Two Former Executives of Medical Manager Found Guilty in Securities Fraud Scheme

March 2, 2010 - Two former executives of Medical Manager Health Systems Inc., (Medical Manager), a subsidiary of WebMD Corporation from 2000 to 2005, were convicted today by a federal jury in Charleston, S.C., with participating in a conspiracy to fraudulently inflate the reported earnings of Medical Manager by more than $16.8 million between 1997 and 2003, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division ; Kevin F. McDonald, Acting U.S. Attorney for the District of South Carolina; David A. Thomas, Special Agent in Charge of the FBI’s Columbia Division; and Jeannine Hammett, Special Agent in Charge of the Charlotte, N.C., Field Office of the Internal Revenue Service (IRS) Criminal Investigation.

Former Medical Manager president John H. Kang, 46, of Trabuco Canyon, Calif., and former vice president and chief operating officer John P. Sessions, 67, of Myrtle Beach, S.C., were convicted of conspiracy to commit mail, wire and securities fraud. Kang and Sessions were charged in a second superseding indictment on Feb. 27, 2007, along with other executives of Medical Manager, for their roles in the fraudulent scheme.

"As the president and vice-president of their company, these defendants were supposed to lead their company with honor and integrity—instead, they orchestrated an elaborate accounting scheme meant to defraud investors about the financial success of their company," said Assistant Attorney General Lanny A. Breuer of the Criminal Division. "Corporate executives cannot decide to play by their own set of rules. The message is simple—obey the laws or face prosecution for your crimes."

"This case will serve as a wake-up call to corporate executives who scheme to profit at the expense of shareholders and the investing public," said Acting U.S. Attorney Kevin F. McDonald. "I am extremely proud of the dedication of the agents and attorneys who investigated and prosecuted this case."

"The FBI is committed to rooting out securities fraud," said FBI Special Agent in Charge David A. Thomas. "We will continue working with our partners to identify and stop those who line their own pockets at the expense of others."

"Corporate fraud has crippling consequences for the American economy," said IRS Special Agent in Charge Jeannine A. Hammett. "This verdict reflects the commitment of the law enforcement community to investigate and pursue allegations of wrongdoing, wherever they may occur, whether it be on our city streets or in our corporate suites."

Kang and Sessions were convicted of conspiring to engage in fraudulent accounting practices intended to artificially inflate the quarterly revenues of Medical Manager in order to meet and exceed the expectations of financial analysts, and thus to fraudulently inflate the market price of Medical Manager stock and, after its acquisition by WebMD, that company’s stock. According to evidence presented during the nearly two-month trial, the conspiracy involved a number of fraudulent practices, including inflating the company’s revenue by engaging in "round-trip" sales with software dealers that Medical Manager was acquiring. Evidence at trial proved that the defendants participated in a scheme to inflate the purchase price for the companies that Medical Manager was acquiring in order to compensate these companies for the simultaneous purchase of Medical Manager software that Medical Manager compelled them to purchase as part of their acquisition.

Evidence presented at trial proved that the defendants also inflated Medical Manager’s revenue by causing companies acquired by Medical Manager to reclassify revenue they had already recognized—and thus already included in their earnings—as "deferred revenue," which was not included in earnings. Once the books of the acquired companies were combined with those of Medical Manager, the conspirators recognized the deferred revenue again, thereby fraudulently increasing Medical Manager’s revenue and earnings. Kang and Sessions were also found guilty of causing companies Medical Manager was acquiring to fraudulently inflate their accrued liability accounts and reserves for various expenses before the financial statements of the target companies were combined with those of Medical Manager. Once the financial statements were combined, the conspirators caused Medical Manager to reverse those accrued liability accounts and reserves into earnings for Medical Manager.

Chief U.S. District Judge David C. Norton presided over the trial and will sentence the defendants at a later date. The maximum penalty for the conspiracy charge is five years in prison and a fine of $250,000, or twice the amount of pecuniary gain or loss resulting from the conduct.

Previously, in related cases, former Medical Manager executives Robert Davids, Kevin M. Kennedy, Glenn S. Moss, Patrick Sedlacek, William Kottage and Henry Holbrook each pleaded guilty for their roles in the scheme. Kennedy and Kottage also pleaded guilty to tax evasion. Also, on Jan. 11, 2010, Michael A. Singer, the former chief executive officer of Medical Manager, entered into a deferred prosecution agreement and agreed to forfeit $2.5 million.

Former corporate controller Charles L. Hutchinson, a/k/a Charlie Hutchinson, 41, of Tampa, Fla., and former associate general counsel Franklyn M. Krieger, a/k/a Frank Krieger, 46, of Tampa are both awaiting trial in this case. Hutchinson is scheduled for trial on May 17, 2010, and Krieger is scheduled to stand trial on Aug. 2, 2010. These cases were transferred from Charleston to Tampa by order of the court.

The case was prosecuted by Assistant U.S. Attorney Eric J. Klumb of the U.S. Attorney’s Office for the District of South Carolina, Assistant U.S. Attorney Jason H. Cowley of the U.S. Attorney’s Office for the Eastern District of North Carolina and Trial Attorney Jennifer R. Taylor of the Criminal Division’s Fraud Section. The case was investigated by agents of the FBI and the IRS.