Robert E Lifson, et al. v. Assisted Living Concepts, Inc., et al. 12-CV-00884-Amended Complaint

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN

ROBERT E. LIFSON, individually and on behalf of all others similarly situated,

Plaintiff,

v.

ASSISTED LIVING CONCEPTS, INC and LAURIE A. BEBO,

Defendants.

Case No. 12-C-884

CLASS ACTION

AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

DEMAND FOR JURY TRIAL

Case 2:12-cv-00884-JPS Filed 02/15/13 of 113 Document 36

TABLE OF CONTENTS

Page

I. INTRODUCTION .............................................................................................................. 1

II. NATURE AND SUMMARY OF THE ACTION .............................................................. 2

III. JURISDICTION AND VENUE ......................................................................................... 7

IV. THE PARTIES.................................................................................................................... 8

A. Lead Plaintiff .......................................................................................................... 8

B. Defendants .............................................................................................................. 8

V. CONFIDENTIAL WITNESSES ........................................................................................ 9

VI. DEFENDANTS’ VIOLATIONS OF THE FEDERAL SECURITIES LAWS............................................................................................................................... 14

A. Company Background .......................................................................................... 14

B. ALC Adopts Aggressive “Private Pay” And Expansion Strategy While Simultaneously Slashing Costs .................................................................. 15

C. The CaraVita Lease With Ventas Realty .............................................................. 18

D. Violations Of The CaraVita Lease Covenants ...................................................... 19

1. The State Regulatory Violations ............................................................... 19

a) Tara Plantation (Georgia) ..............................................................20

b) Peachtree Estates (Georgia) ...........................................................22

c) CaraVita Village (Alabama) ..........................................................26

d) Highland Terrace (Florida) ............................................................28

e) Winterville (Georgia) .....................................................................33

f) Greenwood Gardens (Georgia) ......................................................37

g) The Sanctuary At Northstar (Georgia) ...........................................38

h) Additional Pervasive Regulatory Violations .................................40

2. Defendants’ Additional CaraVita Lease Violations ................................. 49

E. Investors Begin To Learn The Truth .................................................................... 54

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VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS ................................................................................ 60

A. Fourth Quarter and Year-End 2010 ...................................................................... 61

B. First Quarter 2011 ................................................................................................. 65

C. July 21, 2011 SEC Correspondence Regarding ALC’s Compliance With CaraVita Lease Covenants ........................................................................... 68

D. Second Quarter 2011............................................................................................. 70

E. Third Quarter 2011 ............................................................................................... 73

F. Fourth Quarter and Year-End 2011 ...................................................................... 76

VIII. ADDITIONAL SCIENTER ALLEGATIONS ................................................................. 79

A. The 2011 SEC Correspondence ............................................................................ 79

B. State Inspection Reports, Citations, And Notices Of Revocation ........................ 79

C. Termination Of Bebo “For Cause” ....................................................................... 82

D. The Ventas Litigation And $100 Million “Settlement” ........................................ 83

E. Defendants Closely Monitored Regulatory Violations At ALC Facilities................................................................................................................83

F. Defendants Closely Monitored Occupancy Levels As One Of ALC’s “Most Important Key Performance Indicators” ........................................ 90

IX. LOSS CAUSATION ......................................................................................................... 95

X. CLASS ACTION ALLEGATIONS ............................................................................... 101

XI. THE APPLICABILITY OF PRESUMPTION OF RELIANCE: THE FRAUD ON THE MARKET DOCTRINE .................................................................... 103

XII. CLAIMS FOR RELIEF .................................................................................................. 106

FIRST CLAIM FOR RELIEF For Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5(b) Against ALC And Bebo............................................................ 106

SECOND CLAIM FOR RELIEF For Violation Of Section 20(a) Of The Exchange Act Against ALC And Bebo .......................................................................... 108

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I. INTRODUCTION

Court-appointed Lead Plaintiff, the Pension Trust Fund For Operating Engineers (“The

Pension Trust Fund” or “Lead Plaintiff”), brings this action individually and on behalf of all

persons and entities who purchased or otherwise acquired the publicly-traded Class A common

stock of Assisted Living Concepts, Inc. (“ALC” or the “Company”) between March 4, 2011 and

August 6, 2012, inclusive (the “Class Period”), and were damaged thereby (collectively, the

“Class”). Excluded from the Class are Defendants (as set forth herein), present or former

executive officers of ALC and their immediate family members (as defined in 17 C.F.R.

§ 229.404, Instructions (1)(a)(iii) and (1)(b)(ii)).

Lead Plaintiff alleges the following based upon personal knowledge as to itself and its

own acts and upon information and belief as to all other matters. Lead Plaintiff’s information

and belief is based on, inter alia, the independent investigation of Court-appointed Lead

Counsel, Bernstein Litowitz Berger & Grossmann LLP. Lead Counsel’s investigation included

but was not limited to, a review and analysis of: (i) public filings with the Securities and

Exchange Commission (“SEC”) by ALC; (ii) research reports by securities and financial analysts

regarding ALC; (iii) transcripts of ALC investor conference calls; (iv) press releases and media

reports; (v) economic analyses of the historical movement, pricing and trading data for publicly-

traded ALC common stock; (vi) publicly-available filings in legal actions brought against and

among ALC and Bebo; (vii) consultations with relevant experts; (viii) interviews with former

employees of ALC; and (ix) other publicly-available material and data identified herein. Lead

Counsel’s investigation into the factual allegations contained herein is ongoing, and many of the

relevant facts are known only by the Defendants named herein, or are exclusively within their

custody or control. Lead Plaintiff believes that substantial additional evidentiary support will

exist for the allegations set forth herein after a reasonable opportunity for discovery.

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II. NATURE AND SUMMARY OF THE ACTION

1. This is a securities fraud class action against one of the nation’s largest senior

assisted living providers, Assisted Living Concepts, Inc., and its former President and Chief

Executive Officer (“CEO”), Laurie A. Bebo (“Bebo”). According to the Company, ALC operates

more than 200 assisted living facilities with over 9,000 units in 20 states, and provides housing

and assistance with residents’ daily living needs, such as eating, bathing, dressing, and

medication management. ALC operates within a highly-regulated industry and its facilities are

subject to numerous health, safety and other code requirements, as well as frequent and regular

inspections by state regulators. Certain of ALC’s facilities also include a special unit known as

“memory care” unit, which provides more intensive services and security for residents with

Alzheimer’s disease, dementia and other mental impairments and, accordingly, are subject to

even stricter regulatory requirements.

2. This action arises from Defendants’ false and misleading statements regarding

ALC’s compliance with state regulatory and other requirements, as well as certain occupancy

and operating covenants in a master lease agreement between ALC and Ventas Realty, Limited

Partnership (“Ventas”), governing eight separate ALC-operated senior living facilities located in

Georgia, Alabama, South Carolina and Florida, which collectively accounted for approximately

15% of the Company’s entire business (the “CaraVita Lease”). Although Defendants repeatedly

assured investors that ALC was in compliance with all terms of the master lease agreement with

Ventas – including, in particular, ALC’s compliance with state and federal regulations sufficient

to maintain its operating licenses for all Ventas-leased facilities – in truth, health department

officials in those states found serious and systematic health and safety code violations warranting

permanent revocation of ALC’s operating licenses. Unbeknownst to investors (or to Ventas),

ALC’s facilities were subject to numerous undisclosed and uncorrected citations for serious

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regulatory violations prior to and throughout the Class Period. Alabama regulators, for example,

found that deficiencies at one ALC facility – which were detailed in an 85-page narrative listing

numerous, repeated willful violations dating back to 2009 – put “residents at serious risk for

physical and emotional harm” such that ALC’s operating license should be revoked. Georgia

regulators also notified the Company that it intended to revoke its operating license after

determining that ALC’s practices, which had led to at least one death, posed “ an imminent and

serious threat to the physical and emotional safety to persons in care. ”

3. Defendants also made false and misleading statements about the success of the

Company’s aggressive “private pay” strategy, adopted in 2006, to shift its customer base from

residents participating in subsidized care programs (such as Medicaid) to “private pay” residents,

increase ALC’s capacity through acquisition and expansion, and improve margins by

dramatically cutting costs. Throughout the Class Period, Defendants repeatedly touted the

Company’s strong financial performance and quarter-over-quarter growth, including ALC’s

“record” operating margins for the fourth quarter of 2011, which led to the Company reporting

net income of $7.3 million, a 35% increase over earnings reported just one year earlier.

Defendants attributed ALC’s financial performance to the success of the private pay strategy,

which Defendants repeatedly assured investors would achieve costs savings in a manner that

would “maintain or improve the quality of care ” provided at ALC facilities. Indeed,

Defendants claimed in SEC filings that one of ALC’s primary competitive advantages, was that

“the staffing model of our residences . . . emphasizes the importance we place on delivering

quality care to our residents, with a particular emphasis on preventive care and wellness .”

Similarly, throughout the Class Period, Defendants touted the Company’s reported occupancy

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data, including the percentage of private pay residents, information the Company deemed one of

the “most important key performance metrics” for ALC executives and investors.

4. In truth, ALC’s private pay strategy was an abysmal failure. Practically all of

ALC’s regulatory violations – and violations of the Ventas lease covenants – were driven by the

Company’s corporate-level directive to reduce costs. For example, in citing to inadequate

staffing levels that endangered resident welfare, state inspection reports recounted statements

from ALC employees who explained, for example, that “they [ALC’s corporate office] are so

concerned about the hours worked” that “the corporate office does not allow [the facility] chef

sufficient man hours to clean up” after meals, and that “the Regional Director of Operations for

the Alabama facility refused to provide CPR training for facility staff, and required that

employees pay for such training out of their own pockets.”

5. Additionally, while Defendants claimed that ALC was increasing its private pay

occupancy rates throughout the Class Period, in fact, Defendants were deliberately and

systematically overstating and falsifying ALC’s occupancy data by including rooms occupied by

employees and third-parties as bona fide rentals, and other misconduct that inflated and falsified

ALC’s occupancy information provided to Ventas, the SEC, and investors. Moreover, as ALC

later admitted in its 2011 Annual Report on Form 10-K filed with the SEC on March 12, 2012,

the “private pay strategy” actually “ resulted in a significant number of unoccupied units .”

6. Numerous former ALC employees who were interviewed by Lead Counsel as

confidential witnesses (as described below) in connection with this Complaint confirm that, as a

direct and foreseeable result of the Company’s private pay strategy, cost-cutting measures and

staff reductions, ALC received hundreds of citations for health and safety code violations, notices

of license revocation and rising consumer complaints, which were not promptly addressed. ALC

4


ultimately was subject to state regulatory actions and citations in seventeen of the twenty states

in which it operates, an SEC investigation, a lawsuit by Ventas and other civil litigation. The

Company was forced to buy out all of the properties previously leased from Ventas – paying

150% more than ALC’s own estimated fair market value for the properties – plus $3 million

and Ventas’ litigation expenses, for a total of more than $100 million , to resolve the Ventas

lawsuit, effectively wiping out ALC’s profits for the entire prior year.

7. On May 3, 2012, the Company launched an internal investigation into reports that

ALC had submitted fraudulent occupancy information and other “irregularities with the

Company’s lease with Ventas.” Shortly thereafter, ALC’s Vice President and Medical Director,

Dr. Mark Schaten, who reported directly to Bebo and described himself as a “key member of

[ALC’s] Senior Leadership Team,” together with an ALC Corporate Nurse, shredded resident

treatment records at the ALC/Ventas facility, Peachtree Estates, in Georgia. According to a

former Peachtree Estates employee, another ALC employee notified Georgia regulators of the

shredding.

8. Just weeks later, on May 29, 2012, ALC’s Board fired its President and CEO,

Bebo, “for cause.” According to former ALC employees, Bebo was abruptly “escorted” out of

the Company’s Menomonee Falls headquarters the same day she was fired. One analyst who

followed ALC throughout the Class Period cited Bebo’s departure, the “negative image” of the

Ventas lawsuit and “related improprieties” as reasons for downgrading the Company, writing the

“sudden departure of CEO is never a good thing and it is unlikely near term performance will

exceed expectations.” 1 Dr. Schaten was also fired by ALC in June 2012, shortly after Bebo.

1 Emphasis added throughout unless otherwise specified.

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9. Bebo has since sued the Company seeking more than $2.4 million in severance

pay and other termination payments, as well as indemnification and payment of defense costs in

this and other pending litigation and proceedings. In its SEC filings, ALC has explicitly reserved

its rights to file a counterclaim against Bebo , “including for matters related to her conduct and

performance in her capacity as CEO of ALC .” Bebo also filed a complaint with the U.S.

Department of Labor against ALC under the “whistleblower” provisions of the Sarbanes-Oxley

Act of 2002, claiming her “termination was in retaliation for her suggestion that the Company

disclose that the reason for the delay in its earnings report and earnings call, announced on

May 3, 2012 [sic], was the . . . litigation with Ventas.”

10. As the market began to learn the truth about Defendants’ Class Period

misstatements regarding ALC’s compliance with the Ventas lease, the failure of its private pay

strategy, and the Company’s true financial and operating condition, ALC’s stock price

plummeted more than 64% from its Class Period high of $19.57 2 to a low of $7.89 on August 7,

2012, following the Company’s announcement of the SEC investigation – causing a total market

capitalization loss of $233 million .

11. The market’s response to revelations of Defendants’ misconduct is demonstrated

graphically below.

2 Adjusted for two-for-one stock split on May 2, 2011.

6


Assisted Living Concepts Inc. (NYSE: ALC)

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III. JURISDICTION AND VENUE

12. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and SEC

Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.

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

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

14. Venue is proper in this District pursuant to 28 U.S.C. Section 1391(b) and Section

27(a) of the Exchange Act because, at all relevant times, ALC has conducted business in this

District and has maintained its principal executive office in this District at W140 N8981 Lilly

Road, Menomonee Falls, Wisconsin, and because many of the false and misleading statements

were made in or issued from this District.

15. In connection with the acts alleged in this Amended Complaint For Violation Of

The Federal Securities Laws (“Complaint”), defendants, directly or indirectly, used the means

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and instrumentalities of interstate commerce, including but not limited to the mails, interstate

telephone communications and the facilities of the national securities markets.

IV. THE PARTIES

A. Lead Plaintiff

16. The Pension Trust Fund for Operating Engineers was appointed by the Court as

Lead Plaintiff by Order dated November 14, 2012. See Nov. 14, 2012 Order [ECF No. 16]. The

Pension Trust Fund is a defined benefit plan based in Alameda, California that represents the

pension and retirement interests of more than 40,000 participants who are primarily heavy

equipment operators through Northern California, Northern Nevada, Utah and Hawaii. As set

forth in the certification previously filed with this Court on October 29, 2012, and as

incorporated by reference herein, the Pension Trust Fund purchased 25,000 shares of ALC Class

A common stock during the Class Period and has been damaged thereby. The Pension Trust

Fund suffered losses of more than $173,000 from its purchases of ALC Class A common stock

during the Class Period. Lead Plaintiff has reviewed this Complaint and authorized its filing.

B. Defendants

17. Defendant Assisted Living Concepts, Inc. is a Nevada corporation with its

principal place of business at W140 N8981 Lilly Road, Menomonee Falls, Wisconsin. ALC was

founded in 1994, acquired by Extendicare Health Services, Inc. (“Extendicare”) in 2005, and

spun-off by Extendicare as a publicly-traded company in 2006. According to the Company, ALC

together with its subsidiaries currently operates over 200 senior living residences comprising

more than 9,000 units in 20 states, with each senior living facility typically consisting of 40 to 60

units. ALC claims to offer housing and general services, which include meals, activities,

laundry, and housekeeping; support services, including assistance with medication, monitoring

health status, coordination of transportation; and coordination with physician offices and

8


personal care, such as dressing, grooming, and bathing. The Company’s Class A common stock

trades on the New York Stock Exchange under the symbol “ALC.”

18. Defendant Laurie A. Bebo (“Bebo” or, together with ALC, “Defendants”) was

ALC’s President and CEO from November 2006 until she was fired by ALC “for cause” in May

2012. Bebo also served as a Director on ALC’s Board from May 2008 to July 2012. Prior to

becoming President and CEO, Bebo served as Chief Operating Officer of ALC from February

2005 to November 2006. From 1999 through 2006, Bebo also served in various management

positions at Extendicare, including Chief Operating Officer, Senior Vice President, Vice

President Sales & Marketing; Vice President Assisted Living Operations; and Area Vice

President. Bebo was ALC’s highest paid executive, earning total compensation valued at

$1,359,872 in 2010 and $1,449,140 in 2011. Due to her high-level management position as the

President and CEO of ALC and her day-to-day involvement in the management and operations

of the Company, Bebo knew or recklessly disregarded that the Company was at all times during

the Class Period subject to numerous regulatory violations, citations and notices of revocation, in

violation of the CaraVita Lease covenants, and falsely recording units leased to and/or occupied

by ALC employees and third parties as occupied by bona fide assisted living residents, among

other adverse facts. Despite her knowledge or reckless disregard of these undisclosed facts,

Bebo made materially false and misleading statements and omissions during the Class Period.

V. CONFIDENTIAL WITNESSES

19. The allegations herein are supported, in part, by first-hand accounts of

confidential witnesses, including persons who were employed by ALC during the Class Period.

As set forth below, the confidential witnesses were each in a position to know the information

alleged, and many corroborate the allegations of one another as well as information that is

9


publicly available, such as the statements of deficiencies from state regulators. The confidential

witnesses have been identified with particularity but without disclosing identities in order to

address concerns about retaliation or career injury:

a) Confidential Witness 1 (“CW1”) worked for ALC and its former parent

Extendicare for approximately twenty-five years, most recently serving as a VP of Human

Resources at ALC from 2006 through November 2011 at ALC’s Menomonee Falls headquarters,

during which time CW1 reported directly to Bebo, and participated in weekly meetings and had

daily communications with Bebo and other top executives at the Company.

b) Confidential Witness 2 (“CW2”) is a former Regional Accountant at

ALC’s headquarters from June 2008 to January 2012. CW2’s job was not limited to any

particular region, despite the title, and included accounting responsibilities for all ALC facilities.

CW2 reported directly to ALC Assistant Controller, Anthony “Tony” Ferreri, but also reported to

John Lucey, ALC’s Director of Financial Reporting, and Walter “Wally” Levonowich

(“Levonowich”), ALC’s Controller.

c) Confidential Witness 3 (“CW3”) is a former Accounts Payable

Coordinator and Payroll Specialist at ALC’s headquarters from September 2009 to September

2012. CW3 reported to Angie Toniazzo, who initially was the Accounts Payable Manager, and

then became Payroll Manager. CW3 also reported to Kevin Graber, another Payroll Manager

who left in early 2011, and Joey Williams later in 2011.

d) Confidential Witness 4 (“CW4”) is a former Billing Supervisor at ALC’s

headquarters from August 2008 until November 2011. CW4 was in the Accounts Receivable

Department handling bills and interacting with customers. CW4’s direct supervisor was Wally

Levonowich, Controller, and CW4 also reported up to Bebo.

10


e) Confidential Witness 5 (“CW5”) is a former ALC Regional Director of

Operations for the Southeast Region, which included the Ventas facilities subject to the CaraVita

Lease, from mid-to-late October 2011 to June 2012. CW5 reported to Jared Houck (“Houck”),

Senior Vice President (“VP”) of Operations, who reported directly to Bebo. Beginning about

February 2012, CW5 had increasingly frequent contact with Bebo, mainly concerning “that mess

in Dalton” ( i.e. , the Peachtree Estates facility). CW5 testified on behalf of Peachtree to the

Georgia Department of Community Health (“GDCH”) in early December 2012, and also

provided testimony regarding ALC’s Tara Plantation facility.

f) Confidential Witness 6 (“CW6”) worked for ALC from March 2011 to

May 2012, first as Regional Director of Sales & Marketing for the Southeast Region, reporting to

Kathy Bucholtz (“Bucholtz”), VP of Sales & Marketing, and to Houck. In December 2011, CW6

became residence director for ALC’s Winterville Retirement Center in Winterville, GA.

g) Confidential Witness 7 (“CW7”) was a Regional Director of Sales for the

Southeast region of ALC, including all of the Ventas properties, for about 9-10 months, until

August 2009. CW7 reported to Bucholtz, who reported to Bebo.

h) Confidential Witness 8 (“CW8”) was the Executive Director at Peachtree

Estates in Dalton, GA for over one year from 2008 to 2009. CW8 reported to Houck, interacted

frequently with Bucholtz, and participated in conference calls with Bebo.

i) Confidential Witness 9 (“CW9”) was the Sales and Marketing Director for

Peachtree Estates from January 2009 to July 2010. CW9 reported directly to Carla Yonadi

(“Yonadi”), until Yonadi’s departure, and then to Jenny Powers-McCullen. CW9 reported that

employee turnover at ALC was “high” and, in fact, CW9’s 18-month tenure was the longest

employment term of any ALC Sales and Marketing Manager.

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j) Confidential Witness 10 (“CW10”) was a Residence Sales Manager at

Peachtree Estates between October 2011 and April 2012, and continued to visit the facility

virtually every day thereafter to visit his mother-in-law, a resident. CW10 confirmed that

problems at Peachtree were reported to ALC management in conference calls, including calls

with Dennis Stamey (“Stamey”), a Regional Director of Operations for the Southeast Region,

and occasionally Houck.

k) Confidential Witness 11 (“CW11”) was the Residence Director at

Peachtree Estates from November 2010 to April 2011 and reported to Stacy Cromer (“Cromer”)

CW11’s responsibilities included hiring employees and oversight of the facility’s operations,

including the residents’ well-being, dietary and nursing needs, staffing and sales.

l) Confidential Witness 12 (“CW12”) worked as an Executive Director at

ALC’s Tara Plantation facility from December 2009 until May 2011, before moving to

Greenwood Gardens as Executive Director until December 2011. CW12 was responsible for

maintaining the general well-being of the community. Furthermore, the Executive Director or

Administrator was responsible for ensuring the facility complied with state regulations.

