West Palm Beach Police Pension Fund, et al. v. …securities.stanford.edu/filings-documents/1044/BEAT10_01/...16 WEST PALM BEACH POLICE PENSION Civil Actio o.: FUND, Individually and

Case 3:10-cv-00711-L -NLS Document 1 Filed 04/05/10 Page 1 of 59

1 MORGAN, LEWIS & BOCKIUS LI.PJoseph E. Floren, State Bar No. 168292

2 Elizabeth A. Frohlich, State Bar No. 195454One Market, Spear Street Tower

3 San Francisco, CA 94105-1126 FILEDTel: 415.442. 1000

4 Fax: 415. 442.1001APR 6 2010

-^^ 5 Of Counsel

- 0LXRK, U,k. DI8TR I CO RT=s- 6 Marc J. Sonnenfeld SOUTHBAN DIOTAICT - : NN1A

Karen Pieslak Pohlmann

7 1701 Market StreetPhiladelphia, PA 19103-2921

8 Tel.: 215.963.5000CD Fax: 215.963.5001

9Attorneys for Defendants CardioNet, Inc., Arie

10 Cohen, James M. Sweeney, Martin P. Galvan, FredMiddleton, Woodrow Myers Jr., M.D., Eric N.

1 I Prystowsky, M.D., Harry T. Rein, Robert J. Rubin,M.D., and Randy H. Thurman ^x••

12

[Additional parties and counsel identified on13 signature page] A.

14 UNITED STATESÎSTRICT COURT} .•r.:.r».:.:..ws+owgtr^sAr►^.,'44ir.eSSt'1T^^"^w.^.

15 SOUTHERN DISTRICT OF CALIFORNIA

16 WEST PALM BEACH POLICE PENSION Civil Actio o.: FUND, Individually and on Behalf of All Others 10 CV U 1 1 L NLS17 Similarly Situated,

NOTICE OF REMOVAL^^

18 Plaintiff, lJ ;,Rem - ._.

19 vs.Superior Court of the State of California

20 CARDIONET, INC., ARIE COHEN, JAMES M. County of San DiegoSWEENEY, MARTIN P. GALVAN, FRED Docket No.: 37-2010-00086836-CU-SL-

21 MIDDLETON, WOODROW MYERS JR., M.D., CTLERIC N. PRYSTOWSKY, M.D., HARRY T.

22 REIN, ROBERT J. RUBIN, M.D., RANDY H.THURMAN, BARCLAY'S CAPITAL, INC.,

23 CITIGROUP GLOBAL MARKETS INC.,LEERINK SWANN LLC, THOMAS WEISEL

24 PARTNERS LLC, BANC OF AMERICASECURITIES LLC and COWEN AND

25 COMPANY,

26 Defendants.

27

28

NOTICE OF REMOVAL

v


1 Pursuant to 28 U.S.C. §§ 1441, 1446, defendants CardioNet, Inc., Arie Cohen, James M.

2 Sweeney, P. Galvan lied Middleton Woodrow Myers Jr. M.D. Eric N. Pr stowskY> >' ^ Y Y Y,

3M.D., Harry T. Rein, Robert J. Rubin, M.D., and Randy H. Thurman, (collectively, the

4

"CardioNet Defendants"), and Barclays Capital, Inc. (erroneously named as Barclay's Capital,5

6 Inc.), Citigroup Global Markets Inc., Leerink Swann LLC, Thomas Weisel Partners LLC, Banc of

7 America Securities LLC and Cowen and Company (collectively, the "Underwriter Defendants"

8 and together with the CardioNet Defendants, "Defendants") hereby remove the above-captioned

9 civil action, and all claims and causes of action therein, from the Superior Court of the State of

10 California, San Diego County to the United States District Court for the Southern District of

11California. This action is removable pursuant to the Securities Litigation Uniform Standards Act

12

13of 1998 ("SLUSA"), 15 U.S.C. §§ 77v(a), 77p(c).

14As grounds for removal, Defendants state as follows:

15 1. On or about March 5, 2010, plaintiff West Palm Beach Police Pension Fund filed a

16 Class Action Complaint for Violation of the Securities Act of 1933 and the California

17 Corporations Code (the "Complaint") initiating an action in the Superior Court of the State of

I8California, San Diego County, Docket No. 37-2010-00086836-CU-SL-CTL (the "State Court

19

Action"). The Complaint is styled as a putative class action on behalf of plaintiff and all others20

21who "purchased or otherwise acquired the common stock of CardioNet pursuant and/or traceable

22 to the Company's $83 million initial public stock offering on March 25, 2008 (the ÌPO') and or

23 its $152+ million secondary stock offering on August 6, 2008 (the `Secondary Offering,'

24 collectively with the IPO, the Òfferings')." ' Compl. ¶ 1. (A copy of the Summons and Complaint

25 is attached hereto as Exhibit A.)

262. The Complaint alleged, among other things, that the Offerings contained

27

misstatements and omissions in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of28

2 NOTICE OF REMOVAL


1 1933, 15 U.S.C. §§ 77(k), 77(a)(2), 77(o) (the "Securities Act"). See Compl. ¶T 31, 64-80, 87-

2 106. The Complaint also asserted a claim under Sections 25401 and 25501 of the California

3Corporations Code Against defendants Sweeney and Middleton. See Compl. ¶J 1, 31, 107-17,

4

3. On or about March 10, 2010, plaintiff filed an Amended Complaint in the State5

6Court Action that eliminated the state law claims under Sections 25401 and 25501 of the

7 California Corporations Code, leaving the remaining allegations of a putative class action under

8 the Securities Act untouched. See Am. Compl. (A copy of the Amended Complaint is attached

9 hereto as Exhibit B.)'

10 4. Defendants have taken no action in state court, and the state court has not entered11

any orders in the State Court Action.12

135. The State Court Action is related to an earlier-filed putative class action now

14 Pending in the United States District Court for the Eastern District of Pennsylvania, which alleges

15 claims against CardioNet, Inc. and certain-of the CardioNet Defendants for violations of Section

16 10(b), Rule l Ob-5 thereunder, and Section 20(a) of the Securities Exchange Act of 1934, 15

17 U.S.C. §§ 78j(b), 78t(a), 17 C.F.R. § 242.1Ob-5 (the "Pennsylvania Action'). The Pennsylvania

18Action was filed in August 2009 and concerns the same subject matter as this action and involves

19

20many of the same factual allegations and parties. (A copy of the Consolidated Complaint in the

Pennsylvania Action is attached hereto as Exhibit C.) Given the overlapping nature of the21

22 allegations in the Pennsylvania Action and the claims asserted in this action, as well as the fact

23 that most Defendants are located in or are close to the Eastern District of Pennsylvania—whereas

24 plaintiff here, as a citizen of Florida, has no connection to either forum and is actually closer to

25Pennsylvania than California—Defendants will move, at the earliest possible time, to transfer this

26action to the Eastern District of Pennsylvania pursuant to 28 U.S.C. § 1404 and other applicable

27law.

28

3 NOTICE OF REMOVAL


1 Removal is Timelv

2 6. This Notice of Removal is timely pursuant to 28 U.S.C. § 1446(b) because it is

3 filed in the United States District Court for the Southern District of California within thirty days

4of Defendants' receipt of the original Complaint in the State Court Action. "Receipt" of the

5complaint means proper service as required by state . law; any other means of "receipt" is

6

7 insufficient to trigger the removal period. See Murphy Bros., Inc. v. Michetti Pipe Stringing, Inc.,

8 526 U.S. 344, 347-48, 354 (1999) (faxed file-stamped copy of complaint did not trigger removal

9 period). Each of the Defendants was served with process within thirty days of the filing of this

10 Notice of Removal. Specifically, defendants Middleton and Myers were served with the original

I IComplaint on March 7, 2010, defendant Sweeney was served with the original Complaint on

12March 10, 2010 and defendant Thurman was served with the original Complaint on March 11,

13

142010. The remaining CardioNet Defendants were served (via return of a Notice and

15 Acknowledgement of Receipt) with the Summons, Complaint and First Amended Complaint on

16 March 25, 2010. Underwriting Defendant Thomas Weisel Partners LLC was served with the

17 Summons and original Complaint on March 10, 2010 and the First Amended Complaint on

18 March 16, 2010. The remaining Underwriter Defendants were served with the Summons,

19original Complaint and the First Amended Complaint on March 12, 20 10. (A copy of the

20summons for each defendant is attached as Exhibit Q.

21

22Applicability of SLUSA to Removal of this Action

237. This action is within the original jurisdiction of this Court under 28 U.S.C. § 1331

24 because it asserts purported claims arising under the laws of the United States, namely Sections

25 11, 12(a)(2), and 15 of the Securities Act. Because this is a civil action over which this Court has

26 original jurisdiction under 28 U.S.C. § 1331, it is removable under 28 U.S.C. § 1441(a). Pursuant

27 to 28 U.S.C. § 1441(a): "Except as otherwise expressly provided by Act of Congress, any civil

28

4 NOTICE OF REMOVAL


I (emphasis added). The State Court Action is removable under Section 16, and is therefore within

2 the express exception to the general nonremoval provision of Section 22(a).

310. Section 16(c) of the Securities Act, as amended by SLUSA, provides: "Any

4covered class action brought in any State court involving a covered security, as set forth in

56 subsection (b), shall be removable to the Federal district court for the district in which the action

7 is pending, and shall be subject to subsection (b)." 15 U.S.C. § 77p(c) (emphasis added). This

8 case is a "covered class action' involving a "covered security."

9 11. The term "covered class action' includes:

10 [a]ny single law suit in which ... one or more named parties seek to recover

11 damages on a representative basis on behalf of themselves and other unnamedparties similarly situated, and questions of law or fact common to those persons or

12 members of the prospective class predominate over any questions affecting onlyindividual persons or members.

1315 U.S.C. § 77p(f)(2)(A)(i)(Il). "Covered security" is defined to include any security "listed, or

14authorized for listing, on the National Market System of the NASDAQ Stock Market (or any

15

16successor to such entities)." 15 U.S.C. §§ 77p(f)(3), 77r(b)(1)(A) & (C).

1712. Here, plaintiff is a named party seeking to recover damages on a representative

18 basis on behalf of itself and others similarly situated, and the Amended Complaint alleges that

19 questions of law or fact common to the proposed class predominate over individual questions.

20 See Am. Compl. ¶¶ 81, 85. Thus, this case is a "covered class action."

2113. The action concerns common stock of Defendant CardioNet, Inc., which has been

22listed or authorized for listing on the Nasdaq Global Market (formerly known as the National

23

24Market System) at all times relevant, and is therefore a "covered security." 15 U.S.C.

25 § 77r(b)(1)(C). The Amended Complaint concedes this. Am. Compl. ¶ 27. Accordingly, this is a

26 "covered class action' involving a "covered security."

27

28

6 NOTICE OF REMOVAL


1 14. Under these circumstances, this action is removable to this Court under 15 U.S.C.

2 §§ 77v(a), 77p(c) and 28 U.S.C. § 1441(a). See Brody v. Homestore, Inc., 240 F. Supp. 2d 1122

3(C.D. Cal. 2003) (holding that class action claims brought under the Securities Act are removable

4under SLUSA); Knox, 613 F. Supp. 2d 419 (same); Pinto v. Vonage Holdings Corp., No. 07-

56 0062, 2007 WL 1381746, (D.N.J. May 7, 2007) (same); Rovner v. Vonage Holdings Corp., No.

7 07-178, 2007 WL 446658, (D.N.J. Feb. 7, 2007) (same); Rubin v. Pixelplus Co., No. 06-CV-

8 2964, 2007 WL 778485 (E.D.N.Y. Mar. 13, 2007) (same); Alkow v. TXU Corp., Nos. 3:02-CV-

9 2738-K, 3:02-CV-2739-K, 2003 WL 21056750 (N.D. Tex. May 8, 2003) (same); see also Luther

10v. Countrywide Home Loans Servicing LP, 533 F.3d 1031, 1033, n.l (9th Cir. 2008) (suggesting

11that SLUSA removal would apply to plaintiffs' claims under the Securities Act if the case had

12

13involved "covered securities," but noting that both sides agreed that the securities at issue were

14 not of that type); Cal. Pub. Emplovees' Ret. Sys. v. WorldCom, Inc., 368 F.3d 86, 97 (2d Cir.

15 2004) ("Section 16(c) of the [Securities] Act excepts `class action[s] brought in state court' from

16 the scope of the nonremoval provision and provides that those class actions `shall be removable to

17 the Federal district court for the district in which the action is pending."').

1815. Plaintiff alleges that the State Court Action is not subject to removal because it

19now asserts only a federal law claim and therefore, in plaintiff's view, is not a covered class

20

21action subject to Section 16 of the Securities Act. Plaintiff thus contends that only putative class

22 actions asserting state law claims are removable under SLUSA, and plaintiff has amended its

23 complaint to drop the originally asserted California Corporations Code claims in an effort to

24 avoid removal jurisdiction. See Am. Compl. ¶ 31. (Plaintiff apparently recognizes that its

25 original Complaint was indisputably subject to removal under SLUSA, notwithstanding its

26erroneous allegation that it was not removable. See Compl. ¶ 31.) But the more persuasive

27

28decisions expressly reject the assertion that only actions asserting state law claims are removable

7 NOTICE OF REMOVAL


I under SLUSA. See supra ¶ 14. Specifically, courts have held that the plain language of SLUSA

2 supports removal because "to interpret [Section 16(b)-(c)] in the manner suggested by Plaintiff

3would render [SLUSA's] amendment to [Section 22(a)] meaningless." Brody, 240 F. Supp. 2d at

41124; see also Rubin, 2007 WL 778485, at *4 (noting that SLUSA's amendments to Section

5

6 22(a) would be superfluous if Section 16(b)-(c) was read to address only state law claims);

7 Rovner, 2007 WL 446658, at *4 (same). As those well-reasoned decisions correctly determined,

8 "[a] holding that a class action complaint labeled as a state law or common law cause of action is

9 removable, and one labeled as a Securities Act violation is not, would lead to an absurd result that

10would undermine the principal purpose of SLUSA, which was to stop `state court litigation of

11class actions involving nationally traded securities."' Rubin, 2007 WL 778485, at *5 (quoting

12Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 82 (2006)); see also Brody,

13

14 240 F. Supp. 2d at 1124; Pinto, 2007 WL 1.381746, at *2; Rovner, 2007 WL 446658, at *5;

15 Alkow, 2003 WL 21056750, at *2. Although there are conflicting decisions among the district

16 courts, including within California, on this point, a contrary interpretation of the Securities Act

17 and SLUSA would conflict with the plain language of the statute and would undermine the

18express purpose and intent of Congress in adopting the SLUSA amendments to the Securities Act.

1916. Further confirming its intent to make actions such as this one removable, Congress

20

21adopted the Class Action Fairness Act of 2005 ("CAFA") to provide for removal to federal court

22 of numerous types of class actions of potentially national significance. See Corsino v. Perkins,

23 No. 09-9031, 2010 WL 317418, at *2 (C.D. Cal. Jan 19, 2010) (noting that "CAFA was enacted,

24 in part, to restore the intent of the framers of the United States Constitution by providing for

25 Federal court consideration of interstate cases of national importance under diversity jurisdiction"

26(internal quotation omitted)). In adopting CAFA, Congress recognized that it was unnecessary to

27

28provide for the removal of "covered class actions" involving "covered securities" under the

8 NOTICE OF REMOVAL


1 Securities Act, because the removability of such actions had already been established under

2 SLUSA. See Estate of Pew v. Cardarelli, 527 F.3d 25, 32 (2d Cir. 2008) (noting that SLUSA and

3CAFA "confirm an overall design to assure that the federal courts are available for all securities

4cases that have national impact (including those that involve securities traded on national

56 exchanges)").

7 Other Procedural Requirements

8 17. In accordance with 28 U.S.C. § 1446(a), Exhibits A and B include file-stamped

9 copies of all process, pleadings and orders served upon Defendants in the state court action,

10 namely the Summons, Complaint, and Amended Complaint. Included in Exhibit A as served on

11defendant Middleton is a Civil Case Cover Sheet, form for Stipulation to Alternative Dispute

12Resolution Process, a Notice of Case Assignment, and a Notice to Litigants/ADR Information

13

14Package.

