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UNITED STATES DISTRICT COURTDISTRICT OF NEW JERSEY

ARNOLD DLUTSCI L , Individually and On Behalf Case No. ~' ~ ``,of All Others Similarly Situated,

Plaintiff,

- against - r1

MERCK & CO ., INC., RAYMOND V . GILMARTIKENNETH. C. FRAZIER, RICHARD C .HIEN RIQUES, JU1)Y C . LEWENT and MARY M. ucat

McDONALD AL L 1 2002Defendants . AT '

------------------------ ------------- -------- ---------------------WILLIAM T If ALSHCLERK

CLASS ACTION COMPLAINT - JURY TRIAL DEMANDE D

Plaintiff, individually and on behalf of all other persons similarly situated, by hi s

undersigned attorneys, for his complaint, alleges upon personal knowledge as to himself

and his own acts, and upon information and belief as to all other matters, based upon an

investigation made by and through his attorneys, which included, among other things, a

review of news stories and other public documents regarding Merck & Co., Inc ,

("Merck" or the "Company"), including its press releases and public filings with the

Securities and Exchange Commission (the "SEC") ,

NATURE OF THE ACTION

I , Plaintiff brings this action as a class action on behalf of himself and al l

other persons or entities who purchased or otherwise acquired the common stock of

Merck during the period July 1, 1999 through and including June 21, 2002 (the "Class

Period"), to recover damages caused by Defendants' violations of the federal securities

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laws .

2. Merck describes itself as a research-driven pharmaceutical products and

services company that discovers , develops, manufactures and markets a broad range of

human and animal health products , directly and through joint ventures . The Company's

operations are comprised of two reportable segments : Merck Pharmaceutical, which

includes products marketed either directly or through joint ventures, and Merck ' s wholly

owned subsidiary , Merck -Medco Managed Care , L.L.C. ("Merck-Mcdco") . Merck-

Mcdco manages pharmacy benefits for employers, insurers and other plan sponsors .

3. Since Merck acquired Merck-Medco in 1993 and throughout the Clas s

Period, Merck and Merck-Medco have falsely inflated their reported revenues by billion s

of dollars, in violation of Generally Accepted Accounting Principles ("GAAP") In

particular, the Company reported inflated Merck-Medco revenues that, in turn, inflate d

total revenues for Merck . During the Class Pe riod , Merck-Medco' s revenues have made

up over 50% of Merck ' s total revenues .

4. Merck-Mcdco revenues are purportedly derived from the filling an d

managing prescriptions and health management programs . Consumers who are member s

of pharmacy benefits plans and purchase prescriptions must make a co-payment directl y

to the pharmacy .

5. To artificially boost Merck-Medco' s apparent sales, Defendants include d

consumer co-payments for prescription drugs in its revenues, contrary to the revenu e

recognition practices of two of Merck-Medco's biggest competitors and in violation o f

GAAP. As a result, Merck-Mcdco and Merck overstated the companies' total economic

activity, making it look more successful than it was in reality ,

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b . According to a June 21, 2002 article in The Wall. Street Journal , which

first broke the story, neither company bills for the co-payments, gets billed for there, o r

otherwise comes into contact with them . Defendants admit that the companies do not

have any risk for these co-payments . Their recognition thus violates GAAP . Indeed, The

Wall Street Journal quoted Lynn Turner, a former chief accountant with the SEC as

saying "a PBM that has no legal liability for the co-payment, has no risk for the co-pa y

and in fact never ever receives the co -payment, it would not be appropri ate under GAAP

to report this revenue . "

7. According to The Wail Street Journal , Merck has not disclosed the actua l

co-payments charged . In general, however, drug prescription co-payments range from $5

to $50, averaging between $10 and $15 per prescription . Assuming an average co-

payment of $10 per prescription, The Wall Street Journal estimated Merck and Merck-

Medea may have artificially inflated their 2001 revenues by as much as $4 .6 billion .

Similar overstatements would have occurred for 1999 and 2000 .

8. In the wake of The Wall Street Journal article, the price of Merck' s

common stock immediately dropped 4 .25% from its closing price of $52 , 20 on June 20 ,

2002 to its closing price of $49 .98 on June 21, 2002, its lowest closing price since late

1997 .

