UNITED STATES SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 16722 / September 25, 2000

ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1308 / September 25, 2000

SECURITIES AND EXCHANGE COMMISSION v. CLIFFORD E. HOTTE, et al. (United States District Court, E.D.N.Y., Civil Action No. CV00-5704)

The Securities and Exchange Commission ("Commission") announced the filing, on September 21, 2000, of a complaint in the United States District Court for the Eastern District of New York, alleging a financial fraud conducted by former officers and employees of Health Management, Inc. Health Management, which was purchased by another company in 1997, was headquartered in Holbrook, New York, and provided outpatient drug therapies to individuals and performed management services for the health care industry. Without admitting or denying the Commission's allegations, all of the defendants have consented to the entry of Final Judgments and Orders.

The complaint alleges that, from approximately July 1994 through February 1996, senior officers and employees of Health Management, including defendants Clifford E. Hotte, Chief Executive Officer and Chairman of the Board, currently incarcerated; Drew Bergman, of Merrick, New York, Chief Financial Officer; Michael R. Norman, of Stockton, New Jersey, Chief Operating Officer; Luis E. Gomez, of Jericho, New York, Controller; Irwin Hirsh, of Pittsburgh, Pennsylvania, Vice President of Purchasing; and Michael Escuder, of Flushing, New York, Supervising Pharmacist, took part in a scheme to falsify the books and records of the company in order to meet quarterly and annual earnings expectations. Beginning with the first quarter of fiscal 1995 and continuing through the second quarter of fiscal 1996, Health Management issued fraudulent financial statements and press releases, which materially overstated its revenues, earnings and financial condition. Hotte and Bergman directed and supervised the fraudulent scheme at Health Management. The complaint also alleges insider trading by Bergman and his broker, Theodore R. Hunter, of Kula, Hawaii.

As part of the scheme, the complaint alleges that the defendants falsified the aging of accounts receivables to mislead Health Management's auditors and to overstate revenues. The defendants also falsely inflated inventory in order to increase earnings for the fiscal year ended April 30, 1995. They told the auditors that almost $2 million of inventory had been in transit on the day that inventory was counted, when in fact this inventory did not exist. As a result, the company reported inflated revenue which, together with other fraudulent adjustments, overstated Health Management's net income for the year by 72 percent.

The complaint also alleges that defendants Bergman and Hunter engaged in unlawful insider trading in the common stock of Health Management. In late May 1995, after learning that Health Management would not meet expected earnings estimates for the quarter, Bergman sold Health Management stock from one of his personal brokerage accounts, avoiding approximately $13,563 in losses. In addition, immediately prior to a June 14, 1995 public announcement by Health Management of the lower than expected earnings, Bergman tipped Hunter about the substance of the announcement. Following the announcement, the price of Health Management common stock dropped by 28 percent. While in possession of the material, nonpublic information furnished by Bergman, Hunter traded securities in his own and 27 of his client accounts, including accounts for Bergman, Bergman's children and brother, thereby avoiding losses in the total amount of $95,130.

The Final Judgments and Orders permanently enjoin all of the defendants from violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 ("Exchange Act"). In addition, Bergman and Hunter are permanently enjoined from violating Section 17(a) of the Securities Act of 1933. Hotte and Bergman are also permanently enjoined from violating Sections 13(a), 13(b)(2)(A) and 13(b)(5)of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2. Norman, Gomez and Hirsh are also permanently enjoined from violating Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2.. Escuder is also enjoined from violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1. In addition, the Orders bar Hotte and Bergman from serving as officers or directors of any reporting company. Bergman is ordered to disgorge $23,775, plus prejudgment interest, and to pay a civil penalty of $53,775. Gomez, Escuder and Hirsh are ordered to pay civil penalties of $10,000 each. Hunter is ordered to disgorge $84,918, plus prejudgment interest, and to pay a civil penalty of $84,918. No civil penalty is ordered against Norman based on his demonstrated inability to pay.

Hotte was convicted by a jury of securities fraud, mail fraud and wire fraud, and in October 1998 was sentenced to nine years in prison, and ordered to pay $250,000 in fines and $9.5 million in restitution. He is currently incarcerated. Because of the criminal fines and restitution previously imposed, the Commission did not seek additional civil penalties from Hotte.