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U.S. Securities and Exchange Commission


Litigation Release No. 22968 / April 8, 2014

Accounting and Auditing Enforcement Release No. 3549 / April 8, 2014

Securities and Exchange Commission v. CVS Caremark Corp., Civil Action No. 14-177-ML (D.R.I., April 8, 2014)

SEC Charges CVS with Misleading Investors and Committing Accounting Violations

The Securities and Exchange Commission today charged CVS Caremark Corp. with misleading investors about significant financial setbacks and using improper accounting that artificially boosted its financial performance.

CVS has agreed to pay $20 million to settle the charges.

According to the SEC's complaint filed in federal court in Rhode Island, CVS has two business segments as a pharmacy benefits manager and a retail chain of drug stores. In offering documents for a $1.5 billion bond offering in 2009, CVS fraudulently omitted that it had recently lost significant Medicare Part D and contract revenues in the pharmacy benefits segment. Investors were therefore misled about the expected future financial results for that line of business. When CVS eventually revealed the full extent of the setbacks on Nov. 5, 2009, its stock price fell 20 percent in one day. CVS further misled investors on an earnings call that same day by maintaining there was a slight improvement in its "retention rate," which is a key metric of retained business often used to compare pharmacy benefits management companies. But CVS omitted the fact that it had manipulated how it calculated the rate and concealed the full extent of its lost business.

The SEC's complaint further alleges that CVS made improper accounting adjustments that overstated the financial results for its retail pharmacy line of business. During the same 2009 timeframe, CVS altered the accounting treatment for its acquisition of another drug store chain - Longs Drugs - and failed to disclose the adjustments in its quarterly report filed on November 5. CVS improperly reduced the value of $189 million of personal property in the Longs stores down to $0, and then reversed $49 million of depreciation that had been taken on those assets since the acquisition. The undisclosed depreciation reversal increased the third-quarter earnings and enabled CVS to exceed analysts' expectations at a time when it was otherwise announcing significant bad news about earnings projections in its pharmacy benefits line of business.

The SEC alleges that the improper accounting adjustments were orchestrated by Laird Daniels, who was the retail controller at CVS and is charged with accounting violations in a related SEC administrative proceeding. According to the SEC's order against Daniels, proper accounting would have treated the asset write-down as a current period expense, and the third quarter earnings per share for CVS would have been reduced by as much as 17 percent. As Daniels described in an e-mail, the dramatic change in accounting turned the acquisition of Longs Drugs from a "bad guy" to a "good guy" in terms of purported profitability for CVS.

Daniels has agreed to settle the administrative case against him by paying a $75,000 penalty and being barred for at least one year from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC. Without admitting or denying the allegations, Daniels agreed to the entry of a cease-and-desist order finding that he willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Rule 13b2-1 under the Securities Exchange Act of 1934. The order finds that Daniels willfully aided, abetted, and caused violations by CVS of the reporting, books and records, and internal control provisions of the federal securities laws. See Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the Commission's Rules of Practice, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Administrative Proceeding File No. 3-15825, Securities Act Release No. 9573, Exchange Act Release No. 71896, Accounting and Audit Enforcement Release No. 3548 (April 8, 2014).

The SEC's complaint charges CVS with violations of Section 10(b) of the Exchange Act and Rule 10b-5, and Section 17(a) of the Securities Act. CVS also is charged with violations of the reporting, books and records, and internal control provisions of the federal securities laws. In addition to the $20 million penalty, CVS consented to the entry of a final judgment permanently enjoining the company from violating various anti-fraud, books and records, and internal control provisions of the securities laws. CVS neither admitted nor denied the allegations. The settlement is subject to court approval.

The SEC's investigation was conducted by Marc Jones, Frank Huntington, Ruth Anne Heselbarth, Amy Gwiazda, and Kevin Currid of the Boston Regional Office. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).

SEC Complaints: SEC Complaint



Modified: 04/08/2014