Case 2:09-cv-00659-EJL-CWD Document 61 Filed 07/13/10 Page 1...

Case 2:09-cv-00659-EJL-CWD Document 61 Filed 07/13/10 of 62

UNITED STATES DISTRICT COURTFOR THE DISTRICT OF IDAHO

In re NIGHTHAWK RADIOLOGY Master File No. 09-cv-00659 (EJL/CWD)HOLDINGS, INC. SECURITIESLITIGATION

CLASS ACTION

AMENDED COMPLAINT This Document Relates To: ALLACTIONS

Plaintiff has alleged the following based upon the investigation of Plaintiff’s

counsel, which included a review of United States Securities and Exchange Commission

(“SEC”) filings by NightHawk Radiology Holdings, Inc. (“NightHawk” or the

“Company”), as well as regulatory filings and reports, securities analysts’ reports and

advisories about NightHawk, press releases and other public statements issued by

NightHawk, and media reports about NightHawk, and Plaintiff believes that substantial

additional 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 class action brought on behalf of purchasers of the

common stock of NightHawk between May 2, 2007 and May 7, 2008, inclusive (the

“Class Period”), seeking to pursue remedies for securities fraud under the Securities

Exchange Act of 1934 (the “Exchange Act”), against NightHawk and Dr. Paul Berger,

Jon D. Berger, Timothy Mayleben and Glenn Cole (the “Individual Defendants”).

NightHawk was a family-run company that went public in 2006 and which, from its

inception, specialized in providing to United States hospitals “preliminary reads” or

interpretations of radiologic images taken of emergency room patients during off hours.

The preliminary reads were performed by radiologists in Australia and Switzerland

which NightHawk retained on a contract basis (the “radiologist contractors”), and were

followed up by “final” reads and reports prepared during normal business hours by U.S.

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radiologist groups (the “radiologist customers”). The radiologist customers paid

NightHawk for the “preliminary” reads and were themselves compensated by Medicare

or other insurer plans for the “final” reads and reports.

2. Beginning in 2007, NightHawk engaged in a series of corporate

acquisitions to expand into the business of providing the “final” reads – a $14 billion

market – and to enhance its administrative services business products which it hoped to

“cross-sell” to its radiologist group customers.

3. Throughout the Class Period, NightHawk and the Individual Defendants

issued false and misleading statements and made misleading omissions with respect to

NightHawk’s revenue trends and customer retention, its success in integrating its recent

corporate acquisitions and its purported in-roads into the broader “final reads” market,

using the U.S.-based radiologist contractors who had worked for the acquired

companies. Defendants also repeatedly issued bullish revenue and earnings guidances

that they knew were predicated upon assumptions that conflicted with existing facts that

were concealed from the public, particularly with respect to the problems that had arisen

as a result of the Company’s acquisitions spree. For months, the Individual Defendants

sought to hide the devastating impact of the acquisitions upon the Company’s

profitability and prospects and artificially inflated the Company’s stock. As the truth

leaked into the market, NightHawk’s stock price plummeted, from a Class Period high

of $25.25, to $7.37, when the full truth was revealed.

Jurisdiction and Venue

4. The claims asserted herein arise under and pursuant Sections 10(b) and

20(a) of the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated

thereunder by the SEC [17 C.F.R. §240.10b-5].

5. This Court has jurisdiction over the subject matter of this action pursuant

to 28 U.S.C. §1331 and Section 27 of the Exchange Act.

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

Act and 28 U.S.C. §1391(b). Many of the acts charged herein, including the preparation

and dissemination of materially false and misleading information, occurred in

substantial part in this District.

7. In connection with the acts alleged in this Complaint, Defendants,

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

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

facilities of the national securities markets.

Parties

8. Plaintiff Plymouth County Contributory Retirement System (“Plymouth”)

purchased the common stock of NightHawk during the Class Period at inflated prices,

and, when the truth was revealed, NightHawk’s stock price declined and Plymouth was

damaged thereby. On April 29, 2010, the Court appointed Plymouth lead plaintiff for

this securities class action.

9. Defendant NightHawk Radiology Holdings, Inc. (“NightHawk”) is

incorporated in Delaware and maintains its headquarters at 601 Front Avenue, Suite 502,

Coeur d’Alene, ID 83814. NightHawk, through its subsidiaries, provides professional

services, business services, and clinical workflow technology to radiology groups and

hospitals in the United States. NightHawk was founded in 2001, by Defendants Dr. Paul

E. Berger and his son, Defendant Jon D. Berger, to provide off-hour preliminary reads to

radiology groups and hospitals. NightHawk was a family-run business, which went

public in February 2006, and in which father and son both sat upon NightHawk’s Board

of Directors, occupied its highest executive officer positions, and were intimately

involved in its day-to-day operations. The Berger family connections within

NightHawk, included employing Scott Berger, Paul’s son and Jon’s brother, to develop

NightHawk’s flawed TALON system, which was promoted as NightHawk’s proprietary

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Customer Workflow Solutions and was supposed to form a key IT platform for

NightHawk’s future business growth.

10. Defendant Dr. Paul E. Berger (“Dr. Berger”) served as NightHawk’s

President, Chief Executive Officer and Chairman from 2004 to July 25, 2007. Prior to

that, he was the President and Chairman of NightHawk’s predecessor. From July 25,

2007 until November 15, 2008, Dr. Berger served as NightHawk’s CEO and Chairman.

On November 15, 2008, he was ousted as CEO, and remained on the Board through a

transition period until his eventual resignation on June 8, 2009. In connection with Dr.

Berger’s resignation and replacement as CEO, NightHawk agreed to purchase 3,000,000

shares from Dr. Berger, thereby removing him as a substantial shareholder of

NightHawk.

11. Dr. Berger ran NightHawk with his son, Jon D. Berger. Like many

company founders, Dr. Berger was actively involved in NightHawk’s day-to-day

activities and was a hands-on manager. For example, Dr. Berger personally oversaw

and negotiated NightHawk’s contracts with the foreign and U.S. radiologist contractors

performing NightHawk’s preliminary and final reads, even as their numbers grew with

NightHawk’s acquisitions. Dr. Berger authorized the bonus pay to the radiologist

contractors to cover the widespread scheduling gaps that occurred within NightHawk’s

service in 2007 and 2008. Dr. Berger was also actively involved in NightHawk’s 2007

acquisitions, including the negotiation of its purchase and their integration, particularly

with respect to the radiologist contractors.

12. Defendant Jon D. Berger (“Jon Berger”) served as a NightHawk Vice

President of Sales, Marketing and Business Development and as a NightHawk Director

from 2004 until 2008. On or about February 13, 2008, Jon Berger assumed the role of

Senior Vice President of Strategy and Business Development and served briefly as

interim Chief Operating Officer (“COO”). On November 15, 2008, Jon Berger resigned

as a NightHawk Director and as Senior Vice President of Strategy and Business

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Development. NightHawk purchased substantially all of Jon Berger’s shares in 2009 to

remove him as a substantial shareholder.

13. Like his father, Jon Berger was actively involved in the management of

NightHawk. Jon Berger served in the key position of Vice President of Sales, Marketing

and Business Development from 2004 until 2008. In this position, Jon Berger had direct

responsibility for NightHawk’s sales and marketing, which provided him with extensive

current information about NightHawk’s customers, their contracts and their

dissatisfaction with the Company. As Vice President of Sales, Jon Berger received the

cancellations of NightHawk’s customer contracts. Jon Berger also played a lead role in

NightHawk’s 2007 acquisitions, having primary responsibility for the due diligence on

those deals. In his role as Vice President, Jon Berger also assumed the role of cross-

selling and marketing the newly acquired companies’ services. Additionally, as the

CEO’s son, Jon Berger insinuated himself into other areas of NightHawk’s business,

even when those areas were not within the scope of his duties as Vice President of Sales,

Marketing and Business Development. Finally, Jon Berger insisted upon reporting

directly to his father, Dr. Berger, worked in the same office with him and shared his

knowledge with him.

14. Defendant Timothy M. Mayleben (“Mayleben”) served as NightHawk’s

Executive Vice President and COO from January 8, 2007 to July 25, 2007. On July 25,

2007, Mayleben was appointed as President to succeed Dr. Berger. Mayleben continued

in the role of NightHawk’s President and COO until February 29, 2008. Mayleben also

served on NightHawk’s Board from March 2005 until his resignation on February 19,

2008. Mayleben announced his resignation as NightHawk’s President, COO and

Director on February 13, 2008. As COO, Mayleben reported directly to CEO Dr.

Berger. Mayleben was brought in as COO in order to help NightHawk transition from a

small, family-run company to a publicly-traded company.

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15. Defendant Glenn R. Cole (“Cole”) served as NightHawk’s Senior Vice

President and Chief Financial Officer (“CFO”) from May 1, 2007 until May 14, 2008.

Like Mayleben, Cole announced his resignation from his position as NightHawk’s

Senior Vice President and CFO on February 13, 2008. As CFO of NightHawk, Cole

reported to Dr. Berger.

Introduction

16. In 2001, Defendants Dr. Berger, and his son, Jon Berger, co-founded

NightHawk to provide off-hour preliminary reads to radiology groups and hospitals

throughout the United States via the practice of teleradiology. Teleradiology consists of

the electronic transmission of medical scans, such as CT scans and X-rays, from the

location where they are physically performed on a patient, such as at a hospital, to an

offsite location, where they are read and interpreted by a radiologist. The reading

radiologist then electronically transmits his report back to the physicians at the location

where the scan was conducted to be used by them in the treatment of patients.

NightHawk was an early pioneer in this field. At its inception and until 2007,

NightHawk’s then-novel business model primarily entailed retaining, on a contract

basis, radiologists in Switzerland and Australia, working during their daylight hours, to

quickly furnish preliminary “reads” or informal reports for immediate treatment

decisions at hospitals treating patients, on an emergency basis, during off-hours in the

United States. These reports were considered “preliminary,” in part, because Medicare

and certain other insurance plans did not provide reimbursement for radiology reports

performed in foreign countries by foreign doctors.

17. Radiology groups in the United States contracted with and paid

NightHawk for its “preliminary” reads, which were to be followed by “final” reads and

reports prepared by the U.S. radiology groups and which were included in the patients’

medical files. This resulted in a significant “quality of life” benefit to the U.S.

radiologists by alleviating the necessity for them to be available to hospitals at night and

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on weekends. Through this model, NightHawk did not directly compete with the U.S.

radiologists, who prepared the final “read” or report during more convenient hours, and

applied for reimbursement from Medicare or other insurers, for reimbursement of the

“final” read.

18. From its inception until early 2007, NightHawk provided off-hour

preliminary reads exclusively from its centralized reading facilities located in Australia

and Switzerland. The difference in time zones permitted NightHawk’s foreign

radiologists, which it retained on an “independent contractor” basis (rather than as

employees), to work normal daytime hours while providing nighttime services to United

States hospitals. Each of these foreign radiologists, however, had to be licensed in the

various states where the hospitals were located, and credentialed by the individual

hospitals receiving the preliminary reads. A critical aspect of NightHawk’s business

was to facilitate the licensing and credentialing of its foreign radiologist contractors to

permit them to practice at the hundreds of United States hospitals that NightHawk

serviced.

19. To run its business, NightHawk used several computer systems. At

times, NightHawk employed the Falcon, AutoRad and TALON systems. These systems

enabled NightHawk, its radiologist contractors and its customers to transmit medical

scans and reports between each other. These systems also tracked information about

NightHawk’s radiologist customers and hospital sites. NightHawk’s finance department

used the AutoRad system to determine the number of customers and sites that

NightHawk had before reporting that number to the public. NightHawk used a separate

system, the Falcon system, to track its radiologists’ licenses, credentials and privileges

and to conduct scheduling. NightHawk’s radiologist contractors needed to be both

licensed in the state and privileged in the hospital from which the medical scans were

sent in order to be authorized to read the scan. Because of the need to schedule

radiologists only with customers located where the radiologist was properly licensed and

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privileged, the information in the Falcon system tracking the number of NightHawk’s

customers and sites had to be regularly updated and accurate. During the Class Period,

customer and site variances developed between the AutoRad and Falcon systems when

customer cancellations were not entered into AutoRad. TALON was a system

developed by Dr. Berger’s son, Scott Berger, which was put to limited use at

NightHawk, and which NightHawk unsuccessfully attempted to market to its radiologist

customers.

20. In 2007, NightHawk engaged in a series of corporate acquisitions in order

to obtain access to U.S. radiologists who could perform “final” reads and reports (and be

directly reimbursed by Medicare and the insurers) and to expand its customer base.

Through these acquisitions, NightHawk also planned to market the newly acquired U.S.

radiologist “final” read services to its existing hospital customers, and to broaden the

suite of administrative services it could “cross-sell” to its radiologist group customers.

This strategy, however, turned out to be an abysmal failure, as NightHawk was unable to

effectively integrate the companies, the new U.S. radiologists rejected NightHawk’s

lower compensation model, NightHawk’s services – both for preliminary reads and final

reads – deteriorated, and its customers cancelled or refused to renew their contracts.

21. Nonetheless, throughout the Class Period, Defendants issued glowing

reports about the acquisitions on which they had squandered more than $150 million in

corporate assets, and their purportedly high customer retention rates and successful

inroads into the final reads business. Defendants also announced and repeated earnings

guidances predicated upon assumptions of customer contracts and revenue growth which

Defendants knew were wholly at odds with the Company’s actual experience.

The Fraudulent Scheme

22. From its first full year of operations in 2002, which saw annual revenue

of $4.7 million, NightHawk’s business of providing off-hour preliminary reads to

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radiology groups and hospitals grew rapidly. NightHawk’s annual revenue for 2003,

2004, and 2005 was $16.2 million, $39.3 million, and $64.1 million, respectively.

23. In February 2006, NightHawk went public at $16 per share. In October

2006, NightHawk conducted a secondary offering to the public market, allowing

insiders, Dr. Berger, and his son, Jon Berger, to sell over 1.36 million shares for

proceeds of more than $24 million. Even after these sales, these Defendants continued

to beneficially own over 20% of NightHawk’s common stock. These Defendants each

had Rule 10(b) stock sale plans in which thousands of shares of stock were sold each

month from February 2007 through November 2007, inclusive.

24. For 2006, NightHawk’s annual revenue had increased to $92.2 million –

44% growth over the prior year – and, in the Company’s 2006 annual report, NightHawk

proclaimed itself to be “the leading provider of radiology services to radiology groups

and hospitals across the United States.”

25. Up through 2006, virtually all of NightHawk’s revenue was derived from

its contracts to supply preliminary reads to the emergency rooms of hospitals throughout

the United States. As an early pioneer in teleradiology, and using its extensive cadre of

foreign radiologists whose work had been well accepted by the U.S. radiologist groups

and U.S. hospitals, NightHawk managed to grow without much competition or effort on

the part of its sales group. Hospitals and radiology groups reached out to NightHawk for

its unique and valued service. But as with most successful ideas, imitators soon

followed, and NightHawk began to experience competition for its off-hour preliminary

reads business. Unfortunately for NightHawk, this market had very low barriers to

entry, which meant it could face competition from numerous competitors, large and

small. Indeed, in NightHawk’s fourth quarter 2006 (“4Q06”) earnings conference call,

Chris Huber, then NightHawk’s CFO, disclosed the first hint of slowing earnings growth

when he stated that the average price for off-hour preliminary reads had declined 260

basis points (2.6%) during 2006, and that “trends in average pricing have been

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flattening.” To sustain its historical growth rates NightHawk needed to branch out into

new service areas.

26. In 2007, NightHawk followed an aggressive corporate acquisition

strategy. Through these acquisitions, the Defendants planned to increase NightHawk’s

customer base, obtain access to radiologist contractors residing in the United States in

order to gain entry into the much larger traditional market for “final” radiology reads

and to market the software developed by Dr. Berger’s other son, Scott Berger, and to

acquire an administrative services group, in order to “cross-sell” a more comprehensive

package of services to its U.S. radiology groups. This strategy involved a series of three

corporate acquisitions, all made at prices far exceeding the value of their tangible and

measurable assets: the acquisition of Teleradiology Diagnostic Service in February

2007; Radlinx in April 2007; and Midwest Physician Services LLC in July 2007.

The Acquisition of Teleradiology Diagnostic Service

27. On February 9, 2007, NightHawk acquired Teleradiology Diagnostic

Service, Inc. (“TDS”), a privately-held, California-based provider of off-hours

teleradiology services, for $23 million in cash. NightHawk described TDS as “a leading

provider of off-hours teleradiology services on the West Coast, providing services to

hospitals throughout California, the largest market in the U.S.” The purchase of TDS

expanded NightHawk’s presence in California and provided NightHawk with U.S.-based

radiologists to perform both preliminary and final reads. According to statements made

by Defendants at the May 2, 2007 earnings conference call, the TDS acquisition resulted

in the addition of “32 customers serving 59 sites,” and 12 additional radiologist

contractors performing the reads.

28. During NightHawk’s February 15, 2007 earnings conference call, Dr.

Berger explained that the $23 million purchase price was based upon “TDS’ strong

profitability and expectations for continued strong performance in 2007 and beyond.”

NightHawk’s Quarterly Report (Form 10-Q) for the period ended March 31, 2007,

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reflected an allocation of the purchase price showing that virtually all of the $23 million,

plus $6 million of assumed liabilities, were paid for the intangible rights and benefits

(i.e., goodwill) NightHawk was acquiring:

Current assets $ 1,532,034Furniture and fixtures 142,500Intangible assets 10,510,000Goodwill 16,577,133

Assets acquired 28,761,667

Current liabilities assumed 1,392,455Long-term liabilities assumed 4,369,212

Liabilities assumed 5,761,667

Net assets acquired $ 23,000,000

29. For the purchased $28 million of intangible assets and goodwill to have

any value, Defendants needed to retain TDS’s customers and radiologist contractors and

build upon this base. Most of these contracts could be cancelled, without fault, on 30-60

days written notice, so that the benefits of this purchase would be lost if TDS could not

be quickly and effectively integrated into NightHawk’s existing business operations.

30. TDS provided off-hour services only to hospitals in California. In order

for TDS’s radiologists to be integrated into NightHawk, they needed to be able to read

scans from NightHawk’s customers located throughout the United States. This meant

they needed to be licensed and privileged at hundreds of hospitals located throughout the

country.

31. Similarly, in order to integrate TDS’s hospital customers into the

NightHawk system, the foreign radiologists needed to be licensed in California and the

hospitals needed to review their backgrounds and grant them treatment privileges.

According to Confidential Witness #1, who was involved in the management of

NightHawk’s operations during the Class Period, and having responsibilities relating to

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the licensing, privileging, credentialing and scheduling of NightHawk radiologists,

NightHawk required its hospital customers to “credential” anywhere between 25 to 40

radiologists in order to obtain coverage through NightHawk’s teleradiology services. The

credentialing process was time-consuming and represented a significant cost to the

hospitals, since each individual hospital that utilized NightHawk’s teleradiology services

had to individually review and confirm the qualifications and experience of each

radiologist before he or she was authorized to perform work for the hospital.

32. Because the burden of privileging the radiologists fell on the hospitals,

many new customers balked at having to privilege another 25 to 40 NightHawk

radiologists, especially since they had previously needed far fewer radiologists to have

their needs covered. NightHawk also charged more for its teleradiology services than its

acquired companies. As a result, NightHawk soon discovered that it was unable to keep

the TDS customers from cancelling their contracts or to effectively use the newly

acquired radiologists. NighthHawk, and the Individual Defendants thus knew early in the

Class Period that they would face similar problems during the Radlinx integration –

which they did, and to a far greater extent.

The Acquisition of The Radlinx Group

33. On April 9, 2007, NightHawk acquired The Radlinx Group (“Radlinx”)

for $53 million in cash plus a future earnout based upon 25% of Radlinx customers’ first

year revenues following the acquisition. NightHawk described Radlinx as the third

largest provider of teleradiology services in the United States. In NightHawk’s April 9,

2007 press release announcing the deal, Dr. Berger explained the benefits NightHawk

anticipated from acquiring Radlinx’s U.S. radiologists who, as a legal matter, were

permitted to perform and receive reimbursement for final reads, as well as preliminary

reads:

The Radlinx Group is an excellent addition to the current NightHawksuite of radiology solutions . . . . The acquisition significantly expandsour core off-hours business, strengthens our partnerships with

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radiology groups to help grow our final interpretation and sub-specialty business, and extends our capability of providing radiologysolutions and improving patient care with such a strong presence ofdoctors located domestically.

[Emphasis added.]

Dr. Berger was also quoted as asserting that the Company’s capability to perform “final”

reads and provide new services had been expanded by the TDS and Radlinx

acquisitions:

In addition to our core off-hours business continuing to demonstratesolid growth, we expanded further into new areas during the quarterby expanding our daytime reads capacity as well as our serviceofferings in the cardiac imaging and final reads markets. We alsoacquired Teleradiology Diagnostic Service, Inc. (TDS) during thequarter and recently announced the acquisition of The RadlinxGroup. Both companies are leading providers of off-hours anddaytime teleradiology services in the U.S. and enhance our valueproposition to offer a full suite of services to our customers.

[Emphasis added.]

34. On June 6, 2007, NightHawk filed an Amended Current Report (Form 8-

K/A) in which it provided Radlinx’s pre-acquisition financial statements. Radlinx’s

balance sheet revealed total liabilities of $17.9 million, nearly $13 million more than its

hard assets of only $4.4 million – i.e., at the time of its acquisition, Radlinx was

seriously insolvent. Radlinx’s income statement for 2006 disclosed only modest

operating income of $2.75 million in light of its $53 million plus purchase price, high

liabilities and its minimal concrete assets. In NightHawk’s second quarter 2007

(“2Q07”) Form 10-Q, NightHawk reported the following allocation of the $53 million

payment (plus the assumption of Radlinx’s liabilities):

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Current assets $ 3,640,963Fixed assets 856,268Intangible assets 19,400,000Goodwill 36,047,463

Assets acquired 59,944,694

Current liabilities 5,376,810Long-term liabilities 12,532,556

Liabilities 17,909,366

Net assets acquired $ 42,035,328

For its purchase of Radlinx, NightHawk attributed over $36 million of the purchase

price to goodwill and $19.4 million to other intangible assets. Again, like TDS, virtually

all of the corporate acquisition was attributed to intangible rights and benefits that

depended upon NightHawk’s ability to retain Radlinx’s customers and radiologist

contractors.

35. According to statements made at the Company’s July 25, 2007 earnings

call, NightHawk acquired 188 radiologist group customers serving 307 hospital sites. At

the time of the acquisition, Radlinx also purportedly had 41 U.S. radiologists on retainer.

Defendants emphasized that, with these U.S. radiologists, the acquisition permitted the

Company further access to the all important “final” reads market.

36. The Radlinx acquisition would later be revealed as an unmitigated

disaster. First, the U.S. radiologists retained by Radlinx were paid far more than

NightHawk’s foreign radiologists, and as Defendants would later reveal, only about half

of the Radlinx doctors agreed to work for NightHawk. Even those who did commit to

work for NightHawk were paid at a significantly higher rate, which drove down the

Company’s operating margins. Because of the radiologist shortage and NightHawk’s

poor scheduling practices, coverage gaps occurred at the newly acquired hospital

customers, resulting in customer cancellations of and refusals to renew their contracts.

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And to limit these cancellations and the further deterioration of services, the Radlinx

radiologists were paid additional “bonuses,” which further undercut the Company’s

margins. Nor did either the Radlinx or TDS acquisition result in meaningful “final” read

or business services volumes or profits.

37. None of this was unknown to the Defendants during the Class Period. As

the confidential witnesses describe, Dr. Berger personally negotiated the radiologists’

compensation, and Jon Berger took the lead in performing the due diligence for the

Radlinx deal. Jon Berger also headed sales and received the customer cancellations.

According to Confidential Witness #1, in 2007 the finance department learned about

discrepancies in the counts of customers, between the systems used by finance to

provide its public reports and those used for credentialing and scheduling, and Mayleben

commissioned an analysis to reconcile the numbers. Shortly thereafter, the Company

stopped reporting “customer” retention statistics.

38. As Confidential Witness #1 explained, the failure to successfully retain

the Radlinx radiologists contributed to NightHawk’s ongoing problems with scheduling

service coverage for its customers. In 2007, NightHawk experienced severe problems

providing its customers, particularly legacy Radlinx customers, with adequate off-hour

coverage. These coverage gap problems were exacerbated by NightHawk’s practice of

permitting the radiologists to select their own schedules. To induce the radiologists to

cover these gaps, particularly on weekends, Dr. Berger began to offer radiologists

“bonuses” which substantially increased the costs incurred by NightHawk for the

professional fees paid its contractors.

39. Confidential Witness #2 explained that the poor customer service also

forced NightHawk’s sales people to engage in “damage control” with upset customers.

This significantly undercut their efforts to “cross-sell” NightHawk’s new service

offerings, the key purported benefit of the Company’s acquisition program.

