Undaunted by allegations of fraud, CalPERS on Monday formally awarded a huge drug-benefit contract to CVS Caremark.

CalPERS chose Caremark even though the company is being sued by several former employees for allegedly defrauding the pension fund the last time it held the contract, nearly a decade ago.

The pension fund said it didn't consider the lawsuit a serious issue. Besides, it has instituted safeguards in the new contract, including quarterly evaluations, "performance guarantees and penalties for noncompliance," said Brad Pacheco, a spokesman for the California Public Employees' Retirement System.

Caremark got the deal only because Medco Health Solutions Inc., the incumbent carrier and CalPERS' No. 1 choice for a new contract, became entangled in the bribery scandal involving businessman and former CalPERS board member Alfred Villalobos.

In a brief statement, Caremark said it is "pleased" to have won the contract.

The contract is a big one, worth several hundred million dollars a year in revenue. Caremark, based in Woonsocket, R.I., will ship prescription drugs to nearly 350,000 members of CalPERS' PPO programs.

Caremark had the contract from 2003 to 2006. In a lawsuit pending in Los Angeles Superior Court, some former employees say Caremark falsified records, improperly switched patients to cheaper drugs and shipped drugs that had been returned to the warehouse.

The company has said it did nothing wrong. However, it has entered into settlement discussions with the former employees, said Caremark spokeswoman Christine Cramer in an email.

The case was supposed to go to trial in May but has been put off indefinitely.

CalPERS has long been aware of the allegations, but said its own audit of Caremark's performance under the earlier contract unearthed no major problems. Pacheco said several of the claims made in the lawsuit have been dropped, and the "lawsuit has been diminished in so many ways."

The lawsuit was kept sealed while the California attorney general investigated the allegations. The state, without giving a reason, chose not to join in the lawsuit, and it was unsealed in 2005. Even though the state isn't pursuing the case, it would collect damages if the lawsuit succeeds; the former employees would get a "whistle-blower's" share.

Medco won the contract away from Caremark in 2006 and finished first in the bidding for a new contract set to begin next January. But in March, allegations surfaced that Medco paid more than $4 million to Villalobos, the man accused of bribing pension fund officials to influence investment decisions.

An investigation commissioned by CalPERS concluded that Medco hired Villalobos to help it win the 2006 contract. Medco said it did nothing wrong and hired Villalobos to help clear up some old audit issues.

In any event, CalPERS called off discussions with Medco on the new contract and began negotiating with the runner-up, Caremark.

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