CVS pays $20 million to settle SEC fraud charges

April 9, 2014

CVS Caremark agreed on Tuesday to pay a $20 million fine to settle the U.S. Securities and Exchange Commission (SEC) charges that it misled investors in 2009 about financial setbacks and used improper accounting methods for boosting its financial results, according to a SEC statement.

CVS Caremark agreed on Tuesday to pay a $20 million fine to settle the U.S. Securities and Exchange Commission (SEC) charges that it misled investors in 2009 about financial setbacks and used improper accounting methods for boosting its financial results, according to a SEC statement.

CVS Caremark will pay the fine to settle the charges with a “no admit or deny basis” agreement and is not required to restate its earnings for any reporting period, according to the company’s statement.

SEC charged CVS Caremark with misconduct from its activities during the last two quarters of 2009. SEC alleges that during a $1.5 billion bond offering in September 2009, CVS failed to disclose to investors that it had lost significant Medicare Part D and contract revenues in its pharmacy benefit management (PBM) business. When the company disclosed the information November 5, 2009, the stock price plunged 20% that day.

Also, on that same day during an investors’ conference call about earnings, SEC alleges that CVS continued to mislead investors, stating improvement in its PBM “retention rate,” when it had allegedly manipulated the calculation of that rate.

CVS also was charged with improper accounting of its acquisition of Longs Drugs, a drugstore chain, during that time period, overstating financial results for its retail pharmacy business.

“[CVS] failed to disclose the adjustments in its quarterly report filed on November 5,” according to SEC. “CVS improperly reduced the value of $189 million of personal property in the Longs stores down to $0, and then reversed $49 million of depreciation that had been taken on those assets since the acquisition.”

 

SEC states that undisclosed depreciation reversal led to higher third-quarter earnings, thus exceeding analysts’ expectations, at the same time the company announced its PBM business was down.

Laird Daniels, the CVS retail controller at the time, was charged by SEC with accounting violations in a related SEC proceeding. In an email by Daniels, he noted “the dramatic change in accounting turned the acquisition of Longs Drugs from a ‘bad guy’ to a ‘good guy’ in terms of purported profitability for CVS,” according to SEC.

Daniels, who assumed the position of CVS’ senior vice president for international operations and business development in May 2013, agreed to settle his SEC case by agreeing to pay a $75,000 fine and to not work as an accountant for at least a year for any entity regulated by the SEC.

“Without admitting or denying the allegations, Daniels agreed to the entry of a cease-and-desist order finding that he willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Rule 13b2-1 under the Securities Exchange Act of 1934,” according to SEC.