CASE NO. 12-1173 All Others Similarly Situated, CENTENE ...shareholdersfoundation.com/.../centene_corporation... · 25. Centene offers its services through primary and specialty care

Case: 4:12-cv-01173-CDP Doc. #: 1 Filed: 06/29/12 Page: 1 of 31 PageID #: 1

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MISSOURI

, Individually and On Behalf Of All Others Similarly Situated,

Plaintiff,

vs.

CENTENE CORPORATION, MICHAEL F. NEIDORFF, WILLIAM N. SCHEFFEL and JEFFREY A. SCHWANEKE,

Defendants.

CASE NO. 12-1173

CLASS ACTION COMPLAINT

Plaintiff (“Plaintiff”) alleges upon personal knowledge as to allegations

specifically pertaining to Plaintiff and, as to all other matters, upon the investigation of counsel,

which included, without limitation: (a) review and analysis of public filings made by Centene

Corporation (“Centene” or the “Company”) and other related parties and non-parties with the

U.S. Securities and Exchange Commission (“SEC”); (b) review and analysis of press releases

and other publications disseminated by certain of the Defendants and other related non-parties;

(c) review of news articles, shareholder communications, and postings on Centene’s website

concerning the Company’s public statements; and (d) review of other publicly available

information concerning Centene and the Individual Defendants.

I. NATURE OF THE ACTION

1. This is a federal securities class action against Centene and certain of its officers

and/or directors for violations of the federal securities laws. Plaintiff brings this action on behalf

of all persons or entities that purchased Centene securities between February 7, 2012 and June 8,

2012, inclusive (the “Class Period”), seeking to pursue remedies under the Securities Exchange

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Act of 1934 (the “Exchange Act”). The Exchange Act claims allege that Defendants engaged in

a fraudulent scheme to artificially inflate the Company’s stock price. As a result of the fraud

described below, the Company has lost a substantial portion of its value.

2. Centene operates as a multiline healthcare company in the United States. The

Company was founded in 1984 and is headquartered in St. Louis, Missouri.

3. Plaintiff alleges that, throughout the Class Period, Defendants made materially

false and misleading statements regarding the Company’s business and operations. Specifically,

Defendants made false and/or misleading statements and/or failed to disclose: (i) that the

Company’s profit and revenue forecasts issued in January 2012 and increased in April 2012 were

lacking in any reasonable basis; (ii) that, at the time the Company issued its profit and revenue

forecast in January 2012, the Company’s insiders knew that the competitive landscape in its

industry was more difficult than described and would thus make the Company’s guidance

impossible to achieve; (iii) that certain insiders of the Company capitalized on this material

adverse information to sell the Company’s shares at inflated prices before the truth concerning

Centene’s financial information was disclosed to the market; (iv) that the Company lacked

adequate internal and financial controls; and (v) that, as a result of the above, the Company’s

statements concerning its business and operational prospects were materially false and

misleading at all relevant times.

4. On June 11, 2012, the Company issued a press release in which it announced that

it was cutting its full-year profit and revenue forecasts because of higher-than-expected medical

costs. Centene revised its projections to earnings of $1.45 to $1.65 per share for 2012 versus a

previous forecast of $2.64 to $2.84 per share. In addition, the Company also disclosed that

expenses were above projections for commercial polices sold by its Celtic Insurance unit and

Centene was evaluating goodwill and intangible assets at the unit that may result in a non-cash

charge of about $28 million.

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5. Centene’s announcements caused the Company’s stock price to plummet $7.89

from its prior trading day close of $25.47 to close on June 11, 2012 at $27.58—a huge one-day

decline of over 22% on unusually heavy trading volume. The stock price decline was the largest

drop for the Company in six years.

6. Defendants’ wrongful acts and false and misleading statements and omissions

have caused a precipitous decline in the market value of the Company’s stock. Plaintiff and

other Class members have suffered significant losses and damages.

II. JURISDICTION AND VENUE

7. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.

§§ 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b 5).

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

U.S.C. §§1331 and 1307, and Section 27 of the Exchange Act (15 U.S.C. § 78aa).

9. Venue is proper in this Judicial District pursuant to 28 U.S.C. §1391(b) and

Section 27 of the Exchange Act. Centene maintains its corporate headquarters in this District,

and many of the acts charged herein, including the preparation and dissemination of materially

false and misleading information, occurred in substantial part in this District.

10. In connection with the acts and omissions alleged in this complaint, Defendants,

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

not limited to, the mails, interstate telephone communications, and the facilities of the national

securities markets.

III. PARTIES

A. Plaintiff

11. Plaintiff purchased the publicly traded Centene securities at artificially inflated

prices during the Class Period and has been damaged thereby.

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B. Defendants

i. The Company

12. Defendant Centene is a Delaware corporation with principal executive offices

located at 7700 Forsyth Boulevard, St. Louis, MO 63105.

ii. The Individual Defendants

13. Defendant Michael F. Neidorff (“Neidorff”) was, at all relevant times, the

President, Chief Executive Officer and director of Centene. Neidorff has served in these

positions with the Company since May 1996. In addition, Neidorff has served as Chairman of

the Board since May 2004.

14. Defendant William N. Scheffel (“Scheffel”) was, at all relevant times, the Chief

Financial Officer, Executive Vice President and Treasurer of Centene. Sheffel has served in

these positions with the Company since May 2009. Scheffel served as the Company’s Executive

Vice President, Specialty Business Unit from June 2007 to May 2009. From May 2005 to June

2007, he served as Senior Vice President, Specialty Business Unit. From December 2003 until

May 2005, he served as enior Vice President and Controller.

