Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 1 of 40
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`LEVI & KORSINSKY, LLP
`Adam M. Apton (SBN 316506)
`75 Broadway, Suite 202-1908
`San Francisco, California 94111
`Telephone: (415) 373-1671
`Facsimile: (415) 484-1294
`Email: aapton@zlk.com
`
`Gregory M. Nespole (pro hac vice forthcoming)
`Daniel Tepper (pro hac vice forthcoming)
`Ryan Messina (pro hac vice forthcoming)
`55 Broadway, 10th Floor
`New York, New York 10006
`Telephone: (212) 363-7500
`Facsimile: (212) 363-1294
`Email: gnespole@zlk.com
`dtepper@zlk.com
`rmessina@zlk.com
`
`Attorneys for Plaintiff Jeffrey Edelman
`UNITED STATES DISTRICT COURT
`
`NORTHERN DISTRICT OF CALIFORNIA
`
`Case No. 3:22-cv-5379
`
`VERIFIED STOCKHOLDER
`DERIVATIVE COMPLAINT
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`JEFFREY EDELMAN, Derivatively on
`Behalf of CAREDX, INC.,
`
`
`
`Plaintiff,
`v.
`
`MICHAEL D. GOLDBERG, REGINALD
`SEETO, GEORGE BICKERSTAFF, FRED
`COHEN, GRACE E. COLON, CHRISTINE
`COURNOYER, WILLIAM HAGSTROM,
`PETER MAAG, RALPH SNYDERMAN,
`ARTHUR TORRES, HANNAH
`VALANTINE, AND ANKUR DHINGRA,
`
`
`
`Individual Defendants,
`-and-
`
`CAREDX, INC.,
`
`
` Nominal Defendant.
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 2 of 40
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`Plaintiff Jeffrey Edelman (“Plaintiff”), by his attorneys, submits this Verified Stockholder
`Derivative Complaint for violations of securities laws, insider trading, breach of fiduciary duty,
`waste of corporate assets, and unjust enrichment. Plaintiff alleges the following upon information
`and belief, except as to the allegations specifically pertaining to Plaintiff, which are based on
`personal knowledge. This complaint is also based on the investigation of Plaintiff’s counsel,
`which included, among other things, a review of public filings with the U.S. Securities and
`Exchange Commission (“SEC”) and a review of news reports, press releases, and other publicly
`available sources.
`
`NATURE AND SUMMARY OF THE ACTION
`This is a stockholder derivative action brought by Plaintiff on behalf of Nominal
`1.
`Defendant CareDx, Inc. (“CareDx” or the “Company”) against members of its board of directors
`(the “Board”) and members of upper management. The wrongdoing alleged herein has caused
`substantial damage to CareDx’s reputation, goodwill, and standing in the business community
`and has exposed CareDx to substantial potential liability for violations of federal securities laws
`and the costs associated with defending itself. The violations of the law outlined herein have
`damaged CareDx in the form of, among other things, millions of dollars in losses to the
`Company’s market capitalization.
`This action seeks to remedy wrongdoing committed by CareDx’s directors and
`2.
`officers from February 24, 2021 through the present (the “Relevant Period”).
`CareDx is a diagnostics company that provides services and products to the organ
`3.
`transplant recipient community, offering diagnostic testing services, products, and digital
`healthcare software for transplant patients and care providers. The information gathered through
`the Company’s surveillance and tests purportedly enables clinicians to make treatment decisions
`in the event of signs of organ rejection.
`During the Relevant Period, testing services for kidney and heart transplant
`4.
`recipients represented at least 85% of the Company’s total revenues. This has been the case since
`at least the beginning of 2020. The Company’s AlloSure® blood test for transplant recipients
`
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 3 of 40
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`was, and is, the Company’s primary source of revenue.
`For testing services, the Company receives a higher payment from Medicare
`5.
`reimbursements than from commercial payers. Therefore, the number of tests for which the
`Company was able to get Medicare reimbursement correlated with the Company’s comparably
`higher average sales price (“ASP”) for testing services. ASP was not specifically reported, but
`investors were able to calculate ASP by dividing testing service revenue by the number or volume
`of reported tests per financial period.
`Throughout the Relevant Period, CareDx reported growing revenue and strong
`6.
`demand in the Company’s testing services segment. In February 2021, the start of the Relevant
`Period, the Company reported a 51% year-over-year increase in total revenue, with testing
`services revenue seeing a material increase from $104.6 million in 2019 to $163.5 million in 2020,
`a 56% year-over-year increase. Defendant Reginald Seeto (“Seeto”), the current CEO, informed
`the public that the Company “should be focused” on the testing services segment. Defendants
`presented the testing services segment as the Company’s growth driver. Seeto described the
`Company’s testing services segment as having “a winning formula” that would allow the
`Company to capture a massive total addressable market (“TAM”).
`Seeto and the other Individual Defendants (defined below) also emphasized to
`7.
`investors the success of the Company’s RemoTraC service, an at-home blood draw service that
`the Company launched in response to the Covid-19 pandemic. The public was told throughout
`the Relevant Period that the RemoTraC service was a massive success that gave the Company the
`ability to “drive margins” for testing services.
`During the Relevant Period, the Individual Defendants caused the Company to
`8.
`issue materially false and misleading statements regarding testing services. Specifically, the
`Individual Defendants failed to disclose that certain CareDx officers had engaged in a number of
`improper and illegal schemes to inflate testing services revenue, including: (i) pushing protocols
`for surveillance of organ rejection through inaccurate marketing materials and in violation of
`Medicare standards; (ii) offering extravagant inducements or kickbacks to physicians and other
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 4 of 40
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`providers; and (iii) improperly bundling expensive testing services with other blood tests as part
`of the RemoTraC service. As a result of this misconduct, CareDx would be subject to an
`undisclosed risk of regulatory scrutiny and the Company’s testing services revenue and demand
`reported throughout the Relevant Period was artificially inflated. As a result, Defendants’ positive
`statements about the Company’s business, operations, and prospects were materially false and
`misleading and/or omitted material facts necessary to make those statements not false and
`misleading.
`On October 28, 2021, the truth began to emerge when CareDx filed its quarterly
`9.
`report for the third quarter of 2021. Under the heading “United States Department of Justice and
`United States Securities and Exchange Commission Investigation,” the Company revealed for the
`first time that CareDx was the subject of at least three government investigations. Specifically,
`the Company had received: (1) a civil investigative demand (“CID”) from the U.S. Department
`of Justice (“DOJ”) requesting the Company produce documents in connection with the DOJ’s
`False Claims Act investigation; (2) a subpoena from the SEC in relation to an of matters similar
`to those identified in the CID and certain accounting and public reporting practices; and (3) an
`information request from an unnamed state regulatory agency (collectively the “Government
`Investigations”).
`On this news, the Company’s stock price dropped from $70.34 per share on
`10.
`October 28, 2021 to $51 per share on October 29, 2021. The stock continued to decline over the
`next week reaching $47.04 per share on November 5, 2021. This represented a 33% decline from
`the closing price on October 28, 2021.
`The Company then remained silent on the status of the Government Investigations
`11.
`for several months. But investors learned more about the extent of the Company’s misconduct
`and the nature of the Government Investigations on April 15, 2022, when the Company’s former
`Head of Community Nephrology, Dr. Michael Olymbios, filed a complaint in California Superior
`Court that provided details regarding: (1) misconduct, including the use of RemoTraC to
`improperly bundle the Company’s most expensive testing services, including AlloSure, with other
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 5 of 40
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`blood tests, that led to the Government Investigations; (2) Defendant Peter Maag’s (“Maag”), the
`former CEO and current director on the Company’s Board, and Seeto’s knowledge of the
`misconduct throughout the Relevant Period; and (3) their attempts to conceal the misconduct.
`On this news, the Company’s stock price fell to $35.41 per share on April 14, 2022
`12.
`and continued to fall the next trading day reaching $32.55 per share, a 14% decrease from the
`closing price of $38.02 on April 13, 2022.
`On May 5, 2022, the Company announced its results for the first quarter of 2022.
`13.
`The disclosure reported that testing service revenue fell well short of analysts’ expectations and
`there was a 4.9% decline in ASP versus the last quarter of 2021.
`On this news, the stock price fell to $25.78 on May 6, 2022 and continued to fall
`14.
`the following trading day descending to $22.46, a 29% drop from the closing price on May 5,
`2022.
`
`The Individual Defendants breached their fiduciary duties by failing to correct
`15.
`and/or causing the Company to fail to correct these false and misleading statements and omissions
`of material fact. The Individual Defendants also willfully or recklessly caused the Company to
`fail to maintain an adequate system of oversight, disclosure controls and procedures, and internal
`controls over financial reporting.
`As detailed herein, and as alleged in the ongoing federal securities class action in
`16.
`the Northern District of California styled Plumbers & Pipefitters Local Union #295 Pension Fund
`v. Caredx, Inc. et al., Case No. 3:22-cv-03023, (the “Federal Securities Class Action”), CareDx’s
`officers and directors substantially damaged the Company by making false and misleading
`statements that omitted material adverse facts concerning the Company’s worsening business
`prospects.
`
`JURISDICTION AND VENUE
`This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1331 because
`17.
`Plaintiff’s claims raise a federal question under Section 14(a) of the Exchange Act, 15 U.S.C.
`§78n(a)(1), Rule 14a-9 of the Exchange Act, 17 C.F.R. § 240.14a-9, and Section 20(a) of the
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 6 of 40
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`Exchange Act (15 U.S.C. §§ 78j(b), 78t(a) and 78t-1) and raise a federal question pertaining to
`the claims made in the Federal Securities Class Action based on violations of the Exchange Act.
`This Court has supplemental jurisdiction over Plaintiff’s state law claims pursuant to 28 U.S.C. §
`1367(a).
`This derivative action is not a collusive action to confer jurisdiction on a court of
`18.
`the United States that would not otherwise have such jurisdiction.
`Venue is proper in this District because the Company is headquartered in this
`19.
`District and the Individual Defendants have been involved in business in this District. Further,
`Defendants’ actions have had an effect in this District.
`THE PARTIES
`
`
`
`Plaintiff
`Plaintiff Jeffrey Edelman is and has continuously been a stockholder of CareDx
`20.
`during the wrongdoing complained of herein.
`
`Nominal Defendant
`Defendant CareDx is a Delaware corporation with its principal executive offices
`21.
`at 8000 Marina Boulevard, Brisbane, California 94005. CareDx’s shares trade on the Nasdaq
`under the ticker symbol “CDNA.”
`
`Individual Defendants
`Defendant Michael D. Goldberg (“Goldberg”) has served as a Company director
`22.
`since November 2011 and the Chairman of the Board since November 2021. He has served as a
`member of the Audit Committee since the start of the Relevant Period. During the Relevant
`Period, Goldberg made the following sales of stock:
`
`Date
`
`Shares Sold
`
`Price
`
`Proceeds
`
`5/10/2021
`
`5/11/2021
`
`10/11/2021
`
`
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`$68.59
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`$1,064,561.41
`
`$66.99
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`$3,268,971.80
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`$62.50
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`$31,250.00
`
`15,442
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`49,083
`
`500
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`6
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`1
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 7 of 40
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`11/9/2021
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`12/9/2021
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`1/10/2022
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`2/9/2022
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`3/9/2022
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`4/11/2022
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`500
`
`500
`
`500
`
`500
`
`500
`
`500
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`$47.54
`
`$45.41
`
`$42.97
`
`$42.96
`
`$33.41
`
`$36.01
`
`$23,770.00
`
`$22,705.25
`
`$21,485.00
`
`$21,480.00
`
`$16,704.00
`
`$18,006.40
`
`Total Proceeds:
`
`$4,488,933.86
`
`Defendant Seeto has served as CEO and as a Company director since November
`23.
`2020. He has also served as President since November 2018. During the Relevant Period, Seeto
`made the following sales of stock:
`
`Date
`
`3/1/2021
`
`6/7/2021
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`6/8/2021
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`6/9/2021
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`6/24/2021
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`6/25/2021
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`6/28/2021
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`7/8/2021
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`8/27/2021
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`1/18/2022
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`1/19/2022
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`2/1/2022
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`2/2/2022
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`
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`Shares Sold
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`Price
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`Proceeds
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`$84.46
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`$90.01
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`$90.00
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`$914,700.48
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`$897,643.80
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`$45,001.00
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`$90.01
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`$1,504,818.94
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`$95.31
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`$1,010,513.73
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`$95.15
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`$876,317.69
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`$95.88
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`$1,264,990.34
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`$85.74
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`$80.00
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`$40.07
`
`$40.05
`
`$42.13
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`$41.25
`
`$513,503.31
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`$52,640.00
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`$68,880.85
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`$125,633.71
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`$34,293.82
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`$131,257.50
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`10,704
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`9,973
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`500
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`16,718
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`10,602
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`9,210
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`13,212
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`5,994
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`658
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`1,719
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`3,137
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`814
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`3,182
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 8 of 40
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`2/4/2022
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`2/9/2022
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`3/1/2022
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`3/21/2022
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`4,988
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`2,550
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`3,153
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`2,888
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`$40.34
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`$45.00
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`$38.62
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`$40.43
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`$201,237.37
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`$114,758.93
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`$121,753.73
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`$116,774.26
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`Total Proceeds:
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`$7,994,719.44
`
`Defendant George Bickerstaff (“Bickerstaff”) has served as a Company director
`24.
