U.S. Securities and Exchange Commission
Litigation Release No. 18170 / June 4, 2003
Accounting and Auditing Enforcement Release No. 1792 / June 4, 2003
Securities and Exchange Commission v. Charles W. McCall, United States District Court for the Northern District of California, Civil Action No. CO3-2603-SC
SEC Charges Former Chairman of the Board of Directors of McKesson HBOC for His Role in the Massive Accounting Fraud
The Securities and Exchange Commission today announced charges against the former Chief Executive Officer of HBO & Company and the former Chairman of the Board of Directors of McKesson HBOC, Charles W. McCall, for his role in the financial reporting fraud at the companies. McKesson HBOC (since renamed McKesson Corporation), a Fortune 100 company with headquarters in San Francisco, California, was formed by the January 1999 merger of McKesson Corporation with HBO & Company ("HBOC"), an Atlanta, Georgia-based vendor of healthcare software. McCall becomes the eleventh person charged by the Commission in its investigation of the long-running fraudulent scheme to inflate the company's revenue and net income. He is the highest company official to be charged. McCall, age 59, lives in Fort Lauderdale, Florida.
In a separate action, the U.S. Attorney's Office for the Northern District of California also filed criminal charges against McCall and Jay Lapine, HBOC's former general counsel. The Commission already has a securities fraud suit pending against Lapine.
According to the Commission's complaint, McCall and other top officers participated in a long-running fraudulent scheme to artificially inflate revenue and net income of HBOC and later McKesson HBOC. When the fraud was discovered in April 1999, McKesson HBOC's stock tumbled from approximately $65 to $34 a share, a drop that slashed the company's market value by more than $9 billion. McCall's participation in the fraud began at least by January 1998 and continued through the March 1999 quarter, which was the first combined reporting period for McKesson HBOC.
As alleged in the Commission's complaint, McCall, in concert with others, used a variety of means to inflate HBOC's and McKesson HBOC's revenues and earnings, most prominently, by the use of side letters and agreements in connection with software licensing contracts. These side letters and agreements provided customers with the right to cancel contracts or return product if certain contingencies were not met. Generally Accepted Accounting Principles preclude recognition of revenue from contingent contracts, until the contingency is satisfied. The side letters were separated from the rest of the contracts and were not provided to the company's outside auditors thus circumventing the companies' accounting controls and falsifying the companies' books and records.
The Commission's charges allege that McCall, acting with others, engaged in other prohibited practices, such as backdating contracts and swapping inventory for the purpose of increasing revenue. McCall, in concert with others, also is alleged to have managed earnings by using the company's acquisition reserves to reduce unrelated current expenses. This violated Generally Accepted Accounting Principles because it artificially reduced reported operating expenses and increased quarterly net income and earnings per share.
McCall's role in the fraud is alleged to have culminated in April 1999, when he was chairman of the board of directors of the combined McKesson HBOC. Shortly after the end of McKesson HBOC's March 31, 1999 quarter, McCall helped negotiate a $20 million software deal with Data General Corporation. The deal was then backdated to make it appear that it had been entered into prior to the end of the March 31, 1999 quarter, and McKesson HBOC fraudulently recognized revenue on the transaction in that quarter. As alleged in the Commission's complaint, the Data General transaction was designed by McCall and others to enable McKesson HBOC to meet analyst expectations for the March 31, 1999 quarter, which also was McKesson HBOC's fiscal year end.
The fraud alleged against McCall enabled HBOC to report an unbroken run of financial success, and continually to exceed analysts' quarterly earnings expectations. 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. McKesson HBOC was required to restate its combined financial results for the previous three fiscal years.
The Commission has charged that McCall violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), 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 from McCall a permanent injunction against future violations of these provisions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties. The Commission also seeks to bar McCall from being an officer or director of a public company.