Philip Musica was born in New York City in 1884 and dropped out of school at the age of 14 to help out at his father’s grocery store. Within two years he was in charge, handing everyday operations to his younger brother while he set about undercutting competitors by dodging tariffs on imports. Thus began a three decade career as a swindler. He had two spells in jail for bribery and forgery in 1909 and 1913, getting his second sentenced commuted by volunteering to work as a government agent during World War I. In this period he changed his identity several times, eventually settling on Dr F. Donald Coster, and founding the Adelphi Pharmaceutical Manufacturing Company, as a front for bootlegging. By 1926 he had made enough money to buy McKesson & Robbins, a struggling consumer-medicine firm.
What was the scam?
On the surface “Dr Coster” appeared to be a successful businessman, overcoming the Great Depression to turn McKesson & Robbins into a company with sales of $174m by 1937 (around $3bn in today’s money). However, at least $19m ($332m today) of this was fictitious – one of Musica’s brothers forged sales documents between McKesson’s Canadian subsidiary and a shell company created to enable Musica to skim money from the parent company .
What happened next?
McKesson’s treasurer, Julian Thompson, noticed that the Canadian subsidiary had never returned any of its large paper profits to the main company and so tried to persuade the board to liquidate part of the Canadian firm’s inventory to raise some cash. He found that, instead of the subsidiary making money for McKesson, McKesson was paying money to support the Canadian branch. After reporting the matter to the board of directors, they fired Coster and brought in the authorities, who discovered his real identity, which prompted Musica to commit suicide.
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Lessons for investors
Receivers appointed to look into McKesson’s books found that the company was still solvent, but the shares still plunged by more than 90% when trading in them, which had been suspended when the fraud was revealed, was resumed. The firm managed to survive and today McKesson Corporation is one of the largest medical-supply companies in the US, with a market capitalisation of more than $22bn. Sometimes, markets overreact to news of fraud.
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