SEC, U.S. ATTORNEY'S OFFICE AND FBI BRING FRAUD AND CONSPIRACY CHARGES AGAINST FORMER MCKESSON HBOC CHAIRMAN CHARLES MCCALL

Charles W. McCall, age 59 of Ft. Lauderdale, Florida, the former chairman of the board of directors, was charged with securities fraud.  In addition, former general counsel, Jay Lapine, age 51, of Alpharetta, Georgia, was charged.  Mr. Lapine was arrested in San Francisco.  An arrest warrant was issued for Mr. McCall.  According to the FBI, he is believed to be out of the country.  There is no allegation at this time that he fled to avoid prosecution.  However, Mr. McCall will be arrested when he returns to the United States. 

The U.S. Attorney's Office and FBI also announced today new charges against former McKessonHBOC corporate vice president and HBOC president Albert Bergonzi.  The SEC previously brought civil fraud charges against Mr. Bergonzi and Mr. Lapine.  Those cases are pending.

Mr. McCall is the most senior official to be charged in the civil and criminal investigations into the accounting fraud at McKesson HBOC.  Mr. McCall becomes the eleventh person charged by the SEC, and the criminal charges against Mr. McCall and Mr. Lapine bring to six the number of persons charged criminally by the U.S. Attorney's Office and FBI.

Mr. Gilbertson was the Chief Financial Officer of HBOC.  He resigned that position in November 1998.  In pleading guilty, Mr. Gilbertson admitted that, beginning in December 1997 and until he left HBOC in November 1998, he conspired with other officers of HBOC, including Mr. McCall, Mr. Bergonzi, Mr. Lapine, Mr. Heyerdahl, and Mr. DeRosa, to inflate HBOC's revenue and earnings in violation of rules and regulations promulgated by the SEC and in violation of Generally Accepted Accounting Principles.

Mr. Gilbertson admitted that the objects of the conspiracy were to mislead Wall Street analysts, HBOC investors, and the SEC about HBOC's true revenue and earnings for the purpose of increasing and maintaining the price of HBOC's stock.  He, Mr. McCall, Mr. Bergonzi, and Mr. Lapine agreed to inflate HBOC's reported revenue and earnings for the first three quarters of 1998 by (1) recording revenue on contracts that were conditioned on "side letters" that permitted customers to cancel, and which were concealed from outside auditors; (2) backdating contracts to record revenue in prior quarterly periods; and (3) recording revenue on end-of-quarter "sales" that were actually exchanges of cash and inventory.  He admitted to recording revenue from sales for which HBOC had secretly guaranteed repayment to a finance company in the event of customer default, and to making false entries in company books and records at quarter-end in order to reduce operating expenses and increase net income by whatever amount was necessary to meet quarterly net income and earnings goals.

Mr. Gilbertson also admitted that he, Mr. McCall, Mr. Bergonzi, and Mr. Lapine caused false statements to be made to HBOC's outside auditors in connection with their quarterly reviews, the SEC in Form10-Qs and other required filings, and financial analysts and the investing public in press releases and oral statements regarding HBOC's past and future financial performance.

Kevin V. Ryan, United States Attorney for the Northern District of California, said:  "Unscrupulous executives who attempt to deceive shareholders for the purposes of inflating stock price and enhancing their positions within the company are violating federal laws.  These cases demonstrate our continuing commitment to root out corporate fraud and punish those who intentionally deceive the investing public."  He added, "It is essential to the proper functioning of the financial markets, and thus critical to our economy, that corporate executives adhere to the rules and regulations of the SEC and resist the temptation to inflate revenues and earnings for the purpose of boosting the companies' stock price.  When executives give in to that temptation, the U.S. Attorney's Office, in partnership with the FBI and the SEC, will vigorously pursue all appropriate means of bringing those executives to justice."

Helane L. Morrison, District Administrator of the SEC's San Francisco District Office, said: "Charles McCall betrayed the trust that the shareholders of HBO & Company, and later McKesson HBOC, placed in him.  McCall actively participated in the fraudulent scheme that ultimately cost shareholders over $9 billion, and the SEC is determined to hold him accountable for his actions." 

