Case 1:09-cv-00554-S-DLM Document 33 Filed 06/01/10 Page 1 of 101
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
RICHARD MEDOFF, Individually and On
Behalf Of All Others Similarly Situated,
CVS CAREMARK CORPORATION,
THOMAS M. RYAN, DAVID RICKARD,
and HOWARD McLURE,
Civil Action No. 1:09-cv-00554-S-DLM
CORRECTED CONSOLIDATED CLASS
Barry J. Kusinitz
155 South Main Street, Suite 405
Providence, Rhode Island 02903
LABATON SUCHAROW LLP
Joseph A. Fonti
New York, NY 10005
RUDMAN & DOWD LLP
Robert M. Rothman
58 South Service Road, Suite 200
Melville, NY 11747
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TABLE OF CONTENTS
NATURE OF THE ACTION ............................................................................................. 2
THE CLAIMS ASSERTED IN THIS COMPLAINT........................................................ 6
JURISDICTION AND VENUE ......................................................................................... 6
CLASS ACTION ALLEGATIONS ................................................................................... 7
PARTIES ............................................................................................................................ 8
Lead Plaintiffs......................................................................................................... 8
Defendants .............................................................................................................. 9
SUBSTANTIVE ALLEGATIONS .................................................................................. 10
Background Allegations........................................................................................ 14
The CVS Caremark Merger.................................................................................. 21
Defendants Knew Pervasive Integration Issues Were Causing Service
Issues And Client Terminations, But Fraudulently Stated They Were
Maintaining And Increasing Their PBM Clients.................................................. 25
Contrary To Their Public Statements, Defendants Knew Months Before
Disclosure That Key Contracts Were Lost Due To Failed Integration And
Service Issues........................................................................................................ 28
Defendants Fraudulently Withheld From Investors That The Integration
Was A Failure, Impacting Contract Renewals...................................................... 36
While Knowing They Had Misled Investors, Defendants Made
$40 Million Selling Their Shares Before Their Fraud Was Revealed.................. 39
Defendants Knew That The 2009 Regulation Eliminating Med-D PDP
Spread Impaired SilverScript’s Pricing Structure And Would Lead To
Material Losses In 2010........................................................................................ 42
Defendants Knew That The Maintenance Choice Offering Was Neither
Driving Contract Renewals Nor Gaining New PBM Contracts ........................... 43
VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND
VIII. THE TRUTH IS REVEALED.......................................................................................... 74
POST-CLASS PERIOD CONDUCT ............................................................................... 80
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ADDITIONAL EVIDENCE OF SCIENTER .................................................................. 83
LOSS CAUSATION/ECONOMIC LOSS ....................................................................... 87
FRAUD-ON-THE-MARKET PRESUMPTION OF RELIANCE................................... 88
XIII. NO SAFE HARBOR PROTECTION .............................................................................. 90
XIV. CAUSES OF ACTION..................................................................................................... 91
COUNT I -- AGAINST DEFENDANTS FOR VIOLATIONS OF SECTION 10(b) OF
THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER ....... 91
COUNT II -- AGAINST THE INDIVIDUAL DEFENDANTS FOR VIOLATIONS OF
SECTION 20(a) OF THE EXCHANGE ACT ................................................................. 95
PRAYER FOR RELIEF ................................................................................................... 96
JURY TRIAL DEMANDED............................................................................................ 97
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The City of Brockton Retirement System, the Plymouth County Retirement System, and
the Norfolk County Retirement System (collectively, “Lead Plaintiffs”) bring this class action for
violations of the anti-fraud provisions of the Securities Exchange Act of 1934 (the “Exchange
Act”) against defendants CVS Caremark Corporation (“CVS Caremark” or the “Company”);
Thomas M. Ryan (“Ryan”), Executive Chairman, President, and Chief Executive Officer
(“CEO”); David B. Rickard (“Rickard”), Executive Vice-President and Chief Financial Officer
(“CFO”); and Howard A. McLure (“McLure”), President of Caremark Pharmacy Services
Lead Plaintiffs allege the following based upon personal knowledge as to themselves and
as to other matters upon the investigation of Lead Counsel, which included, among other things,
(i) a review and analysis of public filings by CVS Caremark with the United States Securities
and Exchange Commission (the “SEC”); (ii) a review and analysis of other publicly available
information, including press releases, transcripts of the Company’s conference calls with Wall
Street analysts, and articles in the general and financial press; (iii) a review and analysis of
documents obtained through freedom of information act requests under state acts and statutes;
(iv) interviews with scores of former employees of CVS Caremark (and related legacy entities),
customers, and industry experts; and (v) a review and analysis of other available materials
relating to CVS Caremark. Lead Plaintiffs believe that substantial additional evidentiary support
will exist for their allegations after a reasonable opportunity for discovery.1
1 Attached is a Glossary of Terms defined herein.
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NATURE OF THE ACTION
In March 2007, CVS Corp. (“CVS”), the nation’s largest retail pharmacy chain,
completed its much-anticipated merger with Caremark Rx Inc. (“Caremark”), the second largest
prescription benefits manager (“PBM”), forming CVS Caremark (the “Merger”). This case
arises from Defendants’ materially false and misleading statements relating to the Merger, and,
in particular, the success and profitability of the PBM business, which administers drug benefit
programs on behalf of entities (e.g., employers) that provide prescription drug insurance to their
enrollees or members (e.g., employees and retirees).
