Risk & Compliance

Former McKesson VP Settles SEC Charges

Accused of taking part in the drug company's accounting fraud nearly a decade ago, the former executive has agreed to pay a $50,000 civil penalty.
Sarah JohnsonAugust 17, 2007

A former McKesson Corp. executive has settled charges that he helped to inflate revenue and net income at a software vendor that later merged with the pharmaceutical giant. Michael Smeraski has agreed to pay $50,000 and put an end to the six-year-old civil fraud charges filed against him by the Securities and Exchange Commission. Smeraski agreed to the settlement without admitting or denying the allegations.

The accounting scandal — which led to a $9 billion cut in McKesson’s market capitalization — resulted in the 2005 acquittal of former McKesson CFO Richard Hawkins, who was exonerated of securities-fraud charges. Onetime CEO Charles McCall and general counsel Jay Lapine were also acquitted of a conspiracy charge one year later.

In its suit against Smeraski, the SEC accused him of participating in fraudulent activities with other executives when he was a senior sales vice president of HBO & Co., which merged with McKesson in 1999. The executives allegedly approved software sales contracts that included so-called side letters containing backdated information so that they could recognize revenue sooner than allowed under generally accepted accounting principles. The SEC’s original complaint said these letters were hidden from the company’s accountants.

In press releases and regulatory filings, HBO & Co. gave the impression it “was having an unbroken run of financial success and…had continually exceeded analysts expectations,” the SEC said. To be sure, the rosy picture of the company’s financial well-being dissipated quickly when McKesson announced it was conducting an internal investigation into financial reporting irregularities a short while after it bought HBO, the SEC added. The company’s shares quickly fell from about $65 to $34 at that time. McKesson later restated its financial results.

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