Securities Law Prof Blog

SEC Annoounces Panelists for June 2 Market Structure Roundtable

The SEC has announced the agenda and panelists for its Market Structure Roundtable scheduled for June 2. 

Panel One — Market Structure Performance and Price Volatility

How well does the current market structure perform the job of establishing prices and allowing investors to efficiently buy and sell stocks, both in normal and stressed trading conditions? How can the Commission improve current market structure to appropriately minimize short-term volatility and its harm to longer-term investors? Are there particular types of time out mechanisms for individual stocks that should apply across all trading venues? How should market orders be handled in connection with the duty of best execution? What are the most useful metrics for assessing market structure performance for different types of investors? Does the current market structure create imbalances that either favor or disadvantage longer-term investors? Is the current market structure fair for longer-term investors and how is "fairness" measured?

Ian Domowitz, Managing Director, Investment Technology Group
Charles Jones, Professor of Finance and Economics, Columbia Business School of Columbia University
Christopher Nagy, Managing Director-Order Routing Strategy, TD Ameritrade
Joseph Ratterman, President & Chief Executive Officer, BATS Exchange
Richard Rosenblatt, Chief Executive Officer, Rosenblatt Securities
Stephen Sachs, Director of Trading, Diamond Hill Investments
Timothy Sargent, Chief Executive Officer, Quantitative Services Group
Gus Sauter, Chief Investment Officer, Vanguard Group 
 
Panel Two — High Frequency Trading

How would you characterize high frequency trading? Overall, has its emergence been a positive or negative development for the markets? What effect does high frequency trading have on liquidity and spreads, both in normal and stressed trading conditions? Does high frequency trading affect market impact costs for other market participants? Are there particular high frequency strategies that are beneficial or harmful to the markets or certain participants? What types of tools are used by high frequency traders and does their access to these tools give them an unfair advantage? Do some high frequency strategies provide liquidity to the market in a manner comparable to the traditional obligations of market makers? Should high frequency traders be subject to any trading obligations comparable to those of traditional market makers?

Sal Arnuk, Partner, Themis Trading
Kevin Cronin, Director of Global Equity Trading, Invesco
David Cushing, Director of Global Equity Trading, Wellington Management Company
Michael Goldstein, Professor of Finance, Babson College
Richard Gorelick, Chief Executive Officer, RGM Advisors
Mark Grier, Vice Chairman, Prudential Financial
Terrence Hendershott, Associate Professor of Finance and Operations and Information Technology Management, Haas School of Business, University of CA at Berkeley
Stephen Schuler, Chief Executive Officer, GETCO
Jeffrey Wecker, President & Chief Executive Officer, Lime Brokerage 
 
Panel Three — Undisplayed Liquidity

What role does undisplayed liquidity play in today's market structure? What types of dark pools currently exist and whom do they serve? How much of institutional and retail investor order flow is executed in the undisplayed markets? Do institutional and retail investors receive better quality executions in the dark markets? To what extent do economic considerations for those who route orders — rather than best execution — affect routing decisions? Has the volume of trading in the undisplayed venues become sufficiently large that it is detracting from the quality of price discovery in the public markets, such as by exacerbating price volatility? If so, is there a viable regulatory response? Are market participants able to effectively access dark pool liquidity? Do dark pool participants understand the business practices of dark pools, such as transmitting order information to others? Should dark pools be required to provide greater transparency concerning their business practices?

Brian Conroy, Senior Vice President & Head of Global Equity Trading, Fidelity Management and Research Company
Larry Leibowitz, Chief Operating Officer, NYSE Euronext
Dan Mathisson, Managing Director & Head of Advanced Execution Services, Credit Suisse Securities
Seth Merrin, President & Chief Executive Officer, Liquidnet
Eric Noll, Executive Vice President-Transaction Services, NASDAQ OMX Group
William O'Brien, Chief Executive Officer, Direct Edge
Mark Ready, Professor of Finance, Investment and Banking, Wisconsin School of Business
Andrew Silverman, Managing Director & Global Co-Head, Morgan Stanley Electronic Trading
 

SEC Adopts Final Rules on Municipal Securities Disclosure

The SEC posted on its website final amendments to Rule 15c2-12 (“Rule 15c2-12” or “Rule”) relating to municipal securities disclosure. The amendments revise certain requirements regarding the information that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities must reasonably determine that an issuer of municipal securities or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of the issuer’s municipal securities, to provide to the Municipal Securities Rulemaking Board (“MSRB”). Specifically, the amendments require a broker, dealer, or municipal securities dealer to reasonably determine that the issuer or obligated person has agreed to provide notice of specified events in a timely manner not in excess of ten business days after the event’s occurrence; amend the list of events for which a notice is to be provided; and modify the events that are subject to a materiality determination before triggering a requirement to provide notice to the MSRB. In addition, the amendments revise an exemption from the Rule for certain offerings of municipal securities with put features.