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40. In addition to suffering coverage gaps from NightHawk, many legacy

Radlinx customers, just like TDS customers, were dissatisfied with having to privilege

25 to 40 radiologists when Radlinx had provided them with coverage with only five or

six radiologists. The added costs associated with privileging so many NightHawk

radiologists to obtain proper coverage, further led customers to cancel their contracts

with NightHawk.

41. According to Confidential Witness #2, NightHawk also experienced

severe problems getting Radlinx radiologists and customers to use NightHawk’s IT

platforms, such as TALON and AutoRad. Many of the Radlinx customers and

radiologists did not want to change to NightHawk’s AutoRad system. As a result,

NightHawk would transfer results from its systems to the legacy Radlinx system in order

to provide customers with the desired read format. To the extent that NightHawk

insisted that customers accept AutoRad, even more customers became dissatisfied and

either cancelled or refused to renew their contracts with NightHawk.

42. Finally, NightHawk charged more for its services than had Radlinx.

When NightHawk tried to impose its higher prices upon the Radlinx customers, Radlinx

customers refused, especially given the deterioration in service and coverage they were

receiving. With plenty of lower cost competitors providing an alternative to

NightHawk, legacy Radlinx customers either cancelled their contracts under the 30-day

written notice provision or declined to renew their contracts with NightHawk. The end

result was additional lost customers.

The Acquisition of Midwest Physician Services, LLC

43. On July 16, 2007, NightHawk acquired Midwest Physician Services, LLC

(“Midwest”) from St. Paul Radiology (“St. Paul”), for $62.5 million plus a warrant

entitling St. Paul to purchase 300,000 shares of NightHawk common stock. By this

acquisition, NightHawk also acquired Emergency Radiology Services, LLC, St. Paul’s

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small teleradiology group. As part of the same transaction, St. Paul, itself a large

radiologist group serving over 40 hospitals, agreed to a multi-year business services

contract with Midwest, for a percentage of St. Paul’s on-going revenues. By this

agreement, St. Paul also agreed to use the TALON software developed by Dr. Berger’s

son, Scott Berger.

44. Before the acquisition, Midwest, with about 100 employees, had provided

St. Paul – its only customer – with back office support, including revenue cycle

management, human resources management, transcription, and other services required to

effectively operate a radiology practice. As NightHawk declared in its press release

dated July 16, 2007 announcing the acquisition, “[t]he combination of these business

services with NightHawk’s professional services and clinical workflow technology will

provide a powerful competitive advantage for NightHawk.” NightHawk renamed

Midwest “NightHawk Business Services” and, according to Mayleben, planned to

“cross-sell” these business services to NightHawk’s “over 700 radiology group customer

base.” Throughout the Class Period, that never happened; St. Paul remained the only

user of Midwest’s business services.

45. Immediately following NightHawk’s July 16, 2007 announcement, the

Company conducted a conference call about the Midwest acquisition. During the

conference call, Dr. Berger opined that he did not expect the acquisition of Midwest to

interfere with the integration of TDS and Radlinx. According to Dr. Berger, those

efforts were proceeding as planned: “we expect in the second half of the year to be

realizing the synergies from the acquisitions. We’re happy with the progress that we’re

making. As we talked about before, the key is, first of all, to get folks working on our

platform, the technology platform, and then to get the radiologist converted to our

physician pay structure. And we’re making nice progress on both of those.” That was

untrue, as the Confidential Witnesses explained and NightHawk grudgingly admitted

after the Class Period.

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46. As described above, at the time of its acquisition, Midwest had exactly one

customer – St. Paul. As part of the acquisition, St. Paul and NightHawk entered into a

long-term agreement under which NightHawk would provide business services, including

the use of NightHawk’s TALON clinical workflow technology, to St. Paul in exchange

for “a fee based on a percentage of St. Paul Radiology’s revenue.” NightHawk estimated

that for 2007, Midwest would contribute $8 to 9 million in revenue and $16 to 18 million

in revenue for 2008.

47. The Midwest acquisition revealed, however, that NightHawk’s highly

touted TALON system – developed by Dr. Berger’s son, Scott Berger – simply did not

work. Instead, problems with TALON would lead St. Paul to declare NightHawk in

material breach of its services agreement, leading to the eventual unwinding of the

Midwest / St. Paul transaction at a significant loss to NightHawk. Moreover,

NightHawk has never succeeded in marketing Midwest’s business services to any of its

other customers.

48. The purchase of Radlinx and Midwest was financed with a $150 million

loan carrying an interest rate of 250 basis points over LIBOR, or in 2007, about a 7.5%

interest rate. The bulk of the acquired Radlinx and Midwest intangible property – more

than $46 million of goodwill – has been written off as impaired.

Defendants’ False and Misleading Statements and Omissions

49. As described above, Defendants engaged in a high-stakes gamble – one

which cost NightHawk millions in cash and another $150 million in loans to finance –

for the purchase of three businesses with largely “intangible” property rights such as

customer lists and contracts, their professional fee contracts with U.S. radiologists

performing the preliminary and final reads, and a suite of administrative services that

Defendants hoped to cross-sell to the Company’s existing radiologist group customers.

50. As the confidential witnesses describe (and as NightHawk later admitted),

however, it did not take long for Defendants to realize that, not only were the hoped-for

18


“cross-selling” opportunities not being realized, but that the extraordinary burdens of

integrating the new acquisitions were causing the quality of NightHawk’s pre-existing

services to deteriorate, with a resulting loss of its existing and newly acquired

customers. In addition, Radlinx’s lower-priced customer contracts, and its higher-priced

professional services agreements, were devastating the Company’s profit margins. And

finally, no one wanted to purchase the highly touted TALON business software

application developed by Dr. Berger’s second son, Scott Berger – including St. Paul

Radiology which was now committed to using it – because it was poorly designed.

51. To conceal their own business missteps, and in Dr. Berger’s case, the

professional failings of his children, while permitting the insider sales of stock to

continue at inflated prices, Defendants misrepresented the Company’s performance, and

misled the market about its prospects, as described below.

52. In Nighthawk’s May 2, 2007 Earnings Conference Call, when touting the

success of Nighthawk’s acquisitions of TDS and Radlinx, Defendant Mayleben stated:

Now, the second key element of our growth strategy is through M&A. Asyou know, we acquired both Teleradiology Diagnostic Services or TDS,and also the Radlinx group earlier this year. TDS was acquired onFebruary 9, and we're starting to see the benefits of integrating them onto the NightHawk platform. As a reminder, TDS is a leading provider ofteleradiology services on the West Coast, providing services to hospitalsthroughout California, which is the largest market in the U.S. TDS hasallowed us to significantly expand our presence in California and as wepreviously mentioned, we believe that we are now the largest provider ofteleradiology services in the state. We paid $23 million in cash for TDSand expect the acquisition to be accretive to adjusted EPS this year.

On April 5, we acquired the Radlinx group, which is the nation's thirdlargest teleradiology services provider. Radlinx is headquartered in Texaswith doctors located exclusively in the U.S. and brings over 300 newhospitals to the NightHawk customer base. This acquisition significantlyexpands our core off-hours business, strengthens our partnership withradiology groups to help grow our final reads and subspecialty business,and extends our capability of providing radiology services and solutions toan even larger customer base. In addition, we've added 35 outstandingphysician radiologists to our team of affiliated radiologists and,importantly, this significantly expands our presence of U.S.-basedphysicians to over 50. We paid $53 million cash for Radlinx and expect itto contribute between 17 million and $19 million in revenue for the

19


remainder of 2007. And importantly to be accretive to adjusted earningsper share.

Now, our integration efforts are in their very early stages but they'reproceeding very well. The first steps include working with the customersand physicians from these two acquisitions to help them transition to theNightHawk platform. And we'll be working with them to implementenhanced workflows and our propriety technologies over the monthsahead. As Dr. Berger mentioned, we're pleased with the very early successof our growth initiatives in 2007, even though we're in the rollout phasewith some of them. We expect these initiatives to continue to gathermomentum throughout the remainder of the year and we could not bemore excited about the success of all of our growth initiatives from thesenew services and solutions that I've mentioned to the strategic M&Aadditions.

53. Mayleben’s statements about the benefits of integrating TDS were false

and misleading, because Nighthawk was experiencing customer cancellations and

problems integrating TDS’s radiologist into Nighthawk’s platforms. Moreover, the

statement regarding the 35 radiologists was not true, because Nighthawk knew that it

was having problems retaining radiologists because the radiologists were paid more by

TDS and Radlinx.

54. In a press release dated July 25, 2007, NightHawk announced its financial

results for the second quarter of 2007 (“2Q07”), the period ended June 30, 2007.

Commenting on the results, Dr. Berger stated:

We are pleased with our performance during the second quarter whichdemonstrates continued, outstanding organic growth, combined withimpressive acquisition contribution . . . . With the addition ofTeleradiology Diagnostic Solutions (TDS), Radlinx, and MidwestPhysician Services, we believe we are in the strongest position in theindustry and are well positioned to build on our track record ofexecution, innovation, and financial performance. In short, we havestrengthened and expanded our foundation for future growth andprofitability.

[Emphasis added.]

Defendant Mayleben added, “The integration of Radlinx and TDS are progressing

extremely well.” As a result of the corporate acquisitions, Defendants increased

NightHawk’s guidance for 2007 revenues and expected “adjusted earnings” – a non-

GAAP measure which excluded, inter alia, the expense attributable to the amortization

20


of the intangible property acquired in the corporate acquisitions as well as the interest

expense to pay for them. Mayleben stated:

Looking forward to the remainder of the year, we expect total companyrevenue for 2007 to be in the range of $155 million to $162 million,which includes the previously announced $8 million to $9 millionrevenue contribution from the Midwest Physician Services acquisition . . .. Furthermore, we expect adjusted earnings per diluted share (excludingcertain non-cash items described below) for 2007 to be in the range of$0.94 to $0.98, which includes an additional $0.01 to $0.02 from theMidwest Physician Services acquisition.

NightHawk’s press release also included a projection for 2008 annual revenues of

“$215 million to $225 million and adjusted earnings of $1.31 to $1.36 per diluted

share.” This 2008 guidance was predicated upon the projected base revenue and

earnings as of December 31, 2007, and growth rates that simulated those which

NightHawk had accomplished in the early years of its existence.

55. Following the issuance of the press release, NightHawk held an earnings

conference call with analysts and investors to discuss NightHawk’s earnings and

operations. Dr. Berger, Mayleben, and Cole participated in the conference call. During

the conference call, these defendants made numerous positive (and misleading)

statements about NightHawk’s business, operations and prospects. As Dr. Berger stated:

These [quarterly] results demonstrate our ability to execute on ourstrategy and to deliver strong financial performance. Therefore, we areraising our 2007 guidance to reflect our recent acquisition and areproviding a primarily [Sic.] outlook for 2008.

Full year 2007 guidance has been raised to $155 million to $162 millionin revenue and $0.94 to $0.98 in adjusted earnings per diluted share toreflect the acquisition of Midwest Physician Services announced on July16, 2007. Furthermore, we are providing a preliminary outlook for 2008of $215 to $225 million in revenue and $1.31 to $1.36 in adjustedearnings per diluted share.

Let me tell you why I’m so confident we’ll achieve these results. Wecontinue to execute on our strategy and now have further distinguishedourselves from the competition through our integrated platform ofprofessional services, clinical workflow technologies and businessservices. This is the broadest suite of solutions available today,allowing us to not only grow our core business but to deliverincremental revenues from our current customers, as well as add newcustomers.

21


This is possible because NightHawk solutions continue to improve theoverall quality of radiology services to our radiology group customersand ultimately, the physicians and patients they serve. We improve theefficiency with which radiology services are provided through optimalclinical workflow processes and service solutions and we improve theprofessional practices and the quality of life for our radiology groupcustomers and parties and that’s what it’s really all about.

[Emphasis added.]

This was false and misleading because, in fact, NightHawk was not cross-selling the

products of its acquisitions nor its purported service solutions. The only significant

purchase of the TALON software, or use of the Midwest administrative services, was by

St. Paul Radiology, who agreed to use these services as part of the Midwest sale

transaction.

56. At this same earnings conference, Mayleben also made false and

misleading statements about the Company’s retention of its existing customers:

So, now, on to customers and sites. At quarter end, we were providingservices to 768 radiology group customers and 1,379 sites. This growthwas driven by new client wins and a continued strong retention rateamong existing customers of greater than 95%.

[Emphasis added.]

As the confidential witnesses explained, the customer cancellations were not being

included in the database used for financial reporting purposes, and there were extensive

customer cancellations.

57. Mayleben also falsely suggested that the addition of Radlinx radiologist

contractors had strengthened the Company’s ability to provide professional services:

Lastly, you may be interested to know that the number of affiliatedradiologists providing services grew from 75 at the end of the first quarterto 118 at the close of the second quarter, and 41 one of those came fromthe Radlinx acquisition.

