Odyssey Healthcare

(ODSY)

plunged 40% Monday after the hospice company said it is the subject of a false claims act investigation.

The Dallas-based company also warned of an earnings shortfall and shook up its executive suite. The company said Chairman Richard Burnham would take the CEO job from David Gasmire, who "has decided to leave the company," Odyssey said. Gasmire had been with the company for eight years and had taken over the CEO job from Burnham Jan. 1.

Odyssey said the Justice Department's Civil Division told the company last month that it has begun an investigation under the False Claims Act. The investigation relates to claims for payment the company has submitted since Jan. 1, 2000, and covers "conduct with respect to patient admissions, patient retention and billing practices."

Odyssey, saying it will cooperate with the probe, said it "has a longstanding and ongoing employee training and regulatory compliance program, including a mechanism for employees to alert management anonymously of issues." The company said it couldn't comment on how the probe might affect its operations or liquidity.

Odyssey said weak admissions would hurt earnings for the third quarter ended last month and the year ending in December. Odyssey expects to make 24 cents a share for the third quarter, which is up from the year-ago 21 cents but below the 27-cent Thomson First Call analyst consensus estimate. The company expects to earn 95 cents a share for the year, which is about a dime below previous guidance.

"We will report strong operating cash flow and reduced pharmacy costs for the third quarter," Burnham said in a press release. "However, we saw increasing competition in selected markets that caused us to have weaker than expected admissions and patient census."

Early Monday, Odyssey fell $6.68 to $10.18.