Three Former Cardinal Executives Settle A Financial Fraud Case
The SEC filed a settled financial fraud action against three former senior finance executives of Cardinal Health, Inc. SEC v. Miller, Civil Action No. 09-CV-4945 (S.D.N.Y. Filed May 27, 2009). This case follows a similar action brought against the company two years ago. SEC v. Cardinal Health, Inc., Civil Action No. 07 CV 6709 (S.D.N.Y. Filed July 26, 2007) (settled with a consent to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions, the payment of a $35 million penalty and the retention of an independent consultant to review disclosure processes and practices related to the issued in the complaint).
The action yesterday was brought against former Cardinal executives Richard Miller, CFO, Gary Jensen, vice president and corporate controller, and Michael Beaulieu, corporate vice president, controller and principal accounting officer. The scheme, according to the complaint, was designed to permit the company to continue its string of consecutive years of high growth. Specifically, Cardinal had reported 16 consecutive years of 20% or higher growth in earnings per share before special items and 77 fiscal quarters in which it met or beat performance guidance.
Changes in the pharmaceutical distribution business put downward pressure on Cardinal’s operating revenue, operating revenue growth rates and earnings. This in turn impaired the ability of the company to meet guidance.
A key part of the scheme involved the reclassification of revenue from “bulk” to “operating revenue.” The former consisted largely of certain full case quantities of pharmaceutical products delivered to customer warehouses. It had little profit margin. The latter consisted primarily of customized orders delivered to pharmacies and others. In late 2001, with defendant Miller’s approval, a new practice was instituted under which bulk sales held for 24 hours or more were reclassified as operating revenue. Later bulk sales were intentionally held for more than 24 hours to meet the new practice. Overall this practice was used to inflate Cardinal’s reported operating revenue by more than $5 billion. Since operating revenue is a key industry metric, this misleads the public and investors.
Defendants also manipulated Cardinal’s reported earnings in certain quarters by selectively accelerating payment of vendor invoices. This permitted the premature recording of over $133 million in cash discount income. Other improper techniques were used to bolster income including improper practices regarding reserves and the misleading classification of $22 million in anticipated litigation settlement proceeds according to the complaint.
Following an internal investigation, Cardinal restated its fiscal results for FY 2000 to 2003 and for the first three quarters of FY 2004. That restatement reduced Cardinal’s net earnings by a cumulative total of $65.9 million.
To settle the action, each defendant consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and internal control provisions of the securities laws. Mr. Miller also agreed to an order imposing a $120,000 civil penalty and prohibiting him from serving as an officer or director of a public company for five years. He also agreed in a related Rule 102(e) order to suspend his right to practice before the SEC as an accountant for three years. Mr. Jensen agreed to pay a $75,000 civil penalty and to an officer/director bar for three years. Mr. Beaulieu agreed to pay a civil penalty of $50,000 and an officer/director bar for three years.