Diabetes Kit Provider Grapples With Lawsuit, Possible FBI Probe and Falling Stock Price

Woburn, Mass. A class-action lawsuit alleging securities fraud was filed against PolyMedica, just a week after the company's stock plummeted 40 percent in response to a magazine article alleging the company and its subsidiary, Liberty Medical Supply, were under investigation by the FBI.

The suit, filed Nov. 27 on behalf of all common stockholders from Sept. 3, 1999, through Nov. 17, 2000, in U.S. District Court for the District of Massachusetts, names PolyMedica and its chief executive officer, Steven Lee, as defendants. It alleges that the company, the nation's largest diabetes testing-kit provider, issued false or misleading statements concerning its billing and marketing practices and that it artificially inflated its stock price during the Class Period.

Lee said the company would "contest this lawsuit vigorously."

The suit stems from an article in the financial weekly Barron's alleging that the FBI was investigating the company's billing and marketing of its diabetes testing kits. The article questioned whether the company billed Medicare using incomplete documentation and noted that it gives away glucometers.

Lee, during a conference call, said the company had no knowledge of an investigation and added, "Liberty Medical only bills Medicare when it has received complete order information, including signed authorization of benefits and doctor's orders."

He also defended the practice of sending out free glucometers, saying they are provided free to Liberty Medical by suppliers and are shipped free to customers. Medicare is not billed, he said, adding the practice is "an accepted industry standard that helps the patient and saves Medicare millions of dollars annually."

Despite Lee's rebuttal to the article, which included news that the company expects to exceed analyst estimates in the third quarter ending Dec. 31 with net revenue of $56 million, or 53 to 54 cents a share, the company's stock fell more than $20 to $30.63.