1518. Defendants will promptly serve a copy of the Notice of Removal on plaintiff's

16 counsel and file with the Clerk of the Superior Court of the State of California, San Diegoi

17 County, a Notice of Filing of Notice of Removal pursuant to 28 U.S.C. § 1446(d).

18 19. This Notice of Removal is signed pursuant to Fed. R. Civ. P. 11. See 28 U.S.C.

191446(a).

20Reservation of Rights

2120. By removing the State Court Action to this Court, Defendants do not waive, and

22

23expressly preserve, any and all defenses that they may have including, but not limited to, lack of

24 personal jurisdiction and service of process.

25

26

27

28

9 NOTICE OF REMOVAL


APR=05-2010 MON 09:36 AN FAX NO. P. 05

i

1 WHEREFORE, this action should proceed in the United States District Court for the

2 Southern District of California as an action properly removed thereto.

3'

4

5 DATED: April 5, 2010 Respectfully submitted,

6 MORGAN, LEWIS & BOCKIUS LLP

7 / „rBy.

8 Êliza e A. ^rohl ch

9 Attorneys for Defendants CardioNet, Inc., ArieCohen, James M. Sweeney, Martin P. Galvan,

10 Fred Middleton, Woodrow Myers Jr,, M.D., EricN. Prystowsky, M.D., Harry T. Rein, Robert J.

11 Rubin, M.D., and Randy H Thurman

12 DATED: April _, 2010 GIBSON DUNN & CRUTCHER LLP

13By:

14 Dean J. Kitchens

15 Gibson, Dunn & Crutcher LLPDean J. Kitchens, State Bar No. 82096

16 Theane Evangelis Kapur, State Bar No, 243570333 South Grand Avenue

17 Los Angeles, CA 90071-3197Tel.: 213.229.7726

18 i Fax: 213.229.6726

19 Attorneys for Defendants Barclay's Capital, Inc.,Citigroup Global Markets Inc., Leerink Swann

20 LLC; Thomas Weisel Partners LLC, Banc ofAmerica Securities LLC and Cowen and

21 Company

22

23

24

25

26

27

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10 NOTICE OF REMOVAL

Case 3:10-cv-00711- L -NLS Document 1 Filed 04/05/10 Page 10 of 59

-APR 02 1 10 03 , 52PM GD&C LA 5113 P.2

1 WHEREFORE, this action should proceed in the United States District Court for the

2 I Southern District of Califomia as an action properly removed thereto.

3

4'

5 DATED: April 5, 2010 Respectfully submitted,

6 MORGAN, LEWIS & BOCKIUS LLP

By: 8 Elizabeth A. Frohlich

g Attorneys for Defendants CardioNet; Inc., ArieCohen, James M. Sweeney, Martin P. Galvan,

10 . i ' Fred Middleton, Woodrow Myers, Jr;,. MD,, EricN. Prystowsky; M.D., Hary'T. Rein, Robert J

11 Rubin, M.D., and Randy H. Thurman

12 DATED; April Z 2010 GIBSON DUNN & CRUTCH13t LLP

By. 14. Dean J. Kitchens

15 Gibson, Dunn & Crutcher LLPDean J. Kitchens, State Bar No. 82,096

16 Theane Evangelis Kapuf, Stat e Bar No. 243570333 South Grand Avenue

17 Los Angeles, CA 90071-3197Tel.: 213.229.7726

18' j Fax: 213.229,6726

19 Attorneys for Defendants Barclay's Capital, Inc,,Citigroup Global Markets Inc., Leerink Swann•.

20 LLC, Thomas Weisel Partners LLC, Bain of;.America Securities LLC and Cowen -and

21 Company

22

.24

25"!

26

27

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10 NOTICE OF REMOVAL


1 TABLE OF CONTENTS FOR EXHIBITS

2 PAGE NO.

3 EXHIBIT A - Summons and Complaint 12

4 EXHIBIT B - Amended Complaint 58

5 EXHIBIT C - Consolidated Complaint in the Pennsylvania Action 94

6

7

8

9

10

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1 1 NOTICE OF REMOVAL


Case 3:1 0-cv-00711-L -NLS Document 1 Filed 04/05/10 Page 13 of 59

SUM-100

SUMMONS(CITACION JUDICIAL)

NOTICE TO DEFENDANT:

(A VISO AL DEMAMDA DO).'

Cardj oNet, Inc. 26See Additional Parries Attachment

YOU ARE BEING SUED BY PLAINTIFF: L'A(LO ESTA DEMANDANDO EL DEMANDANTE):

West Palm Beach Police Pension Fund, Individually and on Behalf of

All Others Similarly Situated

NOTlCEI You Cava been sued The caun may decide against you without your being heard un less you tespondwil.- iin 30 days, Read its

inforrr3t!cnDCIDW.

You have 30 CALENDAR DAYS shot this summons and legal papers are "ryad on you to Me a writ-.an fasporisa at . this coun and have a copyserved on the plaintiff. A lellar at phone Lai, " not protect you. Your written re*ponce must

be in proper legal form if you want the court to hest your

case. There may be a court form that you can use Im yaw response. You can W those counforims and more information at the Callfoniai CourtsOnline Self-Help Center Your. county Isw library, or the courthouso nosiest you. If you carinol pay the filing fee, askthe court cl6ricror a tali vrolvat form, If you do not file your response on tinne, you may lose the case by default, and your wages, mcney, aid propertymay be taken without funhair warning from the court.There

are other legal requirements. You may want to caft an stIbificy fight away. If you do not know art attorney, you may vvant to call ar, attorneynnot areferr I service. if you caff a. itaid 2ttoiney, you may

be eligible

lot free legal services from a nonprofit legal services program. You can locate

thesa"n."plafit groups at the Caffatnia Legal Services Web file the California Courts Online "r-Help Centeror by Contacting your local court at county bar. association; NOTE: The court has a statutory lien for waived lees am_

costs on any settlement or arbitration award of $10.030 or more in a civic case. The court's Ilan must be paid before the doj" v4I dismiss the case. IIA VISOI Lo han damandado, Si no responds d6tiltio do 30 dies, Is cone puede dvoidir an su contras1n e3cuchar su versidn. Lee to olo"Macion acontlausci6a.

3D DIAS DE CALE-NDARto dospu6s aiô que Is aritrspud;rl 6sts ci tacidn y papaiss legates pare prasentar Line respuesia par esento anCorte 00f

quo so onfregue una copla, ofdomendonfe. U44 terra 0 unallamaida (elall!inico no b ptotegan, So respuesta par iscrife, dente quo ester y

1 an ibmisto iogolcoffecto rd desso quo jor6casen sm Cosa On

/a code. Es posib.e. quo hays un formurdrio quo usfodouada usar pars su faspua&la.Puede encordiar estos lotmulados; do Is carte Y mhs i"101*1114aWn on a/ Contra do Ayuds do /as Canes, de Calhialnia (vww.1Uc*rta.ca gov), an I&o1bliatoca do /ayes do su, condado a on /a earls quo to quede mis caeca. Si no puede, pager Is cuo.a do prosentacitin, pida alaocrotario do Is coneWe 10 d6

Uri formiulario do exencOn do palito do cu5fas- St no Presents su rospuesto a liemoo, puede perder

of caso par bicumphmiorito y /a cone to

POdij WOW SU Weldo. diners y biants sin Mix advorloricia.Hey ones, roqzr'4ft" k9jiloa Es racomondabla qua !lame a on abogado;nmedtatamante, Si no carioca a tin abogado, puede I)jmi)r a un serv7c;o di;

remiisiii.n a abogsdos. Si no puede pagat, a unabegaido, as pialbia 9* u* cumialo con W mquislios , pato obloner serv;6oz legiales pfoluilas de unprograms do scrViclas 49ales, sin lines

do lucra.. Puade encOnlrat Oslo& grupoz sin lines do luoro @A a/ s/6 web do California Legal Services,

an of Centro do Ayuds do

las . Caries do Caffatnia, (AAovw.&ucona,cs.9ov) a poniAndave an coril;Cfto can 4 cone a elcolagio do abogados IOCOAtim AVISO. Pat Jay. Is code 60110 defecho a reeismar 102 cuotas y /as castes exoneos par imparier un gravamen sobtacualquiernocup.iracf&v do,$16,000 6 m6s de'volar fecibids medianfe tin scum-do a uno ooncesdri, do arb4r;Âs en-un coma, de derecho civii Tiene qt;zpager al grevamen do la carts entes do 940 4 come pueds desarchai a) caso,

The riarno and address of the court is:(El norr-bre y dire cci6ri de la corki as):

San Diego Superior Court, 330 W. Broadway, San Diego, CA 91101 1 v.7njo-nnaa . 6836-CU-SL-CTL.1

The name, address, and telephone number of plaintiff's attorney, of plaint 'ff without an attorney, is:(El nombro, /a direccidn y al n0rhero do 1616tiono del fibogado dot demandonle, o del detnandanle quo no nene abogado. es).-Marti K- Blasy, Sc6n+Scoti UP, 600 , 8 Street, F, 1500, Sail Diego, CA 92101, 619/ 233-4565

DATE: "AR 0 5 ? k. by ^11

. Clar k. i - Deputy(Fecha) (Sacrefolip) {Adjust to;

(For PrOOf OfSeViCe 011hiS summons. use Proof of Sence of Summons (form POS-010).)(Para prusbe de enlrega de Oslo cilati6 use el formulaffo Proof of Service of Summon$, (POS-070)).

NOT()CE TO THE PERSON SERVED: You are

servedIS MI1. FV'-) as an individual defendant.2.F as the person sued eider the ficti::ous name n,4,1specily):

3. = on behalf of (specify):

under. Q CCP 4 1 6 10 (corporation) CCP 416.60 (minor)

CCP 416.20 (defunct corporation) Q CCP 416.70 (consares-lee)

F-1 CCP 418.40(associ*Oor.orpartnership) Q CCP 416.90 (authorized person)

= other (specify):

4. by personal delivery on (date):

Firm Adcpuc. W Wsua" theJumew COL'Ve otca IX.3 SUMMONS Coca of cwt Fra-d— 11 4 1.7.20. *65SuW 100 !qw -ra/ 1. 2o091

EXHIBIT A, Page 00001 2


SUM-200(A) SHORT TITLE: c.Ase: w.aâ

F West Palm Beach Police Pension Fund v. CardioNet

INSTRUCTIONS FOR USE4 This form may be used as an attachment to any summons a space does not parm h the listing of all parties on ft sjrnmons.4 0 this attachment is used. ;nsen the foilovring statement in the plaintiff ardefendart box on tho suaunons. "Additional Parties

Attachment form is attached:'

List additional parties (Check only one box. Use a separate page for each type of perry)

[] Plainti ff 0 Defendant Q Cross-Complainant Q Cross-Defendant

A.RIE COWEN, JAMES M. SWEENEY, MARTIN P. GALVAN, FRED MIDDLETON, WOODROWMYERS JR., M.D., ERIC N. PRYSTOWSKY, M.D., [-LARRY T. RE]N, ROBERT J. RLBN, M.D.,RANDY H. THURMAN, BARCLAY'S CAPITAL, TNC., CITIGROUP GLOBAL MARKETS INC.,LEERINK SWANN LLC, THOMAS WEISEL PAR TNERS LLC, BANC OF AMERJCA SECURITIESLLC and COWEN AND COMPANY

Papa of

Jud.Jbfs^

Ceu+ctl w p:rompft as roruanca:a . ADDITIONAL PARTIES ATTACHMENTal '

SUM-2 WA; la«• Attachment to Summons xrur rntry4â^ ^^. ^ Fermsvx++nc•^.eamj

EXHIBIT A, Page 000013

Case 3:10-cv-007-L -NLS Document 1 Filed 04//10 Page 15 of 59,11

CM-010f^."TOa1'iY OA Pr.RTV v4Tn.;ilT F1'ICR!:t: r (r raa. Sea x• Sv ^,rdo, ,f.7 aQi+:re) FOR COLR r use ONL yi Mzry k Dlasv (-11262)1 Scott4 Scou LLP

600 B Street, rt1500, San Diego, CA 92101

r_sa :=xo

6)9/233-4565 F4x.o 6191233-0508 :,:I -oft:v:cE rn ^, Plaintiff °'`''^

SUPERIOR COURTOFCAUFORNIA. COUNTY OF San Diegostarn.ccAess 330 W. Broadwayurr't',•:U sc;aess

c - A- z,p ca:e San Diego, CA 92101 10 V, Li - t) !'11 ;: 26aRAN04 NAME

CAS= AME* n n 1 i i' 1f'r ^/ /v ^' ^? 1Ft ;! if;[ i 5r Cr

CIVIL CAS COVER SHEET Complex Case Designation 4 CASE zesI 3 I Unlimited n Limited I 37-2010-DOD86836-CU-SL-CTL

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Reins 1-6 below must be como!ctod (see Instructions on pope 2). i1. Check one box below for the ca so type that best describes 1his case:

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factors requiring excepiirnal judicial manageri ient•.a•tM Large numberof separaiely represented parties d. Q Large number of witnessesb. [7 Extensive motion Practice raising dit8cultor novel e. f7 Ceoreenation with related actions pending In one or mere alurts

issues that will be time -consuming to resolve in other counties, states, or courmes, or in a federal counC. U Substandal amount:of documentary evidence 1. =Substantial postjudgment judicial supervision

3. Remediessought (check all Mal apply; a,M monetary b.= ronmonetary: declaratory or Injunctive: refief a. I ^puniir:e4 NU'mbef Of ca

yss

lesof action (speury): Securities Act of ! 933, §§ 11, 12 ')(2) and 15; Cal. Corp. §§25401 ; 25501z5 This case : + t is F^ is not a class action suit.

6 If there are any known related cases, file and serve a no: ::a of related case. (, u may use fort CM-015.1

Date: March 5, 20104itiry K. Blasi, } 1^ -TT

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1 SCOTT+SCOTT LLP --1ARTHUR L. SHINGLER 111 (181719)

2 MARY K. BLASY (21 1362)600 B Street, Suite 1500

3 'San Diego, CA 92101'telephone: 6191233-4565

4 619/233-0508 (fax) C1, - :; _C,ash ingler/^.cmt-scotf.coin c

5 and —DAVID R. SCOTT

6 P.O. Box 192156 South Main Street

7 Colchester, CT 06415Telephone: 860/537-3818

3 860/537-4432(fax)drsconvscott-scort,corn

9Counsel for Plaintiff

10[Additional Counsel on Signature Page)

ll

12 SUPERIOR COURT OF THE STATE OF CALIFORNIA

13 COLNTY OF S,%N l:)II CiC;

14

WEST- PALM BEACH POLICE PENSION Ca%e N,o. 37-2010 - 00086836 -CU-SL-CTL15 FLTD, Individually and on Behalf of All Others

Similarly Situated ; CLASS :?C"1"JU\ C'C7MPL.A1 N'f FOR16 I VIOLATIONS OF THE SECURITIES ACT OF

Plaintiff, ( 1933 AND THE CALIFORNIA17 CORPORATIONS CODE

vs.

18

CARDIONET, INC., ARIE COHEN,.JAMES M.19 SWEENEY, MARTIT P. GALVAN, FRED JURY TRIAL DEMANDED

'MIDDLETON. WOODROW MYERS JR.. M.D..20 ERIC N. PRYSTOWSKY, M.D., HARRY T.

REIN, ROBERT J. RUBIN, M.D., RANDY Fl.21 THUR.MAN, BARCLAY'S CAPITAL, INC..