`since April 2014. He has served as Chair of the Audit Committee since the start of the Relevant
`Period. During the Relevant Period, Bickerstaff made the following sales of stock:
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`Date
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`5/12/2021
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`5/21/2021
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`2/28/2022
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`Shares Sold
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`Price
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`Proceeds
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`10,000
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`10,000
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`25,000
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`$63.39
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`$630,746.94
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`$75.63
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`$753,373.47
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`$39.11
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`$977,672.50
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`Total Proceeds:
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`$2,361,792.91
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`Defendant Fred Cohen (“Cohen”) has served as a Company director since 2003.
`25.
`Defendant Grace E. Colon (“Colon”) has served as a Company director since
`26.
`2019. During the Relevant Period, she made the following sales of stock:
`
`Date
`
`3/9/2022
`
`Shares Sold
`
`Price
`
`Proceeds
`
`1,393
`
`$34.56
`
`$48,146.12
`
`Defendant Christine Cournoyer (“Cournoyer”) has served as a Company director
`27.
`since 2019. She has served as a member of the Audit Committee since the start of the Relevant
`Period.
`Defendant William Hagstrom (“Hagstrom”) has served as a Company director
`28.
`since 2015. He has served as a member of the Audit Committee since the start of the Relevant
`Period. During the Relevant Period, he made the following sales of stock:
`
`
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`8
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 9 of 40
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`
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`Date
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`5/14/2021
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`6/9/2021
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`Shares Sold
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`Price
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`Proceeds
`
`10,000
`
`5,000
`
`$67.06
`
`$668,884.08
`
`$88.14
`
`$440,706.00
`
`Total Proceeds:
`
`$1,109,590.08
`
`Defendant Maag has served as a Company director since 2012 and as Executive
`29.
`Chair from November 2020 until 2021. He also served as CEO of the Company from October
`2012 until November 2020 and as President from October 2012 until November 2018. During the
`Relevant Period, Maag made the following sales of stock:
`
`Date
`
`3/5/2021
`
`4/5/2021
`
`5/3/2021
`
`5/5/2021
`
`5/10/2021
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`5/11/2021
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`5/25/2021
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`6/7/2021
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`6/8/2021
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`6/9/2021
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`6/24/2021
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`6/25/2021
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`7/6/2021
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`8/5/2021
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`9/7/2021
`
`
`
`Shares Sold
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`Price
`
`10,000
`
`10,000
`
`20,000
`
`10,000
`
`26,293
`
`87,128
`
`10,000
`
`26,500
`
`978
`
`2,522
`
`9,605
`
`395
`
`10,000
`
`10,000
`
`10,000
`
`9
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`Proceeds
`
`$612,850.96
`
`$724,015.43
`
`$62.05
`
`$72.15
`
`$76.96
`
`$1,532,722.77
`
`$73.48
`
`$733,191.89
`
`$68.58
`
`$1,812,623.36
`
`$66.99
`
`$5,802,799.21
`
`$80.82
`
`$805,870.84
`
`$87.52
`
`$2,285,752.20
`
`$90.05
`
`$90.00
`
`$95.30
`
`$88,073.69
`
`$226,981.51
`
`$915,397.80
`
`$95
`
`$37,525.00
`
`$90.42
`
`$83.04
`
`$74.40
`
`$907,002.19
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`$831,312.94
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`$736,762.58
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 10 of 40
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`10/5/2021
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`11/5/2021
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`12/6/2021
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`1/5/2022
`
`2/7/2022
`
`3/7/2022
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`4/5/2022
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`10,000
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`10,000
`
`10,000
`
`10,000
`
`10,000
`
`10,000
`
`10,000
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`$65.02
`
`$49.40
`
`$42.04
`
`$44.71
`
`$42.06
`
`$33.20
`
`$38.91
`
`$646,729.45
`
`$494,000.00
`
`$416,189.87
`
`$444,465.55
`
`$420,668.28
`
`$328,062.55
`
`$386,394.32
`
`Total Proceeds:
`
`$21,189,392.39
`
`
`
`Defendant Ralph Snyderman (“Snyderman”) has served as a Company director
`30.
