Florida's attorney general has been investigating a possible privacy lapse at a J.C. Penney ( JCP) unit since August, but the company hasn't disclosed the probe in its regulatory filings. The civil probe comes as Penney seeks to defend a $100 million class action lawsuit against its Largo, Fla.-based Eckerd drugstore unit. It also comes at a time when Wall Street, still reeling from Enron and associated scandals, is particularly sensitive to companies' disclosure practices; Penney stock has been battered in recent weeks by rumors of accounting irregularities, which the company has denied. Two weeks before Penney told investors in a press release that it was "unaware of any investigation or unannounced litigation," officials at Eckerd delivered subpoenaed documents to a Florida investigator, probing whether the company violated consumer protection laws. The investigation centers on allegations that the company used prescription forms that misled customers into agreeing to release personal information. Penney didn't comment on the allegations. An Eckerd spokeswoman, Tami Alderman, says the company didn't disclose the probe because it wasn't material.
According to the complaint, when prescription customers receive medicine, Eckerd asks them to sign a label whose fine print permits Eckerd to release personal information. In some cases, the customers aren't informed that Eckerd will release the information, according to the complaint. Now, the Florida attorney general's office is weighing whether to widen the consumer protection investigation to include allegations that the chain overbilled consumers for prescription medications, says Jerry Lockwood, the investigator. The attorney general's office subpoenaed documents, which included training materials and agreements with drug manufacturers, in December, Lockwood says. The company delivered the documents on Jan. 10. The case could result in fines and other penalties. "This is fairly new," Lockwood says. "We're in the process of evaluating those records."
While Penney's decision not to inform investors of the inquiry may not run afoul of securities laws, which specify only that "material" legal proceedings must be disclosed, it does appear to conflict with the spirit of the regulations, a securities lawyer says. "The interpretation the SEC has given makes it clear that if you have been formally notified by a government agency, you should be talking," says Tom Twedt, a partner at the Washington law firm Dow Lohnes & Albertson. Twedt says that's especially true in cases in which subpoenas have been issued; a posting on the Florida attorney general's Web site indicates that's so. Many companies typically disclose any pending investigations or legal proceedings in an effort to let investors decide what is material or not, say legal experts. Indeed, the definition is far from concrete: The Supreme Court defines material information as "information that a reasonable investor needs to know in order to make an informed decision about an investment." But online auctioneer eBay ( EBAY) goes so far as to mention the possibility of an investigation. In its most recent quarterly filing with the Securities and Exchange Commission it said, "third parties have in the past and may in the future allege that actions taken by us violate the antitrust or competition laws."
Round and Round
The probe and the lawsuit have emerged just as J.C. Penney altered its corporate structure in a way that makes it easier for it to spin off Eckerd, analysts say. While J.C. Penney executives haven't revealed if that is in their plans, they previously have touted the potential of Eckerd, which Penney acquired in 1996 for $2.6 billion. At one gathering last year of investors hosted by Lehman Brothers, J.C. Penney's CEO Allen Questrom said Eckerd alone could be worth $9 billion to $11 billion within three months, or more than the entire company's market capitalization of about $6 billion. Penney, whose shares more than doubled last year as the department store retailer embarked on a turnaround plan, dropped $1.22, to $21.90 Thursday.