Securities And Exchange Commission Vs. Richard Hawkins

Securities and Exchange Commission vs. Richard H. Hawkins

While the widely exposed and discussed trials of WorldCom's and Tyco's top executives were all over the media, one of the most interesting cases of securities fraud was happening without any public acknowledgement.

Richard Hawkins, ex-CFO of a health service industry giant McKesson, was accused and later brought to court for inflating revenue at McKessonHBOC. The acquisition of HBOC, a medical software company, happened long after Hawkins became the CFO, but right before the management of both companies decided to falsify the facts.

It began with a written press release of the preliminary financial results for the quarter and year ended March 31, 1999. According to the release, the quarterly revenue was $6.4 billion, which was later discovered to be false. Hawkins himself approved the release, knowing that the numbers were materially overstated due to the inclusion of an alleged sale contract with Data General. For the purpose of meeting the expectations of the analysts, the software sales growth was exaggerated by 20%. The revenue goals for the March 31 quarter were $120 million, which both Hawkins and Albert Bergonzi, HBOC's Chief Operation Officer knew were very hard to be met.

In the beginning of March the newly joint corporation, McKesson HBOC started a negotiating process with Oracle Corporation. Unfortunately for McKesson, the negotiations ended without a contract. On April 1 Bergonzi let Hawkins know that he found an offer that could be a good deal. The agreement would require McKessonHBOC to sell $20 million worth of software to Data General, along with a license and a right to return any inventory that was not sold during the period of 6 months. The corporation would also have to help Data General find customers for the product. In return, they could buy $25 millions worth of computer hardware. The contract was signed on April 5 the same year. The senior management thought that backdating the sales and purchases would raise the company's revenues up to the desired levels. In order to cover their actions, the company created a false delivery receipt that showed the date of the delivery as March 31, 1999, while in reality the product was delivered in April. Both, the information about the $25 Million purchase of hardware from Data General as well as the return agreement concealed from the public.

On April 21, the management of McKesson met with Teresa Briggs, a Deloitte & Touche public accountant. They were notified "that the recording of revenue on the Data General transaction did not conform with Generally Accepted Accounting Principles and was an accounting error." ( the U.S. Securities and Exchange Commission, p.7) Later that day, Hawkins decided to approve the press release, disregarding the fact that Deloitte & Touche asked to consult with the Audit Committee first.

The defendant knowingly avoided the system of internal accounting controls of McKesson HBOC, which caused the companies to falsify their accounting records. There were several reasons why data General transaction was fraudulent. First of all, the deal was backdated; secondly it gave the company an unconditional right to return the product that was not sold and last, but not least, the transaction was a trade that wasn't regarded as one. Through side letters and agreements they provided the buyer with the right to cancel the contract or return the product if some of the requirements were not met. Generally Accepted Accounting Principles "preclude recognition of revenue from contingent contracts, until the contingency is satisfied." (Securities and Exchange Commission v. Charles W. McCall, United States District Court for the Northern District of California, Civil Action No. CO3-2603-SC, p.1)

According to the court, Hawkins "violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, and 13b2-2 thereunder. The Commission is seeking to enjoin Mr. Hawkins from committing future violations of these provisions, compel him to pay disgorgement, prejudgment interest, and civil monetary penalties, and to bar Mr. Hawkins from serving as an officer or director of a public company." (U.S. Securities and Exchange Commission, p.8) The defendant knowingly avoided the system of internal accounting controls of McKesson HBOC, which caused the companies to falsify their accounting records.

If the defendant were to be found guilty, he would have to face maximum 25 years in prison and $2 million in fines.

Mr. Hawkins left the corporation prior to any decisions made by the court.

After the assumed scam was publicly announced, the company's stock fell from $65 to $34, causing the investors up to $9 Billion in loss, and a row of shareholder lawsuits.

Hawkins was indicted in March, 20004 by the grand jury "on charges of conspiracy, securities fraud and making false statements to an accountant in connection with an audit of McKesson." (US: Former McKesson CFO Indicted in Fraud, p.1) Later that year, Mr. Hawkins waived his right to jury trial. The attempt was very risky, but it paid off well, he was a given a chance.

During the long process of trial a couple of witnesses pleaded guilty and gave the court more information on the case. However, On July 11 Mr. Hawkins was found not guilty. The U.S. District Court Judge Martin Jenkins, who was leading the case, accepted the testimony given by the defendant, that stated that he was not aware