Three former senior finance executives with medical supply company Cardinal Health have agreed to pay $245,000 in civil penalties to settle SEC charges that they engaged in a fraudulent earnings and revenue management scheme.
Former CFO Richard J. Miller, former controller and principal accounting officer Gary S. Jensen, and former senior VP of finance Michael E. Beaulieu agreed to pay the penalties and consent to an injunction without admitting or denying the SECs allegations. On July 26, 2007, the SEC filed a related action against the company, in which it agreed to pay a $35 million penalty.
According to the SECs complaint, between September 2000 and March 2004, the three executives tried to present afalse picture of the Dublin, Ohio-based companys operational resultsto investors. The defendants and other members of Cardinals management team closely monitored Cardinals financial performance to assess whether it met internal expectations and the guidance it provided to analysts. The SEC alleges that their actions had the effect of inflating reported operating revenue by improperly misclassifying more than $5 billion of bulk sales as operating revenue.
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.
The complaint alleges that in November 2001, with Millers approval and Beaulieus knowledge, Cardinal implemented an undisclosed internal practice, under which it reclassified any revenue from the sale of bulk product held on its premises for 24 hours or longer as operating revenue. Jensen allegedly became aware of this undisclosed practice and its impact on operating revenue after becoming Cardinals controller in August 2002.
Cardinal began to intentionally hold bulk inventory orders on its premises for longer than 24 hours in certain quarters, in order to convert the sales from bulk revenue to operating revenue. This maneuver was known as the 24-Hour Lever. The SEC complaint alleges that Miller decided when to use the 24-Hour Lever, and that Beaulieu and Jensen participated in deciding to activate the 24-Hour Lever, based on the strength or weakness of Cardinals quarterly sales. Miller, Jensen and Beaulieu used the 24-Hour Lever, along with other revenue and earnings management practices, to fraudulently overstate Cardinals reported operating revenue and earnings.
According to the complaint, Miller, Jensen and Beaulieu manipulated Cardinals reported earnings by selectively accelerating, without disclosure, the payment of vendor invoices in order to prematurely record a cumulative gross total of $133 million in cash discount income. The SEC also alleges that, at different times, and to varying degrees, Miller, Jensen and Beaulieu also boosted Cardinals reported earnings by improperly creating and using a general reserve account and approving improper adjustments to other reserve accounts.
The complaint alleges that these improper reserve practices contributed to Cardinal overstating approximately $65.9 million in net earnings from fiscal years 2000 through 2004. Miller also allegedly advocated for and approved the improper classification of $22 million in anticipated litigation settlement proceeds, which enabled Cardinal to meet its earnings targets in two quarters.
Without admitting or denying the allegations, Miller, Jensen and Beaulieu have consented to the entry of orders permanently enjoining them from engaging in such violations. Miller agreed to an order imposing a $120,000 civil penalty against him and prohibiting him from acting as an officer or director of a public company for a period of five years.
Jensen agreed to an order imposing a $75,000 civil penalty and prohibiting him from acting as an officer and director of a public company for three years. Beaulieu agreed to an order imposing a $50,000 civil penalty and prohibiting him from acting as an officer or director of a public company for three years. The settlements are subject to the approval of the U.S. District Court for the Southern District of New York.
In addition, without admitting or denying the SECs findings, the three men have been suspended from appearing or practicing before the SEC as accountants, with Miller given the right to re-apply after five years, and Jensen and Beaulieu after three years.
