In re McKesson Hboc, Inc. Securities Litigation
| Decision Date | 28 September 2000 |
| Docket Number | No. C-9920743RMW.,C-9920743RMW. |
| Citation | 126 F.Supp.2d 1248 |
| Parties | In re MCKESSON HBOC, INC. SECURITIES LITIGATION This Document Relates to All Actions |
| Court | U.S. District Court — Northern District of California |
Leonard Barrack, Gerald J. Rodos, M. Richard Komins, Barrack, Rodos & Bacine, Philadelphia, PA, Max W. Berger, Daniel L. Berger, Rochelle Feder Hansen, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, Co-Lead Counsel for Plaintiffs.
Moses Silverman, Thomas Gentile, Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, Michael J. Shepard, Howard Caro, Heller Ehrman White & McAuliffe, San Francisco, CA, Counsel for Defendant Charles McCall.
Paul Renne, Cooley Godward LLP, San Francisco, CA, Dorothy Kirkley, Penn Payne, Kirkley & Payne, LLP, Atlanta, GA, Counsel for Defendant Albert J. Bergonzi.
Mark Stein, David Hennes, Fried, Frank, Harris, Shriver & Jacobson, New York, NY, James T. Fousekis, David Romanski, Rachel Boehm, Steinhart & Falconer, San Francisco, CA, Counsel for Defendant Mark A. Pulido.
John A. Reding, Grace A. Carter, Maria Graesser, Paul, Hastings, Janofsky & Walker LLP, San Francisco, CA, Counsel for Defendant Jay P. Gilbertson.
William Alderman, Orrick, Herrington & Sutcliffe, San Francisco, CA, Counsel for Defendant Richard H. Hawkins.
Tony Powers, Rogers & Hardin, Atlanta, GA, Counsel for Defendant Jay M. Lapine.
Samuel R. Miller, James Goldberg, Folger Levin & Kahn LLP, San Francisco, CA, Counsel for Defendants Alfred C. Eckert, Philip A. Incarnati, Alton F. Irby, M. Christine Jacobs, Gerald E. Mayo, James V. Napier, and Donald C. Wegmiller.
Melvin R. Goldman, Paul T. Friedman, Morrison & Foerster LLP, San Francisco, CA, Counsel for Defendants Mary F. Bitterman, Tully M. Friedman, John M. Pietruski, David S. Pottruck, Carl E. Reichardt, Alan Seelenfreund, Jane E. Shaw, and Robert H. Waterman.
James J. Binns, Philadelphia, PA, J. Philip Kirchner, Flaster, Greenberg, Wallenstein, Roderick, Spirgel, Zuckerman, Skinner & Kirchner, P.C., Cherry Hill, NJ, Counsel for Defendant Michael Smeraski.
Douglas R. Young, Farella Braun & Martel LLP, San Francisco, CA, Counsel for Defendant Heidi E. Hodowitz.
Jonathan J. Lerner, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, James E. Lyons, Timothy A. Miller, Skadden, Arps, Slate, Meagher & Flom LLP, San Francisco, CA, Counsel for Defendant McKesson HBOC, Inc.
Marshall Grossman, Gwyn Quillen, Alschuler, Grossman, Stein & Kahan, Los Angeles, Stan Roman, Tracy Clements, Krieg, Keller, Sloan, Rilley & Roman LLP, San Francisco, CA, Counsel for Defendant Arthur Andersen LLP.
Paul H. Dawes, Iatham & Watkins LLP, Menlo Park, Jonathan M. Hoff, Dennis Block, Cadwaiader, Wickersham & Taft, New York, NY, Counsel For Defendant Bear Stearns & Co.
Pending before the court are fourteen motions to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, which were heard by the court on September 15, 2000. The court has read the moving and responding papers and heard the argument of counsel. The court's ruling is set forth in full at the end of this order.
This is a securities class action lawsuit stemming from a dramatic decrease in the trading price of McKesson HBOC, Inc. ("McKesson HBOC") stock in April 1999.
In October 1998, McKesson, Inc., a San Francisco-based company, announced that it would be acquiring HBO & Company ("HBOC"), a healthcare software company based in Atlanta, Georgia, through a merger.1 The newly formed entity was to be named McKesson HBOC, Inc. On November 13, 1998, McKesson registered shares for McKesson HBOC, Inc. with the Securities Exchange Commission ("SEC"). These shares were to be issued to HBOC shareholders in the event that the merger was approved. As part of the registration process, McKesson filed a registration statement ("the McKesson November Registration Statement"). The McKesson November Registration Statement included, among other things, data from HBOC's financial statements (some of which had been previously filed by HBOC with the SEC). The McKesson November Registration Statement also disclosed that holders of HBOC common stock would receive 0.37 shares of newly-issued McKesson HBOC stock for each share of HBOC stock.
