Former McKesson CEO and Board Chairman Convicted of Fraud

Continuing with our annals of health care crime, Bloomberg.com reported a new verdict on a very old case:

Former McKesson Corp. Chairman Charles McCall was convicted in a second trial of participating in a fraud 10 years ago that cost investors $8.6 billion, one of the largest white-collar crimes at the time.

A federal jury in San Francisco yesterday found McCall guilty of five of six counts of securities fraud and circumventing accounting rules. He was acquitted of falsifying records. Sentencing is set for March 2. Ex-McKesson General Counsel Jay Lapine was found not guilty of three charges.

McCall and Lapine were accused of hiding backdated sales contracts from auditors and other conduct that improperly inflated revenue figures at San Francisco-based McKesson, the biggest U.S. drug distributor, and HBO & Co., a software maker led by McCall that was acquired by McKesson in 1999.

The McCall verdict was a victory for prosecutors who lost a 2006 trial of the ex-chairman. Assistant U.S. Attorney David Anderson told jurors in the three-week trial that McCall learned of the practices a few months before HBO was to be acquired.

Instead of blowing the whistle, McCall covered up the fraud and was named chairman of the merged company, Anderson said.

When McKesson disclosed in April 1999 that sales had been prematurely booked, leading to a restatement, the shares lost 47 percent of their value. McCall and Lapine were fired that year.

A federal investigation followed, and five former McKesson executives pleaded guilty. McCall and Lapine were indicted in 2003. McKesson, which wasn’t named in the U.S. criminal cases, agreed to pay $960 million in 2005 to settle investor lawsuits.

On Health Care Renewal, we often seem to get caught up in the details of the moment. This case is a reminder that the problems we have been discussing have been going on for a long time, certainly long before we started to use the new-fangled medium of a blog to write about them.

The case also is a rare example of health care leaders actually suffering negative consequences for bad behavior.  We have noted many examples (see some here) in which bad behavior by health care organizations results only in a penalty for the organization as a whole, whose impact may be diffused among employees, stock-holders, and customers or clients.  Those who authorized, directed, or implemented the behavior often suffer no negative consequences.  In the current case, some of the responsible leaders have already paid a penalty, and now the most senior responsible leader also appears to be on the verge of also paying a penalty. 

On the other hand, it took 10 years from the time the bad behavior was recognized for the penalty to be decided.  Meanwhile, Mr McCall likely continued to enjoy the wealth he had amassed in his position of leadership.  The 1999 McKesson HBOC proxy statement, which included a statement that McCall was forced to resign his positions as Chairman of the Board and employee, noted that Mr McCall had already received a salary and bonus of greater than $2 million (in 1999 dollars) that year, and was the proud possessor of 2,879,677 shares of common stock, more than 1% of shares outstanding, after his resignation. 

I say again, meaningful health care reform is unlikely unless we deal with the problem of conflicted, unethical, and sometimes corrupt leadership of health care organizations.