Writer software, for which Synetic refused to pay, was

operationally flawed and incomplete, and, in fact, the "last"

phase had not been successfully completed.

55. Further, on December 5, 1997, in an interview on an

MSNBC Business Video, defendant Edelson responded to concerns

about the recent decline in the Company's stock price by statin:

There were some specific things that are in play Ithink with our stock and unfortunately none of them hadto do with the fundamentals of the company. If youlook at the company's growth and I know you've reviewedit, we basically have had the increasing revenues andprofits for each quarter since we went public and infact we've meet [sicl or exceeded analystsexpectations. We've been profitable now for fourquarters and have a tremendous pipeline of business.

Yet nonetheless of course companies that do aswell as ours are oftentimes [sic] declared shortsellers, short sellers as you know circulate rumors, inthis case unfounded, about the company which has oflate depressed the stock. But we believe to get thefundamentals of the performance we seem to be verycomfortable with our numbers, we feel very comfortableof the pipeline and we expect very exciting things tohappen in the near future....

36

56. In truth and in tact, defendant Edelson's statements

were ma:._erially false and misleading for the reasons set forth in

52 above.

57. On March 10, 1998, Advanced Health issued a press

release, published on Business Wire, announcing its financial

results for the year ended December 31, 1997. The Company

reported net income of $7.2 million, as compared to a loss of

$1.5 million reported in the nrior year. Commenting on the

results, defendant Edelson stated:

1997 ended on a very strong note across the board,demonstrating the sustained value of our services tophysicians and propelling our company into 1998 withgood top and bottom line momen'Lum. Trends are in ourfavor as market forces are compelling physicians toseek professional management services. Increasingly,as well, physicians and hospitals are recognizing howcriLical information management is to managing thehealth care cycle that begins in a physician's officeand often extends in7io the hospital. Our latestresults validate our strategy ot integrating thephysician management and physician informationtechnology businesses hy demonstrating marketing,operational, and financial synergies between ourbusiness units.

The March 10 press release quoted defendant Masarek as follows:

We signed up a record number of new providers a.7_ multi-specialty practices. Physicians are signing up for ourmanagement services because they recognize we possessthe resources and know-how to meaningfully improve theoperations and growth trajectory of their practices.We stand out in our industry not only for the value wecreate for these practices bur also for our uniquemodel of preserving physician independence, which ishighly appealing to the many physicians who wish tomaintain au,:.onomy.

"We have determined," Mr. Masarek added, than thelarger, higher volume practices have betteropportunities for success than do certain smaller ones.As such, we are focusing on bringing our services to

37

larger physician groups where we receive optmalreturns for our investment of t.me and effort."

Defendant Rogers also commented on the year-end results as

follows:

Overall for the fourth quarter, Advanced Health'sprofits were up substantially and operating cash flowwas positive. In addition to the growth in ourpractice management business, our Advanced HealthTechnologies ;ACT) division signed a record number ofsoftware license agreements during the fourth quarter,in 1998, ... [T]he growth of ACT will be enhanced bythe expanded product offerings and distributionchannels we added through our previously announcedacquisition of Bukstel SL Halfpenny and our recentinvestment in Patient Care Dynamics.

58. The following day, March 11, 1998, Bloomberg News

Service reported that the Company's stock "rose 13 percent after

the physician management company met earnings expectations for

the fourth quarter and said it's confident it will match 1998

esLimaLes as well." In fact, from the close of trading on March

9, 1998 to the close of trading on March 12, 1998, the market

price of Advanced Health common stock rose $3.5625 per share to

$18.125 uer share, or almost 25 percent, as a result of the March

10, 1998 earnings report_ This was the highest the stock price

had been in over four months.

59. In an article released on March 15, 1998 (and dated

March 23, 1998), The New York Observer reported that agents from

the Federal Bureau of Investigation, the Internal Revenue

Service, and the Department of Health and Human Services were

investigating fraudulent billing and improper patient referral at

two medical group practices. The New York Observer article

further reported that Advanced health, which managed the billing

38

A

and administration of those practices, was also under

investigation.

60. On April 1, 1998, Advanced Health issued a press

release maintaining that neither it nor the physician groups it

managed were the targets of a federal investigation.

61. On April 4, 1998, Advanced Health filed its annual

report on Form 10-K for the year ended December 31, 1997, which

reiterated the previously announced results in the March 10, 1998

press release. The Form 10-K was signed by, among others,

deLeadants Edelson, Hochberg, Masarek, and Rogers.