JURISDICTION AND VENUE

9. The claims alleged herein arise under Sections 10(h) and 20 of the

Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C . § 78j(b) and 78t, an d

Rule 10b-S , 17 C .F.R. § 240 . 10b-5 promulgated thereunder .

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10. The jurisdiction of this Court is based on Section 27 of the Exchange Act,

15 U.S.C. 78aa and 28 U.S .C. § 133 .

11 . Venue i s proper in this District pursuant to Section 27 of the Exchange

Act and 28 U .S .C . § 1391(h) . Many of the acts alleged herein , including the

dissemination to the investing public of the misleading statements and omissions at issue ,

occurred in substantial part in this District . Merck also maintains its principal executive

offices in this District .

12 . In connection with the acts, transactions and conduct alleged herein ,

Defendants used the means and instrumentalities of interstate commerce, including th e

United States mails, interstate telephone communications and the facilities of nationa l

securities exchanges and markets .

THE PARTIE S

13 . Plaintiff purchased shares of Merck common stock during the class perio d

as set forth in the certification attached hereto .

14. Defendant Merck maintains its principal executive offices at One Merc k

Drive, Whitehouse Station, New Jersey . Merck trades on the New York Stock Exchange

under the ticker symbol "MRK .,,

15. Defendant Raymond V_ Gilmartin ("Gilmartin") has been, at all relevant

times, the Company's Chairman of the Board of Directors, President and Chief Executiv e

Officer . During the Class Period, Gilmartin was quoted in and approved the Company' s

false and misleading press releases and signed the Company's false and misleadin g

annual reports filed with the SEC on Form 10-K .

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16. Defendant Kenneth C. Frazier ("Frazier") has been , at all relevant times

since December 1999, the Company's Senior Vice President and General Counsel .

During the Class Period, Frazier signed each of the Company ' s false and misleadin g

quarterly reports filed with the SEC on Form 1p-Q after December 1999 .

17. Defendant Richard C, Henriques ("Henriques") has been , at all relevan t

times, the Company's Vice President and Controller. During the Class Period, Henrique s

signed each of the Company's false and misleading quarterly reports filed with the SE C

on Form 10-Q and the Company' s false and misleading annual reports filed with the SE C

on Form 10-K.

18, Defendant Judy C . Lewent ("Lewent") has been, at all relevant times, the

Company's Executive Vice President, Chief Financial Officer and Principal Financia l

Officer . During the Class Period , Lewenl signed the false and misleading annual repo rt s

filed with the SEC on Form 10-K .

19 . Defendant Mary M . McDonald ("McDonald") was, at all relevant. times

until December 1999, the Company's Senior Vice President and General Counsel .

During the Class Period, McDonald signed each of the Company's false and misleadin g

quarterly reports filed with the SEC on Form 10-Q prior to December 1999 .

20. Defendants Gilmartin, Frazier, Henriques, Lewent and McDonald ar e

sometimes referred to herein as the "Individual Defendants ."

21 . By reason of their positions with the Company, the Individual Defendant s

had access to internal Company documents, reports and other information, includin g

adverse non-public information concerning the Company's services, financial condition ,

and future prospects, and attended management and/or board of director meetings . As a

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result of the foregoing, they were responsible for the truthfulness and accuracy of th e

Company's public reports and releases described herein .

22. Merck and the Individual Defendants, as officers and directors of a

publicly held company, had a duty to promptly disseminate truthful and accurat e

information with respect to Merck and to promptly correct any public statements issued

by or on behalf of the Company that had become false and misleading .

23 . Each Defendant knew or recklessly disregarded that the misleadin g

statements and omissions complained of herein would adversely affect the integrity of th e

market for the Company's stock and would cause the price of the Company's stock to

become artificially inflated . Each Defendant acted knowingly or in such a reckles s

manner as to constitute a fraud and deceit upon Plaintiff and the other members of th e

Class .

24_ Defendants are liable, jointly and severally, as direct participants in an d

co-conspirators of, the wrongs complained of herein .

