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Why Won't Medco Admit Its CEO Is Linked to an SEC Investigation?

Everything you need to know about why the California Public Employees' Retirement System fired Medco (MHS) last week as its pharmacy benefit manager can be found on page 11 of this internal CalPERS report detailing the alleged wrongdoings of its former CEO.

The controversy is complicated, but its central allegation can be boiled down to a single sentence: Medco paid a consultant $4 million; that consultant then paid for the wedding of former CalPERS CEO Fred Buenrostro; and CalPERS then awarded Medco a $48 million contract to manage pharmacy benefits for the retirement fund. (CalPERS administers the largest state pension fund in the U.S., and Medco previously handled prescription drug benefits for 300,000 of its members.)

Moreover, Medco CEO David Snow (pictured) attended a meeting that is now the focus of a kickback investigation by the SEC, according to CalPERS, yet Medco has not made that clear to its investors.

The CalPERS report is admirably detailed about the failings of its former CEO and various board members. That transparency stands in stark contrast to Johnson & Johnson (JNJ) and Sequenom (SQNM), where neither company has offered any significant detail as to what went wrong with their Tylenol production and Down Syndrome testing, respectively, even though both have led to the ouster of senior executives and millions of dollars in lost revenues.

A meeting in Nevada
Here is how Medco won its CalPERS contract in 2005, according to the report. It's worth quoting at length because it is so rare for a large financial institution to be this forthcoming about its own management:

In late May 2004, Alfred Villalobos hosted a meeting at his home in Nevada, a few miles from Lake Tahoe and the California border. Villalobos, a former member of the CalPERS Board of Administration and a former Deputy Mayor of the City of Los Angeles, was joined by David Snow, the Chairman and Chief Executive Officer of Medco Health Solutions, one of the nation's largest pharmacy benefit management ("PBM") companies, and Fred Buenrostro, who was the Chief Executive Officer of CalPERS -â€" a public official -â€" at the time.

Soon after the May 2004 meeting at the Villalobos home, Medco agreed to retain Villalobos as a consultant and pay him $4 million.

... That November, Buenrostro would also allow Villalobos to host Buenrostro's wedding at the Villalobos home and reportedly pay for the new couple's related expenses.

... Buenrostro was married in 2004, while serving as CEO, and allowed Villalobos to not only host the wedding at his home in Nevada, but reportedly also allowed Villalobos to pay for the event as well as lodging nearby for Buenrostro's guests who attended the ceremony.

The marriage of Buenrostro (pictured) didn't last very long:
... after his divorce and over the course of his last two years as CEO [until 2008], Buenrostro dated a woman employed for part of that time by one of CalPERS' investment managers.
In October 2005, the year after Buenrostro got married on Snow's consultant's dime, Medco got the CalPERS contract:
Medco apparently had a check cut for hand-delivery that same day â€" a $1 million payment to Villalobos, the final installment of the initial $4 million agreement.
The report does not allege any wrongdoing by Snow. It does say that CalPERS has a lot more information about what went down at the Snow-Buenrostro meeting in 2004 that it cannot reveal "in deference to law enforcement authority requests." And it hints that Medco has other skeletons in its closet:
As a former Villalobos associate said, "Do you think we just did this in California? We took the show on the road."
Medco oddly coy
CalPERS' disclosure reveals how non-transparent Medco has been about its potential legal problems. The protagonists in this scandal could, in theory, go to prison. Yet here is how Medco described the controversy in its annual report:
In April 2010, the Attorney General for the State of California requested information from the Company about a former consultant engaged by the Company in 2004.... In February 2011, the Company received a telephonic inquiry from the staff of the Securities and Exchange Commission with respect to its investigation relating to this former consultant.
Aside from stating that it was cooperating, Medco offered investors no further substantive information. On March 18, after it was fired, it elaborated a little more about why it hired Villalobos:
The Consultant was engaged by the Company after CalPERS had retained a large national plaintiffs' law firm to pursue perceived issues with the Company's PBM services under the contract ending in 2002. This was during a time in which the Company was concurrently managing an extensive caseload of publicly disclosed legal challenges.
But the company has yet to admit that its current CEO allegedly attended a meeting that is under investigation by the SEC.

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