Problems keep sweeping through the pharmacy benefit management industry like a contagious disease. In a disappointing earnings release on Wednesday, Express Scripts ( ESRX) revealed that it has become the latest target of state prosecutors investigating major players in the PBM sector. The company's two larger peers -- Medco ( MHS) and Caremark ( CMX) -- already have come under intense government scrutiny. "While ESRX has been generally above the fray of the legal scrutiny faced by other PBMs, it is obviously no longer immune," wrote Thomas Weisel Partners analyst George Hill, who has a peer perform rating on the stock. "The regulatory scrutiny certainly damages ESRX's credibility in the near-term. "Based on our experience, PBM stocks typically react violently on the downside after such legal issues are announced," Hill wrote. Indeed, shares of Express tumbled 13% to $62.84 late Thursday morning. Medco and Caremark came under some selling pressure as well. Express Scripts said it received a "notice of proposed litigation" from the New York attorney general on July 12. The AG has accused Express Scripts of violating civil laws and breaching its contract with the state. The company also has fielded a "civil investigative demand" from the attorney general of Vermont and expects similar subpoenas from 18 other states. It is being asked for "documents regarding a wide range" of its business practices. The company denies any wrongdoing but, nevertheless, plans to increase its legal reserves by as much as $20 million to pay for its defense. "Obviously, the company will be forced to defend itself against all these allegations," noted Schwab Soundview Capital Markets analyst Glen Santangelo, who has an outperform rating on the stock. And "a legal staff is not cheap!" Phil Blando, vice president of the PBM industry trade group Pharmaceutical Care Management Association, expressed surprise at news of yet another government probe in the sector. Blando is convinced that PBMs -- accused of defrauding customers -- are in fact responsible for saving huge sums of money every year.