A Medical Device Daily

The Securities and Exchange Commission reported filing a civil action against three former finance executives of Cardinal Health (Dublin, Ohio), a pharmaceutical distribution company, in which the former Cardinal executives agreed to settle charges that they engaged in a fraudulent revenue and earnings management scheme.

Cardinal's former CFO, Richard Miller, former controller and principal accounting officer, Gary Jensen, and former senior VP of finance, Michael Beaulieu, without admitting or denying the allegations, consented to the entry of an injunction and agreed to pay a total of $245,000 in civil penalties.

The commission's complaint alleges that, at different times from September 2000 through March 2004, the former Cardinal executives engaged in the misconduct in order to present a false picture of Cardinal's operational results to the financial community and the investing public – one that matched Cardinal's publicly disseminated earnings guidance and analysts' expectations, rather than its true economic performance. The complaint alleges that as a result of these actions, Cardinal materially overstated its operating revenue, earnings, and growth trends in public earnings releases and filings with the commission.

According to the complaint, the defendants and other members of Cardinal's management closely monitored Cardinal's financial performance to assess whether it met internal expectations and external guidance to analysts. Miller, Jensen, and Beaulieu, as the complaint describes, engaged in the management of Cardinal's reported revenue and earnings through a variety of undisclosed and improper actions.

The complaint alleges that their actions had the effect of inflating reported operating revenue through the improper misclassification of more than $5 billion of bulk sales as operating revenue. As detailed in the complaint, Cardinal classified its revenue from drug distribution as either "bulk" revenue or operating revenue. Bulk revenue consisted primarily of certain full case quantities of pharmaceutical products delivered to customer warehouses and had virtually no profit margin. Operating revenue consisted primarily of customized orders delivered to pharmacies and other provider customers.