UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16743 / October 2, 2000
Accounting and Auditing Enforcement Release No. 1329 / October 2, 2000
SECURITIES AND EXCHANGE COMMISSION v. JAY GILBERTSON, ALBERT BERGONZI AND DOMINICK DEROSA, United States District Court for the Northern District of California, Civil Action No. C-00-3570 (WHA)
SEC Charges Former Executives In Massive Financial Reporting Fraud At McKesson HBOC
The Securities and Exchange Commission today announced the first charges from its continuing investigation into financial reporting fraud at McKesson HBOC, a Fortune 100 company with headquarters in San Francisco, California. McKesson HBOC was formed by the January 1999 merger of San Francisco-based McKesson Corporation with HBO & Company, an Atlanta, Georgia-based vendor of healthcare software. The Commission's action charges three people, including the two top officers of HBO & Company, with participating in a long-running fraudulent scheme to inflate the company's revenue and net income. In a separate action, the U.S. Attorney's Office for the Northern District of California also filed criminal charges against two of the officers.
According to the Commission's complaint, the fraud began at HBO & Company in 1997 and continued in successive quarters through the March 1999 quarter, which was the first combined reporting period for McKesson HBOC. The defendants' 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' quarterly earnings 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 the company's market value by more than $9 billion.
The Commission's complaint charges that two former top executives of HBO & Company, Jay P. Gilbertson and Albert J. Bergonzi, were the architects of this fraudulent scheme to "cook the books." While carrying out this scheme, defendants unjustly enriched themselves with lucrative bonuses tied to the company's financial performance, as well as sales of HBO & Company stock at prices inflated by their fraud. Gilbertson and Bergonzi were HBO & Company's Co-Presidents and Co-Chief Operating Officers, and Gilbertson was also HBO & Company's Chief Financial Officer until he left the company in November 1998. Following the January 1999 merger, Bergonzi was an Executive Vice President of McKesson HBOC, and remained President of the HBO & Company division of the combined company until June 1999.
The Commission's complaint also names as a defendant Dominick A. DeRosa, who was Vice President of Enterprise Sales of HBO & Company until September 1998. The complaint alleges that Bergonzi, Gilbertson, and DeRosa repeatedly took active steps to perpetuate the fraud and conceal their actions from the public, including:
As a result of the fraud, the financial statements of HBO & Company, and later McKesson HBOC, were materially false and misleading during at least the period January 1998 through April 1999. The Commission's complaint alleges that the defendants violated the antifraud, internal controls, and books and records provisions of the federal securities laws, and also alleges that Gilbertson violated the rule against lying to auditors (Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Exchange Act of 1934 and Rules 13b2-1 and 13b2-2 thereunder). The complaint also alleges that each of the defendants was unjustly enriched through significant bonuses tied to meeting earnings expectations, or through sales of HBO & Company stock while the price was inflated due to their fraud, and seeks to compel disgorgement of these sums. The complaint further seeks to suspend or bar the defendants from serving as officers or directors of public companies.
Simultaneous with the filing of the Commission's civil complaint, DeRosa consented, without admitting or denying the allegations in the Commission's complaint, to the entry of a permanent injunction against all of the alleged violations. He agreed to disgorge $361,528.80 in ill-gotten gains (including interest) and to pay a civil penalty of $50,000. DeRosa also agreed to be barred for five years from serving as an officer or director of a public company.
In a separate action, the U.S. Attorney's Office for the Northern District of California announced criminal charges against Gilbertson and Bergonzi for their roles in the fraud.