62. The "Notes To Consolidated Financial Statements"

included in the Form 10-K represented with respect to the

Company's policy regarding revenue recognition and compliance

with current accounting standards that:

The Comoany recognizes revenue from the licensing ofits information systems and services (upon installationand acceptance), and from the licensing of its softwareto third parties (upon delivery)._ The Company'srevenue recognition policy is in compliance with theprovisions of [SOP 91-1]. [Emphases added.]


and other representations referred to in 11 57, 61 and 62 above

were materially false and misleading in that, among other things:

(a) The Company's revenues and net income for fiscal

1997 were materially overstated for the reasons set forth in $1

39 and 52 above;

(b) In addition, the Company's financial statements

also violated GAAP, and the Company's own stated policy,

regarding revenue recognition, in that, among other things:

39

(i) Defendants recorded revenue of $3.5 million

from a transaction with ACRM, Inc. ("ACRM") in the fourth quarter

of fiscal year 1997, although ACRM was a sham entity that had no

offices, business cards, stationary, or other indicia of an

operating business. Recording revenue for the purported sale to

ACM violated GAAP because ACRM did not exist as a separate

entity and, thus, no true exchange had taken place between

Advanced Health and ACRM. Moreover, collection of the sales

price was impossible under the circurrstances. As a result of

improperly recording revenue from this transaction, the Company's

revenues were overstated by approximately $3.5 million tor the

fourth quarter of fiscal year 1997;

(ii) Defendants recorded a sale of approximately

$2.5 million at the end of fiscal year 1997 to Patienteare

Dynamics, LLC ("PCD"). In exchange for a $5 million investment

trom Advanced Health, PCD agreed to purchase $2.5 million of

software from Advanced Health. Recording PCD's "purchase" of

software as revenue violated GAAP because no r_rne exchange had

taken place and the collection of the sales price was not

reasonably assured_ The purported revenue was, in substance, a

return of Advanced Health's investment in PCD. As a result,

revenues were overstated by 82.5 million for the fourth quarter

of fiscal year 1997; and

(iii) Defendants recorded the sale of

approximately $1 million of software in late 1997 to the Mayo

Clinic in Rochester, Minnesota. Defendants shipped the software

to the Mayo Clinic, despite knowing that: (1) the software was

40

not functional, (2) did not perform properly, and (3) would be

rejected by the Mayo Clinic when it was found to be defective.

When an Advanced Health officer brought these facts to the

attention of defendant Masarek, the officer was told by defendant

Masarek that the only thing that mattered was the Federal Express

receipt, which could be used to prove a completed transaction in

order to permit booking of the revenue in 1997. The officer was

further told that the transaction would be hooked as $1 million

in revenue for the last quarter of 1.997 in spite of the fact that

the Mayo Clinic had never paid for the software. Recording

revenue under these circumstances violated GAAP because no true

exchange had taken place, the earnings process was not complete,

and collection of the sales price was impossible. Indeed, the

Mayo Clinic has never paid for the software; and

(c) Contrary to defendants' representations ;:hat the

Company recognized revenue from the sale of its information


the licensing of its software to third parties upon delivery, in

truth and in fact, it was defendants' policy and practice to

recognize revenue upon the signing of a contract.

64. On May 12, 1998, Advanced Health issued a press

release, published on Business Wire, announcing its financial

results for the first quarter of 1998, the quarter ended March

31, 1998. The Company reported that revenues for the quarter

increased to $24.2 million, as compared to $10 million in the

first quarter of 1997. Net income grew to $2.4 million, or $0.21

per diluted share, as compared to net income of $660,000, or

41

$0.08 per diluted share, for the first quarter of 1997.

Defendant Rogers commented on he results as follows:

Advanced Health posted another strong quarter,bolstered by both our practice management andinformation technology segments. Market demand forphysician management services continues to grow on theEast Coast. As well, national demand for ourinformation technology services remains strong_

65. In that same press release, the Company also announced

the $6.6 million ($5 million in Advanced Health stock and the

remainder in cash) acquisition of Integrated Medical Management,

Inc. ("IMM"), a privately-held physician management company.

Concerning the acquisition, defendant Masarek stated: "We believe

• . . that this acquisition provides great synergy and long-term

strategic value to Advanced Health, especially given the number

of physicians under management and the platform IMM provides from

which our combined entities can success fully target the

marketplace." Defendants intentionaily overstated the Company's

revenues, to specifically inflate the trading price of Advanced

Health stock, in order, among other things, to use the stock as

consideration for this and other acquisitions.

66. The results reported in the May 12, 1998 press release,

were repeated in the Company's quarterly report on Form 10-Q for

the quarter ended March 31, 1998 (the "First Quarter 1998 10-Q"),

which was signed by defendants Edelson and Rogers and filed with

the SEC on or about May 15, 1998. The Company did not disclose

whether any of the monthly payments on account of the purported

$2,000,000 loan to Madison had been received. The Notes To

42

Consolidated Financial Statements, contained in the First Quarter

1998 10-Q, stated:

Reference is made to the Notes to ConsolidatedFinancial Statements contained in the Company'sDecember 31, 1997 audited consolidated financialstatements as filed with the Securities and ExchangeCommission on Form 10-K. In the opinion of Management,the interim unaudited financial statements includedherein reflect all adjustments necessary, consisting ofnormal recurring adjustments, for a fair presentationof such data on a basis consistent with that of theaudited data presented therein.


