A class action has been filed against disease management program provider Matria Healthcare, Inc. (Nasdaq: MATR) and certain of its officers and directors by stockholders who purchased the company's common stock between October 24, 2001, and June 25, 2002. The action claims that the defendants violated federal securities laws by issuing a series of material misrepresentations to the market over this time period, thereby artificially inflating the price of the company's securities. The stockholders seek to recover compensatory damages for the loss of value of their stock.

During the time period involved, the company touted the "strong performance" of all of its diabetes businesses and repeatedly bragged about its growth, noting the signing of new contracts and anticipated contracts. The defendants assured the market during this time that they were ramping up the company's infrastructure and implementing a major systems change that would help them fulfill their goal to be the most technologically advanced provider in their sector of the health industry and that would significantly increase their capabilities. Citing their growth, the defendants explained that the reason expenses had exceeded anticipated revenues at certain times was that it was difficult to time the need for additional personnel and infrastructure with the receipt of large contracts because "contractual negotiations can delay the anticipated start dates for new disease management programs."

Unbeknownst to the investors, however, the company allegedly was experiencing serious known problems that rendered the defendants' statements false and misleading. Moreover, the defendants had a duty to disclose this information under Item 303(a)(ii) to Regulation S-K. Specifically, the stockholders allege that the defendants failed to disclose until June 25, 2002, despite a duty to do so, the following adverse, known facts:

1. The company's Health Enhancement Segment was experiencing significant "information system constraints" which led to unfilled customer orders.

2. The company's Facet Technologies division was experiencing higher costs as a result of undisclosed inventory and supply chain management problems.

3. Facet's gross margins were materially and adversely affected by decreasing price concessions from its major suppliers.

4. Matria's gross profit margins were being negatively impacted by an increase in the price of one of its key drugs.

5. The company's Health Enhancement revenues would be negatively impacted by at least $800,000 due to the bankruptcy of a health plan whose deteriorating financial condition the defendants knew of or were severely reckless in disregarding.

The stockholders allege that the defendants were motivated to conceal these problems in order to inflate the purchase price of Matria common stock because the defendants negotiated two acquisitions during the class period, using Matria common stock as currency.

On June 25, 2002, after the close of trading, the defendants shocked the market by revising the company's financial outlook for fiscal 2002 and revealing all of these problems. In response to this shocking news, the price of Matria's common stock plummeted on unusually heavy volume the next trading day, dropping from nearly $12 to $7 before closing at $8.95 per share. A chorus of Wall Street analysts also downgraded the stock as a result.