The Commission also is providing interpretive guidance intended to assist municipal securities brokers, dealers, and municipal securities dealers in meeting their obligations under the antifraud provisions of the federal securities laws.

SEC Posts Consolidated Audit Trail Proposal

The SEC has posted on its website its proposed new Rule 613 under Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (“Exchange Act”) that would require national securities exchanges and national securities associations (“self-regulatory organizations” or “SROs”) to act jointly in developing a national market system (“NMS”) plan to develop, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities.  Comments are due 60 days after publication in the Federal Register.

Pequot Capital Management CEO Settles Charges of Insider Trading in Microsoft

Remember Pequot Capital Management?  The SEC was harshly criticized in an earlier investigation of the hedge fund for not aggressively pursuing insider trading charges.  (The SEC's Inspector General investigated and found no misconduct.)  The SEC again investigated the firm when an ex-wife of a former employee brought it evidence of another instance of insider trading, and yesterday it settled charges against Pequot Capital Management, Inc., and its Chairman and CEO Arthur Samberg involving insider trading in Microsoft Corporation securities. The SEC separately brought an enforcement action against a former Microsoft employee who later worked at Pequot for allegedly tipping the firm and Samberg with nonpublic information about Microsoft's earnings.

Pequot and Samberg agreed to pay nearly $28 million to settle the SEC's charges. The SEC Division of Enforcement's case against the tipper, David Zilkha, will continue in an administrative proceeding before the Commission.

 The SEC's complaint against Pequot and Samberg, filed in U.S. District Court in Connecticut, alleges that amid rumors in April 2001 that Microsoft would miss its earnings estimates for the quarter that had just ended, Samberg sought information from Zilkha, a Microsoft employee who had just accepted an offer from Samberg to work at Pequot. Zilkha quickly reached out to a Microsoft colleague, who sent him an e-mail stating that the company would meet or beat its earnings estimates for the quarter.

According to the SEC's complaint, Zilkha then conveyed to Samberg his understanding that Microsoft would meet or beat its earnings estimates. Samberg thereafter traded in Microsoft on behalf of funds managed by Pequot. On April 19, after the market had closed, Microsoft announced that it beat its earnings estimates, driving up the price of Microsoft's stock. As a result of the illegal trading by Pequot and Samberg, the Pequot funds made more than $14 million.

Pequot and Samberg agreed to settle the SEC's charges without admitting or denying the SEC's allegations against them. Pequot and Samberg agreed to pay a total of nearly $18 million in disgorgement of trading profits and prejudgment interest as well as $10 million in penalties. With the exception of certain activities aimed solely at winding down Pequot, Samberg also has agreed to be barred from association with an investment adviser.

In the insider trading enforcement action against Zilkha, the SEC Division of Enforcement also alleges that during a prior investigation into his conduct, Zilkha concealed from the SEC staff that he had received inside information about Microsoft's earnings and then recommended that Samberg buy Microsoft securities on the basis of this information. The Enforcement Division alleges that in 2005 and 2006, Zilkha did not produce nor disclose the existence of the e-mail he had received from a Microsoft colleague concerning Microsoft's earnings, despite subpoenas and direct questions that required him to do so.

In January 2009, the SEC staff first received direct evidence that Zilkha had material, nonpublic information about Microsoft — when staff was provided copies of e-mails that had been located on a computer hard drive that was then in the possession of Zilkha's ex-wife.

SEC Charges Famous NYC Adviser with Stealing Clients' Money

The SEC charged Manhattan-based financial advisor Kenneth Ira Starr (whom the press identifies as a financial adviser to the stars) with fraud and is seeking an emergency court order to freeze his assets after he stole client money for his personal use, including the purchase last month of a multi-million dollar apartment where he and his wife now reside. According to the SEC’s complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16.

