A criminal investigation on illegal drug shipments against two
of the biggest global logistics companies -
United Parcel Service, Inc.
) - is what the market least expected from an industry,
especially when the market is already dwindling with poor
The biggest players in the parcel industry are now under the
scrutiny of federal grand jury for dealing in shipments of
illegally operated online pharmacies. Both the companies have
already mentioned this legal probe in their regulatory filings
and expect the case to be reconsidered.
However, there is hardly any near-term visibility in the
dismissal of such litigation as recent investigations project
difficult times ahead for both FedEx & UPS. According to
reports, 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
The disclosure was followed by an immediate shutdown of these
online stores and several arrests were made that resulted in
further investigations proving involvement of shipping companies.
According to news, recent arrests pertaining to the case have
revealed involvement of FedEx and UPS in delivering drugs without
proper prescriptions. However, the companies have been in denial
regarding such revelations.
In July 2006, UPS and FedEx both served subpoena from grand
jury as a part of the investigation by the Antitrust Division of
the U.S. Department of Justice. The subpoena required them to
furnish records that could provide an insight into possible
antitrust violations in transportation of packages for online
Although this legal battle has been going on for many years,
it did not draw much attention. Even now, the market seems to be
less responsive with no significant changes in the stock prices
of FedEx and UPS.
Regulatory issues have not been new to the parcel industry.
Companies like UPS and
Expeditors International of Washington Inc.
) have been in the news earlier this year for price fixation. In
March 2012, the European Union (EU) commission's antitrust
regulators have charged $225 million as fine to 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 logistics companies were involved in four
cartel activities, fixing air freight 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 the news, how far these shipping companies can
be held responsible for verifying prescription before delivering
medical products is yet to be proven. As a matter of fact, do
these shipping companies really have a contractual binding beyond
delivering goods to the user end in desired condition? Was there
any rule set in the preview of federal laws that establish
regulatory bindings for shipping different products or something
as cautionary as drugs?
Further, nothing much has been revealed in the investigation
regarding the nature of the drugs shipped i.e., whether these
were merely over the counter drugs or involved prescription
drugs. In addition, it is also not transparent that these
shipping companies actually verified records on legality of such
online pharmacies with which they held business
All these questions still remain unanswered but in the coming
days we expect more visibility in this legal action.
We assume the legal proceeding may not have a material adverse
impact given the mammoth financial strength of these companies.
However, the rising number of litigations does call over a closer
look into the existing regulations that continue to govern the
freight forwarding companies.
The emergence of e-commerce does not only require advancement
of technology but also calls for a revival of age old laws that
continue to govern modern day businesses. As for the parcel
industry, will there be any change in the regulatory environment
yet to be discovered. Even if the change does take place, the
benefits it would have for carriers as well as consumers would be
something to watch out for.
We have a long-term Neutral recommendation on UPS and FedEx.
The stocks retain a Zacks #3 Rank, implying a short-term (1-3
months) Hold rating.
EXPEDITORS INTL (EXPD): Free Stock Analysis
FEDEX CORP (FDX): Free Stock Analysis Report
UTD PARCEL SRVC (UPS): Free Stock Analysis
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