At its most basic, the Merger’s purported goal was to deliver to PBM plan
participants the “right drug at the right place at the right time,” according to defendant Ryan,
CVS Caremark’s CEO. Defendants were keenly aware that the Merger’s success hinged on the
Company’s service to its clients. Indeed, shortly before the Merger, CEO Ryan made a pledge to
investors that: “[n]o one is going to be able to out-cost us in the market . . . . So, then it’s all
about . . . service.” The emphasis of service over price was a critical component of the
Company’s business model. As Defendants acknowledged, while they could always be
competitive on price, if participants were not satisfied with how the Company was servicing their
needs, existing business would be lost and new contracts would be illusive—costing the
Company billions of dollars in annual earnings.
From the inception of the Merger, customers and investors voiced their concerns
regarding the Company’s ability to execute the level of service that Ryan had promised. As
CEO Ryan explained, customers and investors “want to get calmed down that . . . we’re still
going to focus on execution and service and we’re confident that we are.” As Ryan knew,
however, this promise hinged on a successful integration of the Company’s computer systems,
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policies, procedures, and staff—a complex undertaking for two companies that each had
undergone numerous acquisitions and attempted integrations prior to the Merger.
Within months, however, Defendants declared that the Merger was a success. For
example, during a call with investors and analysts on November 1, 2007, defendant Ryan
claimed he was “pleased that we’ve completed the integration of both the organization and back
end systems quickly and successfully.” Thereafter, Defendants continued to insist in the face of
investor scrutiny that the Merger had gone smoothly, that the Company was fully integrated, and
that customers were eagerly pleased with the new Company’s service.
In reality, CVS Caremark’s integration was a failure, causing the Company’s plan
participants and plan sponsors to launch frequent, consistent, and repeated complaints
concerning the Company’s sheer incapacity to provide benefits as promised. Ultimately,
Defendants lost $4.5 billion in PBM revenue for 2010, with as much as $3 billion attributable to
three contracts—Coventry, New Jersey, and Chrysler. Defendants had personal knowledge that
the clients would terminate all three of these contracts months before Defendants chose to reveal
it to the market. And, significantly, Defendants knew that these contracts were lost due to poor
service resulting from the Company’s failed integration.
As detailed herein, Defendants’ personal knowledge of these facts arose, in part,
from detailed reports and frequent meetings and conferences addressing the integration failure
and the impact thereof. Each week, Defendants received Sales Pipeline Reports, which
specifically identified contracts at risk for termination. At least monthly, they participated in
conferences dedicated to discussing customer issues and renewal efforts. Some problem
accounts, like Coventry (with contracts worth in excess of $4 billion annually) and New Jersey (a
contract worth in excess of $1 billion annually), were featured no later than May 2008 in internal
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Company documents as being at the highest risk for termination due to service issues, and were
the subject of daily discussion by Defendants. In fact, by Fall 2008, it was practically official
within the Company that each of these three contracts was not going to be renewed—a material
fact concealed from investors.
Recognizing that the loss of these lucrative contracts was eviscerating CVS
Caremark’s ability to hit projected earnings—and would reveal that the Merger had failed—
Defendants acted in desperation to retain their remaining clients. In particular, at year-end 2008,
Defendants announced that they unilaterally decided to cut prices on more than 50 percent of
CVS Caremark’s contracts, including 70 percent of the national contracts, which have higher
profit margins. When one securities analyst questioned whether poor service caused the re-
pricing, Ryan directly and forcefully stated: “there was no hidden agenda here about giving a
lower price because of lack of service.” In reality, however, that was precisely Defendants’
On August 4, 2009, Defendants told investors they “would be very disappointed if
[the Company] didn’t have an EPS growth of at least 13 to 15% next year.” This projection was
based on “low to mid single digit” growth in the PBM business. Defendants fraudulently made
this statement notwithstanding their actual knowledge that CVS Caremark’s largest contracts
were lost due to service issues and disruptions—the same issues and disruption that resulted in
the wrong drugs being sent to the wrong people at the wrong price across numerous significant
plan sponsor clients.
The next day, August 5, 2009, Defendants received a letter confirming that the
New Jersey contract was not being renewed, a fact that Defendants had known since 2008.
Rather than disclose this material fact to investors, let alone admit that their earnings projection
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of 13-15 percent was false, Defendants decided, instead, to capitalize on their adverse, non-
public information, and sell in excess of $40 million of their Company shares at artificially
inflated prices before revealing the truth. Specifically, on August 7, 2009, CEO Ryan and PBM
head McLure sold nearly $21 million of their Company shares in a single day. On August 17,
2009, CFO Rickard sold $8.5 million of his Company shares. Between September and
November, 2009, defendant McLure sold an additional $11 million in Company shares. In total,
defendant McLure sold more than 98 percent of his shares personally held during the Class
Period, and over 60 percent of his holdings, including vested options.