and other representations referred to in 11 64 and 66 above we

materially false and misleading in that, among other things, for

the reasons set forth herein, the Company's financial statements

violated GAAP and it was not true that Advanced Health's

financial statements contained all necessary adjustments for a

fair presentation of the Company's operatlng results, as

defendants represented. Among other things, the First Quarter

1998 10-Q reoresented that accounts recelvatae as of March 31,

1998 totaled $16,468,000. However, the Company's accounts

receivable were materially misstated by approximately $7 million

because accounts receivable as of March 31, 1998 improperly

included the sales to ACRM, PCD, and the Mayo Clinic alleged in

$ 63 above. These amounts were not properly included as accounts

receivable as of March 31, 1998 because the related sales

resulted from either: (1) i=he shipping cf inoperable software to

customers (PCD and the Mayo Clinic), or (2) a transaction with a

sham entity (ACRM). Under these circumstances, collection of the

43

sales price was not reasonably assured, and the accounts

receivable should have been written off in accordance with GAAP.

68. On May 29, 1998, several of the Individual Defendants

sold significant amounts of Advanced Health common stock as

follows:

(a) Defendant Masarek sold 15,000 shares at $12.54 per

share, representing virtually all of his holdings (excluding

opt.ions(b) Defendant Edelson sold 20,000 shares at $12.54 per

share; and

(c) Defendant Alger sold 7,500 shares at $12.54 per

share.

THE TRUTH BEGINS TO EMERGE

69. On June 30, 1998, just one month after defendants'

insider sales, Advanced Health surprised the market by issuing a

press release announcing that iL anticipated a second-quarter

loss. The press release stated, m [biased on a preliminary

anal ysis of results in the second quarter and one-time special

charges, the Company will likely experience an operating loss of

approximately $3 million to $4 million on revenues of

approximately $17.5 million and one-time charges of approximately

$8 million pre-tax."

70. According defendants, the "one- 1:.ime charges" were

expected to include the write-off of approximately $5 million in

certain accounts receivable for sales prior to 1998.

44

71. In the same announcement, it was revealed that

defendant Rogers, Advanced Health's Chief Financial Officer, had

resigned from the Company "to pursue other interests".

72. ALLer the close of the market. on June 30, 1998,

Bloomberg News Service reported that Advanced Health's shares had

fallen 41 percent "after the company said its chief financial

officer quit and that weak sales of its medical-records software

will give it a second •quarter loss." Advanced Health shares :cell

3-3/4 from the previous day's closing price to close at 5-1/2 per

share, representing the biggest percentage decline on U.S.

markets for the day.

73. The June 30, 1998 press release was materially false

and misleading because defendants still failed to disclose, and

concealed, The true extent to which they previously had

misrepresented the Company's financial results.

74. On August 6, 1998 (one day after the end of the Class

Period), the Company announced its actual financial results for

the second quarter of 1998, the period ending June 30, 1998,

which revealed that the extent of the Company's problems was even

greater than the June 30, 1998 press release had led the market

to believe. Notwithstanding the previous announcement, the

Company now reported that revenues for the second quarter of 1998

were only $16.8 million, that the Company had experienced an

operating loss of $16.3 million, and that one-time charges for

the quarter were $9.6 million. The Company described the one-

time charges as follows:

45

$3.1 million for bad debts; - 52_1 million relating toprofessional fees; -- $1.5 million in non-capitalizablesoftware development costs; -- $800,000 for networkmanagement services; -- $800,0000 relating to thewrite-off of goodwill; -- $400,000 for previouslyterminated employees; and -- $900,000 for miscellaneousitems.

By the close of trading on August 6, 1998, the stock had fallen

even further to just $2.50 per share -- a decline of more than

90% tram the Class Period high of $27.375 per share (on October

16, 1997). Advanced Health common stock currently trades in the

range of $2-$3 per share.

75. On November 12, 1998, the Company issued a press

release announcing that it was caking yet another charge of $6.3

million relating to the write down of Med-E-Practice software

development assets, effectively admitting that the Med-E-Practice

products had failed.

76. On January 13, 1999, the Company issued a press release

announcing that it was changing its name to AHT Corporation, to

reflect its new focus on "healthcare e-commerce'. The press

release further announced that the Company was "seeking strategic

alternatives" for its practice management business, which

according to defendant Edelson was not "core" to the Company's

new healthcare e-commerce business.

