CVS Caremark Corp., the country's second-largest pharmacy chain, has agreed to pay $20 million to settle charges that it misled investors and used improper accounting techniques to artificially boost its financial earnings, the U.S. Securities and Exchange Commission announced Tuesday.
The charges stem from activities that occurred in the third and fourth quarters of 2009, regulators said.
According to the SEC, CVS had conducted a $1.5-billion bond offering in 2009 but did not tell investors that it had recently lost "significant" Medicare Part D and contract revenues in its pharmacy benefits business segment.
The extent of that loss was not revealed until later on Nov. 5, 2009, and the stock price fell 20% in one day, the SEC said.
Regulators said that CVS further misled investors by touting a slight improvement in its "retention rate," a key metric of retained business. The SEC said CVS manipulated how it calculated the rate to hide the extent of its lost business.
“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.”
The SEC also said the company's retail controller, Laird Daniels, had used improper accounting practices relating to a 2008 acquisition of drug store chain Longs Drugs to boost the company's financial performance. Daniels was charged in a related SEC administrative case.
Regulators accused him of improperly reducing the value of personal property at Longs Drugs stores from $189 million to zero and also reversed a $49-million depreciation that occurred on the assets acquired.
Failing to disclose that depreciation allowed the company to beat analysts' expectations when it reported earnings that year.
A CVS Caremark spokeswoman said the company did not admit or deny wrongdoing in agreeing to the settlement and it won't be required to restate earnings for any reporting period. "This matter is now fully resolved for the company and individuals," the spokeswoman said in an emailed statement.
The Woonsocket, R.I.-based company's shares were down $0.48, or 0.65%, Tuesday to $73.35.
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