CLASS ACTION ALLEGATION S

25. Plaintiff brings this action as a class action pursuant to Federal Rules o f

Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons wh o

purchased Merck common stock during the period from July 1, 1999 through and

including June 21, 2002, and who suffered damages thereby. Excluded are Defendants ,

members of Defendants` families, any entity in which any Defendant has a controllin g

interest or is a parent or subsidiary of or is controlled by the Company, and the officers ,

directors, employees, affiliates, legal representatives, heirs, predecessors, successors an d

assigns of any of Defendants (the "Class")

r26. The members of the class are so numerous that joinder of all members i s

impracticable . While the exact number of Class members is unknown to Plaintiff at thi s

time and can only be ascertained through appropriate discovery, Plaintiff believes there

are, at a minimum, hundreds of members of the Class who traded during the Class Period .

27 . Common questions of law and fact exist as to all members of the Clas s

and predominate over any questions affecting solely individual members of the Class .

Among the questions of law and fact common to the Class are ,

a. whether the federal securities laws were violated by Defendants ' acts as

alleged herein ;

b, whether Merck issued false and misleading statements during the Clas s

Period;

c, whether the Individual Defendants caused Merck to issue false and

misleading statements during the Class Period ;

d, whether Defendants acted knowingly or recklessly in issuing false an d

misleading statements ;

e. whether the market prices of Merck securities during the Class Period

were artificially inflated because of Defendants' conduct complained o f

herein ; and

f. whether the members of the Class have sustained damages and, if so, what

is the proper measure of damages .

28 . Plaintiffs claims are typical of the claims of the members of the Class as

Plaintiff and members of the Class sustained damages arising out of Defendants '

wrongful conduct in violation of federal law as complained of herein .

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29. Plaintiff will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class actions an d

securities litigation . Plaintiff has no interests antagonistic to or in conflict with those o f

the Class .

30. A cla ss action is superior to other available methods for the fair an d

efficient adjudication of the controversy since joinder of all members of the Class is

impracticable . Furthermore, because the damages suffered by the individual Class

members may be relatively small, the expense and burden of individual litigation make it

impossible for the Class members individually to redress the wrongs done to them . There

will be no difficulty in the management of this action as a class action .

FRAUD ON THE MARKET PRESLTMP`l'IO N

31 . Plaintiff will rely, in part, upon the presumption of reliance established by

the fraud-on-the-market doctrine, in that ,

a. Defendants made public misrepresentations or failed to disclose materia l

facts regarding Merck's revenues, profits and sales during the Class

Period;

b. The omissions and misrepresentations were material ;

c . The common stock of the Company traded on the New York Stoc k

Exchange ("NYSE"), an efficient and open market ;

d. The misrepresentations and omissions alleged would tend to induce a

reasonable investor to misjudge the value of the Company 's commo n

stock ;

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e. Plaintiff and the members of the Class purchased their NYSE stock

between the time Defendants failed to disclose or misrepresented material

facts and the time the true facts were disclosed, without knowledge of the

misrepresented facts ; and

f. Merck was followed by various analysts such as : Bear Stearns & Co., Inc . ,

Prudential Securities-Equity, Leerink, Swann & Company, CIBC World

Markets, Crowell Wecdon & Company, Friedman , Billings , Ramsey &

Co., Inc ., and Gruntal & Co ., U -C . At all relevant times, the price of

Merck's stock reflected the effect of news disseminated in the market .

32. Based on the foregoing, Plaintiff and the members of the Class are entitled

to the presumption of reliance upon the integrity of the market .

I)EFEIVDANTS' FALSE AND MISLEADING STATEMENTS

33 . On May 12, 1999, the Company filed its Quarterly Report on Form 10- Q

with the SEC for the period ended March 31, 1999 (the "First Quarter 1999 10-Q") ,

reporting Merck revenues of $8 .2 billion and Merck-Medco revenues of $4 .3 billion fo r

the first quarter of 1999 . Defendants McDonald and Henriques signed the First Quarter

1999 1p-Q .

34. On July 23, 1999, the Company emphasized the importance of its sale s

volume, reporting that its sales revenues rose 24% for the second quarter of 1999 .

Defendant Gilmartin was quoted as stating that "[s]ales growth for the quarter and the

first half of 1999 was led by established major products, the newer products . as well

as growth from the Merck-Medco Managed Cared business ." (Emphasis added) .