15. Defendant Jeffrey A. Schwaneke (“Schwaneke”) was, at all relevant times, the

Senior Vice President, Corporate Controller and Chief Accounting Officer of Centene.

Schwaneke has served Senior Vice President, Corporate Controller since December 2011 and

Chief Accounting Officer since September 2008. He served as Vice President, Corporate

Controller from July 2008 to December 2011.

16. Defendants Neidorff, Scheffel and Schwaneke are collectively referred to herein

as the “Individual Defendants.”

17. Centene and the Individual Defendants are referred to herein as “Defendants.”

18. During the Class Period, the Individual Defendants, as senior executive officers

and/or directors of Centene, were privy to confidential, proprietary and material adverse non-

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public information concerning Centene, its operations, finances, financial condition and present

and future business prospects via access to internal corporate documents, conversations and

connections with other corporate officers and employees, attendance at management and/or

board of directors meetings and committees thereof, and via reports and other information

provided to them in connection therewith. Because of their possession of such information, the

Individual Defendants knew or recklessly disregarded that the adverse facts specified herein had

not been disclosed to, and were being concealed from, the investing public.

19. The Individual Defendants are liable as direct participants in the wrongs

complained of herein. In addition, the Individual Defendants, by reason of their status as senior

executive officers and/or directors, were “controlling persons” within the meaning of §20(a) of

the Exchange Act and had the power and influence to cause the Company to engage in the

unlawful conduct complained of herein. Because of their positions of control, the Individual

Defendants were able to and did, directly or indirectly, control the conduct of Centene’s

business.

20. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its reports, press releases and

presentations to securities analysts and through them, to the investing public. The Individual

Defendants were provided with copies of the Company’s reports and publicly disseminated

documents alleged herein to be misleading, prior to or shortly after their issuance and had the

ability and opportunity to prevent their issuance or cause them to be corrected. Thus, the

Individual Defendants had the opportunity to commit the fraudulent acts alleged herein.

21. As senior executive officers and/or directors and as controlling persons of a

publicly traded company whose securities were, and are, registered with the SEC pursuant to the

Exchange Act, and were traded on NASDAQ and governed by the federal securities laws, the

Individual Defendants had a duty to disseminate promptly accurate and truthful information with

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respect to Centene’s financial condition and performance, growth, operations, financial

statements, business, products, markets, management, earnings, and present and future business

prospects, to correct any previously issued statements that had become materially misleading or

untrue, so the market price of Centene’s securities would be based on truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class

Period violated these specific requirements and obligations.

22. The Individual Defendants are liable as participants in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of Centene’s publicly traded

securities by disseminating materially false and misleading statements and/or concealing material

adverse facts.

IV. SUBSTANTIVE ALLEGATIONS

A. Background of Centene

23. Centene operates as a multiline healthcare company in the United States. The

Company operates through two segments, Medicaid Managed Care and Specialty Services. The

Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage

to individuals through government subsidized programs, including Medicaid, the State children’s

health insurance program, foster care, and Medicare special needs plans, as well as aged, blind,

or disabled programs. Its health plans principally provide primary and specialty physician care,

inpatient and outpatient hospital care, transportation assistance, emergency and urgent care,

vision care, prenatal care, dental care, laboratory and x-ray services, immunizations,

prescriptions and over-the-counter drugs, home health and durable medical equipment,

behavioral health and substance abuse services, therapies, social work services, care

coordination, and 24-hour nurse advice line.

24. The Specialty Services segment manages behavioral healthcare for members;

provides health insurance to individual customers and their families; implements life and health

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management programs; offers long-term care services to the elderly and people with disabilities;

administers routine and medical surgical eye care benefits through its network of eye care

providers; provides telehealth services; and offers progressive pharmacy benefits management

services, including claims processing, pharmacy network management, benefit design

consultation, drug utilization review, formulary and rebate management, specialty and mail order

pharmacy services, and patient and physician intervention services. It also provides care

management solutions that automate the clinical, administrative, and technical components of

care management programs.

25. Centene offers its services through primary and specialty care physicians,

hospitals, and ancillary providers. Centene Corporation was founded in 1984 and is

headquartered in St. Louis, Missouri.

B. False and Misleading Statements

26. The Class Period begins on February 7, 2012. On this date, Centene issued a

press release announcing its financial and operating results for the fourth quarter and full year

ended December 31, 2011. The press release stated in pertinent part as follows:

ST. LOUIS, Feb. 7, 2012 /PRNewswire/ -- Centene Corporation (NYSE: CNC) today announced its financial results for the quarter and year ended December 31, 2011. As previously discussed, beginning with the fourth quarter of 2011, we have reclassified certain medical costs to more closely align with the NAIC definitions. All of the information in this release has been reclassified to conform to the current presentation. For additional information, the details of the reclassification are provided in the supplemental financial data of this release.

Premium and Service Revenues (in millions) Consolidated Health Benefits Ratio General & Administrative expense ratio Diluted EPS

2011 Highlights Q4

Full Year

$ 1,458.5

$ 5,181.0

85.9 %

85.2 %

11.0 % 11.3 % $ 0.57 $ 2.12 (1)

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Cash flow from operations (in millions) $ 172.0 $ 261.7

(1) Includes $0.10 per share of debt extinguishment costs.

Fourth Quarter Highlights

• Quarter-end managed care at-risk membership of 1,816,000, an increase of 18.4% year over year.

• Premium and Service Revenues of $1.5 billion, representing 29.1% year over year growth.

