U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20243 / August 15, 2007
Securities and Exchange Commission v. Michael G. Smeraski, et al., Case No. C-01-3651 MJJ (N.D. Cal.)
SEC Settles Civil Fraud Injunctive Action Against Former McKesson Corporation Executive
On August 7, 2007, a consent and final judgment against Michael G. Smeraski was entered by the United States District Court for the Northern District of California. Smeraski was charged in a previously-filed action with securities fraud in connection with a massive financial reporting fraud at McKesson HBOC Corporation (now, McKesson Corporation), a Fortune 100 company headquartered in San Francisco, California. Smeraski consented to the entry of judgment without admitting or denying the allegations of the Commission's complaint except as to jurisdiction.
The Commission's Complaint
The Complaint, filed September 27, 2001, alleged that Smeraski, a senior sales vice president, together with other senior executives participated in a long-running fraudulent scheme to inflate the revenue and net income of HBO & Company, an Atlanta, Georgia-based vendor of health care software that merged with McKesson in 1999. Smeraski and others routinely approved software sales contracts with associated side letters containing unsatisfied contingencies precluding revenue recognition and backdated contracts and other documents for the purpose of recognizing revenue in an earlier reporting period. Both of these practices failed to comply with Generally Accepted Accounting Principles. The fraud enabled HBO & Company to report falsely in press releases and in periodic reports filed with the Commission that the company was having an unbroken run of financial success and that HBO & Company 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 final judgment against Smeraski permanently enjoins him from violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5)of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Smeraski was ordered to pay a civil penalty of $50,000. For additional information, see Litigation Release No. 17189 (Oct. 15, 2001); 16743 (Oct. 2, 2000).