U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21058 / May 27, 2009
Accounting and Auditing Release No. 2977 / May 27, 2009
Securities and Exchange Commission v. Richard J. Miller, Gary S. Jensen, and Michael E. Beaulieu, United States District Court for the Southern District of New York, Civil Action No. 09-CV-4945 (S.D.N.Y. May 27, 2009)
SEC CHARGES THREE FORMER SENIOR FINANCE EXECUTIVES OF CARDINAL HEALTH, INC. FOR FRAUDULENT EARNINGS AND REVENUE MANAGEMENT SCHEME
The Securities and Exchange Commission today filed a civil action against three former finance executives of Cardinal Health, Inc. (Cardinal), a pharmaceutical distribution company based in Dublin, Ohio, in which the former Cardinal executives agreed to settle charges that they engaged in a fraudulent revenue and earnings management scheme. Cardinal’s former chief financial officer, Richard J. Miller, former controller and principal accounting officer, Gary S. Jensen, and former senior vice president of finance, Michael E. Beaulieu, without admitting or denying the allegations, consented to the entry of an injunction and agreed to pay a total of $245,000 in civil penalties.
The Commission’s Complaint alleges that, at different times from September 2000 through March 2004, the former Cardinal executives engaged in the misconduct in order to present a false picture of Cardinal’s operational 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. The Complaint alleges that as a result of these actions, Cardinal materially overstated its operating revenue, earnings, and growth trends in public earnings releases and filings with the Commission.
According to the Complaint, the Defendants and other members of Cardinal’s management closely monitored Cardinal’s financial performance to assess whether it met internal expectations and external guidance to analysts. Miller, Jensen, and Beaulieu, as the Complaint describes, engaged in the management of Cardinal’s reported revenue and earnings through a variety of undisclosed and improper actions. The Complaint alleges that their actions had the effect of inflating reported operating revenue through the improper misclassification of 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 or operating revenue. Bulk revenue consisted primarily of certain full case quantities of pharmaceutical products delivered to customer warehouses and had virtually no profit margin. Operating revenue consisted primarily of customized orders delivered to pharmacies and other provider customers. The Complaint alleges that in November 2001, with Miller’s approval and Beaulieu’s knowledge, 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. The Complaint alleges that Jensen became aware of this undisclosed practice and its impact on operating revenue after becoming Cardinal’s controller in August 2002. Shortly after implementing this practice, as the Complaint describes, Cardinal began to intentionally hold bulk inventory orders on its premises for longer than 24 hours in certain quarters, in order to convert the sale of this product from bulk revenue to operating revenue (the 24-Hour Lever). The Complaint alleges that Miller decided when to use the 24-Hour Lever and that Beaulieu and Jensen participated in deciding to activate the 24-Hour Lever, based on the strength or weakness of Cardinal’s quarterly sales. Miller, Jensen, and Beaulieu used the 24-Hour Lever, along with other revenue and earnings management practices, to fraudulently overstate Cardinal’s reported operating revenue and earnings.
According to the Complaint, Miller, Jensen, and Beaulieu manipulated Cardinal’s reported earnings by selectively accelerating, without disclosure, the payment of vendor invoices in order to prematurely record a cumulative gross total of $133 million in cash discount income. The Complaint further alleges that, at different times, and to varying degrees, Miller, Jensen, and Beaulieu also boosted Cardinal’s reported earnings by improperly creating and using a general reserve account and approving improper adjustments to other reserve accounts. The Complaint alleges that these improper reserve practices contributed to Cardinal’s approximately $65.9 million overstatement of its net earnings from fiscal years 2000 through 2004. According to the Complaint, Miller also advocated for and approved the improper classification of $22 million in anticipated litigation settlement proceeds, which enabled Cardinal to meet its earnings targets in two quarters.
The Complaint alleges that Miller, Jensen, and Beaulieu each: violated 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; violated the falsification of accounting records and circumvention of internal controls provision of the Exchange Act, Section 13(b)(5), and Exchange Act Rule 13b2-1; and aided and abetted Cardinal’s violations of the reporting, record-keeping, and internal controls provisions of the Exchange Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The Complaint also alleges that Miller and Jensen each signed one or more materially false and misleading management representation letters to Cardinal’s auditor in violation of Exchange Act Rule 13b2-2 and that Miller signed officer certifications to Cardinal’s periodic filings in violation of Exchange Act Rule 13a-14.
Without admitting or denying the allegations set forth in the Commission’s Complaint, Miller, Jensen, and Beaulieu have consented to the entry of orders permanently enjoining them from engaging in the violations set forth above. Miller agreed to an order imposing a $120,000 civil penalty against him and prohibiting him from acting as an officer or director of a public company for a period of five years. Jensen agreed to an order imposing a $75,000 civil penalty and prohibiting him from acting as an officer and director of a public company for three years. Beaulieu agreed to an order imposing a $50,000 civil penalty and prohibiting him from acting as an officer or director of a public company for three years. The settlements are subject to the approval of the United States District Court for the Southern District of New York.
In addition, separately, without admitting or denying the Commission’s findings, Miller has consented to the institution of administrative proceedings pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant, with a right to re-apply after five years, based on the anticipated entry of the injunction. Without admitting or denying the Commission’s findings, Jensen and Beaulieu also have consented to the institution of administrative proceedings pursuant to Rule 102(e)(3), suspending them from appearing or practicing before the Commission as accountants, with a right to re-apply after three years, based on the anticipated entry of the injunctions.
On July 26, 2007, the Commission filed a related action against Cardinal, in which it consented to the entry of an order enjoining it from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and agreed to pay a $35 million penalty. For more information about that action, see Commission Litigation Release Number 20212 (July 26, 2007).