• Health Benefits Ratio of 85.9%, compared to 85.0% in the prior year and 85.0% in the third quarter of 2011.

• General and Administrative expense ratio of 11.0%, compared to 11.3% in the prior year.

• Diluted earnings per share from continuing operations of $0.57, an increase of 14.0% from the prior year.

• Employees increased from 4,200 at December 31, 2010 to 5,300 at December 31, 2011, reflecting our continued business expansions.

Other Events

In January 2012, we were selected to contract with the Washington Health Care Authority to serve Medicaid beneficiaries in the state. Operations are expected to commence in the third quarter of 2012. In February 2012, Louisiana Healthcare Connections began operating under a new contract in Louisiana to provide healthcare services to Medicaid enrollees participating in the Bayou Health program. In addition, Nurtur, our subsidiary which provides life, health and wellness programs, commenced operations to provide disease management services for state employees in Louisiana beginning in January 2012.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "During 2011, we were able to successfully demonstrate our ability to grow through new contract awards and expansions, while continuing to focus on our targeted margins. I look forward to the new business commencing in 2012 and the opportunity to develop additional markets."

The following table depicts membership in Centene's managed care organizations, by state:

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Arizona Florida Georgia Illinois Indiana Kentucky Massachusetts Mississippi Ohio South Carolina Texas Wisconsin

Total at-risk membership

Non-risk membership Total

December 31, 2011 2010

23,700 22,400

198,300 194,900

298,200 305,800

16,300 -

206,900 215,800

180,700 -

35,700 36,200

31,600 -

159,900 160,100

82,900 90,300

503,800 433,100

78,000 74,900

1,816,000 1,533,500

4,900 4,200

1,820,900 1,537,700

The following table depicts membership in Centene's managed care organizations, by member category:

Medicaid CHIP & Foster Care ABD & Medicare Hybrid Programs Long-term Care



December 31, 2011 2010

1,336,800 1,177,100

213,900 210,500

218,000 104,600

40,500 36,200

6,800 5,100

1,816,000 1,533,500

4,900 4,200

1,820,900 1,537,700

Statement of Operations: Three Months Ended December 31, 2011

• For the fourth quarter of 2011, Premium and Service Revenues increased 29.1% to $1.5 billion from $1.1 billion in the fourth quarter of 2010. The increase was primarily driven by new operations in Mississippi, Illinois and Kentucky added during 2011, Texas expansion and overall membership growth.

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• Consolidated IIBR of 85.9% for the fourth quarter of 2011 represents an increase of 0.9% from the comparable period in 2010 and from the third quarter of 2011. This increase is primarily a result of the commencement of operations in Kentucky in November 2011.

• Consolidated G&A expense ratio for the fourth quarter of 2011 was 11.0%, compared to 11.3% in the prior year. The decrease is a result of leveraging our costs over higher revenues, offset by additional business expansion costs.

• Earnings from operations increased to $47.4 million in the fourth quarter 2011 from $45.5 million in the fourth quarter 2010. Net earnings from continuing operations were $30.1 million in the fourth quarter 2011, compared to $25.5 million in the fourth quarter of 2010.

• Earnings per diluted share increased to $0.57 in the fourth quarter of 2011 compared to $0.50 in the prior year.

Statement of Operations: Year Ended December 31, 2011

• For the year ended December 31, 2011, Premium and Service Revenues increased 20.9% to $5.2 billion from $4.3 billion in 2010. The increase was driven by the commencement of operations in Mississippi, Kentucky and Illinois during 2011, Texas expansion and membership growth.

• Consolidated IIBR of 85.2% for 2011 represents a decrease of 0.3% from 2010 primarily as a result of lower levels of utilization and contract enhancements, partially offset by our Kentucky health plan which began operations in November 2011.

• Consolidated G&A expense ratio for 2011 was 11.3%, compared to 11.2% in the prior year. The increase is primarily due to additional business expansion costs, offset by leveraging our expenses over higher revenues.

• Earnings from operations increased to $190.3 million in 2011 from $157.1 million in 2010, or 21.2% year over year. Net earnings from continuing operations were $111.2 million in 2011, compared to $90.9 million in 2010.

• Earnings per diluted share increased to $2.12 in 2011, including $(0.10) of debt extinguishment costs, compared to $1.80 in the prior year.

Balance Sheet and Cash Flow

At December 31, 2011, the Company had cash, investments and restricted deposits of $1,237.1 million, including $38.2 million held by its unregulated entities. Medical claims liabilities totaled $608.0 million, representing 45.3 days in claims payable. Total debt was $351.6 million and debt to capitalization was 22.6% at December 31, 2011 excluding the $77.8 million non-recourse mortgage note. Cash flows from operations for the year ended December 31, 2011 were $261.7 million, or 2.4 times net earnings.

A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter-end is presented below:

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Days in claims payable, September 30, 2011 43 .6*

Impact of new business

1.8

Ohio pharmacy carve in

(0.8)

Timing of claim payments

0.7

Days in claims payable, December 31, 2011

45.3

* Days in claims payable for September 30, 2011 have been reduced by 1.0 day to reflect the medical cost reclassification.

Outlook

The table below depicts the Company's annual guidance for 2012:

m and Service Revenues (in millions)

EPS ated Health Benefits Ratio

& Administrative expense ratio

Full Year 2012 Low High

$ 7,200 $ 7,600 $ 2.60 $ 2.80

87.0% 88.0%

9.5% 10.0%

Shares Outstanding (in thousands)

53,400

The above guidance has not been adjusted to include the impact associated with the Washington RFP and assumes that the Texas expansion will begin on March 1 with required CMS approval of premium rates.