CITIGROUP GLOBAL MARKETS INC.,22 LEF.RTNK SWANN LLC, THOMAS WEISEL

PARTNERS 1_1-C, BANC OF AMERICA23 SECURITIES LLC and COWEN AND

COMPANY,24

Defendants.25 _

f26

I

27

28

CLASS ACT -I01N' COl`4P1_,111\T FOR. VIOLATION'S OF THE SECURITIES ACT Of 1933 AND THECALIFORNIA CORPORA"r101\'S CODL



I Plaintiff West Palm Beach Police Pension Fund ("Plaintill''), individuaIlyand on behaIfofalI others

2 similarly situated, by Plaintiffs undersigned attorneys. for Plaintiff's complaint against defendants, alleges

3 the following based upon personal knowledge as to Plaintiff and Plaintifi'`s own acts, and upon information

4 and belief as to all other matters based on the investigation conducted by and through Plaintiff's attorneys,

5 which included, among other things, a review of CardioNet, Inc.'s ("CardioNet" or the "Company") press

6 releases, Securities and Exchange Commission ("SEC") filings, analyst reports, media reports and other

7 publicly disclosed reports and information about the defendants. Plaintiff' believes that substantial

8 evidentiary support will exist for the allegationsset forth herein aftera reasonable opportunity fordiscovery,

9 NATURE OF THE ACTION

10 1. This is a securities class action on behalfofPlaintiffand all other persons or entities, except

I 1 for defendants, who purchased or otherwise acquired the common stock of CardioNet pursuant and/or

12 traceable to the Company's S83 iniNlon initial public stock offering on March 25, 2008 (the "IPO") and/or

13 its S152+ million secondary stock offering on August 6, 2008 (the "Secondary Offering," collectively with

14 the IPO, the Òfferings") seeking to pursuesrriel liahiliry remedies under the Securities Act of 1933 (the

13 "Securities Act") and rescission and/or damages under Sections 25401 and 25501 of the California

16 Corporations Code.

17 INTRODUCTION AND BACKGROUND TO THE ACTION

18 2. CardioNet provides Mobile Cardiac Outpatient Telemetry ("MCOT") using an internally

19 developed proprietary technology platform. MCOT allows continuous cardiac monitoring for up to 30 days.

20 with the capability for real-time review and querying from a monitoring center. According to defendants,

21 the technology purportedly allows for the identification of heart rhythm irregularities that elude the

22 commonly used shorter-term monitoring technologies (e.g.. Holler monitoring), and many insurers,

23 including Medicare, purportedly cover MCOT for defined subsets of patients who experience serious, but

24 unpredictable, arrhythmias that have not been adequately evaluated by those other less expensive techniques.

23 3. Diagnostic tests like MCOT are represented by two CPT billing reimbursement codes (or

26 "Current Procedural Terminology" codes). One code identifies the Professional Component of the test — the

27 physician's interpretation of the test result as it relates to the individual patient; the second code identifies

28

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE


Case 3:10-cv-007-L -NLS Document 1 Filed 04//10 Page 18 of 59,11

I the Technical Component of the test — in the case of CardioNet, the resources required to provide and

2 conduct the test and generate a test report (the MCOTequipment, the monitoring center with its technology

3 and staff, the computerized analysis of data, the generation of a report to the physician, etc.). CardioNet

4 operates a physiological testing laboratory — monitoring patients nationwide from its monitoring base in

5 Pennsylvania and billing insurers for the Technical Component ofthe test, while the referring physician bills

6 for the Professional Component, which is small compared to the Technical Component.

7 4. MCOT obtained FDA approval and was approved for commercial use in 2002, and

8 CardioNet, then headquartered in California, set up its Pennsylvania testing center that same year. As a

9 Pennsylvania-based testing facility, the center did all of its Medicare billing to a single regional Medicare

10 Part 8 carrier, liighmark Medicare Services (''Highmark"), also based in Pennsylvania. At the time of the

1 1 Company's March 2008 IPO and August 2008 Secondary Offering, the test was provided under a temporary,

12 non-specific, Category I I I CPT code. Aecordimg to Flighmark's Januar y 13. 2006 press release, using the

13 temporary CPT code. CardioNet was being reimbursed for the'l -cchnical Component at an average rate of

14 S 1,123, while, prescribing physicians were receiving an average Professional Component reimbursement fee

15 of $128:

16 Real-Time, Outpatient Cardiac M. onitorine

17 Effective 45 days from the date ofthis notice, the reimbursement allowance(s) for procedurecode, 93799 when used with the narrative, "ECG arrhythmia detection and alarm system"

18 will change. The new allowance(s) effective for dates of service on or after March 1, 2006will be:

93799- ECG arrhythmia detection and alarm system;r

S1123.07

20 Technical Technical ComponentComponent

2193799- ECG arrhythmia detection and alarm system; $128.27

22 26 Professional Component23

These codes and their corresponding al lowances represent a course of treatment that includes

24 up to 21 consecutive days of cardiac monitoring,

25 S. In March 2008, CardioNet concluded its $82 million IPO, selling 4.5 million shares at S18

2 6 per share. In August 2008, CardioNet and certain insiders and venture capital tinancers sold another 5.75

27

28-2-

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AN'D THE --CALIFORNIA CORPORATIONS CODE



1 million shares for $26.50 per share, taking in over $152 million in proceeds. SelIin-shareholders included

2 CardioNet's founder and former Chief Executive Officer.

3 6. In October of 2005, CardioNet would announce approval of permanent codes for MCOT

4 CPT 93228 for the Professional Component and CPT 93229 for the Technical Component — effective

5 January 2009, and a carrier-derermined reimbursement rate for the Technical Component of $1,123.07.

6 7. The analyst community that followed and established a market price for CardioNet stock is .

7 extremely sensitive to reimbursement issues, particularly for single product companies where one

8 reimbursement decision can be make-or-break the Company. The CardioNet reimbursement story began

9 unraveling on April 24. 2009 when an analyst began speculating about an imminent Highmark payment

10 reduction for the MCOT Technical Component. Though CardioNet immediately issued a rebuke, its

1 1 common stock fell precipitously, closing down 13% and erasing over $70.5 million in market capitalization.

12 On May 18, 2009, the Company again responded with a further press release that solidified the situation,

13 announcing formal Highmark posting of the $1,123.07 rare originally announced in October 2008.

14 8. However, on June 30, 2009. CardioNet was forced to issue a press release announcing a

15 significant downward revision of its financial guidance for fiscal 2009 based on lower than expected

16 commercial reimbursement rates. Analyst concern over Medicare reimbursement was heightened by this

17 news, and confirmed in a July 12, 2009 CardioNet announcement of a revised Highmark Technical

18 Component payment rate effective September I, 2009 — a more than 30% reduction — to $754. On this

19 announcement, the price of CardioNet's stuck once again suffered a significant decline, falling 34% in one

20 day on trading volume o v er seven times its average three-month daily average.

21

22

23

24

25

26

27

28




1 9. As displayed vividly in a November 20, 2009 Wall Sfree! Journal exposd ; once the

2 investment community learned the truth about CardioNet, the price of the millions of shares of CardioNet

3 stock sold to the unsuspecting public in the Company's IPO and Secondary Offering simply cratered:

4Fading Heartbeat I CardioN.et's public history

March 19, Auc. & Feb. 18, April 24 & 28: June 30 & July L2;

6 2008: Stock 2009: Jefferies INtlates Sto& falls asInitia; pegksat Shares rise ooverAwof CardoNetannouncspublic slikso on fourth Cerdlohet with commercial insurers

7 offering quarter sell ratl% cuttingresults. CardioNet denies reimbursement and,

8 elements of the later, Medicare rate$40 per share ... report: cuts.

9

10r:1

20 .

12 20U3 ,^

IJ5 W.W WSJIJr":J WI4 baw; :151 raacrN

14 10. Unbeknownst to investors, prior to the IPO, CardioNet had actually made a series of

13 conscious business strateg y decisions that imprudently simultaneously increased bode reported revenues and

16 its reimbursementjeopardy, significantly increasing the risk associated with the purchase ofCardioNel stock

17 in the Offerings.

18 11. First, by maintaining all of its testing operations in a single location, CardioNet put its entire

19 Medicare business into the hands of a single local Medicare contractor. Had operations been regionalized,

20 there would have been a different contractor for each region. A single contractor would then have impacted

21 only a portion of the Medicare business. not all of it. There was a trade-off at work: using a single carrier

22 increased reimbursement jeopardy by pulling all ofthe Company's eggs in a sinble basket; use oI multiple

23 carriers would have spread the risk, but required commensurately broadened advocacy communications and

24 reimbursement support to multiple regional Medicare carriers. CardioNet opted for using the sin-le carrier:

25 Highmark, over which, unbeknownst to investors, it wielded significant pricing influence.

26 12. I f multiple carriers had been handlin g CardioNet's claims pre-[PO. Medicare would have had

27 an incentive to set reimbursement at a single, nationally determined level, especially if there were regional

28-4-

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND TH.ECALIFORNIA CORPORATIONS CODE



1 disparities that could not be supported by differential costs. But a single explicitly national rate established

2 cenlrally would have been greatly preferable to an effectively national rate set by a single regional carrier.

3 At file national level, there are procedural rules, formal opportunities for comment on proposals, and public

4 notification of the basis upon which a decision is made. Asa local carrier, Highntark was nor bound by any

3 of these requirements. Instead, CardioNet used its influence over Highmark to self-Set extremely high

6 reimbursement rates prior to its IPO — rates that unbeknownst to investors were under critical, pointed

7 review at the time of the IPO.

8 13. Second, CardioNet chose to operate as a physiological testing laboratory rather than selling

9 its technology ro independent laboratories. Had it done the laver, the Company would have been tree to sell

10 the technology at a price of its own choosing. This would have transferred the primary reimbursement risk

I I to CardioNet's customers, but it would also have provided those customers with unequivocal documentation

12 of an important cost element required for the test — the technology cost. Under the scenario CardioNet

13 chose, there was no such documentation, as there was no arms'-length transaction between the technologyI

14 supplier and the testing facility. Under these circumstances, Medicare invokes special accounting rules

15 applicable to "rclated party transacrions"; the relevant aspect of those rules is that transfers between related

16 parties occur at the cost of manufacture or acquisition — no margin (markup) is recognized. Thus, to the

17 extent CardioNet provided real cost data, Medicare would calculate the cost of providing the Technical

18 Component without allowing a markup on cost ofmanufacture.

19 14. CardioNet made the choice . it did in order, to caprure a larger share of the total Technical

20 Component revenue stream prior to its 11'0 and Secondary Offering, allowing it to report the receipt of

21 artificially inflated revenues in the 1PO and Secondary Offering Registration Statements. Sul there was an

22 undisclosed trade-off: control of the total revenue streain increased direct exposure to reimbursement ;1' kL

23 And there was a more conservative choice available: sell the technc,lo ,,ro testing facilities until

24 reimbursement was clearly established, and then expand into the testing business once reimbursement risk

25 was minimized.

26 13. The third risk-increasin g activity defendants undertook pre-IPO. ye [ concealed from

27 investors, was implementing aggressive sales practices that included training prescribing physicians to over-

28




I prescribe and over-bill for MCOT services, which would ultimately result in critical regulatory scrutiny of

2 reimbursement rates, decreased acceptance rates amongst payors and generally damage the product's sales

3 potentials.

d 16. Essentially unbeknownst to investors, Card ioNet took the Company public before solidifying

5 its business position and before removing reimbursement risk from the equation. Instead, doing the TPO and

6 the Secondary Offering simply allowed early investors to cash out and lake profits and management to

7 realize substantial capital gains. This action seeks recovery, including rescission, for innocent purchasers

8 who suffered tens of millions ofdollars in losses\vhen the truth about CardioNet emerged and its stock price

9 was pummeled.

10 SUMMARY AND OVERVIEW OF THE ACTION

11 17. Traditional heart rate monitors include Holter and event monitors. Holter monitors

t2 continuously record a patient's heartbeats. They are generally worn for a one or two-day period. Older

13 Holter monitors require the patient'to physically return the device to the physician for review, while newer

14 1-folier mon itors allow for the results to be uploaded via the Intemer. Event monitors intermittently record a

15 patient's heartbeats during cardiac events. They are generally worn for a 1 5 to 30-day period. Sane types

16 of event monitors are manually activated by the patient when symptoms associated with a cardiac event are

1 7 experienced, while other types of event monitors have an auto trigger that will automatically record an

18 event. The event monitors have limited storage capacity and the data must be transmitted periodically via

19 telephone in order to avoid the risk of exhausting their storage,

20 18. CardioNet's MCOT system incorporates a lightweight patient-worn sensor attached to

21 electrodes that capture two-channel ECG data, measuring electrical activity of the heart and communicating

22 wirelessly with a compact, handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat

23 information from the sensor on a real-time basis by applying algorithms desi g ned to detect arrhy-thmias.

24 According to CardioNet, the MCOT system continuously monitors a patient's heartbeats and the data is

25 transtnirted wirelessly to the Company's control center. When die MCOT monitor detects an arrhythmic

76 event, it automatically transmits the ECG to the CardioNet Monitoring Center, even in the absence of

27 symptoms noticed by the patient and without patient involvement. Conversely, traditional Holter and event78

-6- CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THE

CALIFORNIA CORPORATIONS CODE



1 monitors required more patient participation, both in recognizing cardiac events, initiating monitoring, and

2 transmitting their cardiac data to be analyzed.

3 19. MCOT reimbursement fees are paid by commercial payors and from Medicare Part B carriers

4 where the services are performed on behalfofthe Centers for Medicare and Medicaid Services (the "CMS").

5 At the time of the 1PO in March 2008, the Company received approximately 30% of its revenues as

6 reimbursement from Medicare, and the rest came from private payors. However, most private payors tended

7 to incorporate Medicare reimbursement guidelines into their own reimbursement schedules. The.

8 reimbursement paid to CardioNet and prescribing physicians alike was either provided by the Medicare

9 Part B carrier for Pennsylvania on behalf of the CMS, or by commercial payors.

10 20. Historically. commercial payors have r-efi,sed to enter into contracts to reimburse the fees

I I associated with medical devices or services that payorsdetermined to be --experimental and investigational."

12 Commercial payors typically label medical devices or services as "experimental and investigational" until

13 such devices or services have demonstrated product superiority evrdetrced by a randornized clinical trial.

14 CardioNet claimed to have completed such a clinical trial in March 2007 in which the CardioNet MCOT

15 system provided higher diagnostic yield than traditional event monitoring. Prior to this clinical trial; the

16 CardioNet MCOTsystem was labeled "experimental and investigational" by 21 targeted commercial payors,

17 representing approximately 95 million covered lives. Accordin; to defendants, subsequent to this March

18 2007 trial, three commercial payors, representing over 26 million covered lives, purportedly removed the

19 designation of the CardioNet System as "experimental and investigational."

20 21. The financial viability ofCardioNeCs business model is. and always had been, inherently

21 dependent upon physicians' willingness to prescribe CardioNet's MCOT services. A key barrier to MOOT

22 use. even following FDA approval. was the general reluctance by Medicare providers and commercial

23 insurers to pay for the more expensive MCOT monitoring service — both the Technical and Professional

24 Components — without proof the additional medical diagnoses benefit it provided was "medically

25 necessary."

26 22. But on March 5, 2007, CardioNel's senior executives issued a press release entitled "New.

27 Study Finds Comtnoniy Used Heart Monitoring System Often Failsto Detect Serious Cardiac Arrhythmias.

287 -




I a Leading Cause of Stroke and Sudden Cardiac Death -.Journal of CareliovascfdrrrElecn-ophysiology Finds

2 That New Methods Are Needed to Help Save Lives Business." The release stated that a `first of its kind

3 study, to be published in the March issue ofthe Journal of Cardiovasculm • Eleclrophysiology, compared the

4 effectiveness of two ambulatory electrocardio graphic monitoring systems in detecting arrhythmias, a.

3 condition in which a person's heartbeat is abnormal," and that the "results ofrhesmay showed that MCOT

6 was almost three times mare effective detecting and diagnosing clinically significant arrhythniius

7 compared to the frequently prescribed cardiac loop event recorder," The release cited CardioNet founder,

8 Chainnan and Chief Executive Officer ("CEO") James M. Sweeney ("Sweeney"), as stating "he now

9 expected] more insurance companies to reimburse for MCOT as a result of the Findings of this study."

10 [Emphasis added.]

11 23. To help sell its MCOT services to a reluctant purchaser base prior to its 1 PO, CardioNet also

12 enlisted an aggressive sales force and trained them to coerce physicians into prescribing MCOT. Traditional

13 external cardiac monitoring devices, including Holier and event monitors, have limited memory capacity

14 which requires that patients frequently visit their doctors' offices to have the data uploaded, or that they

15 upload themselves telephonically or via the intemet. The advent of telemetry permitted real-time data

16 transmission anywhere cell phone reception was possible that did not require patient assistance to send.

