Caremark's Sage Counsel

The company's top lawyer is leaving with a windfall.
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If all goes as planned, when Edwin "Mac" Crawford retires as

Caremark's

(CMX)

CEO, a familiar sidekick will follow him out the door.

Edward Hardin became Caremark's top lawyer shortly after Crawford joined the company nine years ago. Now both men, enriched by stock options, are ready to call it quits even as other Caremark executives -- including Crawford's son -- arrange to stay on following an unpopular merger with

CVS

(CVS) - Get Report

. The two men will leave behind a powerful pharmacy benefit manager that, while clearly successful, faces more than its share of legal challenges.

Of course, Hardin had his hands full from the beginning. In the summer of 1998, Hardin walked into a company that was struggling to survive. His boss's stock options, issued just months earlier as an enticement to join the company, looked worthless as a result.

Thus, with Hardin freshly installed as its lead counsel, Caremark repriced Crawford's initial 3.25 million stock options from $10 to $3.25 a share. The company issued Hardin stock options with a strike price of $3.25 a share as well.

Meanwhile, Caremark sought a buyer for its struggling physician management business so that it could focus on its smaller, but profitable, PBM division instead. Caremark chose KPC, run by controversial businessman Kali P. Chaudhuri, over a competing bidder that was seeking control of the company's huge California-based doctor network.

In a mid-1999 press release, Hardin portrayed KPC as a capable operator with an experienced management team and claimed that the pending transaction was in the best interests of all parties involved. KPC bought the company's California clinics out of bankruptcy but, despite cash infusions by health insurers, failed to turn the business around.

"The condition of the company was considerably worse off than was represented," Chaudhuri told

The Orange County Register

in March of 2000. "But I would not accuse (Caremark) of fraud. I don't think they knew what they had."

Still, Caremark seemed a lot more comfortable with what it had left.

Indeed, Crawford expressed his growing confidence in the company that very month by agreeing to forgo his annual bonus for years to come in exchange for a one-time grant of 3.875 million stock options. Those options, issued as the stock hit an annual low, have since come under scrutiny in a sweeping government probe.

For its part, Caremark claims that its stock-option grants comply with all applicable laws.

Meanwhile, KPC -- saddled with Caremark's bleeding physician management business -- had taken a turn for the worse. The company collapsed into bankruptcy in late 2000. Patients found themselves without doctors or medical records. Chaudhuri, a relatively obscure physician when he bought the operation, continues to shoulder most of the blame.

Years later, Chaudhuri told

The Orange County Register

that his reputation had "suffered enormously" as a result of KPC's downfall. Chaudhuri paid a $1.5 million settlement -- and sacrificed another $5 million worth of claims -- in an effort to satisfy his creditors, the newspaper reported.

Caremark executives, including Hardin, fared much better. Hardin started cashing in his cheap stock options the same month that KPC went under. He has followed up with even bigger sales and will see his remaining options vest -- padding his generous retirement package -- under the change-of-control provisions triggered by the CVS merger.

Besides Crawford, Hardin is the only senior Caremark executive who has explicitly announced plans to resign after the merger goes through. Hardin will continue to serve as a "litigation consultant" for the company, however.

Hardin still could have his hands full.

For starters, Caremark has been accused of defrauding the government -- an allegation, denied by the company, that has become almost routine in the secretive PBM world. But Caremark stands out from the rest of the PBM pack. Notably, Caremark ranks as the only major PBM swept up in the stock-option backdating scandal. Moreover, the company has been slapped with lawsuits filed by shareholders unhappy with its proposed CVS merger as well.

Caremark favors the CVS deal over a competing -- seemingly better -- offer made by rival PBM

Express Scripts

(ESRX)

. The company claims that investors will gain more by joining forces with CVS in the end. It is relying on top-name investment banks for some good advice.

By now, however, Caremark has seen some expert calls go bad. Back in mid-2004,

The Wall Street Journal

laid out the whole troubling story. It involves Richard Scrushy, the notorious HealthSouth founder who once ran Caremark, and his favorite investment banker. That banker, Benjamin Lorello, struck it rich on deals that later failed.

For example,

The Wall Street Journal

notes, Lorello helped with the risky expansion of Integrated Health Services back in the 1990s. Scrushy served on the IHS board until 1995, when he resigned due to conflicts that could arise involving IHS and his own HealthSouth. Interestingly, Crawford -- Caremark's future CEO -- joined the IHS board that same year.

In 1997, IHS paid more than $1 billion for some HealthSouth nursing homes despite challenges facing the industry. With IHS struggling, Crawford resigned from the company's board a couple of years later. IHS went bankrupt shortly after that.

Thanks to his relationship with HealthSouth -- and its ties to companies like IHS -- Lorello apparently pocketed big bucks all along.

"HealthSouth sometimes bought properties from, or sold them to, other Lorello clients, giving the banker 'deal flow,' "

The Wall Street Journal

explained. "In all, Mr. Lorello handled more than $13 billion worth of deals for HealthSouth."

Lorello, a star dealmaker at UBS, was portrayed as an adviser to Caremark in that 2004 report. But Caremark claims that Lorello never assisted the company's current management team with any major transactions. Moreover, both Caremark and UBS say that Lorello has no role in the company's current merger plans. UBS is listed as one of two financial advisers on that particular deal.

Under the terms of that transaction, CVS-Caremark will inherit all of Caremark's legal problems while providing generous retirement packages for Crawford and Hardin, and attractive jobs for other Caremark executives. Notably, the agreement also calls for a steep $675 million breakup fee.

For its part, Caremark insists that the merger is in the best interests of its shareholders and has nothing to do with the company's legal problems. The company also points out that Hardin will be ending his career at 66 -- a normal retirement age -- while offering future assistance on legal matters when necessary.

Ultimately, Caremark shareholders will decide the company's fate. They are scheduled to vote on the merger proposal in a special meeting scheduled for Feb. 20.

Meanwhile, Caremark's stock -- fueled by deal discussions -- continues to climb, setting a new all-time high of $61.59 a share Wednesday.