27. On February 21, 2012, the Company filed its annual report with the SEC on Form

10-K for the fiscal year ended December 31, 2011. The Company’s 10-K was signed by

Defendants Neidorff, Scheffel and Schwaneke and reaffirmed the Company’s financial results

previously announced on February 7, 2012. The Company’s Form 10-K also contained

Sarbanes-Oxley (“SOX”) certifications signed by Defendants Neidorff and Scheffel, who

certified:

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1. I have reviewed this Annual Report on Form 10-K of Centene Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably

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likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

28. Defendants Neidorff and Scheffel also certified the following on the Company’s

Form 10-K:

In connection with the annual report on Form 10-K of Centene Corporation (the Company) for the period ended December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned . . . hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

29. On April 24, 2012, Centene issued a press release announcing its financial and

operating results for the first quarter of 2012 ending March 31, 2012. In the press release, the

Company increased financial guidance for 2012. The press release stated in pertinent part as

follows:

- Centene Corporation Reports 2012 First Quarter Earnings of $0.45 Per Diluted Share and Increases Guidance for 2012 -

ST. LOUIS, April 24, 2012 /PRNewswire via COMTEX/ --Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended March 31, 2012.

First Quarter Highlights

• Quarter-end managed care at-risk membership of 2,149,500, an increase of 39% year over year.

• Premium and Service Revenues of $1.7 billion, representing 41% year over year growth. • Health Benefits Ratio of 88.2%, compared to 84.9% in the prior year and 85.9% in the

fourth quarter of 2011. • General and Administrative expense ratio of 9.8%, compared to 12.0% in the prior year. • Diluted earnings per share of $0.45, compared to $0.46 from the prior year. • Employees increased from 4,500 at March 31, 2011 to 5,700 at March 31, 2012,

reflecting our continued business expansion.

Other Events

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• In January 2012, we were selected to contract with the Washington Health Care Authority to serve Medicaid beneficiaries in the state. Operations are expected to commence in the third quarter of 2012.

• In February 2012, we announced that we were selected to contract with the Office of Administration for Missouri to serve Medicaid beneficiaries in all three regions of the state. Operations are expected to commence in the third quarter of 2012.

• In February 2012, we announced that Superior HealthPlan received an Excellent Accreditation rating by the National Committee for Quality Assurance (NCQA). Superior HealthPlan is the only Medicaid plan in Texas to earn an Excellent Accreditation, the highest rating by NCQA.

• In March 2012, we began operating under contracts in Texas that expanded its operations through new service areas including the 10 county Hidalgo Service Area and the Medicaid Rural Service Areas of West Texas, Central Texas and North-East Texas, as well as the addition of STAR+PLUS in the Lubbock Service Area. The expansion also added the management of outpatient pharmacy benefits in all service areas and products, as well as inpatient facility services for the STAR+PLUS program. At March 31, 2012, we served over 300,000 additional Texas members compared to December 31, 2011.

• In March 2012, Standard & Poor's raised its outlook to positive from stable and affirmed its counterparty credit and senior unsecured debt rating of BB.

• In April 2012, we were notified by the Ohio Department of Job and Family Services that Buckeye Community Health Plan, our Ohio subsidiary, was not awarded a contract to continue serving Medicaid members in Ohio, effective January 2013. We have filed a formal protest contesting the awards.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "While underlying trend remains predictable, results were mixed due to seasonality of medical costs particularly in March, continued high medical costs in Kentucky, and general and administrative costs at higher levels associated with an additional 370,000 members in Texas. We continue to expect solid full year 2012 results as evidenced by our increased financial guidance. This guidance includes our newest states of Missouri and Washington, as well as the additional Texas lives."

The following table depicts membership in Centene's managed care organizations, by state:

March 31, 2012

2011 Arizona

23,100

22,600 Florida

199,500

188,800 Georgia

306,000

303,300 Illinois

17,400 -- Indiana

206,300

209,400 Kentucky

145,700 -- Louisiana

51,300 -- Massachusetts

36,000

34,100 Mississippi

29,500 -- Ohio

161,000

160,900 South Carolina

86,700

84,900 Texas

811,000

456,700 Wisconsin

76,000 81,800 Total at-risk membership

2,149,500 1,542,500

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Non-risk membership -- 10,400 Total

2,149,500 1,552,900

The following table sets forth our membership by line of business:

Medicaid CHIP & Foster Care ABD & Medicare Hybrid Programs Long-term Care



March 31, 2012 2011

1,634,800 1,169,700

218,800 208,900

247,400 123,800

41,500 35,200

7,000 4,900

2,149,500 1,542,500

-- 10,400

2,149,500 1,552,900

Statement of Operations: Three Months Ended March 31, 2012

For the first quarter of 2012, Premium and Service Revenues increased 41% to $1.7 billion from $1.2 billion in the first quarter of 2011. The increase was primarily driven by new operations in Mississippi, Illinois, Kentucky and Louisiana as well as the Texas and Arizona expansions, pharmacy carve-ins and overall membership growth. Consolidated IIBR of 88.2% for the first quarter of 2012 represents an increase of 330 basis points from the comparable period in 2011 and an increase from 85.9% from the fourth quarter of 2011. The increase year over year is primarily due to (1) the addition of our Kentucky market which we continue to record at a high IIBR, (2) higher medical costs in Texas specifically in March and a September 1, 2011 premium rate decrease in our existing Texas service areas (excluding the expansion), (3) higher seasonal medical costs in our South Carolina market and (4) increased medical costs in our individual health business. The increase sequentially is due to retroactive premium rate increases recorded in the fourth quarter of 2011 associated with Georgia and Florida, as well as increased medical costs in our existing Texas service areas. Consolidated G&A expense ratio for the first quarter of 2012 was 9.8%, compared to 12.0% in the prior year. The year over year decrease reflects the leveraging of our expenses over higher revenues in 2012 and a reduction in performance based compensation expense in 2012. The G&A ratio in 2011 reflects a 50 basis point increase as a result of the general and administrative costs recorded in our Mississippi market for the first quarter without recording the corresponding revenue. Earnings from operations were $34.2 million in the first quarter 2012 compared to $39.1 million in the first quarter 2011. Net earnings were $24.0 million in the first quarter 2012, relatively flat compared to $23.7 million in the first quarter of 2011. Earnings per diluted share were $0.45 in the first quarter of 2012 compared to $0.46 in the prior year.

Balance Sheet and Cash Flow

At March 31, 2012, the Company had cash, investments and restricted deposits of $1,202.4 million, including $35.5 million held by its unregulated entities. Medical claims liabilities totaled $708.8 million, representing 44.7 days in claims payable. Total debt was $350.4 million and debt

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to capitalization was 21.8% at March 31, 2012 excluding the $77.2 million non-recourse mortgage note. Cash flows from operations for the quarter ended March 31, 2012 were $(32.1) million, which reflects the delay of $71.2 million in premium payments from one of our state customers.

A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter-end is presented below:

Days in claims payable, December 31, 2011

45.3 Impact of new business

0.5 Timing of claim payments

(1.1) Days in claims payable, March 31, 2012

44.7

Outlook

The table below depicts the Company's updated annual guidance for 2012 including our newest states of Missouri and Washington, as well as the additional Texas lives:

Full Year 2012 Low High

Premium and Service Revenues (in millions)

Diluted EPS Consolidated Health Benefits Ratio General & Administrative expense ratio

Diluted Shares Outstanding (in thousands)

$ 7,700 $ 8,100

$ 2.64 $ 2.84

87.0% 88.0%

9.5% 10.0%

53,400

The guidance provided in the table above excludes any impairment charge associated with the loss of the Ohio contract, which is currently under appeal. Absent a successful appeal, the Company expects a material non-cash impairment charge will be recorded in its 2012 consolidated statement of operations for the year ended December 31, 2012. As of March 31, 2012, Buckeye Community Health Plan had goodwill and net intangible assets of $42.8 million.

30. Also on April 24, 2012, the Company filed its Form 10-Q for the first quarter of

2012, which was signed by Defendants Neidorff, Scheffel and Schwaneke and contained SOX

certifications signed by Defendants Neidorff and Scheffel. The Form 10-Q reaffirmed the

financial results presented in the Company’s April 19, 2012 press release.

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C. The Truth Comes to Light

31. On June 11, 2012, prior to the opening of the markets, Centene issued a press

release entitled, “Centene Corporation Revises 2012 Earnings Guidance Range.” The press

release provided in pertinent part as follows:

ST. LOUIS, June 11, 2012 /PRNewswire/ -- Centene Corporation (NYSE: CNC) announced today that it is revising its 2012 guidance to $1.45 to $1.65 per diluted share, from the previously announced range of $2.64 to $2.84 per diluted share. The revised guidance range reflects negative financial results in May for our Kentucky Health Plan and the Hidalgo service area in our Texas Health Plan, as well as in the Celtic individual health business. Albeit at lower levels, the above items are anticipated to impact the financial results for the remainder of 2012, and the estimated impact is reflected in the revised guidance for 2012. The balance of Centene's products and markets continue to perform as expected. Centene currently estimates it will report a loss for the second quarter of 2012, but expects the Company to return to profitability in the third quarter of 2012. Higher than anticipated medical costs became evident at the end of the first week of June as part of the May closing process. For Kentucky, the increase in medical costs primarily resulted from the retroactive assignment of members and a significant volume of non-inpatient claims received in May for dates of service prior to May 2012. For Texas, Centene has experienced a significant increase in certain non-inpatient claims received for the Hidalgo service area. For Celtic, we continue to experience a high level of medical costs for our individual health policies. The Company is evaluating the goodwill and intangible assets of its Celtic business unit that may result in a non-cash impairment charge of approximately $28.0 million, which is currently not included in the revised guidance given above.

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32. After the Company’s announcement, Centene’s stock price plunged $7.89 per

share from its prior trading day close of $25.47 to close on June 11, 2012 at $27.58—a huge one-

day decline of over 22% on unusually heavy trading volume.

33. As a result of Defendants’ materially false and misleading statements and

omissions during the Class Period, Plaintiff and the Class have suffered millions of dollars in

damages.

D. Reasons For Falsity

34. Centene’s statements and filings during the Class Period were materially false and

misleading, and omitted material adverse information concerning the Company’s business,

operations and prospects.

35. Specifically, Defendants made false and/or misleading statements and/or failed to

disclose: (i) that the Company’s profit and revenue forecasts issued in January 2012 and

increased in April 2012 were lacking in any reasonable basis; (ii) that, at the time the Company

issued its profit and revenue forecast in January 2012, the Company’s insiders knew that the

competitive landscape in its industry was more difficult than described and would thus make the

Company’s guidance impossible to achieve; (iii) that certain insiders of the Company capitalized

on this material adverse information to sell the Company’s shares at inflated prices before the

truth concerning Centene’s financial information was disclosed to the market; (iv) that the

Company lacked adequate internal and financial controls; and (v) that, as a result of the above,

the Company’s statements concerning its business and operational prospects were materially

false and misleading at all relevant times.

