White Collar Crime and Securities: Former McKessonHBOC Chairman Sent to Prison

Last week a federal judge in San Francisco sentenced Charles McCall, the former chairman of McKessonHBOC to 10 years in prison for securities fraud. McCall had been found guilty after a jury trial on November 19, 2009. The jury had found him guilty of an accounting fraud that inflated the reported revenues of HBOC and McKessonHBOC. The court denied McCall bail pending appeal and remanded him to the custody of the U.S. Marshal to begin his sentence.

The fraud began in 1997 when McCall was the CEO of HBOC. It continued after McKesson's acquisition of HBOC in early 1999. At the time of the acquisition, the name of the new entity became McKessonHBOC, and McCall became chairman of the board of directors of the new company.

The fraud came to light on April 28, 1999, when McKessonHBOC announced that it would restate its financial information for the quarter that ended March 31, 1999. The announcement caused the price of the the company's stock to collapse, dropping approximately 47% in one day in trading on the New York Stock Exchange. The fall wiped out about $8 billion of shareholder value in that one day. As a result, the government alleged loses of $8.6 billion resulting from McCall's fraud.

McCall participated in a scheme that artificially inflated software revenues of HBOC and McKessonHBOC by $100 million. The companies reported revenues that were based on contingent sales agreements. The recognition of the revenues should have been deferred until the contingencies no longer existed. Instead the companies reported the contingent revenues while acknowledging the contingent nature of the sales in secret side letters. The side letters were concealed from the companies' independent auditors.

This was the second attempt of the government to convict McCall of the crimes charged in the indictment. A 2006 trial resulted in a mistrial after the jury could not reach a verdict.

For more about the case please see Web Newswire, "Former McKessonHBOC Chairman Sentenced to 10 Years in Prison," March 10, 2010, http://www.webnewswire.com/node/513147.