17 Continuous transmission, CardiolVel's sales personnel would emphasize to physicians, could provide

18 physicians with lucrative daily monitoring fees. As one physician was told by a CardioNet sales

19 representative when asked why physicians should use MCOT over traditional cardio-monitoring devices:

20 -because there is more money [in] it. You can bill daily." Receiving daily reimbursement was crucial

21 because doctors received daily reports when using MCOT. But unbeknownst to investors, CMS was quickly

22 catching on - the sleight of hand was slower than the eye - and CMS would drastically reduce the

23 Professional Component and preclude claiming daily reimbursement rates.

24 24, As part of its extensive pre-I PO effort to increase the number of MCOT prescriptions being

23 written by physicians. CardioNet also provided its equipment to physicians on a cost-free basis, and trained

26 the physicians to bill Medicare and private insurers for use of the equipment as part of the Professional

27 Component fee they were collecting. As was explained to one sales representative in May 2006, "[i]n this

288

CLASS ACTION COMPLAINT FOR VCOLATIONS OF THE SECURII - IES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE



model there is no capital investment made from the doctor." Alforeover, physicians were shown that by

2 writing Holter prescriptions, but providing ryICOT ser vices, they could bill daily for analyzing the MCOT

3 resells repays. These billing practices led to higher fees being paid to physicians and increased their

4 willingness to prescribe — and even over-prescribe — MCOT over Holter and event monitoring when

5 patients' symptoms did not necessarily indicate MCOT was appropriate.

6 25. Additionally, utilizing strong ties CardioNet had engendered with Pennsylvania-based

7 Highmark, the sole intermediary designated by the CMS as the controlling contractor For MCOT services,

8 CardioNet had successfully convinced CMS that MCOT was medically necessary, tiring MCOT's purposed

9 diagnostic advantages over traditional Holter and event monitoring services. Prior to the IPO, the Technical

10 Component ofCardioNet's service was being billed by CardioNer under Medicare's non-specific billing. or

11 CPT, code "93799." Having the non-specific code permitted CardioNet to exhibit greater influence over the

12 single reimbursement rate Highmark was setting for the Company —and CardioNet and its reimbursement

13 fee-hungry physician customers were collecting.

14 26. CardioNel's pre-IPO sales push was a huge success. CardioNel's annual revenues more

15 than doubled from S34 mullion in FY 2006 to S73 million in FY 2007 (for the fiscal year ending

16 December 31, 2007).

17 27. The IPO was effected through a Registration Statement on Form S-i (File No. 333-145547)

18 declared effective by the SEC on March 18, 2008 pursuant to which 3 million shares of common stock were

19 sold on March 25, 2008 by CardioNet and 1.5 million shares were sold by venture capital financier Guidant

20 Investment Corporation/Boston Scientific Corporation ("Guidant") for $18.00 per share, resulting in

21 aggregategrossproceedsofS54 million to CardioNet and S27ntillion to Guidant. Thereafter, on April 8.

22 2008, an additional 1 :014,286 shares were sold by Guidant upon a partial exercise of the underwriters' over-

23 allotment option, at the S18.00 price, resulling in SI.B mullion in additional proceeds to Guidant.

24 Underwriters Citigroup Global Markets inc. (- 'Citi"), Lehman Brothers, Inc. ("Lehman Bros."). Leerink

25 Swann LLC ("Leerink'), and Thomas Weisel Partners LLC ("Thomas Weise)") shared an estimated S3.8

26 million in underwriting fees in connection with the IPO. Net of underwriting fees and other expenses.

27

28-9-

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURJTIES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE



1 CardioNet received approximately $46.7 million in proceeds from the 1PO. The Company's stock also

2 began trading on the Nasdaq Global Market under the symbol "BEAT" following the I PO.

3 28. The Secondary Otlering was effected through a Registration Statement on Form S-1 (No.

4 333-151829) declared effective b y the SEC on July 31, 2008 pursuant to which 5.75 million shares of

5 common stock %were sold on August 6, 2008 for $26.50 per share. resulting in aggregate gross proceeds to

6 the selling stockholders of S152.37S million. Selling stockholders in the Secondary Offerurg included

7 CardioNet Directors Fred Middleton and Harry T Rein, and C'ardioNel Fonnder and CEO Sweeny, who

8 sold 1,369,724 shares, 638,272 shares and 593,876 shares, respectively, receiving 536.3 million, 516.9

9 million acrd S/5.4 million i»grosspraceeds. Underwriters Citi, Banc of America Securities LLC (''Banc of

10 America"). Leerink, Thomas Weisel and Cowen and Company ("Cowen') also shared an additional

11 estimated $144.4 million in underwriting fees in connection with the Secondary Offering.

12 29. Defendants in this action include CardioNet, the CardioNet executives and directors who

13 sinned the registration statements used to conduct the Offerings and the underwriters to those offerings

14 (including Barclays Capital Inc. ('Barclay's-) as successor-in-interest for now defunct Lehman Bros.)

15 (collectively, "Defendants"). fn violation of the Securities Act, Defendants were negligent by issuing false

16. and misleading statements to the investing public relating to the Offerings and the Re gistration Statements

17 and Prospectuses (collectively referred to as the `Re g istratiL)n Statements") the Company filed with the SEC

18 in support of the Offerings. Defendants negligently allowed the Registration Statements to paint a rosy

19 picture of the Company's business and financial . fundamentals and to inaccurately communicate that

20 CardioNet's revenue stream was both viable and reliable.

21 30. Specifically, under the applicable SEC Files and regulations governing the preparation of the

22 Registration Statements, Defendants were negligent in failing to disclose or indicate, at the time ofthe iP0

23 and the Secondary Offering ; the following material facts: (1) the Registration Statements (and the financial

24 statements and related SEC filings incorporated therein by reference) reported tens of millions of dollars in

25 improperly obtained revenues; (2) the Registration Statements materially understated the potential for payers

26 to reduce their reimbursement rates for the Company's MCOT ser v ices going forward by actively

27 concealing defects in the March 2007 study and the improper daily billing methods CardioNet's aggressive

28- 10-

CLASS ACI ION COMPLAINT FOR VIOLATIONS OF THE SF.CUR1TILS ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE



I sales force were training physicians to undertake; (3) the Registration Statements concealed the extent of

2 influence CardioNet had and had exercised over Highmark in setting the higher rates; (4) the Registration

3 Statements misstated that, as a result of the above, the Company's financial results following the Offerings

4 would in no way be analogous to the financial statements provided in its Registration Statements and the

revenue and gross margin increases being promised were not possible; (5) the Registration Statements

6 misstated that the Company lacked adequate intemal and financial controls; and (8) as a result or the

7 foregoing, the Company's Registration Statements were false and misleading at all relevant times.

8 JURISDICTION AND VENUE

9 31. This Court has subject matter jurisdiction over the causes ofaction asserted herein pursuant to

10 the California Constitution, Article VI, §10, because this case is a cause not given by statute to other trial

I I. courts. This action is not removable. Certain claims alleged herein arise under §§11, 12(a)(2) and 15 of the

12 1933 Act. See 15 U.S.C. §§77k, 771(a)(2) and 77o. Jurisdiction is conferred by §22 of the Securities Act

13 and venue is proper pursuant to §22 of the Securities Act. Section 22 of the Securities Act explicitly states

14 that "(e]xeept as provided in section 16(c), no case arising under this title and brought in any State court of

15 competent jurisdiction shall be removed to any court in the United States." Section 16(c) refers to "covered

16 class actions," %vhich are defined as lawsuits brought as class actions or brought on behalf of more than 50

17 persons asserting claims understate or common law. This is an action asserting federal la%v claims. Thus, it

18 does not fall within the definition of-covered class action - under § 16(b)-(c) and therefore is not removable to

19 federal court. The odier claims asserted herein arise under §§25401 and 25501 of the Califomia Corporations

20 Code.

21 32. This COttrt has personal jurisdiction over each of the Defendants narned herein because they

22 conducted business in, resided in and/or were citizens of California at the time of the IPO and Secondary

23 Offering (including CardioNet, which maintained its principal place of business in this state at the time of

24 the CPO. and individual defendants James Sweeney, Fred Middleton and Woodrow Myers). The violations

25 of law complained of herein also occurred in San Diego County, California, including the preparation and

26 dissemination of the materially false and misleading Registration Statements complained of herein, which

27 statements were disseminated into this County. Cooley Godward K.ronish LLP, San Diego. California,

28




I served as counsel to CardioNet in both Offerings. CardioNet, the Underwriter Defendants and all of the

2 Individual Defendants conducted extensive business in this County. Multiple suppliers provided the

3 components used in the CardioNet System, but its facilities in San Diego, California were registered and

4 approved by the United States Food and Drug. Administration, or "FDA", as the ultimate manufacturer ofthe

CardioNet System. CardioNet manufactured the monitors and sensors for the CardioNet System in San

6 Diego, California. CardioNet was originally incorporated in California in 1994. At the time ofthe I.PO and

7 Secondary Offering, CardioNet had been a California-licensed medical device manufacturer since March

8 2002. At the time of the IPO, CardioNet's executive headquarters were located at 1010 Second Avenue, San

9 Diego, California and it leased approximately 20,000 square feet ofspace for its headquarters in San Diego

10 both at the time of the f PO and the Secondary Offering (though the Company's physical headquarters were

1 I moved to Pennsylvania between the March 2008 1 PO and the August 2008 Secondary Offering).

12 33. Venue is proper in this Court because Defendants' wrongful acts arose in and emanated from

13 this County.

14 PARTIES

15 34. Plaintiff West Palm Beach Police Pension Fund purchased CardioNet common stock pursuant

16 and/or traceable to both the IPO and the Secondary Offering, and was damaged thereby.

17 35. Defendant CardioNet was originally incorporated in the State of California in March 1994.

18 The Company reincorporated in the State of Delaware on February 22, 2008. At the rime ofthe March 2008

19 I'PO, CardioNet's principal execrrrive offices were located at 1010 Second Avenue, San Diego, California.

20 92101. CardioNet - s principal executive offices are now located at 227 Washington Street, #300,

21 Conshohocken, Pennsylvania 19428.

22 36. Defendant James M. Sweeney ("Sweeney"), the Company's founder, served as a CardioNet

23 Director from April 2004 until July 9, 2008, as its CEO from April 2004 until November 2007, and as its

24 Chainnan of Board from April 2004 until July 8, 2008. By the time of the 1.PO, Sweeney had been

25 succeeded as Presidenr and CEO by defendant Arie Cohen, but would remain as the Executive Chairman of

26 the Board of Directors until his departure in July 2008: Defendant Sweeney signed the false and misleading

27

28-12-




I Registration Statements. Sweeney sold 693,876 shares in the Secondary Offering, receiving $16.4 million in

2 proceeds.

3 37. Defendant A.rie Cohen ("Cohen") served as the Company's President and CEO from

4 November 2007 until he resigned January 22, 2009 and as a Director front December 2007 until he resigned

6 effective January 22, 2009. Defendant Cohen signed the false and misleading Registration Statements.

6 38. Defendant Martin P. Galvan ("Galvan") has served as CardioNet's Chief Financial Officer

7 since September 2007 and as the Chief Operating Officer of PDSHeart since October 2007. Defendant

8 Galvan signed the false and misleading Registration Statements.

9 39. Defendant Fred Middleton ("Middleton") is, and at all relevant times was, a Director of

10 CardioNet, having joined the Board in April 2000. Since 1987, Middleton has also been a general

11 partner/managing director of Sanderling Ventures, a firm specializing in biomedical venture capital.

12 Middleton has played active management roles in many biomedical companies, including aschairman, CEO

13 or director of a number of Sanderling portfolio companies. Sanderling is one of CardioNet's pre-[PO

14 venture capital financiers who participated in the Secondary Offering. Defendant Middleton signed the false

16 and misleading Registration Statements. Middleton also sold 1.369,724 shares in the Secondary Offering,

16 receiving $36.3 million in proceeds.

17 40. Defendant Woodrow A. Myers Jr., M.D. ("Myers".) served as a Director of Card ioNet from

18 August 2007 until May 8, 2009. Defendant Myers signed the false and misleading Registration Statements.

19 41. Defendant Eric N. Prystowsky, M.D. ("Prystowsky") is, and at all relevant times was, a

20 Director of Card ioNet, having joined the Board in March 2001. Since January 2004, Prystowsky has served

21 as editor-in-chief of the Journal ojCardiovosculorElecrrophysiologv. Defendant Prystowsky signed the

22 false and misleading Registration Statements.

23 42. Defendant Harry T, Rein ("Rein") served as a Director of CardioNet from January 2006 until

24 he resigned effective August 4, 2008. Rein had also served as a general parmer with Foundation Medical

26 Partners, a venture capital firm, since March 2003. Foundation Medical Partners was one of CardioNet's

26 pre-IPO venture capital financiers and participated in the Secondary Offering. Defendant Rein signed the

27

28-13-




I false and misleading Registration Statements. Rein also sold 638.272 shares in the Secondary Offering,

2 receiving S16.9 million in proceeds.

3 43. Defendant Robert J. Rubin. M.D. ("Rubin") is, and at all relevant times was, a Director of

4 CardioNet, having joined the Board in July 2007. Defendant Rubin signed the false and misleading

5 Registration Statements.

6 44. Defendant Randy H. Thurman ('Thurman") joined CardioNet in July 2008 as Executive

7 Chairman and a director. Defendant Thurman signed the false and misleading Secondary Offering

8 Registration Statement.

9 46. Defendants Sweeney, Cohen, Galvan, Middleton, Myers, Prystowsky, Rein, Rubin and

10 Thurman are collectively referred to hereinafter as the "Individual Defendants."

11 46. Defendant Citigroup Global Markets Inc. ("Citigroup") was an underwriter of the Company's

12 Offerings, and served as a financial advisor and assisted in the preparation and dissemination ofCardioNet's

13 false and misleading Registration Statements.

14 47. Defendant Barclays Capita), Inc. ("Barclays") is a successor-in-liability to Lehman Brothers

15 Inc. ("Lehman Brothers"), an underwriter of the Company's March 2008 1 PO. Lehman Brothers served as a

16 Financial advisor and assisted in the preparation and dissemination ofCardioNet's false and misleading IPO

17 Registration Statement. On September 15, 2008, Lehman Brothers Holdings Inc., the corporate parent ofI

18 Lehman Brothers, filed a petition in the United States Bankruptcy Court for the Southem District of New

19 York seeking relief under Chapter I 1 of the United States Bankruptcy Code. Subsequently, 18 additional

20 affiliates of Lehman Brothers Holdings Inc. filed petitions in the United States Bankruptcy Court for the

21 Southern District orNew York seeking relief under Chapter 1 1 of the United States Bankruptcy Code. On

22 September 22, 2008, Barclays PLC announced that Lehman Brothers had begun to re-open for business

23 under the ownership of Barclays Capital, Inc. These actions followed the Bankruptcy Court' for the

24 Southern District of New York's approval on September 20, 2008 of Barclays agreement to acquire

25 Lehman Brothers' fixed income and equity sales, trading and research; prime services; investment banking;

26 principal investing; and private investment management businesses in North America at a discounted price.

27 According to Barclay's September 22, 2008 release. "[m]ore than 10,000 Lehman Brothers employees

78-14-

CLASS ACTION COMPLAINT FOR VIOLATION'S OF THE SECURITIES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE

EXHIBIT A, Page 000029 `


I (were) offered jobs in the new entity." the "combined firm [would) use the Barclays Capital name," and

2 Lehman president and chief operating officer Bart McDade was quoted as stating "[a)I I ofLehman Brothers'

3 partners arc excited to join with Barclays Capital."

4 48. Defendant Leerink Swann LLC ("Leerink Swann") was an underwriter of the Company's

5 Offerings, and served as a financial advisor and assisted in the preparation and dissemination ofCardioNet's

6 false and misleading Re g istration Statements.

7 49. ' Defendant Thomas Weisel Partners LLC ( ` 'Thomas Weisel") was an underwriter of the

8 Company's Offerings, and served as a financial advisor and assisted in the preparation and dissemination of

9 CardioNet's false and misleading Registration Statements.

t0 50. Defendant Banc of America Securities LLC ("Banc of America") was an underwriter of the

I I Company's Secondary Offering. and served as a financial advisor and assisted in the preparation and

12 dissemination of CardioNet*s Secondary Offering Registration Statement.

