Penney Says 'No' to Fraud Rumors

In the wake of Kmart Corp. (Troy, Mich.) announcing it was being investigated by the Securities and Exchange Commission for accounting irregularities, J.C. Penney Corp. (Plano, Texas) said rumors about its accounting irregularities are “unfounded and without merit.”

The rumors suggested that Eckerd Corp., the drugstore division of Penney, had participated in an alleged Medicare fraud. A whistleblower in Florida, where Eckerd is based, is said to have brought the allegations to a U.S. senator, who in turn brought it to the attention of government regulators. The rumors drove Penney's stock price down 8 percent on Thursday and Friday.

Both Florida senators, Democrats Bob Graham and Bill Nelson, said they were not aware of any investigation but would inquire within their respective offices.

Eckerd has been under government scrutiny before. In July 2001, the drugstore chain entered a plea deal with the Department of Justice and agreed to pay $1.7 million for overcharging on Medicaid prescriptions. The government also filed a related civil case in 1998, which is still pending (according to an Eckerd spokeswoman).

The 2600-store Eckerd operation, which Penney bought in 1996, lost about $600,000 last year on revenues of $13 billion. But Allen Questrom, the presidentand ceo hired by Penney in 2000 to turn the company's business around, has made Eckerd a key part of his plan. Last year, he told a financial group thatEckerd alone could be worth between $9 billion and $11 billion within three years, more than the entire company's current market capitalization of $6.25 billion.