77. During the Class Period, defendants materially misled

the investing public, thereby inflating the price of Advanced

Health stock, by publicly issuing materially false and misleading

statements and omitting to disclose material facts necessary to

make defendants' statements, as set forth herein, not false and

misleading. Said statements and omissions were materiall y false

45

and misleading when made in that they failed to disclose material

adverse information and misrepresented the truth about the

Company, its business, operations, performance, and financial

condition. Amona other things:

• a) Contrary to defendants' affirmative

representations, the Company's financial statements were not

prepared in accordance with GAAP and the federal securities laws

and SEC regulations concerning fair reporting as set forth below,

and it was not true that Advanced Health's financial statements

contained all necessary adjust-Tents for a fair presentation of

the Company's operating results;

(b) Defendants materially overstaed the Company's

reported revenues and net income due to their violations of GAAP

as set forth herein;

(c) Defendants materially overstated the Company's

assets due to their violations of GAAP as set forth herein;

(d) Contrary to defendants' representations that the

Company recognized revenue from the sale of its information


the licensing of its software to third parties upon delivery, in

truth and in fact, it was defendants' policy and practice to

recognize revenue upon the scning of a contract;

(e Defendants falsely represented that the Company's

Internet Script Writer software worked, when in truth and in

fact, the software was flawed and incomplete; and

(f) The Company's public filings during the Class

Period failed to describe known trends and uncertainties that

47

had, and that the Company reasonably expected would continue to

have, a material unfavorable impact on net sales or revenues or

income from continuing operations as required by Item 303(a) and

(b) of Regulation S-K.

78. At all relevant times, the material misrepresentations

and omissions particularized in this Complaint directly or

proximately caused or were substantial contributing causes of the

damages sustained by plaintiffs and other members of the Class.

As detailed herein, during the Class Period, defendants made or

caused to be made a series of materially false and misleading

statements about Advanced Health which had the cause and effect

of creating in the market an unrealistically positive assessment

of Advanced Health and its busLness, performance and operations,

thus causing the Company's common stock 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 common stock at artificially inflated

prices, that did not reflect the stock's true value, thus causing

the damages complained of herein.

DEFENDANTS' GAP VIOLATIONS

79. Although defendants represented that the Company's

financial statements issued during the Class Period were prepared

in accordance with GAAP and fairly presented on a basis

consistent with that of the audited data presented therein,

defendants violated GAAP and SEC regulations in material and

significant ways as described below_

48

80. GAAP incorporates the consensus among accountants at a

particular Lime concerning the economic resources and obligations

that should be recorded as assets and liabilities, which changes

in them should be recorded, when these changes should be

recorded, how the recorded asseLs and liabilities and changes in

them should be measured, what information should he reported, how

it should be disclosed, and which financial sUaLements should be

prepared.

81. The SEC requires that publicly-traded companies present

their financial statements in accordance with GAAP. 17 C,F.R. §

210.4-01(a)(1). Financial statements filed with the SEC that are

not_ prepared in accordance with GAAP "will be presumed to be

misleading or inaccurate, despite footnote or other disclosures,

unless the Commission has otherwise provided." 17 C.F.R. §

210.4-01(a)(1).

82. Moreover, under Item 303 of Regulation S-K, promulgated

by the SEC under the Exchange Act, there is a duty to disclose in

periodic reports filed with the SEC "known trends or any known

demands, commitments, events or uncertainties" that are

reasonably likely to have a material impact on a Company's sales

revenues, income or liquidity, or to cause previously reported

financial information not to be indicative of future operations

results. 17 C.F.R. 5 220.303a)(1)-(3) and Instruction 3. To

addition to the periodic reports required under the Exchange Act,

management of a public company has a duty "to make full and

prompt announcement of material facts regarding the Company's

49

financial condition." Release No. 34-8995 (October 15, 1970), 17

C.P.R. § 241.8995.

83. Defendants intentionally or recklessly tailed to

disclose the existence of known trends, events or uncertainties

that they reasonably expected would have a material unfavorable

impact on Advanced Health's operating results or that were

reasonably likely to result in the Company's liquidity decreasing

in a material way, in violation of Item 303 of Regulation S-K

under the federal securities laws (17 C.F.R. § 229.303). Such

failure rendered the Company's Class Period financial statements

and Forms 10-K and 10-Q materially false and misleading.

84. The realization principle requires generally that

revenue be earned before it is recognized. Under GAAP, revenue

is recognized when the earnings process is complete and a true

exchange has taken place (Statement of Financial Accounting

Concepts ('FAC") D. 5, Recognition and Measurement in Financial

Statements of Business Enterprises, V[ 83, 84). Paragraph 83(b)

of PAC No. 5 states:

Revenues are not recognized until earned. Anentity's revenue-earning activities involvedelivering or producing goods, renderingservices, or other activities that constituteits ongoing major or central operations, andrevenues are considered to have been earnedwhen the entity has substantiallyaccomplished what it must do to be entitledto the benefits reoresented by the revenues.[Footnote omitted.]

Moreover, the earnings process is not complete until collection

of the sales price is reasonably assured (Id.).

50

85. During all relevant times, the authoritative accounting

pronouncement was the American Institute Of Certified Public

Accountants Statement of Position 91-1 (ACC-SOP 91-1) issued on

December 12, 1991. The criteria for determining the timing of

software license revenue recognition is discussed at ACC-SOP 91-

1,034, "Software Licenses With Other Significant Vendor

Obligations," which states in pertinent part:

If, in addition to the obligation to deliver thesoftware, the sales or licensing agreement includesother significant vendor obligations, the agreementshould first be examined to determine if it should beaccounted for using contract accounting or as a servicetransaction. For agreements with significant vendorobligations beyond the delivery of the software thatare not accounted for using contract accounting or asservice transactions, revenue should not be recognizeduntil all of the following conditions are met:

a. Delivery has occurred.b. Other remaining vendor obligations are no longersignificant.c. Collectibility is probable. [Emphasis added.]