13 51. Defendant Cowen and Company ("Cowen") was an underwriter of the Company's Secondary

14 Offering: and.served as a financial advisor and assisted in the preparation and dissemination ofCardioNet's

15 Secondary Offering Registration Statement.

16 52. Defendants Citigroup. Barclay's (as successor-in-liabilit) , to Lehman Brothers Inc.), Banc of

17 America, Leerink Swann. Thomas Weisel and Cowen are collectively referred to hereinafter as the

18 "Underwriter Defendants." CardioNet, the Individual Defendants and the Underwriter Defendants are

19 collectively referred to as "Defendants."

20 53. Pursuant to the Securities Act, the Underwriter Defendants are liable for the false and

21 misleading statements in the I PO and Secondary Offering Registration Statements and Prospectuses. These

22 Defendants' failure to conduct adequate due diligence investigations was a substantial factor leading to the

23 harm complained of herein.

24 (a) The Underwriter Defendants are investment banking houses which specialize, inter

25 alit, in underwriting public offerings of securities. They served as the underwriters of the IPO and the

26 Secondary Offering and received more than $148 million in fees collectively. The Underwriter Defendants

27 determined that in return for their share of the I PO and Secondary Offering proceeds, they were willing to

28Is-




1 merchandize CardioNet stock in the Offerings. The Underwriter Defendants arranged a multi-city road

2 show prior to the Offerings during which they, and certain of the Individual Defendants, met with potential

3 investors and presented highly favorable information about the Company, its financial prospects and its sales

4 and reimbursement practices.

5 (b) The Underwriter Defendants also demanded and obtained an agreement from

6 CardioNet that CardioNet would indemnify and hold the Underwriter Defendants harmless from any liability

7 under the federal securities laws. They also made certain that CardioNet had purchased millions of dollars

8 in directors' and officers' liability insurance.

9 (c) Representatives of the Underwriter Defendants also assisted CardioNet and the

10 Individual Defendants in planning the Offerings, and purportedly conducted an adequate and reasonable

1 I investigation into the business and operations of CardioNer, an undertaking Mown as a "due diligence"

13 investigation. The due diligence investigation was required of the Underwriter Defendants in order to

13 engage in the Offerings. During the course of their "due diligence," the Underwriter Defendants had

14 continual access to confidential corporate information concerning CardioNet's business sales model,

15 financial condition, internal control and its future business plans and prospects,

16 (d) In addition to availing themselves ofvirtually unbridled access to internal corporate

17 documents, agents of the Underwriter Defendants, including theircounsel at Dewey & LeBoeuf, New York,

18 New York, met with CardioNet's lawyers, management and top executives in San Diego, California and

19 engaged in "drafting sessions" between at least August 2007 and March 2008 and again between at least

20 June 2008 and August 2008. During these sessions, understandings were reached as to: (i) the strategy to

21 best accomplish the Offerings; (ii) the terms of the Offerings, including the price at which CardioNet stock

22 would be sold: (iii) the language to be used in the Registration Statements; (iv) what disclosures about

23 CardioNet would be made in the Registration Statements; and (v) what responses would be made to the SEC

24 in connection with its review of the Registration Statements. As a result of those constant contacts and

25 communications between the Underwriter Defendants' representarives and CardioNet management and top

26 executives. the Underwriter Defendants Mew, or should have known, ofCardioNet's existing problems as

27 detailed herein.

28 -lb-CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THE




I (e) The Underwriter Defendants caused the Registration Statements to be tiled with the

2 SEC and declared effiective in connection with offers and sales thereof, including to Plaintiff and the Class.I

SUBSTANTIVE ALLEGATIONS

4Background

54. The Company's flagship offering is MCOT. which, according to the Company's websi.re

6 "enables heartbeat-by-heartbeat, ECG monitoring, analysis and response, at home or away, 24/7/365."

7 Patients wear three chest leads attached to a small portable sensor that continuously detects every heartbeat

8 and transmits the ECG data in real-time to a pocket-sized monitor. I fthe algorithms in the monitor detect an

9 abnormal heartbeat; the monitor automatically transmits the patient's ECG data to the CardioNet Monitoring10

Center using wireless communications. In February 2002, the Company received FDA approval for MCOT

I 1

and opened the first CardioNet Service Center in Pennsylvania.

1255. In Mav 2006, CardioNet raised venture capital financing through Guidant issuing it a warrant

13 to purchase 200,136 shares of CardioNet's Series D- I preferred stock. Again in August 2007, CardioNet

14 issued a warrant to purchase 214,285 shares of its Series D-I preferred stock to Guidant. The exercise price

13 of the warrants issued to Guidant was $3.50 per share. These warrants were automatically net exercised

16 immediately prior to the completion of the IPO in accordance with their terms and Guidant would be the

17 sole selling stockholder in the company's IPO, reaping over $28 million in proceeds.

1856. In preparation for the Company's IPO. on March 5, 2007, CardioNet's senior executives

19 issued a release entitled "New Study Finds Commonly Used Heart Monitoring System Often Fails to Detect20

Serious Cardiac Arrhythmias, a Leading Cause of Stroke and Sudden Cardiac Death - Journal of2}

Cardiovascular Elecirophysiologoy Finds "that New Methods Are Needed to Help Save Lives." Defendant22

Prystowsky, a long-time CardioNet Director, is the editor-in-chief of the Journal of Cardiovascular

Elecu•ophysiology. The Company's release, which prominently featured CardioNet's MCOT technology,

24 stated in relevant part that:

25A recently completed multi-center, peer-reviewed study has found that cardiac arrhythmias,

26 one of the most common yet potentially dangerous heart conditions affecting more than fourmillion Americans often go undetected despite medical monitoring, resulting in more than

27 780,000 hospitalizations and contributing to approximately 500,000 deaths each year.

28- 17-

CLASS ACT10N COMPLAINT FOR VIOLATIONS OF THE SECURJTIES ACT OF 1933 AND THE^^CALIFORNIA CORPORATIONS CODE



I The first of its kind study, to be published in the March issue of the J611r71a/ ofCardiovascular ElecrrophysiologI), compared the effectiveness of tivo ambulatory

2 electrocardiographic monitoring, systems in detecting, arrhythmias, a condition in which aperson's heartbeat is abnormal. Three hundred patients presenting with symptoms

3 suggestive of a cardiac arrhythmia and with previous negative or inconclusive 24-hourHoller monitoring or 24-hours of telemetry, were enrolled in the study by 17 cardiology

4 practices. Patients were randomized to either a new technology called Mobile CardiacOutpatient Telemetry (MCOT) or to a cardiac loop event recorder. The results ofthe study

5 showed Mat MCOT was almost three times more effective detecting and diagnosingclinically significant arrhyllimias compared to thefrequently prescribed cardiac loop event

6 recorder.

7 M COT detected clinically significant arrhythmias in 41 percent ofpatienIs, compared to thecardiac loop event recorder, which detected arrhythmias in just 15 percent of patients (p <

8 0.001). Furthermore, MCOT detected clinically significantalrial fibrillation in 23 percent ofpatients, compared to 8 percent by cardiac loop event recorders (p < 0.001). In patients that

9 experienced no symptoms (asymptomatic patients) during the study, the cardiac loop eventrecorders detected no (0%) clinically significant atrial fibrillation, compared to MCOT,

10 which detected clinically significant atrial fibrillation in 17 percent of patients (p < 0.00)).

11 Other notable findings of the study:

12 In patients with syncope (faintin g , passin g out) or presyncope (di-r_ziness),. MCOT jdetected clinically significant arrhythmias in 52 percent of patients, compared to 16

13 percent of cardiac loop event patients (p < 0.001).

14 in patients with syncope or presyncope, MCOT detected elinieally significant atrialFibrillation in 24 percent ofpatients compared to 2 percent of cardiac loop event patients

15 (p less than 0.001). In the same group of patients, MCOT detected asymptomatic atrialFibrillation in 19 percent of patients compared to no (0%) cardiac loop event patients (p <

16 0.001).

17 in a sub-group of sires using the auto-detect/auto-trig ner cardiac loop event recorders, anarrhythmia was confirmed or excluded as the cause oFsymptoms in 88 percent of MCOT

18 patients, compared to only 46 percent of cardiac loop event patients (p=0.002).

19 "These are very compelling, findings that for the first time clinically validate the importanceand superiority of MCOT--particularly when you consider that a meaningful percentage of

20 patients may not experience easily detectable symptoms.' said Steven A. Rothman, M.D.,Mainline Arrhythmia and Cardiology Consultants, Wynnewood, PA, the principal

21 investigator of the study. "Clearly; physicians need to more carefully consider the value ofprescribing MCOT as the first-line diagnostic toot when monitoring palientsfor clinically

22 significant arrhythmias.

23 "In the diagnosis of patients with symptoms of a cardiac arrhythmia, MCOT provides asignificantly higher yield than standard cardiac loop event recorders," continued Dr.

24 Rothman. "This result was more pronounced in patients presenting with symptoms ofsyncope or presyncope. MCOT was superior to cardiac loop event recorders for the

25 detection of clinically significant arrhythmias, with a shorter time to diagnosis. Thetechnology reduces patient error, enhances diagnostic accuracy, decreases time to diagnosis,

26 and improves patient care."

27 About Cardiac Arrhylhmia Monitoring

28-18-



Case 3:1 -L -NLS Document 1 Filed 04//10 Page 35 of 59,J

i

I A cardiac arrhythmia is categorized as a temporary or sustained abnormal heart rhythm thatis caused by a disturbance in the electrical signals in the chambers of the heart. Proper

2 administration of electrical signals to The heart is necessary to ensure effective heart function.There are Two main categories of arrhythmias: tachycardia, meaning a rapid heartbeat, and

3 bradycardia, meaning a slow heartbeat.

4 The ability to diagnose or rule out a cardiac arrhythmia as the cause ofa symptom or cardiaccondition is important both to near those patients with serious arrhythmias, as well as to

5 identify those patients that may not require further medical attention. The problem is that themost commonly prescribed diagnostic method, the Holter moniror(first developed in the late

6 1940s and generally worn by a patient for 24-48 hours), rarely finds infrequent butnonetheless serious arrhythmias in many patients. Circulation, a publication of die American

7 Heart Association,- reported as early as 2003 that the "principal limitation of Holzerrecordings is that the sampling period is usually too short to allow capture of all

8 arrhythmia." Similarly, a 2004 Frost & Sullivan study reported that Holter monitors havebeen found to be effective in diab osing cardiac arrhythmias only 10 percent ofthe time.

9When Holter monitoring fails to detect an arrhythmia, physicians often place the patient on a

10 portable cardiac loop event recorder, which patients wear for 30 days, but the recorder onlystores a limited amount of data, Typically about 10 minutes. Additionally, in most cases,

I I cardiac loop event recorders require that the patient activate the device when they feel

12symptoms, an inherent limitation as patients may or may not experience symptoms.

The most recent advancement in ambulatory arrhythmia monitoring is CardioNet MCOT.

13 whereby patients wear three chest leads attached to a small portable sensor that continuouslydetects every heartbeat and transmits the ECG data in real-time to a pocket-sized monitor. If

14 the aloritltms in the monitor detect an abnormal heartbeat, the monitor automaticallytransmits the patient's F_CG data to the'CardioNet Monitoring Center using wireless

15 communications. CardioNet MCOT offers several advantages to physicians, payors, andpatients, including: real-time, continuous ECG data detection; 96 hours of memory;

16 inerctued compliance through technololzy and reduced patient interaction; reflection of real-life cardiac activity; symptom correlation; detection of arrhythmias where symptoms are not

17 experienced; minimization of data artifacts or `noise"; nvo-way wireless capabilities fortransmission, remote programming and data retrieval; and the ability to tailor Elie system to

.18 physicians' needs.

19 CardioNet MCOT is available today in 25 states and growing, rapidly. In some other stateswhere reimbursement has been lagging, payors have been waiting for clinical data to prove

20 the efficacy of the new service. Jim Sweeney, Chairman and CEO of CardioNet, said that henow expects more insurance companies to reimburse for MCOT as a result of the findings of

21 this study. "It is far better to cover the cost of an effective monitoring technology than toincur the cost ofongoing testing and treatment of patients who are left undiagnosed, and who

22 may ultimately be hospitalized because of stroke or other serious Kean conditions."

23 (Emphasis added; footnotes omitted.]

24 57. Later that month in March 2001 ; CardioNet announced that it had closed on another

25 approximately $115 million private financing round, making it one or the largest private placements of

26 equity bridge financing in the medical technology sector since January 2000, according to Sweeney. "I'hat's

27 even more than most initial public offerings," said Sweeney, speaking at the 56th annual scientific session of

28-19-

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECUR TIES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE



I the American College ofCardiolo;y in New Orleans. Underwriter Defendant CitiGroup also served as the

2 lead placement agent for this round of venture capital financing. In connection with the financing,

3 CardioNet issued and sold to investors an aggregate of 114.839 shares of mandatorily redeemable

4 convertible preferred stock at a purchase price of $1,000 per share, for aggregate consideration of $1 14.8

5 million. Upon the closing of the Company's March 2008 1PO, these shares would convert into 7.680,902

6 shares ofcommon stock, many ofwhich would be sold in the Company's August 2008 Secondary Offerinla,

7 includintr shares sold by venture capital funds Sanderling and Foundation, where defendants Middleton and

8 Rein, respectively, serve as general panners.

9 The Truth T3etîns to Enierroe

10 58_ Beginning with the release of a highly critical JefTeries & Company, Inc. ("JefTeries -) analyst

I I reporron Apri 124, 2009, the market learned the true basis of CardioNet'$ purported success and how fallible

12 its business model was. Analyst Brian Kennedy of JefTeries issued a detailed 16-page report initiating

13 covers ,c of CardioNet, rating CardioNet as "Underperform." and ,ti —es(ing that a significant

14 reimbursement- rate cut by Highmark was imminent. Among other things, the JeTeries report disclosed for

15 the first time that_

16 (a) While over the previous "several years," the Professional Component had been

17 reimbursed at upwards of $300 (depending on the carrier), and the Technical Component, which was

18 reimbursed by "only one Medicare carrier, Pennsylvania's Highmark." had been reimbursed at "an average

19 rate of $1,123.07," both reimbursement fees would be drantaticaliy reduced beginning in 2009. Specifically,

20 the professional fee paid to physicians would be reduced to ''approximately $25." While the Technical

71 Component would still be determined at "contractor rate," i.e., by Highmark, it was clear to JefTeries that

22 CNIS had determined Highmark had been "over-valuing" the service in the past and Highmark would likely

23 reduce the Technical Component CardioNet received in proportion to the reduction in the Professional

74 Component, resultin g in a range of $700 - $1,000 payable for the technical fee.

25 (b) By adding a "modifier [of) -26 and specify[ing) 'mobile cardiac outpatient telemetry'

26 (or close variation) on the CNIS claim form,' physicians - as instructed by CardioNet's aggressive sales

27 staff- had been improperly manipulating the rate of reimbursement for MCOT services: "While CMS

28-20-


sEXHIBIT A, Page 000035


I guidelines stated that the service should be paid only onetime in any 30-day period regardless of the number

2 ofdata transmissions involved (a policy most private insurers [also] follow[ed]). the use ofan unlisted code

3 made payment inconsistencies from carrier to carrier fairly common."

4 (c) "1n an October 2006 letter to CMS, [CardioNet had] discusse[d] this issue, saying

5 'payment for physicians varies widely through the country and there is no single methodology used by

6 carriers to determine payment,"' and that "[t]o illustrate its point, [CardioNet] enclosed a gable listinb the

7 payments made by several Medicare carriers for" the "-26"-modified billing code with the table showing a

S range of "payments of $30 [to] $299," assuming a monitoring period of up to thirteen days. As a result,

9 Jefferies warned that the "new payment of roughly $25 for a 30 day period tinder the recently created

10 MCOT-specific code ... represents a step back — and in some instances a significant step back - in

I I physician reimbursement jor NICOT."

12 (d) Jefferies also explained that the "the new fee is comparable to those for older-line

13 devices, Holterand event monitors, which removes iheprojit incentive that oncefa vored jWCOT relative to

14 these other technologies." T'he Jet-eries report carefully added that "Ithrough we're not suggesting that a

15 profit motive alone drives MCOT adoplion - the technology has clear diagnostic benefits - we think the

16 added profitability of MCOT encouraged many plrvsiciarrs to of least trial the technology" and that

17 Jefferies was "cautious that dris willingness to trial MCOT may decline now that the professional

18 reimbursement is on par with that for more routinely used Holters and event monitors."