The acquisition of HBOC required approval from the shareholders of both companies. On November 27, 1998, the two companies solicited proxies through a joint proxy statement and prospectus ("the Joint Prospectus"). The Joint Prospectus contained the same HBOC financial data reported in the McKesson November Registration Statement.
Both companies' shareholders approved the merger, which was accomplished on January 12, 1999. That same day, McKesson was renamed McKesson HBOC, Inc. HBOC became McKesson HBOC's Healthcare Information Technology Business Unit ("the ITBU"), a wholly owned subsidiary of McKesson HBOC. On the day of the merger, McKesson HBOC stock traded for as much as $89½ per share.
Barely four months later, on April 27, 1999, McKesson HBOC issued a press release in which it announced the company's discovery of more than $42 million in improperly recognized revenue, which would have to be reversed. The improperly recognized sales were in fact contingent transactions. The improperly recognized sales all came from HBOC and the ITBU. The company warned that it was continuing a financial audit, and warned of the "possibility that additional contingent sales may be identified." (Compl. ¶ 41.)
The market reacted swiftly to this disclosure. Within 24 hours, the trading price of McKesson HBOC stock had dropped from the previous day's close of $65.75 to a closing price of $34.50. This drop represented a $9 billion drop in market capitalization.
On May 25, 1999, McKesson HBOC issued a further press release, which updated the market on the status of the HBOC/ ITBU audit. According to the press release, "additional instances of improper revenue recognition have been found." (Compl. ¶ 43.) The press release promised that the company would conclude the investigation and issue corrected financials in the near future.
Less than a month later, and before it had issued corrected financials, the company announced that several former HBOC executives were being terminated for their participation in the HBOC/ITBU accounting improprieties. Specifically, the company announced that McKesson HBOC Chairman Charles W. McCall "has been removed as Chairman of the Board and dismissed as an employee" and that four other ITBU officers — including defendants Bergonzi, Lapine and Smeraski — had "been dismissed immediately for cause." (Compl. ¶ 170a.) In subsequent communications with the press, McKesson HBOC officials (including the company's newly appointed Chairman and its official spokesperson) discussed the ongoing HBOC/ ITBU audit. According to these officials, HBOC/ITBU senior management had been intentionally (and secretively) booking contingent software transactions as sales for several years. (Compl. ¶¶ 170b-f.)
Finally, on July 14, 1999, McKesson HBOC issued a press release announcing the results of its audit. The audit had uncovered more than $327 million in improperly recorded transactions, of which at least $50 million were never likely to become properly recognizable sales. (Id. ¶ 45.) The company's restated financials were filed with the SEC on July 16, 1999.
Not surprisingly, several dozen shareholders' lawsuits had meanwhile been filed. Named defendants included McKesson HBOC, the ITBU, directors and executives of the corporations involved in the merger, and the accounting firm and investment bank that failed to undercover the alleged accounting fraud.
The various class actions alleging violations of federal securities law have been consolidated in this court, and the New York State Common Retirement Fund has been appointed Lead Plaintiff for those actions.
On February 25, 2000, Lead Plaintiff filed an Amended and Consolidated Class Action Complaint ("the Complaint"). The Complaint alleges sixteen causes of actions against almost all possible defendants (with the notable exception of HBOC /ITBU, which has been sued by Lead Plaintiff in a separate complaint). The Complaint provides the specifies of the restated financial data and also details McKesson HBOC's public statements about the accounting improprieties.
In addition, the Complaint summarizes the results of lead counsel's investigation into the HBOC/ITBU accounting irregularities, as well as investigative reporting in the Wall Street Journal about the alleged accounting fraud.
The Complaint identifies 15 HBOC employees and customers who cooperated with lead counsel's investigation. They are identified by job title, but not by name.
The sources implicate several of the named defendants in HBOC's apparently widespread practice of accompanying contracts with side letters that revealed contingencies not disclosed on the face of the contract. (Compl. ¶ 181-182.) The sources state that the side letters were often stored separately from the contracts. The complaint recounts several witnesses' statements implicating several defendants in the improper recognition of those contingent sales as revenue. According to the relevant section of the complaint:
183. Independent sources told plaintiffs' investigators that while defendant Gilbertson had the final say as to whether and when revenue would be recognized on a given contract, including those that were subject to contingencies and "side letters," or knew of the decision, such decisions were collaborative efforts among defendants McCall, Bergonzi, Gilbertson and Lapine.
a. A Senior Vice President ("Sr. V.P.1"), a Regional Vice President who came to HBOC...
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