Feds Looking at Caremark Case

Updated from 2 p.m.

Caremark ( CMX) could soon be suffering from its worst headache yet.

Federal authorities are seeking detailed information about the company's business practices, according to a lawyer whose clients are suing Caremark.

Michael Leonard, a Chicago attorney representing two Caremark whistleblowers, says he got a subpoena from a federal agency requesting legal documents related to the case. It isn't clear whether the company itself also has been subpoenaed, or whether Caremark is a target of the probe.

The Nashville, Tenn.-based pharmacy benefit manager said late Monday that it hasn't received a subpoena and doesn't expect to.

But the federal Office of Inspector General inside the Office of Personnel Management has asked for deposition transcripts and "all auditing records, monitoring records, consulting reports or other reviews relating to Caremark's mail-service pharmacy operations," Leonard says.

Caremark is already under scrutiny by numerous state prosecutors who suspect that the company may have failed to properly share drug rebates with state customers. The company has denied any wrongdoing in that matter, saying that it "believes that its business practices comply in all material respects with applicable laws and regulations." Caremark has said it will cooperate with requests for information.

The federal inquiry could be much broader. Leonard says he'll supply, what he calls, damaging evidence indicating that Caremark has defrauded, and even endangered, federal customers by failing to properly fill their prescriptions and selling them potentially damaged goods.

Leonard has estimated that Caremark already faces $100 million in damages for its behavior in Florida alone. But the company's contract with the National Association of Letter Carriers -- worth $500 million when it was inked more than a decade ago -- is even larger than its deal with the state of Florida. And another pharmacy benefit manager, which ranks as Caremark's largest competitor, has already suffered a huge blow amid a sweeping federal probe of its own.

Earlier this year, Medco ( MHS) lost its major contract with the federal government as an investigation of the company's business practices heated up. Both Caremark and Medco have been accused of improperly switching and canceling patient prescriptions in order to maximize their profits.

For its part, Caremark also faces the more sensational charge of selling drugs that were returned through the mail but never tested for damage.

For a while, Caremark escaped government probes despite the serious allegations. Last year, the Florida attorney general officially declined to join the whistleblower lawsuit against the company. But a Florida prosecutor who used to work for the law firm now representing Caremark recently reversed course and intervened at the company's request. Critics smelled an immediate conflict and insisted that David Moye, Florida's assistant deputy attorney general for healthcare fraud, was really more interested in derailing a damaging case against Caremark than in actually prosecuting the company.

Since then, 19 other attorneys general have started questioning Caremark's business practices. Twenty attorneys general -- including Florida -- have already snared a multimillion settlement from Medco. Medco settled its state case without admitting to any wrongdoing. The Florida attorney general's office recently told TheStreet.com that it is unsure whether it is also involved in the multistate investigation of Caremark.

Caremark stock was down 48 cents at $31.45.

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