Second suit questions Caremark options - 6/1/2006

Pirelli trust calls timing of grants to CEO 'miraculous' By TODD PACK Staff Writer Published: Thursday, 06/01/06

A second shareholder has filed suit against Caremark Rx Inc. executives and board members over questions about the timing of stock option grants to senior executives.

Caremark has denied backdating any options.

Last month, the Nashville-based disease management company said it had received a federal grand jury subpoena and a letter of informal inquiry from the Securities and Exchange Commission concerning its stock option grants. It said the SEC also wanted information related to the company's relocation program.

Pirelli's lawsuit notes that Caremark granted 1.25 million stock options to senior executives on March 1, 2005, which coincided with the stock's low price for the year. The lawsuit, which was filed on Friday but wasn't entered into court records until Tuesday, calls the timing of the options "miraculous."

Options often are used as incentives for senior executives. They let executives buy stock at a set price, usually the closing price of the stock on the date that the options were granted.

If the price increases, the executives can buy shares at the lower price and sell them at an immediate profit. If the options were backdated to when the closing price was at or near its lowest point, the executives could sell their shares for a higher profit.

The Pirelli trust's lawsuit likens the practice to "picking lottery numbers on the day after the winning numbers are announced."

Its lawsuit followed a derivative action bought by a New York investor.

That lawsuit cited a May 19 story in The Wall Street Journal that said the company's chairman, president and chief executive, Mac Crawford, was awarded 3.875 million stock options on March 8, 2000. The options gave Crawford the right to buy shares of the company for 15 percent above the closing price that day, which coincided with the stock's low point of the year.

In that lawsuit, the investor, Stewart Simon, said the odds of that occurring by chance "are very slim."

Crawford has denied receiving backdated stock options. A spokesman said Tuesday that the company has a policy against commenting on pending litigation.