[Emphasis added.]

In fact, 20 of the 41 Radlinx radiologists refused to work for NightHawk.

58. In response to an analyst’s question about the 2007 and 2008 guidance,

Cole disclosed the guidance’s underlying assumptions. According to Cole, the

22


guidances assumed an organic growth rate in the 25 to 30 percent range, and included

assumed higher margins for the acquired companies predicated upon NightHawk’s

plan to transfer the physicians performing the reads “onto our compensation model,

which really drives a much higher level of productivity and a much higher level of gross

margin.” Defendant Cole noted that Radlinx’s past physician compensation rate was

about double that of NightHawk’s. Although Defendants would, over the next several

months, continue to reaffirm the 2007 and 2008 revenue and earnings projections in the

2007 and 2008 guidances, they did so knowing that the Company had failed to obtain

the revenue growth on which the revenue guidances were predicated, that half of the

Radlinx doctors had refused to continue with NightHawk, and that those who remained

were being paid “bonuses” that further inflated their compensation levels and

contradicted the assumptions in the announced margins.

59. In a press release dated October 30, 2007, NightHawk announced its

financial results for the third quarter of 2007 (“3Q07”), the period ended September 30,

2007. Commenting on the results, the release attributed statements to Dr. Berger, which

falsely discussed the purported success in the integration of the acquisitions (when, in

fact, the integration efforts were floundering), and the purported sales of new service

offerings that did not occur (beyond the St. Paul Radiology agreement executed as part

of the Midwest sale):

Our third-quarter results reflect continued solid organic growth andsignificant progress on integrating recent acquisitions, and we continueto gain traction in our new service offerings. Our investments inacquisitions, infrastructure, and management in 2007 have positionedus to capitalize on significant future market opportunities and we’revery pleased that we’ve been able to achieve both record revenues andrecord adjusted earnings per share during this period of investment.

[Emphasis added.]

Despite the growing problems integrating the acquisitions, and the Company’s customer

losses (as described by the confidential witnesses) the press release only slightly reduced

the 2007 projections and reaffirmed the earlier issued 2008 guidance.

23


60. On October 31, 2007, NightHawk held an earnings conference call with

analysts and investors to discuss the 3Q07 results. Dr. Berger, Mayleben, and Cole

participated in the conference call.

61. During the call, Dr. Berger misled the market about the purported in-

roads the Company was making into the final reads business, stating, “[W]hile our

finals business is growing very well, we have learned that the sales cycle is longer than

expected. Our sales pipeline is full, and growth in this service line is accelerating

further as we head into 2008. He then, “reaffirm[ed] our guidance for 2008.”

[Emphasis added.]

62. Mayleben too falsely led the market to believe that the acquisitions were

leading to success in the potentially enormous market for final reads: “ We estimate the

total market for final reads to be more than $14 billion. We don’t need to capture

much of that total market to generate significant additional revenue. As Dr. Berger

said, we’re pleased with the progress we’re making on integrating the three

acquisitions we made earlier this year.” [Emphasis added.]

63. With regard to Radlinx, Mayleben also misled the market about the

Company’s failure to retain the critically important U.S. radiologists from the Radlinx

acquisition, spinning this failure as part of the pre-existing plan:

With Radlinx, I’m very pleased to report that we’ve successfullyretained the radiologists we sought to recruit; 13 will be providingpreliminary interpretations and eight will be conducting finalinterpretations for NightHawk. The transition from the Radlinxsystems to our NightHawk system will take place during this, ourfourth quarter, and we’re committed to providing a seamless transitionfor the former Radlinx customers and ensuring the former Radlinxradiologists are trained to use the NightHawk platforms so they can beas productive as possible right from the start.

[Emphasis added.]

Notably, Mayleben failed to disclose that half of the Radlinx doctors had refused to

work for NightHawk, causing gaps in coverage of Radlinx’s customer contracts, and that

24


those Radlinx radiologists who did consent to continue to work for NightHawk were

being paid additional “bonuses” to do so.

64. On this call, Mayleben further misled investors by insisting that the

Company’s customer retention rates remained unchanged, when, in fact, customers were

cancelling their contracts and refusing to renew because of the deterioration in service

and the higher prices NightHawk was charging. As Mayleben stated: “First, at the end

of the third quarter, NightHawk was providing solutions to 753 radiology group

customers and 1469 hospital sites. Let me repeat that. NightHawk is providing

solutions to 753 radiology group customers and 1469 hospital sites. The number of

sites increased by 90 since last quarter, driven by new clients wins and continued

strong retention of existing customers. Our year-to-date retention rate remains 95%,

and we now provide services to 26% of hospitals across the country. . . .” [Emphasis

added.]

65. Regarding NightHawk’s 2008 guidance, Mayleben misled the market

about the effects of the true unrevealed current experience on the assumptions

underlying the guidance: “We remain comfortable with the revenue guidance of 215 to

225 million and the adjusted earnings per diluted share guidance of $1.31 to $1.36, as

we expect to close 2007 with excellent progress against all our key initiatives,

positioning us well to take advantage of the outstanding growth opportunities that lie

ahead in 2008.” In response to an analyst’s question about the assumptions in the

guidance – i.e., what Defendants saw in 2008 that made their 2008 guidance

achievable, Mayleben pointed to the purportedly existing final reads pipeline:

“With respect to the 2008 guidance, I think that we continue to becomfortable. As Dr. Berger said, we’re – with the finals, while the time toclose some of those contracts is a little bit longer than we had expected,we’ve got a really nice pipeline of business there.”

[Emphasis added.]

25


66. On November 5, 2007, NightHawk filed its quarterly report for the period

ended September 30, 2007, which presented a false and misleading picture of the

Company’s revenue trends:

Trends in our Business and Results of Operations

Revenue Trends. Our business has grown rapidly sinceinception. This growth has been driven by an increase in our customerbase, an increase in utilization of our service by our customers,acquisitions, an expansion of services offered, an expansion of our servicehours, a high customer retention rate and the growth in the use ofdiagnostic imaging technologies and procedures in the healthcare industry.

* * *

Volume and revenue trends are driven by continuing growth inimaging demand, strong customer retention and recurring revenuestreams, and expanded service offerings.

[Emphasis added.]

67. As the confidential witnesses report, and as the Company later admitted,

at this time the growth in revenues had stalled, and customers were cancelling their

contracts. Nor was NightHawk successful in cross-selling its “expanded service

offerings.”

68. Defendants’ false representations about the Company’s ability to retain its

customers following the three acquisitions was critically important to investors and

analysts, and persuaded the market that Defendants’ guidances had a reasonable factual

basis when they did not. For example, Goldman Sachs explained in a January 10, 2008

analyst report that NightHawk management’s “ affirmation of 95% customer retention,

continued mid-20s organic growth, and strong expected new customer growth to support

our 2008-2009 forecasts, and we make no further changes to estimates at this time.”

[Emphasis added.]

26


The Truth Begins to Leak Into the Market While Defendants Continue to Make False Statements

69. In a press release dated January 28, 2008, NightHawk announced its

preliminary 2007 results. NightHawk reported it “expects to report 2007 revenue in the

range of $151 to $152 million” and “2007 adjusted earnings per diluted share in the

range of $0.90 to $0.91.” In explaining its miss of its 2007 earnings guidance, the

Company falsely attributed it to temporary causes that did not implicate its on-going

results (so as to minimize the disclosure’s impact on NightHawk’s stock price):

The company’s 2007 results were impacted by slightly lower fourthquarter volumes due to greater than expected seasonality, and a delayin transitioning the former Radlinx physician contracts to thecompany’s compensation model.

[Emphasis added.]

In fact, as the confidential witnesses explained, and as the Company would later admit,

during this period, NightHawk was losing customers who had cancelled their contracts,

and Radlinx physicians had either refused to work for NightHawk or were demanding

higher pay levels – factors which would have a recurring adverse effect on the

company’s 2008 revenues and earnings, as well as its long-term profitability.

70. In response to this partial revelation of the truth, the price of NightHawk

stock fell $2.64 per share, or 14%, to close at $16.24 per share, on January 29, 2008.

71. By a press release dated February 13, 2008, NightHawk announced its

financial results for fourth quarter 2007 (“4Q07”) and for the year ended December 31,

2007. Unbeknownst to investors, however, the Company had only come close to its

2007 “adjusted earnings” guidance by secretly converting its cash bonuses, to stock

compensation, an item that the Company excluded from its definition of this non-GAAP

measure of earnings. As Morgan Stanley wrote in a April 11, 2008 analyst report after

discovering this manipulation:

Why We’re Moving to GAAP: We have learned that previouslyundisclosed changes in the mix of compensation in 4Q07 obscuredgrowing costs by shifting cash expenses (which are included in consensus

27


estimates) into stock expenses (which are not). To mitigate the impact ofthese accounting distortions, from today we will focus solely on GAAPmetrics in valuing the shares.

* * *

As shown in exhibit 4, growth in cash SG&A has been highly correlatedwith revenue growth, implying little operating leverage over time. Theonly meaningful deviation in this trend was seen in 4Q07 and wasattributable to greater use of stock-based compensation in lieu of cash.However, what was not disclosed at the time of the report or in laterfilings is that in 4Q07 certain cash payroll expenses from prior periodstotaling $2 million were reversed and exchanged for an equal amount ofstock-based compensation. Since stock compensation is excluded fromthe calculation of consensus earnings estimates, the move helped theresults compare more favorably by adding a 5-cent tailwind to earningsfor the period.

After adding back the value of the stock grant to cash expenses, cashSG&A rose 81% in 4Q07 compared to a 78% rise in revenue – far greaterthan the 56% increase that had been implied by the reported results. Thus,it was this accounting adjustment in 4Q07 may have dampened growth incash expenses and masked worrisome cost and earnings trends. In thepast, the aim of excluding stock compensation was to remove this volatileline item from the computation of consensus estimates to facilitatecomparability. To the extent that it has evolved in a way that obscuresrather than facilitates analysis and comparison, our future estimates andanalysis will rely exclusively on reported GAAP figures.

[Emphasis added.]

72. In the February 13, 2008 press release, Nightflawk also significantly

reduced its guidance for 2008. In delivering this disappointing news (and partially

revealing the truth) Defendants continued to misrepresent the Company’s current

business problems and their continuing impact on the Company’s 2008 prospects:

Updated Full-Year 2008 Guidance

The company updated its full-year 2008 guidance for revenue andadjusted earnings per diluted share. Full year 2008 revenue is nowprojected to be in the range of $195-$205 million, and adjustedearnings per diluted share is projected to be in the range of $1.10-$1.20.

“Our business continues to remain fundamentally strong, and we arepleased with our continued organic growth, our success at integratingacquisitions, and the traction we’ve achieved with our new service

28


offerings. NightHawk has the leading market presence, a scalablebusiness with high operating margins and strong cash flows, and abrand that is synonymous with quality and service, leaving us wellpositioned to execute on our vision,” said Dr. Berger.

[Emphasis added.]

These statements were false and misleading in that, as the confidential witnesses

describe, the integration of the acquisitions was floundering, the Company had not

succeeded in cross-selling its new service offerings and NightHawk’s reputation had

been severely damaged by its coverage gaps and its deterioration in service.

73. By the same February 13, 2008 press release, NightHawk announced that

Mayleben would be leaving the Company and that Cole would be stepping down from

the Company in the following quarter, which aroused suspicion that the Company’s

problems were more serious than Defendants were describing.

74. On February 13, 2008, following the issuance of the press release,

NightHawk held an earnings conference call with analysts and investors to discuss the

NightHawk’s earnings and operations. Each of the Individual Defendants participated in

the conference call. During the conference call, various of the Defendants made false

and misleading positive statements about NightHawk’s business, operations and

prospects, including a repetition that temporary “seasonability” was to blame for the

Company’s reduced revenues and that a purposeful change in the timing of the transition

of Radlinx doctors to NightHawk’s compensation model accounted for the Company’s

purportedly temporary lower margins and profitability. These misrepresentations (and

the omissions of facts showing the statements were misleading) went uncorrected by the

other Defendants on the call. As Dr. Berger stated:

We were disappointed that our adjusted EPS fell short of our guidance aswe announced at the end of January. Our 2007 results were impacted byslightly lower fourth-quarter scan volumes due to a greater thanexpected seasonality and an intentional delay in transitioning the formerRadlinx physician contracts to our NightHawk affiliated radiologistcompensation model.

29


Let me take a moment to expand on these two items. First, as we said onprevious calls, ours is a fairly seasonal business and this year the sameside [sic] volume declines we experienced were higher than anticipatedat 9% compared to seasonal declines historically ranging from 4% to 8%.