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35, On July 23,1999, an article in the Medical Industry Today noted that

Merck-Mcdco "saw sales of $3 .76 billion from drugs made by companies other than

Merck - - up 33% from the 1998 quarter . "

36. On August 12, 1999, the Company filed its Quarterly Report on For m

10-Q with the SEC for the period ended June 30, 1999 (the "Second Quarter 1999 10-

Q"), reporting Merck revenues of $8 .7 billion and Merck-Medco revenues of $4 .4 billion

for the second quarter of 1999 . The Company also reported Merck revenues of $16 .9

billion and Merck-Mcdco revenues of $8 .7 billion for the first six months of 1999 .

Defendants McDonald and Henriques signed the Second Quarter 1999 10-Q .

37. On October 21, 1999 , the Company reported that sales were up 20% a t

$8 .2 billion for the third quarter of 1999 . Defendant Gilmartin was quoted as stating that

"[s]ales growth for the quarter and nine months of 1999 was led by established major

products, the newer products . . . and growth fro m the Merck-Medco Managed Cared

business." (Emphasis added) . Defendant Gilmartin also stated that "[i]ncome growth for

the first nine months was driven by strong sales volume gains as well as [other factors] ."

According to the Company, Merck-Medco 's sales were up 31% at $3.8 billion for th e

third quarter .

38 . On November 12, 1999, the Company filed its Quarterly Report on For m

10-Q with the SEC for the period ended September 30, 1999 (the "Third Quarter 1999

if?-Q"), reporting Merck revenues of $8 .9 billion and Merck-Mcdco revenues of $4 .5

billion for the third quarter of 1999 . The Company also reported Merck revenues of

$25.7 billion and Merck-Medco revenues of $13 .2 billion for the first nine months o f

1999. Defendants McDonald and Henriques signed the Third Quarter 1999 10-Q .

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39 . On January 26, 2000, the Company announced that sales for the fourt h

quarter of 1999 were $9 .0 billion , up 19%, and sales for the 1999 fiscal year were $32.7

billion , up 22% . Defendant Gilma rt in was quoted as stating that "[s]ales growth for the

quarter and the year was led by established major products , the newer products . . . as

well as growth from the Merck-Medea Managed Cared business" and that "[ i]ncome

growth for the year was driven by strong sales volume gains as well as [other factors] . "

(Emphasis added) .

40. On March 22, 2000, the Company filed its Annual Report on Form 10- K

with the SEC for the quarter and year ended December 3 :I, 1999 (the "1999 10-K") ,

reporting Merck revenues of $35 .4 billion and Merck-Medco revenues of $18 .1 billion

for the year ended December 31, 1999. Defendants Gilmartin, Lewent and Henrique s

signed the 1999 10-K ,

41 . On April 24, 2000, the Company announced that sales for the first quarter

of 2000 were $8 .9 billion, up 17% . Defendant Gilmartin was quoted as stating that

"[s]ales growth for the quarter was led by V1OXX . . . other newer and established

products and growth from the Merck-Medco Managed Cared business," that "[o]verall,

[the Company's] worldwide operations reported strong sales volume gains" and that

"[i]ncome growth for the quarter was driven by strong sales volume gains as well as

[other factors] ." (Emphasis added) .

42 . ❑n May 12, 2000, the Company filed its Quarterly Report on Form 10-Q

with the SEC for the period ended March 31, 2000 (the "First Quarter 2000 10-Q") ,

reporting Merck revenues of $9.5 billion and Merck-Medco revenues of $4 .9 billion for

•the first quarter of 2000 . Defendants Frazier and Henriques signed the First Quarter 200 0

JO-Q .

43. On August 10, 2000, the Company tiled its Quarterly Report on Form 10-

Q with the SEC for the period ended June 30, 2000 (the "Second Quarter 2000 10-Q") ,

reporting Merck revenues of $10,2 billion and Merck-Medco revenues of $5 .2 billion for

the second quarter of 2000 . The Company also reported Merck revenues of $19 .7 billion

and Merck-Medco revenues of $8 .7 billion for the first six months of 2000 . Defendants

Frazier and Henriques signed the Second Quarter 2000 10-Q .