19 (e) Jefferies explained that "Cardiologists and electrophysiologists are generally more

20 experienced with Holters and event monitors and some have the technology, particularly Holters, in their

21 off ices, allowing their to bill for Me technical fee too and generate more revenue."

2 2 (1) Jefferies also cautioned that its "checks with physicians who've already adopred

23 MCOT revealed] frustration over the new rate given the greater number of MCOT reports relative to the

24 other technologies, as well as the additional time needed to work through issues such as explaining to the

25 patient that MCOT is associated with a higher co pay.'' with Jefferies concluding that "[w]hile many

26 doctors indicate that they'll continue usi.no MCOT even if they're generating a loss on their efforts, we're

27 inclined to think that demand from existing users could decline as physicians become more selective in

7821



Case 3:10-cv-007L -NLS Document 1 Filed 04/0/10 Page 38 of 59,11-

I choosing patients whoW benefit frum the technoloav" and that "many private insurers [would] gravitate

2 toward the new CMS professional fee over time, further pressuring demand from both new and existing

3 users of MCOT."

4 (g) 14ypothecating that the "new lower professional fee clearly establishes where the

5 technical fee is headed," Jefferies stated that ''[b]roadly stated, we believe CMS assigns a lower cosdhenefil

6 value to MCOT than some of the local Medicare carriers, particularly Highnturk.

7 (h) Jefferies also cautioned that havin n MCOT costs viewed as "indirect costs, not direct

8 costs," would "increasen the likelihood of a lower national technical fee." Jefferies also stated that

9 `'[c]omtnents made by [CardioNet] in letters sent to CMS last year indicate[d] that" CardioNet knew "many

10 MCOT costs [were being viewed] as indirect costs rather than direct costs," including the '`the son-ware anti

I 1 hardware used in the MCOT monitoring center." Being characterized as indirect costs rendered MCOT

12 costs "akin to overhead, because these items are used to process multiple patients in parallel rather than on a

13 serial basis." Jefferies continued that "(a]Ithough [Cardiobeat] cites several technologies it believes offerI

14 precedent for the type of reimbursement [it was] requesting. /Jefferies wasJcuulions that/regulatorcf hald/

15 already considered and rejected this line of thinking."

16 (i) Jefteries warned that the "spread between Medicare reimbursement rates for event

17 monitors and MCOT [vas] large and should prove unsustainable over time," noting "that 11.1COT

18 reimbursement /was/ approximately five times greater than reimbursement for event monitors ; which

19 typically [fell] between $200 and $250 per case" and that **Hotter reimbursement /was/ art even greater

20 step down. at approximately $100 per case." Jefferies reported that "(s]everal people [it had] spoken with

21 suggest[ed] that MCOT bald/ managed to maintain its snbstantiul reimbursement premium because only

22 lCardioNr/l had been actively pursuingthe opportunity before 2007, and the company's scale was much

23 smaller than it" was in then in April 2008, stating "(t)hese observers believe that BEAT'S aggressive growth

24 strategy, paired with Life Watch's emergence as an MCOT competitor, (would] attract reimbursement

25 scrutiny and make cuts inevitable."

26 0) Jefferies also observed that "Highmark was the first supporter of MCOT, and first

27 supporters tend to be generous with reimbursement," noting CardioNet has "gotten far less traction with

28 _22_ CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THE




I CMS than it has with Highmark." Accordin- to Jefferies, in u "2006 letter to CMS, ICardioNell

2 ackuowledgeldl its dependence on flighmark bluntly, even limiling its influence to a single person,

3 Highmark medico/ director Dr. Andrew Bloschichak: 'Our payment is based on the willingness of Dr.

4 Bloschichak-to learn about MCOT, carefully research issues and provide for payment that reflects the cost of

S the service.''' Jefferies emphatically stated "[wje don't expect CMS to give MOOT the open-minded

6 consideration that Dr. Bloschichak has (due to CMS's priorities elsewhere), and we think an upcoming

7 reimbursement reduction by Hi;hntark will mark the end of MC.OT's most favorable Medicare

8 reimbursement tenns."

9 (k) Jefferies also questioned the scientific worth of the March 2007 study CardioNet had

10 designed, paid for and extensively touted, referencing its "non-ideal control group" and stating that while

1 I "f from a pure technology standpoint, [CardioNet's) MCOT system performed admirably in the trial," `the

12 results [were] somewhat unremarkable to those familiar with cardiac monitoring, since using better

13 technology capable of capturing asymptomatic events and extending the observation time window should

14 obviously improve one's diagnostic yield. According to Jefferies, however, citing a December 2007

15 technology assessment of remote cardiac monitoring devices, while increased diagnoses yields might

16 improve patient management, further evidence of actual improved "patient-oriented outcomes" was needed

0 to determine efficacy. Specifically, the Jefferies report concluded that:

18 At present, several private insurers won't reimburse for MCOT even though the [CardioNet)system has achieved statistically significant results in a large-scale randomized clinical trial.

19 Some of these private payers have indicated that they don't think the study's data aresufficient, an opinion that may stem from a primary focus on outcomes rather than simply

20 diagnosis. We believe until more outcomes data are generated, restrictions on thereimbursable uses of the service are likely to increase as coverage moves Toward a

21 Medicare national payment decision. Orr checks indicate that Highmark and someprivate insurers are now fairly lenient in requiring documentation to support the medical

22 necessity of MOOT compared to otter less expensive forms of monitoring. We expectCMS to impose more restrictions on usage. We note that once the technical fee moves out

23 of Highmark's control and into CMS's. the MCOT providers should have the abi lily to openindependent diagnostic testing facilities in any state, not just Pennsylvania. Webelieve CMS

24 will take pains to prevent MCOT euphoria from building on the national leveL We viewCMS's decision to remove the financial incentive favoring MCOT by lowering the

26 professional fee to S2S as an early tell that the agency plans to rein in MCOT costs and

26limit the technology's use to only those patients who truly need it.

27(1) in conclusion, the Jefferies report, which was a culmination of extensive research

28 about CardioNet's and the lucrative historical reimbursement rates it had obtained for the MCOT device,

-23- CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THE




I hypothesized that, as a result of Highmark's review , ofCardioNet's historical MCOT billing practices —

2 practices CardioNet's sales stafjhad taught doctors to follow to hicrease their reintbursernent rates to

3 in crease MCOTprescriprions— Highmark would cut the Professional Component of the reimbursement fee

4 CardioNet was receiving by at least $200 per service in 2009.

5 (Emphasis added.)

6 59. Based on its analvsis. Jefferies established a price target for CardioNet's stock of $17 per

7 share, compared to the Company's then-current market price of $22.91 per share, Jefferies' target price was

8 more than 22% lower than the S 18 per share Defendants had garnered in the I PO and more than 35% lower

9 than the $26.50 per share they had garnered in the Secondary Offering. Issuance of the Jefferies report

10 caused the price ofCardioNet's common stock to fall by $2.97 per share to close at $19.94 on April 24,

11 2009, a one-day decline of 13%, erasing overS70.5 million in market capitalization.

12 60. 'I'hough CardioNet adamantly denied and attempted to discredit the findings in the Jefferies

13 report., on June 30, 2009 CardioNet suddenly issued a press release announcing that it was lowering its full

14 year 2009 guidance and withdrawing its 2010 and 201 1 guidance based on "lower than anticipated

15 commercial reimbursement rates" for its MCOT device. On this news, CardioNet's shares again plunged

16 $6.75 per share from $16.32 per share on June 30, 2009 to $9.57 per share on July I, 2009, a one^day

17 decline of41 % per share on volume of 23.4 million shares, over 24 times the preceding three-month's daily

18 average.

19 61, Finally, on July 12, 2009, CardioNet announced'that it had received a letter from Highmark

20 stating that the reimbursement rate for the technical portion of the MCOT device would be lowered by

21 approximately 33%, from $ I ,123 to $754 per service, and that as a result, the Company was %vithdrawing its

22 full year 2009 guidance entirely. On this announcement, the price ofCardioNet's stock once again suffered

23 a significant decline, falling $2.96 per share to close at $5..87 per share on July 13, 2009 —a one-day decline

24 of 34% on volume of ) 1.8 million shares, over seven times the average three-month daily average.

25 62. As detailed in a November 20; 2009 Wall Sneer Journal expose, the price of the millions of

26 shares of CardioNet stock sold to the unsuspecting public in the Company's IPO and Secondary Offering

27 had cratered:

28-24-




1 Fading Heartbeat I CardioNet's public history

Match 19, Aug, 8: Feb. ta, April 24 k 28Z June 30 S July 12

2 2001,: Stock 2009: Jeff&les Initiates Stock Ws asInitial peaks at Shares rise coverage of CardioNet announcespublic 53450 on fourth CardioNlet with commercial insurersoffering Quaver sell rating. cutting

results. CardloNotdenics reimbursementand.

4 elements of the later, Medicare rate50 per share report. arts:

30 I

6 r,

8 2008'in0 . I , c .. .

9 5-4— WSJ Ma:N Diu frwcc WSJ,Mdmh

10 63. The November 20, 2009 Wall SIreer Journal article, which also detailed CardioNet's

I I concerted—and disingenuous —efforts to discredit the Jefleries report for over a year. including %^Titing the

12 SEC, the Nasdaq Stock Market and the Financial Industry Regulatory Authority accusing Jefferies ofstock

13 man ipulation, quoted CardioNet's then-current CEO conceding that that "the rare cut means Card ioNec , wiI I

i4 not be able to sustain operations as a stand-alone company"' anymore. Indeed, by mid-December 2009,

1 5 CardioNet's CEO would be forced to disclose that (a) the Company planned to cut S 16 million in operating

16 costs (in addition to the $8 million in expense cuts that had been made during the period from mid-Jul y to

17 mid-December 2009) to remain afloat, and that (b) the Company had retained Lazard Freres & Co. to

18 evaluate its options, including what some analysts believe could be a sale of the Company. Even today. with

19 talk of a possible sale of the Company in the market, CardioNet stock continues to trade in the range of

20 $6.60 to $6.60 per share, after falling as low as $4.36 per share on December 8, 2009.

21 THE FALSE AND MISLEAD NG IPO REGISTRATION STATEMENT22

64, On or about August 17, 2007, CardioNet fled with the SEC a Form S-I Registration23

Statement for the IPO that went through several rounds of amendments before being declared effective by24

the SEC on March 18, 2008. On or about March 25. 2008, the Company conducted its IPO valued at more25

than $82 million. including shares sold by Guidant. The IPO Registration Statement and , Prospectus26

(collectively the "IPO Registration Statement) contained material false and misleading statements, omitted27

28-26-

CLASS ACTION COMPLAINT FOR V10LATIONS OF THE SECURY11ES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE



I to state other facts necessary to make the statements made not misleading and were not prepared in

2 accordance with the rules and regulations governing their preparation.

3 65. Purporting to describe the "advanta ges" CardioNet "believe[d] that the CardioNet System

4 ofl'er[ed] ... to physicians, payors and patients," the IPO Registration Statement listed a "Potential reduction

5 in health care costs," stating "[w]e have demonstrated increased diagnostic yield as compared to event

6 monitoring, which we believe may reduce 'time to diagnosis' and reduce health care costs resulting from

7 repeated emergency room and physician visits, additional diagnostic testing, prolonged hospitalization for

8 the sole purpose ofarrhythmia monitoring and unnecessary hospitalizations for drug initiation and titration,

9 as well as expenditures resulting from stroke and other serious cardiovascular complications."


11 66. These statements in the IPO Registration Statement concerning "reduction[s] in health care

12 costs" were materially inaccurate. First, the statements, which were made in conjunction with the iPO,

13 concealed/miss-fated that CardioNet lacked any scientific basis for stating that MCOT's increased diagnostic

14 yields actually led to reduced healthcare costs. CardioNet's March 2007 study was defective and

l: scientifically non-conclusive. While MCOT increased diagnoses yields, the Company lacked a scientific

16 basis to say that increased diagnoses yields reduced actual patient cam costs. Second, because CardioNet's

17 sales represen tat i veswere employing improper— if not illegal — sales tactics, including instructing doctors to

18 prescribe MCOT to patients whose severity of symptoms did not warrant it, encouraging doctors to bi Il the

19 professional fee on a daily basis for reviewing medically unnecessary daily reports and charging Medicare

20 and private payors for using the MCOT rechnology CardioNet provided to them for free, the costs associated

21 with the use of MCOT were actually materially higher than viable alternatives. And third, because MCOT

22 was significantly more expensive that other diagnoses methods and payors would not deem MCOT

23 "medically necessary" based on the Company's flawed study, CardioNet had no basis to state it could

24 expand MCOT's acceptance rate amongst physicians, and thus, its own market share and sales revenues.

25 67. As to Card ioNet"s "Business Strategy," the IPO Registration Statement cited "[I]everag[ing]

26 [e]xpanded [s]ales [t]ootprint to [e]nhance [m]arket [p]enetration" as a goal, specifically stating that:

27 With the acquisition of PDSHeart, we now provide services to patients in 48 states. Oursales force increased from 27 account executives at December 31, 2006 to 76 account

28 -26- CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECUR-ITIES ACT OF 1933 AND THE




I executives as of December 31, 2007, largely as a result of the PSDHean acquisition, and weintend to continue to add sales capacity. The acquisition accelerated our market expansion

2 strategy by providing us with inunediate access to a sales force with existing physicianrelationships capable of marketing our CardioNet System in areas of the country where it

3 had previously not been marketed or sold.

4 [Emphasis added.]

5 68. These statements in the IPO Registration Statement concerning the Company's ability. to

6 expand CardioNet's sales footprint into "areasofthe country where [CardioNet MCOT] had previously not

7 been marketed or sold" were false and misleading as expanding the Company's sales footprint exposed

8 CardioNet's exorbitant reimbursement rates to being reduced, Once those rates were reduced, CardioNet's

9 higher cost vis -a-vis Holter and event monitors would reduce physician prescriptions by rendering use of

10 CardioNet MCOT financially unviable to patients and physicians alike.

11 69. The IPO Registration Statement stated that CardioNet "receive[d] reimbursement for [its]

12 services from commercial payors and from Medicare Part B carriers where the services /were) perfornhed

13 on behalf of the Centers for Medicare and Medicaid Services, or CMS," and that its "prescribing

14 . physicians received] reimbursement for professional interpretation of the information provided by [itsl

15 products and services from commercial payors or Medicare carriers within the slate where they practice." .

16 These statements were false and misleading as they concealed that all pricing was set by Highmark in

17 Pennsylvania, over which CardioNet's executives wielded signifrcunt influence. [Emphasis added.]

18 70. The iPO Registration Statement stated that defendants "believe[d] the CardioNet System

19 monitoring system revenues [would] increase as a percentage of revenues going forward as [they]

20 emphasize[d] This service, continue[d] [CardioNet's] geoa aphic expansion and achieve[d] greater market

21 penetration in existing markers." These statements were false and misleading as the 2007 study was flawed,

22 which would result in a reduction rather than an expansion of pa yor acceptance, reducing revenues.

23 Moreover, because CardioNer's national reimbursemenr fees were being set by Highmark alone, over which

24 CardioNet exhibited significanr influence, unbeknownst to investors, the Company's reimbursement rates

25 would be slashed when CMS realized how much Fighmark had been over-valuing CardioNeCs MCOT

26 services. When CMS reduced reimbursement raECS, Card loNec*s revenues would be significantly diminished

27 and its "geographic expansion" and "market penetration" would contract, rather than expand. Speci fically,

28 -27- CLASS ACTION COMPLAINT FOR V IOLATIONS OF THE SECURITIES ACT OF 1933 AND THE




1 at the time of the IPO, Defendants knew CMS was critically reviewing reimbursement rates for CardioNet

2 MCOT.

3 71. The I PO Prospectus stated that "[nor the year ended December 31, 2007, [CardioNet's] gross

1 profit margin was 63%," and that '*[i]n general, [defendants] expected) gross profit margins on the

3 CardioNet System services to remain flat or increase, assuming no changes in reimbursement rates."

6 Conversely, defendants stated that ` (Qor [CardioNet's] event and Holier monitoring services, (the

7 Company] expect[ed] gross profit margins to decrease as reimbursement rates declineld/ as (then/

8 currently proposed by CMS." These statements concerning Defendants' "gross profit" projections for

9 MCOT wire false and misleading as Defendants then knew that more likely than not CMS would force a

10 significant reduction in CardioNet's reimbursement rates once multiple providers of MCOT necessitated

1 1 CMS establishing a national reimbursement rate and CardioNet could no longer dictate reimbursement rates

12 through its influence over Highmark.