At the end of the Class Period, investors learned the truth: the Merger integration
was a failure, driving customers—and thus billions in revenue—away from the Company. In
particular, Defendants admitted that the Coventry contracts were lost due to service issues. As
defendant Ryan put it, “when we lost the [Medicare Part D contract with Coventry in May 2008],
we knew we were going to lose the commercial business, there were some service issues.”
(Emphasis added.) Defendants disclosed the loss of the Coventry commercial contract in
May 2009, but concealed their knowledge that the loss was due to service until the end of the
Class Period. Under the guise of “retirement,” Defendants also announced that McLure, the
chief architect of the Merger’s PBM model, was fired.
Upon learning these revelations, investors reacted severely, causing the share
price of CVS Caremark stock to collapse 20 percent in a single day, on 13 times the average
daily volume during the Class Period. In view of the truth, analysts who had bought into
Defendants’ misrepresentations also reacted. For instance, an analyst from HSBC pointed to the
fact that the “[s]urprise nature of disclosure raises credibility issues” for management, and an
analyst from Deutsche Bank concluded that the Company’s PBM business had no value.
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Perhaps most succinctly, notwithstanding Defendants’ statements during the Class Period that
the Merger was a success, as an analyst with Credit Suisse put it: “CVS provided undeniable
evidence today that it has mismanaged the Caremark acquisition and destroyed shareholder
value.” (Emphasis added.)
THE CLAIMS ASSERTED IN THIS COMPLAINT
This Complaint sets forth claims under Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78j(b) and 78t(a), and the rules and regulations promulgated thereunder,
including SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, against Defendants, who were knowing or
reckless participants in defrauding investors in connection with their material misrepresentations
and omissions concerning the success of the Merger.
JURISDICTION AND VENUE
The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78J(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC, 17
C.F.R. § 240.10b-5.
This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and pursuant to 28 U.S.C. § 1331.
Venue is proper in this District pursuant to Section 27 of the Exchange Act,
15 U.S.C. § 78aa, and pursuant to 28 U.S.C. § 1391(c). CVS Caremark resides and transacts
business in this District, and maintains its corporate headquarters in this District at One CVS
Drive, Woonsocket, Rhode Island 02895. In addition, many of the acts and transactions that
constitute the violations of law complained of herein, including the preparation and
dissemination to the public of untrue statements of material facts, occurred in this District.
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CLASS ACTION ALLEGATIONS
Lead Plaintiffs bring this action as a class action pursuant to Federal Rules of
Civil Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased, or
otherwise acquired, CVS Caremark common stock between October 30, 2008 and November 4,
2009, inclusive, and were damaged thereby. Excluded from the Class are Defendants; the other
officers and directors of CVS Caremark; members of the immediate families of any excluded
person; the legal representatives, heirs, successors, or assigns of any excluded person or entity;
and any entity in which Defendants have or had a controlling interest.
17. While the exact number of Class members is unknown to Lead Plaintiffs at this
time, and can only be ascertained through appropriate discovery, Lead Plaintiffs believe that
there are tens of thousands, if not hundreds of thousands, of members in the proposed Class.
Throughout the Class Period, CVS Caremark securities were traded on the New York Stock
Exchange, with an average daily volume of approximately 14 million shares.
The members of the Class are so numerous that joinder of all members is
impracticable. Record owners and other members of the Class may be identified from records
maintained by CVS Caremark and may be notified of the pendency of this action by mail, using
the form of notice similar to that customarily used in securities class actions.
Lead Plaintiffs’ claims are typical of the claims of the other members of the Class,
as all members of the Class are similarly affected by Defendants’ wrongful conduct in violation
of federal law that is complained of herein.
Lead Plaintiffs will fairly and adequately protect the interests of the members of
the Class and Lead Counsel is competent and experienced in class actions and securities
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Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
whether federal securities laws were violated by Defendants’ acts as
whether the SEC filings, press releases, reports, and other public
statements disseminated to the investing public during the Class Period contained
material misstatements or omitted to state material information;
whether and to what extent the market price of CVS Caremark’s securities
were artificially inflated during the Class Period due to the non-disclosures and/or
misrepresentations complained of herein; and
to what extent the members of the Class have sustained damages and the
proper measure of damages.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
The City of Brockton Retirement System represents over 3,000 active and retired
employees of the City of Brockton, Massachusetts, and manages more than $390 million in
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Plymouth County Retirement System represents more than 9,700 active and
retired public employees of Plymouth County, Massachusetts, and manages approximately
$636 million in assets.
Norfolk County Retirement System has over 9,500 active and retired members
from 40 governmental units throughout the County of Norfolk, Massachusetts, and has
approximately $500 million in assets.
Brockton, Plymouth, and Norfolk enjoy a long-standing, pre-existing working
relationship and share joint membership in Massachusetts-based retirement system organizations.
As set forth in their certifications previously filed with the Court, Lead Plaintiffs purchased
shares of CVS Caremark common stock during the Class Period and suffered damages
proximately caused by the violations of the securities laws alleged herein.
Defendant CVS Caremark was created through the Merger. CVS Caremark is
incorporated in Delaware and maintains its principal place of business and chief executive
offices at One CVS Drive, Woonsocket, RI 02895. The Company’s Class A shares of common
stock are publicly traded on the New York Stock Exchange, under the symbol “CVS.”
