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Medco Insiders on Selling Spree

Its top lawyer is among those selling stock as legal woes mount.

Medco Health


executives, including the general counsel, have been selling a lot of stock as the company moves toward a high-stakes courtroom trial.

Last month alone, four different officers carried out options transactions that netted them more than $1 million apiece. The company's top lawyer, David Machlowitz, executed the biggest sale of all. On Dec. 15 -- three days after Medco learned about a new whistleblower lawsuit against the company -- Machlowitz cashed in options for more than 100,000 shares of stock and walked away clearing nearly $3 million. He had carried out an even bigger sale a month earlier.

All told, Machlowitz has sold nearly a quarter-million shares over the course of two months. Based on his latest regulatory filings, he continues to hold just over 60,000 shares now.

But Medco spokesman Jeff Simek claims that Machlowitz's recent sales actually represent a "small fraction" of his holdings in the company. He says that Medco requires all of its senior executives, including Machlowitz, to hold Medco shares worth three to five times their annual salary. And when they do sell stock, he says, they must place a big chunk of the proceeds in a special account that cannot be touched until the execs have been gone from the company for more than a year.

"You literally can't cash out," Simek insists. "And David Machlowitz continues to hold shares in Medco stock -- including restricted stock and vested and unvested options -- that reflect a significant equity investment in the company that is subject to the same market risk shared with other shareholders."

Simek offered an explanation for the timing of Machlowitz's recent transactions as well. Notably, he says that Machlowitz -- along with other officers -- received special retention options when the company went public that finally vested in August of last year. As a result, he says, those officers have only recently found themselves able to sell part of their big stakes in Medco and diversify their portfolios. Moreover, he says, many of them filed plans ordering the stock to be sold on predetermined dates or at predetermined prices regardless of the company's situation. He counts Machlowitz among that group.

To be fair, other Medco executives -- including several division presidents and the operating chief -- have been cashing in some profits following a big run-up in the company's stock as well. The shares, while down 9 cents to $56.71 on Thursday, have more than doubled since they first started trading in mid-2003. Still, the recent sales by Machlowitz, in particular, have raised some eyebrows because of their size and the position that the executive holds.

Machlowitz stays busy defending Medco against multiple lawsuits, including a 6-year-old whistleblower case -- led by one of the most feared prosecutors in the country -- that is set to go to trial this year. James Sheehan, associate U.S. attorney for the eastern district of Pennsylvania, has accused Medco of defrauding government customers for years. Some believe that he could walk away with a $1 billion-plus settlement in the end.

For its part, Medco has portrayed Sheehan's allegations as "either false or significantly overstated" while pledging to vigorously defend itself in court. But Patrick Burns, a spokesman for Taxpayers Against Fraud, believes the company -- which has already lost some major contracts in the wake of the government probe -- should have shifted tactics long ago.

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"If they settled this case, their stock would probably rise; that often happens," Burns says. "The company could clear the deck and say something they badly want to say: 'This is old news. We've moved past it.'"

Double Jeopardy

Instead, Medco could face yet another case led by Sheehan.

On Dec. 12, the company learned that Sheehan's office had asked for more time to consider whether it will join a new whistleblower lawsuit against the company. Like the earlier case, the new complaint accuses Medco of failing to properly fill prescriptions and then covering its tracks in order to avoid government penalties.

The lawsuit outlines, in some detail, a number of steps that Medco allegedly took in order to meet turnaround deadlines. In Pittsburgh, it says, the company would develop creative schemes like "Wait Seven," which sometimes gave it an extra week to fill prescriptions as it sought outstanding co-payments from customers whether those orders belonged in the "Wait Seven" pile or not. And in Texas, it says, the company would often falsify receipt dates -- and even ask the U.S. Postal Service to hold deliveries -- when it was particularly overwhelmed. At one point in late 2003, it says, the company found itself in a "crisis" situation with a backlog of some 800,000 prescriptions waiting to be filled.

Thus, the complaint suggests, Medco often took shortcuts. For example, it says, the company's Texas pharmacy would routinely avoid calling doctors with questions about prescriptions and send faxes -- that often generated no response -- and then cancel the prescriptions instead.

"The practice of not calling physicians to review prescriptions saved Medco the labor costs of making repeated phone calls but violated the (federal) contracts' requirements," the lawsuit states. "When Medco's corporate management learned of the Texas pharmacy's handling of doctor calls, rather than denouncing the practice, the management identified the Texas pharmacy as using 'best practices' and encouraged other pharmacies to imitate the Texas pharmacy's procedures."

The complaint, filed by an unnamed whistleblower, seeks to hold Medco -- along with three company executives -- accountable.

For its part, Medco points out that it already faces similar allegations in the older Sheehan case. The company also stresses that the latest complaint includes no allegations about any "health, safety or clinical violations."

Still, Burns views the new lawsuit as bad news for the company. After all, he notes, the current fight with Sheehan has already gotten ugly enough. The two sides have battled bitterly at times, with Sheehan portraying Medco as uncooperative and Medco characterizing Sheehan as an overzealous prosecutor who is just fishing for a crime. But Burns feels that Medco has occasionally gone too far.

"They have to realize that calling people names -- as they have with Sheehan -- does not increase their bargaining power," Burns says. "I don't think Sheehan will make a personal issue of that. But he probably has to get down on his knees at night to keep from doing it."

In the meantime, Burns suspects, some Medco insiders have decided to play it safe by cashing in some of their stock-option profits right now.

"Some selling, in general, is prudent if your stock has gone up 40%," he concedes. "But it is important to watch what people do. We see them mysteriously dumping stock in unfolding scandals every day."