86. As set forth above, the Company violated the foregoing

GAAP principles, and its own publicly-stated revenue recognition

principles, in connection with major software transactions with,

at least, Synetic (see 25-28, 35(a) and 39(a)), Horizon • (see 11

b1(b)), ACRM (see 63(b)(i)), PCD (see 11 63(b)(ii)), and the

Mayo Clinic (see 1 63(b) (iii)).

87. Accounting Research Bulletin No. 43 and FASB No. 5,

Accounting for Contingencies provide that entities report

accounts receivable at net realizable value." By reclassifyiny

accounts receivable due from Madison Medical as intangible assets

as described in 11 39(b) above, defendants avoided immediately

writing off the receivables down to "net realizable value" (under

51

the circumstances, zero) and instead sought to write the

receivables off over thirty years the length of the corc.:ract

between Advanced Health and Madison Through this improper

practice, the Company recognized the revenue immediately, while

deferrng charges to net income for thirty years Thus, the

Company's revenues and net income were overstated by

ap'oroximately $3.6 million for the second quarter of fiscal year

1997.

38. Moreover, by capitalizing the forgiven receivables, the

Company was able to present a far more favorable cash flow from

operations, even though no cash was collected from the sale to

Madison. Indeed, the Company's cash flow from operations was

negative for the quarters ending December 31, 1996 and March 31,

1997.

89. In addition to the accounting violations noted above,

the Company presented its financial statements tr. a manner which

also violated at least the following provisions of GAAP:

(a) The principle that a conservative approach betaken providing early recognition ofunfavorable events and minimizing the amountof income recorted (See Statement No. 4 ofthe Accounting Principles Board ("AEG Nos")at 1$ 28, 35, 171);

(b) The principle that the financial informationpresented should be complete. (See APB No.4, 11 28, 35, 83 171);

(c) The principle of fair presentation ("presentsfairly"). (See APB No. 4, 9 4[ 109, 138, 189);

(d) The principle of adequacy and fairness ofdisclosure. (See APB No. 4, $1 81, 106, 189,199);

52

(e) The principle of materiality concerninginformation that is significant enough toaffect evaluations or decisions. (Sec APBNo. 4, 4 1 25, 128),

(f) The principle that the substance oftransactions rather than form should bereflected. (See APB No. 4, '01 25, 35, 127);

(q) The principle tha7 informed judgment based onbackground and knowledge should be applied.(See APB No. 4, Vfi 25, 35, 124, 173, :74);

(h) The principle that items included in thefinancial statements be reliably corroboratedby outside evidence (verifiability). (See APBNo. 4, 11 23, 35, 90);

(i) The principle that the financial statementscontain and disclose relevant,understandable, and timely information forthe economic decisions of the user. (See APBNo. 4, 23, 88, 89, 92);

(j) The principle that the financial statementsprovide reliable financial information aboutthe enterprise for the economic decisions ofthe user. (See APB No. 4, 77, 73, 107,108); and

(k) The principle that accounts receivable mustbe reported in the financial statements atnet realizable value (See, e.q., ARB-43,Chapter 3A; FASB No. 5, Accounting for Contingencies.)

ADDITIONAL SCIENTER ALLEGATIONS

90. As alleged herein, defendants acted with scienter in

that defendants knew that the public documents and statements

issued or disseminated in The name of the Company during the

Class Period 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 szatements or

documents as primary violations of the federal securities laws.

As set forth elsewhere herein in detail, defendants, by virtue of

their receipt of information reflecting the true facts regarding

Advanced Health, :heir control over, and/cr receipt and/or

modification of Advanced Health's allegedly materially misleading

misstatements and/or their associations with the Company which

made them privy to confidential proprietary information

concerniny Advanced Health, participated in the fraudulent scheme

alleged herein.

91. Defendants were motivated to conceal the true state of

affairs at the Company in order to enable the Company and certain

selling shareholders to sell 2.5 million shares of Advanced

Health common stock at $22.75 per share, raising $55 million,

Defendants also sought to profit by using shares of artificially

inflated Advanced Health stock as consideration for the

acquisition of two other companies.

