SEC Charges Former CFO, Five Others at HBOC

The 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.

In other financing news, Moody's downgraded Walt Disney's senior unsecured debt to A3 from A2, and lowered its short-term rating to P-2 from P-1. "The outlook is stable, although that outlook may be revised to negative if Disney does not take steps to de-leverage its balance sheet near-term," the rating agency stated in its report.

The downgrade results from the cumulative effects of the significant leverage increase resulting from Disney's pending $5.3 billion Fox Family Worldwide acquisition, a substantial amount of stock repurchase activity recently, and the expectation that Disney's parks, networks, and consumer products divisions will face significant pressure on performance over at least the next 12 to 18 months, Moody's adds.

The Jobs News Worsens
The job market has been going from bad to worse since the September 11 terrorist attacks.

In the past week, the aviation industry has lopped off more than 100,000 people from their payrolls. Other companies have also announced layoffs en masse in the past two weeks. No surprise, then, that last week new claims for unemployment benefits soared to a nine-year high.

Worse, an index that measures the number of jobs being offered across the U.S. fell in August to its lowest level since February 1983. And it's hard to believe this index will improve for September.

Meanwhile, the steady drumbeat of layoffs continues. The latest announcements:

• Milacron Inc. said Thursday it will eliminate nearly 800 more jobs by year's end, doubling the number of cuts previously announced.

• Exelon Corp., the electricity giant created by last October's merger of Philadelphia-based PECO Energy and Commonwealth Edison parent Unicom, said it will cut 450 jobs after announcing that it is reducing its third-quarter and full-year earnings outlook.

• About.com said it has cut about 60 jobs, or 20 percent of its workforce.

• The Motley Fool is cutting its staff by at least 50 percent this week, from 140 to 70, sources close to the company said on Thursday, according to Reuters. Motley Fool had 400 employees at its peak.

• Marriott International Inc. is preparing contingency plans for layoffs and reduced work schedules that could affect up to 20 percent of its headquarters staff, according to The Washington Post.

• NEC Corp. said it will cut another 300 jobs at a chip plant in California. It already cut 700 jobs at the facility earlier in the year.

Marsh to Create New Insurance Unit
Worried that insurance rates are going to rise in the aftermath of the terrorist attacks?

Here's some proof that these fears are well-founded. Marsh & McLennan Cos. said Friday that it has created a new Bermuda-based insurer, Axis Specialty Ltd. This is typically what happens in the insurance industry when capacity is disappearing and the climate for higher rates is improving.

Axis will begin underwriting policies in the fourth quarter and plans to offer insurance and reinsurance in a number of areas that are experiencing among the biggest rate hikes, such as property, aviation, war risk, and political risk, according to The Wall Street Journal.

Marsh said it will capitalize the new entity at $1 billion.

John Charman, the former president of Ace International, a subsidiary of Ace Ltd., will be chief executive of Axis Specialty, according to the published report.

"MMC is sponsoring the formation of Axis Specialty in response to demand for reinsurance and insurance capacity at a time when it is most needed in the marketplace," said MMC chief executive J.W. Greenberg in a statement.

In Brief

• The Congressional Budget Office said that with just two days left in the current fiscal year, tax receipts appeared to have declined this year for the first time since 1983. The budget surplus for the year that began last October 1 is estimated to be $121 billion, the fourth straight annual surplus but well below what economists had been forecasting just months ago, and less than half the previous year's total.

• Nasdaq on Thursday suspended until January 2 its rule that stocks be delisted if the price falls below $1 for an extended period.