`since 2005. During the Relevant Period, he made the following sales of stock:
`
`Date
`
`5/27/2021
`
`5/28/2021
`
`6/1/2021
`
`6/2/2021
`
`Shares Sold
`
`Price
`
`Proceeds
`
`1,966
`
`2,511
`
`2,512
`
`2,511
`
`$81.01
`
`$81.08
`
`$77.30
`
`$81.57
`
`$159,265.66
`
`$203,594.64
`
`$194,173.33
`
`$204,815.24
`
`Total Proceeds:
`
`$761,848.87
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`As a result of these insider sales, Defendants Goldberg, Seeto, Bickerstaff, Colon,
`31.
`Hagstrom, Maag, and Snyderman, avoided $25.5 million in losses. The loss calculations are based
`on a post-disclosure price of $22.46, the second consecutive trading day after the truth fully
`emerged.
`Defendant Arthur Torres (“Torres”) has served as a Company director since
`32.
`September 15, 2021.
`Defendant Hannah Valantine (“Valantine”) has served as a Company director
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`since July 1, 2021.
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 11 of 40
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`Defendant Ankur Dhingra (“Dhingra”) served as the Company’s Chief Financial
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`Officer from March 25, 2021 until May 25, 2022.
`Collectively, Defendants Goldberg, Bickerstaff, Cournoyer, and Hagstrom, are
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`referred to herein as the “Audit Committee Defendants.”
`Collectively, Defendants Goldberg, Seeto, Bickerstaff, Cohen, Colon, Cournoyer,
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`Hagstrom, Maag, Snyderman, Torres, and Valantine, are referred to herein as the “Individual
`Defendants.”
`The Individual Defendants, because of their positions with CareDx, possessed the
`37.
`power and authority to control the contents of CareDx’s reports to the SEC, press releases, and
`presentations to securities analysts, money and portfolio managers, and institutional investors.
`Each of the Individual Defendants was provided with copies of the Company’s reports and press
`releases alleged herein to be misleading prior to or shortly after their issuance, and each had the
`ability and opportunity to prevent their issuance or cause them to be corrected. Because of their
`positions and access to material non-public information, each of the Individual Defendants knew
`that the adverse facts specified herein had not been disclosed to and were being concealed from
`the public and that the positive representations being made were then materially false and/or
`misleading.
`
`SUBSTANTIVE ALLEGATIONS
`CareDx offers various testing services for transplant patients, such as: a donor-
`38.
`derived cell-free DNA (“dd-cfDNA”) blood test for kidney transplant patients called AlloSure®
`Kidney; a gene expression test for heart transplant patients known as AlloMap® Heart; and a dd-
`cfDNA test for heart transplant patients called AlloSure® Heart.
`The Company’s revenues are reported in three segments: testing services,
`39.
`products, and patent and digital solutions. The testing services segment, which provides
`diagnostic surveillance testing services for solid organ transplant patients, accounted for 87% of
`the Company’s 2021 revenue.
`AlloSure Kidney launched in 2017 and the Company has repeatedly stated that
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 12 of 40
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`AlloSure Kidney “has received positive coverage decisions for reimbursement from Medicare,”
`with a reimbursement rate of $2,841 per test. Indeed, the Company acknowledged that generating
`testing service revenue was dependent upon, among other things, the number of tests performed
`on transplant patients and the establishment of coverage policies by third-party insurers and
`Medicare.
`The amount the Company could charge for testing services varied from payer to
`41.
`payer with the Company receiving its largest payments from Medicare reimbursement. Medicare
`reimbursement continued to play an outsized role in the Company’s reported revenues and growth
`leading up to and during the Relevant Period. In the Form 10-K filed February 24, 2021 for the
`year ended December 31, 2020 (the “2020 10-K”), the Company reported that tests performed on
`patients covered by Medicare represented 48% of all CareDx tests in 2020, but accounted for 67%
`of all testing revenue from 2020 because Medicare reimbursement paid more than commercial
`payers.
`Likely due to the Covid-19 pandemic, the Company reported a significant
`42.