The New York Times provides additional interesting details, including the fact that Andrew Stein, former New York City Council president, was arrested in connection with the case.  Starr allegedly used misappropriated funds to help support Stein's "extravagant personal expenses;" the feds say Stein did not know about the fraud, but was arrested on tax charges.  NYTimes, Adviser to Stars Named in Fraud

Lehman Bankruptcy Estate Accuses J.P. Morgan of Taking Funds Illegally

The bankruptcy estate of Lehman Brothers sued J.P. Morgan Chase & Co. today, alleging that J.P. Morgan illegally took billions of dollars from Lehman shortly before Lehman filed for bankruptcy. WSJ, Lehman's Bankruptcy Estate Sues J.P. Morgan

Treasury Announces Sales of 1.5 Billion Shares of Citigroup Stock

 The U.S. Department of the Treasury today announced the completion of its sale of 1.5 billion shares of Citigroup common stock pursuant to a trading plan with Morgan Stanley as sales agent as announced on April 26.  In this initial plan, Treasury sold 19.5% of its Citigroup common stock holdings and received gross proceeds of approximately $6.2 billion from the sale.

Treasury received 7.7 billion shares of Citigroup common stock last summer as part of the exchange offers conducted by Citigroup to strengthen its capital base.  Treasury exchanged the $25 billion in preferred stock it received in connection with Citigroup's participation in the Capital Purchase Program for common shares at a price of $3.25 per common share.

Treasury currently owns approximately 6.2 billion shares of Citigroup common stock and expects to continue selling its shares in the market in an orderly fashion.  Treasury has entered into a second pre-arranged written trading plan under which Morgan Stanley will have discretionary authority to sell an additional 1.5 billion shares under certain parameters.  Because Treasury will not sell shares during the blackout period set by Citigroup in advance of its second quarter earnings release, which period is expected to begin on July 1, the plan will terminate on June 30 even if all shares have not been sold by that time.  

SEC Approves Rules to Improve Municipal Securities Disclosure

The SEC approved rule changes improving the quality and timeliness of municipal securities disclosure.  Municipal securities, such as municipal bonds, are exempt from the disclosure requirements of the federal securities laws. As such, the SEC’s statutory authority is limited. The SEC’s rule amendments approved today are designed to provide enhanced information to municipal securities investors by further regulating those who underwrite or sell such municipal securities. The measures will strengthen existing requirements for the scope of securities covered, the nature of the events that issuers must disclose, and the time period in which disclosure must be made.

“The compliance date of the new rules is Dec. 1, 2010.

SEC Proposes Consolidated Audit Trail System

The SEC today proposed a new rule that would require the self-regulatory organizations (SROs) to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets.  A consolidated audit trail system would help regulators keep pace with new technology and trading patterns in the markets. Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Stock market regulators tracking suspicious market activity or reconstructing an unusual event must obtain and merge an immense volume of disparate data from a number of different markets and market participants. Regulators are seeking more efficient access to data through a far more robust and effective cross-market order and execution tracking system.

Last year, the SEC set up an agency-wide task force to carry out the audit trail initiative and begin the process of developing the rulemaking proposal recommended to the Commission today.

The SEC's proposal seeks public comment and data on a broad range of issues relating to a consolidated audit trail. Public comments on the proposal should be received by the Commission within 60 days of its publication in the Federal Register.

SEC Charges Disney Employee with Attempting to Sell Confidential Earnings Info

The SEC charged a Walt Disney Company employee and her boyfriend in a scheme to sell confidential information about Disney's quarterly earnings to hedge funds.  According to the complaint, Bonnie Jean Hoxie, an administrative assistant to a high-level Disney executive, and her boyfriend Yonni Sebbag sent anonymous letters in March 2010 to more than 20 hedge funds in the U.S. and Europe, offering to provide pre-release results of Disney's second quarter 2010 earnings in exchange for a fee. Some hedge funds alerted the SEC, which immediately worked with the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation (FBI) to investigate. The FBI set up an undercover operation and made several contacts with Sebbag who offered to sell the information, in one instance for $15,000 and in another for half the expected trading profits.

