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

Pharmaceutical Distribution Company to Pay $35 Million Penalty


Washington, D.C., July 26, 2007 - The Securities and Exchange Commission today announced that Cardinal Health, Inc., a pharmaceutical distribution company based in Dublin, Ohio, has 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.

Linda Thomsen, Director of the Commission's Division of Enforcement, said, "Cardinal's scheme deceived investors by presenting a string of revenue and earnings reports and other disclosures that reflected a false picture of Cardinal's financial performance. As this case demonstrates, issuers cannot resort to accounting ploys and misleading disclosures to make their numbers."

Antonia Chion, an Associate Director of the Commission's Division of Enforcement, said, "Sound financial reporting - the foundation of our capital markets - includes not only compliance with GAAP, but transparent disclosure of information that investors need to understand a company's performance. Cardinal's fraudulent mischaracterization of its operating revenues, as alleged, deprived investors of material information."

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. 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. As the complaint describes, Cardinal, among other improper practices, 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. The complaint alleges that Cardinal decided when to start and stop this practice based on the strength or weakness of quarterly sales and earnings.

According to the complaint, Cardinal also 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 agreed to be permanently enjoined from violating the antifraud, reporting, record-keeping and internal controls provisions of the federal securities laws. 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 also will 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.

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For more information, contact:

Antonia Chion
Associate Director, SEC Division of Enforcement
(202) 551-4842

Christopher Conte
Associate Director, SEC Division of Enforcement
(202) 551-4834

Daniel Chaudoin
Assistant Director, SEC Division of Enforcement
(202) 551-4952

  Additional materials: Litigation Release No. 20212



Modified: 07/26/2007