`slowdown in testing services volume in early 2020. In response to the slowdown, CareDx
`launched RemoTraC, a home-based blood draw solution for immune-compromised transplant
`patients, in late March 2020. By early 2022, CareDx reported more than 11,000 kidney, heart,
`and lung transplant patients had enrolled in RemoTraC.
`The Individual Defendants’ False and Misleading Statements
`February 24, 2021 Press Release, Form 10-K, and Earnings Call
`On February 24, 2021, the Company announced its financial results for the fourth
`43.
`quarter and full year ended December 31, 2020. The press release announcing the results touted
`“record full-year revenue of $192.2 million, an increase of 51%” from the prior year and that
`testing services revenue for the quarter was $50.3 million, compared to $29.1 million in the same
`period of 2019. Defendant Seeto was quoted in the press release, stating “[o]ur record fourth
`quarter result was the culmination of an extraordinary year for CareDx.” CEO Seeto referred to
`the 2020 as “transformational” due to the Company extending its “leadership position in
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 13 of 40
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`transplant centers through RemoTraC.” 2021 guidance in the press release expected $255 million
`to $265 million in revenue.
`That same day, the Company filed the 2020 10-K. The 2020 10-K stated, in
`44.
`relevant part:
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`While we believe that we are currently in material compliance with applicable laws and
`regulations relating to our LDTs, we cannot be certain that the FDA or other regulatory
`agencies would agree with our determination. A determination that we have violated these
`laws, or a public announcement that we are being investigated for possible violation of
`these laws, could hurt our business and our reputation.
`
`The 2020 10-K did not disclose any present or impending claims that the Company
`45.
`violated the federal False Claims Act, only stating: “Our future activities relating to billing,
`compliance with certain regulations and Medicare reimbursement requirements, physician and
`other healthcare provider financial relationships and the sale and marketing of our products may
`be subject to scrutiny under these laws.” Defendants Seeto, Maag, Bickerstaff, Cohen, Colon,
`Cournoyer, Goldberg, Snyderman, and Hagstrom signed the 2020 10-K.
`Appended to the 2020 10-K as an exhibit was a signed certification pursuant to the
`46.
`Sarbanes-Oxley Act of 2002 (“SOX”) by Defendant Seeto, attesting that “the information
`contained in the [2020 10-K] fairly presents, in all material respects, the financial condition and
`results of operations of the Company.”
`Later on February 24, 2021, Defendant Seeto, among others, represented the
`47.
`Company at an earnings call to discuss the fourth quarter and full year 2020 results. During the
`call, Defendant Seeto stated that “2020 was an exceptional year for CareDx as demand continued
`unabated for our innovative first-in-class suite of high-value health care solutions for transplant
`patients and caregivers.”
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 14 of 40
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`May 5, 2021 Press Release, 10-Q, and Earnings Call
`On May 5, 2021, the Company announced its financial results for the first quarter
`48.
`ended March 31, 2021. The press release announcing the results touted “strong start to 2021” and
`that the Company was raising full-year guidance for revenue to a range of $270 million to $280
`million. The press release reported a 76% increase in total revenue year-over-year and testing
`services revenue of $59.3 million, compared to $31.4 million in the same period of 2020, an
`88.8% increase year-over-year.
`That same day, the Company filed Form 10-Q for the period ended March 31,
`49.
`2021. Seeto and Dhingra signed the 10-Q and a certification pursuant to SOX attesting that “the
`information contained in the [10-Q] fairly presents, in all material respects, the financial condition
`and results of operations of the Company.” The financial results from the May 5, 2021 were
`reiterated in the 10-Q.
`That same day, Defendants Seeto and Dhingra represented the Company during
`50.
`an earnings call discussing the first quarter 2021 results. During the call, Seeto stated that he was
`“[r]eally excited about the testing services, which is growing well above the 50% range[.]”
`Regarding the revised guidance, Dhingra stated “[w]e are updating our 2021 revenue expectations
`to reflect our strong first quarter results and continued strong demand for our solutions.”
`Regarding gross margins on testing services, Dhingra stated that “so on the margin side, we don't
`see any structural issues there[.]”
`June 1, 2021 Jefferies Healthcare Conference
`On June 1, 2021, Seeto represented the Company at the Jefferies Healthcare
`51.