E. Improper Insider Sales During the Class Period

36. The Individual Defendants caused or allowed Centene to issue false and

misleading press releases, financial reports and direct statements during the Class Period, and

failed to disclose material, nonpublic information necessary to make such statements not false

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and misleading. As a result of these false and misleading statements and omissions, the price of

the Company's stock was artificially inflated.

37. The Individual Defendants were motivated to engage in the wrongdoing herein,

resulting in the artificial inflation of the Company's stock, in order to allow certain Company

insiders, including the Individual Defendants, to profit from their sales of Centene common stock

during the Class Period.

38. As detailed above, the Individual Defendants, as officers and directors of the

Company, were privy to confidential financial information concerning the Company's business,

financial condition, future business prospects and outlook. In this capacity, the Individual

Defendants had access to material, nonpublic information concerning Centene’s true financial

condition.

39. Notwithstanding the duty not to sell Centene common stock under these

circumstances, or the duty to disclose the material, nonpublic information prior to selling the

stock, these insiders sold Centene stock at prices that were artificially inflated by the Individual

Defendants' materially false and misleading statements and omissions.

40. Specifically, these insiders, while in possession of material, nonpublic

information regarding the Company's true business prospects, improperly sold their Centene

stock at artificially inflated prices and personally profited from their insider knowledge. These

individuals improperly sold over 374,000 shares of Centene stock during the Class Period for

total proceeds of nearly $18 million:

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Date Insider Position Shares Transaction Value 02/28/12 Neidorff, Michael Chairman/President/CEO 100,000 Sale at $48.97 per share. 4,897,000 02/28/12 Hunter, Jesse EVP: Operations 25,000 Sale at $48.98 per share. 1,224,500

02/28/12 Gephardt, Richard Director 10,000 Sale at $48.99 per share. 489,900 02/29/12 Neidorff, Michael Chairman/President/CEO 68,591 Sale at $48.93 per share. 3,356,157

03/01/12 Neidorff, Michael Chairman/President/CEO 81,409 Sale at $47.45 per share. 3,862,857 03/04/12 Ditmore, Robert K. Director 22,500 Sale at $46.65 per share. 1,049,625 03/05/12 Goldman, Carol EVP/CAO 38,081 Sale at $45.64 per share. 1,738,016 03/05/12 Scheffel, William EVP/CFO/Treasurer 24,000 Sale at $45.64 per share. 1,095,360

04/25/12 Harrold, Jason M. I SVP: Specialty Business Unit 1 5,000 Sale at $42.36 per share. 211,800 Total Insider Selling 374,581

17,925,215

V. UNDISCLOSED ADVERSE INFORMATION

41. The market for Centene’s securities was an open, well-developed and efficient

market at all relevant times. As a result of the materially false and misleading statements and

failures to disclose described herein, Centene’s securities traded at artificially inflated prices

during the Class Period. Plaintiff and the other members of the Class purchased or otherwise

acquired Centene’s securities relying upon the integrity of the market price of Centene’s

securities and market information related to Centene and have been damaged thereby.

42. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of Centene’s securities, by publicly issuing false and misleading

statements and omitting to disclose material facts necessary to make Defendants’ statements, as

set forth herein, not false and misleading. Such statements and omissions were materially false

and misleading in that they failed to disclose material adverse non-public information and

misrepresented the truth about the Company, as well as its business and financial operations, as

alleged herein.

43. At all relevant times, the material misrepresentations and omissions particularized

herein directly or proximately caused or were a substantial contributing cause of the damages

sustained by Plaintiff and the other members of the Class. As described herein, during the Class

Period, Defendants made or caused to be made a series of materially false and misleading

statements about Centene’s operational and financial condition.

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44. These material misstatements and omissions had the cause and effect of creating

in the market an unrealistically positive assessment of Centene and its financial condition, thus

causing the Company’s stock to be overvalued and artificially inflated at all relevant times.

Defendants’ false and misleading statements during the Class Period resulted in Plaintiff and

other members of the Class purchasing the Company’s securities at artificially inflated prices,

thus causing the damages complained of herein.

VI. SCIENTER ALLEGATIONS

45. As alleged herein, the Individual Defendants acted with scienter in that Individual

Defendants knew that the public documents and statements issued or disseminated in the name of

the Company during the Class Period were materially false and misleading; knew that such

statements or documents would be issued or disseminated to the investing public; and knowingly

and substantially participated or acquiesced in the issuance or dissemination of such statements

or documents as primary violations of the federal securities laws.

46. As set forth herein, the Individual Defendants, by virtue of their receipt of

information reflecting the true facts regarding Centene, their control over, receipt and/or

modification of Centene’s allegedly materially misleading statements and omissions, and/or their

positions with the Company which made them privy to confidential information concerning

Centene, participated in the fraudulent scheme alleged herein.

47. The ongoing fraudulent scheme described herein could not have been perpetrated

over a substantial period of time, as has occurred, without the knowledge and complicity of the

personnel at the highest level of the Company, including the Individual Defendants.

VII. STATUTORY SAFE HARBOR

48. The federal statutory safe harbor provided for forward-looking statements under

certain circumstances does not apply to any of the allegedly false statements pleaded herein.

Furthermore, many of the statements pleaded herein were not identified as “forward-looking

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statements” when made, or indicated that actual results “could differ materially from those

projected.” Nor were there any meaningful cautionary statements identifying important factors

that could cause actual results to differ materially from the statements made therein.