44. On October 23, 2000, the Company announced its third quarter of 200 0

results. Defendant Gilmartin was quoted as stating that "[i]ncome growth for the quarte r

and first nine months reflects strong sales volume gains . . , as well as manufacturin g

productivity improvements ." According to the Company, Merck-Medco and the

Company's human health products drove the sales volume growth .

45 . On November 13, 2000, the Company filed its Quarterly Report on For m

10-Q with the SEC for the period ended September 30, 2000 (the `Third Quarter 2000

10-Q") reporting Merck revenues of $11 .4 billion and Merck-Medco revenues of $6 . 2

billion for the third quarter of 2000 . The Company also reported Merck revenues o f

$25 .7 billion and Merck-Medco revenues of $13 .2 billion for the first nine months of

2000. Defendants Frazier and Henriques signed the Second Quarter 2000'10-Q .

46. On January 23, 2001, the Company announced its fourth quarter and year

end 2000 results . Defendant Gilmartin was quoted as stating that "[i]ncorne . growth for

the quarter and first nine months reflects strong sales volume gains, as well as

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manufacturing productivity improvements ." According to the Company, Merck-Medc o

and the Company's human health products drove the sales volume growth .

47. On March 23, 2001, the Company filed its Annual Report on Form 10-K

with the SEC for the quarter and year ended December 31, 2000 (the "200010-K") ,

reporting Merck revenues of $43 .1 billion and Merck-Medco revenues of $23 .3 billion

for the year ended December 31, 2000 . Defendants Gilmartin, Lewent and Henriques

signed the 2000 10-K .

48 . On April 20, 2001, Defendants issued a press release announcing firs t

quarter 2001 results . In the press release, the Company announced that first quarter 200 1

"net income grew 11 % to $1,657 .3 million driven. by a 28% sales increase fbr the quarter

to $11 .3 billion . Sales growth was driven by Merck's human health products, whic h

increased 8% for the first quarter, and the Merck-Medco business." (emphasis added) .

According to the Company, "Merck-Medco continued its strong contribution to Merck's

revenue growth in the first quarter of 2001 ." The Company also reaffirmed its full-year

2001 financial guidance, as set forth in its February 15, 2001 press release, stating that

the "company remains comfortable with the estimates of the income statement

components cited in that release, including the sales forecasts . . . . .. (emphasis added) .

49. On May 10, 2001, the Company filed its Quarterly Report on Form 10- Q

with the SEC for the period ended March 31, 2001 (the "First Quarter 2001 10-Q") ,

reporting essentially the same results as reported in the April 20, 2001 press release . The

Company reported Merck revenues of $12 billion and Merck-Mcdco revenues of $7 . 2

billion for the first quarter of 2001 . Defendants Frazier and Henriques signed the Firs t

Quarter 2001 10-Q .

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50, On June 22, 2001 , Defendants issued a press release updating its financia l

guidance for 2001, stating that "Merck-Medco sales in 2001 are estimated to range fro m

$25 billion to $26 billion . "

51 . On July 20, 2001, Defendants issued a press release announcing th e

Company's second quarter 2001 financial results . In the press release the Company

announced that second quarter 2001 sales increased 25% to $ 1 1 .9 billion and sales for the

first six months of 2001 grew 27% to $23 .2 billion . The Company also reaffirmed its

June 22, 2002 updated financial guidance, stating that the "company remains comfortable

with the estimates of the income statement components cited in that release, including

.sales forecasts . . . . . . (emphasis added) .

52 . On August 9, 2001, the Company filed its Quarterly Report on Form I0-Q

with the SEC for the period ended June 30, 2001 (the "Second Quarter 2001 10-Q"),

reporting essentially the same results as reported in the July 20, 2001 press release . The

Company reported Merck revenues of $12 .6 billion and Merck-Mcdco revenues of $7 .4

billion for the second quarter of 2001 . The Company also reported Merck revenues of

$24.7 billion and Merck-Medco revenues of $14 .6 billion for the first six months of 2001 .

Defendants Frazier and Heririques signed the Second Quarter 2001 1 Q-Q .

53 . On Octob er 1 8, 2001, Defendants issued a press release announcing th e

Company's results for the third quarter of 2001 . In the press release the Compan y

announced that third quarter 2001 sales increased 13% to $11 .9 billion and sales for the

first nine months of 2001 grew 22% to $35 .2 billion .