Deputy Attorney General Larry Thompson said:  "The President created the Corporate Fraud Task Force to restore the public's confidence in the integrity of our free markets by investigating and punishing those who engage in illegal schemes that enrich a few at the expense of employees and shareholders.   Major corporate fraud cannot happen over an extended period of time without the complicity of accountants, lawyers and other professionals. The outstanding work of the US Attorney for the Northern District of California, the FBI and SEC, have further proven our commitment to follow the evidence wherever it leads - to not only those executives but also those lawyers or other professionals who defraud the investing public."

According to the civil complaint and criminal indictment, beginning in approximately early 1998, Mr. McCall conspired with other top HBOC executives to "cook the books."   The SEC and the Justice Department allege that the defendants used a variety of means to inflate HBOC's and McKessonHBOC's revenues and earnings, most prominently, by agreeing to sign 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 be provided to the company's outside auditors – thus circumventing the companies' accounting controls and falsifying the companies' books and records.

The civil and criminal charges allege that the defendants engaged in other prohibited practices, such as backdating contracts and swapping inventory for the purpose of increasing revenue.  The defendants are 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.

Mr. 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, Mr. 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 civil and criminal filings, the Data General transaction was designed by Mr. McCall, Mr. Bergonzi, Mr. Lapine, 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 Mr. 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.

As a result of the fraudulent conduct, McKessonHBOC was required to restate its combined financial results for the previous three fiscal years.  For the five quarters covered by the Superseding Indictment, the restated results were as follows:

3/98                    $393.1             $376.8           4.3 %                 $64.9             $45.6            42.3 %

6/98                    $376.7             $308.1           22.3 %               $75.6             $23.5            221.7 %

9/98                    $399.6             $330.5           20.9 %               $83.7             $16.5            407.3 %

12/98                  $469.0             $381.0           23.9 %               $59.6             $8.5              601.2 %

3/99                    $431.9             $402.6           7.3 %

In the criminal superseding indictment, Mr. McCall is charged with conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371, which carries a maximum penalty of 5 years imprisonment and a fine of $250,000.  He is also charged with violations of the securities laws, including securities fraud, in violation 15 U.S.C. § 78j(b), filing false documents with the SEC, in violation of 15 U.S.C. § 78ff, and circumventing accounting controls and falsifying books and records, in violation of 15 U.S.C. § 78m(b).  Each violation of the securities laws carries a maximum penalty of 10 years imprisonment and a $1,000,000 fine.  If convicted, Mr. McCall would be obligated to pay restitution to investors harmed by the alleged fraud.

Mr. Bergonzi and Mr. Lapine also are charged in the superseding indictment with conspiracy, in violation of 18 U.S.C. § 371, as well as violations of the securities laws, including securities fraud, in violation 15 U.S.C. § 78j(b), filing false documents with the SEC, in violation of 15 U.S.C. § 78ff, and circumventing accounting controls and falsifying books and records, in violation of 15 U.S.C. § 78m(b).  In addition, Mr. Bergonzi is charged with wire and mail fraud, in violation of 18 U.S.C. §§ 1341 and 1343.  Each violation of Title 18 carries a maximum penalty of 5 years imprisonment and a $250,000 fine; each violation of the securities laws carries a maximum penalty of 10 years imprisonment and a $1,000,000 fine.  If convicted, Mr. Bergonzi and Mr. Lapine also would be required to pay restitution to investors harmed by the alleged fraud.

Any criminal sentence following conviction would be dictated by the Federal Sentencing Guidelines, which take into account a number of factors, and would be imposed in the discretion of the Court.  An indictment simply contains allegations against an individual and, as with all defendants, Mr. McCall, Mr. Bergonzi, and Mr. Lapine must be presumed innocent unless and until convicted.

Mr. Lapine made his initial appearance in federal court in San Francisco and was released on a personal recognizance bond of $500,000.  He was ordered to appear before U.S. District Judge Martin J. Jenkins on June 19, 2003, at 2:00 pm.