49. Defendants are liable for the statements pleaded because, at the time each of those

statements was made, Defendants knew the statement was false and the statement was authorized

and/or approved by an executive officer of Centene who knew that such statement was false

when made.

VIII. LOSS CAUSATION

50. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the prices of Centene’s

securities and operated as a fraud or deceit on Class Period purchasers of Centene’s securities by

failing to disclose to investors that the Company’s financial results were materially misleading

and misrepresented material information. When Defendants’ misrepresentations and fraudulent

conduct were disclosed and became apparent to the market, the prices of Centene’s securities fell

precipitously as the prior inflation came out of the Company’s stock price. As a result of their

purchases of Centene’s securities during the Class Period, Plaintiff and the other Class members

suffered economic loss.

51. By failing to disclose the true state of the Company’s financial statements,

investors were not aware of the true state of the Company’s financial status. Therefore,

Defendants presented a misleading picture of Centene’s business practices and procedures.

Thus, instead of truthfully disclosing during the Class Period the true state of the Company’s

business, Defendants caused Centene to conceal the truth.

52. Defendants’ false and misleading statements had the intended effect and caused

Centene’s common stock to trade at artificially inflated levels throughout the Class Period. The

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stock price drops discussed herein caused real economic loss to investors who purchased the

Company’s securities during the Class Period.

53. The decline in the price of Centene’s common stock after the truth came to light

was a direct result of the nature and extent of Defendants’ fraud finally being revealed to

investors and the market. The timing and magnitude of Centene’s common stock price decline

negates any inference that the loss suffered by Plaintiff and the other Class members was caused

by changed market conditions, macroeconomic or industry factors or Company-specific facts

unrelated to the Defendants’ fraudulent conduct. The economic loss suffered by Plaintiff and the

other Class members was a direct result of Defendants’ fraudulent scheme to artificially inflate

the prices of Centene’s securities and the subsequent decline in the value of Centene’s securities

when Defendants’ prior misrepresentations and other fraudulent conduct were revealed.

IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

54. At all relevant times, the market for Centene stock was an efficient market for the

following reasons, among others:

a. Centene securities met the requirements for listing, and were listed and

actively traded on NASDAQ, a highly efficient market;

b. As a regulated issuer, Centene filed periodic public reports with the SEC

and NASDAQ;

c. Centene securities were followed by securities analysts employed by

major brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace; and

d. Centene regularly issued press releases which were carried by national

newswires. Each of these releases was publicly available and entered the public marketplace.

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55. As a result, the market for Centene securities promptly digested current

information with respect to the Company from all publicly-available sources and reflected such

information in Centene’s stock price. Under these circumstances, all purchasers of Centene

common stock during the Class Period suffered similar injury through their purchase of stock at

artificially inflated prices and a presumption of reliance applies.

X. CLASS ACTION ALLEGATIONS

56. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of all persons who purchased or otherwise acquired

Centene securities during the Class Period and who were damaged thereby (the “Class”).

Excluded from the Class are Defendants, members of the immediate family of each of the

Individual Defendants, any subsidiary or affiliate of Centene and the directors, officers and

employees of the Company or its subsidiaries or affiliates, or any entity in which any excluded

person has a controlling interest, and the legal representatives, heirs, successors and assigns of

any excluded person.

57. 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 Plaintiff at this time

and can only be ascertained through appropriate discovery, Plaintiff believes that there are

thousands of members of the Class located throughout the United States. Throughout the Class

Period, Centene securities were actively traded on NASDAQ (an open and efficient market)

under the symbol “CNC.” As of April 24, 2012, the Company had approximately 51 million

shares outstanding. Record owners and other members of the Class may be identified from

records maintained by Centene and/or its transfer agents and may be notified of the pendency of

this action by mail, using a form of notice similar to that customarily used in securities class

actions.

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58. Plaintiff’s claims are typical of the claims of the other members of the Class as all

members of the Class were similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

59. Plaintiff will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

60. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by Defendants’ acts and

omissions as alleged herein;

b. whether Defendants participated in and pursued the common course of

conduct complained of herein;

c. whether documents, press releases, and other statements disseminated to

the investing public and the Company’s shareholders during the Class Period misrepresented

material facts about the business, finances, financial condition and prospects of Centene;

d. whether statements made by Defendants to the investing public during the

Class Period misrepresented and/or omitted to disclose material facts about the business,

finances, value, performance and prospects of Centene;

e. whether the market price of Centene common stock during the Class

Period was artificially inflated due to the material misrepresentations and failures to correct the

material misrepresentations complained of herein; and

f. the extent to which the members of the Class have sustained damages and

the proper measure of damages.

61. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

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the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this suit as a

class action.

XI. COUNTS AGAINST DEFENDANTS UNDER THE EXCHANGE ACT

COUNT I For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated

Thereunder Against Defendants

62. Plaintiff repeats and realleges the allegations set forth above as though fully set

forth herein. This claim is asserted against Defendants.

63. During the Class Period, Centene and the Individual Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and, throughout

the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class

members, as alleged herein; (ii) artificially inflate and maintain the market price of Centene

common stock; and (iii) cause Plaintiff and other members of the Class to purchase Centene

stock at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of

conduct, Defendants, and each of them, took the actions set forth herein.

64. These Defendants: (a) employed devices, schemes, and artifices to defraud; (b)

made untrue statements of material fact and/or omitted to state material facts necessary to make

the statements not misleading; and (c) engaged in acts, practices and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for Centene securities in violation of §10(b) of the

Exchange Act and Rule 10b-5. Defendants are sued as primary participants in the wrongful and

illegal conduct charged herein. The Individual Defendants are also sued herein as controlling

persons of Centene, as alleged herein.

