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Caremark Counsel Selling Shares

The pharmacy benefit manager's top lawyer continues to unload with the stock near its high.

The senior executive who should know most about

Caremark's

(CMX)

legal exposure has been cashing out of the stock.

The company's top lawyer, Edward Hardin, last week exercised $765,000 worth of options and then sold the stock for $1.76 million. He shed $6.4 million worth of stock in a similar transaction earlier this year.

All told, Hardin has sold 200,000 shares of Caremark stock in 2005 alone. In contrast, he has retained just 5,000 shares for himself.

Caremark spokesman Gerard Carney says the sales were simply carried out as part of a trading plan adopted by Hardin in June of 2004. Still, Hardin scheduled the trades after the federal government had already been scrutinizing Caremark for years. Since then, the Justice Department this spring

indicated in court that it plans to pursue the company for alleged Medicaid fraud under the False Claims Act.

The government has long complained that pharmacy benefit managers, or PBMs, in general have failed to repay Medicaid for drug bills they should have covered themselves. As a result, the government believes it is owed huge sums -- totaling hundreds of millions of dollars annually -- for unpaid Medicaid claims. Under the False Claims Act, the government could charge Caremark up to three times the company's actual portion of that bill.

"That's a pretty large amount," says Patrick Burns, a spokesman for Taxpayers Against Fraud. "If the company's chief counsel is selling stock, I am assuming that he has done the analysis and has decided that selling is a good idea."

Hardin fetched a high price on his most recent sale. He cashed out at $44 a share, within $1 of the stock's all-time peak. The shares have continued to hover near that high, climbing 41 cents to $43.88 on Tuesday.

Burns, for one, believes that Caremark could be trying to settle the possible false claims case.

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He points to several recent developments as evidence. As reported earlier by

TheStreet.com

, the Centers for Medicare and Medicaid Services recently issued an opinion supporting the government's stance. So did the Labor Department. And both the federal government and the state of Texas -- which is known for its tough stance on Medicaid fraud -- have expressed interest in pursuing the company.

Burns says that "trifecta" of setbacks may have finally pushed Caremark to act.

"At that point, maybe the rational minds at Caremark felt the heat and saw the light and thought about a settlement," Burns says. "I believe that somebody is at the negotiating table right now."

That theory could help explain a delay. Previously, government prosecutors had indicated that they would officially decide whether to intervene in the case last month. However, Burns notes, they secured a 30-day extension instead.

Thus, Burns expects a major development soon. He is simply waiting to see whether the government inks a settlement or formalizes its investigation -- and pursues triple damages in the courtroom -- instead.

In the meantime, Caremark itself has offered no update.

"We have disclosed all material facts as we know them," Carney says. "There is nothing new to report at this time."

Caremark Climbs
Stock's yearlong rally

Analysts have little to say about the matter as well. Even Burns concedes that the case looks "fairly technical" and could be difficult to understand. Still, he believes that analysts should be paying more attention to a case that could trigger significant damages.

He says Medicaid has been reporting $350 million a year in so-called pay-and-chase losses. If a good-size chunk of that is attributed to Caremark, a big settlement could be in the offing, Burns contends.

"It's a scale issue," he says.