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Five years ago, the merger between McKesson Corp. and HBO & Co. seemedlike a natural fit. But in Fulton County State Court today, lawyers for one side likely willargue that the merger was based on deceit and fraud. Within months of the 1999 merger that formed the world’s largest healthcare services company, the deal turned disastrous. Following a specialaudit, the newly formed company, McKesson HBOC, announced an accountingstatement that resulted in the elimination of $327 million in revenuepreviously reported by Alpharetta, Ga.-based HBO & Co. McKesson sharesplunged 47 percent in one day, leaving the company stripped of $9billion in value. In the wake of the scandal, more than 90 suits have been filed againstthe company, its officers and directors, former employees and itsoutside accountants and investment bankers. Four executives have pleaded guilty to charges including securitiesfraud and insider trading. Charges of conspiracy and securities fraudare pending against HBO & Co.’s former general counsel, Jay M. Lapine,and its former CEO, Charles W. McCall. Today, another chapter in the company’s legal saga will unfold beforeFulton State Court Judge Penny Brown Reynolds. She will hear argumentsfrom McKesson’s attorneys seeking the dismissal of a $21 million suitbrought against the company on behalf of a New York investment advisoryfirm. That firm represented about 20 pension funds, foundations andother institutional investors, each of whom lost an average of $1million when the share price plunged. If Reynolds decides the claims are “unique” compared to the federalclass action already underway in the U.S. District Court of NorthernCalifornia, it will pave the way for the institutional shareholders tomove forward with their state suit and begin discovery in earnest. Suffolk Partners v. McKesson HBOC, No. 00VS010469 (Fult. St. Oct. 24,2000). The Suffolk Partners case is just one of several multimillion-dollarsuits pending as a result of the accounting problems at HBO & Co.,which became public after the merger with McKesson. Based on court briefs, the attorneys representing McKesson — John H.Williamson and Joseph R. Manning of Morris, Manning & Martin — areexpected to argue that Suffolk’s claims should become part of thefederal class action because its injuries are not unique from the othershareholders. “To bring a claim directly, a shareholder must allege an injury uniqueto him, such as being deprived of the right to vote, and not one commonto his fellow shareholders as a group,” Williamson wrote. The firmdidn’t return phone calls. In response, the plaintiffs’ attorneys, Edward H. Nicholson Jr. andMartin D. Chitwood of Chitwood & Harley, draw a distinction betweentheir clients and the other shareholders. Nicholson declined comment but his firm’s brief outlines his clients’position: “Plaintiffs do not claim that they should be compensated forlosses suffered by the company because of a depreciation in the price ofa stock they were holding but instead for damages they suffered directlyby paying artificially inflated prices for the stock,” Nicholson wrote.”Defendants attempt to overturn well-established law recognizing a cleardistinction between individual claims for fraud and negligentrepresentation in connection with a purchase of common stock (allowed)and individual claims brought by shareholders for [the decrease] of thevalue of shares held (disallowed, unless damages to plaintiffs meetcertain standards of uniqueness).” ‘SCHEME’ TO INFLATE REVENUE According to the criminal and civil filings, several top HBO & Co.officers participated in a “scheme” to inflate revenue and net income.The day after McKesson announced the earnings restatement, the company’sstock price dropped from about $65 a share to $34. The firm’s stockclosed Tuesday at $27.70. The government accuses the HBO & Co. officers of exaggerating revenue byusing contracts with “side letters” that allowed customers to cancel anorder or return software without the knowledge of outside auditors, andby backdating contracts in order to record revenue in prior quarterlyperiods. Federal authorities also have said that the executives counted customerexchanges of cash and inventory as end-of-quarter “sales.” The allegedly deceitful accounting caused the newly merged company torestate its combined financial results for the previous three years. Almost immediately, the finger-pointing began. Sixty-seven federal suitswere filed along with 24 state suits in the courts of California,Colorado, Delaware, Louisiana, Pennsylvania and Georgia. McKesson’s SEC filings have detailed the cases against the company. According to those documents, the federal class action suits thatweren’t dismissed, with the exception of several ERISA claims, have beenconsolidated into one case. In re McKesson HBOC, No. C9920743. Judge Ronald M. Whyte of the U.S. District Court of Northern Californiahas appointed the New York State Common Retirement Fund as leadplaintiff. Besides the federal class action and the ERISA actions, several federalsuits brought on behalf of individual shareholders also are pendingbefore Whyte. Amidst the federal suits is one McKesson filed against its shareholders.In that case, McKesson sought to recover the “unjust enrichment”received by HBO & Co. shareholders who exchanged more than 20,000 sharesduring the merger. Those investors received more stock than would havebeen permitted without the inflated value of the HBO & Co. shares, theMcKesson lawyers alleged. On Jan. 9, 2002, Whyte dismissed McKesson’s claim with prejudice, butthe company has appealed the decision to the 9th U.S. Circuit Court ofAppeals. SEEKING $100M IN DAMAGES In Georgia courts, the accounting problems revealed after theMcKesson-HBO & Co. merger have been the subject of seven suits,according to the company’s filings with the U.S. Securities and ExchangeCommission. Two consolidated cases pending before Fulton Superior Court Chief JudgeElizabeth E. Long assert damages of more than $100 million each. A localbusinessman, Holcombe T. Green, who served on HBO & Co.’s board, broughtthe first. Green v. McKesson, No. 2002CV48407 (Fult. Super. Jan. 31,2002). In the related case, Green’s wife, Nancy Hall Green, is one ofthe limited partners in the family investment group named as theplaintiff. Hall Family Investments v. McKesson, No 2002CV48612 (Fult.Super. Feb. 6, 2002). Another suit was brought by a former general counsel of HBO & Co., JamesGilbert, who alleged that he lost $2 million in the wake of the scandal. TheSEC documents say the case has been stayed pending the outcome of thefederal class action. Gilbert v. McKesson, No. 02VS032502C (Fult. St.May 8, 2002). Another former HBO & Co. employee filed suit in Fulton State Court,saying he was owed $300,000 in commissions. He also alleges securitiesfraud and RICO violations. The company since has settled the claimsstemming from the unpaid commissions and said it expects the remainingclaims to be dismissed. Drake v. McKesson, No. 01VS026303A (Fult. St.Dec. 12, 2001). McKesson also settled a suit brought in Gwinnett County State Court byMelvin Adler, a shareholder who claimed losses of $43 million. SECdocuments say the case was settled following discovery, and theplaintiff filed a dismissal with prejudice on July 17, 2002. Adler v.McKesson HBOC, No. 99C79803 (Gwinn. St. Dec. 9, 1999). In addition to Suffolk Partners, Chitwood & Harley also represent CurranPartners in a $2.6 million claim pending before Reynolds. That claim isexpected to be consolidated with the Suffolk case. Curran Partners v.McKesson HBOC, No. 00VS010801 (Fult. St. Nov. 1, 2000).

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