`Conference. During the conference Seeto stated that in “the kidney space…it’s an absolute
`winning formula” and emphasized that of the “1,000- plus community nephrology practices, we
`have more than 100 now using AlloSure as part of that.” Seeto further claimed that “there’s just
`so much opportunity for us, overall testing services TAM.”
`June 8, 2021 Goldman Sachs Global Healthcare Conference
`On June 8, 2021, Seeto and Dhingra represented the Company at the Goldman
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 15 of 40
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`Sachs 42nd Annual Global Healthcare Conference. During the conference, Seeto stated, in
`relevant part:
`I've been at a lot of companies that talked about patient first, patient centricity. And what
`I can say is CareDx actually lives and believes it. And it's just incredible. Every single
`town hall, we have these monthly starts off with the patient. As we look at every single
`one of our presentations, it starts off with the patient. If we think of who we hire, everyone
`has a connection to the patient.
`
`July 29, 2021 Press Release, 10-Q, and Earnings Call
`On July 29, 2021, the Company announced its second quarter 2021 financial
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`results for the period ended June 30, 2021. The press release announced revenue growth of 77%
`year-over-year and again raised guidance for 2021’s revenue to a range of $280 million to $290
`million. The press release also announced testing services revenues of $64.9 million, compared
`with $36.3 million in the same period of 2020, a 78% year-over-year increase.
`That same day, the Company filed Form 10-Q for the second quarter 2021 ended
`54.
`June 30, 2021. The 10-Q reiterated the financial results in the press release. Seeto and Dhingra
`signed the 10-Q and a certification pursuant to SOX attesting that “the information contained in
`the [10-Q] fairly presents, in all material respects, the financial condition and results of operations
`of the Company.”
`Also on that same day, Seeto and Dhingra represented the Company at an earnings
`55.
`call to discuss the second quarter 2021 results. Regarding the Company’s testing services revenue,
`Seeto stated that “[t]he main driver of growth in the quarter was from our testing services revenue,
`which increased 79% to $64.9 million.” Seeto also stated that “[o]ur direct to center approach
`remains core to our strategy, where we are focused on building the moat through an expanded
`portfolio of offerings within the transplant centers and by increasing the number of AlloSure
`testing protocols.” Dhingra stated that the basis of increased revenue guidance was a “continued
`strong demand for our testing services in the United States.” He added that “[w]e see great
`demand for our services and continuation of very positive response from patients.”
`The Individual Defendants made materially false and misleading statements and/or
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`Case 4:22-cv-05379-DMR Document 1 Filed 09/21/22 Page 16 of 40
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`omissions designed to mislead the investing public. The Individual Defendants failed to disclose
`that: (1) certain CareDx officers had engaged in a variety of improper and illegal schemes to
`inflate testing services revenue and demand, including pushing a surveillance protocol through
`inaccurate marketing materials, offering extravagant inducements or kickbacks to physicians and
`other providers, and improperly bundling expensive testing services with other blood tests as part
`of the RemoTraC service; (2) these practices, exposed the Company to an undisclosed risk of
`regulatory scrutiny and/or liability under the federal False Claims Act; (3) these practices
`rendered the Company’s testing services revenue reported throughout the Relevant Period
`artificially inflated; and (4) as a result, Individual Defendants’ positive statements about the
`Company’s business, operations, and prospects were materially false and misleading at all
`relevant times.
`
`The Truth Begins to Emerge
`October 28, 2021 Press Release, 10-Q, and Earnings Call
`On October 28, 2021, the Company issued a press release announcing its third
`57.
`quarter 2021 results for the period ended September 30, 2021. The press release announced that
`the Company “[g]rew testing services volume 86% year-over-year,” however, testing services
`revenue had only increased from $45.5 million to $66.5 million year-over-year, a 46% increase.
`The Company again raised 2021 revenue guidance, this time to a range of $290 million to $293
`million.
`That same day, Seeto and Dhingra represented the Company on an earnings call
`58.
`to discuss the third quarter 2021 results. During the call, an analyst from Craig-Hallum asked
`Seeto and Dhingra to comment on the lower ASPs for testing service revenue the Company
`reported during the quarter and asked whether they had seen “any changes in Medicare billing
`practices[.]” Dhingra replied “any change in the billing practices? No, no change. We haven't
`observed anything on the Medicare billing practices.”
`That same day, the Company filed its form 10-Q for the third quarter 2021. The
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`10-Q disclosed that the Company had recently received a CID from the DOJ requesting
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