Defendant Ryan was, at all relevant times, the Company’s Executive Chairman,
President and CEO. Ryan has served as Chairman of the Board of CVS Caremark since
November 2007 and President and CEO of CVS, and later CVS Caremark, since May 1998.
Ryan is also a director of Bank of America Corporation and Yum! Brands, Inc., and previously
served as a director of Reebok International Ltd. until January 2006. Ryan has been with CVS
Caremark for 35 years, rising in the ranks from in-store pharmacist to CEO. Ryan holds a
Bachelor of Science degree from the University of Rhode Island.
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Defendant Rickard was, at all relevant times, the Company’s CFO and Executive
Vice-President. He held both positions from September 1999 to December 2009. Prior to
joining CVS, Rickard was Senior Vice-President and CFO of RJR Nabisco Holdings
Corporation from March 1997 to August 1999, and also served as Executive Vice-President of
International Distillers and Vintners Americas. Rickard currently serves as a director and audit
committee chairman of numerous companies, including Jones Lang LaSalle Inc. and Dollar
General Corp. Rickard received a Bachelor of Science degree in Social Psychology in 1969
from Cornell University and an M.B.A. in Finance in 1971 from Harvard Business School.
Defendant McLure was, at all relevant times, President of Caremark Pharmacy
Services, the division of CVS Caremark which includes its PBM business. Prior to obtaining
this position, McLure was the Chief Operating Officer and Senior Executive Vice-President of
Caremark from June 21, 2005 to March 2007. He also served as an Executive Vice-President,
CFO, and Principal Accounting Officer of Caremark from May 2000 to June 21, 2005. McLure
is a Certified Public Accountant and a member of the American Institute of Certified Public
Defendants Ryan, Rickard, and McLure are hereinafter collectively referred to as
the “Individual Defendants.”
Lead Plaintiffs’ allegations are based on the investigation conducted by Lead
Counsel, which included, among other things, a review of public filings by CVS Caremark with
the SEC, press releases, transcripts of the Company’s conference calls with Wall Street analysts,
publicly available trading information, articles in the general and financial press, documents
obtained through freedom of information act requests under state acts and statutes, other
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available materials relating to CVS Caremark, interviews with CVS Caremark customers, and
consultation with industry experts.
Lead Plaintiffs’ allegations are also based upon information provided by former
employees of CVS Caremark or their predecessor entities, with knowledge of the facts alleged
herein, including but not limited to, the following confidential witnesses:
? Confidential Witness No. 1 (“CW1”) is a former employee of PharmaCare,
CVS’s pre-Merger PBM, who worked as a Project Manager on the
Company’s Chrysler contract from 2006 through March 2007. During CW1’s
tenure at PharmaCare, one of CW1’s primary responsibilities was to upload
Chrysler’s plan participant data into the Company’s computer systems. As a
result, CW1 was in a position to know, and does know, about service issues
related to CVS Caremark’s failure to integrate Caremark’s plan participant
structure with PhamaCare’s plan participant structure, as alleged herein.
? Confidential Witness No. 2 (“CW2”) is a former employee of PharmaCare
and CVS Caremark, who worked as a PBM Account Executive from 2007 to
February 2008. CW2’s primary responsibility was to manage PBM contracts
through plan benefit design. Throughout CW2’s tenure at CVS Caremark,
CW2 managed several large contracts. As a result, CW2 was in a position to
know, and does know, how CVS Caremark created its Sales Pipeline Reports
(defined below) and what information the reports conveyed to Senior
Executive leadership, including the Individual Defendants, as alleged herein.
? Confidential Witness No. 3 (“CW3”) was an employee of Caremark and CVS
Caremark, from 1999 to January 2009, during which CW3 worked as a Senior
Account Advisor on the New Jersey account. CW3 was responsible for and
did provide periodic reports, including Sales Pipeline Reports (defined
below), to senior executives, including the Individual Defendants, concerning
the New Jersey account. Based on CW3’s communication with the New
Jersey account administrators and CVS Caremark’s management, CW3 was in
a position to know, and does know, that the Company’s pervasive post-
Merger service issues impacted CVS Caremark’s ability to properly service,
among others, the New Jersey account, that attrition among the ranks of upper
management was in large part responsible for the service issues, and that the
New Jersey account was at high risk of termination as early as the fourth
quarter of 2007, as alleged herein.
? Confidential Witness No. 4 (“CW4”) is a former employee of PharmaCare
and CVS Caremark, who worked as a PBM Account Executive from 2004
through July 2009. CW4’s primary responsibility was to manage PBM
contracts through plan benefit design. Throughout CW4’s tenure at CVS
Caremark, CW4 managed several large contracts, amounting to a book of
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business valued at $91 million. As a result, CW4 was in a position to know,
and does know, that the status of PBM contracts were well documented
through Sales Pipeline Reports (defined below) that were regularly distributed
to Senior Executive leadership, including the Individual Defendants, as
? Confidential Witness No. 5 (“CW5”) is a former employee of Caremark and
CVS Caremark who worked as a Director of the PBM department from 2006
through November 2008. CW5’s primary responsibility consisted of
managing over 100 employees who designed plan benefit programs. CW5
additionally oversaw the management of PBM accounts, including customer
satisfaction, inventory, and budgets. Throughout CW5’s tenure at CVS
Caremark, CW5 attended quarterly Senior Executive meetings, which were
attended by the Individual Defendants, to discuss the status of PBM contract
negotiations and service-related issues. Accordingly, CW5 was in a position
to know, and does know, that billions of dollars of PBM contracts were
terminated due to CVS Caremark’s poor systems integration, service, and
insufficient resources, as alleged herein.