Second, we made a deliberate decision in the fourth quarter to modifyour approach to the Radlinx acquisition integration that began earlier inthe year. The decision to postpone one of the final steps of integration,the transition of Radlinx radiologists to our compensation model wasmade with the intention to ensure both the radiologist satisfaction and aseamless transition for our customers.

Important to success of the compensation migration or the breadth ofhospital privileges our physicians obtained which was a process that tooklonger than we expected resulting in our decision to defer the migration tothe new compensation model which as many of you know is where wealso gain significant margin improvements. While this decision had amodest short-term impact on our adjusted earnings per diluted share, itwas the right decision for our business.

Now I would like to comment on our updated guidance for 2008. As youprobably read in today’s release, we have updated our full-year 2008guidance for revenue and adjusted earnings per diluted share. Full-year2008 revenue is now projected to be in the range of $195 million to $205million, and adjusted earnings per diluted share is projected to be in therange of $1.10 to1.20 to reflect increased conservatism in ourcommunications with our shareholders and the investment community.

[Emphasis added.]

75. Cole then outlined the assumptions underlying the new 2008 guidance,

imploring investors not to interpret the changes to mean that the Company’s profitability

had deteriorated (which it had):

Thank you, Andrea. I’d like to take a few minutes to walk through theassumptions that were used to develop the 2008 guidance which hopefullywill assist you in understanding the various avenues for growth this year.The projected revenue range of $195 million to $205 million representsincreased revenue of $43 million to $53 million and growth of 29% to35% over revenue of $151.7 million in 2007.

This revenue guidance is based on the following primary assumptions,total organic revenue growth of 18% to 24% representing an incremental$27 million to $37 million; 11% growth related to the full-year impact ofthe 2007 acquisitions representing approximately $17 million of additionalrevenue from these acquisitions in 2008; total preliminary interpretationsvolume growth of 20% to 26%; and associated revenue growth of 18% to21% representing $153 million to $156 million of total revenue frompreliminary interpretations.

Of this volume growth, 15% to 21% is projected to be organic and 13% to15% of the revenue growth. Total final interpretations volume growth of

30


115% to 148% and associated revenue growth of 76% to 117%representing $21 million to $26 million of total revenue from finalinterpretations. Of this volume growth, 104% to 137% is projected to beorganic.

Business services revenue growth of approximately 90% or an incremental$9 million in 2008 largely representing the full-year impact of this 2007acquisition, for a total of approximately $19 million in business servicerevenues in 2008. Very modest growth in other revenues including CCTAand CWS offerings in combination representing $1.6 million to $3.6million of incremental revenue in 2008 for a total of $2 million to $4million.

A final comment about phasing of these revenues, we typically experienceour largest volumes in the second and third quarters of each year with thefirst quarter growing only modestly over the fourth quarter. Key factorsthat may impact opportunities to enhance where total 2008 revenue fallsagainst the range of our guidance include, execution in generating newsales, adoption rates for finals expansion within our customer base,developments within CMS regarding reimbursement for CCTA services,expanding business service offerings beyond our relationship with St.Paul Radiology, and the impact of customer retention.

In comparing and contrasting our current and most recent 2008 revenueguidance, it was our evaluation and weighting of the range of possibilitiesagainst these key factors combined, as Dr. Berger previously indicated,with our appreciation for the need to meet or exceed our commitments thatled us to believe that an update to our guidance was warranted.

The protracted range for 2008 adjusted earnings per diluted share of $1.10to $1.20 represents growth of 21% to 32% over adjusted earnings perdiluted share of $0.91 in 2007. This adjusted earnings per diluted shareguidance is based on our confidence in our ability to generate an improvedadjusted EBITDA margin in 2008 in the range of 35% representingroughly a 200 basis point improvement over the 2007 adjusted EBITDAmargin of 33% and an implied EBITDA dollar growth rate in the range of35% to 42% above the roughly $50 million of EBITDA generated in 2007based on the following primary assumptions.

First, full realization of the integration synergies associated with theTDS and Radlinx acquisitions; second, additional contribution related tothe full -year impact of TDS, Radlinx, and Midwest Physician Servicesacquisitions; and lastly, continued success in advancing productivityenhancements in our core business thereby improving overall margins.

In considering these assumptions, it is clear that the change from ourprior adjusted earnings per diluted share guidance is not the result of adeterioration in our operating profitability. In fact as indicated, we areprojecting healthy improvement in our adjusted EBITDA margin. Butrather the loss of incremental leverage on relatively fixed amounts ofinterest and depreciation expense in relation to the reduction in 2008revenue projections.

31


[Emphasis added.] These statements were false and misleading because the “key factors”

described as determining whether the Company would meet the high or low amounts of

profits included within the 2008 guidance range, reflected business problems that had

already occurred, and remained concealed, and which Defendants knew made their 2008

guidance wholly baseless. For example, the “integration synergies” of the acquisitions

had already been shown to be non-existent; by February 2008 it was patently obvious that

the acquisitions had devastated the Company’s customer relationships and margins.

76. In response to questions concerning NightHawk’s revisions to its 2008

guidance, Cole grudgingly revealed that, to date, the Company had not succeeded in

breaking into the final reads market or in cross-selling Midwest’s business services:

Yes, David, and I’ll let Dr. Berger comment on this as well for some color.But clearly I think the number one factor is simply our continuedevolution into this finals market. Huge opportunity as we’ve discussed onnumerous occasions, but it is also – it is probably the single largest factorthat could sway us one direction or the other in terms of the range withinthat guidance. And that would be number one by a long shot.

Beyond that going down the list, Midwest Physicians, we’ve guided Iwould say very conservatively on it. It’s essentially just in fact it’s a littleless than a doubling of our actual results for this year and next year. Andwe’ve done that consciously to be very conservative in that the – forinstance right now, our only customer, St. Paul Radiology, from thebusiness services perspective we want to make sure we don’t get ahead ofourselves where there could be some weakness if indeed any of the issuesregarding DRA or something take impact there.

As you know, we actually receive revenue as a percentage of St. Paul’stotal revenue. And as I think was mentioned earlier, we don’t want to gettoo far out in front of ourselves in terms of projecting growth into our newcustomer base in 2008 on that. But there is a great opportunity there.

The CCTA stuff, for sure we’ve been very, very careful not to want to putourselves in the sort of position we were in in 2007 and rely on anythinghere significant. As you know, the flood gates could open there and wedon’t want to guide though based on possible floodgates opening. So weare essentially projecting very, very modest increases in that area.

But going back to your question, I think the gist of it is certainly finalsand our ability to execute from a sales perspective into that finals marketwould be our primary number one factor. And Dr. Berger, you may wantto comment for some additional color here.

[Emphasis added.]

32


77. Dr. Berger then threw the assembled analysts off the track by asserting

that the changes in guidance were attributable to a newfound conservatism in preparing

estimates, and possibility of a future industry-wide downturn, rather than the existing

degradation in the Company’s actual business performance:

The conservatism in our guidance is related to the fact that we’ve justdecided to assume a more conservative approach to things because ofthis experience at this point in time. Silly things even enter our – ormaybe not so silly things enter our mind when people raise the issuewhere the spectrum of a recession or some type of economic downturn.And what happened to the healthcare industry or new industry like ours ifthere was some economic downturn. My honest opinion is it will havevery little impact. But again, when one assumes a conservative position,it’s imperative that we take these things into consideration.

[Emphasis added.]

78. Dr. Berger then evaded an analyst’s direct question on customer

retention, a metric that Defendants had, in the past, repeatedly touted as a key indicator

of the Company’s success:

Yes, again, when we talk about retention, David, we really are looking atvolumes. It’s all about volumes and the price we get for the amount ofexaminations we do and we had a 93% retention in volumes in this yearwhich we think is in a competitive market quite successful.

Dr. Berger’s response prompted a follow up question: “Do [you] have a sense where that

ended the year? Was fourth quarter better or worse than say the prior quarters?” To

which Dr. Berger replied, “I honestly don’t know, I don’t know.” Given the centrality of

customer retention and the trend in revenues from quarter to quarter, it may be strongly

inferred that, in fact, Dr. Berger was not answering “honestly.” Moreover, others on the

call, including his son, Jon Berger, who directly received the cancellation notices from

customers, were well aware of the deterioration in customer retention and the

deteriorating sequential revenue growth trends, but failed to correct Dr. Berger’s sunny

assurances, and to reveal that the 2008 guidance was known to be baseless because it

conflicted with current, undisclosed facts. [Emphasis added.]

33


79. By this time, some of the analysts following the Company’s stock were

not fully accepting Defendants’ story. A February 14, 2008, Goldman Sachs’ analyst

report for NightHawk, for example, questioned NightHawk’s assertion that “seasonality”

was responsible for its 2007 earnings miss, noting that “NightHawk management

previewed missed expectations on a heightened seasonality effect that was not fully

supported by hospitals and other healthcare services companies’ 4Q reporting.”

80. In response to the NightHawk’s announcement, the price of NightHawk

stock fell $1.61 per share, or 11%, to close at $12.54 per share, on February 14, 2008.

81. By a press release dated May 7, 2008, NightHawk announced its financial

results for the first quarter of 2008 (“1Q08”), the period ended March 31, 2008. For the

quarter, NightHawk reported sharply lower revenues and income. It also sharply

reduced its 2008 revenue and adjusted earnings guidance, admitting, for the first time,

that recurring operational problems had reduced the Company’s profitability:

Outlook

“After identifying our challenges on both the sales and cost fronts, andthe need to improve our processes in those areas, we are revising ourfull -year 2008 guidance. As we continue into 2008, we will strive toimprove our operations in these areas of the business while alsocapitalizing on continued growth in the industry as well as our position asthe industry’s leading provider of radiology solutions.” The companyestimates that 2008 revenue will be in the range of $171-$181 million andestimates that 2008 adjusted earnings per diluted share (excluding non-cash stock compensation, IBNR and amortization of intangibles, taxeffected) will be in the range of $0.70-$0.82.

[Emphasis added.]

82. On May 7, 2008, NightHawk held an earnings conference call with

analysts and investors to discuss NightHawk’s earnings and operations. Dr. Berger

participated in the conference call along with Tim Murnane, who had replaced Mayleben

as NightHawk’s President and COO, where they revealed that NightHawk’s problems

were not only operational and recurring, but that they dated back to earlier quarters in

34


the Class Period, when the Individual Defendants had made their rosy assurances, and

omitted key facts. As Dr. Berger stated:

What have been the fundamental problems? First is a failure of oursales operations and execution during the last two quarters. Primarilyrelated to this, we are revising our revenue guidance down for 2008 to$171 million to $181 million. Tim will discuss this in more detailmomentarily.

Secondly, during the last year, we ramped up our infrastructure whichresulted in increased costs and SG&A to support a larger company. Wealso had some additional unanticipated professional services expenserelated to physician scheduling challenges during the quarter. The netresult was higher professional service expense, higher SG&A, and lowerearnings.

As a result of this and the revenues we talked about, we are now loweringadjusted earnings per share to be in the range of $0.70 to $0.82. Moredetails will follow on this as well.

[Emphasis added.]

83. Following up on Dr. Berger’s comments, Tim Murnane explained that

when he and NightHawk’s new sales head came on board, they learned that the

Company’s projected 2008 sales revenues conflicted with reality: “Among our first

tasks was taking a very detailed look at our sales pipeline. We concluded that the

[Sales] pipeline does not support the prior revenue guidance.” [Emphasis added.]

84. Dr. Berger, when questioned about the problems the Company had had

about penetrating the “final” reads market, and how that differed from the Company’s

entry into preliminary reads business, Dr. Berger replied:

Yes, it is absolutely day and night, another really good question.

Succinctly, the nighttime market, the emergency Preliminary marketitself was picking low-hanging fruit. The doctors ultimately needed away to change what they were doing. It was very difficult to work theirridiculous hours and be called several times during the night, and thenwork the next day. So, picking the low-hanging fruit was something thatwas very easy to accomplish.

When we talk about – some of the Preliminary type work that we do willtransition to Finals type work on an emergency basis because some

35


doctors don’t want to read it or don’t have the staff or, from an economicperspective, they would prefer it to be done on a Finals basis.

In our world today – and it’s a very small percentage of our overallworkload. It’s probably 5% or 10% and it makes up about 30% of theFinals work that we do.

The big ticket that I think the investment public focuses their attentionon, or should focus their attention on, or what we talk about at least, isthe $15 billion Finals market, a lot of which is daytime. And thequestion that needs to be asked, I think, is why would the radiologist whoare doing this throughout the country and making $15 billion from itturn over some of their bread and butter to folks like us?

