Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, March 10, 2010

Former HBOC GC Settles Accounting Fraud Charges at McKesson HBOC

The SEC settled charges against Jay Lapine, the former GC of HBO & Company, a vendor of health care technology that merged with McKesson in 1999. Lapine was charged in a previously-filed action with securities fraud in connection with a financial reporting fraud at McKesson HBOC, Inc. (now, McKesson Corporation), a Fortune 100 company headquartered in San Francisco, California. Lapine consented to the entry of judgment without admitting or denying the allegations of the Commission's complaint except as to jurisdiction.

The Complaint, filed September 27, 2001, alleged that Lapine, together with other senior executives, participated in a long-running fraudulent scheme to inflate the revenue and net income of HBOC. As part of this scheme, Lapine took part in negotiating two large backdated transactions with side agreements containing cancellation contingencies that enabled the companies to recognize revenue in earlier reporting periods. Both of these practices failed to comply with Generally Accepted Accounting Principles. The fraud enabled HBOC and McKesson HBOC to report falsely in press releases and in periodic reports HBOC filed with the Commission that the companies were having an unbroken run of financial success and had continually exceeded analysts' 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 its market value by more than $9 billion. The Commission also alleged that Lapine failed in his gatekeeper role during the multi-year long scheme.

The final judgment against Lapine permanently enjoins him from violating federal securities law, bars him from acting as an officer or director of a public company for a period of five years, and orders him to pay a civil penalty of $60,000. Lapine was acquitted on November 19, 2009 of criminal charges related to the fraud at HBOC and McKesson HBOC.

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