? Confidential Witness No. 6 (“CW6”) is a former employee of Caremark and
CVS Caremark, who worked as a Client Liaison Coordinator in the Nashville,
Tennessee office from 2005 through February 2009. CW6 was primarily
responsible for monitoring the Merger transition process among plan sponsor
clients and resolving issues of service interruptions. For instance, CW6
worked directly with CVS Caremark’s Customer Care Representatives so that
they could effectively service calls from plan participants of recently
transitioned plan sponsors. CW6 was in a position to know, and does know,
that throughout CW6’s tenure with the Company, CVS Caremark was plagued
by service-related and integration problems that prevented it from properly
servicing existing clients and new clients, as alleged herein.
? Confidential Witness No. 7 (“CW7”) is a former employee of Caremark and
CVS Caremark, who worked as an Audit Department Team Leader from 1994
to March 2009. CW7’s primary responsibility was to ensure that the prices
charged to plan participant claims were consistent with the plan sponsor’s
contract. Moreover, following an audit of a client’s contract, CW7 granted
plan sponsor reimbursements where necessary. Based on CW7’s experience
with “Reflections,” CVS Caremark’s audit software, CW7 was in a position to
know, and does know, that the Company suffered from severe computer
integration problems that eventually led to the termination of the Coventry,
and other, contracts. Further, CW7 was in a position to know, and does know,
that members of Senior Management, including defendant Ryan, received
monthly audit reports identifying contracts at high-risk of termination, as
? Confidential Witness No. 8 (“CW8”) is a former employee of Caremark and
CVS Caremark, who served as a Specialty Admissions Coordinator from 2006
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to October 2007. CW8’s primary responsibility was to investigate and verify
benefits for plan participants under the Coventry contract. Further, CW8’s
employment with the Company placed CW8 in a position to regularly interact
with other employees who dealt with Coventry. As a result, CW8 was in a
position to know, and does know, about the high level of staff turnover among
those CVS Caremark employees who worked on the Coventry contract.
Moreover, CW8 worked directly with the PeopleSafe software program,
allowing CW8 to experience the poor level of computer systems integration
following the Merger, as alleged herein.
? Confidential Witness No. 9 (“CW9”) is a former employee of Caremark and
CVS Caremark, who worked in the Company’s Nashville, Tennessee call
center from 2005 to August 2009. CW9 primarily assisted plan participants
with issues pertaining to insurance, mail-order prescriptions, billing,
prescription order status, and claims. As a result, CW9 was in a position to
know, and does know, about problems that arose at call centers related to CVS
Caremark’s computer systems following the Merger, as alleged herein.
? Confidential Witness No. 10 (“CW10”) is a former employee of CVS
Caremark who worked as a Client Audit Analyst in the Scottsdale, Arizona
office from 2007 to April 2009. More specifically, CW10 audited CVS
Caremark’s PBM contracts for errors related to billing and processing. CW10
therefore was in a position to know, and does know, that during his/her tenure
at CVS Caremark, PBM customers experienced problems related to the
Company’s billing processes, as alleged herein.
? Confidential Witness No. 11 (“CW11”) is a former employee of PharmaCare
and CVS Caremark, who worked as a Project Coordinator on the Chrysler
contract from 2007 through May 2008. Throughout CW11’s tenure, CW11
was largely responsible for creating and editing Chrysler’s drug formulary
(i.e., the negotiated list of drugs available to Chrysler’s plan participants). As
part of CVS Caremark’s team dedicated to Chrysler, CW11 attended meetings
three to four times a week related to the Company’s issues regarding contract
compliance. Accordingly, CW11 was in a position to know, and does know,
that members of Senior Management, including defendant Ryan, knew that
the Chrysler contract was at high risk of termination throughout CW11’s
tenure, primarily due to CVS Caremark’s integration-related service problems,
as alleged herein.
? Confidential Witness No. 12 (“CW12”) is a former employee of Caremark
and CVS Caremark, who worked as a Prior Authorization Representative at
the Company’s Richardson, Texas call center from 2005 through March 2007.
CW12 was specifically responsible for processing prescription authorizations
for participants from doctors, pharmacists, and nurses. CW12 was in a
position to know, and does know, that high staff turnover rates at these call
centers became a persistent customer service issue due to less experienced
personnel fielding such calls, as alleged herein.