And that requires a number of things. It requires a paradigm shift tounderstand that in the long run, we will solve all of their staffing solutionsforever. And we can offer subspecialty services. We can offer the abilityfor them to get cardiac services. We can offer to do the billing andrevenue cycle management for them. We can offer a whole host array ofservices.

[Emphasis added.]

85. On this call, Dr. Berger also revealed the long-existing gaps in coverage,

and the bonuses the Company had been paying the radiologists from the acquired

companies that had devastated its margins:

With the size and complexity of the coverage and the relatively short leadtimes with respect to our previous scheduling process, we had difficultymeeting the demands at appropriate times.

We were scheduling our doctors too late in the process. They had a greatdeal of flexibility, still do. But, as a result of that, we had to paysignificant additional compensation to meet the customer demands.

In a given weekend, for example, we might not have had enoughradiologists scheduled. And they’re independent contractors, and ourscheduling process was such that the lead times to schedule them was notwhat it should be.

Again, those were very costly things, and we wanted to make sure thatcustomer service was satisfied, so we had to pay higher premiums to getthose physicians to be there at the times that they didn’t expect to bethere.

[Emphasis added.]

36


86. With this call, Dr. Berger finally admitted that the corporate acquisitions

that he and his son had engineered were stunning failures, and that he had, in fact,

merely been talking “a pretty good game,” in misleading investors. In Dr. Berger’s own

words, in announcing a much more realistic guidance for 2008, he had “just stopped

drinking the Kool-aid.”

87. In response to Defendants’ disclosures, the price of NightHawk stock fell

$1.19 per share, or 13.9%, to close at $7.37 per share, on May 8, 2008.

Defendants’ Post-Class Disclosures Further Confirm that the Company’s Problems Existed During the Class Period When Defendants Made Contrary Statements

88. That the trend in customer losses had long existed was confirmed in

NightHawk’s Quarterly Report (Form 10-Q) for the quarter ended June 30, 2008:

Trends in our Business and Results of Operations

Revenue Trends. The market for off-hour, emergent, preliminaryreads has historically experienced rapid volume growth. Our growth hasbeen driven by an increase in our customer base, an increase in utilizationof our services by our customers, acquisitions, an expansion of servicesoffered, an expansion of our service hours, a high customer retention rateand the growth in the use of diagnostic imaging technologies andprocedures in the healthcare industry. In recent quarters, such growth hasmoderated as the market has matured. In addition, the market hasattracted increased competition over the past several years. Thesefactors have resulted in a slowing of market volume growth and declinesin average prices. As a result, our revenue growth has moderated fromhistorical levels.

While we expect our strategy for future growth to be successful,we have experienced, and expect to continue to experience, an impact onvolumes resulting from the loss of certain customers. Finally, we alsoexpect the pricing pressures to continue in the future.

[Emphasis added.]

89. At its July 30, 2008 earnings conference call on the 2Q08 results,

Murnane further elaborated upon the Company’s historical problems:

The second area of improvement focuses on service levels and customersatisfaction. As I outlined in our last call, in the latter part of 2007 andearly 2008, we experienced service difficulties primarily related tophysician scheduling. These difficulties manifest themselves in longer

37


turnaround times and schedule gaps and these service problems didresult in some customer loss.

Put simply, service problems for some of our customers opened the doorto competitors’ offers of lower prices and some customers accepted thoseoffers. In addition, some customers who came to NightHawk throughacquisition and had very low historical pricing chose not to renew whenthey were offered higher renewal prices. In particular, this occurredwith some acquired Radlinx customers where many of them had verylow priced, low margin finals contracts. While our volumes reflect theloss of these contracts, our average pricing and related margins actuallyimproved due to this loss of low priced business.

* * *

An additional benefit of our scheduling improvements has been thereduction in physician on call pay. In the second quarter, we reducedthese costs 80%. This is a direct result of a combination of activelymanaging the scheduling system and process combined with thecooperation and flexibility of our physicians in meeting our schedulingrequirements.

So, by removing the scheduling inefficiencies, we have been able toquickly improve service to our customers while reducing the cost ofdelivery.

[Emphasis added.]

90. During the same call, Murnane confirmed that the declines in customer

service dated back to the Radlinx acquisition: “ We didn’t extend some of the contracts

to doctors just after the acquisition that were covering those sites so the service was

impaired to some degree.” [Emphasis added.]

91. NightHawk’s customer attrition problem that the Company had

experienced throughout the Class Period was also discussed by David Engert, who

replaced Dr. Berger as CEO in November 2008. During NightHawk’s fourth quarter

2008 (“4Q08”) earnings conference call held on February 18, 2009, Engert, in

commenting upon his review of the business since taking over as CEO, stated, “We have

suffered excessive customer attrition over the past 18 months and this is unacceptable

going forward.” [Emphasis added.]

92. On May 1, 2009 the Company wrote off the entirety of the over $60

million in “good will” recorded in connection with its three corporate acquisitions.

38


The Confidential Witnesses Describe the Fraudulent Scheme

Confidential Witness #1

93. CW #1 was a senior manager with responsibility over NightHawk’s

operations throughout the Class Period. CW #1 reported at various times to both

Defendants Jon Berger and Mayleben. CW#1 had responsibilities relating to the

licensing, privileging, and credentialing of physicians, as well as their scheduling. CW

#1 provided the following information:

(a) NightHawk’s senior management was dysfunctional. In

particular, there were conflicts between Defendant Jon Berger and Mayleben. Jon

Berger refused to report to Mayleben, the President and COO and, instead, reported

directly to his father, Dr. Berger. The dysfunction among NightHawk’s senior

executives compromised their ability to run NightHawk, particularly once NightHawk

was no longer a private company. In effect, NightHawk was besieged by Dr. Berger’s

nepotism.

(b) NightHawk acquired Radlinx, the third largest teleradiology

company in the United States, with the assumption that it would keep all of Radlinx’s

customer accounts. NightHawk, however, actually lost numerous Radlinx accounts

following the acquisition. One reason NightHawk lost accounts was because

NightHawk required the hospital customers to “privilege” anywhere from 25–40

radiologists in order for the hospitals to receive the NightHawk teleradiology services.

Each hospital that utilized teleradiology services had to individually “privilege” each

teleradiologist before the teleradiologist could be permitted to perform work for the

hospital. This privileging process included a detailed background check on each

teleradiologist and was quite time-consuming and costly for a hospital to perform. Since

the burden of privileging the teleradiologists fell on the hospitals, many of the Radlinx

customers balked at having to privilege 25 to 40 NightHawk teleradiologists, especially

since Radlinx had only needed five or six teleradiologists to be privileged, which was a

39


much more reasonable proposition for most hospital customers. Radlinx was able to

provide teleradiology coverage for a hospital account with far fewer radiologists than

NightHawk could. This was because Radlinx had more control over the scheduling of its

radiologists than NightHawk had, which also reflected another problem at NightHawk,

namely its inability to adequately schedule radiologists to provide comprehensive

coverage to its customers. Because of various scheduling conflicts, NightHawk needed

many more radiologists compared to Radlinx to ensure they could provide coverage for

their customers. Because privileging 25 to 40 radiologists represented substantial work

for the legacy Radlinx customers, many of them decided they did not want to continue

with NightHawk.

(c) In fact, this requirement that the customer hospitals privilege so

many NightHawk radiologists had also been a problem with the customer accounts that

NightHawk acquired from ATN (an earlier acquisition) and TDS. And many of these

customers were lost as a result. NightHawk simply did not learn anything from its

difficulties with these prior acquisitions, and problems with the legacy Radlinx customers

were significant during 2007.

(d) Just like the legacy Radlinx customers were not keen to become

NightHawk customers, so, too, many of the Radlinx physicians did not want to go to

work for NightHawk. A key reason for this reluctance on the part of the Radlinx

physicians to become NightHawk physicians was because NightHawk’s compensation to

physicians was markedly lower than what Radlinx had paid its physicians. This

disagreement over compensation resulted in many Radlinx physicians not signing

contracts with NightHawk. NightHawk, including Dr. Paul Berger, knew the higher pay

that the Radlinx physicians had received from Radlinx, and wanted from NightHawk.

(e) NightHawk retained 21 Radlinx radiologists but had wanted to

retain far more, upwards to all of the approximately 40 Radlinx physicians. That the

Radlinx physicians were receiving higher compensation should have come as no surprise

40


to NightHawk, since NightHawk had had similar experiences with its other acquisitions,

and also would have known this about Radlinx from the due diligence that NightHawk

conducted. The due diligence, and the decision-making to proceed with the corporate

acquisitions, were handled by Jon Berger. Moreover, negotiating the contracts with the

Radlinx physicians was directly handled by Dr. Paul Berger who was responsible for

physician compensation at NightHawk.

(f) Delays concluding the Radlinx physician contracts impacted the

timing for credentialing the physicians.

(g) Additionally, NightHawk experienced other problems integrating

Radlinx. First, some Radlinx radiologists and Radlinx customers did not want to use the

NightHawk systems, specifically AutoRad. Radlinx radiologists did, however, use

AutoRad in 2007, and many of the Radlinx end-user customers were reluctant to see

changes in the report formats they received from Radlinx, which resulted in increased

customer dissatisfaction.

(h) There was a desire at NightHawk to have the Radlinx personnel

brought over to NightHawk’s TALON system. During 2007 and early 2008, however,

NightHawk had required the legacy ATN radiologists to use the TALON system, but the

ATN radiologists hated it and made no secret of their desire and impatience to get off of

TALON and onto AutoRad, which was the system that TALON was supposed to replace.

In this regard, during 2007 it had been more important for NightHawk to get the ATN

radiologists off TALON and onto AutoRad than it was to get the Radlinx radiologists to

stop using the legacy Radlinx system for sending report results to the Radlinx customers.

(i) TALON performed the same functions as AutoRad, and was

supposed to be a vastly superior system. TALON, however, failed completely. Apart

from the ATN radiologists and a few small customers that licensed the rights to use

TALON, TALON was never deployed internally at NightHawk. TALON was part of the

reason why the relationship between St. Paul and NightHawk eventually deteriorated.

41


(j) TALON had been poorly designed and was simply not fast

enough, responsive enough, or efficient enough for the radiologists who had to use it.

TALON had been designed and developed by Dr. Paul Berger’s other son, Scott Berger

(who was based in Milwaukee.) Like Jon Berger, Scott Berger was not qualified for his

position, and was particularly unqualified to develop a system like TALON, as shown by

TALON’s poor performance and limited deployment. Scott Berger was also supposed to

have created a credentialing system, but was unable to do so, so that those in charge of

credentialing simply created a system where Scott Berger had failed.

(k) NightHawk lost a high number of the legacy Radlinx customer

accounts in no small part because NightHawk senior management did not learn from the

first two acquisitions they did, which had also resulted in customer losses. With both

ATN and TDS, NightHawk lost doctors and customers and the situation was very similar

with what later transpired with Radlinx. And NightHawk was also losing its own

customers during 2007.

(l) There is no doubt that during 2007 NightHawk was losing more

customers than it was reporting to the public. In fact, during 2007 an increasingly large

variance had been developing between the number of active customer accounts that the

NightHawk’s finance department was reporting from the AutoRad system, and the

number that were being generated from NightHawk’s Falcon system, which was used by

its credentialing department.

(m) The credentialing group determined that certain customers had

terminated their relationships with NightHawk, but this information was not being timely

or accurately reported. For instance, when the credentialing department contacted certain

customer accounts to get information needed to renew the credentialing or privileging for

the customer, they would be informed by the customer that the customer had not used

NightHawk for up to three months and that the customer had sent a letter or

communication to the NightHawk sales representative responsible for the account. On

42


these occasions, personnel from the credentialing group would contact the appropriate

salesperson who often acknowledged having received the cancellation letter from the

customer several months earlier, and that the salesperson had forwarded it along to Jon

Berger. However, Jon Berger did not forward this information to anyone else, so that the

systems – AutoRad and Falcon – could be updated.

(n) There were other cancelled customer contracts where the

salespeople had no idea the customer had cancelled its service with NightHawk. Jon

Berger had not informed anyone else that the customer had terminated its relationship

with NightHawk. Jon Berger’s actions deviated from NightHawk’s policy, namely that

the sales department (which was overseen by Jon Berger) notify other departments,

including finance, regarding customers that had cancelled their contracts with

NightHawk.

(o) Discoveries of cancelled customers were made during every month

of the Class Period. The problem with customer cancellations not being timely reported

got much worse in 2007. In the second half of 2007, more and more customers were

cancelling their relationships with NightHawk, to the point that matters came to a head.

