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U.S. Securities and Exchange Commission


Litigation Release No. 20212 / July 26, 2007

Accounting and Auditing Release No. 2654 / July 26, 2007

Securities and Exchange Commission v. Cardinal Health, Inc., United States District Court for the Southern District of New York, Civil Action No. 07 CV 6709 (S.D.N.Y. July 26, 2007)

SEC Sues Cardinal Health, Inc. For Fraudulent Earnings and Revenue Management Scheme

Pharmaceutical Distribution Company to Pay $35 Million Penalty

The Securities and Exchange Commission today filed a civil action against Cardinal Health, Inc. (Cardinal), a pharmaceutical distribution company based in Dublin, Ohio, in which Cardinal agreed to pay $35 million to settle charges that it engaged in a nearly four-year long fraudulent revenue and earnings management scheme, as well as other improper accounting and disclosure practices.

The Commission's complaint alleges that, from September 2000 through March 2004, Cardinal engaged in this conduct in order to present a false picture of its operating results to the financial community and the investing public - one that matched Cardinal's publicly disseminated earnings guidance and analysts' expectations, rather than its true economic performance. Through these practices, Cardinal materially overstated its operating revenue, earnings and growth trends in certain earnings releases and filings with the Commission.

According to the complaint, Cardinal managed its reported revenue and earnings through a variety of undisclosed and improper actions. Cardinal inflated reported operating revenue by misclassifying more than $5 billion of bulk sales as operating revenue. As detailed in the complaint, Cardinal classified its revenue from drug distribution as either "bulk" revenue, which consisted of certain full case quantities of pharmaceutical products delivered to customer warehouses, or operating revenue, which consisted of all other sales. The complaint alleges that Cardinal implemented an undisclosed internal practice under which it reclassified any revenue from the sale of bulk product held on its premises for 24 hours or longer as operating revenue. Shortly thereafter, as the complaint describes, Cardinal began intentionally holding certain bulk shipments for longer than 24 hours, in order to shift revenue from the bulk revenue line to the operating revenue line and fraudulently inflate its operating revenue and operating revenue growth rates in certain quarters (the 24-Hour Lever). Cardinal used the 24-Hour Lever along with other revenue and earnings management practices to fraudulently overstate its operating results.

According to the complaint, Cardinal managed its reported earnings by:

  • selectively accelerating, without disclosure, the payment of vendor invoices in order to prematurely record a cumulative total of $133 million in cash discount income;
  • improperly adjusting reserve accounts, which misstated earnings by more than $65 million; and
  • improperly classifying $22 million of expected litigation settlement proceeds to increase operating earnings.

In addition, the complaint alleges that Cardinal failed timely to disclose the impact of a change in the method of applying its last-in-first-out (LIFO) inventory valuation accounting principle and, on one occasion, intentionally transferred inventory within business units in order to avoid a negative LIFO impact on year-end reported earnings. Furthermore, the complaint alleges that Cardinal prematurely recognized millions of dollars in revenue from Pyxis, a wholly-owned subsidiary it featured as an important growth driver.

The terms of the settlement reflect, and the Commission acknowledges, the cooperation provided by Cardinal during the course of the SEC investigation. Without admitting or denying the allegations of the Commission's complaint, Cardinal has consented to the entry of a final judgment permanently enjoining it from violating: the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5; the reporting provisions of the Exchange Act, Section 13(a) and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13; and the record-keeping and internal controls provisions of the Exchange Act, Sections 13(b)(2)(A) and 13(b)(2)(B). Cardinal also agreed to pay $1 in disgorgement and a $35 million penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders. Cardinal further consented to engage an independent consultant to conduct a review of its disclosure processes, practices and controls, as well as those policies and procedures that relate to allegations in the Commission's complaint. The settlement is subject to court approval.

The Commission also acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York. The Commission's investigation is continuing.

SEC Complaint in this matter



Modified: 07/26/2007