In early May, Hoxie obtained confidential information concerning Disney's quarterly earnings and provided it to Sebbag, who in turn sold it to an FBI agent posing as an investment manager.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, Hoxie had regular access to confidential information concerning Disney's financial performance and operating plans. Hoxie and Sebbag orchestrated a scheme to sell information to hedge funds to be used for purposes of insider trading

SEC Charges New York City Investment Co. with Affinity Fraud

Yet another affinity-based fraud, this one out of New York City:

The SEC charged Gedrey Thompson, a purported money manager, and his New York City-based investment company and two of his associates with conducting an affinity fraud and Ponzi scheme that specifically targeted investors living in the Caribbean and African-American communities of Brooklyn.

The SEC alleges that Thompson, through his firm GTF Enterprises Inc., convinced investors to entrust him with money that he claimed to trade on their behalf. Thompson assured investors that the investments were risk-free and employed "stop-loss" trading techniques, and he guaranteed quarterly returns ranging from 4 to 20 percent.

However, Thompson allegedly invested only a fraction of investor funds and sustained thousands of dollars in trading losses from those investments. He sent investors fake quarterly account statements that hid those losses and instead showed lofty returns. Thompson also made Ponzi-like payments to earlier investors, and he stole thousands of dollars in investor funds to pay for exotic trips and other personal expenses. GTF's account manager Dean Lewis and assistant treasurer Sezzie Goodluck also are charged in the fraud that caused many investors in GTF to lose their life savings.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, Thompson with assistance from Lewis and Goodluck raised a total of more than $800,000 from at least 20 investors from at least 2004 to 2009. Thompson primarily sought investors who were similarly from the Caribbean and now living in the New York area, convincing them to entrust him with their money that he claimed to trade on their behalf in options, futures, commodities, or other securities.

FINRA Proposes to Enhance Oversight of Back-Office Operations

FINRA today issued a Regulatory Notice soliciting comments on a rule proposal designed to enhance oversight of broker-dealers' "back-office" operations by expanding registration requirements to individuals engaging in, or supervising, activities related to sales and trading support, and handling of customer assets. According to the Executive Summary:

FINRA requests comment on a proposal to establish a registration category, qualification examination and continuing education requirements for certain operations personnel. The proposal would expand FINRA's registration requirements to include as qualified and registered persons certain individuals who are engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets to enhance the regulatory structure surrounding a member firm's back-office operations. As further detailed in this Notice, the proposed Operations Professional registration category generally is aimed at capturing those persons with decision-making and/or oversight authority in direct furtherance of the covered operations functions. Persons required to register under this proposal also would be subject to FINRA's continuing education requirements.

FINRA Fines Citigroup $1.5 Million for Supervisory Failures Relating to Misappropriation of Cemeteries' Trust Funds

FINRA imposed a monetary sanction of $1.5 million against Citigroup Global Markets Inc. for supervisory violations relating to its handling of trust funds belonging to cemeteries in Michigan and Tennessee. The sanction represents a $750,000 fine and disgorgement of $750,000 in commissions, which is being returned to the cemetery trusts as partial restitution.  Citigroup consented to findings that, from September 2004 through October 2006, Citigroup broker Mark Singer and two of his customers were involved in a scheme to misappropriate an amount alleged in various legal actions to be over $60 million in cemetery trust funds. One of Singer's customers, Clayton Smart, is currently facing criminal charges arising from the scheme in Tennessee and in Michigan. Singer's criminal trial in Tennessee recently ended in a mistrial. He still faces criminal charges in Indiana. Smart and the second customer, Craig Bush, have been named in civil litigation arising from the scheme. 

FINRA's investigation showed that over a period of more than two years, Citigroup failed to reasonably supervise the handling of these accounts by inadequately responding to a succession of "red flags" – failures that permitted the scheme to continue undetected until October 2006.  In settling these matters, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

 

