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Caremark's Uncanny Timing

Executives just happened to get a big options grant on the same day the stock set a 2005 low.

Caremark Rx


showered its leaders last year with some very well-timed stock options.

The embattled pharmacy benefit manager granted 1.25 million stock options to senior executives on March 1, 2005 -- the day the shares happened to hit their lowest closing price of the year.

Caremark CEO Edwin "Mac" Crawford scored 750,000 options all by himself. Crawford's latest options are priced at $37.92 a share. The stock, hurt around that time by lost contracts and government investigations, would go on to rocket more than 40% in 2005 before coming under pressure again this year. It slipped 26 cents to $46.19 on Monday.

"I find it pretty interesting that the stock would be hitting a low on the day the options were granted," says Peter Cohan, a Massachusetts-based investment strategist with no position in the stock. "I don't know whether Caremark backdates options or not. ... But this looks like an odd coincidence to me."

Caremark rep Robert Mead says "there's no backdated options" and adds that the company normally grants stock options during its first-quarter board meeting. Caremark disclosed the most recent stock awards in its proxy statement. That document was filed shortly before

UnitedHealth Group

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came under fire for granting stock options to its own executives when the company's share price was especially low.

Backdating options isn't illegal, but such action can raise accounting and disclosure questions. The

Securities and Exchange Commission

is exploring options-pricing practices at various companies.

Vitesse Semiconductor



put some top execs on leave as it examines past options-pricing practices.

Spreading the Wealth

Crawford wasn't the only top exec at Caremark to make out in the latest round of options grants. Caremark's top lawyer, Edward Hardin, collected 100,000 options that were priced at $37.92 as well. In addition, Hardin picked up a $1.35 million bonus -- which was more than double his annual salary -- even though his contract calls only for "a bonus of up to 100% of his base salary."

Each non-employee director received 18,000 stock options at the same low price.

Caremark does not always issue stock options during the first quarter. The company said that it granted options later in 2004 because of a major merger. However, past proxy filings show that the company granted options in later quarters the three previous years as well.

Meanwhile, in recent months, Crawford has raked in more than $150 million by cashing in cheaper options that were given to him in the past.

'Troubled Company'

Caremark's recent proxy also confirmed FBI involvement in a government probe of the company.

first reported the FBI's interest back in mid-January. Caremark said it was unaware of any FBI probe at that time. The company now says that it learned of the FBI's involvement through court documents that were made public when the government declined to join a whistleblower lawsuit in February. However, the lawsuit itself says nothing about the FBI.

Mead declined to comment on the matter.

Meanwhile, some believe that Caremark has been fielding questions from the Securities and Exchange Commission as well. SEC Insight, a firm that regularly seeks documents from the SEC, keeps warning about a possible probe of the company.

"With an undisclosed SEC probe added to previously reported FBI activity -- and massive dumping of the shares by insiders -- we are affirming our 'troubled company' risk rating," SEC Insight wrote last month. "The fact that the shares are now trading near all-time highs only adds to our concern."

SEC Insight first labeled Caremark a "troubled company" in late January, shortly after the firm detected possible SEC activity and read about the FBI's interest in the company. The firm cited concerns about a government investigation of, and a huge fine levied against, AdvancePCS -- which Caremark now owns -- as well.

"If Caremark's internal controls are not detecting improper claims to Medicaid or the company has issues with violating the various state-level false claims acts, it signals to us the potential for revenue-recognition problems," SEC Insight wrote back in January. "Or worse, if the allegations of fraud were found to be true, then the company's reported results can't be trusted. Let's just say that the $137.5 million of shareholder money that Caremark doled out to settle allegations against AdvancePCS sure is a lot to pay for having done nothing wrong."

SEC Insight reiterated its concerns about Caremark on


last week. The company's stock took a swift hit as a result.

Even so, JP Morgan analyst Lisa Gill insisted that investors had no reason to worry. Rather, in two separate notes published on the day of the


broadcast, she urged investors to buy Caremark's stock on any weakness instead. Her firm counts Caremark among its clients.

AG Edwards analyst Andrew Speller sounded uneasy.

"We are unsure as to why CMX has not disclosed the SEC inquiry, but we assume it's because they believe it to be immaterial," wrote Speller, whose firm has no relationship with the company. "Certainly, we believe that any and all inquiries -- formal or informal -- should be forwarded to investors in a timely manner. ... (Meanwhile), as valuations move higher for CMX, we must remind investors that negative litigation headlines pose an ever-increasing threat to the CMX shares."