CVS Caremark Corporation Charged By SEC, Settles For $20M

The suit that was filed and settled in federal court in Rhode Island revolves around the company’s business as a pharmacy benefits manager rather than its chain of drug stores. In 2009, when submitting documents ahead of a $1.5 billion bond offering, CVS Caremark Corporation (NYSE:CVS) failed to disclose that it had lost a large portion of its Medicare Part D and contract revenues. When the company revealed the losses, the stock immediately lost 20% in a single day’s trading. On the same day, the SEC alleged that CVS continued to mislead investors during an earnings call when it manipulated how it calculated its retention rate. Retention rate is an important factor used to compare pharmacy benefits management companies.

The charges against CVS

“CVS broke faith with investors in both its stock and its bonds by disguising significant setbacks for its pharmacy benefits management business,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.  “The intentional misconduct by CVS breached the core principle of fair and accurate reporting of financial performance.”

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The SEC also accused CVS Caremark Corporation (NYSE:CVS) of a number of improper accounting adjustments related to its acquisition of Longs Drugs. Adjusting the value of personal property in Longs as well as failing to disclose a depreciation reversal allowed CVS to increase its earnings for the quarter and surprise The Street with its earnings that were no more than improper accounting measures.

Suit penalizes accountant

The accountant in question was Laird Daniels and he was charged with numerous accounting violations in a SEC administrative proceeding. Daniels has subsequently paid a $75,000 fine and will not be allowed to practice as an accountant for another publicly traded company for no less than a year. Daniels, however, was not forced to admit any wrongdoing.

“The accounting standards are designed to provide the public with a fair and consistent measure of public company performance. Instead, CVS Caremark Corporation (NYSE:CVS) and Daniels used improper accounting tactics to give investors a misleading picture of the company’s retail pharmacy earnings,” said Paul Levenson, director of the SEC’s Boston Regional Office.

The SEC’s investigation was conducted by Marc Jones, Ruth Anne Heselbarth, Frank Huntington, Amy Gwiazda, and Kevin Currid of the Boston Regional Office and the settlement still awaits court approval.