13 TT-YE FALSE AND NUSLEADTNG SECONIDARVOFFERING RFGTSTRATION STATEMENT

14

72. On or about June 23, 2008, CardioNet filed with the SEC a Form S-I Regist ration Statement13

for the Secondary Offering, that went through several rounds of amendments before being declared effective16

by the SEC on July 31, 2008. On or about August 6, 2008. the Company conducted its IPO valued at more17

than $132 million. The Secondary Offering Registration Statement and Prospectus (collectively the18

"Secondary Offering Registration Statement) contained material false and misleading statements, omitted to19

state other facts necessary to make the statements made not misleading and were not prepared in accordance20

with the rules and regulations governing their preparation.2]

73. Purporting to describe the "advantages" CardioNet "believe[d] that the CardioNet System22

23 offered]—to physicians, payors and patients," the Secondary Offering Registration Statement listed a

24 "Potential reduction ht health care costs, "stating "(w.le have demonstrated increased diagnostic yield as

25 compared to event monitoring, which we believe may reduce 'time to diagnosis' and reduce health care

costsresuhing from repeated emergency room and physician visits, additional diagnostic testing, prolonged2627 hospitalization for the sole purpose of arrhythmia monitoring and unnecessary hospitalizations for drug

28- 28 -

CLASS ACTION COMPLAfNT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THECALIFORNIA CORPORATIONS CODE



1 initiation and titration, as well as expenditures resultin g from stroke and other serious cardiovascular

2 complications.",

3 74'. These statements in the Secondary Offering Registration Statement eonceming, "reducrion[s]

4 in health care costs" were materially inaccurate. First, the statement, which was made in conjunction with

5 the Secondary Offering, concealed/misstated that CardioNet lacked any scientific basis for stating that

6 MCOT's increased diagnostic yields actually led to reduced healthcare costs. CardioNet's March 2007

7 study was defective and scientifically non-conclusive. While MCOT increased diagnoses yield, the

8 Company lacked a scientific basis to say that increased diagnoses yields reduced actual patient care costs.

9 Second, because CardioNet's sales representatives were employing improper— if not illegal — sales tactics,

10 including instructing doctors to prescribe MCOT to patients whose severity ofsymptoms did not warrant it,

11 encouraging doctors to bill the professional fee on a daily basis for reviewing medically unnecessary daily

12 reports and charging Medicare and private payors for using the MCOT technology CardioNet provided to

13 them for free, the costs associated with the use of MCOT were actually materially higher than viable

14 alternatives. And third. because MCOT was significantly more expensive than other diagnoses methods and

15 payors would not deem MCOT "medically necessary" based on the Company's flawed study, Card ioNet had

16 no basis to state it could expand MCOT's acceptance rate among physicians, and thus, its own market share

17 and sales revenues.

18 75. As to CardioNet's "Business Strategy," the Secondary Offering Registration Statement cited

19 `-[1]everag[inS] [e]xpanded [slates [flootprint to [e]nhance [m]arkec [p]enetration" as a goal, specifically

20 stating that:

21 With the acquisition of PDSHeart, we now provide services to patients in 48 slates. Oursales force increased from 27 account executives at December 31. 2006 to 76 account

22 executives as of December 31, 2007, largely as a result of the PSDHeart acquisition, and weintend to continue to add sales capacity. The acquisition accelerated our market expansion

23 strateg), by providing us with immediate access to a sales force will) existing physicianrelationships capable of marketing our CardioNel System in areas of the country where it

24 had previously not been marketed or sold.


26 76. These statements in the Secondary 01Tering Registration Statement concerning the

27 Company's ability to expand CardioNet's sales footprint into "areas of the country where [CardioNet

28 29 CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1913 AND THE




I MCOT] had previously not been marketed or sold" were false and misleading as expanding the Company's

2 sales footprint exposed CardioNet's exorbitant reimbursement rates to being reduced. Once those rates were

3 reduced. CardioNet's higher cost vis-a-vis Holzer and event monitors wou Id reduce physician prescriptions

4 rendering use of CardioNet MCOT financially unviable to patients and physicians alike.

77. The Secondary Offering Registration Statement stated that CardioNet "receive[d]

6 reimbursement for [its] services from commercial payors and from Medicare Part B carriers where the

7 services /were) performed on behatf of the Centers for Medicare and Medicaid Services, or CMS," and

8 that its "prescribing physicians received] reimbursement for professional interpretation of the information

9 provided by [its] products and services from commercial payors or Medicare carriers within the state

10 where they practice."These statements were false and misleading as they concealed that a// pricing was set

11 by Highmark in Pennsylvania, over which CardioNet's executives wielded significant influence.


13 78. The Secondary Offerin g Registration Statement stated that Defendants "believe[d] the

14 CardioNet System monitoring system revenues [would] increase as a percentage of revenues going forward

15 as [they] emphasized] this service,.continue[d] [CardioNet's] geographic expansion and achieved] greater

16 market penetration in existing markets." These statements were false and misleading- as the 2007 study was

17 Clawed, v,, hich would result in a reduction, rather than an expansion, ofpayor acceptance, reducing revenues.

18 Moreover, because CardioNet's national reimbursement fees were being set by Highmark alone', over which

19 CardioNet exhibited signif --cant influence, unbeknownst to investors, the Company's reimbursement rates

20 would be slashed when CMS realized how much Highmark had been over-valuing CardioNet's MCOTi

21 services. When CMS reduced reimbursement rates, CardioNet's revenues would be significantly diminished

22 and its "geographic expansion" and "market penetration" would contract, rather than expand. Specifically,

23 at the time of the secondary offering, Defendants knew CMS was critically reviewing reimbursement rates

24 for CardioNet MCOT.

25 79. The Secondary Offering Prospectus stated that "[f]or the quarter ended March 31, 2008,

26 [CardioNet's] gross profit margin was 62.6°/%,-" and that "[i]n general. [Defendants] expected] gross profit

27 margins on the CardioNet System services to remain flat or increase, assuming no changes in

29-30-

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND TiiECALIFORNIA CORPORATIONS CODE



I reimbursement rates." Conversely, Defendants stated that " [0or [CardioNet's] event and Holter monitoring

2 services, [the Company] expect[ed] gross profit margins to decrease as reintbursetnenr rates declineldl as

3 lNtenl currently proposed by CMS." These statements concerning Defendants' "gross profit" projections

4 for MCOT were false and misleading as Defendants then knew that more likely than not CMS would force a

5 significant reduction in CardioNet's reimbursement rates once multiple providers of MCOT necessitated

6 CMS establishing a national reimbursement rare and CardioNel could no longer dictate reimbursement rates

7 through its influence over Highmark.

8 80. In general, the statements made in both the Company's IPO and Secondary Offering

9 Registration Statements were materially false and misleading when made because the Company failed to the

10 disclose the following material facts concerning CardioNet's business operations, financial results,

1 1 operations and internal controls:. (1) the Registration Statements (and the financial statements and related

12 SEC flings incorporated therein by reference) reported millions of dollars in improperly obtained revenues,

13 (2) the Registration Statements materially understated the potential for payors to reduce their reimbursement

14 rates for the Company's IvICOT services going forward by actively concealing defects in the March 2007

15 study and the improper billing methods CardioNet's aggressive sales force was training physicians to

16 undertake: (3) the Registration Statements concealed the extent of influence CardioNet had and had

17 exercised over Highmark in establishing CardioNet's national )vICOT reimbursement fees; (4) the

18 Registration Statements misstated tbat, as a result of the above, the Company's Financial, results following

19 , the Offerings would in no way be analogous to the financial statements provided in its Registration

20 Statements; (5) the Registration Statements misstated that the Company lacked adequate internal and

21 financial controls; and (8) as a result of the foregoing, the Company's Registration Statements were false

22 and misleading at all relevant times.

23 PLAINTIFF'S CLASS ACTION A.LLEGATTONS

24 81. Plaintiff brings this action as a class action on behalf ofa Class. consisting of all those who

25 purchased CardioNet's common stock pursuant or traceable to the Company's I PO and Secondary Offering

26 Registration Statements and who were damaged thereby (the "Class"). Excluded from the Class are

27 Defendants, the officers and directors of the Company, at all relevant times, members of their immediate

28-31 -

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND TH.ECALIFORNIA CORPORATIONS CODE



I families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have

2 or had a controlling interest.

3 82. The members of the Class are so numerous that joinder of all members is impracticable.

{ While the exact number of Class members is unknown to Plaintiffat this time and can only be ascertained

5 through appropriate discovery, Plaintiff believes that there are thousands of members in the proposed Class.

6 The proposed Class may be identified from records maintained by CardioNet or its transfer agent and may

7 be notified of the pendency of this action by mail, using the form ofnotice similar to that customarily used

8 in securities class actions.

9 83. Plaintiff's claims are typical of the claims of the members of the Class as all members of the

10 Class are similarly affected by Defendants' wrongful conduct.

11 84. Plaintiff will fairly and adequately protect the interests of the members of the Class and has

12 retained counsel competent and experienced in class and securities litigation.

13 85. Common questions of law and fact exist as to all members of the Class and predominate over

14 any questions solely affecting individual members of the Class. Among the questions of law and fact-

15 common to the Class are:

16 a. whether the federal securities laws were violated by Defendants' acts as alleged

17 herein;

18 b. whether the IPO and Secondary Registration Statements contained false and

19 misleading statements; and

20 c. to what extent Plaintiff and members of the Class have sustained damages and the

21 proper measure of damages.

22 86. A class action is superior to all other available methods for the fair and efficient adjudication

23 of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by

24 individual Class members may be relatively small, the expense and burden of individual litigation make it

25 impossible for members of the Class to individually redress the wrongs done to them. There will be no

26 difficulty in the management ofthis action as a class action.

27

28 -32- CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITICS ACT OF 1933 AND THE

CALIFORNRA CORPORATIONS CODE


Case 3:10-cv-00711- L -NLS Document 1 Filed 04/05/10 Page 49 of 59i

i

I FTRlST C1,AFMViolation of Section 11 of

The Securities Act Against AJI Defendants

87. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth

4 herein.

5 88. This Claim is brought pursuant to Section 1 I ofthe Securities Act, 15 U.S.C. y 77k, on behalf

6 of the Class, against each of the Defendants.

7 89. The WO and Secondary Offering Registration Statements were inaccurate and misleading,

8 contained untrue statements of material facts, and omitted facts necessary to make the statements made

9 therein not misleadine and omitted to state material facts required to be stated therein.

10 90. Defendant CardioNlet is the issuerofthe securities purchased by Plaintiff and the Class. As

I such, CardioNet is strictly liable for the materially inaccurate statements contained in the Registration

12 Statements and the failure of the Registration Statements to be complete and accurate.

13 91. The Individual Defendants each sighed the Registration Statements either personally or

14 through an attorney-in-fact and/or caused their issuance. The Individual Defendants each had a duty to

is make a reasonable and diligent investigation of the truthfulness and accuracy of the statements contained in

16 the Registration Statements. They had a duty to ensure that they were true and accurate, that there were no

17 omissions of material facts that would make the Registration Statements misleading and that the document

18 contained all facts required to be stared therein. In the exercise of reasonable care, the Individual

19 Defendants should have known of the material misstatements and omissions contained in the Registration

20 Statements and also should have known of the omissions of material fact necessary to make the statements

21 made therein not misleading. As such, the Individual Defendants are liable to Plaintiffand the Class.

,Y)92. The Underwriter Defendants each served as undem niters in connection with Offerings.

23 These defendants each had a duty to make a reasonable and dili gent investi gation of the truthfulness and

24 accuracy of the statements contained in the Registration Statements. They had a duty to ensure that they

. 25 were true and accurate, that there were no omissions of material facts that would make the Registration

26 Statements misleading and that the documents contained all facts required to be stated therein. In the

27 exercise of reasonable care, the Underwriter Defendants should have known of the material misstatements28

- 33 - CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT Of = 1933 AND THE'




I and omissions contained in the Registration Statements and also should have known of the omissions of

2 material facts necessary to make the statements made therein not misleading. As such, the Underwriter

3 Defendants are liable to Plaintiff and the Class.

4 93. By reasons of the conduct herein alleged, each Defendant violated §1 1 of the Securities Act.

5 94. Plaintiff acquired CardioNet common units in reliance on the Registration Statements and

6 without knowledge of the untruths and/or omissions alleged herein. Plaintiff sustained damages and the

7 price of CardioNet shares declined substantially due to material misstatements in the Registration

8 Statements.

9 93. This action was brought within one year after the discovery of the untrue statements and

10 omissions and within three years of the date of the IPO and the Secondary Offering.

11 96. By virtue of the foregoing, Plaintiff and the other members of the Class are entitled to

12 damages under Section I I as measured by the provisions of Section 1 I (e), from the Defendants and each of

13 them, jointly and severally.

14 SECOND CLAIM Violation of Section 12(a)(2) of

15 The Securities Act Against All Defendants

16 97. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth

17 herein.

18 98. Defendants were sellers and offerors and/or solicitors of purchasers of the CardioNet

19 securities offered pursuant to the I PO and Secondary Offering Defendants issued, caused to be issued, and

20 signed the Registration Statements in connection with the Offerings. The Registration Statements were used

21 to induce investors, such as Plaintiffand the other members of the Class, to purchase CardioNet securities.

22 99, The Registration Statements contained untrue statements of material facts, omitted to state

23 other facts necessary to make the statements made not misleading, and omitted material facts required to be

24 stated therein. Defendants" actions of solicitation included participating in the preparation of the false and

25 misleading Registration Statements.

26

27

28- 34 - _




i

1 100. As set forth more specifically above, the Registration Statements contained untrue statement

2 of material fact and omitted to state material facts necessary in order to make the statements, in light of

3 circumstances in which the y were made, not misleading.

4 101. Plaintiff and the other Class members did not know, nor could they have known, of the

5 untruths or omissions contained in the Registration Statements.

6 102. The Defendants were obligated to make a reasonable and diligent investigation of the

7 statements contained in the Registration Statements to ensure that such statements were true and that there

8 was no omission ofmaierial fact required to be stated in order to make the statements contained therein not

9 misleading. None of the Defendants made a reasonable investigation or possessed reasonable grounds for

10 the belief that the statements contained in the Registration Statements were accurate and complete in all

I I material respects. Had they done so, these Defendants could have known of the material misstatements and

12 omissions alleged herein.

13 103. This claim was brought within one year after discovery of the untrue statements and

14 omissions in the Registration Statements and within three years after CardioNet securities were sold to the

15 Class in connection with the OfTerings.

16 nfm CLAIMFor Violation of Section 15 of the Securities Act

17 Against the Cndividual Defendants

s 104. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth

19 herein.

20 105. The Individual Defendantsacted ascontrolling persons of CardioNet within the meaning of

21 § 15 of the Securities Act. By reason of their ownership, senior management positions and/or directorships

22 at the Company, as alleged above, these Defendants, individually and acting pursuant to a common plan. had

23 the power to influence and exercised the same to cause CardioNet to engage in the conduct complained of

24 herein. By reason of such conduct, die Individual Defendants are liable pursuant to 51 5 of the Securities

25 Act.

26

27

28-35 -

CLASS ACTION COMPLA IM FOR VIOLATION'S OF THE SECURITIES ACT OF 1933 AND THECALIFORNIA COR.PORATIONS CODE



1 106. By reason ofsuch wrongful conduct. the Individual Defendants are liable pursuant to 315 of

2 the Securities Act. As a direct and proximate result of the wrongful conduct, Class members suffered

3 damages in connection with their purchases of the Company's securities.

