Charles McCall, the former chairman of prescription drug distributor McKesson Corp., has been sentenced to 10 years in prison after he was convicted for his role in accounting fraud.

McCall, 65, of Delray Beach, Fla., was convicted last November of four counts of securities fraud and one count of circumventing internal accounting controls at a public company. The jury found that he had engaged in an accounting fraud between December 1997 and April 1999 that falsely inflated the publicly reported revenues of HBO & Company of Alpharetta, Ga., and McKessonHBOC of San Francisco, after McKesson acquired HBOC.

At the sentencing hearing in San Francisco on March 5, U.S. District Court Judge William H. Alsup sentenced McCall to 120 months on each securities fraud count and 60 months on the circumventing internal accounting controls count, sentences to run concurrently. The judge also imposed a $1 million fine. Prosecutors introduced expert testimony to establish that the loss to investors from the fraud exceeded $8.6 billion. Alsup denied McCall bail pending appeal and ordered that he surrender to the United States Marshal on March 31, 2010, at noon.

In 1997, when the fraud began, McCall was chief executive of HBOC. On Jan. 12, 1999, when McKesson acquired HBOC, , an Atlanta-based vendor of health care technology, the corporation’s name changed to McKessonHBOC, and McCall became chairman of the board of the newly combined company. On April 28, 1999, McKessonHBOC announced that it would restate its financial performance for the quarter ending March 31, 1999 after detecting aspects of the fraud. The price of McKessonHBOC’s stock, which traded on the New York Stock Exchange, dropped by approximately 47 percent with the news of the restatement, wiping out approximately $8 billion in shareholder value in one day.

Evidence at trial showed that McCall participated in a scheme to defraud that falsely inflated, by an amount in excess of $100 million, the software revenues reported by HBOC and McKessonHBOC.  McCall knew that salespeople within the companies entered into contingent software sales that, if known, would have required the revenue to be deferred, but the transactions were concealed in so-called side letters and withheld from the companies’ outside independent auditors. 

The jury found that McCall had falsified HBOC’s financial statements for the quarter ending June 30, 1998, the quarter ending Sept. 30, 1998 and in a registration statement filed on Nov. 13, 1998 in conjunction with the announced merger with McKesson. The jury further found that McCall engaged in a similar scheme that continued into the quarter ending March 1999 and involved the financial statements of the newly-merged company, McKessonHBOC. 

McCall was indicted on June 3, 2003. The first trial resulted in a mistrial in November 2006.

Separately, the Securities and Exchange Commission announced Wednesday that it had settled a civil fraud injunctive action on March 1 against former McKesson attorney Jay Lapine in connection with securities fraud and financial reporting fraud at the company.
Lapine consented to the entry of judgment without admitting or denying the allegations of the SEC's complaint except as to jurisdiction.

The SEC complaint, filed Sept. 27, 2001, alleged that Lapine, together with other senior executives, participated in the fraudulent scheme with which McCall was charged, to inflate the revenue and net income of HBOC. As part of the scheme, Lapine, the general counsel of HBOC and later, of the health care technology unit of McKesson HBOC, took part in negotiating two large backdated transactions with side agreements containing cancellation contingencies that enabled the companies to recognize revenue in earlier reporting periods. Both of these practices failed to comply with GAAP.

The fraud enabled HBOC and McKesson HBOC to report falsely in press releases and in periodic reports HBOC filed with the SEC that the companies were having an unbroken run of financial success and had continually exceeded analysts' expectations.

However, when McKesson HBOC announced in April 1999 that the company was conducting an internal investigation into financial reporting irregularities, its shares tumbled from approximately $65 to $34, a drop that slashed its market value by more than $9 billion. The SEC also alleged that Lapine failed in his gatekeeper role during the multi-year long scheme.

The final judgment against Lapine permanently enjoins him from violating securities laws and barred him from acting as an officer or director of a public company for a period of five years. He was also ordered to pay a civil penalty of $60,000. Lapine was acquitted on Nov. 19, 2009 of criminal charges related to the fraud at HBOC and McKesson HBOC.

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