54. On November 9, 2001, the Company filed its Quarterly Report on Form

10-Q with the SEC for the period ended September 30, 2001 (the "Third Quarter 200 1

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10-Q"), reporting essentially the same results as reported in the October 18, 2001 pres s

release . The Company reported Merck revenues of $12.7 billion and Merck-Medc o

revenues of $7.3 billion for the third quarter of 2001 . The Company also reported Merck

revenues of $37.3 billion and Merck-Medco revenues of $21 .9 billion for the first nin e

months of 2001 . Defendants Frazier and Henriques signed the Third Quarter 2001 10-Q .

55 . On January 22, 2002, Defendants issued a press release announcing th e

Company's results for the fourth quarter and year-end 2001 . In the press release th e

Company announced that fourth quarter 2001 sales increased 10% to $12.6 billion and

sales for the fiscal year 2001 grew 18% to $47 .7 billion. According to the Company the

iioverall sales growth also benefited from the Merck-Medco business, which increase d

15°%o and 31% for the quarter and year, respectively . "

56. On February 26, 2002, the Company announced that the Board o f

Directors and the Audit Committee had fired Arthur Andersen LLP as the Company' s

independent public accountants and had engaged P riccwaterhouseCoopers LLP to serve

as the Company's independent public accountants for the fiscal year of 2002, subject t o

stockholder ratification .

57. On March 21, 2002, the Company filed its Annual Report on Form 10-K

with the SEC for the fourth quarter and fiscal year ended December 31, 2001 (the "200 1

10-K"), reporting essentially the same results as reported in the January 22, 2002 pres s

release . The Company reported Merck revenues of $50.7 billion and Merck-Medco

revenues of $29,7 billion for the year ended December 31, 2001 . Defendants Gilmartin ,

Lewent and Henriques signed the 2001 10-K .

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58, On April 17, 2002 , the Company filed an S - I Registration Statement (the

"Registration Statement") on behalf of Merck-Medco, in preparation for a spin out of th e

Merck-Medco subsidiary. The Registration Statement was filed under the name

"MedcoHealth Solutions, Inc .," the name that Merck-Medco will change to prior to th e

effective date of the Registration Statement .

59. The Registration statement said in pertinent part :

Although we do not have credit risk with respect to copaymenls, webelieve that all of the above indicators of gross treatment are present . In

addition, we view these copayments as a mechanism that we negotiatewith our clients to help them manage their retained prescription drugspending costs, and the level of copayments do not affect our rebates ormargin on the transaction .

60. Although the Registration Statement said that Merck -Medco' s revenues

included co-payments, it misrepresented that its accounting practices and past result s

complied with GAAP . It also failed to quantify the amount by which past revenues had

been over-stated by this practice .

61 . On April 18, 2002, Defendants issued a press release announcing Merck' s

results for the first quarter of 2002 . In the press release the Company announced that

"[s]ales were $12 .2 billion for the quarter, an increase of 7% compared to the same

period last year ." According to the Company the Merck-Medco "managed over $29

billion in drug spend for its clients in 2001 . . . . "

62. On May 13, 2002, the Company filed its Quarterly Report on Form l 0- Q

with the SEC for the period ended March 31, 2002 (the "First Quarter 2002 10-Q") ,

reporting essentially the same results as reported in the April 18, 2002 press release . The

Company reported Merck revenues of $13 billion and Merck-Medco revenues of $8 . 2

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billion for the first quarter of 2002 . Defendants Frazier and Henriques signed the First

Quarter 2002 10-Q .

63 . Throughout the Class Period, Defendants knowingly or recklessly made

the above materially false and misleading statements and material omissions . These

statements were materially false and misleading and omitted material facts when mad e

because :

a. The Company 's financial statements and public releases announcing

financial results overstated total revenues for Merck-Medco and th e

Company ;

b. The Company's financial statements were not in accordance with GA P

because they included billions of dollars in revenues for co-payments fo r

which Merck-Medco and the Company bore no risk .

64 . Defendants ' misrepresentations and material omissions caused th e

Company's stock price to become and remain artificially inflated throughout the Clas s

Period, causing harm to Plaintiff and the other Class members .