At that time, Mayleben demanded a proper accounting of just how many customer

accounts NightHawk actually had. At the end of 2007, Mayleben “put his foot down”

because every week for six or eight weeks a report had been run which showed that

NightHawk was losing more customers than it was reporting, but Jon Berger was “having

fits and saying how stupid we were and we had no clue” as to the actual number of

customer accounts. So, Mayleben had an analysis performed to determine positively the

actual number of customer accounts. The study found that NightHawk had far fewer

customers than were being reported to the public.

(p) NightHawk’s public reporting regarding the number of customer

accounts was most likely based upon reports generated from its finance department.

Beginning in June or July 2007, NightHawk’s Vice President of Finance, Andrea Clegg

43


put into place a system that was supposed to reconcile the customer account information

in the two systems. It was at that time that the variance was recognized. At first, the

variance was not very significant, but the variance grew significantly as 2007 progressed.

Initially Clegg thought the variance was due to a possibly routine cause. AutoRad was

showing that NightHawk had more customers than was actually the case because the

system was not being timely updated regarding the many customers that did not renew

their contracts with NightHawk or had discontinued or otherwise cancelled using

NightHawk’s services.

(q) CW #1 believed that the findings of the study that Mayleben

initiated showed that NightHawk had about 100 fewer customers than NightHawk had

thought. CW #1’s recollection was that at that time NightHawk had been reporting

publicly that it had something like 1,500 customers (sites). The 100 or so customers

included large and small customer accounts.

(r) The 100 fewer customers included legacy Radlinx customers.

Radlinx customer accounts had been added to the Falcon system. The Falcon system was

the credentialing system that NightHawk used to track and monitor all the licensing,

privileging and credentialing, and also scheduling of the NightHawk radiologists. Falcon

also included full details regarding customer accounts, since each customer had to

individually privilege the NightHawk medical personnel who were eligible to work at

that facility. Additionally, Falcon also indicated the estimated number of studies each

customer was expected to require on a nightly basis – this information was critical for the

scheduling function. AutoRad also listed customer accounts (although not necessarily

accurately, as described above) and was used for sending the studies from the radiologists

to the customers.

(s) The number of customers referred to by CW #1 referred to hospital

and medical facilities that were essentially the “end-users” of NightHawk’s services. A

radiology group that contracted with NightHawk might provide services to several

44


medical facilities in a given region and NightHawk, by extension, provided its services to

those medical facilities. One of these end-user medical facilities might discontinue using

the NightHawk services resulting in a customer loss for NightHawk, whereas the other

medical facilities might continue to use NightHawk’s services. In this regard,

NightHawk’s public representation of approximately 1,500 customers meant end-user

medical facilities as opposed to the radiology practices that retained NightHawk.

(t) Each customer loss was supposed to have a “reason code” assigned

to it explaining why the customer had cancelled or discontinued using NightHawk’s

services. Typical reason codes included pricing, customer service, quality and

competition as factors why the customer was no longer using NightHawk. In this regard,

NightHawk’s ability to provide adequate coverage to its customers was compromised

during 2007 and into 2008.

(u) During 2007 and 2008, NightHawk’s ability to schedule enough

radiologists to provide coverage was “awful”. CW #1 was part of the group directly

responsible for scheduling. The problem was fundamentally that NightHawk had limited

control – or limited willingness to control – when the radiologists were available to work.

The radiologists “worked when they wanted to work,” but not always when NightHawk

needed them to work.

(v) The scheduling process worked as follows: about two weeks

before the beginning of a month, each NightHawk radiologist submitted to NightHawk

the dates when the radiologists was available to work. These dates were then entered into

a template to determine how many radiologists were available to work in the upcoming

month. In some situations there were more radiologists available than were needed and

in some situations not enough. A NightHawk employee – Dr. John Thomas – then

communicated to the radiologists telling some of them that their services were not needed

if there was enough coverage during a particular period. Similarly, he also asked the

radiologists if they could work periods when NightHawk needed additional coverage.

45


Sometimes the radiologists accepted the requests, sometimes they did not. On those

occasions when they did not, NightHawk was basically left without enough radiologists

to provide coverage.

(w) The periods when NightHawk did not have enough coverage were

often holidays and weekend evenings. To encourage radiologists to work these shifts,

Defendant Paul Berger often offered “bonuses” to the radiologists of a few hundred to

five hundred dollars per eight to ten hour shift. However, as time went on, the

radiologists deliberately would not make themselves available to work these shifts so that

NightHawk would be forced to offer the bonuses. Typically, five to ten radiologists per

shift received the bonuses. While this definitely represented a cost for NightHawk, the

bonuses did not always work and there were not always enough radiologists available.

(x) When there were not enough radiologists to cover a particular

period, NightHawk’s options were fairly limited. In conjunction with the credentialing

and privileging department, the sales personnel were required to perform “a gap analysis”

of their customer accounts to determine specific hours when NightHawk did not have

enough radiologists to provide coverage. The sales personnel then communicated to

those customers that would be without coverage during a particular period and that those

customers would need to rely on “a backup” for radiology coverage.

(y) Some of NightHawk’s customer contracts included a requirement

that the customer had to have a viable backup provider – usually a local radiology group.

Other customers might not be required to have a backup and might not be overly

concerned that they lacked coverage during the period at issue since they did not

anticipate having radiology service needs at that time. But some customer accounts were

definitely not happy, nor could some customers understand how NightHawk lacked

enough personnel to provide coverage, especially if the customer had been required to

privilege, large numbers, e.g., 30, NightHawk radiologists.

46


(z) The coverage and customer service issues during 2007 forced

many of NightHawk sales personnel to perform “damage control” on their existing

accounts, at the expense of soliciting and developing new business. This was especially

the case with legacy customer accounts of the companies that NightHawk acquired – e.g.,

ATN, TDS and Radlinx. For at least a year following each of the acquisitions, the

NightHawk sales personnel had to spend time placating and salvaging the legacy

customer accounts because so many of the customers were unhappy with the change in

service.


94. CW#2 was a former Sales Director for the Eastern United States during

2007 and parts of 2008. CW #2 reported to the National Sales Manager who, in turn,

reported to Defendant Jon Berger. The following information is attributable to and

within the knowledge of CW #2:

(a) CW #2 confirmed that Jon Berger refused to report to Mayleben

and, instead, reported directly to Dr. Paul Berger. CW #2 characterized Jon Berger as

disruptive and creating a state of constant turmoil within NightHawk.

(b) NightHawk’s efforts to integrate its acquisitions of Radlinx, ATN,

and Midwest were poorly thought out. These acquisitions distracted senior management

to the extent that they lost sight of NightHawk’s core business. CW#2 described the

effects as devastating. CW #2 described the biggest problem that impacted NightHawk

during the Class Period was the poor quality of service arising from the scheduling

problems.

(c) NightHawk’s problems during the Class Period were due to

mismanagement. As CW #2 put it, “it was NightHawk’s game to lose.”

(d) The inattention of NightHawk’s management resulted in

significant problems delivering a consistent level of service. A major problem was that

NightHawk was so disorganized that it failed to schedule enough physicians to provide

47


services. The lack of available physicians created “service gaps” which meant

NightHawk customers oftentimes had to call their regular radiologists during the evening

hours when NightHawk was supposed to be providing service to get a necessary study

performed. This resulted in major customer dissatisfaction which created opportunities

for NightHawk’s competitors to exploit.

(e) Scheduling was overseen by the NightHawk Operations group.

However, the Australian doctors were “making their own schedules” which were often

inconsistent. By contrast to NightHawk, its competitor, VRC, required radiologists to

stick to a fixed schedule. The exact days on and off were not the issue, so much as

ensuring that the physicians adhered to a consistent, predictable schedule, which

NightHawk did not do.

(f) While there had been some scheduling problems in 2006, the

problem became very serious in 2007 due to distractions such as the Radlinx acquisition.

Because customers were so angry when NightHawk was unable to provide them with the

services they were supposed to, NightHawk sales personnel found themselves having to

spend significant time and effort on “damage control” with these customers, which

compromised their abilities to go after new business. And the poor quality of service was

not unknown by new, prospective customers who often mentioned to NightHawk sales

personnel that they had heard an existing NightHawk customer had had to call its own

radiologists “in the middle of the night” because NightHawk had been unable to fulfill

the service.

(g) CW #2 also maintained that nepotism was rampant at NightHawk.

Specifically, CW #2 opined that Wes McClain was “absolutely incompetent” and only

had his job as National Sales Manager because of his wife (who “did a wonderful job”)

and also because McClain was friends with Jon Berger, and they played on the same

softball team. Another example of “nepotism” at the company was that Scott Berger –

48


Jon Berger’s brother – had also been given a responsible position, this one involving

oversight of all of NightHawk’s computer servers.

(h) Given the nepotism and incompetence that CW #2 believed were

rampant throughout NightHawk’s senior management, he had welcomed Mayleben’s

apparent efforts to “bring in the right people” to improve the quality of NightHawk’s

services. However, he said that Mayleben encountered “huge resistance from the

[Berger] family” to many of the changes Mayleben tried to implement.


95. CW #3 was a Senior Director of Human Resources during parts of 2007

and 2008. CW #3 confirmed that physician compensation was handled directly by Dr.

Paul Berger.


96. CW #4 was a Regional Sales Manager at NightHawk from 2006 until mid

2008. CW #4 confirmed that competition in NightHawk’s core off-hours business was

increasing in 2007. CW #4 stated NightHawk’s pricing for a preliminary report had

declined from $60-$65 per report in 2006 to as low as $40-$45 per report in mid-2007.

CW #2 stated the sales force was subject to inconsistent and unclear directives to “cross-

sell” new product lines from Jon Berger, who was VP of Sales and Marketing.


97. CW #5 was a Regional Sales Manager at NightHawk from mid-2006 until

late 2007. CW #5 provided the following information:

(a) CW #5 explained the process for estimating future revenues.

When a contract was signed, sales personnel estimated the amount of annual revenue the

new contract would possibly derive, which was determined by getting historical data

from the customer regarding the typical number of studies that were performed on a

nightly basis. The number of studies typically performed on a nightly basis would be

multiplied by 365 and then by the price of an individual study to arrive at an estimate of

49


the annual revenue the contract would derive. A salesperson might occasionally follow

up with a customer account to see if the actual numbers were comparing closely to the

estimated numbers, but because the sales staff did not receive commissions, they did not

have much incentive to spend time doing this. Nor, however, did they have any incentive

to over-estimate the potential annual revenue of a new contract.

(b) Difficulties in making sales primarily arose because of increasing

competition in the teleradiology field. When CW #5 first started at NightHawk there had

been maybe five or seven other teleradiology firms, but by the time CW #5 left in late

2007, there were upwards of 40 and the number was increasing.

(c) In the face of this escalating competition, NightHawk’s prices were

too high to win business, since it became increasingly clear to CW #5 that customers

were primarily selecting a teleradiology provider based on price. This was in spite of

NightHawk’s often superior technology and capabilities compared to its competitors.

CW #5 recalled being told by various prospective customers that given concerns

regarding the overall worsening global economy, “you [NightHawk] cost too much.”

(d) At the time when CW #5 was told this, CW #5 believed that

NightHawk was charging around $55 for a preliminary study. This basic service

involved providing nighttime radiology service whereby a hospital could send an image

to NightHawk, whose foreign-based radiologists would interpret the image, and return a

preliminary interpretation of the image to the customer within about 20 minutes. CW #5

confirmed that these preliminary studies could be used by an emergency room medical

staff to make certain immediate medical decisions, but ultimately needed to be “over-

read” and a “final” study interpretation conducted, which needed to be performed by a

radiologist in the United States.

(e) CW #5 confirmed NightHawk began suffering from service

problems. There were occasions when customers were not satisfied with the study

interpretations. For instance, if the radiologist “missed” a critical detail in the image, the

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customer might want “a pricing adjustment.” There was also an IT service NightHawk

provided that enabled a customer to see the status of a study as it was being interpreted,

but sometimes this feature “went out of service.” But the biggest service problem

involved “scheduling gaps” when for various reasons NightHawk lacked sufficient

personnel to provide coverage to a hospital or medical group for a given period (usually

an evening.) According to CW #5, the scheduling problems were getting worse in the

period leading up to CW #5’s departure.

