Tuesday, July 12, 2005

Former McKesson CFO Found Not Guilty of Securities Fraud

Former McKesson CFO Richard Hawkins was found not guilty by U.S. District Court Judge Martin Jenkins in an opinion (here) issued on July 11 that is the result of a one month bench trial that ended in February.  The charges arose from an accounting fraud that took place during and after the completion of a merger between McKesson and HBOC, and the government's main witnesses were Albert Bergonzi, former CEO of HBOC, and David Held, former CFO of HBOC.  The judge found neither witness credible and viewed their testimony with "greater caution" because of each entered into guilty pleas and would receive lighter sentences.  The judge stated with regard to Bergonzi:

Mr. Bergonzi has admitted that he began committing fraud, by backdating contracts and using side letters, sometime in 1998, long before the merger with McKesson. He pled guilty to conspiracy to commit securities fraud and securities fraud on October 16, 2003. As part of his plea agreement, the Government agreed to request, on Mr. Bergonzi’s behalf, a downward departure from the sentencing guidelines in exchange for Mr. Bergonzi’s substantial assistance in the investigation and prosecution of others. Accordingly, the Court examines Mr. Bergonzi’s  testimony with greater caution than that of other witnesses.

Judge Jenkins accepted the testimony of Hawkins that he was not aware of the various side agreements that were a practice of HBOC but were not accounted for properly, resulting in material misstatements in the merged company's financial statements. 

The verdict is interesting for two reasons.  First, the government acceded to the defense request to try the case before the court rather than a jury because of the complex accounting issues involved.  While the standard view is that jury's cannot handle complex accounting issues, trying the case to the court is not necessarily a panacea for the government.  Second, and perhaps more important for future prosecutions of senior corporate executives, the use of cooperating witnesses can backfire on the government, particularly when they are at or above the level of the defendant.  The judge flatly rejected the testimony of Bergonzi and Held, and found their cooperation agreements to be a strong reason to view them as less-than-credible witnesses.  Once again, the standard view is that a judge would understand the nature of a cooperation agreement and plea bargain, while a jury could be swayed to disregard the testimony of such witnesses.

The acquittal of Hawkins shows that while cooperating witnesses are necessary in most white collar prosecutions, there is a real peril in relying on them to make the case without good documentary evidence.  Such cases can result in convictions, as demonstrated in the Ebbers trial, but even there the jury found that the main prosecution witness (former WorldCom CFO Scott Sullivan) was not completely credible, but then neither was Ebbers' testimony.  The results of cases like Scrushy and Hawkins may be to lead the government to play down its reliance on witnesses (e.g. Andrew Fastow) who have cut plea bargains for lighter sentences and play up -- to the extent possible -- the documentary proof, if it's there.  If you don't have the paper, you may not have a case.

An article from The Recorder (available on Law.Com here) discusses the Hawkins verdict and notes that two more HBOC executives, former HBOC chairman Charles McCall and HBOC general counsel Jay Lapine, are awaiting trial on similar charges.  Having the two main cooperating witnesses deemed not credible certainly doesn't bode well for the government in those cases. (ph)

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Fraud, Securities, Verdict | Permalink

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