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? Confidential Witness No. 13 (“CW13”) is a former employee of CVS
Caremark who worked as an analyst from November 2009 through February
2010. CW13 attended CVS Caremark’s National Sales Meeting on
February 1-3, 2010 in Orlando, Florida, during which defendant Ryan made
several admissions regarding the Company’s management of its PBM
business since the Merger. As a result, CW13 was in a position to know, and
does know, the substance of defendant Ryan’s statements during the 2010
National Sales Meeting, as alleged herein.
Overview Of The Company And Its Business
Defendant CVS Caremark describes itself as the “largest provider of prescriptions
and related healthcare services in the United States.” The Company was formed as the result of
the Merger. The combined company is both the largest retail pharmacy chain and the largest
PBM in the United States, with approximately 100 million “covered lives”2 as of the first quarter
of 2010. The Company’s main PBM competitors include Medco Health Solutions, Inc.
(“Medco”) and Express Scripts, Inc. (“Express Scripts”).
CVS Caremark operates in two business segments: Pharmacy Services and Retail
Pharmacy. The Pharmacy Services segment provides a range of PBM services, including mail-
order pharmacy services, specialty pharmacy services, plan design and administration, formulary
management, and claims processing. CVS Caremark’s Retail Pharmacy segment sells
prescription drugs and a wide assortment of general merchandise, including over-the-counter
drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards, and
convenience foods through its pharmacy retail stores and over the Internet. As of December 31,
2009, the Retail Pharmacy segment included 7,025 retail drugstores, located in 41 states and the
District of Columbia.
2 The term “covered lives” refers to the number of individuals covered by a pharmacy
benefit health plan.
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The Company’s Pharmacy Services segment primarily serves employers,
insurance companies, labor unions, government employee groups, managed care organizations,
and other sponsors of health benefit plans and individuals. As of December 31, 2009, the
Pharmacy Services segment operated 49 retail specialty pharmacy stores, 18 specialty mail-order
pharmacies and six mail service pharmacies located in 25 states, Puerto Rico, and the District of
Under the Pharmacy Services segment, CVS Caremark also serves, or served, as
PBM to eligible insurance carrier clients (e.g., Coventry, discussed below) that have qualified as
Medicare Part D (“Med-D”) prescription drug plans (“PDP”) under Part D of the federal
government’s Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(“MMA”).3 In addition to servicing PDP clients under Med-D, CVS Caremark operates its own
PDP called SilverScript Insurance Company (“SilverScript”), for which CVS Caremark serves as
Overview Of The Pharmacy Benefit Management Business
PBMs are companies that administer drug benefit programs on behalf of entities
that provide prescription drug insurance to their enrollees or members. These entities (herein
referred to as “plan sponsors”) include employers, government agencies, labor unions, retirement
systems, and health maintenance organizations. Plan sponsors contract with PBMs to handle
drug purchasing and distribution, through retail and mail-order pharmacies.
The PBM business in the United States initially began as a means for plan
sponsors to control rising prescription drug costs. PBMs, such as CVS Caremark, are hired to
manage prescription drug programs in a manner that is cost-effective for their plan sponsor
3 Medicare Part D is a federal program that subsidizes the cost of prescription drugs for
Medicare beneficiaries in the United States.
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clients. The PBMs essentially act as middlemen to negotiate prescription drug prices between
pharmaceutical manufacturers, retail pharmacies (i.e., CVS), and plan sponsors.
Approximately 95 percent of all patients with drug coverage receive benefits
through a PBM. The three leading PBMs include CVS Caremark, Medco, and Express Scripts.
These companies dominate the PBM market and, collectively, manage drug benefits for over 230
In managing their clients’ prescription drug insurance coverage, PBMs perform a
number of functions and services, including:
Establishing pharmacy networks: PBMs contract with retail and mail-
order pharmacies to establish where plan participants4 can fill their prescriptions.
Formulary management: Plan Sponsors may determine broad categories
of drugs that are covered by their benefit plans. PBMs, however, determine which
specific drugs fall within each category. In addition, PBMs are solely responsible for
creating and managing the list of preferred prescription drugs (the “formulary”) for all of
its plan sponsor clients.
Claims administration: PBMs maintain an electronic adjudication system
that processes claims submitted by a pharmacist. PBMs pay claims on behalf of plan
sponsors and inform pharmacies how much cost sharing or “co-payments” to collect from
Plan Participant Call Centers: As part of its service agreements with plan
sponsors, PBMs maintain call centers in order to provide benefit information to, and
assist in the resolution of any service issues for, plan participants.
4 A “plan participant” refers to a third-party employee or plan sponsor member to whom the
PBM’s services flow as part of an employment agreement or other form of contract.
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Mail-order service: Many PBMs offer mail-order service for maintenance
prescriptions that do not need to be filled instantaneously.
Manufacturer price negotiation: PBMs negotiate with drug manufacturers
for the prices of the drugs they manage.
Utilization review: PBMs review patients’ prescription drug use to
prevent drug interactions or over/under use of prescriptions. If a problem is found, the
PBM may alert the pharmacist or prescribing physician.
Medication therapy management: Some PBMs provide certain programs
to improve the quality or cost of pharmaceutical care—such as, consumer and physician
education, and compliance programs to ensure that patients take their medication and
disease management programs.