THE TRUTH IS REVEALED

65. On June 21, 2002, The Wall Street Journal reported on the Company' s

revenue-recognition practices for co-payments .

66. According to a Reuters Business Report article that same day, in response

to the WSJ Article, Merck spokesman Greg Reaves admitted that Merck had been using

this accounting treatment since acquiring Merck-Medco in 1993 . The article said

"[a]sked if the real logic of counting the co-payments as revenue was to make Medco

look more successful than rivals, leaves said the answer was more complicated . "

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67, In the wake of the June 21 article, the price of Merck's common stock

immediately dropped 4.25% from its closing price of $52.20 on June 20, 2002 to its

closing price of $49 .98 on June 21, 2002, its lowest closing price since late 1997 .

VIOLA,rIONS OF GAA P

68. GAAP are those principles recognized by the accounting profession as th e

conventions, rules and procedures necessary to define accepted accounting practice at a

particular time - SEC Regulation S-X (17 C . F.R. §§210 .4-01(a)(1)) states that financial

statements tiled with the SEC that are not prepared in compliance with GAAP are

presumed to be m isleading and inaccurate, despite footnote or other disclosures .

Regulation S-X requires that inte ri m financial . statements must also comply with GAAP,

with the exception that interim financial statements need not include disclosures that

would be duplicative of disclosures accompanying annual financial statements . 17 C .F.R .

§210.10-41(a) .

69. Defendants' failure to properly record its revenue violated the followin g

GAAP pri nciples :

a.) the principle that a conservative approach be taken providing earl y

recognition of unfavorable events and minimizing the amount o f

income reported . (See Statement No. 4 of the Accounting Principle s

Board ("APB Nos") at 4 11l`l 28, 35, 1.71) ,

h) the principle that the financial information presented should be

complete. (Lee APB No- 4, ¶9[ 28, 35, 88, 171) ;

c) the principle of fair presentation ("presents fairly") . (See APB No .

4, 9[g[ 109, 138, 189) ;

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d) the principle of adequacy and fairness of disclosure . (See APB No .

4, 9[9[ 81, 106, 189, 199) ;

e) the principle of materiality concerning information that is significant

enough to affect evaluations or decisions . (See APB No . 4, '][125 ,

128) ;

F) the principle that the substance of transactions rather than for m

should be reflected . (See APB No . 4, `1[`J[ 25, 35, 127) ;

g) the principle that the financial statements contain and disclose

relevant, understandable, and timely information for the economi c

decisions of the user. (See APB No. 4, 9[9I 23, 88, 89, 92) ; and

h) the principle that the financial statements provide reliable financial

information about the enterprise for the economic decisions of the

user. (See APB No. 4, 9[9[ 77, 78, 107, 108) .

COUNT I

AGAINST ALL DEFENDANTS FOR VIOLATION OF SECTION 10(b)OF THE EXCHANGE ACT AND RULE 10b-5 OF THE SEC

70. Plaintiff repeats and realleges each and every allegation contained in th e

foregoing paragraphs as if fully set forth herein .

71 . This Count is asserted again,,( all Defendants and is based upon Sectio n

10(b) of the 1934 Act, 15 U .S.C. § 78j(b), and Rule 10b -5 promulgated thereunder .

72. During the Class Period, Defendants, singly and in concert, directly

engaged in a common plan, scheme, and unlawful course of conduct, pursuant to whic h

they knowingly or recklessly engaged in acts, transactions , practices , and courses o f

business which operated as a fraud and deceit upon Plaintiff and the other members of th e

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Class, and made various deceptive and untrue statements of material facts and omitted to

state material facts in order to make the statements made, in light of the circumstance s

under which they were made, not misleading to Plaintiff and the other members of th e

Class . The purpose and effect of said scheme, plan, and unlawful course of conduct was ,

among other things, to induce Plainti if and the other members of the Class to purchas e

Merck common stock during the Class Period at artificially inflated prices .

73 . During the Class Period, Defendants, pursuant to said scheme, plan, an d

unlawful course of conduct, knowingly and recklessly issued, caused to be issued ,

participated in the issuance of, the preparation and issuance of deceptive and materiall y

false and misleading statements to the investing public, as particularized above .

