Updated from 11:38 a.m.

Medco's

(MHS)

legal headaches could grow worse.

Federal prosecutors, portraying Medco as uncooperative, are seeking an extended discovery period that would provide them with more time to build their case against the company. In recent court filings, the feds argue that Medco has failed to fully comply with their document requests. Instead, they claim, the pharmacy benefit manager dribbled out bits of data before finally unleashing a torrent of unorganized information -- some of it locked in secret code.

"To date, Medco has produced millions of pages ofdocuments in an electronic format and, unfortunately,in no discernable order," the federal motion states."Due to the massive volume of Medco's production, thelack of any organization of the electronic filesproduced by Medco makes it virtually impossible forplaintiffs to conduct a systemized retrieval ofdocuments relevant to their claims."

The government is seeking internal documents in an effort to prove that Medco defrauded federal customers by improperly switching, shorting and canceling their prescriptions. The company has denied any wrongdoing. It has also attacked the government's "11th-hour" effort to extend discovery in a case that, it has repeatedly claimed, lacks merit.

"Despite an intensive 10-month fact discovery period, plaintiffs are still seeking discovery in an effort to support their broad-reaching allegations," Medco's own court filing states. "After five years of investigation and litigation, which has included a government inquiry with a voluminous document production -- plaintiffs are left with a case in search of a theory."

Meanwhile, Medco points to the government's many depositions as a sign of its own cooperation. The company also says that it has already provided the government with more than 3 million pages of documents -- satisfying 99% of many government requests. In addition, it claims that the government has acted "tardily" in asking for certain information that has yet to be supplied.

It's "hard to call Medco uncooperative," company spokeswoman Soraya Rodriguez-Balzac concludes.

But federal prosecutors have portrayed Medco asless than forthcoming.

In their recent motions, they claim that Medcowaited nearly two months -- until the afternoon before Thanksgiving Day -- to even begin gathering requested electronic data in order to comply with a looming court-ordered deadline. The feds say the company then stripped so-called protected health information, or PHI, from the data without good cause. They add that the company left only patient numbers, in encrypted format, as the database information available for review.

Now, prosecutors hope the court will order Medco to provide therequested PHI in unencrypted form. They say that federal rules "expressly authorize" them to receive certain patient information in a civil investigation such as this one. They also insist that they need the electronic data, in particular, so that their experts can calculate damages.

Some industry sources have already estimatedMedco's exposure at more than $1 billion.

For now, however, the government continues tobattle for internal documents to bolster evidence --including company depositions -- already gathered forits case. So far, the government has deposed around 70 witnesses and, if it wins more time, intends to follow through and depose even more.

Medco's stock, favored by many on Wall Street,slid 1.2% to $38.34 Thursday morning.

Juggling Act

To be fair, some could view the government's latest court action as a last-minute act of desperation. But the government has already sought more time from the courts before.

"The court notes that this case involves massive amounts of discovery, some of it only recently exchanged and some not yet provided," an Oct. 19 ruling, cited by the government, states. And "simply stated, there is no way to complete discovery in less than two weeks in a manner consistent with a lawsuit of this complexity and importance."

The judge then granted a 30-day extension to the discovery process.

Afterwards, the government raced to secure several last-minute depositions. But apparently it wasn't easy.

"Medco juggled the witness schedule to ensure thatthe most amount of depositions occurred right beforeor right after the Thanksgiving holiday," a recentgovernment filing states. "It also insisted, despitethe added time and expense, to conduct severaldepositions in Nevada immediately following the mosttraveled weekend of the year."

Prosecutors have already singled out a number ofwitnesses they still hope to depose. For starters,they are targeting Gino Tenace following a recentdeposition that identified Tenace as a "necessarywitness."

"The deposition of Mr. Tenace is necessary," thegovernment states, "because he is the mostknowledgeable individual about Medco's offer of akickback in excess of $200 million to a large managedcare organization for its business."

The government suggests that Medco paid an illegalkickback to another unnamed corporation as well. It has previously accused Medco of giving $87.4 million to a company -- later identified as

Oxford Health

(OHP)

-- in exchange for business. Both Medco and Oxford have since defended that payment.

Prosecutors also want to depose Terry Latanich,the individual described as most knowledgeable aboutMedco's federal contract, as well as three others withpossible information. Latanich is a former vice president and current consultant for Medco. Prosecutors claim they already havedocuments suggesting that Medco had concerns aboutreports on turnaround times and penalties associatedwith the federal deal.

In addition, prosecutors hope to interview CathyBaldwin because thousands of prescriptions wereallegedly canceled under her employee identificationnumber. They also seem unsatisfied with a depositionthey secured from Cindy Sullivan, Medco's vicepresident of finance, about alleged inaccuracies infinancial documents associated with the company'sfederal contract.

"Ms. Sullivan -- who one would assume was in aposition to know about the extent of theseinaccuracies and what, if anything, was done tocorrect them -- recalled little substantiveinformation about these issues," the government'scourt filing states. "She also was unable to recallmuch about her handwritten notes and the email trafficbetween her subordinates on these issues."

The government goes on to say that a subordinateof Sullivan's, deposed the day before Thanksgiving,"had similar gaps in knowledge or lapses in memory."

For its part, Medco claims that the government could have arranged the additional depositions any time over the past 10 months. It also describes as "unfounded" any government claims that the need for such testimony has arisen suddenly.

Jumbled Mess

Meanwhile, the government continues to raise its own arguments.

For one thing, it claims that Medco has restricteddata production by designating "every singletranscript and document" in its electronic database as confidential. Moreover, it complains that it must "unlock or decrypt each row" in the electronic PHI data it has managed to obtain.

But it points to Medco's most recent documentproduction -- which brought a sudden flood of data --with a particular sense of frustration.

"Within the last eight days, Medco has produced 62compact discs containing more than 396,000 pages ofdocuments," the government states. "Due to the sheersize and volume of Medco's production -- and the factthat the documents are produced in an electronic, non-searchable format -- it will take plaintiffs at least 10 business days to process these documents for use. ...

And this period of time may be longer because there are technical problems with eight of the compact discs."

Patrick Burns, a spokesman for Taxpayers AgainstFraud, marveled at the situation.

"It sounds as if the papers were tossed about bymonkeys and then electronically scanned in by blindmen," he said.

In many cases, the government says, Medco hasfailed to place electronic files in folders ororganize them in any other understandable fashion. Italso says that Medco has not separated individualdocuments from each other but has separated emailsfrom their attachments. It says the only "vaguecategorization" comes in cover letters saying thatdocuments are being supplied in response to broadgovernment requests.

The government goes on to challenge Medco's"blanket assertion" that it has provided documents asthey are kept in the ordinary course of business.

"If Medco had produced its documents as they werekept in the usual course of business," the governmentstates, "plaintiffs would have expected to receivedocuments in a more organized, continuous fashion."

The government takes another step by questioningthe company's motives.

"Medco's discovery has been tailored to testwhether the plaintiffs' knowledge of its wrongdoing is consistent with what it has concluded, but has chosen not to voluntary disclose to the government," the filing states. "Not surprising, most of the crucial information which is relevant to proving plaintiffs' allegations is still in the possession of Medco."

Burns, for one, questions the company's legalstrategy.

"I don't understand the end game," he said. "Wheredo they think this will go?"