The pharmaceutical industry involves a complex group of entities. In a typical
arrangement, a plan sponsor (e.g., an employer) contracts with a PBM to manage the plan
participants’ prescription drug benefits. The PBM, in turn, contracts with a network of retail
pharmacies to fill prescriptions. The pharmacies purchase prescription drugs from wholesalers
and receive a dispensing fee for filling prescriptions, in addition to reimbursement of drug costs
from the PBM. PBMs also buy drugs directly from the manufacturers and sell them to plan
beneficiaries through proprietary mail-order pharmacies. The following chart illustrates the
relationship among those entities:
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By way of example, when a plan participant walks into a retail pharmacy with a
prescription (or uses a mail-order pharmacy), the pharmacy inputs the participant’s information
which is then transmitted to the participant’s PBM. The PBM’s claims processing system
analyzes the claim against its participant database and determines whether to approve or reject
the claim. Claims may be rejected for many reasons including, inter alia, the participants
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eligibility, whether or not the drug requested is on the PBM’s approved list, or formulary,
whether or not a deductible has been met, or whether a participant has exceeded their
prescription drug benefit cap. If a prescription drug claim is approved, the PBM’s claim
processing system (i) informs the pharmacy of any co-payment to be collected at the pharmacy,
(ii) credits the pharmacy the agreed-upon amount for that particular drug (minus the co-
payment), (iii) charges the plan sponsor the agreed-upon amount for that particular drug (which
is usually an amount greater than that credited to the pharmacy, see “drug pricing spread”
below), and (iv) informs the drug manufacturer of the transaction in order to collect any rebate
the PBM is due.
Plan sponsors typically procure PBM services through a bidding process. They
issue requests for proposals (“RFPs”) to several PBMs and then evaluate the proposals based on
a variety of factors, including cost and services offered by each bidder. The winning PBM
bidder enters into a contractual agreement to provide services to the plan sponsor. The contracts
between plan sponsors and PBMs are subject to audits. The audits generally focus on, among
other things, compliance with the terms of the contracts and applicable legal requirements.
Overview Of How PBMs Make Money
There are three main ways in which PBMs earn revenue, including:
(i) administrative fees; (ii) manufacturer rebates; and (iii) drug pricing spread.
PBMs profit, in part, through administrative fees paid to them by plan sponsors
for managing prescriptions. These are typically flat fees that a PBM charges for specific services
or each prescription processed.
Although PBMs are supposed to be servicing plan sponsors in exchange for
administrative fees, a substantial portion of PBM profits arise from rebates paid by
pharmaceutical manufacturers to obtain formulary status or to encourage PBMs to dispense their
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drugs. Given their ability to affect a drug’s market share, PBMs have considerable leverage in
this “pay for play” arrangement to negotiate such rebates. The amount of a rebate that a PBM
receives depends upon the particular drug, with more expensive drugs resulting in higher rebates.
The drugs that earn the highest rebates for PBMs are usually not the least expensive for plan
sponsors, nor are they necessarily the most effective for patients. Accordingly, PBMs often have
significant profit incentives that conflict with the interests of plan sponsors and plan
beneficiaries. Typically, PBMs agree to share some of these rebates with plan sponsors. PBMs,
however, often refuse to disclose the specific rebate amounts they receive. This prevents plan
sponsors from learning the actual amount of rebates the PBM has received for administering
drug benefits. Due to the PBM’s failure to disclose rebate amounts, the PBM is able to retain
most or all of the rebates.
Another way in which PBMs make money is by paying pharmacies a lower price
than the PBM charges the plan sponsors for each prescription filled, and pocketing the
difference. For example, a PBM may charge a plan sponsor $100 for a particular drug, but pay
the pharmacy only $75, generating a $25 spread for the PBM. A PBM’s profit from spread is in
addition, of course, to the administrative fee it charges plan sponsors for executing the
transaction, as well as the kickback or rebate it receives from the manufacturer. The
reimbursement amount PBMs pay to the pharmacies, and the resulting spread-profit, is almost
always undisclosed—even if PBM customers request such information. Moreover, the spread
gives PBMs a financial incentive to encourage the use of higher-priced drugs, and higher
corresponding spreads, on their formularies.
A PBM’s willingness to disclose, or permit audits of, drug pricing spreads and
rebates reflects the level of a PBM’s “transparency.”
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The CVS Caremark Merger
On November 1, 2006, CVS and Caremark jointly issued a press release
(“November 1 Press Release”) announcing that they had entered into a “definitive merger
agreement to create the nation’s premier integrated pharmacy services provider.” Under the
terms of the Merger (as defined above), which was valued at over $25 billion, Caremark
shareholders were to receive 1.67 shares of CVS for each share of Caremark. In addition, as a
result of the Merger, CVS shareholders would own 54.5 percent of the combined company,
while Caremark shareholders would own the remaining 45.5 percent.
The November 1 Press Release described the beneficial effect of the transaction
for both health plans sponsors and participants, stating, inter alia:
This merger creates a significant platform to address the needs of
both payors and consumers by providing high-quality, cost-
effective services in a manner that is convenient, flexible and easy
for the consumer to navigate and understand.