74. Throughout the Class Period, Merck acted through the Individual

Defendants, whom it portrayed and represented to the financial press and public as it s

valid representatives. The willfu lness , motive, knowledge, and recklessness of th e

Individual Defendants are therefore imputed to Merck, which is primarily liable for the

securities law violations of the Individual Defendants while acting in their officia l

capacities as Company representatives, or, in the alternative, which is liable for the act s

of the Individual D efendants under the doctrine of respondent superior .

75. As a result of the dissemination of the false and misleading statements se t

forth above, the market price of Merck common stock was artificially inflated during th e

Class Period. In ignorance of the false and misleading nature of the statements describe d

above and the deceptive and manipulative devices and contrivances employed by sai d

Defendants, Plaintiff and the other members of the Class relied, to their detriment, on the

integrity of the market price of the stock in purchasing Merck common stock. Had

20

Plaintiff and the other members of the Class known the truth, they would not have

purchased said shares or would not have purchased them at the inflated prices that were

paid .

76. Plaintiff and the other members of the Class have suffered substantial

damages as a result of the wrongs herein alleged in an amount to be proved at trial .

77. By reason of the foregoing, Defendants directly violated Section 10(b) of

the Exchange Act and Rule 10b-5 promulgated thereunder in that they : (a) employed

devices, schemes, and artifices to defraud ; (h) made untrue statements of material facts or

omitted to state material facts in order to make the statements -made, in light of the

circumstances under which they were made , not misleading ; or (c) engaged in acts ,

practices, and a course of business which operated as a fraud and deceit upon Plaintiff

and the other members of the Class in connection with their purchases of Merck commo n

stock during the Class Period .

COUNT 1 1

AGAINST T IE INDIV IDUAL DEFENDANTS FORVIOLATION OF SECTION 20(a) OF THE EXCHANGE AC T

78 . Plaintiff repeats and realleges each and every allegation contained in eac h

of the foregoing paragraphs as if set forth fully herein .

79. The Individual Defendants, by virtue of their positions, stock ownershi p

and/or specific acts described above, were, at the time of the wrongs alleged herein ,

controlling persons within the meaning of Section 20(a) of the 1934 Act .

80. The Individual Defendants had the power and influence and exercised the

same to cause Merck to engage in the illegal conduct and practices complained of herein .

21

81 . By reason of the conduct alleged in Count I of the Complaint, th e

Individual Defendants are liable for the aforesaid wrongful conduct, and are liable t o

Plaintiff and to the other members of the Class for the substantial damages which they

suffered in connection with their purchases of Merck common stock during the Class

Period.

PRAYER FOR W LIEF

WHEREFORE, Plaintiff, on his own behalf and on behalf of the Class , prays fo r

judgment as follows :

A. Declaring this action to be a proper class action and certifying Plaintiff a s

class representatives under Rule 23 of the Federal Rules of Civi l Procedure ,

B. Awarding compensatory damages in favor of Plaintiff and the othe r

members of the C lass against all Defendants, Jointly and severally , for the damages

sustained as a result of the wrongdoings of Defendants , together with interest thereon ;

C. Awarding Plaintiff attorneys fees and expenses incurred in this action ,

including reasonable allowance for experts ;

D. Granting extraordinary equitable and/or injunctive relief as permitted by

law, equity and federal and state statutory provisions sued on hereunder; and

E. Granting such other and further relief as the Court may deem just an d

proper.

22

JURY TRIAL DEMANDED

Plaintiff demands a jury trial of all issues so triable.

Date : July 1 , 2()2

KAPLAN FOX, IKI ESHEIMIW R, LLP

William J. Pin' is,Esq .237 South 5tr etMorristown, NJ 07960Telephone: (973) 656-0222Facsi mile : (973) 401-11 l 1

BERMAN, DFVALLRIO PEASETABACCO BURT & PUCILLOJeffrey C . BlockMichael G . LangeSteven D. MorrisOne Liberty SquareBoston, MA 02109Telephone: (617) 542-8300

HOLZER & HOLZERCorey D. HolzerMichael I . Fistel, Jr .6135 Barfield RoadSuite 102Atlanta, GA 30328Telephone: (404) 847-008 5

23

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