Plaintiffs In Refco Securities Fraud Action File Petition for Rehearing En Banc

Plaintiffs in Pacific Investment Management Co., LLC v. Mayer Brown LLP filed a petition for rehearing en banc ( Download 09-1619-cv_Petition_for_Rehearing_En_Banc) on May 10.  As you will recall, Mayer Brown was the law firm that represented Refco, a large brokerage and clearing firm, and Mayer Brown's partner, Joseph Collins, served as Refco's "go-to guy" for many years.  Refco, of course, suffered massive losses that were concealed in its securities filings, including a registration statement, and eventually filed for bankruptcy.  Collins ultimately was convicted on two counts of securities fraud and one count to commit securities fraud. The Second Circuit, in its April 27, 2010 opinion, held that plaintiffs could not sue Collins for damages under Rule 10b-5 essentially because the false statements made in the registration statement were not attributed to Collins.  In their petition for en banc hearing plaintiffs emphasize that (1) Mayer Brown and Collins drafted false portions of the registration statement, reviewed SEC comments and participated in group drafting session; (2) the offering memorandum and registration statement identified Mayer Brown as Refco's counsel; (3) the false sections were sections that investors would expect to be drafted by attorneys; and (4) Collins was convicted of securities fraud for his efforts.  Accordingly, how could Mayer Brown and Collins not be primary violators of the federal securities laws for purposes of Central Bank and Stoneridge?  The effect of the decision, as the petition emphasizes, is to immunize a wide class of persons who intentionally draft false statements for public distribution.

Plaintiffs' petition is something of a "hail Mary" pass, because the Second Circuit has been strict in its "attribution" requirement where the drafter is not a corporate official.  Nevertheless, they make a persuasive argument in a case that presents very attractive facts for the plaintiffs, so let's wait and see what happens next. 

FINRA Fines Piper Jaffray Again for Email Retention Failures

FINRA has fined Piper Jaffray & Co. $700,000 for violations related to its failure to retain approximately 4.3 million emails from November 2002 through December 2008. Piper Jaffray also failed to inform FINRA of its email retention and retrieval issues, which impacted the firm's ability to comply completely with email extraction requests from FINRA. It also may have affected the firm's ability to respond fully to email requests from other regulators or from parties in civil litigation or arbitrations. 

Piper Jaffray had previously been sanctioned for email retention failures in November 2002, in a joint action by the Securities and Exchange Commission, New York Stock Exchange Regulation and NASD arising from investigations of the firm's conflicts of interest between its investment banking and research departments. As part of that settlement, Piper Jaffray was required to review its systems and certify that it had established systems and procedures designed to preserve electronic mail communications. The firm made that certification to regulators in March 2003. At no time did the firm alert regulators that its system was experiencing problems. 

FINRA discovered Piper Jaffray's continuing email retention deficiencies when its investigators requested all emails sent or received by a former firm employee suspected of misconduct. The firm provided a CD-ROM purportedly containing all of the employee's emails, on both his firm and Bloomberg email accounts. When reviewing the CD-ROM's contents, however, FINRA discovered that one particular email was not produced that investigators had already obtained in hard copy form – an email whose contents sparked an internal investigation that led to the employee's termination, and formed the basis for a FINRA enforcement action against the employee. Only after further inquiries about that missing email did the firm finally inform FINRA of the intermittent email retention and retrieval issues it had been experiencing firmwide since the November 2002 action.

In settling this matter, Piper Jaffray neither admitted nor denied the charges, but consented to the entry of FINRA's findings

Angell et al. on Equity Trading in 21st Century

Equity Trading in the 21st Century, by James Angel, Georgetown University - Department of Finance; Lawrence Harris, University of Southern California - Marshall School of Business - Finance and Business Economics Department; and Chester S. Spatt, Carnegie Mellon University - David A. Tepper School of Business, was recently posted on SSRN.  Here is the abstract:

The U.S. equity market changed dramatically in recent years. Increasing automation and the entry of new trading platforms has resulted in intense competition among trading platforms.

Despite these changes, traders still face the same challenges as before. They seek to minimize the total cost of trading including commissions, bid/ask spreads, and market impact. New technologies allow traders to implement traditional strategies more effectively. For example, dark pools and indications of interest are just an updated form of tactics that NYSE floor traders used search for counterparties while minimizing the exposure of their clients’ trading interest to prevent front running.

Virtually every measurable dimension of U.S. equity market quality has improved. Execution speeds and retail commission have fallen. Bid-ask spreads have fallen and remain low, although they spiked upward along with volatility during the recent financial crisis. Market depth has increased. Studies of institutional transactions costs find U.S. costs among the lowest in the world. Unlike during the Crash of 1987, the U.S. equity market mechanism handled the increase in trading volume and volatility without disruption. However, our markets lack a market-wide risk management system that would deal with computer generated chaos in real time, and our regulators should address this.