Executive Directors reported to the Regional Director, and the Regional Directors reported to

corporate headquarters. CW12 reported to Stamey and, previously, to Cromer, who both relayed

information reported by CW12 to corporate headquarters.

m) Confidential Witness 13 (“CW13”) was employed by ALC as Executive

Director of Greenwood Gardens from December 2011 through March 2012. CW13 reported to

Stamey who reported to Houck who in turn reported to Bebo.

n) Confidential Witness 14 (“CW14”) worked at the Winterville facility from

January 2012 until October 2012. CW14 served as the facility’s Wellness Director from January

12


until May, 2012, and then worked as Interim Residence Director following the Residence

Director’s departure from May 2012 until October 2012. As Wellness Director, CW14 reported

to the Regional Nurse, Terry Kennedy (“Kennedy”), and later to Rex Bell, who had been

Kennedy’s assistant. As Residence Director, CW14 reported initially to Stamey and later to Tim

Cook, who took over after Stamey left in or around June 2012.

o) Confidential Witness 15 (“CW15”) was employed as a Registered Nurse

(“RN”) and Wellness Director at ALC’s The Sanctuary At Northstar from February 2011 until

May 2011, and reported to the Residence Director, Courtney Legg (“Legg”), the Southeast

Director, and to Kennedy. CW15 was responsible for the care of residents.

p) Confidential Witness 16 (“CW16”) was employed as an Administrator at

ALC’s Highland Terrace facility during the Class Period, and reported to Stamey. CW16 was

responsible for managing and overseeing the facility.

ci) Confidential Witness 17 (“CW17”) was a Regional Director of Operations

at ALC for the Mount Hood Region from approximately October 2010 to August 2011. CW17

oversaw 10 facilities, but at various points, covered all 30 of the communities in western

Washington and Oregon. CW17 reported first to Lori Colwell (“Colwell”) and then to Tim

Dunne (“Dunne”) starting around March or April, but also spoke with Bebo regularly. Colwell

and Dunne were Senior Regional Directors of Operations who reported directly to Houck who in

turn reported to Bebo.

r) Confidential Witness 18 (“CW18”) is a former Residence Sales Manager

for Assisted Living Concepts in Nebraska, from August 2011 to November 2012, reporting to

Susan Richards and Patty Stickman, Regional Directors of Sales & Marketing, and at times to

Bucholtz.

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VI. DEFENDANTS’ VIOLATIONS OF THE FEDERAL SECURITIES LAWS

A. Company Background

20. ALC was founded as a privately-held Nevada corporation in 1994 and operated as

an independent company until January 31, 2005, when it was acquired by Extendicare. At that

time, ALC operated 177 assisted living residences in 14 states with a total of 6,838 units.

21. Following its purchase of ALC, Extendicare consolidated its assisted living

operations with ALC’s and reorganized ALC’s internal reporting structure and operations to

include previously owned Extendicare assisted living residences. ALC subsequently purchased

29 assisted living residences from Extendicare, consisting of 1,412 units, and purchased an

additional assisted living facility in Michigan consisting of 40 units from an unrelated third party.

By the end of 2006, ALC operated a total of 8,535 units.

22. On November 10, 2006, ALC was spun off from Extendicare Inc. (now

Extendicare Real Estate Investment Trust, a Canadian real estate investment trust) and became an

independent, publicly-traded company after shares of ALC’s Class A and Class B common stock

were distributed by its parent. The Company continued to expand, acquiring additional assisted

living facilities and building out capacity at existing facilities. By the end of December 2010,

ALC operated 211 residences with a total of 9,305 units located in 20 states. ALC owned 161 of

these residences outright and operated 50 residences under various leases.

23. The assisted living services industry is highly regulated due to the particularly

vulnerable population it serves. Indeed, ALC repeatedly acknowledged in its SEC filings the

importance of maintaining its good standing with state licensing agencies. For example, the

Company stated in its annual report on Form 10-K for the year ended December 31, 2010:

State licensing agencies regulate certain of our operations and where applicable monitor our compliance with a variety of state and local laws governing licensure, changes of ownership, personal and nursing services, accommodations,

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construction, life safety, food service, and cosmetology. Generally, the state oversight and monitoring of senior living operators has been less burdensome than experienced in the skilled nursing industry. Areas most often regulated by these state agencies include:

• Qualifications of management and health care personnel;

• Minimum staffing levels;

• Dining services and overall sanitation;

• Personal care and nursing services;

• Assistance or administration of medication/pharmacy services;

• Residency agreements;

• Admission and retention criteria;

• Discharge and transfer requirements; and

• Resident rights.

24. ALC also reported that its residences were subject to “periodic unannounced

surveys by state and other local government agencies to assess and assure compliance with the

respective regulatory requirements” and/or following a state’s receipt of a complaint regarding a

residence. “If one of our residences is cited for alleged deficiencies by the respective state or

other agencies, we may be required to implement a plan of correction within a prescribed

timeframe.” Defendants further claimed that “[u]pon notification or receipt of a deficiency

report, our regional and corporate teams assist the residence to develop, implement and submit

an appropriate corrective action plan.” Defendants assured investors that “[m]ost state citations

and deficiencies are resolved through the submission of a plan of correction that is reviewed and

approved by the state agency” and “[t]he survey team will conduct a re-visit to validate

substantial compliance with the state rules and regulations.”

B. ALC Adopts Aggressive “Private Pay” And Expansion Strategy While Simultaneously Slashing Costs

25. Beginning in 2006, ALC embarked on a strategy to expand and add facilities,

while also reducing the number of Medicaid and other government-subsidized residents and

15


attempting to increase the number of private pay residents. Private pay residents are those who,

individually or through a responsible party (e.g. , family member), pay ALC directly, as opposed

to residents who depend upon funding from various state Medicaid or veterans’ programs for

payments of service fees. The strategy was intended by ALC to increase both revenues and

profitability by increasing private pay occupancy in response to “tightened state budgets,” which

reduced or froze altogether annual increases in Medicaid payments. According to ALC, in a

statement contained in its 2010 Annual Report on Form 10-K filed with the SEC on March 10,

2011:

In recent years, as state budgets have tightened, Medicaid annual rate increases for home and community-based services have decreased and in some instances rates have been frozen or have declined for several years. In order to reduce our reliance upon Medicaid funding, over the last year we decreased the number of our residences participating in the Medicaid program by approximately 56%. Medicaid revenues represented 2%, 5% and 8% of our overall revenues for 2010, 2009 and 2008, respectively.

26. In 2007, the Company also announced a plan to expand its capacity by adding a

total of 400 units to its existing portfolio of owned residences. Under the plan, ALC completed,

licensed and began accepting new residents in 78, 244, and 25 units in 2008, 2009 and 2010,

respectively, adding a total of 347 units at a cost of approximately $113,000 per unit. At year-

end 2010, ALC confirmed that it would add an additional 20 units in the first quarter of 2011.

27. As a result of ALC’s private pay strategy, according to Defendants, the proportion

of ALC residents who paid through Medicaid dropped from 29.8% to 7.2% between December

31, 2005 and December 31, 2009. Analysts applauded the Company’s efforts to grow its

facilities and transition to higher margin private pay residents, while cutting costs. For example,

in an analyst report dated March 7, 2011, following ALC’s announcement of its 2010 year-end

results and ranking ALC “Market Outperform” while increasing its stock price target, analyst

Lawrence Solow, CFA, of CJS Securities commented:

16


Q4 results were in line with expectations with double digit growth in earnings driven by modest revenue growth, a continued shift to higher margin private pay (98% of revenue) and cost controls at the facility and corporate level.

* * * *

Margins and profitability have expanded substantially over the last several years despite declining occupancy as mix has dramatically shifted towards an all private pay, and much more profitable, business model.

28. However, the Company was unable to proportionally increase its private pay

residents. In fact, private pay occupancy actually declined throughout the Class Period. For

example, the average private pay occupancy for the year ended 2009 declined by eighty-nine

units compared to the prior year. Indeed, as ALC itself admitted in its 2011 Annual Report on

Form 10-K filed with the SEC on March 12, 2012, the “private pay strategy” “resulted in a

significant number of unoccupied units.” According to ALC’s SEC filings, since the Company

adopted its “private pay strategy” in 2006, the overall average occupancy rates for ALC facilities

declined steadily from 85% at the commencement of the campaign in 2006 to 79% in 2007, with

further reductions to 69.1% in 2008, 64.2% in 2009, 62.5% in 2010, and finally 62.4% as of

December 31, 2011.

29. Moreover, unbeknownst to investors, the Company’s simultaneous efforts to

reduce costs and increase margins resulted in an overall decline in the quality of care provided to

residents. ALC principally reduced costs by reducing headcount and hiring fewer and less

qualified employees to provide care, which caused the coverage ratio (ratio of care providers to

residents) and overall care quality to dramatically decline. Consequently, the Company

experienced a significant increase in the number of complaints to, and citations from, state

regulatory agencies, none of which was disclosed to investors.

30. CW1, a VP of Human Resources at ALC from 2006 through November 2011,

confirmed that staffing was consistently a Company-wide issue as “turnover was very high” due

17


to cost-cutting measures, staffing cuts, pressure to increase sales, and “how people were treated”

by ALC. Bebo would “push the envelope” and “sometimes the envelope was beyond where it

should be.” In short, staffing was an area where cost savings came at the expense of safety. As

complaints and regulatory citations mounted, the Company simply forfeited their assisted living

licenses and converted facilities to less regulated “independent living” centers.

31. CW1 and other confidential witnesses further confirm that Bebo drove all cost-

cutting decisions. “Everything was Laurie Bebo’s directive . . . . You could be talking about a

nickel raise to an hourly wage [employee], and she’d have to sign off on it.” There wasn’t much

that happened or got approved that didn’t go through her. “Nothing happened without Laurie’s

fingerprints on it.”

32. CW1 further confirmed that regulatory violations and, particularly, occupancy

were discussed in great detail – down to the specific residents at each facility – during the

executives’ weekly Monday morning meetings led by Bebo, which typically lasted several hours.

C. The CaraVita Lease With Ventas Realty

33. In furtherance of the Company’s expansion efforts, in January 2008, ALC entered

into a master lease agreement with Ventas pursuant to which ALC leased from Ventas eight

separate senior living facilities located in Georgia, Alabama, South Carolina and Florida

comprising 541 units. The CaraVita Lease was signed by Bebo on behalf of ALC and its

operating subsidiaries. Seven of the leased facilities offered combined Alzheimer’s care/assisted

living facilities, referred to in the industry as a “memory care” unit. The Company announced

the CaraVita Lease in a press release dated January 2, 2008, and filed a Form 8-K Notice of

Entry into a Material Definitive Agreement with the SEC on January 7, 2008.

18


34. Pursuant to the terms of the CaraVita Lease, ALC agreed that an event of default

at any one of the leased facilities would trigger an “Event of Default” by the entire portfolio of

eight leased facilities.

D. Violations Of The CaraVita Lease Covenants

35. Throughout the Class Period, ALC failed to comply with and was in violation of

numerous CaraVita Lease covenants, including to:

• Obtain and maintain any and all licenses, permits, or other governmental authorizations required for the operation of the facilities for their intended use;

• Comply with all applicable laws and keep all authorizations in full force and effect;

• Maintain quarterly occupancy of at least 65% and trailing a twelve month occupancy of at least 75% at each facility;

• Make a continuing warranty that there would be no threatened, existing or pending revocation, suspension, or termination of any Authorization; and

• Notify Ventas promptly after ALC obtains knowledge of any threatened or existing investigation of any leased facility that may affect the right to operate one or more of the leased facilities or any of the Authorizations.

36. Defendants’ numerous undisclosed breaches of the CaraVita Lease and regulatory

violations, and fraudulent misrepresentations regarding ALC’s reported occupancy rates, are

detailed below.

1. The State Regulatory Violations

37. Throughout the Class Period, ALC violated the CaraVita Lease and made false

and misleading statements to investors by committing numerous uncorrected and unreported

violations of various state health and safety code regulations, which ultimately led the GDCH to

take action to revoke the licenses of ALC’s Tara Plantation and Peachtree Estates facilities, and

the Alabama Department of Public Health (“ADPH”) to take action to revoke the license of

ALC’s CaraVita Village facility.

19


38. Defendants did not disclose to investors that ALC had received those revocation

notices or its long history of mounting citations. Instead, Defendants repeatedly (falsely) assured

investors during the Class Period that ALC was in compliance with all occupancy and operating

covenants of the CaraVita Lease and the risk of breach was unlikely. Investors only learned of

Defendants’ numerous breaches of the CaraVita Lease when the Company subsequently

disclosed its litigation with Ventas. Moreover, throughout the Class Period, Defendants were

aware of, and failed to remedy, numerous regulatory violations at ALC facilities that remained

undisclosed to Ventas and the investing public, as detailed below.

a) Tara Plantation (Georgia)

39. Tara Plantation is an assisted living facility previously owned by Ventas and

operated by ALC in Cumming, Georgia. The Georgia Department of Human Resources, Office

of Regulatory Services (the “GDHR”) cited Tara Plantation for at least 16 violations of

applicable state laws and regulations during the Class Period. Among other violations, the

facility was cited for failing to have adequate number of staff on duty to properly safeguard the

health, safety and welfare of the residents, failing to obtain criminal history background check of

employees, and failing to comply with fire and safety rules.

40. In addition, just prior to the Class Period, the GDHR cited Tara Plantation for at

least six violations in a March 1, 2011 follow-up visit to the December 9, 2010 annual

inspection, including failing to ensure that it did not admit or retain a resident that needs care

beyond which the facility is permitted to provide, failing to ensure that the memory care unit was

staffed with a licensed registered nurse or licensed practical nurse, and failing to ensure that it

did not admit residents to the memory care until without a physical examination.

41. GDHR issued several statements of deficiencies for Tara Plantation during the

Class Period, which reveal the same violations that were repeatedly cited during multiple

20


investigations in 2010, 2011 and 2012, including (i) insufficient staffing; (ii) retention of

residents that required more care than the facility was capable and allowed to provide; (iii)

inadequate fire safety; and (iv) falsification of documentation related to fire drills. The GDHR’s

January 24, 2012 investigation also found that Tara Plantation failed to maintain sufficient staff

to ensure that residents were protected from injury and given prompt assistance with eating. The

GDHR’s April 2012 investigations found that the facility violated regulations concerning the

notification of adverse changes in condition.

42. On February 13, 2012, the GDCH issued a Notice of Intent to Revoke Permit with

respect to Tara Plantation (the “Tara Plantation Notice”), stating that the facility “was not in

substantial compliance” with applicable rules and was found to have “falsified records

maintained by the facility.” The notice attached a report citing eight regulatory violations, some

of which were repeat violations, including the failure to ensure an adequate number of staff on

duty to properly safeguard the health, safety, and welfare of the residents, the failure to ensure

that the facility did not admit or retain residents that need care beyond that which it is permitted

to provide, the failure to provide a criminal background check for an employee, and the failure to

“comply with fire and safety rules . . . for personal care homes related to false documentation of

evacuation time on the fire drills; failure to rehearse the evacuation of all residents during the fire

drills; faulty fire doors and an unacceptable evacuation time when all the residents participated.”

Finally, the inspection report concluded that “the facility knowingly falsified information on a

document submitted as part of the investigation.”

43. Confidential witnesses confirm that ALC’s executive management was aware of

the numerous regulatory violations at Tara Plantation but refused to address them. For example,

ALC Executives refused to comply with the state requirement that only a licensed practical nurse

21


(“LPN”) dispense medication in memory care. According to CW12, ALC refused to pay for

LPNs in the memory care units at any facility. Instead, the Company instructed CW12 to lie to

the state and claim that Tara Plantation did not have a memory care unit. To avoid discovery of

the memory care unit by state regulators, ALC directed that doors to the unit be left open during

inspections. Cromer, Southeast Regional Director of Operations, came to Tara Plantation and

opened the doors herself, but the residents wandered and one resident tried to leave through the

fire exit. Tara Plantation was ultimately cited by the state for failing to properly staff its memory

care unit. CW12 recalled that that the fine was significant because it went back to the day of the

first citation and was billed per day, and the fine was paid by corporate.

44. There were numerous inspections and complaints by residents’ family members

and disgruntled staff members. About every 30-40 days, a complaint would prompt the state to

investigate. The inspectors were very familiar with ALC and its manipulative practices. Fire

drills were another problem. ALC wanted CW12 to tell regulators that the facility could

evacuate in less than five minutes. CW12 said they could not physically accomplish this, as it

took far longer to evacuate the residents. CW12 stated that, in general, ALC encouraged its

employees to find a way “ to get around state regulation on anything .”

45. CW7 similarly explained that there were residents at Tara Plantation that were

inappropriate for the facility because they needed more care than ALC could provide, including

Alzheimer’s patients. ALC also claimed the ratio of care providers to residents at Tara Plantation

was approximately 1:12; however, that figure was inaccurate because the Company was

including kitchen workers as caregivers.

b) Peachtree Estates (Georgia)

46. Peachtree Estates is a facility previously owned by Ventas and operated by ALC

in Dalton, Georgia. The GDHR cited Peachtree Estates for at least 33 violations of applicable

22


state laws and regulations during the Class Period. Among other violations, the facility was cited

for failing to provide sufficient staffing to properly safeguard the health, safety and welfare of

the residents, failing to maintain incident reports and failing to train staff properly.

47. Additionally, just prior to the Class Period, the GDHR cited Peachtree Estates for

at least 20 violations based on five days of complaint investigations between November 1, 2010

and February 22, 2011. These citations included violations for failing to perform employee

background checks, failing to maintain clean facilities, failing to undertake required fire safety

measures, failing to investigate accidents and injuries, and inappropriately retaining residents in

need of care beyond that which the facility was permitted to provide and training of staff.

48. Between January 24, 2012 and February 17, 2012, the GDHR conducted five days

of onsite visits at the facility, which resulted in repeated citations for the same violations,

including cleanliness, fire safety, investigation of accidents and injuries, retention of residents in

need of care beyond that which the facility was permitted to provide and sufficient staffing to

properly safeguard the health, safety and welfare of residents. The GDHR further found that the

facility failed to provide beds, mattresses, linens, soap and toilet paper to residents. Peachtree

Estates was also cited for failing to cooperate with the investigation.

49. On March 30, 2012, the GDCH sent to ALC Peachtree Estates a “Notice of Intent

to Revoke Permit” (the “Peachtree Estates Notice”). The Peachtree Estates Notice informed

ALC of the GDCH’s intent to revoke the permit to operate Peachtree Estates. The GDCH

determined that “the facility was not in substantial compliance ” with applicable rules and

regulations and that “ the conditions in the facility pose an imminent and serious threat to the

physical and emotional health and safety to persons in care .” The report cited numerous repeat

violations of law, including failure to have sufficient employees on duty, failure “to ensure that

23


no residents were retained who need care beyond which the facility is permitted to provide,”

failure to immediately investigate the cause of an accident or injury of a resident for 76 of 78

incidents, failure to comply with fire exit drill requirements, failure to ensure housekeeping

standards in the Alzheimer’s unit, and failure to provide beds and mattresses for residents.

Finally, the inspection report concluded that “the facility failed to cooperate with an investigation

by providing information regarding resident care.” In May 2012 – approximately one month

after the March 30, 2012, GDH Notice of Revocation – ALC’s VP and Medical Director, Dr.

Schaten, together with an ALC Corporate Nurse, shredded resident care records at the Peachtree

Facility.

50. Confidential witnesses confirm that ALC executives were aware of the numerous

regulatory violations at Peachtree Estates but refused to address them throughout the Class

Period. According to CW10, ALC was aware of many problems; however, the biggest problem

was staffing. “[ALC] didn’t want to keep the number of staff they needed.” Some residents

required a higher level of care than ALC could provide, including those who were bed-ridden or

close to it, which violated state regulations requiring all residents to be independently mobile in

case of emergency. Peachtree Estates had a memory care unit for residents with dementia or

Alzheimer’s; however, there was never any staff trained to work with such patients. As a result,

on May 27, 2012, a memory care unit resident “eloped” and was found walking alone toward the

highway.

51. CW10 and the Residence Director Theresa Coder (“Coder”) discussed staffing

and other problems on conference calls with Stamey and Houck, who reported directly to Bebo.

When it came to adding staff, “[ALC] just didn’t want to spend the money.” Hourly staff was

required to work a certain number of hours per week – usually 35 – and they were also entitled to

24


breaks. They were not paid overtime, even if they worked more than 35 hours. In fact, Coder

asked the staff to punch out and continue working to avoid technically exceeding their paid

hours. As a result, “a lot of staff were turning in resignations.” Dalton had one of the highest

unemployment rates in the country, so the fact that ALC couldn’t keep employees was especially

troubling.

52. Poor training was another problem, which resulted in medication aides lacking

knowledge of basic medications. One aide did not know what Coumadin (common brand name

of the most widely prescribed oral anticoagulant in North America) was, while one Residence

Director had no healthcare experience. The previous Wellness Director, Leisha Wade, left in

April 2012 “out of fear of losing her nurse’s license.”

