State and federal authorities are investigating possible wrongdoing in connection with the California Public Employees' Retirement System's award of a contract to provide prescription drugs to its members, according to records and interviews.
That contract was first awarded in 2006 to Medco Health Solutions Inc., the nation's biggest pharmaceutical benefits manager with $66 billion in annual sales, to administer benefits for state government workers, retirees and their families.
CalPERS said late Friday that Medco paid Alfred J.R. Villalobos, a former CalPERS board member, more than $4 million for serving as a consultant and helping Medco win the contract.
The nation's largest public pension fund also said the consulting arrangement "may have included improper conduct" by former CalPERS Chief Executive Federico Buenrostro Jr. and other former board members.
CalPERS already has been staggered by claims that Villalobos received huge commissions for helping investment firms win contracts for managing part of the fund's huge portfolio and that Villalobos gave expensive gifts to Buenrostro and other employees as part of his sales efforts.
The latest allegations involving Medco "are appalling and leave a deep scar," said CalPERS Chief Executive Anne Stausboll.
"We have and will continue to evaluate and pursue every remedy that we can to ensure that this never happens again," she said.
In a regulatory filing last week, Medco disclosed that the California attorney general's office has been looking into the activities of "a former consultant" working for Medco in 2004.
Medco also said it had received a "telephonic inquiry" from the Securities and Exchange Commission about its investigation "relating to this former consultant."
The company, based in Franklin Lakes, N.J., said it was voluntarily cooperating with the official requests, but it declined to comment beyond the statements made in its Feb. 22 filing with the SEC.
In 2004, Medco was negotiating with CalPERS to win a contract to provide prescription drug benefits for members. The fund provides healthcare benefits to 1.2 million people.
Villalobos did not return calls for comment.
Last May, the state sued Villalobos and Buenrostro, alleging they schemed to get CalPERS business for investment firms by giving pension fund officials luxury trips and other gifts.
Villalobos and Buenrostro have denied any wrongdoing in connection with that suit.
Medco won the $26-million, three-year CalPERS contract starting July 1, 2006. It was renewed for 18 months on July 1, 2009, and extended through this year, bringing the total for all three contracts to $48 million.
In October, a CalPERS board committee on health benefits named Medco the top contender among four competitors to win a new three-year contract in 2012. But California State Treasurer Bill Lockyer, a CalPERS board member, will ask the committee to reconsider the recommendation, said his spokesman, Tom Dresslar.
In the last 10 years, Medco has been the focus of a number of state and federal investigations and lawsuits.
Among them are three whistle-blower suits in federal courts. Two, filed in Pennsylvania and New Jersey, are sealed, but the company said in its SEC filing that they involved allegations of overcharging, duplicate billing and other billing misconduct. A third was dismissed by a U.S. District Court judge in Florida and is being appealed.
In 2006, Medco agreed to pay $155 million to settle civil fraud claims brought by the Justice Department. The lawsuit had accused Medco of violating U.S. False Claims and Anti-Kickback acts. It accused Medco of "destroying and canceling valid patient prescriptions, soliciting kickbacks from pharmaceutical manufacturers to favor their drugs and paying kickbacks to health plans to obtain business," Justice officials said at the time.
Two years earlier, Medco agreed to pay $29 million to settle similar allegations brought by the U.S. attorney in Philadelphia and the attorneys general of 20 states, including California.
Among the practices it had to change was a procedure in which it switched drugs prescribed to patients with the result of adding costs to patients and their health plans.
Villalobos and his company, Arvco Capital Research of Zephyr Cove, Nev., obtained more than $47 million in "undisclosed and unlawful commissions" for helping private investment firms win about $4.8 billion worth of CalPERS funds to manage, the attorneys general lawsuit said. The suit asked for $95 million in restitution and civil penalties.
The suit also alleged that Buenrostro, the top CalPERS executive from 2002 to 2008, took tens of thousands of dollars in gifts from Villalobos, including a Lake Tahoe condominium in December 2009. A day after retiring from CalPERS, Buenrostro joined Villalobos' company.
As a so-called placement agent or sales intermediary, Villalobos used his personal connections, including a 20-year friendship with Buenrostro, to help Wall Street private equity and investment managers close deals to manage billions of dollars of CalPERS money, the lawsuit said.
Another longtime associate, former CalPERS board member Charles Valdes, accompanied Villalobos on a 2006 round-the-world trip to Dubai and other cities, the lawsuit alleged. Valdes did not report the trip, valued at more than $20,000, as a gift to a public official and later said he reimbursed Villalobos for the travel costs.
In an Aug. 3 deposition, state officials asked Valdes whether he knew anything about CalPERS' contract negotiations with Medco. Valdes declined to answer the question, according to published reports.
Neither Valdes nor his attorney responded to requests for comment.
In September, California's suit was stayed in U.S. Bankruptcy Court in Reno, where Villalobos and Arvco filed for protection from creditors.