4 FOURTH CLALM For Violation of Sections 25401/25501 of the California Corporations Code Against Defendauts

5 James M. Sweeney and Fred Middleton on Behalf of Class Members Who Purchased CardioNct

6Shares in the Aug-ust 2008 Secondary Offering

7107. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth

herein.8

108. This Claim is asserted against Defendants James M. Sweeney and Fred Middleton on behalf9

of Class members who purchased in the August 2008 Secondary Offering under California Corporations10

Code §§25401 and 25501.I1

12109. Defendants Sweeney and Middleton offered to sell, and sold, securities in the August 2008

Secondary Offering by ireans of written and oral communications which included untrue statements of13

material fact or omitted material facts necessary in order to make die statements made, in light of the14IS circumstances under which they were made, not misleading.

110. Each of these Defendants misrepresented and/or participated in the making of,16

misrepresentations of material facts and omissions regarding the business and affairs of CardioNet as set17

forth herein.18

19I l 1. Each of these Defendants made and/or participated in the making of untrue statements of

material fact and/or the omission of facts necessary as set forth herein in order to make die statements made,20

in light of the circumstances under which they were made, not misleading for the purpose of inducing the21

purchase of CardioNet securities by Plaintiffand the members of the Class who purchased in the August

2008 Secondary Offering.

24112. Defendants Sweeney and Middleton knew, or in the exercise of reasonable care, should have

25 known of the misrepresentations made by them.

26113. Each of the statements set forth above at T4j;72-80 was made for the purpose of selling or

offering to sell CardioNet securities to Plaintiff and the Class pursuant to the August 2008 Secondary27Offering.

28-36-




l 114. Plaintiff did nor know the truth regarding Defendants' misrepresentations and/or omissions.

2 115. Defendants Sweeney and Middleton sold the CardioNet shares to Plaintiff and the Class in

3 the Secondary Offering from the State of California where these Defendants reside. The August 2008

4 Registration Statement was also drafted in. and disseminated from, the State of California. "Road shows"

5 were also conducted throughout California in an effort to sell CardioNet shares in the August 2008

6 Secondary Offering.

7 116. Plaintiffand the members oflhe Class who purchased CardioNet shares in the August 2008

8 Secondary Offering have suffered substantial damages because they paid an artificially inflated price for the

9 CardioNet shares they bought in the August 2008 Secondary Offering. Plaintiff and the Class would not

10 have purchased CardioNet shares at the price paid, or would not have purchased them at all, ifaware that the

I 1 price had been artificially and falsely inflated by the Defendants' misleading statements and/or omissions.

12 At the time of the purchase by Plaintiff and the Class of CardioNet stock, the true and Fair market value of

13 said securities was substantially less than the market price paid by Plaintiff and the Class.

14 117. By reason of the foregoing, Defendants Sweeney and Middleton violated Section 25401 of'

15 California Corporations Code. thereby entitling Plaintiff and the members of the Class who purchased

16 CardioNet shares in the August 2008 Secondary Offering to recover damages pursuant to Section 25501 of

17 California Corporations Code.

18 REQUEST FOR RELIEF

19 WHEREFORE, Plaintiff prays forjudgment as follows:

20. A. Declaring this action to be aro er class action pursuant and certip p p fj in ab Plaintiff as a

71 Class representative;

B. Awarding Plaintiff and other members of the Class compensatory damages;

23C. Awarding Plaintiff and other members of the Class rescission on their Section 12(a)(2)

24 and Section 25401/26501 claims;25

26

27

28 -37- CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933 AND THE


EXHIBIT A, Page 000052 I

Case 3:10-cv-00711-L -NLS Document 1 Filed 04/05/ 10 Page 54 of 59

D. Awarding Plaintiffand other- members of the Class pi-c-jud y m.ew zind posi-judgment

interest. as i;.;svw.-a^.Ie ationleys' fees, expen ^\itness fees. and other costs and disbU1-sL-!v1C;—.^:

3 and

4 E. )":or', ':'.'and other meir, !>.-rs o r - h e Class anv other relief' as the Cowl may

i deem just and prort;.

6 JURY TRIAT, 1) FryJANUM

7 Plaintiffbereby demands a trial b\,.iur\.

DATED: March S. 2010 SCOTT+SCOTT U.119 ARTHIJ> L. SHINGLF-R 11i

MARY , . 13L.ASY

10

11 t !I^

12 MAIZY K. LASY

600 Street. Suite ISOOSan &iego. CA 92101

14 Telephone: 619/233-4565619/233-0508 (fax)

15SCO'1-1'+SCO'I'T'LLP

16 DAVID R. SCOTT156 South Main Street

17 P.O. Box 192Colchester. CT 064 IS

1.8 "Telephone: 8601537-3818860637 .4432 (fax)

19

Amber L. Eck204ZELDES & HAEGOQUIST. LLP625 Broadway. Suite 906

21 San Diego, CA 92 101Telephone: 6191434-0()24

22 6191342-7878 (fax)

23 I'luimifl

24

25

26

27

28-38-

CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1433 AND'I HECALIFORNIA CORPORATIONS CODE



SUPERIOR COURT OF CALIFORNIA, COUNTY OF SAN DIEGO roacouarust¢oN^r

sta£ei,dc u s 330 West BroadwayWAI,NZ;AZORES& 330 West Broadwayrm_ s*A T e. t ZIP COOE: San Diego, CA 92101.3827eRANCHNMA£. Con«al

PLAWTIFF(S): West Palm BC&tt Police Pension Fund

DEFENDANT(S); Cardionet Inc el.al .

SHORT TITLE WEST PALM BEACH POLICE PENSION FUND VS. CAROIONET INC

STIPULATION TO ALTERNATIVE DISPUTE RESOLUTION PROCESS CASE NUti

(CRC 3.221) 37-2010-00086836-CU-SL-CTL

Jucips, Joan M. Lewis Department: C-65

Thepa ties and their atlomeys stipulate that the manor is at issue and I've claims in this action snall be subm 'tied to the fo toeing aherna ;ve disputeresowli*n pfocess. Selection of any of These options wi0 not delay any case managomeni time-lines,

q Court-Referred Mediation Program q Court-Ordered Nonbindino Arbitration

q Private Neutrat Evaluation q Coun-Ordered Binding Arbiiratlon (Stipula(ed)

q Private Mini-Trill q Private Reference to General Referee

q Private Summary Jury Trial q Private Refemnce to Judge

El . Private senlemont Confcrenee with Private Neutral q Private Binding Arbfimlion

q Other (specily)-

11 is also stipulated teal ;he following Shall serve as arbitrator, mediator or other neutral: (Name)

Altemale: (mediation If arbitraticn a-iiy)

Cafe. Dale:

Name of Plaintiff Name of Defendant

Signature Si,r^lure

Name o f Plaintiffs Anomey Name of Oefendant's Al;c:r,6y

Signature SignatureIAitaeh another sheot if ardilionai names are necessary). o is ine duty of the parlies (o notify the court of any settlement pursuant 10 CaliforniaRRules of Coun. 3 '385. Upp W i na6 :ica;pn o! ; rte se::fe-tent the court win place this matter on a A&day dismissal calendar.No new pnilles r. ay os added wit''^.xt ;eava o! cotiz and all un -servod, non-appearing or actions by names parties are dismissed.IT IS SO ORDERED.

Oatec J3 U512010JUDGE OF THE SUPERIOR CO!—R'.'

sosc ctvaw"Jitt.°1 -ar) STIPULATION TO USE OF ALTERNATIVE DISPUTE RESOLUTION

3



SUPERIOR COURT OF CALIFORNIA, COUNTY OF SAN DIEGOSi Reel ADDRESS: 133W_t&asu...'IAAiL ING 4,DDnESS' X30 W.- E—c—,CITY AND ZIP CODE: San D.;.. CA 9i. WtBRACH `1A.mE: CSnL•d1_LEPHG%E HIIMBER: t6%911567Gtd

PLAINTIFF(S) I PETITIONER(S). West Palm Beach Police Pension Fund

DEFENDANT(S) I RESPONDENT(S) ,. Cardicnet Inc eLSI.

WEST PALL-A BEACH POLICE PENSION FUND VS. CARDIONET INC

CASE NUMEEk.NOTICE OF CASE ASSIGNMENT 37-2010-00086836-CU-SL-CTL

Judge: Joan M. Lewis DepanmenC C-65

COMPLAINTIPETITION FILED: 03/05/2010

CASES ASSIGNED TO THE PROBATE DIVISION ARE NOT REQUIRED TO COMPLY WITH THE CIVILREQUIREMENTS LISTED BELOW

IT IS THE DUTY OF EACH PLAINTIFF (AND CROSS-COMPLAINANT) TO SERVE A COPY OF THIS NOTICE WITHTHE COMPLAINT (AND CROSS-COMPLAINT).

A!-L COUNSEL WILL BE EXPECTED TO BE FAMILIAR WITH SUPERIOR COURT RULES WHICH HAVE BEENPUBLISHED AS DIVISION It, AND WILL BE STRICTLY ENFORCED.

TIME STANDARDS: The (ollowing limeframes apply tc general civil cases and must be adhered to unless you haverequested and been granted an extension of time. General civil consists of all cases excep(: Small claims appeals,petitions, and unlawful detainers.

COMPLAINTS: Corn p la:nts must be served on all named defendants, and a CERTIFICATE OF SERVICE (SDSC CIV-345) filed within 60 says of filing. This is a mandatory document and may not be substituted by the filing of anyother document.

DEFENDANTS APPEARANCE: Defendant.-must generally appear within 30 days of service of the complaint. (Plaintiffmay stipulate to no more than a 15 day extension which must be in wrifing and filed with the Court.)

DEFAULT: If the defendant has not generally appeared and no extension has been granted, the plaintiff must requestdefault wahin 45 days of the fllicg of the Certificate of Service.

THE COURT ENCOURAGES YOU TO CONSIDER UTILIZING VARIOUS ALTERNATIVES TO LITIGATION,INCLUDING MEDIATION AND ARBITRATION, PRIOR TO THE CASE MANAGEMENT CONFERENCE. MEDIATIONSERVICES ARE AVAILABLE UNDER THE DISPJTE RESOLUTION PROGRAMS ACT AND OTHER PROVIDERS.SEE ADR INFORMATION PACKET AND STIPULATION.

YOU MAY ALSO BE ORDERED TO PARTICIPATE IN ARBITRATION PURSUANT TO CCP 1141,10 AT THE CASEMANAGEMENT CONFERENCE. THE FEE FOR THESE SERVICES WILL BE PAID BY THE COURT IF ALL PARTIESHAVE APPEARED IN THE CASE AND THE COURT ORDERS THE CASE TO ARBITRATION PURSUANT TO CCP1141.10. THE CASE MANAGEMENT CONFERENCE WILL BE CANCELLED IF YOU FILE FORM SDSC CIV-359PRIOR TO THAT HEARING

SDSC C1V-721 (Rev 11-08) aye.: 1

NOTICE OF CASE ASSIGNMENT



SUPERIOR COURT OF CALIFORNIA, COUNTY OF SAN DIEGO

CASE NUMBER: 37-2010-OCC86836-CU-SL-CTL CASE TITLE: West Palm Beach Police Pension Fund vs. Cardior,et Inc

NOTICE TO LITIGANTSIAOR INFORMATION PACKAGE

You are required to serve a copy of this Notice to litigants/ADR Information Package and a copy of the blank Stipulationto Altemative Dispute Resolution Process (received from the Civil Business Office at the time of filing) with a copy of theSummons and Complaint on all defendants in accordance with San Diego Superior Court Rule 2.1.5, Division II and CRCRule 201.9.

ADR POLICY

It is the policy of the San Diego Superior Court to strongly support the use of Altemative Dispute Resolution ("ADR") in allgeneral civil cases. The court has long recognized the value of early case management intervention and the use ofallennalive dispute resolution options for amenable and eligible cases. The use of ADR will be discussed at all CaseManagement Conferences. It is the courl's expectation that litigants will utilize some form of ADR — i.e. the court'smediation or arbitration programs or other available private ADR options as a mechanism for case settlement before trial

ADR OPTIONS

1) CIVIL MEDIATION PROGRAM: The San Diego Superior Court Civil Mediation Program is designed to assist partieswith the early resolution of their dispute. All general civil independent calendar cases, including construction defect,complex and eminent domain cases are eligible to participant in the program. Limited civil co!leclion cases are not eligibleat this time.. San Diego Superior Court Local Rule 2.31, Division 11 addresses this program specifically. Mediation is anon= binding process In which a trained mediator 1) facilitates Communication between disputants, and 2) assists partiesin reaching a mutually acceptable resolution of all or part of their dispute. In this process, the mediator carefully exploresnot only the relevant evidence and law, but also the ponies' underlying interests, needs and priorities. The mediator Isnot the decision-maker and will not resolve the dispute — the parties do. Mediation is a flexible. informal and confidentialprocess that is less stressful than a formalized trial. It can also save time and money, allow for greater client participationand allow for more flexibility in creating a resolution.

Assignment to Mediation, Cost and Timelines: Parties may stipulate to mediation at any time up to the CMC or maystipulate to mediation at the CMC. Mediator fees and expenses are split equa;:y by the parties, unless otherwise agreed.Mediators on the court's approved panel have agreed to the court's payment schedule for county-referred mediation:$150.00 per hour for each of the first two hours and their individual rate per hour thereafter Parties may select anymediator, however, the court maintains a panel of court-approved mediators who have satisfied panel requirements andwho must adhere to ethical standards. All court-approved mediator fees and other policies are listed in the MediatorDirectory at each court location to assist parties with selection. Discovery_ Parties do not need to conduct full discoveryin the case before mediation is considered, utilized or referred. Attendance at Mediation: Trial counsel, parties and allpersons with full authority to settle the case must personalty attend the mediation, unless excused by the court for goodcause.

2) JUDICIAL ARBITRATION: Judicial Arbitration is a binding or non-binding process where an arbitrator applies the lawto the facts of the case and issues an award. The goal of judicial arbitration is to provide parties with an adjudication thatis earlier, faster, less formal and less expensive than trial. The arbitrator's award may either become the judgment in thecase if a., parties accept or if no trial de novo is requested within, the required time. Either party may reject the award andrequest a trial de nova before :he assigned judge J the arbitration was non-binding. If a trial de novo is requested, theIr.al will usually be scheduled within a year of the filing date.

Assignment to Arbitration, Cost and Timelines: Parties may stipulate to binding or non-binding judicial arbitration orthe judge may order the matter to arbitration at the case management conference, held approximately 150 days afterfiling, If a case is valued at under 550.000 and is "at issue". The court maintains a panel of approved judicial arbitratorswho have practiced law for a minimum of five years and who have a certain amount of trial and/or arbitration experience.In addition, if parties select an arbivator from the court's panel. the coun will pay the arbitrator's lees. Superior CourtLocal Rees Division II Chapter 3 and Code of Civil Procedure 1141 et seq. address this program specifically.SOSC Crv- 7100.- Q-ZZ)

Peyr: 1

1



3) SETTLEMENT CONFERENCES: The goal of a settlement conference is to assist the parties in their efforts tonegotiate a settlement of all or pan of the dispute. Parties may, at any time, request a settlement conference before thejudge assigned to their case: request another assigned judge or a pro tern to act as settlement officer, or may privatelyutilize the services of a retired judge. The court may also order a case to a mandatory settlement conference prior totnal before the courts assigned Settlement Conference judge.

4) OTHER VOLUNTARY ADR: Parties may volunla6ly stipulate to private ADR options outside the court systemincluding private binding arbitration, private early neutral evaluation or private judging at any lime by completing the"Stipulation to Alternative Dispute Resolution Process" which Is included in [his ADR package. Parties may also utilizemediation services offered by programs that are partially funded by the county's Dispute Resolution Programs Act.These services are available at no cost or on a sliding scale based on need. For a list of approved ORPA providers,please contact the County's ORPA program office at (619) 238-2400.

ADDITIONAL ADR INFORMATION: For more information about the Civil Mediation Program, please contact the CivilMediation Department at (619) 515-8908. For more information about the Judicial Arbitration Program, please contactthe Arbitration Office at (619) 531-3818. For more information about Settlement Conferences, please contact theIndependent Calendar department to which your case is assigned. Please note that staff can only discuss ADR optionsand cannot give legal advice.

sou CIV-';NRO 12caJ

2



Documents

West Palm Beach Police Pension Fund, et al. v. …securities.stanford.edu/filings-documents/1044/BEAT10_01/...16 WEST PALM BEACH POLICE PENSION Civil Actio o.: FUND, Individually and