The company also spelled out details of its dealings with its former consultant, Alfred Villalobos, who was a past Calpers board member when Medco engaged him in 2004, two years before it won the system's business. The commission seeks documents relating to current and former affiliates of Villalobos and Calpers, among other people and entities, Medco said in a filing with the SEC.
Disclosure of the subpoena caps a week in which Calpers dropped the company from consideration for renewal of the PBM contract as of 2012, amid government probes surrounding the awarding of the original pact. Medco shares slid 13.7% this week.
Medco, one of the nation's largest PBMs, said its own independent directors have been monitoring state and federal probes of Villalobos, and that the independent directors and the board's audit committee have decided not to conduct an internal investigation now.
Calpers earlier this month said it had contacted Medco's independent directors and urged them that the situation required the company to conduct an independent investigation and that the nation's largest public pension fund expected a prompt report of the outcome.
Medco had previously disclosed that the SEC made a phone inquiry about Villalobos last month, and that the California attorney general's office requested information about him from the company last year.
"The company intends to provide documents and to cooperate with the SEC and to continue to voluntarily cooperate with the California attorney general," the SEC filing said.
Medco said it engaged Villalobos after its previous Calpers pharmacy benefits management contract ended in 2002 and before Calpers issued a request for bids in 2005. Medco engaged the consultant after Calpers hired a big plaintiffs' law firm to pursue "perceived issues with the company's PBM services under the contract ending in 2002," the filing said.
"The consultant was compensated $4 million, paid over time in four equal installments, to primarily provide advice and assistance on connection with what the company anticipated would be and, in fact, became, a lengthy, contentious and highly detailed audit. The audit was successfully concluded and the outstanding issues were resolved," Medco said.
Medco said it then paid Villalobos $20,000 a month in a year-to-year contract ending in 2009, "and largely unrelated to Calpers. Both contracts with the consultant stipulated that he follow all laws and regulations in connection with his work for the company, and required the consultant to avoid all conflicts of interest or even the appearance of impropriety."
Calpers this week dropped Medco from consideration for a renewal of its PBM contract, which expires at the end of this year. The company had been a finalist for the business and a Calpers committee had recommended it be the top competitor.
On Monday, Calpers released a report it commissioned to examine middlemen paid by outside money managers to help win fund business, and said the review found apparent misconduct and that some top fund officials had acted inconsistently with their responsibilities.
The report, by an outside law firm, said Villalobos, acting as a go-between, and his firm had earned tens of millions of dollars in Calpers-related deals. A relatively small portion of the report included descriptions of meetings in 2004 at Villalobos' Nevada home between Medco CEO David B. Snow Jr., Villalobos and several men who were Calpers officials at the time.
Snow, while not addressing specifics of the report, said this week that Medco always has behaved with integrity.
"I view the report as incomplete and misleading," Villalobos' attorney, Neal Stephens of Cooley LLP, said Friday, complaining that it didn't reference comments made in a court case that presented Villalobos' activities in a more balanced light.
California last year filed civil fraud charges against Villalobos, alleging that, acting as a placement agent, or middleman, for investment firms, he entertained key senior Calpers executives who then influenced the board to authorize securities transactions that generated millions in commissions for him. The case doesn't involve Medco, and Villalobos has denied wrongdoing.
The state's case against Villalobos has been stayed as a result of his federal bankruptcy proceedings. Defense attorney Stephens noted that the bankruptcy judge cited sworn testimony by Calpers' witnesses as exposing "misrepresentations" in the state's allegations against Villalobos.
Separately on Friday, attorneys representing California state workers filed a lawsuit against Medco and three former Calpers officials, claiming violations of the state's unfair competition law and asking for restitution of all money paid to Medco under the contract.
By the time the current, renewed contract expires at the end of the year, Calpers has said it will have paid Medco some $48 million since 2006. Medco managed about $500 million of prescriptions for Calpers employees in 2009.
-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-982-5582; firstname.lastname@example.org
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(END) Dow Jones Newswires
March 18, 2011 18:46 ET (22:46 GMT)
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