CVS agrees to pay $110m to settle suit
Complaint alleges securities violation
CVS Corp. has agreed to pay $110 million to shareholders to settle a lawsuit that claimed the company violated federal securities laws by making false and misleading statements to artificially inflate stock prices, according to a proposal filed yesterday in US District Court in Boston.
The lawsuit alleges that CVS, the largest chain pharmacy by number of stores, violated accounting practices by delaying discounts on merchandise in an effort to prop up earnings.
The complaint also accused CVS and chief executive Thomas M. Ryan in 2001 of waiting several months to disclose that CVS intended to shutter 200 underperforming stores and that a pharmacist shortage would have a negative impact on the company.
''We believe this is a significant recovery for class members and have asked the court to grant preliminary approval of the settlement," said Deborah Weintraub, an attorney representing the lead plaintiff in the CVS case, the Plumbers & Pipefitters National Pension Fund.
The proposed settlement is the third-largest payout in a securities action in federal court in Boston, according to the agreement. The cash settlement applies to investors who purchased common stock of CVS between Feb. 6, 2001, and Oct. 30, 2001.
In a statement released yesterday evening, CVS officials said the company ''continues to deny liability and entered into the settlement agreement solely to avoid the risk and diversion of resources associated with trial."
The accord, which must be approved by the court, will be paid for ''primarily" by the company's insurers, the statement said. Todd Andrews, a CVS spokesman, said he could not provide a more specific breakdown for the settlement.
Woonsocket, R.I.-based CVS, which operates 5,375 retail and specialty pharmacy stores, had sales of $30.6 billion and $919 million in profits in 2004.
The lawsuit was scheduled to go to trial in federal court in Boston last month. Instead, a federal judge will rule tomorrow whether the settlement should receive preliminary approval by the court. If preliminary approval is granted, a hearing will be set to determine whether the agreement is fair and adequate and then a final approval will be issued.
The CVS case reflects shareholders' growing demand for transparency and highlights the difficulties companies face with disclosure.
''We're now in an environment, for better or worse, where more than 30 companies have paid out $100 million or more for various forms of securities fraud allegations since 1996," said Joseph Grundfest, a professor at Stanford Law School and a former commissioner of the Securities and Exchange Commission.
Eric Bosshard, an analyst with FTN Midwest Research, said disclosure, however, can be a gray area. The SEC requires publicly traded companies to release important information that could affect the stock price.
''It's hard to know when to disclose something because you never know how things are really going to turn out," Bosshard said.
John Nester, a spokesman for the SEC, declined to comment on whether the agency is investigating allegations made against CVS in the shareholder lawsuit.
The suit, which was filed in federal court in 2001, alleged that CVS made a series of false and misleading statements and omissions in public documents.
In the lawsuit, shareholders claimed CVS ''misled the investing public."
The lawsuit alleges CVS took merchandise that was scheduled to be marked down off the shelves and delayed accounting for the expense for several months. By doing so, the lawsuit claims CVS was able to count the merchandise's full value in its earnings report.
The lawsuit also accused the CVS chief executive of insider trading, saying Ryan sold 95,040 shares of CVS stock for a $5 million profit a month before he disclosed the company's second quarter and full year earnings would not meet projections in 2001.
The suit accuses Ryan of withholding that negative information from investors for several months. On June 27, 2001, when Ryan disclosed that information, the stock dropped to $36.51 a share from $44.10 a share, according to the lawsuit.
Shares of CVS yesterday rose 79 cents to close at $58.06 on the New York Stock Exchange.
Jenn Abelson can be reached at abelson@globe.com. 