53. CW11 also confirms that staffing was a big problem, especially in the memory

care unit. Peachtree Estates only had one employee in the memory care unit per shift with 12-14

severely ill people. Once CW11 received notice of the violations, CW11 would fax them to the

Regional Nurse in Atlanta, who would send them to corporate. When the Regional Nurse

received information back from corporate, she would fax the information to CW11. There was

no question that ALC headquarters in Wisconsin was aware of the state issues and citations.

“Corporate was all over it” even though they did not correct the issues. ALC delayed doing

paperwork, falsely promised things would be corrected, and claimed to regulators that their

“local boy” was taking care of it. CW11 thinks the revocation notice was finally issued because

the state only gives facilities so much time to comply.

54. CW5 also had increasing contact with Bebo, beginning about February 2012,

mainly concerning “that mess in Dalton” – i.e. , Peachtree Estates. Bebo visited Peachtree

Estates in late February with Dr. Mark Schaten, then ALC’s VP and Medical Director, and a

25


salesperson from the corporate office. They were there to meet with a local attorney, Gregory H.

Kinnamon (“Kinnamon”), “to address [Kinnamon’s] personal family concerns and [other]

residents’ concerns.” During this visit, Bebo met with CW5 and others to discuss staffing. Bebo

stated that “turnover was good because it saved [ALC] money.” Peachtree Estates kept having

the same problems, and ALC did not fix them. “The problem is that all of [the Ventas facilities]

were grossly mismanaged.” The biggest issue was staffing: “It all came down to staffing.”

“They were only about making a buck.”

55. ALC also routinely asked facility employees to lie to state regulators. For

example, Houck instructed Tim Cook, Southern Division VP, and Peachtree staff to lie to the

state inspector and claim that the facility had “ordered new dining room furniture,” when in fact

no new furniture had been ordered. They showed the inspector an internal purchase order – not

any actual proof of purchase. CW5 could not work with “that kind of dishonesty.”

56. When CW11 joined Peachtree Estates, state regulatory citations had been issued

the previous year and not been corrected. CW11 inherited those legacy citations, and Peachtree

Estates also received approximately twenty-five new citations during CW11’s tenure. The

inspector came multiple times and CW11 had multiple communications with the state, although

the communications had to go through corporate first. CW11 was not aware of past violations

until the state regulator pointed them out. It did not seem that corporate took them seriously.

“Had they taken it seriously, they would have taken care of the violations from the previous

year.” ALC did not handle the violations well and kept drawing the process out.

c) CaraVita Village (Alabama)

57. CaraVita Village is a facility previously owned by Ventas and operated by ALC in

Montgomery, Alabama. The ADPH cited CaraVita Village for at least twenty violations of

26


applicable state laws and regulations during the Class Period, including those relating to

cleanliness, administration of medications, evaluation and assessment of residents, reporting of

incidents and retention of residents in need of care beyond that which the facility was able to

provide.

58. On February 24, 2012 and March 5, 2012, the ADPH conducted investigations

into CaraVita Village and found that the facility failed to remain in compliance with the plans of

correction from previous surveys. Specifically, the ADPH found that seven out of twenty

deficiencies were repeat deficiencies from a complaint survey conducted on July 23, 2009 , and

five out of twenty deficiencies cited were repeat deficiencies from a complaint and probational

survey conducted on February 19, 2010 . The ADPH found that the facility failed to provide a

safe environment for residents by failing to provide sufficient, appropriate staff to meet the care

and safety needs of residents, which resulted in the death of one resident, harm to another and

placed the well-being of all residents at serious risk for harm.

59. On March 27, 2012, the ADPH issued a “Notice of License Revocation Hearing”

(the “CaraVita Notice”). The ADPH determined that the facility “was in violation of the State

Board of Health Rules for Assisted Living Facilities,” and that the “deficiencies are deemed to be

conduct and practices detrimental to the welfare of the residents of this facility.” The CaraVita

Notice attached a Statement of Deficiencies that cited numerous violations, including:

• ALC “failed to implement policies for the management and operation of the facility . . . [and] failed to ensure the administrator complied with the plans of correction from previous surveys . . . . These deficient practices failed to provide all 26 residents living in the facility with a stable and safe environment placing the residents at serious risk for physical and emotional harm ”;

• “[T]he facility failed to ensure sufficient staff were on duty to meet the care needs of the residents and also provide a safe environment for the residents. This deficient practice placed all 26 residents living at the facility at risk for harm”; and

27


• “[T]he facility failed to staff each shift with at least one individual who was certified in CPR. This deficient practice placed all 26 residents living in the facility at serious risk for harm.”

60. The Statement of Deficiencies noted that numerous violations were repeat

deficiencies that had not been corrected since as far back as July 2009 and February 2010.

61. According to CW6, there were certain problems that precipitated the State’s

action in serving the Notice, including a cockroach infestation in March or April 2011 after they

failed to replace the grease trap. It was like a movie, with “huge cockroaches flowing from the

kitchen.” The health inspector went out to the facility the following week and “failed them,”

ordering them to correct the problem within 30 days or their food license would be revoked.

About a week later, a resident’s daughter contacted the State because her mother, who had

Alzheimer’s or dementia, had been moved into the Independent Living (“IL”) section, which was

not appropriate. The IL had “no restrictions,” while Assisted Living (“AL”) was more heavily

regulated. The resident’s daughter knew her mother could not live on her own, so she asked the

State to investigate. In addition, ALC had three other “inappropriate” residents on the AL side.

These findings were “enough to strip the license.”

d) Highland Terrace (Florida)

62. Highland Terrace is a facility previously owned by Ventas and operated by ALC

in Inverness, Florida. The Florida Agency for Health Care Administration (“FAHCA”) cited

Highland Terrace for at least 34 violations of applicable state laws and regulations during the

Class Period. Among other violations, the facility was cited for failing to have adequate staffing

hours for the number of residents, failing to maintain an up-to-date admission and discharge log,

failing to obtain physician-ordered medications, and failing to ensure a physical environment that

provided for the safety and welfare of residents.

28


63. On March 31, 2011, the FAHCA filed an administrative complaint against ALC

seeking to impose a $2,000 fine based upon two Class II deficiencies: (i) the facility failed to

ensure that a resident received care and services appropriate for his needs; and (ii) the facility

failed to provide medications, because the medications were either on order or not on the

medication cart.

64. On April 27, 2011, Mary T. Zak-Kowalczyk (“Zak-Kowalczyk”), ALC’s VP and

Corporate Secretary, signed the Election of Rights disputing the allegations of fact contained in

the Administrative Complaint. On April 27, 2011, Zak-Kowalczyk also wrote the FAHCA

requesting a hearing to appeal the violations and fines assessed against the facility; however, on

May 4, 2011, the FAHCA issued an Order of Dismissal, dismissing the request for hearing

without prejudice because it was untimely filed and because it was legally insufficient. FAHCA

gave the facility the opportunity to amend the hearing request, but ALC did not respond to the

Order of Dismissal. On May 31, 2011, the administrative court adopted the relevant factual

allegations of the Administrative Complaint and the Order of Dismissal, and imposed the

requested $2,000 fine on ALC.

65. On April 8, 2011, the FAHCA conducted an Unannounced Compliance Survey

and determined that Highland Terrace was not compliant with applicable laws and regulations.

Among other violations, staff failed to maintain an up-to-date admission and discharge log, as

not all residents were listed in the log, and failed to obtain physician-ordered medication for

residents. Highland Terrace was cited again for multiple violations in May, July and October

2011 and April 2012.

66. On April 13, 2012, a fire occurred and the entire facility had to be evacuated. The

same day, the FAHCA conducted a survey and found that the facility Highland Terrace was not

29


in compliance with applicable regulations relating to medications. On April 23, 2012, a fire

occurred and the entire facility had to be evacuated. However, the facility was so understaffed

that one resident was left behind during the evacuation process. The fires were subsequently

determined to be arson by an ALC employee. According to Ventas, ALC failed to comply with

the notification covenants in the CaraVita Lease and report these fires and restoration work to

Ventas. See May 14, 2012 First Amended Complaint, Ventas v. ALC CVMA, LLC et al. , No. 12-

CV-3107-RAG (SS) (N.D. Ill.) (“Ventas Complaint”), at ¶52.

67. After the fires, CW5 expected to be sent to Florida to address the crisis, but Bebo

told CW5 to handle it long-distance. Their only concern was paying for the flight, so they said

CW5 could manage it by phone. The only person Bebo and Houck dispatched to the site was the

regional maintenance director, “because their primary concern was the building – that the asset

was preserved.” They eventually did send CW5 to meet with Ventas representative Brian [last

name unknown] in late April or early May 2012. ALC had not reported the fire to Ventas, so

CW5 was sent down to handle the issue with Ventas, because Houck and Bebo “didn’t want to

talk to them.” They also instructed CW5: “Don’t discuss occupancy with these people [ i.e. ,

Ventas].”

68. On April 24, 2012, the FAHCA conducted another survey and found that the

facility was not compliant with applicable regulations, including failing to: have sufficient

qualified staff to securely evacuate the building; provide or arrange for staff training regarding

emergency procedures; ensure a physical environment that provided for the safety and welfare of

the facility’s residents; provide a safe living environment, free of hazards; prepare and implement

a written comprehensive emergency plan; and train all staff in their duties and responsibilities for

implementing the emergency management plan. A May 22, 2012 survey found that the facility

30


was again in violation of applicable regulations. Accordingly, on May 31, 2012, the FAHCA

filed a second administrative complaint seeking to impose a $500 fine. On June 19, 2012, Zak-

Kowalczyk signed the Election of Rights admitting the allegations of facts and law in the

Administrative Complaint. On July 24, 2012, the administrative court imposed the requested

$500 fine on ALC.

69. An August 6, 2012 survey found that the facility was again in violation of

applicable laws and regulations, including failing to: ensure that residents’ health assessment

forms were accurate and complete; respond to residents’ grievances; and ensure that employee

records contained documentation of background screening and required training.


regulatory violations at Highland Terrace but refused to address them throughout the Class

Period. As Administrator, CW16 tried to make changes, but corporate management wanted to

maintain the status quo despite their knowledge of serious “deficiencies” in patient care and

regulatory compliance. CW16 could not get corporate management to address any issues – “they

wouldn’t budge” – so CW16 ultimately resigned on April 10, 2012, after having been there only

three weeks.

71. CW16 described a litany of issues, beginning with “staffing levels which

[endangered] patient safety.” CW16 presented a “list of deficiencies,” including staffing and

non-compliance concerns, to Stamey and Houck. “Corporate would not let me do anything

about it. Houck said, ‘This is the way we do it, this is the way it’s been done.’ He said

absolutely we weren’t going to change the way we did things.” Houck’s messages were clearly

from corporate leadership. CW16 also described missing medications, patients going up to ten

days without medications, dietary and sanitary requirements not being met, bottled water four

31


years out of date, incorrect license numbers on ALC’s advertising information and the wrong

Administrator on ALC’s license. CW16 reported the violations to regulators.

72. CW16 explained that, despite Florida’s regulations, which required a specified

number of hours of care for a certain number of residents, ALC had its “own formula” for

addressing this requirement, involving calculating the number of care hours based on just five

days per week rather than the full seven days per week. “They were just chopping the budget

and cutting costs any way they could.”

73. ALC was also required to have an emergency evacuation plan that, every year,

had to be approved by the EMS system in that area and submitted to state regulators. ALC did

not have an approved emergency evacuation plan. After bringing up the issue to corporate

management, CW16 was told “not to worry about it.” “We don’t worry about these things.”

When state regulators confronted ALC about the lack of an evacuation plan, the Company

submitted a fraudulent plan. Corporate management just changed the date of an older plan,

which had been approved, to make it look current, but it was an “obvious fake.”

74. CW16 talked with Administrators every Friday and found it was the same story at

other facilities. Highland Terrace received citations for lack of education and training of staff,

and lack of an emergency management plan. ALC would not permit Highland Terrace to hire an

in-house RN, so the marketing staff assessed new residents and assigned them a level of care,

even though they lacked the clinical background necessary to make assessments. Some residents

were being assigned lower levels of care than required. As a result, Highland Terrace admitted

residents it should not have admitted because their needs exceeded the highest level of care

offered. For example, one resident with advanced Alzheimer’s was “not compliant” and

“combative” to the point that she would “throw her feces against the wall,” and the facility was

32


neither equipped nor licensed to house a patient in her condition. CW16 told the family she

needed to be in a skilled nursing facility. Houck and other Company leadership got mad and

would not hear it. They told CW16 to clear it through them before changing assessments or

discharging residents.

e) Winterville (Georgia)

75. Winterville is a facility previously owned by Ventas and operated by ALC in

Winterville, Georgia. The GDHR cited Winterville for at least 29 violations of applicable state

laws and regulations during the Class Period. Among other violations, the facility was

repeatedly cited for failing to meet the minimum staffing requirements, failing to ensure that

there were sufficient numbers of trained staff on duty at all times, failing to ensure that it did not

admit or retain a resident who needs care beyond which the facility is permitted to provide, and

failing to ensure that staff received a satisfactory criminal history background check.

76. According to a May 4, 2011 article on wsbtv.com , “Retirement Home Workers

Accused of Beating, Stealing,” the Administrator of Winterville admitted to stealing thousands of

dollars from two residents. Another employee punched an 82-year old female patient in the face

when she attempted to take food off a cart. The resident fell, hit her head and died at the hospital

nine days later. Another employee stole prescription drugs from the facility and tried to sell

them. Winterville’s Police Chief is quoted in the article as saying, “As you know, leadership

works from the top down. If you allow unethical practices you have a slippery slope.”

77. Between May 17, 2011 and May 23, 2011, the GDHR conducted a follow-up

inspection and complaint investigation, which resulted in finding that Winterville failed to ensure

that staff received a satisfactory criminal history background check determination from the local

law enforcement agency, and failed to report an incident of resident exploitation (i.e. missing

narcotics). Subsequently, Winterville was cited for various regulatory violations as a result of

33


inspections in May, June and December 2011 and January and April 2012, including for repeated

failures to obtain background and fingerprint checks on employees.


regulatory violations at Winterville but refused to address them throughout the Class Period.

According to CW5, Houck said ALC was going to close the memory care unit and move the

residents into the assisted living wing, which was inappropriate for persons with dementia and

Alzheimer’s. It was illegal to fail to provide mental supervision to cognitively-impaired people.

ALC staffed at a ratio of one staff person to every fifteen residents and, consequently, Winterville

had just one caregiver in a building that required multiple.

79. ALC tried to skirt this regulation by staffing the minimum level required for low-

needs residents. ALC assessed and assigned residents a number of “points” corresponding to the

level of care required, but assessments were sometimes fabricated. On Friday afternoon, when

sales people were trying to hit their occupancy number for the week, ALC would say: “We’ll

drop the rate.” Consistent with instructions from Houck, they would move residents in at a much

lower level than needed, just to increase occupancy. Later, they would reassess residents, tell

them there was a mistake and that they were a higher-level and would be charged a higher rate.

This was “classic ALC protocol.” As a result, there were numerous residents that were

inappropriate, including they had non-ambulatory residents and residents with care the

community was not licensed to provide.

80. According to CW14, “everything” at Winterville needed fixing. “It was really

bad.” The facility structure had been “severely neglected,” had cracks in the ceilings and walls

and needed a new roof and paint. The carpet was “horrendous and stunk to high heaven.” None

of these problems were addressed. Other ALC/Ventas facilities similarly had many problems.

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According to CW14, Stamey was “overwhelmed” at the number of issues and could not get any

response from corporate beyond “lip service,” which is why Stamey quit.

81. There also were numerous problems with bills that were frequently wrong.

Residents’ family members would ask CW14 why they were billed different amounts from

month to month, even though nothing had changed. CW14 noticed that Houck sometimes

changed the daily rates on bills. Occasionally the Sales & Marketing Manager, after getting the

Regional Sales Manager’s approval, would waive the $1,500 move-in fee for “low-funds

residents” to get them to move in. A couple months later, however, the “$0” was struck out and

changed to $1,500, which appeared on their bill.

82. Cost-cutting began before CW14 began at ALC and they cut staffing

tremendously. ALC also refused to pay its bills and, as result, certain vendors refused to provide

services. For instance, the facility needed some paint work, and CW14 found that they had a

contract with a local painting company; however, the company refused to do work because their

bill had not been paid in six months. According to CW14, Bebo would wait until lawyers came

before paying contractors. She was cutting corners, holding on to “every nickel” and refusing to

sign off on invoices. CW14 said, “From what I understand, [ALC] was basically a one-woman

show. She ran everything .”

83. According to CW6, at the end of December 2011, a contractor served Winterville

with a summons, which gave ALC seven days to respond with a settlement amount. ALC

offered $200 on a $4,000 bill, so of course the contractor rejected the offer and showed up with

police. Similarly, repo men showed up at Winterville facility and “took all my furniture” in early

January 2012. Houck then directed CW6 to lie to state regulators and claim that new furniture

was on order.

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84. When CW6 arrived in December 2011 to become Residence Director, they were

removing the body of a resident that had been struck by a caregiver and died. The previous

Administrator was also found to have been stealing from residents. In addition, there were three

cases of resident abuse, medication errors, and other regulatory issues. CW6 was tasked to

“clean it up.”

85. According to CW6, staffing works on a “points” system. Depending on the

number of residents, ALC was required to have a certain number of staff per residents, but ALC

skirted this requirement. Even if state regulators required more staff, ALC never really followed

through. Facilities in Georgia are required to have two caregivers for fifteen residents during the

day and one at night. When CW6 started, Winterville staffed only one person during the day.

Shortly thereafter, approximately December 14-21, 2011, Georgia cited ALC for the violation.

ALC tried to find “a way around it” by counting the Residence Director as a caregiver, even

though the Residence Director had other responsibilities and did not provide resident care. The

state came back in and cited Winterville for the same violation about a month later. ALC

increased staffing to “one and a half” by having one eight-hour and one four-hour shift worker.

When Winterville was cited for the 1:15 caretaker/resident ratio, this was “not unknown” at the

corporate level. Houck was actually in town at the time, and CW6 confirmed he was the one

who cut the staff.

86. CW6 explained that the quality of care the residents were getting was subpar.

ALC is required to provide residents mental and physical each day, but ALC only staffed

Winterville with an Activity Director for five hours per week. Accordingly, the Activity Director

did not work every week day, but instead worked a couple of hours twice a week, or for a full

36


five-hours on Saturday. For this reason, ALC was also in violation of required staffing ratios

because often there was only one daytime caregiver in the building.

87. The facility housed three “inappropriate” residents, including one that was

completely bedridden. The other two had advanced Alzheimer’s and dementia, respectively.

Winterville was not providing appropriate care for those people. It had a skilled care (or memory

care) wing with coded locks on both sides, but, in October 2011, ALC closed the wing and

moved its residents into the general population “to fend for themselves.” CW6 said, the “weird

thing” was that ALC still charged the higher rates they had charged for the memory care unit.

88. Then, there were instances where ALC would determine that a person was

appropriate but could not afford the fee based on their assessed level of care. For instance, if a

person was assessed a Level 6, senior ALC managers – Bebo or Houck – would instruct CW6 to

sign the resident up at Level 2, and then do another assessment thirty days later and raise them

up to the appropriate level with higher fees. They would then claim there had been a mistake on

the initial assessment.

f) Greenwood Gardens (Georgia)

89. Greenwood Gardens is a facility previously owned by Ventas and operated by

ALC in Marietta, Georgia. The GDHR cited Greenwood Gardens for at least 21 violations of

applicable state laws and regulations during the Class Period. Among other violations, the

facility was cited for failing to ensure the memory care unit is staffed with a registered nurse or

licensed practical nurse, failing to provide protective care and watchful oversight in supervising

the self-administration of medications, and failing to provide physical examination of residents

prior to admission.

90. These violations were repeated during the Class Period and were not remedied

within the time required under applicable regulations. For example, in the annual inspection on

37


March 9 and March 10, 2011, the GDHR found that Greenwood Gardens failed to develop

appropriate individual service plans for residents. In a July 12, 2011 follow-up inspection, the

GDHR once again cited the facility for the same violation.

91. Confidential witnesses confirm that ALC executives were aware of the regulatory

violations at Greenwood Gardens and failed to address them throughout the Class Period. CW13

was the Executive Director of the Greenwood Gardens facility from December 2011 through

March 2012 and identified two “main” issues. The facility was admitting people who did not

qualify for assisted living because they needed a higher level of care in violation of state

regulations. One regulation said a person must be able to evacuate with minimal assistance in

case of a fire, and ALC had several residents who were “completely bedbound.” Another issue

was “improper training.” “Not any [training] at all. And there were numerous medication

errors.” CW13 reported medication errors and other reportable issues to Stamey and state

regulators.

92. CW12 served as Executive Director at Greenwood Gardens from May 2011 to

December 2011, after having previously served as the Executive Director at Tara Plantation, and

found similar issues at both facilities. For example, ALC similarly instructed staff to open the

doors to the memory care unit at Greenwood. Similarly, Greenwood received a fine for not

having a licensed practical nurse (“LPN”) in the memory care unit. CW12 explained that they

would receive a new citation whenever the surveyor came to the facility and saw that they still

had not complied.

g) The Sanctuary At Northstar (Georgia)

93. The Sanctuary At Northstar (“Sanctuary”) is a facility previously owned by

Ventas and operated by ALC in Kennesaw, Georgia. The GDHR cited The Sanctuary for at least

twelve violations of applicable state laws and regulations during the Class Period.