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65. In addition to the duties of full disclosure imposed on Defendants as a result of

their making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the investing public, they each had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S X (17 C.F.R. § 210.01 et

seq.) and S-K (17 C.F.R. § 229.10 et seq.) and other SEC regulations, including accurate and

truthful information with respect to the Company’s operations, financial condition and

performance so that the market prices of the Company’s publicly traded securities would be

based on truthful, complete and accurate information.

66. Centene and the Individual Defendants, individually and in concert, directly and

indirectly, by the use of means or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material

information about the business, business practices, performance, operations and future prospects

of Centene as specified herein. These Defendants employed devices, schemes and artifices to

defraud, while in possession of material adverse non-public information and engaged in acts,

practices, and a course of conduct as alleged herein in an effort to assure investors of Centene’s

value and performance and substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about Centene and its business, operations

and future prospects, in light of the circumstances under which they were made, not misleading,

as set forth more particularly herein, and engaged in transactions, practices and a course of

business which operated as a fraud and deceit upon the purchasers of Centene’s securities during

the Class Period.

67. Each of the Individual Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) each of the Individual Defendants was a high-level

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executive and/or director at the Company during the Class Period; (ii) each of the Individual

Defendants, by virtue of his responsibilities and activities as a senior executive officer and/or

director of the Company, was privy to and participated in the creation, development and

reporting of the Company’s operational and financial projections and/or reports; (iii) the

Individual Defendants enjoyed significant personal contact and familiarity with each other and

were advised of and had access to other members of the Company’s management team, internal

reports, and other data and information about the Company’s financial condition and

performance at all relevant times; and (iv) the Individual Defendants were aware of the

Company’s dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

68. These Defendants had actual knowledge of the misrepresentations and omissions

of material facts set forth herein, or acted with reckless disregard for the truth in that they failed

to ascertain and to disclose such facts, even though such facts were readily available to them.

Such Defendants’ material misrepresentations and/or omissions were done knowingly or

recklessly and for the purpose and effect of concealing Centene’s operating condition, business

practices and future business prospects from the investing public and supporting the artificially

inflated price of its stock. As demonstrated by their overstatements and misstatements of the

Company’s financial condition and performance throughout the Class Period, the Individual

Defendants, if they did not have actual knowledge of the misrepresentations and omissions

alleged, were severely reckless in failing to obtain such knowledge by deliberately refraining

from taking those steps necessary to discover whether those statements were false or misleading.

69. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Centene securities

was artificially inflated during the Class Period. In ignorance of the fact that the market price of

Centene shares was artificially inflated, and relying directly or indirectly on the false and

28


misleading statements made by Defendants, upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known to or

recklessly disregarded by Defendants but not disclosed in public statements by these Defendants

during the Class Period, Plaintiff and the other members of the Class acquired Centene securities

during the Class Period at artificially inflated high prices and were damaged thereby.

70. At the time of said misrepresentations and omissions, Plaintiff and other members

of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the

other members of the Class and the marketplace known of the true performance, business

practices, future prospects and intrinsic value of Centene, which were not disclosed by

Defendants, Plaintiff and other members of the Class would not have purchased or otherwise

acquired Centene securities during the Class Period, or, if they had acquired such securities

during the Class Period, they would not have done so at the artificially inflated prices which they

paid.

71. By virtue of the foregoing, Centene and the Individual Defendants each violated

§10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

72. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and

the other members of the Class suffered damages in connection with their purchases of the

Company’s securities during the Class Period.

COUNT II For Violations of Section 20(a) of the Exchange Act

Against the Individual Defendants

73. Plaintiff repeats and realleges the allegations set forth above as if set forth fully

herein. This claim is asserted against the Individual Defendants.

74. The Individual Defendants were and acted as controlling persons of Centene

within the meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-

level positions with the Company, participation in and/or awareness of the Company’s

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operations and/or intimate knowledge of the Company’s actual performance, the Individual

Defendants had the power to influence and control and did influence and control, directly or

indirectly, the decision-making of the Company, including the content and dissemination of the

various statements which Plaintiff contends are false and misleading. Each of the Individual

Defendants was provided with or had unlimited access to copies of the Company’s reports, press

releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or

shortly after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

75. In addition, each of the Individual Defendants had direct involvement in the day-

to-day operations of the Company and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein,

and exercised the same.

76. As set forth above, Centene and the Individual Defendants each violated §10(b)

and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their

controlling positions, the Individual Defendants are liable pursuant to §20(a) of the Exchange

Act. As a direct and proximate result of these Defendants’ wrongful conduct, Plaintiff and other

members of the Class suffered damages in connection with their purchases of the Company’s

securities during the Class Period.

XII. PRAYER FOR RELIEF

WHEREFORE, Plaintiff, individually and on behalf of the Class, prays for judgment as

follows:

a) Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the

Federal Rules of Civil Procedure on behalf of the Class defined herein;

b) Awarding Plaintiff and the other members of the Class damages in an amount

which may be proven at trial, together with interest thereon;

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c) Awarding Plaintiff and the members of the Class pre-judgment and post-judgment

interest, as well as their reasonable attorneys’ and experts’ witness fees and other

costs; and

d) Awarding such other relief as this Court deems appropriate.

XIII. JURY DEMAND

Plaintiff demands a trial by jury.

Dated: June 29, 2012 By:

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CASE NO. 12-1173 All Others Similarly Situated, CENTENE ...shareholdersfoundation.com/.../centene_corporation... · 25. Centene offers its services through primary and specialty care