“Make or take” pricing, the charging of access fees to market orders that “take” liquidity and paying rebates to limit orders that “make” liquidity, causes distortions that should be corrected. Such charges are not reflected in the quotations used for the measurement of best execution. Direct access by non-brokers to trading platforms requires appropriate risk management. Front running orders in correlated securities should be banned.

Veliotis on Rule 10b5-1 Trading Plans

Rule 10b5-1 Trading Plans and Insiders’ Incentive to Misrepresent, by Stanley Veliotis, Fordham University Schools of Business, was recently posted on SSRN.  Here is the abstract:

Rule 10b5-1 plans provide an affirmative defense against insider trading charges if, at a time when the insider had no material inside information, the insider commits to the future trades that otherwise might then be subject to insider trading charges. The article first describes insider trading regulation under Rule 10b-5, including how trades by an insider can be the primary violation of Rule 10b-5 or instead serve as evidence of scienter in a broader Rule 10b-5 case (e.g., misrepresentation, such as distorted financial statements). The article then details Rule 10b5-1 and then considers existing case law that has substantively addressed trading under plans, and which has largely evidenced a tendency to heavily discount sales under plans as evidence of scienter. The article then reviews economics-based research and details the incentive for insider sellers, especially those now selling under a 10b5-1 plan, to misrepresent. It criticizes the extent to which the affirmative defense insulates an insider from Rule 10b-5 primary violation liability even if the insider’s information is self-created (as opposed to external information, such as learning of a failed or successful drug trial). It also recommends that parties in Rule 10b-5 cases look more closely at the scienter element given the documented incentives insiders have to prop up a stock price before a 10b5-1 plan sale whether or not the plan was initially made in good faith.

FINRA Proposes Rule Change to Increase Number of Arbitrators on List

The SEC posted on its website FINRA's proposed rule change, to amend Rules 12403 and 12404 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and Rules 13403 and 13404 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) to increase the number of arbitrators on each list generated by the Neutral List Selection System (“NLSS”).  A complaint of the FINRA arbitration selection process has been that after the parties exercise their right to strike names, there are no arbitrators left on the list, and FINRA must select arbitrators that were not on the parties' list.  FINRA explains that the amendment would expand the number of arbitrators on each list (public, non-public, and public chairperson) generated through NLSS from eight arbitrators to 10 arbitrators. Thus, in every two party case, at least two arbitrators would remain on each list after strikes. The additional number of arbitrators will increase the likelihood that the parties will get panelists they chose and ranked, even when FINRA must appoint a replacement arbitrator.

Schapiro Testifies on May 6 Market Plunge

Examining the Causes and Lessons of the May 6th Market Plunge, Testimony of Chairman Mary L. Shapiro Before the Subcommittee on Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs, on May 20, 2010

Former HBOC CEO Settles Financial Fraud Charges

The SEC settled fraud charges against Charles McCall, former CEO and Chairman of HBOC and then Chairman of McKesson HBOC, stemming from allegations of financial reporting fraud at McKesson HBOC, Inc. (now, McKesson Corporation), a Fortune 100 company headquartered in San Francisco, California. McCall consented to the entry of judgment without admitting or denying the allegations of the Commission's complaint except as to jurisdiction.  McCall was previously convicted of securities fraud and related charges arising from the fraud at HBOC and McKesson HBOC. He was sentenced to ten years' incarceration and ordered to pay a $1 million criminal fine.

The complaint, filed June 4, 2003, alleged that McCall, together with other senior executives, participated in a long-running fraudulent scheme to inflate the revenue and net income of HBO & Company (HBOC), an Atlanta, Georgia-based vendor of health care technology that merged with McKesson in 1999. According to the SEC, McCall personally took part in negotiating at least two contracts with side letter agreements containing cancellation contingencies, one of which was also backdated. As a result of the scheme, according to the complaint, the companies were able to recognize revenue in earlier reporting periods. These practices failed to comply with Generally Accepted Accounting Principles.

The final judgment against McCall permanently enjoins him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. In addition, McCall was permanently barred him from acting as an officer or director of a public company and was ordered to pay a total of $1,878,128 in disgorgement and prejudgment interest.