Billing Questions Pound Penney

J.C. Penney (JCP Quote - Cramer on JCP - Stock Picks) dropped 8% Thursday afternoon after plaintiffs in a lawsuit against its Eckerd drugstore accused the unit of altering billing records.

The stock slipped $2 to $21.59 in the wake of the accusation, contained in a Thursday filing with a Florida court hearing the overbilling claims against Eckerd. The filing alleges Eckerd has "systematically altered historic patient prescription records in a furtherance of what Plaintiff believes is an illegal scheme designed to cover-up, and evade liability" for overcharging customers.

The filing references a Feb. 4 conference call hosted by Merrill Lynch, in which Wayne Harris, Eckerd's CEO, said the company "recently upgraded its pharmacy processing system" to allow a more accurate quantity of a dispensed drug to appear on the label. In upgrading the system, the filing alleges Eckerd retroactively altered patient records from 1998 to 2001 after the lawsuit was filed.

The accusations hit the market just after Penney finished a conference call in which it blamed its recent turmoil on investors who bet J.C. Penney shares will fall.

"This is a short story; this is not a true story," said Wayne Harris, Eckerd's CEO, in a call following the release of Penney's quarterly earnings. At the same time, Harris reiterated that allegations in the $100 million class-action lawsuit are "without merit."

"This matter is in litigation and we generally don't comment on matters in litigation," says Tami Alderman, Eckerd's spokeswoman. "We have previously stated the class action lawsuit is without merit, and we feel the latest allegations are equally without merit."

Material

Just as it seeks to defend the civil suit, Florida-based Eckerd has come under scrutiny for failing to disclose a separate probe by the Florida attorney general's office over a possible violation of privacy laws. The probe, which was first reported by TheStreet.com, was not disclosed in regulatory filings because the company said it was not material. Disclosure questions have become far more prominent on Wall Street after the collapse of Enron, and any allegation of record tampering also takes on a larger-than-life profile in the wake of evidence-shredding in the demise of the Houston energy trader.

Harris confirmed Thursday that Eckerd is answering questions and delivering documents to the Florida attorney general's office. "Like most public companies, it is not our policy to comment unless we deem it material," he said. "The company is aware of its responsibilities under the securities laws."

The legal issues weren't discussed at length during Thursday morning's conference call to discuss J.C. Penney's quarterly earnings, and short-sellers say they weren't able to ask questions about the legal matters. "It was just a litany of softball questions," says one hedge fund manager who is short the stock. "I just have a real hard time with a company that will blame short-sellers and then not give them a platform to ask questions."

Momentum

Wynn Watkins, J.C. Penney's director of public relations and communications, says the company doesn't seek to exclude short-sellers or hedge fund managers from the conference calls. He says executives answer questions in the order they are received, for a set amount of time.

But, he added, "I don't know why anyone would want to sell short with our momentum."

J.C. Penney shares, which more than doubled last year on hopes the department store business was on the rebound, have sunk this year on worries about the legal problems at Eckerd. Shares are off about 17% since the beginning of the year, and Eckerd's woes have come under increased scrutiny due to speculation that J.C. Penney will seek to spin off the division into a separate publicly traded company.

Shares were already falling early Thursday after the company reported solid quarterly results but said earnings for the first quarter and full year will likely fall short of analysts' expectations.