The charges against United Parcel Service, Inc. (UPS) for doing business with illegal online pharmacies finally reached a conclusion after it settled the case with a non-prosecution agreement with the U.S. Department of Justice. Under this settlement, the company will forfeit $40 million it earned from illegal Internet pharmacies shipping drugs using its services and implement a compliance program against such practices.
We assume that the legal charges may not have a material adverse impact given the mammoth financial strength of UPS. However, the rising number of legal battles against carriers like UPS does call for a closer look into the existing regulations that continue to govern the freight forwarding companies.
The case dates back to 2005, when an investigation done by the U.S. Drug Enforcement Administration (:DEA) exposed approximately 4600 online pharmacies that were operated illegally.
The disclosure was followed by an immediate shutdown of these online stores and several arrests that resulted in further investigation proving the involvement of shipping companies like UPS. Other major shipping companies like FedEx Corporation (FDX) were also indicted of delivering drugs without proper prescriptions. However, these companies were on denial after these revelations were made.
In Jul 2006, UPS and FedEx served a subpoena from grand jury as part of an investigation by the Antitrust Division of the U.S. Department of Justice. The subpoena required them to furnish records that could provide insight into possible antitrust violations in transportation of packages for online pharmacies.
Regulatory issues are not new to the parcel industry. Companies like UPS and Expeditors International of Washington Inc. (EXPD) have been in news earlier this year for price fixation. In Mar 2012, the European Union (EU) commission’s antitrust regulators have charged $225 million as fine on 14 international freight forwarding companies for perusing price fixing activities for freight transactions in Europe.
According to investigation under the EU commission antitrust department, these logistic companies were involved in four cartel activities, fixing airfreight prices between 2002 and 2007. Cartel activities that are undertaken through the collusion of various groups of people or companies involve fixing of any underlying factor that influences market behavior, such as price or production, in order to reduce competition and derive maximum benefit from consumers.
Coming back to UPS, we believe the emergence of e-commerce is giving rise to questionable practices undertaken by many shipping carriers to maximize profits as no concrete regulation has yet been implemented to this online business. In particular, for the parcel industry, any change in the regulatory environment is yet to be made.
UPS has a Zacks Rank #3 (Hold).
Air Transport Services Group, Inc. (ATSG) with a Zacks Ranks #2 (Buy) is another stock in this sector we see as worth considering.
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