PACS Group (NYSE: PACS) leaders are facing a shareholder lawsuit tied to an alleged scheme to submit false Medicare claims.

Five PACS executives, including CEO Jason Murray and CFO Derick Apt, are named as defendants in the now-consolidated federal securities fraud class action lawsuit.

According to the complaint filed on March 21, these PACS executives allegedly failed to alert investors that the false claims were the main driver of the company’s earnings between 2020 and 2023, and that the company abused a Covid-era waiver to inappropriately access skilled nursing Medicare benefits for thousands of patients.

Since the start of 2020, PACS reported strong revenue and profit growth with a total revenue of $2.4 billion for 2022 and $3.1 billion for 2023, positioning itself as one of the largest businesses in the sector. It also launched an initial public offering in the first quarter of 2024.

Of that revenue, Medicare and Medicaid accounted for 47.6% and 30.2% of the total, respectively.

The filing in the U.S. District Court for the Southern District of New York reasserts many of the allegations made by an institutional short seller, the now-defunct Hindenburg Research, into the nursing home giant’s referral and reimbursement practices. PACS has since paused releasing its quarterly earnings results, which are required by publicly-traded companies. 

The Utah-based operator is currently also undergoing a federal investigation as well as conducting its own internal audit.

Skilled Nursing News reached out to PACS regarding the lawsuit but didn’t hear back as of press time.

Improper billing, unlicensed roles

The lawsuit also characterizes PACS’ billing practices as “multi-year, nationwide schemes to maximize per-patient revenue,” in which the plaintiffs claim PACS improperly billed certain therapies to Medicare Part B, even when those therapies weren’t applicable to patients.

In terms of staffing, the lawsuit alleges that PACS placed unlicensed people in administrator positions and miscategorized employee positions to circumvent minimum staffing requirements.

PACS executives named in the lawsuit also breached fiduciary duties by making materially false or misleading statements, and concealed material facts from the investing public, the lawsuit claims. 

If the plaintiffs win their case, PACS executives named in the lawsuit will need to account for all damages caused by them, and outline all profits and special benefits as well as unjustified enrichment obtained as a result of the Medicare schemes, the lawsuit states. 

Plaintiffs are also asking for PACS to take all necessary actions to reform and improve corporate governance and internal procedures to comply with existing governance obligations and laws to protect PACS and its investors from “a recurrence of the damaging events described herein.”

They are also asking for all losses and damages sustained as a result of the acts and transactions made by PACS to be awarded to them with pre-judgment interest and punitive damages.

Hindenburg and PACS’ IPO

The lawsuit repeats allegations detailed in the Hindenburg Research report released last November.

The Hindenburg report alleged that PACS made false claims under Medicare, ultimately enabling PACS to go public in 2024 with an “illusion of legitimate growth and profitability.”

Hindenburg’s five-month long investigation included interviews with 18 former PACS employees and competitors, along with an analysis of more than 900 pages of PACS facility cost reports.

At the time, Murray said that the third-party allegations were “misleading,” but that the company’s audit committee, with assistance from external counsel, was conducting an investigation of the allegations. 

“Given the industry we operate in, we’re subject to various governmental surveys and payment audits in the ordinary course of business and are proud of our compliance track record,” Murray said in November. “We take these types of allegations seriously and will continue to cooperate with the government.”

Just a month after the Hindenburg report, PACS on Dec. 1 closed on an 11-facility deal in Tennessee for an undisclosed amount and Murray said the company “remains on solid footing.” The properties were part of a joint venture with CareTrust REIT (NYSE: CTRE) and an unnamed partner to acquire 31 skilled nursing facilities for $500 million.

The Ensign Group (Nasdaq: ENSG) and Links Healthcare Group were named as operators in the deal, along with PACS.

CareTrust REIT CEO David Sedgwick, during the company’s quarterly earnings call in February, said he was not worried about the situation’s impact on CareTrust.

“We don’t have a worst case scenario that we’re concerned about right now. We think that they’re going to be just fine, and we really don’t have much more to comment before they themselves are able to comment,” Sedgwick said. 

PACS hasn’t had an earnings call since its 3Q call was postponed last November.

Following the Hindenburg report, PACS stock price fell by $11.93 per share, or about 28%, to close at $31.01 on Nov. 4, 2024, and kept falling as the operator failed to report earnings over the last two quarters. 

On Tuesday, PACS shares closed at $11.36, down 57 cents, or 4.78%.