The former chairman of drug wholesaling giant McKesson Corp. has been charged in connection with what prosecutors say was a "long-running fraudulent scheme" to inflate revenue and profit at a software firm he headed.
A federal grand jury indictment, unsealed Wednesday, charges that Charles W. McCall, 59, conspired with other executives to "cook the books" at the firm, HBOC, resulting in $9 billion in shareholder losses. The firm was acquired in early 1999 by McKesson, a San Francisco company that generated $57.1 billion in revenue last year and is one of the nation's largest corporations.
McCall was charged with seven counts of securities fraud, including conspiracy. Each count carries a maximum penalty of 10 years in prison and a $1-million fine. He also faces civil charges.
McCall, a resident of Fort Lauderdale, Fla., was out of the country Wednesday "on a long-planned vacation" when the indictment was unsealed but was immediately returning to the United States to fight the charges, his San Francisco attorney Michael Shepard said.
"We're all very disappointed and surprised. He didn't do it," said Shepard, who would not reveal where McCall was on vacation. McCall will be arrested when he returns, authorities at the U.S. attorney's office said, adding that "there is no allegation at this time that he fled to avoid prosecution."
The indictment of McCall, and of the company's former general counsel, appears to be the culmination of a lengthy investigation that has troubled McKesson since the alleged scheme was exposed in 1999. Six people have been charged criminally by the U.S. attorney's office and Federal Bureau of Investigation in connection with the scandal.
Analysts said the case wasn't likely to hurt McKesson.
"It doesn't affect how I look at the company," said Andrew Speller, an analyst with A.G. Edwards & Sons. "It brings to light some fraudulent activity that was going on and paves the way for a settlement of the class-action suits against the company."
Larry Kurtz, a spokesman for the company, noted that last year, securities regulators gave McKesson a clean bill of health in writing.
"The events today are old news. McKesson is clean. We've moved on," he said. He added, "Over the course of this investigation, we have cooperated fully with the Securities and Exchange Commission and the U.S. attorney's office."
McCall was chief executive of Atlanta-based maker of health-care software HBO & Co., known as HBOC, when McKesson bought it in early 1999 for $12 billion. In April of that year, the combined company, McKesson HBOC, lost $9 billion of market value after the accounting irregularities were uncovered. McCall was fired as chairman of McKesson HBOC by the board in June 1999. The company has since gone back to its original name.
The grand jury also indicted another former executive of HBOC, Jay Lapine, 51, of Alpharetta, Ga., on securities fraud charges.
Lapin, the company's former general counsel, was arrested in San Francisco but pleaded innocent to the charges in federal court Wednesday and was released on a $500,000 bond, authorities said.
Also on Wednesday, U.S. attorneys announced that three other former HBOC executives had pleaded guilty to various charges related to the alleged accounting scheme. They are former HBOC Chief Financial Officer Jay Gilbertson, former Senior Vice President for Sales Dominick DeRosa and former Senior Vice President for Finance Timothy Heyerdahl. The U.S. also filed criminal charges against Albert Bergonzi, former president of HBOC. The SEC already had brought civil charges against Bergonzi, and his case is pending.
"Unscrupulous executives who attempt to deceive shareholders for the purposes of inflating stock prices and enhancing their positions within the company are violating federal laws," said Kevin V. Ryan, U.S. attorney for the Northern District of California. "These cases demonstrate our continuing commitment to root out corporate fraud and punish those who intentionally deceive the investing public."
The indictment alleges that the HBOC executives made false statements to outside auditors and in filings with the Securities and Exchange Commission. The men inflated revenue by recording it on contracts that included "side letters" that permitted customers to cancel, backdating contracts to record revenue in certain quarters and making false entries in books, the indictment alleges.
McCall is the most senior official to be charged in the civil and criminal investigations. . McCall becomes the eleventh person charged by the SEC.
"This is not a major surprise. It took a long time coming," said Eric Coldwell, a health-care analyst with Robert W. Baird & Co. in Chicago. "Clearly, the market didn't read too much into this."
Speller estimated that the suits eventually would be settled for about $500 million to $800 million.
McKesson shares were up 82 cents at $31.80 in New York Stock Exchange trading.