92. Moreover, defendants' insider selling is high4

probative of defendants' scienter and is part of defendants'

scheme, artifice to defraud, and acts, pracLices and course of

business in violation of Section 10(b) and Rule lob-5. As set

forth above, while defendants were issuing false favorable

statements about_ the Company's business and concealing or

obscuring negative information, the Individual Defendants who had

access to confidential inforation and were aware of the truth

about the Company and its operations, were benefitting from the

unlawful scheme complained of herein by selling shares of the

Advanced Health common stock owned by Lhem at artificially

inflated prices without disclosing the material adverse facts

54

about the Company to which they were privy. Such sales were

unusual in their amount and in their timing. Among other things,

detendant Masarck sold virtually all of the shares of Advanced

Health common stock that were owned by him (excluding options)

and the sales by the different defendants were coordinated in

that two or more defendants sold stock on the exact same date on

four separate occasions during the Class Period. The following

table shows the insider selling of certain of the Individual

Defendants during the Class Period:

SHARES PRICEDEFENDANT DATE SOLD PER SHARE PROCEEDS

Jonathan 08/12/97 30,000 $21.25 $637,500Edelson 08/20/97 15,000 $19.88 $298,200

08/31/97 10,000 $20.97 $209,70010/07/97 10,000 $20.97 $209,70005/29/98 20 000 $12.54 $250,800

85,000 $1,605,900

Steven 08/12/97 50,000 $21.25 $1,062,500Hochberg 08/21/97 10,000 $20.00 $200,000

08/22/97 40,000 $20.13 $805,20008/31/97 65,000 $20.97 $1,363,05010/07/97 65,000 $20.97 $1,363,050

230,000 54,793,800

Alan Masarek 05/29/98 15,000 $12.54 $188,100

Robert J. 05/29/98 7,500 $12.54 $94,050Alger

Grand Total 337,500 $6,681,850

55

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

93. At all relevant times, the market for Advanced Health

common stock was an efficient market for the following reasons,

among others:

(a) Advanced Health common stock met the requirements

for listing, and was listed and actively traded, on the NASDAQ

National Market System, a highly efficient market;

(b) As a regulated issuer, Advanced Health filed

periodic public reports with the SEC and the NASD;

(c) Advanced Health stock was followed by securities

analysts empoyed by major brokerage firms who wrote reports

which were distributed to the sales force and customers of their

respective brokerage firms. Each of these reports was publicly

available and entered the public marketplace. Among the

securities firms that followed the Company during the Class

Period were: Cowen & Company, Hambrecht & Quist, and SC Warburg

Dillon Read, Inc.; and

(d) Advanced Health regularly communicated with public

investors by means of established market communication

mechanisms, including through regular dissemination of press

releases on the national circuits of major newswire services and

through other wide-ranging public disclosures, such as

communications with the financial press and other similar

reporting services. Each of these releases was publicly

available and entered the public marketplace.

56

94. As a result, the market for Advanced Health securities

promptly digested current information with respect to Advanced

Health from all publicly-available sources and reflected such

information in Advanced Health's stock price. Under these

circumstances, all purchasers of Advanced Health common stock

during the Class Period suffered similar injury through their

purchase of stock at artificially inflated prices and a

presumption of reliance applies.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

95. 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

specific statements pleaded herein were not identified as

"forward-looking statements" when made. Nor was it stated with

respect to any of the statements forming the basis of this

complaint that actual results "could differ materially from those

projected." To the extent there were any forward-looking

statements, 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. Alternatively, to the extent that the statutory safe

harbor does apply to any forward-looking statements pleaded

herein, defendants are liable for those false forward-looking

sLatements because at the time each of those forward-looking was

made the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement

was authorized and/or approved by an executive officer of

57

Advanced Health who knew that those statements were false when

made_

PLAINTIFFS' CLASS ACTION ALLEGATIONS

96. Plaintiffs bring this action as a class action pursuant

to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of

a Class consisting of all persons who purchased or otherwise

acquired Advanced Health common stock during the period from May

7, 1997 through August 5, 1998, inclusive (the "Class Period"),

and who were damaged thereby. Excluded from the Class are defen-

danLs, members of the immediate family of each of the Individual

DefendanLs, any subsidiary or affiliate of Advanced Health and

the directors, officers and employees of Advanced Health or its

subsidiaries or affiliates, any entity in which any excluded

person has a controlling interest, and the legal representatives,

heirs, successors, and assiyns of any excluded person.

97. The members of the Class are so numerous that joinder

of all members is impracticable. While the exact number of Class

members is unknown to plaintiffs at this Lime and can only be

ascertained through appropriate discovery, plaintiffs believe

that there are hundreds and perhaps thousands of members of the

Class located throughout the United States. As of March 25,

1998, Advanced Health reported that there were more than 9

million shares of common stock outstanding. Throughout the Class

Period, Advanced Health common stock was actively traded on the

NASDAQ National Market System. Members of the Class may be

identified from records maintained by Advanced Health and/or its

58

transfer agent and may he notified of the pendency of this action

by mail and other means, using forms of notice similar to that

customarily used in securities class actions.

98. Plaintiffs' claims are typical of the claims of the

other members of the Class as all members of the Class were

similarly affected by defendants' wrongful conduct in violation

of federal law and state law that is complained of herein.

99. Plaintiffs will fairly and adequately protect the

interests of the members of the Class and have retained counsel

competent and experienced in class and securities litigaticn.