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94. Following inspections on a January 31, 2012 and March 1, 2012, the GDHR cited

the facility for several repeat violations, including the failure to provide protective care and

watchful oversight, including the supervision of medication, the failure to ensure adequate

training of staff, and the failure to ensure that no residents were retained who needed care beyond

which the facility is permitted to provide. These violations had been previously cited on March

10, 2010, July 25, 2011 and September 21, 2011.

95. CW15, RN and Wellness Director at The Sanctuary from February 2011 until

May 2011, confirmed that ALC executives were aware of regulatory violations at the facility but

failed to address them. CW15 “most definitely” saw practices that could cause problems to the

physical and emotional health and safety of residents. One issue was that ALC improperly

assessed the acuity of residents and had many residents that should have been in nursing homes.

The state ultimately found that five out of the eight residents CW15 reported were not

appropriate for assisted living and had to leave. When a person came into the facility, the

admission director would code all new residents at 0 for acuity, which meant that they were

basically independent and did not need help taking medication. CW15 did not know any

residents that could actually take their medication on their own, and this fact alone automatically

brings them to a Level 1 acuity. As time went on, the residents would be reassessed. When

CW15 handled the reassessment, it was done accurately. However, although the reassessments

were recorded correctly on paper in the resident’s chart, the incorrect acuity level in the computer

system was not changed. Whatever number the admission director put in originally would

remain in the system. By keeping the original, lower acuity level in the system, ALC could keep

fewer employees on staff. The Company based staffing on the acuity levels in the system and

CW15 fought unsuccessfully for more staff. Based on assigned acuity levels, CW15’s staff was

39


not even supposed to give insulin shots to patients, but they did. There were only 3-4 people on

staff for about 50 residents. CW15 was working 20 hour days because residents needed more

care than ALC provided.

96. Furthermore, the facility had what was basically an Alzheimer’s unit, but they

could not call it that because they would have needed an LPN in the unit. As a result, they

simply referred to it as a special unit or something similar. There were several Alzheimer’s

patients who required a Hoyer Lift, despite the fact that assisted living facilities are not supposed

to have lifts. In CW15’s complaint to the state, CW15 told them that The Sanctuary was lying

about their monthly fire drills, which the facility did not conduct. ALC lied on its paperwork so

when the state came in, everything seemed to be in order. The state would do a survey, but no

one at ALC was writing up correction plans.

97. Additionally, because the CW15 was the only employee with a license, CW15

remained at the facility 20 hours a day. There were six LPNs or RNs in that position within a

year; CW15 was there the longest. Although ALC does not usually know when the state is

coming in, they would pull in additional staffing once the state showed up so what the surveyor

sees was not typical.

h) Additional Pervasive Regulatory Violations

98. Lead Counsel’s investigation has uncovered a widespread pattern and practice at

ALC of committing – and failing to remedy – state health and safety code violations across the

United States. According CW1, for example, ALC’s problems maintaining assisted living

licenses had become “pervasive” by the end of 2011. In total, ALC has been cited or subject to

license revocation in at least seventeen of the twenty states in which it operates. In addition to

the license revocation proceedings at the ALC facilities leased from Ventas during the Class

Period discussed above, additional license revocation proceedings for ALC facilities have been

40


commenced by several states, including Pennsylvania, Idaho, Indiana, Oregon and Washington,

and sanctions and conditions have been imposed on ALC facilities in many, if not all, states in

which it operates.

99. In fact, ALC facilities have racked up a staggering record of regulatory violations

since at least 2007, when state regulators cited ALC facilities for no less than 114 violations in

five states: Arizona, Idaho, New Jersey, Oregon, and Wisconsin. In 2008, state regulators cited

ALC facilities for no less than 357 violations in eleven states: Arizona, Florida, Kentucky,

Nebraska, New Jersey, Ohio, Oregon, Pennsylvania and Wisconsin. In 2009, state regulators

cited ALC facilities for no less than 369 violations in twelve states: Alabama, Arizona, Idaho,

Indiana, Iowa, Minnesota, Nebraska, New Jersey, Ohio, Oregon, Pennsylvania, and Wisconsin.,

In 2010, state regulators cited ALC facilities for no less than 414 violations in thirteen states:

Alabama, Arizona, Florida, Georgia, Idaho, Indiana, Iowa, New Jersey, Ohio, Oregon,

Pennsylvania, Washington, and Wisconsin. In 2011, state regulators cited ALC facilities for no

less than 636 violations in twelve states: Arizona, Florida, Georgia, Idaho, Indiana, Iowa,

Nebraska, Ohio, Oregon, Pennsylvania, Washington, and Wisconsin. Despite repeated

violations, fines and warnings from regulators throughout the Class Period, ALC failed to take

action to correct the widespread deficiencies. As CW6 explained, it was more profitable for

ALC to continue to incur fines and risk license revocation while inflating occupancy than to

incur the expense necessary to staff and supply ALC facilities appropriately as required by law.

100. For example, on May 11, 2011 and May 12, 2011, the Pennsylvania Department

of Public Welfare, Adult Residential Licensing (“PDPW”) conducted licensing inspections of

ALC’s Statesman Woods facility in Levittown, Pennsylvania, which resulted in a finding that the

facility committed multiple regulatory violations, including failing to report incidents of

41


medication errors and falls, failing to ensure that residents were not neglected, intimidated,

physically or verbally abused, mistreated, subject to corporal punishment or disciplined and

failing to administer medications. In a September 21, 2011 letter, the PDPW revoked Statesman

Woods’ license and issued a provisional license. On January 24, 2012 and January 25, 2012, the

PDPW conducted additional licensing inspections, which found that the facility again failed to

report an allegation of abuse and committed numerous other regulatory violations. On March 22,

2012, March 30, 2012 and May 9, 2012, the PDPW conducted additional inspections, which

found that the facility committed various violations, including failure to report two incidents to

the PDPW and failure to prevent abuse. In a June 5, 2012 letter addressed to Zak-Kowalczyk,

ALC’s VP and Corporate Secretary, Statesman Woods’ provisional license was not renewed and

the facility was barred from admitting new residents because of the repeated violations.

101. Similarly, from November 2, 2010 to January 24, 2011, the State of Washington

Department of Social and Health Services (“WDSHS”) imposed a temporary “Stop Placement

Order” prohibiting admission of new residents due to multiple regulatory violations at Mission

Ridge Assisted Living for Independent Seniors (“Mission Ridge”) is a facility operated by ALC

in Spokane, Washington. On August 12, 2011, the WDSHS imposed certain conditions on

ALC’s license, pending completion of an investigation. On August 23, 2011, the WDSHS

notified ALC that it intended to revoke the license for Mission Ridge, issuing a “Stop Placement

of Admissions,” and imposing additional conditions on the license based on violations including,

failing to ensure that residents were not verbally and mentally abused.

102. Similarly, throughout 2009 and 2010, the Indiana State Department of Health

(“ISDH”) conducted complaint investigations at Monroe House in Bloomington and found

multiple violations, including failing to ensure that residents admitted to the facility were

42


appropriate for residential care and to ensure that enough staff members were available to meet

the residents’ care needs. On April 12, 2010, the ISDH issued a Notice of Non-Renewal of

License. On April 15, 2011, ALC and the ISDH entered into a consent decree pursuant to which

Monroe House would be issued a probationary license until it became compliant. ALC,

however, failed to make Monroe House compliant, and as a result, its license was denied entirely

on December 1, 2011.

103. Similarly, Chaparelle House in Twin Falls, Idaho was cited by the Idaho

Department of Health and Welfare (“IDHW”) for various regulatory violations in 2007, 2008,

2009, 2010 and 2011. On October 19-27, the IDHW conducted an Investigation and found

numerous regulatory violations, including failure to ensure adequate staffing. In a November 7,

2011 letter, the IDHW advised Chaparelle House that its license depends on making corrections.

In a letter dated January 18, 2012, the IDHW stated that the previously identified deficiencies

“seriously impair [Chaparelle House’s] capacity . . . to protect the health and well-being of the

residents.” As a result, Chaparelle House was issued a provisional license.

104. From April 9-10, 2012, the IDHW conducted a follow-up survey and complaint

investigation of Chaparelle House and found that it was not in substantial compliance with Idaho

regulations. In addition, at one point, IDHW staff attempted to conduct an onsite inspection and

were denied entry. As a result, multiple deficiencies were cited, including that it failed to ensure

that the facility was appropriately staffed to meet the needs of all residents; turned the phone

lines and fire alarm system off; denied IDHW surveyors access; failed to protect a resident from

exploitation (a repeat core deficiency); and failed to provide adequate supervision for all

residents.

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105. On April 11, 2012, IDHW staff held a conference call with Bebo and advised her

that due to insufficient staffing and a lack of oversight, it was imposing temporary management

at Chaparelle House. By hand-delivered letter dated April 11, 2012, IDHW revoked the license

for Chaparelle House. On April 13, 2012, temporary management staff reported to ALC’s

corporate offices that the phones were not working and were advised that Bebo had the phones

turned off. The disconnection of the phone system disabled the fire alarm system, and temporary

management staff initiated a “fire watch” which required staff to continually patrol the building

checking for smoke and/or fire.

106. Similarly, Clearwater House, a facility operated by ALC in Nampa, Idaho, was

cited for multiple regulatory violations during the Class Period, including following a September

23, 2011 investigation by the IDHW, which found multiple deficiencies, including that the

facility failed to protect all residents from exploitation, failed to provide adequate supervision of

residents, and failed to investigate accidents and incidents. Between January 12 and January 20,

2012, the IDHW conducted a follow-up investigation and found that it failed to correct the

practices that led to the earlier deficiency. As a result, Clearwater House was issued a

provisional license, effective February 2012 through May 6, 2012. Repeat investigations by

IDHW found the repeat core deficiency, regarding the exploitation of residents, was still

occurring and an additional core issue deficiency for failing to protect residents’ rights. By letter

dated June 21, 2012, IDHW revoked the license to operate Clearwater House effective July 22,

2012.

107. Similarly, on May 11, 2011, ISDH conducted an investigation of the facility based

upon a complaint and found that Inwood Hills Estates, a facility formerly operated by ALC in

South Bend, Indiana, was not in substantial compliance with applicable regulations, including

44


failing to maintain an adequate number of regularly scheduled staff to meet residents’ needs. On

June 24, 2011, ISDH filed an administrative complaint against Inwood Hills. On or around

October 18, 2011, the ISDH issued Inwood Hills Estates a Notice of Non-Renewal of License,

based on recent surveys at the facility and a pending administrative action against the facility’s

license. On November 7, 2011, ISDH conducted a survey of the facility and found that it was

again not in substantial compliance with applicable regulations, including by failing to ensure

that residents were protected from physical and verbal abuse and by failing to ensure that

incidents involving falls and fractures were reported to proper authorities. On December 6,

2011, ISDH amended its administrative complaint seeking to revoke the license to operate

Inwood Hills Estates. ALC initially attempted to appeal the ISDH’s findings, however on March

27, 2012, ALC withdrew the appeal and Inwood Hills surrendered its license.

108. Confidential witnesses confirm that ALC has a pattern and practice of violating

state regulations in ALC facilities throughout the country, that these violations stem from cost-

cutting decisions taken by corporate executives, including Bebo, who were aware of these

violations and failed to remedy them. According to CW17, a Regional Director of Operations

for facilities in Washington and Oregon from October 2010 to August 2011, employees did not

have appropriate training because ALC would not pay for training. The Company wanted CW17

to hire people who already had the training, but these people already knew not to work for ALC.

109. Lexington House was “regularly” in trouble with the state. State inspectors were

at Lexington House every week because it consistently got complaints. The Washington

buildings were regularly cited for inadequate training/certification of staff. When a facility

received a citation, they would always write that they were going to correct it and would have to

put in how they were going to maintain compliance with that law. CW17 explained that ALC

45


had such regular turnover that the employees who were found to be lacking training were

generally gone by the time the facility was surveyed again. If not, ALC would take them off the

schedule and hire trainees. New trainees had 120 days to get certification, assuming that they

were not working alone. After that 120 days passed, the facility would be right back out of

compliance.

110. CW18, a Residence Sales Manager for Assisted Living Concepts in Nebraska

from August 2011 until November 2012, reports that the food budget was so low, they would

often run out of food. They had to prepare three meals a day with a food budget of $4.52 per day

per resident. “Feeding everyone on that was virtually impossible.” CW18 had to buy a dozen

eggs with CW18’s own money because there would be nothing to serve for breakfast. It was

common for staff members to pay out-of-pocket for necessities. The budget being “not enough”

was the root of the problems at the facilities. CW18 tried to address the budget issues, but

management was not receptive to CW18’s ideas.

111. According to CW4, the Company implemented cost savings measures at the

expense of patient safety. There were cuts to housekeeping, general staffing, and the meals

program. ALC tried to reduce staff hours as much as possible, and direct care staff hours were

reduced significantly. CW4 explained that there were regular – roughly biweekly – meetings to

discuss staff reductions and other cost-cutting measures. The meetings were attended by Bebo,

Levonowich, Houck, and sometimes Kathy Dobbins (the Collections Manager at the time),

among others. In discussions about cost cutting, the focus was on profits and saving money and

“there was not much concern” for residents or for providing the best care. CW4 said “It pretty

much stemmed from Laurie. [Cutting costs] seemed to be her main objective,” and everyone

around Bebo was expected to “support her mission.” The meetings were not explicitly held for

46


the purpose of discussing these issues, but it always came back to cost cutting – “cut this, cut

that.” It was the topic of a lot of meetings.

112. It was “common” for state regulators to serve notices to ALC facilities. Certain

facilities in the Southeast were “consistently problematic,” including in Georgia. CW4 first

learned of ALC’s issues with regulatory notices before Christmas in 2010. ALC’s response

“didn’t seem like they took it seriously.” These sorts of issues were discussed in biweekly

meetings, and Bebo, Houck and Zak Kowalczyk, “always knew a little more [about the notices]

than the rest of us.”

113. CW3 similarly reported that cost-cutting measures and other similar policies and

directives “came down from [Bebo].” The Company “did not pay many, many invoices,” which

severely jeopardized patient services and safety. CW3 stated it was practically a matter of policy,

coming down “from the top,” through Houck, who “in almost every situation” directed CW3 to

refuse payment. ALC withheld payment for “a while” on at least twenty percent of its

outstanding invoices and simply did not pay the other eighty percent of invoices at all. CW3 was

instructed by Houck to withhold payment on the grounds that work was “not preauthorized.”

However, this was after the vendor had completed the service. Often these were small

businesses or individual contractors without the means to put up much of a fight. The

preauthorization process was so onerous for even the smallest requests that it was unrealistic.

“The approval process to get miniscule repairs done was astronomical. You shouldn’t have to

contact corporate to unclog a toilet.”

114. There were a few instances when Bebo “personally withheld payment of large

invoices.” For example, SimplexGrinnell had an annual contract to do work at the Highland

Terrace facility. CW3 recalls one SimplexGrinnel invoice, due at the beginning of 2012, for

47


approximately $13,000. Bebo had signed off on their invoices every year for the previous four

years, and all of them, including the 2012 invoice, were “not crazy different in amount year-to-

year.” Bebo stalled as long as she could, which was until mid-2012.

115. According to CW3, Houck took his orders from Bebo. In some instances, Houck

would refuse payment to the point that a vendor would remove their product or equipment from

the residence. For example, a vendor was hired to install security locks on doors to keep

dementia patients from leaving the memory care unit and Houck refused to pay the invoice. This

“got so much worse” beginning around May 2011 and “much much worse right before Bebo got

walked out” of headquarters in May 2012.

116. Other confidential witnesses confirm that ALC refused to staff or supply the

facilities appropriately to meet state requirements or provide sufficient services. For example,

according to CW8, ALC often admitted residents who were “not appropriate” for the

communities. In this regard, CW8 was often in conflict with Houck and Bebo when discussing

the Company’s compliance with state regulations. CW6 described a hypothetical situation to

illustrate corporate’s view on “appropriate residents.” Mr. Sanders is a resident, aged 100, blind

and deaf, who needs around-the-clock care. Say he’s paying $5,700 per month. The State fine for

inappropriately housing such a resident is just $500. So “even if you can keep him for just two

months, you were in a winning situation . . . . [u]ntil it was so huge an issue that the fines meant

you couldn’t profit – only then was a change made.” Until then, ALC would continue to house

the resident, thereby inflating reported occupancy and revenues. “In a lot of those cases, it was

more profitable for the Company to take the fine and continue to show revenue and occupied

units.”

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117. Similarly, CW7 explained that ALC used a “point system” for allocating services

and staffing at each facility. CW7 described the system as “totally messed up.” For example, if

a resident needed help showering, that would count as so many points. The number of points

would determine how much staffing was necessary, but ALC was not staffing appropriately. The

Company would count the Administrator or Residence Director towards staffing, even though

these employees were not directly involved in providing care services to residents. CW7

confirms that ALC improperly included the Residence Director at every facility as an additional

caregiver in its care ratios, even though the Residence Directors were frequently out of the

building on sales calls and other tasks, and should not be counted as a care provider.

2. Defendants’ Additional CaraVita Lease Violations

118. Throughout the Class Period, ALC failed to comply with other CaraVita Lease

covenants, including the covenant prohibiting false and materially misleading representations.

See CaraVita Lease §17.1.5 (any false or materially misleading representation made by or on

behalf of ALC under or in connection with the CaraVita Lease is an Event of Default).

Accordingly, ALC was in material breach of the CaraVita Lease throughout the Class Period

because it reported occupancy numbers and other data that were materially false and misleading.

119. Defendants falsified and overstated ALC’s occupancy data, as reported to both

Ventas and investors, by systematically reporting units occupied by ALC employees and third

parties as bona fide leased units throughout the Class Period. According to CW12, these

occupancy issues arose as a direct result of ALC’s private pay strategy.

120. For example, according to CW12, ALC included in its occupancy data units

purportedly leased to a third-party therapy services provider, Agape Home Therapists (“Agape”),

at both its Greenwood Estates and Tara Plantation facilities (both Ventas-leased facilities).

Stamey, the Southeast Regional Director of Operations, told CW12 that ALC was doing the same

49


thing at every facility. These rooms could not be shown or sold to prospective residents;

however, the rooms remained empty.

121. CW12 recalls a management conference call with twelve Executive Directors,

during which Stamey instructed ALC’s Executive Directors to rent a room to Agape and count it

as part of their occupancy beginning Fall 2010. The Executive Directors complained “this

doesn’t make any sense. It just appeared on all of our rent rolls.” The rent rolls, which reported

occupancy percentages at each facility, were controlled at corporate headquarters. Despite

repeated emails to Stamey, calls to his cell phone and conference calls three to four times a week,

which elevated the issue to ALC’s executive management, CW12 “never got a direct answer

from anyone about this issue” and the practice of “leasing” vacant rooms to Agape continued

through at least December 2011, when CW12 left ALC. According to CW12, Agape paid only a

portion of the total rent but did not pay the full listed value of the apartment; however, it was

counted as a full private-pay resident.

122. Similarly, CW6, Regional Director of Sales & Marketing for the Southeast

Region, reported that ALC also “leased” units to other third-party companies, ostensibly to be

used as office space. For instance, at Greenwood Gardens, two units were rented to other home-

health companies, with the understanding that they would have offices there, but “it never

happened. They never moved into them or did anything.” Moreover, the units were reported as

occupied despite the fact that ALC did not collect rent on the units. These sham leases occurred

in others ALC facilities, including Winterville, where there was one “occupied” unit that never

paid any rent. “Units kept popping up [reported as] occupied, but nobody was ever in them.” At

the time, in the Southeast region, these rental scenarios were happening “biweekly.” Whenever

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CW6 questioned the practice, Houck or Cromer responded: “It’s none of your business. Your job

is generating move-ins.”

123. CW6 stated: “I don’t think there’s any question [the SEC will] be able to find

some fraud there . . . . I know there were several regions posting move-ins that were completely

bogus.” In addition, “projects were off-base” and the reported revenues were inaccurate, which

was apparent from CW6’s review of monthly data reported internally versus information

reported to the public. “I’d look at the numbers, and the numbers reported out were completely

different. I don’t think there’s any question there was fraud. It was widespread . . . . [and] at

[Bebo’s] direction.” “[N]othing happened at that company – especially with regard to financials

– without Bebo’s approval.”

124. Similarly, CW9, Sales and Marketing Director for Peachtree Estates from January

2009 to July 2010, described another mechanism used by ALC to falsify and overstate its

occupancy census. CW9 was aware of instances in which a husband and wife moved out of one

apartment and into another but ALC kept showing them as separately occupying two apartments

even though the one apartment was empty. The purpose of this double booking was to make the

census look better. They were told to leave both apartments booked in the computer system.

125. CW9 believes that occupancy was updated in the computer system everyday so

that the people at headquarters in Wisconsin could see what was going on with every building.

ALC’s focus was “to grow occupancy, grow occupancy, grow occupancy.” Every Friday at 3:00

p.m., the director of each facility had to report occupancy numbers to ALC’s corporate

headquarters. The reports included detail about move-ins and move-outs that occurred during

the week, and the computer program would calculate the facility’s overall occupancy percentage.

The system used to be called WAR but the Company then switched to the STAR system.

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Employees would log into the STAR system, and it would show your building and occupancy

percentage. It would also show the occupancy percentage for all of the buildings in each region.

According to CW9, executive management at ALC’s headquarters, including Bebo, “absolutely”

had access to the detailed occupancy reports.

