Addiction Centers|Sued by Stockholders

NASHVILLE (CN) - A substance abuse treatment company did not disclose murder and abuse charges against it for a patient's death, causing stock to suddenly drop after news of an indictment, a class claims.

Joseph Kasper sued AAC Holdings Inc. and current and former executives - CEO Michael Cartwright, general counsel Kathryn Phillips, and former president Jerrod Menz - in Federal Court on Monday. AAC owns American Addiction Centers facilities.

The class action claims AAC stock crashed after it had to disclose the criminal charges. Kasper filed the lawsuit on behalf of a proposed class of those who bought AAC stock between Oct. 1, 2014 and Aug. 3, 2015.

The company went public last October, selling five million shares of stock at $15 per share. It said in a Securities and Exchange Commission registration statement that it was not aware of any legal proceedings that would affect business operations, the lawsuit claims.

However, the California Department of Justice was investigating a patient death at AAC's facilities, according to the complaint. Not only was a civil lawsuit filed against the company, but a grand jury returned an indictment for second-degree murder and adult abuse against AAC subsidiaries and current and former employees on July 29. Menz stepped down as company president after his murder indictment, the lawsuit claims.

AAC stock dropped only four percent after it issued a press release acknowledging the indictment but did not name the specific charges, the complaint states. But when the company filed a Form 10-Q earlier this month, it reportedly revealed the murder and adult abuse charges handed down, causing stock to plummet after analysts took note.

Bleeker Street Research reported that there have been at least eight undisclosed AAC patient deaths in California and Florida as recently as 2014, according to the complaint.

"AAC's common stock price plunged in reaction to this news, falling by $12.90 per share," or 39 percent, the lawsuit states. The class action claims that AAC stock has dropped a total of 49 percent, "wiping out $153 million in market capitalization."

Bleeker reported that AAC knew of the possibility of criminal charges as early as 2013 when an assistant California attorney general filed an affidavit in a civil case, the class action states.

Kasper claims AAC violated the Securities Exchange Act by filing misleading statements to defraud stockholders.

"Plaintiff and the class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for AAC common stock," the complaint states. "Plaintiff and the class would not have purchased AAC common stock at the price paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements."

The lawsuit seeks class certification, punitive damages and costs. The class is represented by Paul Bramlett in Nashville and by Block & Leviton LLP in Boston.

AAC operates drug and alcohol addiction treatment centers throughout the United States, according to the complaint. It also reportedly runs one facility for overeating-related disorders. The company's principal executive offices are located in Brentwood, Tenn.

The company set up www.aacthetruth.com to address the allegations against it.

"We believe there is no evidence that the AAC subsidiary that operated the facility 'caused or permitted' injury or endangerment to the client or caused his death, as the indictment alleges," the website's FAQ page states. "The local Sheriff-Coroner's report revealed the client died of hypertensive cardiovascular disease and chronic obstructive pulmonary disease. The Sheriff-Coroner classified the death as 'natural.'"

AAC claims its patient death rate is about one in every 4,252 discharges, which it says is 10 times better than the industry average.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit