Caremark Connections Draw Fire

More than a dozen states are ready to probe its business practices, but Caremark ( CMX) could have at least one prosecutor on its side.

The Nashville, Tenn.-based pharmacy benefit manager said Friday that 19 state attorneys general are seeking documentsunder their consumer protection laws. The news drove Caremark shares down 4% in heavy trading.

But another matter is raising the eyebrows of some Caremark watchers: the company's ties to politicians in Florida, including the state attorney general'soffice.

David Moye, assistant deputy general for health care fraud and economic crimes in Florida, until last year practiced for the very law firm that serves as Caremark's outside counsel. It was Moye who, in an unusual move, last month intervened in a whistleblower lawsuit against Caremark -- at the company's request. The whistleblowers, unlike the state, have accused Caremark of defrauding and even endangering Florida customers.

It isn't clear whether Moye personally represented Caremark while at the firm, Fowler White Boggs Banker, and some legal experts see no glaring conflict in his past work there. For its part, the attorney general's office has shrugged off questions about its actions, simply saying it is better suited to lead the case than the whistleblowers themselves.

Even so, some Caremark critics are questioning Moye's motives.

Michael Leonard, a Chicago attorney representing the Caremark whistleblowers, points out that Moye's motion failed to include a single allegation against Caremark and was reviewed -- by the company's law firm -- before it was ever filed.

"The fact that he came from that same law firm is troubling and creates at least an appearance that Caremark is receiving special treatment," the lawyersays.

A Florida legal expert was puzzled by the intervention.

"I've never heard of an attorney general intervening in such a way that it would undercut the whistleblowers," says Lyrissa Barnett Lidsky, a professor at the University of Florida College of Law. "Normally, you would just stay out of it."

Caremark failed to answer previous questions or return a call on Friday. But it did say in a prepared statement that it believes itsbusiness practices "comply in all material respects with applicable laws and regulations." Still, the company's stock, after hitting a record high of $35.31this spring, has slipped more than 10% in recent months as the Caremark story has grown more complicated.

Changing Sides

In the spring of 2003, Moye left Fowler White Boggs Banker -- a firm that has made a name for itself in part by defending companies accused of health care fraud -- to begin prosecuting violators instead.

Attorney General Charlie Crist described Moye as the ideal candidate to crack down on wrongdoers in the industry.

"It is rare that the taxpayers get the opportunity to benefit from the experience and expertise of someone as talented as David Moye," Crist stated in a prepared release last year. "Health care fraud and economic crimes are reprehensible activities because they steal from our most vulnerable citizens, and I know David will do an outstanding job leading our drive to stop con artists and scammers throughout our state."

But critics such as Leonard, the whistleblowers' lawyer, see things differently. They point out, for instance, that it was just a few months after Moye joined the attorney general's office that the government officially declined to join the whistleblower lawsuit against Caremark.

The complaint, originally filed under seal in January 2003, accuses Caremark of shortchanging government customers and even endangering them byselling restocked drugs that were returned through the mail but never tested for damage. Leonard claims the company continued to resell drugs for seven months without the state ever warning customers about a potential health threat. He says that Caremark changed its practices only after learning of the whistleblower complaint when it was unsealed last summer.

"The state was asleep at the wheel," Leonard says. "Nobody ever did anything."

Heat Rises

For its part, Florida simply claims that married Caremark pharmacists Michael and Peppi Fowler should no longer direct the whistleblower lawsuit because at least one of them could soon face an administrative hearing, involving alleged misconduct, over which the state would be presiding. The state made its decision after learning from Caremark that the Fowlers couldwind up appearing before the Florida Pharmacy Board for allegedly stealing confidential patient information and improperly obtaining narcotics.

"Caremark affirmatively has asked the Office of the Attorney General to intervene in this case for purposes of resolving as quickly and efficiently aspossible whatever business/partnership issues exist between Caremark and the state of Florida under their PBM contract," the company stated in its own legalfiling. "Caremark looks forward to a quick resolution of these matters."

Now, though, other states have launched their own probes of Caremark's business practices. The company said Friday that attorneys general in 19 states, led by a prosecutor in Washington state, are formally seeking documents from the company under their consumer protection laws.

Twenty states -- including Florida -- recently scored a big settlement against Medco ( MHS), a Caremark rival accused of similar transgressions. But the attorney general's office in Florida said on Friday that it didn't know whether it is part of the group that is now similarly pursuing Caremark.

Meanwhile, Caremark declined to say whether Moye himself had ever represented the company while at Fowler White Boggs Banker. A Caremark spokesman instead suggested contacting the attorney general's office, which failed to respond to a series of questions for this story. Still, Moye apparently sought Caremark's consent -- a step recommended by the Florida State Bar when prosecutors pursue a former client -- before filing his motion. The state's motion clearly states that Caremark did not oppose the government's intervention.

A Florida legal expert spotted potential reason for alarm.

"If he represented Caremark and is now representing the consumers of the state of Florida against Caremark, that certainly raises concerns on both sides," says Barnett Lidsky of the University of Florida College of Law. "There's the potential that the interests of one will be picked over the interests of another. ... You really can't do that."

Bush League?

Also raising red flags with some Caremark critics are the company's ties to Gov. Jeb Bush. Public Citizen, a nonprofit consumer advocacy group, pointsout that C. David Brown -- a Caremark director since early 2001 -- has earned elite "Ranger" status for raising at least $200,000 for the governor's brother.Brown also served as the central Florida finance chair for the campaign of the Florida governor himself.

Caremark enjoys other connections to the governor's office as well. Notably, the company employs a lobbying firm known for its warm relationship with the governor. Southern Strategy has risen to power -- and rankled its foes -- during Bush's reign over Florida.

"Competitors complain that Southern Strategy flaunts its ties to the governor and poaches their clients," the St. Petersburg Times reported inMarch. "Their name for the firm: the House of Ego."

The newspaper went on to state that businesses that have hired Southern Strategy, including Caremark, have "fared well getting state contracts."

Caremark has chosen a particularly well-placed lobbyist at the firm. Christopher Dudley served as chief of staff for Bush's original lieutenant governor before joining Southern Strategy. Dudley also counts Wachovia -- a big fan of Caremark's stock -- among his major clients.

Wachovia enjoys a close financial relationship with Caremark.

Last spring, for example, the firm served as a lead arranger and book manager for a $500 million credit facility for the company. It also acted as thestock transfer and exchange agent in a recent merger with AdvancePCS ( ADVP), a company -- now under scrutiny by state prosecutors as well -- with ties to President Bush. The merger has transformed Caremark into an even more dominant force in the loosely regulated PBM industry.

More recently, Wachovia found itself recommending Caremark's stock anew after hearing that the whistleblower complaint could wind up in state hands.

"We believe that the Florida A.G. intervened in the case because Caremark has brought to light information that calls the conduct of the twopharmacists (the relators) into question," wrote Wachovia analyst Eric Veiel, who has an outperform rating on Caremark's stock. "The A.G. has declined tojoin the lawsuit in the past, so we believe it is unlikely that the A.G. will pursue the case with the same vigor as the whistleblowers would have."

To be fair, at least one former prosecutor sees nodefinite conflict in Moye's dealings with Caremark and the law firm that recently employed him. Rick Morgan, who handles whistleblower lawsuits himself, does say, however, that it's "not common" for prosecutors to allow their targets to review motions against them before they're filed. Moreover, he adds, companies do not normally welcome government prosecution.

"When I've seen defendants ask for the government to intervene ... it usually means they think they're losing ground" against the whistleblowers, Morgan says. "As a general rule, the last thing a company wants is government intervention."

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