U.S. Securities and Exchange Commission
Litigation Release No. 18649 / March 31, 2004
Accounting and Auditing Enforcement Release No. 1981 / March 31, 2004
SECURITIES AND EXCHANGE COMMISSION v. RICHARD H. HAWKINS, United States District Court for the Northern District of California, Civil Action No. 04-1259 CW
SEC Charges Former Chief Financial Officer of McKesson HBOC For His Role in the Massive Accounting Fraud
The Securities and Exchange Commission today announced civil fraud charges against the Chief Financial Officer of McKesson HBOC for his role in a massive accounting fraud. McKesson HBOC (now renamed McKesson Corporation) is a Fortune 100 company with its corporate headquarters in San Francisco.
The SEC's complaint, filed in the Northern District of California, alleges that Richard Hawkins, age 53, of Atherton, California, violated the antifraud, lying-to-accountants, and books and records provisions of the federal securities law. Mr. Hawkins also was indicted today on criminal charges stemming from his role in the fraud.
As alleged in the complaint, Mr. Hawkins participated in a fraudulent scheme with other former McKesson officers to artificially inflate the company's financial results for the fiscal quarter ended March 31, 1999, by fraudulently recognizing revenue on a $20 million transaction between McKesson and Data General Corporation. Mr. Hawkins and others caused revenue from the Data General transaction to be reported to the public as part of the company's earnings release on April 22, 1999, despite the fact that McKesson's independent auditors told Mr. Hawkins that revenue from the transaction could not be recognized. Soon after the fraud was discovered in April 1999, McKesson's stock tumbled from approximately $65 to $34 a share, a drop that slashed the company's market value by more than $9 billion.
Mr. Hawkins was also formerly the Chief Financial Officer of San Francisco-based McKesson Corporation before the company's January 1999 merger with Atlanta-based HBOC & Company ("HBOC") to form McKesson HBOC. The charges relate to Mr. Hawkins conduct in the first fiscal quarter after the merger.
Mr. Hawkins is the only former McKesson officer who was not employed by HBOC, to date, to be charged in the investigations into the accounting fraud at McKesson HBOC. Mr. Hawkins becomes the twelfth person charged civilly by the SEC in connection with this investigation. Six former HBOC executives have previously been charged criminally.
According to the civil complaint, the charges against Hawkins stem from his involvement in a single fraudulent $20 million transaction between McKesson and Data General. The transaction allowed McKesson to report to the public that the company met Wall Street analysts's expectations for the quarter ended March 31, 1999, which was the first quarter of combined operations after McKesson's acquisition of HBOC.
According to the complaint, the Data General transaction was fraudulent for three reasons: the deal was backdated, gave Data General an unconditional right to return the McKesson product, and was a swap that was not accounted for as a swap.
According to the complaint, the Data General transaction was conceived, negotiated, and executed, in its entirety, after the close of the quarter. The transaction consisted of two separate contracts. The first contract was improperly backdated to March 31, 1999. The second contract was dated April 5, 1999. Both contracts were contingent upon each other and negotiated contemporaneously as part of the same transaction. The second contract also contained a provision requiring McKesson to buy back any software that Data General was unable to resell.
According to the complaint, although McKesson HBOC's outside auditors informed Mr. Hawkins that revenue from the transaction could not be recognized under Generally Accepted Accounting Principles, Mr. Hawkins and others included the $20 million transaction in the company's earnings release on April 22, 1999. Hawkins also made false statements to the company's auditors regarding the Data General transaction.
The SEC charges Mr. Hawkins with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, and 13b2-2 thereunder. The Commission is seeking to enjoin Mr. Hawkins from committing future violations of these provisions, compel him to pay disgorgement, prejudgment interest, and civil monetary penalties, and to bar Mr. Hawkins from serving as an officer or director of a public company.