100. Common questions of law and fact exist as to all

members of the Class and predominate over any questions solely

affecting individual members of the Class. Among the questions

of law and fact common to the Class are:

(a) Whether the federal securities laws were violated

by defendants' acts and omissions as alleged herein;

(b) Whether defendants participated in and pursued the

common course of conduct complained of herein;

(c) Whether documents, press releases, and other

statements disseminated to the investing public and the Company's

shareholders during the Class Period misrepresented and omitted

material facts about the business, finances, financial condition,

and performance of Advanced HealL11;

(d) Whether the market price of Advanced Health common

stock during the Class Period was artificially inflated due to

the material misrepresentations and omissions, and failures to

59

correct the material misrepresentations and omissions complained

of herein; and

(e) Whether members of The Class have sustained

damages and the proper measure of damages.

101. A class action is superior Lc all other available

methods for the fair and efficient adjudication of this contra

versy since joinder of all members is impracticable. Further-

more, as the damages suffered by individual Class members may be

relaLively small, the expense and burden of individual litigation

make it. impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in

the management of this suit as a class action.

FIRST CLAIM

(Violations Of Section 10(b) Of The Exchange ActAnd Rule 10b-5 promulgated Thereunder Against

All Defendants)

102. Plaintiffs repeat and reallege each and every

allegation contained above.

103. Each of the defendants: (i) knew or recklessly

disregarded material adverse non-public information about

Advanced Health's financial results and then-existing business

conditions, which was not disclosed; and (ii) participated in

drafting, reviewing and/or approving the misleading statements,

press releases, reports, and other public representations of and

about Advanced Health.

104. During the Class Period, defendants, with knowledge of

or reckless disregard for the truth, disseminated or approved the

false statements specified above, which were misleading in that

60

they contained misrepresentations and failed to disclose material

facts necessary in order to make the statements made, in light of

the circumstances under which they were made, not misleading.

105. Defendants have violated 10(b) of the Exchange Act

and Rule 1012-5 promulgated thereunder in that they: (i) employed

devices, schemes and artifices to defraud; (ii) made untrue

statements of material facts or omiLLed to state material facts

necessary in order to make statements made, in light of the

circumstances under which they were made, not misleading; and

(iii) engaged in acts, practices, and a course of business that

operated as a fraud or deceit upon the purchasers of Advanced

health stock and the market for Advanced Health stock during the

Class Period.

106. Plaintiffs and members of the Class have suffered

damage in that, in reliance on the integrity of the market and/or

the materially false and misleading statements and omissions

complained of herein, they paid artificially inflated prices for

Advanced health stock that did not reflect the true value of the

stock. Plaintiffs and members of the Class would not have

purchased Advanced Health stock at the prices they paid, or at

all, had they known the truth with respect to the maters

complained of herein.

SECOND CLAIM

(Violations Of Section 20(a) Of The Exchange ActAgainst The Individual Defendants)

107, Plaintiffs repeat and reallege each and every

allegation contained above.

61

108. Throughout the Class Period, the Individual Defendants,

by virtue of their positions as senior executive officers,

directors, and major shareholders of the Company, had the power

and influence, and exercised the same, Lc cause the Company to

engage in the unlawful acts, conduct, and practices complained of

herein. As a result, at the times of the wrongs alleged herein,

the Indlvialal Defendants were "controlling persons" of the

Company within the meaning of Section 20(a) of the Exchange Act.

109. Pursuant to SecLion 20(a) of the Exchange Act, by

reason of the foregoing, each of the Individual DefendanLo is

liable jointly and severally with and to the same extent as the

Company for the Company's aforesaid violations of Section 10(t.)

of the Act and Rule 10b-5 promulgated thereunder.

110. As a direct and proximate result of these defendants'

wrongful conduct, plaintiffs and other members of the Class

suffered damages in connection with their purchases of Advanced

Health stock during the Class Period.

WHEREFORE, plaintiffs pray for relief and judgment, on

behalf of themselves and the Class, as follows:

A. Determining that this action is a proper plaintiff

class action and certifying the Class defined herein and

plaintiffs as representative of the Class under Rule 23 of the

Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of plaintiffs

and other Class members against all defendants, jointly and sev-

erally, for all damages sustained as a result of defendants'

62

wrongdoing, in an amount to be determined at trial, including

interest thereon;

C. Awarding plaintiffs and the Class their reasonable

costs and expenses incurred in this action, including counsel

fees and expert fees;

D. Awarding plaintiffs and the Class nre-judgment and

post-judgment interest as allowed by la; and

E. Awarding such other and further relief as the Court may

deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: February 5, 1999

MILBERG WEISS BERSHADHYNES & LERACH LLP

••.

(H !IBy: .

