VideoThe Securities and Exchange Commission on Thursday filed fraud charges against the former chief financial officer and five other executives at HBO & Co., stemming from an accounting scandal that sliced $9 billion from the market capitalization of health services giant McKesson Corp., which bought HBO in 1999 for $12 billion.
Several months after the merger closed, McKesson discovered bogus sales at the provider of health care software dating back to 1997, according to the SEC. McKesson had to restate its earnings.
The civil complaint filed on Thursday comes a year after the U.S. Attorney's office filed criminal fraud charges against HBOC's former co-presidents, Jay Gilbertson and Albert Bergonzi. That case is still pending.
The six defendants named by the SEC are:
- David Held, HBOC's former chief financial officer, alleged to have approved the booking of $20 million in revenue for a quarter ending in March 1999, even though he knew the deal wasn't completed until April 1999. Held agreed to pay a $15,000 fine to settle the charges without admitting or denying the charges.
- Jay Lapine, HBOC's former general counsel, accused of manipulating documents to book revenue prematurely.
- Timothy S. Heyerdahl, a former HBOC senior vice president of finance, accused of concealing expenses and repeatedly recording sales to inflate profits. In a settlement with the SEC, Heyerdahl agreed to pay a $100,000 fine and pay back $521,492 in illegal profits, plus interest. He did not admit or deny the allegations.
- Elaine Decker, HBOC's former manager of contract accounting, accused of knowingly booking bogus revenue. Without admitting or denying guilt, Decker agreed to pay a $35,000 fine to settle the charges.
- Michael Smeraski, a former HBOC senior vice president, accused of closing deals with "side letters" that were concealed from the company's accountants.
- Deborah Mattiford, the former director of HBOC's contract and administration, accused of abusing her "gatekeeper" role by instructing her staff to alter records to conceal illegal activity. In a settlement, Mattiford agreed to pay a $55,000 fine and pay back $27,439 in illegal profits, plus interest. She did not admit or deny the allegations.
SEC Files Complaint Against Manufacturing Finance Exec
The SEC on Thursday also filed a civil complaint against former senior officers of Sabratek Corp., an Illinois manufacturer of infusion pumps and flush syringes, including vice president of finance Scott P. Skooglund.
The other execs are CEO Kuldarshan S. Padda, president Stephen L. Holden, and vice president of sales Stephan C. Beal.
The SEC alleges that the four execs engaged in a fraudulent earnings management scheme. Padda and Beal have consented — without admitting or denying the allegations against them — to the entry of permanent injunctions barring future violations of anti-fraud, record-keeping, and reporting provisions of the federal securities laws.
Padda has agreed to pay a $125,000 civil penalty, and Beal has agreed to pay $35,430 in disgorgement, reflecting bonuses and commissions, and a $60,000 civil penalty.
The complaint alleges that from the first quarter of 1998 through the first quarter of 1999, the defendants engaged in a scheme to defraud and caused Sabratek — whose stock was formerly traded on Nasdaq — to make material misstatements to investors and to file false periodic reports with the commission. "The defendants used fictitious sales of infusion pumps, inventory parking arrangements, improper revenue recognition, and billings for consulting services that were not performed to overstate net sales by 62 percent and operating income by 229 percent," states the SEC.
The complaint also alleges that the defendants each knew, or was reckless in not knowing, that the revenue from these fraudulent sales could not be recognized under generally accepted accounting principles. "The defendants allegedly reported inflated revenue to protect Sabratek's stock price and to conceal reduced revenues resulting from lower demand for infusion pumps and from a halt in the sales of flush syringes due to safety concerns," adds the complaint.
In the second half of 1999, when news of Sabratek's inflated operating results began to emerge, its market capitalization declined by $202.5 million, or about 95 percent.
Another Jumbo Bond Offering
In the second jumbo bond offering of the week, Tyson Foods Inc. sold $2.25 billion in three-part senior notes in the private placement market. It was led by J.P. Morgan and Merrill Lynch & Co.
On Tuesday, Bristol-Myers Squibb Co. sold $5 billion of bonds in a two- part offering, up from an anticipated $4 billion.
Tyson sold $500 million of 3-year notes priced to yield 6.695 percent, or 347 basis points over Treasurys. Another $750 million in 5-year notes was priced to yield 7.324 percent, or 360 points over Treasurys. Tyson also sold $1 billion in 10- year notes, priced to yield 8.302 percent, or 375 points over the benchmark.
All three issues were rated Baa3/BBB.
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