126. CW9 explained how ALC disguised occupancy levels when Ventas visited

Peachtree Estates in February or March 2010. The doors to the units had the residents’ names on

name plates. Before Ventas came, they were instructed to pull all the name plates off and,

instead, just put a piece of paper with the room number up. According to CW, this change was to

make all the rooms look the same so that Ventas could not tell how many were actually occupied.

When CW9 arrived at the facility, the Executive Director had already printed room numbers off

the computer and instructed CW9 to help him put them up. CW9 is sure the order came from

Houck, Bucholtz, and/or Bebo, who accompanied Ventas representatives on a tour of the

building.

127. CW9 described two specific instances in which ALC “double booked” rooms and

inflated reported occupancy for the Peachtree Estates facility (a Ventas-leased facility). In one

instance, a husband and wife had moved into a larger room but ALC continued to report the

couple as occupying both rooms for some number of months. It gave the appearance of an extra

move-in and showed a higher than actual occupancy for Peachtree. The couple’s prior room

remained unrented. In the second occurrence, two sisters who were living together moved into a

smaller room. Again, ALC continued to report both rooms as rented.

128. Similarly, CW7 confirms that ALC’s reported occupancy for Peachtree Estates

was falsely inflated during the Class Period. If a couple moved into the building, ALC would put

their names in the computer as though they were occupying two different units even though they

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were actually sharing a room. CW7 stated that the daily occupancy reports at Peachtree were not

accurate.

129. Similarly, CW8 said that ALC did “tricky” things with reported occupancy. For

example, CW8 recalled a husband and wife who lived in a single unit at Peachtree. To double-

count the occupancy, ALC put the husband’s name on one unit and the wife’s name on another

unit. If the couple would have been charged $3,000 to rent a single unit, ALC would simply

send the family two separate bills for $1,500 each. The couple’s son complained that it was

confusing to receive two bills when the couple was only occupying one room; however, the

strategy allowed ALC to report more rooms as occupied than actually were.

130. CW8 also recalled that ALC reported rooms temporarily occupied by ALC

employees – for which ALC was receiving no rent – as bona fide leased units. For example,

when Bucholtz came to Peachtree Estates and stayed for a week, the unit she occupied was listed

as rented on the occupancy report. Occupancy was reported weekly; therefore, whenever

regional ALC employees were in town – even just overnight – the reported occupancy numbers

for the week were inflated. ALC required regional personnel to stay in the building when

performing site visits.

131. CW5 similarly confirmed that the CaraVita Village facility counted units occupied

by employees as bona fide rentals. CW2 also confirmed that the occupancy reports that ALC

provided to Ventas contained false and misleading information in violation of the CaraVita

Lease. CW2’s group had separate reports—the “Ventas Reports”—they used to report to Ventas.

The source for these reports was the general ledger. It was “more or less a financial statement

with certain exclusions,” such as management fees, which they were not allowed to include in

these statements. According to CW2, there were instances when ALC was not in compliance

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with the CaraVita Lease, but they still filed statements with Ventas claiming to be in compliance.

“They weren’t reporting honestly about occupancy levels . . . . they were counting employees as

residents.” CW2 also saw evidence of overstated occupancy data in Company filings for the

second and third quarters of 2011. The occupancy numbers claimed in the filings did not reflect

the accurate figures. “I’d say the statements filed with Ventas said we were in compliance,” but

this was untrue based on CW2’s experience.

132. According to CW2, in addition to the occupancy “adjustments” ALC was making,

there was a revenue component, too. ALC had to meet Earnings Before Interest, Taxes,

Depreciation, Amortization, and Restructuring or Rent Costs (“EBITDAR”) margins to remain in

compliance with the CaraVita Lease so the accounting department was given additional revenue

to book on the seven Ventas properties. This revenue was offset on a “reserve” cost center so

that consolidated income was not impacted. In reporting to Ventas, the revenue would have been

overstated. This revenue was supposed to represent revenue that would have been received if the

unit were rented out, not inhabited by an employee. Every month as part of the close process

“we were given this entry to record, much to our disagreement.” This was common practice for

at least a year and a half and Bebo was well aware of it.

E. Investors Begin To Learn The Truth

133. The truth about Defendants’ misstatements was revealed in a series of disclosures

beginning on May 4, 2012, when ALC disclosed for the first time that Ventas had filed a lawsuit

against the Company for violations of CaraVita Lease. In this same announcement, ALC also

revealed that it had received notices of intent to revoke licenses from state regulators for three

assisted living facilities in Georgia and Alabama. Ventas contended, among other things, that

receipt of those notices constituted violations of the CaraVita Lease. The Company’s May 4,

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2012 press release also disclosed for the first time that on May 3, 2012, the Company’s Board of

Directors had retained outside counsel and launched an internal investigation into “possible

irregularities in connection with the Company’s lease with Ventas.”

134. On May 10, 2012, ALC failed to file its quarterly report on Form 10-Q for the

first quarter of 2012, as required. The following day, on May 11, 2012, the Company’s stock

price declined $1.31 from its $17.58 per share opening price to close at $16.38, a one-day decline

of 7.4%. After market close on May 11, 2012, ALC confirmed that it was unable to timely file

its quarterly report because the Company was “unable to predict” how long its internal

investigation would take or “whether the findings of the investigation would have any impact on

the Ventas lease, the Company’s results of operations or financial condition, or other matters

relating to the Company and its business.”

135. On May 14, 2012, ALC filed a Current Report on Form 8-K with the SEC

addressing the potential impact of the Ventas litigation. In its report, ALC disclosed that Ventas

was seeking accelerated rent payments, which could reduce ALC’s future net income by as much

as $10.2 million per quarter. By comparison, ALC reported net income of $16.5 million for the

year ended December 31, 2010. Thus, the loss of the Ventas facilities would be material.

136. On May 15, 2012, ALC filed its quarterly report on Form 10-Q for the first

quarter of 2012 ended March 31, 2012. The Company disclosed additional new details about the

Ventas litigation, including assertions by Ventas in a May 9, 2012 letter that ALC had defaulted

on the CaraVita Lease during the Class Period by, among other things, submitting “fraudulent

information by treating units leased to employees as bona fide rentals by third parties” and

violating the minimum occupancy covenant and coverage ratio covenants, “fail[ing] to provide

required notices, including with respect to fires at an assisted living facility in Florida subject to

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the [CaraVita] lease,” failing to comply with lease requirements with respect to repair work, and

failing to provide information previously requested by Ventas. The Company reiterated that the

negative impact on earnings if Ventas were to succeed in its claims would be material, and also

disclosed that any material default on the Ventas lease would also constitute an event of default

under a separate lease between ALC and MLD Delaware Trust (which also had been acquired by

Ventas) governing four properties containing a total of 156 units (the “MLD Units”) causing a

further net revenue reduction of $0.8 million. Finally, ALC disclosed that average private pay

occupancy had decreased over the same quarter in the prior year; nevertheless, the Company

claimed it would continue to pursue its private pay strategy. A May 24, 2012 report by Sadif

Analytics downgraded ALC from “below average” to “risky” calling the Company a “below

average quality company” and citing “negative” market sentiment and noting that “[t]he trend in

[ALC’s] fair value exchange rate against its closest rated-competitor . . . has been depreciating

over the past two weeks.”

137. After the close of trading on May 29, 2012, the Company announced that it had

fired Bebo “for cause,” and named Charles H. “Chip” Roadman II, M.D as new interim President

and CEO. The Company refused to provide any details about the reasons for Bebo’s termination,

indicating only that her replacement, Dr. Roadman, would “concentrate on and directly address

certain matters facing ALC.” Commenting on his appointment, Dr. Roadman stated “I recognize

that we have areas that need attention, and those matters are my top priority.”

138. Securities analysts and news reporters, however, immediately connected Bebo’s

termination with the Company’s recent disclosures of noncompliance with regulatory

requirements and violations of the CaraVita Lease covenants. A May 30, 2012 analyst report by

Lawrence Solow, CFA, of CJS Securities, Inc., bluntly stated “CEO Laurie Bebo fired . . . [e]xact

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reason(s) behind dismissal not disclosed, likely related to recent allegations of violation of

[Ventas] lease obligations” as “negative image of lawsuit and related improprieties could have

driven Board’s decision to implement a change.” The report further explained that the “sudden

departure of CEO is never a good thing and it is unlikely near term performance will exceed

expectations” citing “risks” including the “[o]ngoing lawsuit from Landlord Ventas.” The report

further warned that “uncertainty could continue to pressure shares.”

139. Similarly, in a May 29, 2012 article entitled “Embattled Assisted Living Concepts

fires CEO Bebo, Guy Boulton of the Milwaukee Journal Sentinel wrote “Assisted Living

Concepts, the assisted living chain facing increasing scrutiny from regulators in several states,

has fired Laurie Bebo, its president and chief executive” and noted that “[r]egulators in several

states, including Wisconsin, have found a string of violations at several of the company’s center

in the past year.” The article further explained that “[i]n April, Idaho regulators shut down a

center in Twin Falls for inadequate staffing” and that, as revealed by the Ventas lawsuit, “[s]tate

inspections in Georgia and Alabama found inadequate staffing at several of the company’s

centers in those states.”

140. In reaction to the news of Bebo’s firing, the market price for ALC common stock

declined $1.55 or approximately 11% on unusually heavy trading from its May 29, 2012 closing

price of $14.48 to as low $12.93 on May 31, 2012.

141. On June 21, 2012 – just days after the Illinois District Court overseeing the Ventas

litigation granted Ventas discovery in the lawsuit – ALC announced that it had entered into an

agreement with Ventas to purchase the eight properties subject to the CaraVita Lease, as well as

the additional four MDL Units, for a total purchase price of $97 million, plus the payment of $3

million “for a litigation settlement fee” and payment of Ventas’s litigation expenses. As part of

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the purchase agreement, Ventas agreed to release all claims and dismiss its lawsuit against ALC.

The $100 million payment was 150% more than ALC’s own estimated appraised value of the

properties, and effectively wiped out the Company’s profits for the entire prior year.

142. On August 3, 2012, ALC announced its results of operations and financial

condition for the second quarter of 2012 ended June 30, 2012, further revealing the impact of the

Company’s misstatements and disastrous private pay strategy. The Company reported a net loss

of $25.1 million in the second quarter of 2012 as compared to net income of $6.3 million in the

second quarter of 2011, and an overall occupancy decline of 222 units. Admitting to ALC’s

numerous serious quality of care and service issues, newly-appointed interim CEO Dr. Roadman

stated: “The second quarter of 2012 was filled with challenges leading to a decline in both our

occupancy and net income” and “[b]eginning in the second quarter, we have taken swift and

decisive actions to address the quality of service delivered to our residents including the

engagement of outside advisors.” In fact, the Company revealed that “[r]esidence operations

expenses increased primarily from an increase in salaries and wages resulting from quality

restoration efforts initiated in June, 2012 .”

143. On August 6, 2012, the Company issued a Form 8-K, purportedly in compliance

with the “Fair Disclosure” requirements under SEC Regulation FD, 17 CFR §§ 240, 243, 249.

The Company stated that, in its August 3, 2012 conference call to discuss ALC’s financial results

for the second quarter of 2012, a participant had inquired during the question and answer session

“about the Company’s expectation regarding future financial impacts of increased staffing.”

ALC’s Form 8-K disclosed that “[a]fter further consideration, the Company estimates that the

hiring of approximately 800 additional employees will increase operating expenses from the

second quarter of 2012 to the third quarter of 2012 by approximately $5 to $6 million .”

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Following this announcement, the market price for ALC common stock declined by $2.09 from

its closing price of $12.86 on the prior trading day, Friday August 3, 2012, to close at $10.77 on

Monday, August 6, 2012 – a one-day decline of more than 16%.

144. On August 7, 2012, before the market opened, ALC disclosed in its Form 8-K

that, on August 2, 2012, the SEC had commenced an investigation into the Company’s

“compliance with occupancy covenants” under the CaraVita Lease and the “leasing of units for

employee use,” among other topics. On this revelation, the market price of ALC common stock

further declined $2.88 from its closing price of $10.77 from the prior trading day to close at

$7.89 on August 7, 2012 – a one-day loss of nearly 27%.

145. After the close of trading on August 8, 2012, the Company filed its quarterly

report on Form 10-Q for the second quarter of 2012 ended June 30, 2012, discussing the

Company’s financial results and operating condition and further informed investors about the

financial impact of the Company’s pervasive regulatory violations and declining care standards.

In the second quarter of 2012, we began a review of our operations which included identifying and evaluating operational issues affecting the delivery of care and service to our residents. Based upon our review, we believe that certain failures to meet ALC’s established performance standards have contributed to ALC’s inability to increase private pay occupancy as rapidly as desired. In the second quarter of 2012, we initiated a number of measures to enhance the performance of our resident services to restore in all affected facilities the level of quality care and service expected by our residents, their families, the regulators, the board of directors and the stakeholders of the Company and to re-establish our reputation with regulators, our stakeholders and the communities in which our facilities are located.

146. These “restorative” efforts included, among other things, hiring an independent

consultant “to review the quality of our resident services performance” with on-going

independent quality reviews of residences, creating a new position of Senior VP of Quality

Services and Risk Management, hiring approximately 800 new employees “to enhance quality

and clinical procedures,” and “revis[ing] staffing patterns.”

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147. The Form 10-Q also disclosed that, on June 29, 2012, Bebo had (i) initiated an

arbitration proceeding against ALC disputing the existence of cause for her termination and

alleging that she is entitled to more than $2.4 million in severance pay and other termination

benefits because her termination was without cause; and (ii) filed a lawsuit captioned Bebo v.

Assisted Living Concepts, Inc. in Wisconsin state court seeking an order requiring ALC to

produce certain Company records and a judgment requiring ALC to indemnify Bebo for all

expenses incurred in connection with the Company’s investigation as well as to advance all

expenses incurred by Bebo in connection with the investigation. ALC’s quarterly report also

revealed that, in the first quarter of 2012, ALC closed one property consisting of 56 units in

Washington and, in the second quarter of 2012, ALC closed an additional property consisting of

39 units in Idaho. Both facilities were closed due to regulatory issues. ALC further stated that it

had “several other residences with various degrees of regulatory issues” but did not provide any

further specific information.

148. On these disclosures, ALC’s stock price continued to decline, trading as low as

$6.93 on August 14, 2012.

VII. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS

149. During the Class Period, Defendants made numerous untrue statements of

material fact regarding ALC’s compliance with the CaraVita Lease covenants and the Company’s

operating condition, and numerous omissions of material facts necessary to make such

statements not misleading. These materially false and misleading statements and omissions

became part of the total mix of information impacting ALC’s stock price, and caused ALC Class

A common stock to trade, or continue to trade, at artificially inflated prices throughout the Class

Period.

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150. Defendants’ misstatements generally concern two subject matters. First,

Defendants repeatedly and unequivocally assured investors that ALC was in compliance with all

operating and occupancy covenants pursuant to the CaraVita Lease when, in truth, ALC was in

violation of CaraVita Lease covenants since before and continuing throughout the Class Period.

Second, Defendants repeatedly touted ALC’s private pay strategy while failing to disclose to

investors that ALC’s occupancy rates were materially overstated because, among other things,

the Company was counting units leased to or occupied by employees or agents as occupied by

private pay residents and that the Company generally – and the Ventas-leased facilities in

particular – were the subject of increasing formal regulatory complaints, citations and license

revocation due to the drastic cost-cutting measures implemented by ALC.

A. Fourth Quarter and Year-End 2010

151. The Class Period begins on March 4, 2011, with the announcement of ALC’s

results of operations and financial condition for its fourth quarter and full year ended December

31, 2010. On that date, ALC issued a press release titled “Assisted Living Concepts, Inc.

Announces Continued Private Pay Strategy Success; Completes Refinancing.” The press release

stated that ALC “reported net income of $5.4 million ($0.46 per diluted common share) in the

fourth quarter of 2010 as compared to net income of $4.3 million ($0.37 per diluted common

share) in the fourth quarter of 2009.” The press release further touted the Company’s success in

reducing operating expenses due to “lower labor costs associated with the reduction of Medicaid

residents” and focus on increasing private pay occupancy, as well as “general economic

conditions [that] enabled us to hire new employees at lower wage rates.” Commenting on these

results, Bebo claimed: “ Operating results continue to demonstrate the tremendous potential of

our private pay strategy as Adjusted EPITDAR dollars and Adjusted EBITDAR margins reached

record levels.”

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152. On March 4, 2011, the Company also hosted an earnings conference call with

investors and securities analysts, where Bebo continued to tout the success of the Company’s

“private pay strategy.” Specifically, Bebo began the earnings conference call by stating:

We are pleased to report an increase in average private pay occupancy for the 2010 year of 90 units over 2009. In the quarter ended December 31st, 2010, we increased average private pay occupancy by 45 units over the fourth quarter of 2009, and three units over the third quarter of 2010. This represents our sixth quarter in a row with private pay occupancy gains and our seventh quarter in a row where our private pay move-ins exceed the number of private pay move-outs . . . . Effectively, we are a private pay Company .

153. Bebo further claimed “[w]e remain well positioned to maintain the quality of

service our residents have come to expect, while earning strong margins and cash flows for our

investors.”

154. On March 10, 2011, the Company filed its annual report for 2010 on Form 10-K

(“2010 10-K”) with the SEC. ALC’s 2010 10-K continued to promote the success of the

Company’s “private pay” strategy, while also claiming as a “competitive advantage” “the staffing

model of our residences which emphasizes the importance we place on delivering quality care

to our residents , with particular emphasis on preventive care and wellness . . . .”

155. In the section of the 2010 10-K titled “Government Regulation,” ALC claimed:

Our residences may be subject to periodic unannounced surveys by state and other local government agencies to assess and assure compliance with the respective regulatory requirements. A survey can also occur following a state’s receipt of a complaint regarding a residence. If one of our residences is cited for alleged deficiencies by the respective state or other agencies, we may be required to implement a plan of correction within a prescribed timeframe. Upon notification or receipt of a deficiency report, our regional and corporate teams assist the residence to develop, implement and submit an appropriate corrective action plan. Most state citations and deficiencies are resolved through the submission of a plan of correction that is reviewed and approved by the state agency .

156. ALC explicitly acknowledge the risks associated with regulatory non-compliance

in the 2010 10-K section titled “Risks Relating to Our Business,” which stated in relevant part:

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“We operate in a regulated industry. Failure to comply with laws or government regulation

could lead to fines and penalties .”

157. Moreover, in its discussion of the ALC facilities subject to the CaraVita Lease, in

the section of the 2010 10-K titled “Notes to Consolidated Financial Statements,” the Company

stated:

In connection with the master lease, ALC guarantees certain quarterly minimum occupancy levels and is subject to net worth, minimum capital expenditure requirements per residence, per annum and minimum fixed charge coverage ratios. Failure to meet certain operating and occupancy covenants in the CaraVita operating lease would give the lessor the right to accelerate the lease obligations and terminate our right to operate all or some of those properties. At December 31, 2010 and 2009, ALC was in compliance with all master lease covenants .

158. Additionally, in ALC’s 2010 10-K, in the section titled “Future Liquidity and

Capital Resources,” the Company further confirmed “ [w]e were in compliance with all . . .

[CaraVita Lease] covenants as of December 31, 2010, . . . .”

159. In connection with the Company’s 2010 10-K, Bebo executed a certification

pursuant to the Sarbanes-Oxley Act of 2002 (“SOX Certification”), dated March 10, 2011, that

attested to the purported accuracy and completeness of the Company’s financial and operational

reports. Bebo affirmed under oath that she had reviewed the quarterly report and:

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report . .

160. The statements in ALC’s March 4, 2011 press release, the statements made during

the March 4, 2011 earnings conference call, and the statements contained in the Company’s 2010

10-K, and in Bebo’s SOX Certification, identified above, were each materially false and

misleading when made for the following reasons:

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(a) Contrary to its affirmative claims, ALC was not in compliance with all

CaraVita Lease covenants as of December 31, 2010, as set forth in Section VI.D. above. Among

other deficiencies, ALC was not in compliance with the minimum occupancy covenants in the

CaraVita Lease, and several of the Ventas facilities operated by ALC were not in compliance

with applicable regulations, resulting in ALC receiving notices of intent to revoke operating

licenses and other disciplinary action.

(b) Similarly, the Company acknowledged that the risk of default under the

CaraVita Lease would have a material impact on the Company’s financial condition and

operating results. Specifically, the Company disclosed:

Failure to comply with those obligations could result in our being required to make an accelerated payment of the present value of the remaining obligations under the lease through its expiration in March 2015 (approximately $19.9 million as of March 31, 2011), as well as the loss of future revenue and cash flow from the operations of those properties. The acceleration of the remaining obligation and loss of future cash flows from operating those properties could have a material adverse impact on our operations.

(c) This statement was false and misleading when made because Defendants

knew or recklessly disregarded that ALC had already failed to comply with its obligations under

the CaraVita Lease and was subject to numerous regulatory citations that remained

unremediated, and was falsely overstating its occupancy information, one of the Company’s

“most important key performance indicators.”

(d) Defendants’ statements regarding the success of ALC’s private pay

strategy and its operating results were also false and misleading because Defendants knew or

recklessly disregarded that ALC’s occupancy data was falsely inflated and the drastic cost-

cutting measures were causing a significant decline in the quality of services and causing the

Company to receive increasing regulatory citations.

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(e) Furthermore, contrary to her SOX certification, Bebo was aware or

deliberately reckless that ALC’s quarterly report contained untrue statements of material fact and

omitted to state material facts necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading, including the fact that

ALC was in violation of the CaraVita Lease and subject to numerous regulatory citations that

remained unremediated, and was falsely overstating its occupancy information, one of the

Company’s “most important key performance indicators.”

