Ex-McKesson Chairman McCall Faces New Jury for Fraud (Update2)
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By Karen Gullo

Oct. 27 (Bloomberg) -- Charles McCall covered up a scheme to inflate sales at McKesson Corp., prosecutors told a jury today as the former chairman faced a second trial for allegedly taking part in a fraud that 10 years ago cost investors $8.6 billion in losses.

McCall and former McKesson general counsel Jay Lapine are accused of hiding from auditors backdated sales contracts 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 McCall led that was acquired by McKesson in 1999.

McCall learned of the practices a few months before his software company, which had $1 billion in annual sales, was to be acquired by McKesson, where sales were $1 billion a month, said David Anderson, Assistant U.S. Attorney. The deal would usher McCall, who would become chairman of the merged company, into the highest echelon of corporate America, he said.

“He could go ahead with the merger, or he could blow the whistle on HBOC,” Anderson told a jury in opening arguments in San Francisco federal court today. “The evidence will show he covered up the fraud at HBOC.”

When McKesson said in April 1999 that sales had been prematurely booked, leading to a restatement, the company’s shares lost 47 percent of their value. McCall was fired that year.

2003 Indictments

A federal investigation followed and five former McKesson executives pleaded guilty to what prosecutors said was one of the largest white-collar crimes at the time. McCall and Lapine were indicted in 2003. McKesson agreed to pay $960 million in 2005 to settle investor lawsuits.

At a 2006 trial in San Francisco, McCall and Lapine were acquitted of conspiracy and won a mistrial on accusations of securities fraud, falsifying books and circumventing accounting rules. Prosecutors are retrying them on the charges that the jury in the first trial couldn’t agree on.

McCall was wrongly charged, his attorney Ted Wells told the jury. Two of his top deputies at HBOC, as HBO & Co. had been known, held a secret meeting where they decided without McCall’s knowledge to use so-called side letters on sales contracts that, among other things, allowed customers to back out of the deals and rendered the sales ineligible to be recognized as revenue, Wells said.

The two executives, one of whom pleaded guilty and cooperated with the government, betrayed McCall after he had promoted them to co-presidents at HBOC.

“Charles McCall is completely innocent. He’s a person who’s been wrongly charged,” Wells said today. His deputies never told them they were writing side letters and hiding them from auditors, Wells said.

Lapine has denied wrongdoing.

The second trial is expected to last three weeks, court filings said.

The case is U.S. v. Charles McCall, 00-CR-505, U.S. District Court, Northern District of California (San Francisco).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

Last Updated: October 27, 2009 14:23 EDT