PERSISTENCE YIELDS THE SEC A SETTLEMENT WITH A LAWYER
Nobody will ever claim that, once on the trail, the SEC is not persistent. Nine years after the complaint was filed, and following an acquittal on parallel criminal charges, attorney Jay Lapine settled fraud and books and records charges with the Commission. SEC v. Lapine, Case No. C-0103650 (N.D. Cal. Filed Sept. 27, 2001). Mr. Lapine served as General Counsel to HBOC from 1997 through 1999. After that company merged with McKesson in 1999, he was named vice president and General Counsel of the HBOC division of McKesson HBOC and served in that position through June 1999.
The SEC’s complaint centers on events from 1998 to 1999. Prior to that time, the company had an unbroken series of increases in revenue from product sales. The company consistently announced results that met or exceeded analysts’ predictions with only one exception. As revenue began to dwindle, senior management engaged in a scheme to boost the numbers. According to the complaint, senior management caused the company to negotiate and execute sales agreements which were contingent on future events. The contingencies were put in side letters. The revenue from these agreements was recognized, despite company policies to the contrary.
By June 1998, Mr. Lapine became aware of these improper practices. Rather than report them to the accounting department, he became a participant, according to the SEC. Mr. Lapine helped prepare the agreements and side letters. The revenue from those agreements was reported in filings made with the Commission.
The next year, Mr. Lapine drafted agreements which were crafted to improperly permit revenue recognition. In the transaction, McKesson HBOC entered into a contract with Data General for an exchange of product and services. The agreement was broken into to parts. The first appeared to be a reseller license and distribution agreement backdated to the end of the quarter and fiscal year. Under this agreement, Data General purchased a license for McKesson HBOC software that Data General would resell to other customers. Data General agreed to pay $20 million. The second, dated the first month of the next fiscal year and written as an amendment to the first, provided for McKesson HBOC to purchase hardware from Data General that would be resold. The purchase price was $25 million. McKesson was also to assist Data General in reselling the software it had purchased. The right of return, and the duty to assist, precluded revenue recognition. The revenue, however, was recognized. Without the revenue from this transaction, the company would not have made the consensus estimate for the year.
To resolve the case with the Commission, Mr. Lapine consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions. He also agreed to the entry of a five-year officer/director bar and to pay a $60,000 civil fine. In 2007, other officers of the company settled with the SEC as discussed here. See also Litig. Rel. 21444 (Mar. 10, 2010).