B. First Quarter 2011

161. On May 2, 2011, ALC issued a press release announcing its results of operations

and financial condition for the first quarter ended March 31, 2011. On the same day, the

Company also announced a two-for-one stock split and a $0.10 per share post-split cash

dividend.

162. In the Company’s earnings press release, Bebo again emphasized ALC’s private

pay strategy as key to the Company’s success: “We continue to strengthen our portfolio of

properties by making positive strides in both private pay occupancy and earnings” and “[w]e are

encouraged that the market has recognized our consistent positive results and driven up our share

price.”

163. On May 3, 2011, ALC hosted an earnings conference call with investors and

securities analysts. During the call, Bebo continued to claim that the Company’s private pay

strategy was successful:

While we recognize the need to grow our private occupancy, ALC has continued on very solid ground throughout our strategic transition with a conservative balance sheet and strong financial stability. By consciously having made the counterintuitive decision to drastically reduce our reliance on government funding, we have improved margins and cash flow and reduced our revenue vulnerability .

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164. On May 5, 2011, ALC filed its quarterly report for the first quarter of 2011 on

Form 10-Q with the SEC. On May 9, 2011, ALC filed an amended quarterly report on Form 10-

Q/A. Both ALC’s Form 10-Q and 10-Q/A, in the section titled “Future Liquidity and Capital

Resources,” stated:

[T]he failure to meet certain operating and occupancy covenants in the CaraVita operating lease could give the lessor the right to accelerate the lease obligations and terminate our right to operate all or some of those properties. We were in compliance with all such covenants as of March 31, 2011, . . . .

165. In connection with the Company’s quarterly report, Bebo executed a SOX

Certification, dated May 5, 2011, that attested to the purported accuracy and completeness of the

Company’s financial and operational reports. Bebo affirmed under oath that she had reviewed

the quarterly report and:

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report . . . .

166. The statements in ALC’s May 2, 2011 press release, the statements made during

the May 3, 2011 earnings conference call, the statements contained in the Company’s Forms 8-K,

10-Q and 10-Q/A, and the statements made in Bebo’s SOX Certification, identified above, were

each materially false and misleading when made for the following reasons:

(a) Contrary to its affirmative claims, ALC was not in compliance with the

occupancy and operating covenants of the CaraVita Lease as of March 31, 2011, as set forth in

Section VI.D. above. Among other deficiencies, ALC was not in compliance with the minimum

occupancy covenants in the CaraVita Lease, and several of the Ventas facilities operated by

ALC were not in compliance with applicable regulations, resulting in ALC receiving notices of

intent to revoke operating licenses and other disciplinary action.

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Ventas master lease would have a material impact on the Company’s financial condition and





the CaraVita Lease.




cutting measures were causing a significant decline in the quality of services and the Company’s

ability to comply with regulatory requirements.

(e) Furthermore, contrary to her SOX Certification, Bebo was aware or

deliberately reckless that ALC’s quarterly report contained untrue statements of material fact

and omitted to state material facts necessary to make the statements made, in light of the





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C. July 21, 2011 SEC Correspondence Regarding ALC’s Compliance With CaraVita Lease Covenants

167. On July 21, 2011, ALC received a letter from the SEC’s Division of Corporation

Finance directed to Bebo regarding the Company’s Annual Report on Form 10-K for the fiscal

year ended December 31, 2010, and requesting a response with ten business days. On July 21,

2011, ALC disclosed the letter to investors by uploading a copy to the SEC’s EDGAR website.

The SEC’s July 21, 2011 correspondence specifically requested clarification regarding the

statements made by Bebo and ALC regarding the Company’s compliance with the CaraVita

Lease covenants:

We note your statement that continued poor economic conditions could constrain your ability to remain in compliance with certain operating and occupancy covenants in the CaraVita operating lease and that failure to comply could have a material adverse impact on your operations. To the extent that you remain at risk of non-compliance, disclose the CaraVita operating lease covenants and your performance relative thereto. Confirm that you will disclose any other material contractual covenants for which you are at risk of default, as well as your relative performance .

168. On August 5, 2011, Bebo, on behalf of ALC, responded to the SEC’s July 21,

2011 letter in correspondence also made available to investors by ALC on the SEC’s EDGAR

website. In response to the SEC’s request for further information regarding the CaraVita Lease,

Bebo and ALC stated that: The Company believes additional disclosure of the operating lease

covenants and its performance relative thereto is not meaningful or required under the

guidance contained in Release No. 33-8350” because, among other reasons, “ [b]ased upon

current and reasonably foreseeable events and conditions, the Company does not believe that

it has a reasonably likely degree of risk of breach of the CaraVita covenants .”

169. The statements in Defendants’ August 5, 2011 letter to the SEC, identified above,

were each materially false and misleading when made because ALC was not in compliance with

the occupancy and operating covenants of the CaraVita Lease as of August 5, 2011, as set forth

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in Section VI.D. above. Among other deficiencies, ALC was not in compliance with the

minimum occupancy covenants in the CaraVita Lease, and several of the Ventas facilities

operated by ALC were not in compliance with applicable regulations, resulting in ALC receiving

notices of intent to revoke operating licenses and other disciplinary action.

170. Moreover, as explained in the SEC guidance contained in Release No. 33-8350,

titled “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis

of Financial Condition and Results of Operations (available at www.sec.gov/rules/interp/33-

8350.htm), SEC Regulation FD, 17 CFR 211, 231 and 241, requires that management

communicate with investors “in a clear and straightforward manner . . . that not only meets

technical disclosure requirements but generally is informative and transparent.” Among the

objectives of SEC Regulation FD is that management “provide a narrative explanation . . . that

enables investors to see the company through the eyes of management” and “provide[s] the

context within which financial information should be analyzed.” Additionally, SEC Regulation

FD requires that companies “identify and disclose known trends, events, demands, commitments

and uncertainties that are reasonably likely to have a material effect on the financial condition or

operating performance.” Among the key variables that the SEC recommends issuers disclose are

“regulatory actions or regulatory environment.” Id., n.27.

171. Statements by ALC and Bebo in the Company’s press releases, earnings

conference calls, and SEC filings throughout the Class Period failed to comply with the

requirements of SEC Regulation FD because they failed to disclose known trends and adverse

regulatory actions at numerous ALC assisted living facilities across the country, and particularly

at facilities subject to the CaraVita Lease.

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D. Second Quarter 2011

172. On August 4, 2011, ALC issued a press release announcing its results of

operations and financial condition for its second quarter ended June 30, 2011. The press release,

titled “Assisted Living Concepts, Inc. Announces Continued Growth in Private Pay Occupancy,

Record Earnings and Strong Strategic Positioning in the Changing Economic Environment,”

Bebo continued to promote the Company’s private pay, expansion and cost reduction strategies,

stating: “In the second quarter of 2011, we continued to see upward movement in our private pay

occupancy . . . . We are particularly pleased that we were able to leverage that growth into 37.0%

Adjusted EBITDAR margins, the highest we have posted since becoming a public company.”

173. On August 5, 2011, the Company hosted an earnings conference call with

investors and securities analysts. During the call, Bebo again touted the Company’s private pay

and cost reduction strategies, claiming “we are well positioned to continue to successfully

operate and further strengthen ourselves” and “[a]s other economic uncertainties loom we are

confident strong balance sheets and improved in capital structure will support both our long and

short-term strategic calls.”

174. During the question-and-answer session, Bebo was asked to comment further

regarding trends in resident “move-ins” and “move-outs.” In response, Bebo stated “ We are

really happy with the progress in the second quarter. As I mentioned in my opening comments,

. . . the [private pay] trend continues positive ” and “we’ve got . . . continued move-ins ” and

“some reduction of the move-outs .” In response to a similar analyst question later in the call,

Bebo similarly claimed “We continue to have strong move-ins and inquiries, and . . . a reduction

in the moveouts.”

175. Similarly, in response to an analyst question concerning the Company’s ability to

successfully operate and continue to improve its profit margins, Bebo stated that, in addition to

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growing the percentage of customers who were private payers, the Company had also obtained

costs savings by “improve[ing] the expense side while still maintaining or improving the

quality of what we have in service or items .”

176. Another analyst, Jerry Doctrow of Stifel Nicolaus, pointedly asked about the

performance of ALC’s “leased assets” – i.e. , including the ALC facilities subject to the CaraVita

Lease agreement – and “whether those are under performing . . .” In response, however, Bebo

omitted to disclose any information regarding the performance of the CaraVita Lease facilities,

including that ALC was in material default of the occupancy and operating covenants.

177. On August 8, 2011, ALC filed its quarterly report on Form 10-Q for the second

quarter of 2011 ended June 30, 2011. In the 10-Q, ALC repeatedly affirmed that it was “ in

compliance with all [CaraVita operating and occupancy] covenants as of June 30, 2011 .”

Moreover, in consideration of the SEC’s July 21, 2011 correspondence, Defendants added the

following statement:

Based upon current and reasonably foreseeable events and conditions, ALC does not believe that there is a reasonably likely degree of risk of breach of the CaraVita Covenants.


Certification, dated August 8, 2011, that attested to the purported accuracy and completeness of

the Company’s financial and operational reports. Bebo affirmed under oath that she had

reviewed the quarterly report and:


179. The statements in ALC’s August 4, 2011 press release, the statements made

during the August 5, 2011 earnings conference call, the statements contained in the Company’s

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Forms 8-K and 10-Q, and the statements made in Bebo’s SOX Certification, identified above,

were each materially false and misleading when made for the following reasons:


occupancy and operating covenants of the CaraVita Lease as of June 30, 2011, as set forth in

Section VI.D. above. Among other deficiencies, ALC was not in compliance with the minimum

occupancy covenants in the CaraVita Lease, and several of the Ventas facilities operated by ALC

were not in compliance with applicable regulations, resulting in ALC receiving notices of intent

to revoke operating licenses and other disciplinary action.







the CaraVita Lease.






72



deliberately reckless that ALC’s quarterly report contained untrue statements of material fact

and omitted to state material facts necessary to make the statements made, in light of the





E. Third Quarter 2011

180. On November 4, 2011, ALC issued a press release announcing its results of

operations and financial condition for the third quarter of 2011 ended September 30, 2011. The

press release, titled “Assisted Living Concepts, Inc. Sees Strategic Plan Yield Acceleration of

Growth in Private Pay Occupancy, Continued Strong Earnings and Cash Flow,” highlighted the

“success” of the Company’s private pay strategy. Bebo stated: “In the third quarter of 2011, we

accelerated our upward movement in our private pay occupancy” and “[a]lthough more

temporary short term price concessions were used, we were able to significantly move the needle

on occupancy while maintaining strong results.”

181. Also on November 4, 2011, the Company hosted its quarterly earnings conference

call with investors and securities analysts. During the call, Bebo continued to tout ALC’s

increases in average private pay occupancy, stating: “We have continued to share our confidence

regarding private pay occupancy growth in 2011, and expect it to continue in 2012.”

182. Further commenting on the Company’s efforts to reduce expenses, Bebo stated:

“Once again, our strategic initiative to achieve an all-private-pay revenue stream has resulted

in record-level margins for a third quarter ” and “[t]he acceleration in the rate of our occupancy

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growth combined with our continued expense control discipline, continues to position us well for

future growth opportunities.”

183. On November 8, 2011, ALC filed its quarterly report on Form 10-Q for the third

quarter of 2011 with the SEC. In its report, the Company stated that it was “ in compliance with

all such [operating and occupancy covenants in the CaraVita operating lease] as of September

30, 2011 .” The Company further stated: “Based upon current and reasonably foreseeable

events and conditions, ALC does not believe that there is a reasonably likely degree of risk of

breach of the CaraVita covenants .”


Certification, dated November 8, 2011, that attested to the purported accuracy and completeness

of the Company’s financial and operational reports. Bebo affirmed under oath that she had

reviewed the quarterly report and:

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report . . . .

185. The statements in ALC’s November 4, 2011 press release, the statements made

during the November 4, 2011 earnings conference call, the statements contained in the

Company’s Forms 8-K and 10-Q, and the statements made in Bebo’s SOX Certification,

identified above, were each materially false and misleading when made for the following

reasons:


occupancy and operating covenants of the CaraVita Lease as of September 30, 2011, as set forth



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This statement was false and misleading when made because Defendants knew or

recklessly disregarded that ALC had already failed to comply with its obligations under the

CaraVita Lease.

(c) Defendants’ statements regarding the success of ALC’s private pay





(d) Furthermore, contrary to her SOX Certification, Bebo was aware or





remained unremediated, and that ALC was falsely overstating its occupancy data, one of the


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F. Fourth Quarter and Year-End 2011

186. On March 8, 2012, ALC issued a press release titled announcing its “record”

results of operations and financial condition for the fourth quarter and year ended December 31,

2011. Bebo stated “[f]ourth quarter results blossomed with the momentum we built up in quarter

three,” and attributed the Company’s “record” quarterly and annual results to its “private pay

strategy, increased occupancy and other careful cost controls.”

187. Also on March 8, 2012, the Company hosted its earnings conference call with

investors and securities analysts. During the call, Bebo continued to tout the Company’s private

pay strategy, claiming “[w] were pleased to report an increase of 108 units in average private pay

occupancy for the fourth quarter of 2011, compared to the fourth quarter of 2010, and 41 units

over the third quarter of 2011” and “[o]nce again, our strategic initiative to achieve an all

private pay revenue stream has resulted in record level margins for a quarter.”

188. On March 12, 2012, ALC filed with the SEC its annual report on Form 10-K for

the year ended December 31, 2011 (“2011 10-K”). ALC’s 2011 10-K continued to promote the

success of the Company’s “private pay” strategy, claiming average private pay occupancy in the

year ended December 31, 2011 had increased by fifty-nine units as compared to the year ended

December 31, 2010.

189. In the section of the 2011 10-K titled “Government Regulation,” ALC claimed:

Our residences may be subject to periodic unannounced surveys by state and other local government agencies to assess and assure compliance with the respective regulatory requirements. A survey can also occur following a state’s receipt of a complaint regarding a residence. If one of our residences is cited for alleged deficiencies by the respective state or other agencies, we may be required to implement a plan of correction within a prescribed timeframe. Upon notification or receipt of a deficiency report, our regional and corporate teams assist the residence to develop, implement and submit an appropriate corrective action plan. Most state citations and deficiencies are resolved through the submission of a plan of correction that is reviewed and approved by the state agency .

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190. ALC explicitly acknowledge the risks associated with regulatory non-compliance

in the 2011 10-K section titled “Risks Relating to Our Business,” which stated in relevant part:

“We operate in a regulated industry. Failure to comply with laws or government regulation

could lead to fines and penalties .”

191. Additionally, in ALC’s 2011 10-K, in the section titled “Future Liquidity and

Capital Resources,” the Company further confirmed “ [w]e were in compliance with all

[CaraVita Lease occupancy and operating] covenants as of December 31, 2011, . . . .” and

“[b]ased upon current and reasonably foreseeable events and conditions, ALC does not believe

that there is a reasonably likely degree of risk of breach of the CaraVita covenants .”

192. In connection with ALC’s 2011 10-K, Bebo executed a SOX Certification dated

March 10, 2011, that attested to the purported accuracy and completeness of the Company’s

financial and operational reports. Bebo affirmed under oath that she had reviewed the quarterly

report and:


193. The statements in ALC’s March 4, 2011 press release, the statements made during

the March 4, 2011 earnings conference call, and the statements contained in the Company’s 2010

10-K and in Bebo’s SOX Certification, identified above, were each materially false and

misleading when made for the following reasons:


occupancy and operating covenants of the CaraVita Lease as of December 31, 2011, as set forth



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CaraVita Lease would have a material impact on the Company’s financial condition and





the CaraVita Lease.











remained unremediated, and that ALC was falsely overstating its occupancy data, one of the


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VIII. ADDITIONAL SCIENTER ALLEGATIONS

A. The 2011 SEC Correspondence

194. The fact that the SEC focused on the Company’s disclosures concerning the

CaraVita Lease in September 2011, which necessarily required the Company’s senior officers to

examine its disclosures concerning the CaraVita Lease carefully, also provides compelling

evidence of the Defendants’ fraudulent intent. The SEC’s letter was addressed to Bebo. After

performing all inquiries necessary, Bebo responded to the SEC in a letter confirming that ALC

was in compliance with the CaraVita Lease covenants and, in addition, that “ the Company does

not believe that it has a reasonably likely degree of risk of breach of the CaraVita covenants .”

Indeed, in response to the SEC’s concerns, Defendants added language reflecting their obligation

to assess the likelihood of breaching the CaraVita covenants – language which had not been

included in prior SEC filings. Notably, despite Defendants’ representations to the SEC and its

investors on August 4, 2011, that a breach of the CaraVita lease was unlikely, just nine months

later Ventas sued ALC for breach of the CaraVita Lease.

B. State Inspection Reports, Citations, And Notices Of Revocation

195. The state inspection findings themselves further support scienter and reveal that it

was the Company’s senior managers that initiated and carried out the policies that violated state

law, and thus violated the CaraVita Lease, and that those policies were established by senior

management of the Company. For example, in concluding ALC executives “knowingly”

provided false information to state health department officials concerning Tara Plantation’s

compliance with regulations requiring the regular performance of fire evacuation drills, the state

inspection report quoted a member of ALC’s “corporate staff,” who admitted that she instructed

facility staff not to follow proper fire evacuation procedures and that “fire drills are reviewed by

risk management at the corporate office.” While the facility had submitted documents claiming

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that proper evacuations were conducted every month per regulations, numerous witnesses stated

that a full evacuation at the facility had not occurred for at least a year-and-a-half.

196. Similarly, the state inspection report setting forth the bases for the Alabama

Department of Public Health’s determination to revoke ALC’s license to operate the Caravita

Village cited to repeated violations dating back to at least 2009 that required “corrective action

plans,” which, as the Company itself admitted, were developed and implemented by the

Company’s “regional and corporate teams.”

197. The state inspection findings show that ALC’s violations stemmed from a

corporate directive to cut costs, even when doing so violated state law and endangered patient

welfare. For example, according to the state inspection report for the Caravita Village facility,

the Regional Director of Operations required – in violation of state law – that ALC employees

pay for CPR training out of their own pockets, knowing that employees would be unable to pay

for such training themselves.

198. The state inspection reports also reveal a deliberate attempt by the Company’s

senior management to conceal ALC’s numerous legal violations. For example, both ALC’s

Regional Director of Operations and the Regional Director of Quality Care management

responsible for the CaraVita facility refused to provide information requested by state health

inspectors in February and March 2012. Similarly, in February 2012, the Regional Director of

Quality Care management told regulators that she needed to consult with ALC’s corporate legal

department before providing the names and phone numbers of facility staff members that state

inspectors sought to interview, and the full list of names and numbers were never provided.

ALC’s Regional Directors are among a handful of Company employees with direct reporting

responsibilities to ALC’s senior management.

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199. Bebo signed a consent agreement on December 21, 2009, with Alabama officials

on behalf of CaraVita Village agreeing that: (i) CaraVita Village’s status would be downgraded to

probational for one year; and (ii) if, at any time during the probational period, the ADPH

determined that CaraVita Village had not demonstrated that it had achieved or could maintain

substantial regulatory compliance, then the ADPH could issue a notice of license revocation. In

addition, ALC was required to create a plan of correction to address the numerous violations

cited by the ADPH. ALC submitted such a plan on January 6, 2012, and an amended plan on

January 11, 2010. The ADPH deemed both plans unacceptable and, on March 27, 2010, issued

its notice of revocation, finding ALC’s conduct and practices “detrimental to the welfare of

residents.” In response, ALC proposed to voluntarily surrender the assisted living license for 50

of the 164 units at CaraVita, and indicated that it planned to reopen the remaining units as

independent living apartments.

200. Additionally, Kinnamon, a Georgia lawyer who represented his mother-in-law and

twenty-five families of other Peachtree Estates residents, testified under oath in an affidavit that

ALC management – including ALC VP and Executive Medical Director, Dr. Mark Schaten –

were onsite at Peachtree Estates, and that corporate ALC personnel were “actively shredding

files of the facility,” following the GDCH notice of intent to revoke ALC’s license. CW10 was

present at the Peachtree Estates facility in early May 2012 (May 7-11), and confirmed that Dr.

Schaten – a direct report to Bebo and self-described “key member of [ALC’s] Senior Leadership

Team” – shredded resident care records, along with a corporate nurse. According to CW10, Dr.

Schaten went into the facility’s nurse’s office, closed the door behind him, and then staff heard

him running the shredder. “It was obvious [that Dr. Schaten was shredding resident care records]

because the papers were missing” and the staff were exclaiming “he’s shredding everything in

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there.” Another Peachtree Estates employee notified Georgia regulators. According to CW5,

Bebo was also present at Peachtree Estates at the same time as Dr. Schaten and Mr. Kinnamon.

Dr. Schaten was subsequently fired by ALC in June 2012, shortly after Bebo was terminated “for

cause.” Defendants’ spoliation of evidence provides strong evidence of culpable intent.