Indeed, the stated purpose behind the Merger was quite simple: Leverage the
purchasing power of the largest prescription drug retailer along with one of the largest PBMs to
(i) create the lowest PBM price structure in the industry, and (ii) provide unique, integrated
service offerings that only a retail-PBM could offer. The proposed CVS Caremark combined
entity would be the largest prescription drug purchaser, able to drive drug selection through
formulary control and exert enormous pricing-leverage over drug manufacturers. In addition, as
a retail-PBM, the combined CVS Caremark offered unique services to the prescription drug
industry, like Maintenance Choice, a program the Company initiated to allow participants to get
a 90-day prescription directly from the retail pharmacy at the same cost, to the participant, as
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Following the Merger announcement, CEO Ryan and Mac Crawford (Caremark’s
CEO at the time) held a conference call with analysts on November 1, 2006 (“November 1 call”).
During the call, Ryan continued to lay out the logic behind the Merger and the reason why it
would be successful, stating, in pertinent part:
So combining Caremark’s expertise in serving employer’s with our
expertise in serving consumers, will help employers and health
plans better manage costs, and the complexities of the U.S.
healthcare system, driving superior outcome and enhancing value
for overall constituencies. Once again, this, is all about giving the
consumers unparalleled access and choice.
There’s also the benefit on the other side of the [aisle], the payor
community. At its most basic level, the combined company will
help employers and plan providers deliver the right drug at the
right place at the right time.
At the end of the day, this is about providing a low net cost on a
per plan, per member, per month with the lowest cost, and the best
outcomes for healthcare. This is a whole new model.
CVS Caremark Knew It Had To Distinguish Itself On Service
By virtue of the size of the merged Company, Defendants knew they could always
be competitive on price. Thus, as Defendants acknowledged prior to the Merger, service would
be the key distinguishing factor for CVS Caremark. During the March 13, 2007 Bank of
America Conference, Defendant Ryan put it simply:
Think about this. No one is going to have a lower cost structure
than this combined company. No one is going to be able to out-
cost us in the market when we go.
So, then it’s all about, okay, what about service, what about
product? And we think we can out-service and out-sell our
(Emphasis added.) What defendant Ryan refers to as “service” includes both servicing the plan
sponsors and the plan participants. The plan sponsors want transparency in their dealings with
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the PBM, meaning they want to be able to determine that the PBM is adhering to the contract
terms, and, in particular, pricing. At the same time, plan participants want to be able to obtain
their medicines when needed at the correct price under the contract.
Clients raised their concerns about possible service issues directly with Ryan. As
he put it during the May 8, 2007 earnings call with analysts (“May 8 call”):
Yes, they’re, I guess the two things that [plan sponsors are] most
concerned about, one is that there’s no degradation of service.
That’s the first thing. And they want to get calmed down that, as I
said earlier, that we’re still going to focus on execution and
service and we’re confident that we are.
The second is they want to find ways to help lower their healthcare
costs. I mean that’s long-term.
Post-Merger Integration Was Essential To Profit From The Merger
The predicate for the combined-company to provide effective customer service
was the integration of the computer systems used by CVS’s proprietary PBM, PharmaCare, with
the computer systems used by Caremark. This was no small task. As illustrated in Exhibit 1
(supra at ¶42), each PBM had contractual relationships with plan sponsors, and each PBM has a
unique pricing relationship with its retail pharmacy network and with the individual drug
manufacturers. Failures to integrate the PBMs’ computer systems, policies, and procedures
would result in plan participants getting the wrong drugs, at the wrong price, at the wrong time.
And, that is if they were able to get their drugs at all. Absent effective systems integration, plan
sponsors would suffer from breaches of the contract terms due to formulary mismanagement
(e.g., getting more expensive brand drugs in place of cheaper generics) and improper pricing, as
well as complaints flowing from their participants. More specifically, a successful integration
was necessary to avoid payment errors, enable call center representatives to respond to questions,
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and prevent system outages that would make it impossible for plan participants to fill
Ultimately, a successful integration was the only way the Company could
maintain and attract new clients, and the billions of dollars in earnings they generated. While
analysts saw some benefits in a merged company, they expressed concern that the integration of
CVS and Caremark would be possible. For example, an analyst for William Blair & Company
expressed “serious concerns about the ‘merger of equals’ structure of the transaction and the
heightened integration risk, given that both companies themselves have been active industry
consolidators in the recent past.”
On March 13, 2007, during the 2007 Bank of America Consumer Conference
(“March 13 Conference”), just days prior to the CVS and Caremark shareholder votes on the fate
of the Merger, defendant Ryan attempted to quell any dissent over whether CVS and Caremark
could be successfully integrated:
People always question this because, you know, you hear people
talk about vertical mergers and they don’t really work. This is not
really a vertical merger because we own the PBM. We understand
this business. It’s not like we’re getting in, buying a hospital or
nursing home. This is a business that we understand. We have a
history with PBMs.
Integration planning is on the way . . . . Caremark has done a lot of
these. PharmaCare [CVS’s pre-merger PBM business] is relatively
small. I don’t mean to diminish any integration because there’s
always risk, but it’s relatively straight-forward . . . .
During the March 13 Conference, defendant Ryan continued to tout the Merger,