Richard H. Weiss(RW-9265)Lee A. Weiss(LW-1130)

One Pennsylvania Plaza49th FloorNew York, NY 10119(212) 594-5300

BERMAN, DeVALERIO& PEASE LLP

BY:Norman BermanMichael T. Matraia(MM-7532)

One Liberty SquareBoston, MA 02109(617) 542-8300

63

ABBEY GARDY & SQUITIERI, LLP

By: p i -d ..411 , ..,. . &: .... ,udith L. Spanier

(JS 5055). c"

41J 8James S Not is-( N 9)

12 East 39th Streetr)New York,, NY 1 001 6

:

222) 889-3700

BEATIE & OSBORN

.._By : fAT-A-Lc,_!_, F) . OatonLV

Russel H. Beatie(RP 4439 )Dan'e. 1 A. Osborn(DO 2809)

599 Lexington AvenueNew York, NY 10022(27:2). 888-9000

Lead Counsel for Plaintiffs

WOLF POPPER LLPPaul 0 Paradic845 Third Avenue_New York, NY 10022-6689

212 759-4600

STULL, S TULL & BRODYaes BrodyT 1LI 7

6 East 45th Street4t1 1 FloorNew York, NY 10017(212) 687-7230

COHEN, MILSTEIN,HAUSFELD & TOLL, P.L.L.C.

Andrew N. Friedman1100 New York Avenue, N.W_West Tower, Suite 500Washington, D.C. 20005-3964

64

COHEN MILSTEINHAUSFELD & TOLL PL.L.C.

Steven J. TollThe First Interstate Building999 Third AvenueSuite 3600Seattle, WA 98101(206) 521 0080

WECH SL ER HARWOODHALEBIAN & F EFFER LLP

Robert I. Harwood486 Madison AvenueNew York NY 10022(212) 935-7400

REINHARDT & ANDERSONRandall St e nmever5-1000 First National BankPulldn 9332 Minnesota StreetSaint Paul, MN

227-9990 55101

(612)

FARUQI & FARUQINadeem Paruqi419 Madison AvenueNew York, NY 10017(212) 986-1074

LAW OFFICES OFJAMES V. BASHIAN , P.C.

James V. Bashian500 Fitth AvenueSuite 2700New York, NY 10110(212) 921-4110

LAW OFFICES OFSTEVEN E. CAULEY, P.A.

Steven E. Cauley2200 North Rodney Parham RoadSuite 218Little Rock, AR 72212(501) 312-8500

65

LAW OFFICES OFBERNARD M. GROSS, P.C.

Deborah R. Gross1500 Walnut StreetPhiladelphia, PA 19102(215) 561-3600

Counsel for Plaintiffs

TO: O'SULLIVAN GRAEV & KARABELL, LLPJonathan RosenbergJames L. Burns30 Rockefeller PlazaNew York, NY 10112(212) 408-2400

f':\A1JVANCEP n981800.16

66

CERTIFICATE OF SERVICE

I hereby certify that, on this date, I caused to

be served by United Parcel Service true copies of the

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF

SECURITIES LAWS, upon counsel listed on the attached service

list.

Dated; February 5, 1999

LEE A. WEISS

COUNSEL LIST

Jonathan RosenbergJames L. Burns

LO'SULIVAN GRAEV KARABEL:30 Rockefeller PlazaNew York, NY 10112

Counsel for Defendants

Norman BermanMichael T. MatraiaBERMAN, DeVALER10

& PEASE LLPOne Liberty SquareBoston, MA 02109

Judith L. SpanierJames S. NotisABBEY GARDY SQUITIERI, LLP212 East 39th StreetNew York, NY 10016

Russel H. BeetleDaniel A. OsbornBEATIE & OSBORN599 Lexington AvenueNew York, NY 10022

Co-Lead Counsel for Plaintiffs

Paul 0. ParadisWOLF POPPER LLP845 Third AvenueNew York, NY 10022-6689

Jules BrodySTULL, STULL & BRODY6 East 45th Street4th FloorNew York, NY 10017

Andrew N. FriedmanCOHEN, MILSTEIN,HAUSFELD & TOLL, P.L.L.C,

1100 New York Avenue, N.W.West Tower, Suite 500Washington, D.C. 20005-3964

Steven J. TollCOHEN, MILSTEIN,

HAUSFELD & TOLL, P.L.L.C.The First Interstate Building999 Third AvenueSuite 3600Seattle, WA 98101

Robert I. HarwoodWECHSLER HARWOOD

HALEBIAN & FEFFER LLP488 Madison AvenueNew York, NY 10022

Randall H. SteinmeyerREINHARDT & ANDERSONE-1000 First National Bank Building332 Minnesota StreetSaint Paul, MN 55101

Nadeem FaruqiFARUQI & FARUQI415 Madison AvenueNew York, NY 10017

James V. BashianLAW OFFICES OF

JAMES V. BASHIAN, P.C.Suite 2800New York, NY 10010

Steven E. CauleyLAW OFFICES OF

STEVEN E. CAULEY, P.A.2200 North Rodney Parham RoadSuite 218Little Rock, AR 72212

Deborah R. GrossLAW OFFICES OF

BERNARD M. GROSS, P.C.1500 Walnut StreetPhiladelphia, RA 19102

Counsel for Plaintiffs

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