201. Significantly, practically all of ALC’s violations were driven by the Company’s

“corporate-level” directive to reduce costs. For example, in citing to inadequate staffing levels

that endangered resident welfare, state inspection reports cited to statements from ALC

employees who explained, for example, that “they [ALC’s corporate office] are so concerned

about the hours worked” that “the corporate office does not allow [the facility] chef sufficient

man hours to clean up” after meals, and that “the Regional Director of Operations for the

Alabama facility refused to provide CPR training for facility staff, and required that employees

pay for such training out of their own pockets.” Among other things, Georgia regulators found

that, in 2011, ALC had knowingly falsified documents in an attempt to conceal repeated,

deliberate violations of the fire code. Similarly, Alabama regulators found that ALC committed

repeated, deliberate violations of governing regulations, including providing inadequate staff to

serve the needs of residents, failing to train facility staff, and neglecting to have a facility

administrator with an operating license for an extended period.

C. Termination Of Bebo “For Cause”

202. Additionally, the fact that the Company’s long-serving CEO was fired “for cause”

– without any further explanation and only three weeks after the Company’s audit committee

initiated an investigation into alleged “irregularities” related to the Ventas lease – also raises a

strong inference of fraudulent intent. Indeed, while the former CEO has since filed a lawsuit

against the Company claiming that she was improperly terminated, the Company has expressly

reserved its rights to countersue Bebo for “matters related to her conduct and performance in her

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capacity as CEO of ALC.” Additionally, Bebo asserts in her state court action against ALC that

she “was a focus of the investigation,” including “her conduct as an officer, employee, agent

and/or director of ALC” and “allegations of [her] misconduct,” and was advised by the Company

to retain her own counsel. Bebo subsequently refused to resign from ALC’s Board, forcing the

Company to file a supplemental proxy statement announcing the Company’s intention to reduce

the numbers of directors and notifying shareholders that Bebo was the one director not

nominated for re-election. According to ALC’s own filing in the Bebo action, “ALC

stockholders voted overwhelmingly to remove Bebo as a director of the Company.”

D. The Ventas Litigation And $100 Million “Settlement”

203. The circumstances surrounding the timing and amount of the settlement of the

Ventas lawsuit, which was resolved for an amount that was 150% more than the purchased

properties’ appraised value and just days after the Company received an unfavorable ruling

permitting extensive discovery into the Company’s operations, also supports a finding of

scienter. Indeed, given the terms of the settlement, the Company’s resolution of the action

appears to have been singularly motivated by a desire to eliminate further scrutiny of ALC’s

operations.

E. Defendants Closely Monitored Regulatory Violations At ALC Facilities

204. As Defendants acknowledged in ALC’s Form 10-K for the year ended December

31, 2010, filed with the SEC on March 10, 2011, “[s]tate licensing agencies regulate certain of

our operations and where applicable monitor our compliance with a variety of state and local

laws governing licensure.” Indeed, Defendants specifically represented that corporate level

executives are involved in addressing the regulatory violations, “Upon notification or receipt of a

deficiency report, our regional and corporate teams assist the residence to develop, implement

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and submit an appropriate corrective action plan.” In light of this representation, the Company’s

repeated, continuing and egregious failures to comply with the relevant regulations governing the

facilities’ operations, as required by the CaraVita Lease, provides further support for Defendants’

scienter.

205. Confidential witnesses confirm that Defendants closely monitored regulatory

violations at its facilities during the Class Period. According to CW6, whenever an ALC facility

got a notice from the State, it was immediately faxed to the Clinical Director, who during CW6’s

time was Rex Bell, and then to Houck and Bebo as well as ALC’s legal department. Notices and

other citations would be discussed on the conference calls immediately.

206. CW12 similarly explained that state reports were scanned and sent to corporate

and regional, either to Cromer or Stamey. CW12 also sent it to an email address at corporate that

likely went to a distribution list. CW12 would request the approval of Cromer and the Regional

Nurse of a proposed response before typing up the response and sending it back to the state.

207. There was a pattern and practice of ALC executives, including Bebo, being

informed of regulatory violations throughout their facilities and telling regional directors to

“suck it up” and “subvert the regulations.” For example, CW17 was consistently instructed to

disregard state regulations and was made to staff buildings inappropriately knowing that they

could not handle the load. CW17 was told to put employees on the floor to work with residents

even though they did not have the appropriate training or certifications by the state. CW17 dealt

with this issue at every Washington community at any given time. CW17 received instructions

to ignore these regulations from Colwell for the most part, but there were times when Bebo

would tell CW17 to “subvert the regulations basically.” She would instruct CW17 to break it.

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208. Some of CW17’s communities had to pay fines and fees because they were found

to be out of compliance more than once. They were typically charged about $100 a day. If ALC

was fined for 10 or 15 days, for example, moving just one more resident into the facility would

cover the fees, so the Company was not worried about it. All the fees had to be submitted to

headquarters in Menomonee Falls for payment.

209. There was a “decision tree” that said what to do in any given situation. For

instance, if a facility received a citation, it would detail steps on whom to notify and when.

Citations and plans of correction were always submitted to corporate. They were sent to an

email address that was an email distribution list. Bebo was copied on or informed about

everything, including the distribution list assigned to the email address that the plan of

corrections and citations were sent. The community would let the Regional Director of

Operations and the Regional Nurse know about complaints and state violations. CW17 would

inform the Senior Regional Director of Operations (“RDO”), who would inform the corporate

office, specifically the VP of Nursing. There were lots of times when CW17 would also forward

the report along to corporate to ensure that it got there quickly. Receiving violations was such a

regular occurrence and “so backburner” for ALC that no one worried too much. Upper

management never sent help to the facilities. They knew that citations were coming and would

wait until they received them.

210. CW17 would make Sarah Vadakin (“Vadakin”), ALC VP of Nursing, aware of

these state reports. Once Vadakin left, CW17 would send the reports to either Bebo or Colwell.

Bebo gave “horrible,” profit-motivated instructions, which were always about making sure they

got residents moved in. Bebo never provided any instruction on how to appropriately handle an

allegation of abuse, for instance, and provided no follow-up. If Bebo called to discuss

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occupancy with CW17 and CW17 brought up an issue at a building, Bebo was never surprised.

Bebo oversaw this area for about 3-5 months until the Company hired “Dr. Mark.” Usually

CW17 would send the information via email, but often times would call and leave a message,

saying the facility was cited for this and ask what they were going to do about it. Because of

their inability to correct violations, several communities were put in a stop placement, which

meant that they could no longer bring in new residents, and if one of their residents went to the

hospital, the resident could not be readmitted to ALC’s facility. A stop placement was the fastest

way to get ALC to respond. CW17 would always call the Senior RDO and would usually have a

conference call with Bebo, Houck, and the corporate nurse.

211. More often than not, CW17 was “told to suck it up.” If CW17 lacked necessary

staff to get out of a citation for staffing, Colwell would tell CW17 to figure it out. The Company

would not allow CW17 to use a temporary staffing agency. CW17 was forced to inappropriately

cover the facilities, meaning not using enough people and using people who were not qualified.

CW17 heard that the citations and survey issues were not unique to CW17’s region and that

everyone was having similar issues. CW17 asked the Regional Nurse whether they would get

any help, and the Regional Nurse replied that all nurses have issues and basically to “suck it up.”

212. CW13 was the Regional Director over roughly ten ALC properties in Ohio.

Usually when a state regulator walked into a building, the residence director would contact

CW13 and the Regional Nurse. The Regional Wellness Director or Nurse would report the

citations to the VP of Clinical. After the VP of Clinical left, the information was reported to

Bebo instead. Bebo basically took over the clinical responsibility for about five or six months

until ALC hired Dr. Schaten in June 2011, following which the citations were reported to Dr.

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Schaten. CW13 would also report the state’s findings to the Divisional VP, Tamela Supchak

(“Supchak”)

213. CW3 explained that regulatory notices were received at ALC headquarters in the

mail and opened by the Accounting Department. It might be addressed to Bebo, Houck and/or

the Residence Director of the facility in question. CW3 or others in Accounting would give

notices to Houck or to Bebo’s assistant. CW3 was instructed to do this by CW3’s manager. If it

“seemed severe enough,” it would definitely go to Bebo. Usually they would send it to Houck

and “cc” the Residence Director. Nine out of ten times it went to Houck. If a state was

threatening to revoke a license, it would definitely go to Bebo. In such a case, CW3 would also

give copies of the notice to Houck and to the Legal Department “so everyone was on the same

page,” and would let the Residence Director know. But in general, CW3 took it to the manager

who would instruct, “this one to Jared [Houck], this one to Bebo.” The notices specified things

that did not meet regulatory criteria and advised as to what needed to be fixed. CW3 recalled

seeing notices throughout CW3’s tenure at ALC, but said they had more problems in 2011 and

2012. CW3 explained that, “when the Ventas stuff came up, everything needed to go to Laurie

and Legal,” which CW3 recalled was a couple of months before Bebo was “walked out” in May

2012.

214. ALC was legally obligated to keep up its state certifications, and they did not.

Bebo dealt with lapsed state certifications by creating a subsidiary, Swan Home Health Care

(“Swan”), to officially manage those residences that had lost certification, including properties in

Georgia. Swan was created sometime around the end of 2010. After taking on the Swan name,

the homes were still advertised as assisted living facilities and residents were charged the same

prices, even though Swan was “not technically assisted living – it was senior living.” Compared

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to “senior living” residences, assisted living facilities were held to a strict set of regulations,

which, under the Swan designation, ALC conveniently avoided. That was the goal. CW3 said,

“We were told that it was because state regulations were too firm. And honestly, we were told it

was a roundabout way around the state law.” CW3 believed this explanation came directly from

Bebo. CW6 confirms that ALC created a subsidiary called Swan Health Care to provide “special

services” for residents that were in Independent Living, even though they should have been in

Assisted Living.

215. According to CW1, ALC’s regulatory violations and decreased occupancy were

related to the Company’s cost cutting and “poor treatment” of employees. In response to

mounting citations and notices of revocation, ALC thus chose to relinquish valuable licenses in

order to avoid oversight from state agencies. However, decertification also decreased the value

of the beds, because the facilities essentially became retirement communities or apartment

buildings. Forfeiting licenses for the Ventas-leased properties violated the CaraVita lease.

216. CW5 has worked as an Administrator and an Executive Director so CW5 knew

what a payroll should look like, and understood how it should be based on the acuity of a

community and how many labor hours it takes to care for those people. In every community,

there were “multiple examples” of “inappropriate” budgetary calculations. CW5 would get

emails from Houck about the EBITDAR margins, listing them from best to worst. Every

community had a 50-60 percent EBITDAR margin. “You don’t run those kinds of numbers.

Even the Ventas owner representative said they were reporting over 50% margins.” In April

2012, the Southeast was reporting a 50% margin. “That’s unheard of.” “How could a CEO or

SDP think that earning 60 cents on the dollar is appropriate when the state is saying you need to

discharge residents?” It was also “inappropriate” that Houck talked about wanting to “de-license

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and bring in Swan Health Care,” an ALC subsidiary that would not be subject to the same

regulations as an official assisted living facility. They did this in some states as a workaround for

operating without certification. CW5 “has reason to think – suspect – that Ventas revisited their

financial statements, just the ones for ALC, in March or April [2012].” CW5 said, “Laurie Bebo

had to know what was going on there. There’s no way she couldn’t know.” Not only that, but

“the board knew what was going on while she was there and they failed to do anything about it.”

CW5 also asked the board to assign a supervisor other than Houck – anyone but Houck. “They

failed to acknowledge that he was part of the problem.”

217. According to CW2, ALC created two entities to sidestep state regulations. Under

Bebo’s direction, they created “Swan Home Healthcare,” which was a fully consolidated

company that was supposed to provide the nursing component of a resident’s care so that ALC’s

buildings could be licensed as independent living facilities rather than assisted living facilities.

This designation allowed the buildings to be staffed at much lower levels. CW2 was also

instructed to set up a company called “Compassionate Cuisine,” which was supposedly a

separate company that was to supply food and all kitchen services to ALC's locations in

Michigan. This was also done to avoid having to comply with state regulations. ALC provided

all the back office support for this company, set up a bank account in Compassionate Cuisine’s

name, processed all their payroll and accounts payable. The accounts receivable department also

had to bill rent and a “food program” as separate line items on residents invoices to show

separation. The owner of Compassionate Cuisine had no equity in it and was not at risk of loss

for anything.

218. According to CW2, Bebo “had a very close watch on staffing levels.” The shift in

customer base from residents participating in federal health care programs to private-pay

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residents “definitely resulted in lower occupancy.” “I think overall it was a negative trend.” The

“general trend” was declining occupancy, and CW2 was more certain of the decline in 2011.

219. CW6 heard about the Ventas litigation in July or August 2011, because that is

when Ventas representatives “showed up in Florida” at the Highland Terrace facility. CW6 was

the Regional Director of Sales & Marketing for the Southeast Region at the time. The Residence

Director at Highland Terrace called Cromer, who was then the Regional Director of Operations,

and said that “Ventas was in the building and wanted to see financial records, building

maintenance records, and what should we do?” According to CW6, ALC “refused access.”

Then Houck flew down, and “within a couple weeks, we started hearing that we’d come to work

and find locks on the doors.” The legal documentation was not filed until months later.

220. According to CW6, Ventas started investigating the facilities because ALC had

“so many complaints” from residents and their families and “so many people making accusations

for such a long period of time.” It was over six months from the time they started looking into

the complaints to the time the lawsuit was filed, partly because Ventas “really wanted to be

thorough and wanted to base things on actual facts,” but also because “they received no

cooperation from ALC. That’s part of why the relationship went sour.” CW6added, “It was a

process of gathering information before they could move. When they did file, it was huge and

ultimately led to ALC outright purchasing those buildings.”

F. Defendants Closely Monitored Occupancy Levels As One Of ALC’s “Most Important Key Performance Indicators”

221. During the Class Period, Defendants closely monitored the occupancy levels at its

facilities. Indeed, ALC admitted in its 2011 10-K that occupancy was one of the “most important

key performance indicators” that the Company closely monitored for all of its residences:

We manage our business by monitoring certain key performance indicators. We believe our most important key performance indicators are:

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Census

Census is defined as the number of units that are occupied at a given time.

Average Daily Census

Average Daily Census, or ADC, is the sum of occupied units for each day over a period of time, divided by the number of days in that period.

Occupancy

Occupancy is measured as the percentage of average daily census relative to the total number of units available for occupancy in the period.

* * * *

In order to compare our performance between periods, we assess the key performance indicators for all of our continuing residences.

222. Confidential Witnesses confirm that ALC executives, and particularly Bebo,

followed occupancy figures closely. Although in face-to-face meetings, Bebo did not necessarily

speak, CW6 explained that “[s]he’d speak up on the conference calls, though.” “Most of the

conference calls were about occupancy – how to get a move-in – so she was very active in those

calls. Typically you heard from her when there was an issue about a resident being

inappropriate.” This issue came up about three times a week. “That’s typically when she speaks

up.” When CW6 became Residence Director of Winterville in December 2011, the census was

only ten residents for the fifty-six unit building.

223. CW4 also explained that, a lot of the time the cuts were meant to promote more

occupancy in order to “make the buildings look better.” Very few people ever spoke up; most

went along with whatever Bebo wanted. Some of the others in management positions had been

there so long, “they were used to being quiet.” CW13 similarly explained that Bebo held

quarterly call with all of the Regional Directors. The Regional Director, the Divisional Director,

Bebo, and Bucholtz discussed occupancy numbers on these calls. They were basically

evaluating the performance of the directors at the communities. They would go over occupancy

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and would also discuss if there were any citations, but the call was mostly focused on occupancy,

quotas for sales calls, quotas for move-ins, and move-outs.

224. Each Region had a leadership trifecta: a regional Director of Operations, a

Regional Director of Sales, and a regional clinical person. Regional Directors of Operations

usually reported to the Divisional VP, but CW7 reported straight to Bucholtz. CW7’s region, the

Southeast Region, was the hot region, and Bebo visited a lot because it was a newly acquired

region and was an important acquisition. The focus was all about 80% occupancy. When ALC

took over the region from CaraVita, the facilities were running at about 92% occupancy, but the

numbers started dropping pretty quickly. The highest CW7 saw occupancy was about 87%. But

by the time CW7 left, occupancy had dropped down to 76%, and CW7 heard occupancy in the

region subsequently dropped down in the 60s. Occupancy was dropping every day because there

were more move-outs occurring than move-ins. The state inspectors were getting called in, as

both families and former employees called to complain about ALC. The mentality at ALC was

that they “would beat people down and treat them like crap.” ALC increased prices but was not

providing proper care.

225. CW7 provided all quarterly sales reports, numbers, and projections to Bucholtz,

including reports on market changes, how numbers were dropping, and the reasons for any

decline. One night, Bucholtz told CW7 that ALC was lying to Ventas. CW7 remarked to

Bucholtz what a mess things were in the region and Bucholtz replied how hard it was to meet

numbers but that the information ALC was sharing with Ventas was not accurate.

226. CW12 also received a report by email weekly or monthly that listed the

occupancy percentage of each facility within the Region, and the overall “regional occupancy

rate.” The report would show both the resident count and the number of units because, for

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instance, two residents could be staying in one room. It would list the monthly totals, the

projected numbers for the following month, and note discrepancies. The report showed the

actual and budgeted numbers, so that directors knew what their goals were. “Everybody”

received the report, meaning all of the Executive Directors. The report would be sent down from

corporate to the regional directors, who would then distribute to the Executive Directors. CW12

saw Bebo’s name on the distribution list of those occupancy reports.

227. Bebo called CW17 all the time to talk about occupancy in ALC’s facilities in

Washington and Oregon. During the calls, Bebo would discuss whether to offer a move-in

special to increase occupancy. According to CW17, corporate was always monitoring

occupancy: “that is all we talked about.” Occupancy reports came out daily. Every community

would enter their occupancy in the morning through a program ALC designed, and by that

afternoon they would get the Company’s update. CW17 received a report each day that

compared occupancy by region, by division, and by Company all in the same report. CW17 said

that everyone at the Company got these reports, meaning Bebo down to the residence directors.

228. CW6 explained that census reports were generated through the TIPS software

program. RDOs and regional sales directors all had access to it, as did people at the corporate

level. It was a shared system. Occupancy data and care plans went into TIPS. Because of the

way move-outs are recorded, if you looked at the census on January 31 it might register as 86%,

but it could be down to 70% by the second week of February. Occupancy numbers fluctuated in

part because ALC housed residents for a variety of terms, ranging from full-time to temporary to

respite stays. CW6 estimated that 50% of move-ins were respite (short-term) stays. “Typically

you’ll hit high census numbers in mid-month.” ALC typically sent occupancy numbers to Ventas

the second week of the month. Move-outs were usually recorded on the second or third day of

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the month, and “the pipeline would allow you to move in a significant number of people in the

first two weeks. So you could post strong end-of-the-month numbers in January and fall off

miserably in the first week of February.”

229. On Mondays, CW13 would have a phone call with each building in the region to

go over occupancy and other issues. At the end of the day, they would have to project their

numbers for each week. Every Friday, there was a wrap-up call to validate the weekly numbers.

CW13 would report the numbers to Divisional VP Supchak, though CW13 is sure the occupancy

numbers also went up to the executives, such as Bebo. CW13 felt that there was a lot of

redundancy in reporting occupancy numbers. ALC had a computer system and in-house

software, through which the buildings would enter move-ins. The calls were to validate the

numbers in the system. Perhaps a resident moved in late Friday and was not in the system yet.

Employees could pull up and access occupancy reports through the system, called “Crystal

Reports.” CW13 received these reports daily and would have to validate them. CW13 is sure

the executives accessed these reports as well because “they lived and breathed by the numbers.”

230. CW2 explained that there was a system the Accounts Receivable (A/R)

Department used to generate “Crystal Reports” for each facility on the average monthly number

of residents in a building These monthly performance reports, which contain both income

statements and occupancy reports, incorporated data from general ledger reports. They were

posted on ALC’s Intranet and all facility managers, regional directors, and executives, including

Bebo, had access to them. Bebo would have seen these reports.

231. Additionally, CW2 explained that management maintained a “Rolling Occupancy

Worksheet” that was broken out by Region and Division. It was an Excel file that was stored on

ALC’s server, so people knew where it was and had access to it. Management would use it to

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report to the Board of Directors. The worksheet was broken up by region and division, and

contained running totals by quarter, by year and by comparison to prior year. It also had budget

numbers to compare to. Also in the worksheet were data on occupied units, both private pay and

Medicaid pay.

232. According to CW7, there were daily occupancy summary reports at ALC that

showed occupancy dropping over time. The Executive VPs, such as Bucholtz, knew the

occupancy issues, and Bucholtz was Bebo’s “right-hand woman.” “It goes straight to Laurie.”

The daily occupancy reports were reviewed for each facility. Everyone had access to these

reports, meaning the Regional Directors, the executive VPs, and Bebo. “Laurie Bebo lived by

them.” At the annual meeting, all the executives talked about was “driving occupancy.” CW7

brought up occupancy issues on conference calls with Bebo. CW7 feels the numbers dropped

because ALC was doing so much wrong and not providing proper care. CW7 could not live with

the guilt and left because the care was so horrible. Additionally, every Regional Sales Directors

for each of the sixteen regions participated in weekly Monday conference calls with ALC

executive management, including Bebo. During these weekly conference calls, the executives

“crucified” and “beat down” the Regional Directors about occupancy “numbers are dropping.”

Although Bucholtz led these calls, “ [eJveryone knew that occupancy was dropping .”