(f) When these scheduling gaps arose, sales personnel would be told

by the NightHawk scheduling department that they needed to notify the customers being

affected that coverage would not be available. Customers were not very happy when

they were notified of this, but there was not much sales personnel could do except

apologize.Additional Scienter Allegations

98. During the Class Period, the Individual Defendants, as senior executive

officers and/or directors of NightHawk, a family-run Company, were privy to, and

shared, confidential and proprietary information concerning NightHawk, its operations,

finances, financial condition and present and future business prospects. The Individual

Defendants also had access to material adverse non-public information concerning

NightHawk, as discussed in detail below. Because of their positions with NightHawk,

and their family connection, the Individual Defendants had access to non-public

information about its business, finances, products, markets and present and future

business prospects via internal corporate documents, conversations and connections with

other corporate officers and employees, attendance at management and/or board of

directors meetings and committees thereof and via reports and other information

provided to them in connection therewith. Because of their possession of such

information, the Individual Defendants knew or recklessly disregarded that the adverse

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facts specified herein had not been disclosed to, and were being concealed from, the

investing public.

99. Each of the Individual Defendants received performance based

compensation for 2007. Under NightHawk’s 2007 Performance-Based Incentive

Program, each of the Individual Defendants were eligible to receive up to 100% of their

base salary as a bonus payment. In early 2007, NightHawk’s Board changed the metric

for bonus compensation from revenue and EBIDTA targets to revenue and adjusted

earnings per share. Based upon the new metrics, each of the Individual Defendants

received 89% of their base salary as a bonus for 2007. In addition, Mayleben and Cole

were motivated to downplay the problems at the Company in February 2008, when they

were leaving the Company, in order to receive lavish severance packages of $879,632

and $720,145, respectively.

100. The Individual Defendants, because of their positions with the Company,

and their family relationships, controlled and/or possessed the authority to control the

contents of its reports, press releases and presentations to securities analysts and through

them, to the investing public. The Individual Defendants were provided with copies of

NightHawk’s reports and press releases alleged herein to be misleading, prior to or

shortly after their issuance and had the ability and opportunity to prevent their issuance

or cause them to be corrected. Thus, the Individual Defendants had the opportunity to

commit the fraudulent acts alleged herein.

101. As senior executive officers and/or directors and as controlling persons of

a publicly traded company whose common stock was, and is, registered with the SEC

pursuant to the Exchange Act, and was, and is, traded on the NASDAQ Stock Market

(“NASDAQ”) and governed by the federal securities laws, the Individual Defendants

had a duty to promptly disseminate accurate and truthful information with respect to

NightHawk’s financial condition and performance, growth, operations, customers,

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

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

misleading or untrue, so that the market price of NightHawk’s common stock would be

based upon truthful and accurate information. The Individual Defendants’

misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

102. The Individual Defendants are liable as participants in a fraudulent

scheme and course of conduct that operated as a fraud or deceit on purchasers of

NightHawk’s common stock by disseminating materially false and misleading

statements and/or concealing material adverse facts. The scheme: (i) deceived the

investing public regarding NightHawk’s business, operations and management and the

intrinsic value of NightHawk common stock; (ii) enabled Defendants Dr. Berger and Jon

Berger to sell millions of dollars of NightHawk stock at inflated prices; and (iii) caused

Plaintiff and members of the Class to purchase NightHawk common stock at artificially

inflated prices, and when the truth was revealed, to suffer losses.

Insider Trading

103. As alleged herein, the Individual Defendants acted with scienter in that

they knew that the public documents and statements issued or disseminated in the name

of NightHawk contained materially false and misleading statements, and that material

facts necessary to make the statements not misleading were omitted from the

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

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

issuance or dissemination of such statements or documents, or failed to correct the

statements, 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 NightHawk, their control over, and/or receipt and/or modification of

NightHawk’s allegedly materially misleading misstatements and/or their associations

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with the NightHawk which made them privy to confidential proprietary information

concerning NightHawk, participated in the fraudulent scheme alleged herein.

104. Defendants were further motivated to engage in this course of conduct in

order to allow Dr. Berger and Jon Berger to sell huge amounts of their stock at inflated

prices. The stock sales from the time of NightHawk’s initial public offering through the

end of the Class Period by Dr. Berger and Jon Berger are listed on Exhibits A and B,

respectively. These exhibits were prepared from Form 4’s publicly filed with the SEC.

Loss Causation

105. During the Class Period, as detailed herein, Defendants engaged in a

scheme to deceive the market and a course of conduct that artificially inflated the prices

of NightHawk common stock and operated as a fraud or deceit on Class Period

purchasers of NightHawk common stock. When Defendants’ prior misrepresentations

and fraudulent conduct leaked into the market and became apparent to the market, the

price of NightHawk common stock fell precipitously as a result, as the prior artificial

inflation was removed from the stock price. As a result of their purchases of NightHawk

common stock during the Class Period, the misconduct of Defendants, and ultimately

the disclosure of the truth, Plaintiff and the other Class members suffered economic loss,

i . e., damages, under the federal securities laws.

106. Defendants presented a misleading picture of NightHawk’s business and

prospects. Defendants’ false and misleading statements had the intended effect and

caused NightHawk common stock to trade at artificially inflated levels throughout the

Class Period, reaching as high as $25.25 per share on October 10, 2007.

107. As a direct result of Defendants’ disclosures on January 28, 2008,

February 13, 2008, and May 7, 2008, the price of NightHawk common stock fell

precipitously, falling from a high of $25.25 to $7.37 at May 8, 2008, immediately

following the end of the Class Period.

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108. The timing and magnitude of the price declines in NightHawk common

stock negate any inference that the loss suffered by Plaintiff and the other Class

members was caused by changed market conditions, macroeconomic or industry factors

or NightHawk-specific facts unrelated to Defendants’ fraudulent conduct. The

economic loss, i.e., damages, suffered by Plaintiff and the other Class members was a

direct result of Defendants’ fraudulent scheme to artificially inflate the prices of

NightHawk common stock and the subsequent significant decline in the value of

NightHawk common stock when Defendants’ prior misrepresentations and other

fraudulent conduct were revealed.

Applicabilitv of the Presumption of Reliance: Fraud on the Market Doctrine

109. At all relevant times, the market for NightHawk common stock was an

efficient market for the following reasons, among others:

(a) NightHawk common stock met the requirements for listing, and

was listed and actively traded on the NASDAQ, a highly efficient and automated

market;

(b) as a regulated issuer, NightHawk filed periodic public reports with

the SEC and the NASDAQ;

(c) NightHawk regularly communicated with public investors via

established market communication mechanisms, including regular disseminations of

press releases on the national circuits of major newswire services and other wide-

ranging public disclosures, such as communications with the financial press and other

similar reporting services; and

(d) NightHawk was followed by several securities analysts employed

by major brokerage firms, including Goldman Sachs and Morgan Stanley, who wrote

reports which were distributed to the sales force and certain customers of their

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respective brokerage firms. Each of these reports was publicly available and entered the

public marketplace.

110. As a result of the foregoing, the market for NightHawk common stock

promptly digested current information regarding NightHawk from all publicly available

sources and reflected such information in the prices of the stock. Under these

circumstances, all purchasers of NightHawk common stock during the Class Period

relied upon the integrity of the market price, and suffered similar injury through their

purchase of NightHawk common stock at artificially inflated prices and a presumption

of reliance applies.

No Safe Harbor

111. 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. Many of the specific false and misleading statements pleaded herein

were not identified as “forward-looking statements” when made. To the extent false and

misleading forward-looking statements have been alleged, 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. To the

extent that forward-looking statements have been alleged to be false or misleading,

Defendants are liable for those false forward-looking statements because at the time

each of those forward-looking statements were 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 NightHawk who knew that

those statements were false when made.

Class Action Allegations

112. Plaintiff brings 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 those who

purchased the common stock of NightHawk between May 2, 2007 and May 7, 2008,

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inclusive, and who were damaged thereby (the “Class”). Excluded from the Class are

Defendants, the officers and directors of the Company, at all relevant times, members of

their immediate families and their legal representatives, heirs, successors or assigns and

any entity in which Defendants have or had a controlling interest.

113. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, NightHawk common stock was actively

traded on the NASDAQ. While the exact number of Class members is unknown to

Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff

believes that there are hundreds or thousands of members in the proposed Class. Record

owners and other members of the Class may be identified from records maintained by

NightHawk or its transfer agent and may be notified of the pendency of this action by

mail, using the form of notice similar to that customarily used in securities class actions.

114. Plaintiff’s claims are typical of the claims of the members of the Class as

all members of the Class are similarly affected by Defendants’ wrongful conduct in

violation of federal law complained of herein.

115. Plaintiff will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class action and

securities litigation.

116. 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 as alleged herein;

(b) whether statements made by Defendants to the investing public

during the Class Period misrepresented material facts about the business and operations

of NightHawk;

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(c) whether the price of NightHawk common stock was artificially

inflated during the Class Period; and

(d) to what extent the members of the Class have sustained damages

and the proper measure of damages.

117. A class action is superior to all other available methods for the fair and

efficient adjudication of this controversy since joinder of all members is impracticable.

Furthermore, as the damages suffered by individual Class members may be relatively

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 action as a class action.

Count IViolation of Section 10(b) of the Exchange Act and Rule 10b-5

Promulgated Thereunder Against All Defendants

118. Plaintiff repeats and realleges each and every allegation contained above

as if fully set forth herein.

119. During the Class Period, Defendants disseminated or approved, or failed

to correct, the materially false and misleading statements specified above, which they

knew or deliberately disregarded were misleading in that 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.

120. Defendants: (a) employed devices, schemes, and artifices to defraud; (b)

made untrue statements of material fact and/or omitted to state material facts necessary

to make the statements not misleading; and (c) engaged in acts, practices, and a course

of business which operated as a fraud and deceit upon the purchasers of the Company’s

common stock during the Class Period.

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121. Plaintiff and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for NightHawk common

stock. Plaintiff and the Class would not have purchased NightHawk common stock at

the prices they paid, or at all, if they had been aware that the market prices had been

artificially and falsely inflated by Defendants’ misleading statements.

122. When the truth was revealed, the artificial inflation in Nighthawk’s stock

price was removed. As a direct and proximate result of Defendants’ wrongful conduct,

Plaintiff and the other members of the Class suffered damages in connection with their

purchases of NightHawk common stock during the Class Period.

Count IIViolation of Section 20(a) of

the Exchange Act Against the Individual Defendants

123. Plaintiff repeats and realleges each and every allegation contained above

as if fully set forth herein.

124. The Individual Defendants acted as controlling persons of NightHawk

within the meaning of Section 20(a) of the Exchange Act as alleged herein. By reason

of their positions as officers and/or directors of NightHawk, their family relationships

and/or their ownership of NightHawk stock, the Individual Defendants had the power

and authority to cause NightHawk to engage in the wrongful conduct complained of

herein. By reason of such conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, certifying Plaintiff as

a Class representative under Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Plaintiff and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a

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result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest

thereon;

C. Awarding Plaintiff and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

Jury Trial Demanded

Plaintiff hereby demands a trial by jury.

DATED: July 13, 2010 SCOTT+SCOTT LLP

/s/Walter W. Noss

ARTHUR L. SHINGLER III (prohac vice)MARY K. BLASY (pro hac vice)WALTER W. NOSS (pro hac vice)HAL D. CUNNINGHAM (pro hacvice)600 B Street, Suite 1500San Diego, CA 92101Telephone: 619-233-4565Facsimile: [email protected]@[email protected]@scott-scott.com

SCOTT+SCOTT LLPDAVID R. SCOTT156 South Main StreetP.O. Box 192Colchester, CT 06415Telephone: 860-537-3818Facsimile: [email protected]

Lead Counsel

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HOLLAND& HART LLPB. NEWAL SQUYRES (ISB 1621)TED C. MURDOCK (ISB 5431)U.S. Bank Plaza101 South Capitol Blvd., Suite 1400Boise, ID 83702Telephone: 208-342-5000Facsimile: [email protected]@hollandhart.com

Liaison Counsel

Willie C. BriscoeTHE BRISCOE LAW FIRM, PLLCThe Preston Commons8117 Preston Rd., Suite 300Dallas, TX 75225Telephone: 214-706-9314Facsimile: [email protected]

Additional Counsel

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CERTIFICATE OF SERVICE

I hereby certify that on July 13, 2010, I caused the foregoing to be electronically

filed with the Clerk of the Court using the CM/ECF system which will send notification

of such filing to the e-mail addresses denoted on the Electronic Mail Notice List, and I

hereby certify that I caused the foregoing document or paper to be mailed via the United

States Postal Service to the non-CM/ECF participants indicated on the Manual Notice

List.

I certify under penalty of perjury under the laws of the United States of America

that the foregoing is true and correct. Executed on July 13, 2010.

/s/ Walter W. Noss Walter W. Noss (pro hac vice)SCOTT+SCOTT LLP600 B Street, Suite 1500San Diego, CA 92101Telephone: 619-233-4565Facsimile: [email protected]

An Attorney for Lead Plaintiffs

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Case 2:09-cv-00659-EJL-CWD Document 61 Filed 07/13/10 Page 1...

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