November 7, 2022


Case Studies

BR&B served as co-lead counsel representing the lead plaintiff, the New York State Common Retirement Fund, in this action against McKesson HBOC, Inc., a company formed in January 1999 as a result of a merger between McKesson, a pharmaceutical distributer, and HBO & Company, a health care information systems developer. Despite the tenuous connection between these two business areas, McKesson’s management believed that the merger of McKesson’s mature, slow growth business with the newer — and faster-growing — business of HBOC would create synergies that would benefit McKesson’s shareholders. HBOC’s growth, however, was largely an illusion created by premature revenue recognition and other financial manipulation. 

The action was commenced in April 1999, less than four months after the merger, following the disclosure of a financial fraud at HBOC prior to the merger, which continued during the period following the merger. On the day McKesson announced its discovery of the fraud, the price of McKesson HBOC stock dropped by more than $31 per share in a single day, losing more than $9 billion in shareholder value. 

After several years of litigation in the United States District Court for the Northern District of California before the Honorable Ronald M. Whyte and in the Court of Appeals for the Ninth Circuit, and several mediation sessions with the retired U.S. Magistrate Judge Edward Infante, we achieved a series of settlements totaling $1.0425 billion, including:

  • A settlement with McKesson and HBOC for $960 million, which received final approval in February 2006, following nearly seven years of litigation, including three amended complaints, three rounds of motions to dismiss and extensive discovery.
  • A settlement that received final approval in April 2007 for $72.5 million with HBOC’s outside auditing firm during the class period, Arthur Andersen, LLP, which had ceased operations shortly after the litigation commenced.
  • A three-way settlement that received final approval in January 2008 whereby the lead plaintiff settled its claims with Bear Stearns & Co., which settled its claims for indemnity against McKesson, in connection with which the class received a further payment of $10 million.

Among the notable achievements in achieving this recovery were the following:

  • We obtained an injunction from the district court preventing two law firms representing plaintiffs who had unsuccessfully sought to be appointed as lead plaintiffs for a subset of the class from using misleading materials to solicit members of the class to opt out and bring individual actions and requiring the law firms to disseminate a corrective notice. We then obtained dismissal of their appeal in the Court of Appeals for the Ninth Circuit.
  • In addition to overcoming motions to dismiss as to most of the claims asserted against defendants, we obtained dismissal of a counterclaim filed by McKesson, which sought to recover for unjust enrichment allegedly obtained by persons who exchanged artificially inflated HBOC for McKesson stock in the merger. We then obtained a decision from the Ninth Circuit affirming the dismissal of the counterclaim.
  • We obtained a ruling from the district court denying McKesson’s motion to dismiss as to false financial information published after the merger. The court held that, even though the fraud occurred entirely at HBOC, because the former chairmen and CEO of HBOC became the chairman of McKesson after the merger, his state of mind was attributable to McKesson. This was one of the developments that enabled us to obtain a settlement of nearly $1 billion from McKesson, despite a separate ruling by the district court that McKesson had no liability for the securities law violations previously committed by HBOC after McKesson acquired it in a reverse triangular merger.