IX. LOSS CAUSATION

233. As detailed above, Defendants’ false representations and omissions of material

facts caused ALC’s Class A common stock to trade at artificially inflated prices and operated as a

fraud and deceit on purchasers of the Company’s stock. By March 31, 2011, ALC’s stock closed

at a split-adjusted Class Period high of $19.57 and continued to trade at artificially high prices

until May 4, 2012, when the truth about the previously concealed adverse facts concerning

ALC’s noncompliance with the CaraVita Lease covenants and its impact on the Company’s

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condition began to be revealed in a series of disclosures. As a result, ALC’s stock price declined

to a closing price of $7.89 on August 7, 2012 – a drop of 60% from the split-adjusted Class

Period high price of $19.57 for a total market capitalization loss of approximately $233 million.

Moreover, as the market continued to absorb the truth about ALC’s noncompliance with the

CaraVita Lease and its impact on the Company’s condition, the price for ALC stock continued to

decline, closing at $7.01 on August 13, 2012 and losing an additional 11% of value. Class

members who purchased ALC Class A common stock during the Class Period suffered economic

loss, i.e. , damages, under the federal securities laws.

234. As alleged above, before trading commenced on May 4, 2012, ALC disclosed for

the first time that Ventas had filed a lawsuit against the Company for violations of the terms of

the master lease agreement. ALC also revealed that it had received notices of intent to revoke

permits from state regulators with respect to its licenses to operate three assisted living facilities

in Georgia and Alabama. Ventas contended that receipt of those notices constituted violations of

the CaraVita Lease.

235. The Company’s May 4, 2012 press release also disclosed for the first time that on

May 3, 2012, the Company’s Board of Directors had retained outside counsel and launched an

internal investigation into “possible irregularities in connection with the Company’s lease with

Ventas.” Following this announcement, the market price for ALC’s stock dropped on unusually

heavy trading nearly $3.00 per share from the prior day’s close of $19.17 to as low as $16.18,

and closed at $16.80 – a loss of 12.36% over the prior day.

236. On May 10, 2012, ALC failed to file its quarterly report on Form 10-Q for the

first quarter of 2012, as required. The following day, on May 11, 2012, the Company’s stock

price declined $1.31 from its $17.58 per share opening price to close at $16.38, a one-day decline

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of 7.4%. After market close on May 11, 2012, ALC confirmed that it was unable to timely file

its quarterly report because the Company was “unable to predict” how long its internal

investigation would take or “whether the findings of the investigation would have any impact on

the Ventas lease, the Company’s results of operations or financial condition, or other matters

relating to the Company and its business.” When trading resumed on Monday, May 14, 2012,

ALC’s stock price declined another $0.37 or 2.26% to close at $16.02.

237. On May 15, 2012, after market close, ALC filed its quarterly report on Form 10-Q

for the first quarter of 2012 ended March 31, 2012. The Company disclosed additional new

details about the Ventas litigation, including assertions by Ventas in a May 9, 2012 letter that

ALC had defaulted on the CaraVita Lease during the Class Period by, among other things,

submitting “fraudulent information by treating units leased to employees as bona fide rentals by

third parties” and violating the minimum occupancy covenant and coverage ratio covenants,

“fail[ing] to provide required notices, including with respect to fires at an assisted living facility

in Florida subject to the [CaraVita] lease,” failing to comply with lease requirements with respect

to repair work, and failing to provide information previously requested by Ventas. The Company

reiterated that the negative impact on earnings if Ventas were to succeed in its claims would be

material, and also disclosed that any material default on the Ventas lease would also constitute an

event of default under a separate lease between ALC and MLD Delaware Trust (which also had

been acquired by Ventas) governing four properties containing a total of 156 units (the “MLD

Units”) causing a further net revenue reduction of $0.8 million. Finally, ALC disclosed that

average private pay occupancy had decreased over the same quarter in the prior year;

nevertheless, the Company claimed it would continue to pursue its private pay strategy. On this

news, ALC’s stock price declined from an opening price of $16.18 per share to close at $51.25

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on May 16, 2012, a decline of $0.90 or 5.57%. The stock price continued to decline $0.76 the

following day, May 17, 2012, from $15.14 to $14.46 per share, or 4.98%.

238. After the close of trading on May 29, 2012, the Company announced that it had

fired Bebo “for cause,” and named Dr. Roadman as new interim President and CEO. The

Company refused to provide any details about the reasons for Bebo’s termination, indicating only

that her replacement, Dr. Roadman, would “concentrate on and directly address certain matters

facing ALC.” Commenting on his appointment, Dr. Roadman stated “I recognize that we have

areas that need attention, and those matters are my top priority.”

239. Securities analysts and news reporters, however, immediately connected Bebo’s

termination with the Company’s recent disclosures of noncompliance with regulatory

requirements and violations of the CaraVita Lease covenants. For example, in a May 29, 2012

article entitled “Embattled Assisted Living Concepts Fires CEO Bebo,” Guy Boulton of the

Milwaukee Journal Sentinel wrote “Assisted Living Concepts, the assisted living chain facing

increasing scrutiny from regulators in several states, has fired Laurie Bebo, its president and

chief executive” and noted that “[r]egulators in several states, including Wisconsin, have found a

string of violations at several of the company’s center in the past year.” The article further

explained that “[i]n April, Idaho regulators shut down a center in Twin Falls for inadequate

staffing” and that, as revealed by the Ventas lawsuit, “[s]tate inspections in Georgia and Alabama

found inadequate staffing at several of the company’s centers in those states.”

240. Similarly, a May 30, 2012 analyst report by Lawrence Solow, CFA, of CJS

Securities, Inc., bluntly stated “CEO Laurie Bebo fired . . . [e]xact reason(s) behind dismissal not

disclosed, likely related to recent allegations of violation of [Ventas] lease obligations” as

“negative image of lawsuit and related improprieties could have driven Board’s decision to

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implement a change.” The report further explained that the “sudden departure of CEO is never a

good thing and it is unlikely near term performance will exceed expectations” citing “risks”

including the “[o]ngoing lawsuit from Landlord Ventas.” The report further warned that

“uncertainty could continue to pressure shares.”

241. In reaction to the news of Bebo’s firing, the market price for ALC common stock

declined on unusually heavy trading from its closing price on May 29, 2012 of $14.48 to as low

$12.93 on May 31, 2012 – a $1.55 drop or approximately 11%.

242. Before trading commenced on August 6, 2012, the Company issued a Form 8-K,

purportedly in compliance with the “Fair Disclosure” requirements under SEC Regulation FD,

17 CFR §§ 240, 243, 249. The Company stated that, in its August 3, 2012 conference call to

discuss ALC’s financial results for the second quarter of 2012, a participant had inquired during

the question and answer session “about the Company’s expectation regarding future financial

impacts of increased staffing.” ALC’s Form 8-K disclosed that “[a]fter further consideration, the

Company estimates that the hiring of approximately 800 additional employees will increase

operating expenses from the second quarter of 2012 to the third quarter of 2012 by

approximately $5 to $6 million .” Following this announcement, the market price for ALC

common stock declined by $2.09 from its closing price of $12.86 on the prior trading day, Friday

August 3, 2012, to close at $10.77 on Monday, August 6, 2012 – a one-day decline of more than

16%.

243. On August 7, 2012, before the market opened, ALC disclosed in Form 8-K that,

on August 2, 2012, the SEC had commenced an investigation into the Company’s “compliance

with occupancy covenants” under the CaraVita Lease and the “leasing of units for employee

use,” among other topics. On this revelation, the market price of ALC common stock further

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declined $2.88 from its closing price of $10.77 from the prior trading day to close at $7.89 on

August 7, 2012 – a one-day loss of nearly 27%.

244. After close of trading on August 8, 2012, the Company filed its quarterly report

on Form 10-Q for the second quarter of 2012 ended June 30, 2012, discussing the Company’s

financial results and operating condition and further informed investors about the financial

impact of the Company’s pervasive regulatory violations and declining care standards.

In the second quarter of 2012, we began a review of our operations which included identifying and evaluating operational issues affecting the delivery of care and service to our residents. Based upon our review, we believe that certain failures to meet ALC’s established performance standards have contributed to ALC’s inability to increase private pay occupancy as rapidly as desired. In the second quarter of 2012, we initiated a number of measures to enhance the performance of our resident services to restore in all affected facilities the level of quality care and service expected by our residents, their families, the regulators, the board of directors and the stakeholders of the Company and to re-establish our reputation with regulators, our stakeholders and the communities in which our facilities are located.

245. These “restorative” efforts included, among other things, hiring an independent

consultant “to review the quality of our resident services performance” with on-going

independent quality reviews of residences, creating a new position of Senior VP of Quality

Services and Risk Management, hiring approximately 800 new employees “to enhance quality

and clinical procedures, and “revis[ing] staffing patterns.”

246. The Form 10-Q also disclosed that, on June 29, 2012, Bebo had (i) initiated an

arbitration proceeding against ALC disputing the existence of cause for her termination and

alleging that she is entitled to more than $2.4 million in severance pay and other termination

benefits because her termination was without cause; and (ii) filed a lawsuit captioned Bebo v.

Assisted Living Concepts, Inc. in Wisconsin state court seeking an order requiring ALC to

produce certain Company records and a judgment requiring ALC to indemnify Bebo for all

expenses incurred in connection with the Company’s investigation as well as to advance all

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expenses incurred by Bebo in connection with the investigation. ALC’s quarterly report also

revealed that, in the first quarter of 2012, ALC closed one property consisting of 56 units in

Washington and, in the second quarter of 2012, ALC closed an additional property consisting of

39 units in Idaho. Both facilities were closed due to regulatory issues. ALC further stated that it

had “several other residences with various degrees of regulatory issues” but did not provide any

further specific information.

247. As the market continued to absorb the full impact of ALC’s disclosures about the

extent and nature of its regulatory violations, the breaches of its CaraVita Lease and the financial

consequences to the Company, the market price for ALC stock continued to decline, trading as

low as $6.93 on August 14, 2012.

X. CLASS ACTION ALLEGATIONS

248. The Pension Trust Fund brings this action as a class action pursuant to Rule 23 of

the Federal Rules of Civil Procedure on behalf of itself and all persons and entities who

purchased or otherwise acquired the publicly-traded Class A Common Stock of Assisted Living

Concepts, Inc. between March 4, 2011 and August 6, 2012, inclusive, and were damaged thereby.

Excluded from the Class are Defendants (as set forth herein), present or former executive officers

of ALC and their immediate family members (as defined in 17 C.F.R. § 229.404, Instructions

(1)(a)(iii) and (1)(b)(ii)).

249. The members of the Class are so numerous that joinder of all members is

impracticable. During the Class Period, there were more than 10 million outstanding shares of

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ALC common stock3 owned by hundreds, if not thousands, of persons. Thus, the disposition of

their claims in a class action will provide substantial benefits to the parties and the Court.

250. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to members of the Class that

predominate over questions which may affect individual Class members include:

(a) Whether the federal securities laws were violated by Defendants;

(b) Whether Defendants engaged in a fraudulent scheme or omitted and/or

misrepresented material facts;

(c) Whether Defendants’ statements omitted material facts necessary to make

the statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether Defendants’ knew or recklessly disregarded that their statements

were materially false and misleading;

(e) Whether the prices of ALC Class A common stock were artificially

inflated during the Class Period;

(f) Whether Defendants’ fraudulent scheme, misrepresentations and

omissions caused Class members to suffer economic losses, i.e. , damages; and

(g) The extent of damages sustained by Class members and the appropriate

measure of damages.

251. Lead Plaintiff’s claims are typical of those of the Class because Lead Plaintiff and

the Class purchased ALC Class A common stock during the Class Period and sustained damages

from Defendants’ wrongful conduct. Lead Plaintiff will adequately protect the interests of the

3 On June 16, 2011, ALC completed a 2:1 stock split, which resulted in a total of approximately 20 million shares of Class A common stock outstanding.

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Class and has retained counsel who are experienced in class action securities litigation. Lead

Plaintiff has no interests that conflict with those of the Class.

252. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy. A class action will achieve economies of time, effort and

expense and provide a uniformity of decision to the similarly situated members of the Class

without sacrificing procedural fairness or bring about other undesirable results. Class members

have not indicated an interest in prosecuting separate actions as none have been filed. The

number of Class members and the relatively small amounts at stake for individual Class

members make separate suits impracticable. No difficulties are likely to be encountered in the

management of this action as a class action.

253. In addition, a class action is superior to other methods of fairly and efficiently

adjudicating this controversy because the questions of law and fact common to the Class

predominate over any questions affecting only individual Class members. Although individual

Class members have suffered disparate damages, the fraudulent scheme and the

misrepresentations and omissions causing damages are common to all Class members. Further,

there are no individual issues of reliance that could make this action unsuited for treatment as a

class action because all Class members relied on the integrity of the market and are entitled to

the fraud-on-the-market presumption of reliance.

XI. THE APPLICABILITY OF PRESUMPTION OF RELIANCE: THE FRAUD ON THE MARKET DOCTRINE

254. The market for ALC’s Class A common stock was open, well developed and

efficient at all relevant times. Lead Plaintiff and the Class are entitled to a presumption of

reliance on Defendants’ material misrepresentations and omissions pursuant to the fraud-on-the-

market doctrine for the following reasons, among others:

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(a) ALC’s stock met the requirements for listing, and was listed and actively

traded, on the New York Stock Exchange, a presumptively efficient market;

(b) ALC’s stock volume available for trading was substantial. At the

beginning of the Class Period, ALC had approximately 10 million shares outstanding. On June

16, 2011, ALC completed a 2:1 stock split, which resulted in a total of approximately 20 million

shares of Class A common stock outstanding thereafter. The Company had an average weekly

trading volume of 2% during the Class Period and 2.5 for the trading period March 4, 2011

through August 14, 2012;

(c) Institutional investors held a significant portion of ALC common stock, on

average of 16.6 million shares or approximately 92.7% of ALC’s average outstanding shares

during the Class Period;

(d) As a regulated issuer, ALC filed annual, periodic and interim public

reports with the SEC;

(e) ALC was eligible to register securities with the SEC on Form S-3. To be

S-3 eligible, a company must have $75 million in stock held by non-affiliates, and had to have

filed financial reports with the SEC for at least one year. The value of shares held by non-

affiliates of ALC exceeded the $75 million threshold;

(f) ALC regularly communicated with public investors via established market

communication mechanisms, including through the regular dissemination of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures,

such as communications with securities analysts, the financial press and other reporting services;

and

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(g) Numerous securities analysts and news reporters followed ALC, attended

the Company’s conference calls, and issued reports prior to, during and after the Class Period.

255. Furthermore, as demonstrated above, the market price for ALC stock reacted

rapidly in response to the release of unexpected material information about the Company, which

demonstrates a cause-and-effect relationship between the public release of unexpected

information about ALC and the price movement of the Company’s stock.

256. As a result of the foregoing, the market for ALC common stock promptly digested

current information regarding ALC from all publicly available sources and such information was

reflected in the Company’s stock price. Under these circumstances, all purchasers of ALC

common stock during the Class Period suffered similar injury through their purchases of ALC

common stock at artificially inflated prices and the subsequent revelations which caused the

prices to decline, and a presumption of reliance applies.

257. A Class-wide presumption of reliance is also appropriate in this action under the

Supreme Court’s holding in Affiliated Ute Citizens of Utah v. U.S. , 406 U.S. 128 (1972), because

plaintiffs’ fraud claims are grounded in Defendants’ material omissions. As this action involves

Defendants’ failure to disclose material adverse information regarding ALC’s compliance with

CaraVita Lease covenants – information that Defendants were obligated to disclose – positive

proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld

be material in the sense that a reasonable investor might have considered them important in the

making investment decisions.

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XII. CLAIMS FOR RELIEF

FIRST CLAIM FOR RELIEF For Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5(b)

Against ALC And Bebo

258. Lead Plaintiff incorporates and realleges each of the foregoing paragraphs as

though fully set forth herein and further alleges as follows.

259. During the Class Period, Defendants engaged in a scheme and fraudulent course

of conduct. In violation of Section 10(b) of the Exchange Act and Rule 10b-5, Defendants,

individually or in concert, by the use of means or instrumentalities of interstate commerce and of

the United States mails (i) employed devices, schemes, and artifices to defraud; (ii) made untrue

statements of material fact and omitted to state facts necessary to make the statements made not

misleading; (iii) deceived Lead Plaintiff and the Class, as alleged herein; (iv) artificially inflated

and maintained the market price for ALC common stock; and (v) caused Lead Plaintiff and the

Class to purchase ALC common stock at artificially inflated prices and suffer losses. Defendants

were primary participants in the wrongful and illegal conduct charged herein.

260. During the Class Period, Defendants made, disseminated and/or approved each of

the statements specified in Section VII above.

261. Each of the statements specified in Section VII above was materially false or

misleading at the time it was made because it contained misrepresentations of fact or failed to

disclose material facts necessary to make the statements not misleading in light of the

circumstances in which it was made.

262. The statutory safe harbor conditionally provided by 15 U.S.C. Section 78u-5 for

certain forward-looking statements does not apply to any of the statements alleged herein to be

materially false or misleading because:

a. The statements were not forward-looking or identified as such when made;

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b. The statements were not accompanied by meaningful cautionary language

that sufficiently identified the specific important factors that could cause actual results to differ

materially from those in the statements; or

c. The statements were made by Defendants with actual knowledge that the

statements were false and misleading.

263. Defendants made, disseminated or approved the statements specified in Section

VII above while knowing that the statements were false and misleading because they failed to

disclose facts necessary to prevent the statements from misleading investors in light of the

circumstances under which they were made.

264. Lead Plaintiff and the Class purchased ALC common stock in reliance upon the

truth and accuracy of the statements specified in Section VII above and the other information that

was publicly reported by Defendants about ALC and its operations without knowledge of the

facts, transactions, circumstances, and conditions fraudulently misrepresented to or concealed

from the market during the Class Period, as specified above.

265. Lead Plaintiff and the Class has suffered damages because they:

a. Paid artificially inflated prices for ALC common stock;

b. Purchased ALC stock in an open, developed and efficient public market;

and

c. Incurred economic loss when the prices of ALC common stock declined

as the direct and proximate result of the public dissemination of information that was

inconsistent with Defendants’ prior public statements or otherwise alerted the market to facts,

transactions, circumstances and conditions concealed by Defendants’ misrepresentations and

omissions or the economic consequences thereof.

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266. Lead Plaintiff and the Class would not have purchased ALC common stock at the

prices they paid, or at all, if they had been aware that the market price had been artificially and

falsely inflated by Defendants’ fraudulent conduct and misleading statements and omissions.

SECOND CLAIM FOR RELIEF For Violation Of Section 20(a) Of The Exchange Act Against ALC And Bebo

267. Lead Plaintiff incorporates and realleges each of the foregoing paragraphs as

though fully set forth herein and further alleges as follows.

268. Defendants and/or persons under their control violated Section 10(b) of the

Exchange Act and Rule 10b-5 by the acts and omissions described above, causing economic

injury to Lead Plaintiff and other members of the Class.

269. By virtue of their positions as controlling persons, Defendants are each liable

under Section 20(a) of the Exchange Act for the acts and omissions committed in violation of

Section 10(b) the Exchange Act.

270. Each of the Defendants acted as a controlling person of some or all of persons

who committed the violations of Section 10(b) of the Exchange Act because they each had the

capacity to control, or did actually exert control, over the actions of the other(s) in violation of

the federal securities laws.

271. Bebo was, and acted as, a controlling person of ALC within the meaning of

Section 20(a) of the Exchange Act by virtue of her position of power and control as President,

CEO, and as a member of the Board of Directors of ALC; her stock ownership; her power to hire

and fire and her supervisory authority over other members of ALC’s senior management; her

responsibility for, participation in and awareness of the Company’s day-to-day operations and

performance. Bebo had the power to influence and control, and in fact did influence and control,

directly or indirectly, the decision-making of the Company, including the content and

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dissemination of the statements that Lead Plaintiff alleges were false and misleading. Bebo was

provided with or had unlimited access to copies of the Company’s press releases, periodic reports

filed with the SEC, and other statements alleged by Lead Plaintiff to be misleading before or

shortly after these statements were issued and had the ability to prevent the issuance of the false

statements and material omissions or cause such misleading statements and omissions to be

corrected.

272. In addition, Bebo had direct involvement in or power to control the day-to-day

operations of ALC and, therefore, is presumed to have the power to, and did exercise, control or

influence the particular transactions giving rise to the violations of the federal securities laws

alleged herein and the content of the statements that misled investors about those conditions and

practices as alleged above.

273. Defendant ALC had the power to control and influence Bebo and others who

violated Section 10(b) of the Exchange Act and Rule 10b-5 by the acts and omissions described

above by virtue of its power to hire, fire, supervise and otherwise control the actions of its

employees, including Bebo, and the salaries, bonuses, incentive compensation and other

employment consideration and arrangements provided to them.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff prays for relief and judgment as follows:

A. Declaring this action to be a class action pursuant to Rule 23;

B. Awarding compensatory damages, interest and costs in favor of Lead Plaintiff and

the Class against all Defendants, jointly and severally; and

C. Awarding such other relief as the Court may deem just and proper.

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JURY DEMAND

Lead Plaintiff demands a trial by jury.

Dated: February 15, 2013 Respectfully submitted,

BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP

/s/ Blair A. Nicholas BLAIR A. NICHOLAS

BLAIR A. NICHOLAS BENJAMIN GALDSTON JOSEPH W. GOODMAN 12481 High Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323 [email protected] [email protected]


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Robert E Lifson, et al. v. Assisted Living Concepts, Inc., et al. 12-CV-00884-Amended Complaint

Documents

Transcript of Robert E Lifson, et al. v. Assisted Living Concepts, Inc., et al. 12-CV-00884-Amended Complaint