UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17189 / October 15, 2001
Accounting and Auditing Enforcement Release No. 1467 / October 15, 2001
SEC CHARGES SIX FORMER SENOR EXECUTIVES AND EMPLOYEES IN MASSIVE FINANCIAL REPORTING FRAUD SCHEME AT MCKESSON HBOC, INC.
SECURITIES AND EXCHANGE COMMISSION v. JAY LAPINE, United States District Court for the Northern District of California, Civil Action No. C-01-3650 (VRW)
SECURITIES AND EXCHANGE COMMISSION V. MICHAEL SMERASKI, TIMOTHY HEYERDAHL, DEBORAH MATTIFORD, ELAINE DECKER, AND DAVID HELD, United States District Court for the Northern District of California, Civil Action No. C-01-3651 (MMC)
On September 27, 2001, the United States Securities and Exchange Commission filed securities fraud charges against the former General Counsel, Senior Vice President of Finance, Chief Financial Officer, Senior Vice President in charge of Enterprise Sales, and two other former gatekeepers of the financials of HBO & Company ("HBOC"), later a subsidiary of McKesson HBOC, Inc. (now known as McKesson Corporation). The Commission alleges that each of the senior managers played integral roles in a scheme to "cook the books" of the company. The wrongdoing pervaded the top levels of HBOC's legal, finance, accounting, sales and other departments. This massive financial reporting fraud scheme began at Atlanta-based HBOC in 1997, and continued after its January 1999 merger with San Francisco-based McKesson Corporation. When the fraud was first disclosed in April 1999, McKesson HBOC shares tumbled from approximately $65 to $34, a decline that slashed the company's market value by more than $9 billion.
These complaints follow the Commission's action on September 28, 2000, in which the Commission brought fraud charges against the former co-Presidents and the former head of sales of HBOC at the same time that the co-Presidents were indicted by the United States Attorney's Office for their direction of the financial fraud scheme. Those actions are pending.
The complaints filed September 27, 2001 were filed in federal district court in San Francisco, and the Commission alleged that the six former top officers and employees of HBOC participated in the scheme by booking revenue on incomplete deals, backdating contracts, falsifying the company's financial records, and/or lying to the outside auditors to conceal the fraud. Four of the defendants simultaneously settled these charges. Named were the following:
Jay Lapine, former General Counsel of HBOC and later the HBOC division of McKesson HBOC, is alleged to have negotiated "side letters" to customer contracts so that software revenue could be booked prematurely. He also backdated documents on a fraudulent $20 million software deal that was negotiated and signed in April 1999 to make it appear that it had been concluded in the previous quarter. Lapine lives in Alpharetta, Georgia.
Michael Smeraski, former Senior Vice President of Enterprise Sales of HBOC and later McKesson HBOC, closed deals with side letters that were hidden from the contract accounting department, backdated contract documents on deals closed after quarter-end, and directed his salespeople to do the same. Smeraski is a resident of Medford, New Jersey.
Timothy S. Heyerdahl, a Certified Public Accountant and former Senior Vice President of Finance and Treasury of HBOC, repeatedly made end-of-quarter entries in the company's books to fraudulently inflate the company's net income--including simply deleting significant expense amounts--and lied to the outside auditors to hide the fraud. Heyerdahl lives in Smyrna, Georgia.
Deborah Mattiford, former director of HBOC's Contract and Administration Department, violated her duty to be a gatekeeper and ensure that all software sales contracts were complete when forwarded to accounting for revenue recognition. She instructed her staff to separate from the contracts any side letters containing revenue-preventing contingencies before forwarding the contracts to accounting, and instructed her staff to alter the company's books and records to conceal the scheme. Mattiford lives in Marietta, Georgia.
Elaine Decker, a former Certified Public Accountant and former Manager of Contract Accounting at HBOC, also participated in the fraud by abdicating her gatekeeper role over the recording of software revenue when she repeatedly booked revenue on contracts where she knew it was improper to do so. Decker lives in Alpharetta, Georgia.
David Held, a Certified Public Accountant and former Chief Financial Officer of HBOC and later the HBOC division of McKesson HBOC, approved recognition of revenue on a $20 million transaction for the March 1999 quarter despite knowing that the deal had been negotiated and finalized in April, after quarter-end. Held resides in Alpharetta, Georgia.
As a result of the fraud, the financial statements of HBOC, and later McKesson HBOC, were materially false and misleading during at least the period January 1998 through April 1999. The Commission's complaints allege that all of the defendants violated the antifraud, internal controls, and books and records provisions of the federal securities laws (Sections 10(b) and 13(b)(5) of the Exchange Act of 1934 and Rule 13b2-1). One complaint also alleges that Smeraski, Heyerdahl, and Decker violated the antifraud provision in connection with the offer or sale of securities (Section 17(a) of the Securities Act of 1933). The complaints further allege that Lapine, Heyerdahl, Decker, Held and Mattiford aided and abetted the company's violations of the requirement to file accurate periodic reports with the Commission (Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, except that Held is not alleged to have violated Section 13(b)(2) (A)). In addition, one complaint further alleges that Heyerdahl violated the rule against lying to auditors (Rule 13b2-2 under Section 13(b)(5) of the Exchange Act). The complaints also claim that Lapine, Smeraski, Heyerdahl, and Mattiford were unjustly enriched through significant bonuses tied to meeting earnings expectations, or through sales of HBOC stock while the price was inflated due to their fraud, and seeks to compel disgorgement of these sums. The complaints further seek to enjoin Smeraski, Lapine, and Heyerdahl from serving as officers or directors of public companies.
Simultaneous with the filing of the Commission's civil complaints, Heyerdahl, Mattiford, Decker, and Held consented, without admitting or denying the allegations in the complaints, to the entry of a permanent injunction against all of the alleged violations. Heyerdahl also agreed to disgorge $521,492.18 in ill-gotten gains (including interest), to pay a civil penalty of $100,000, and to be enjoined for five years from serving as an officer or director of a public company. Heyerdahl further agreed to an order in an administrative proceeding to be filed by the Commission denying him the privilege of practicing before the Commission as an accountant for five years. In addition to the injunctive relief, Mattiford also agreed to pay disgorgement and interest totaling $27,438.72 and a civil penalty of $55,000. Decker agreed to pay a civil penalty of $35,000, and agreed to an order in an administrative proceeding to be filed by the Commission denying her the privilege of practicing before the Commission as an accountant for three years. Finally, Held agreed to pay a civil penalty of $15,000 and an order in an administrative proceeding to be filed by the Commission denying him the privilege of practicing before the Commission as an accountant for three years.