No matter what, BVF will be remembered as the company who missed its quarterly numbers because a truck carrying a load of “sold” pills crashed — after the close of the quarter. It’s one of my three favorite corporate excuses of all time.
[Thought not as infamous as Overstock.com, Biovail is one of a select group of companies which has blamed its business woes on “manipulation” by prominent hedge funds. However, US and Canadian securities regulators found that — surprise! — the company’s woes were self-inflicted and the accusations regarding hedge funds were a willfully misleading diversion.
Biovail’s “truck accident” accounting hoax ranks among the most amusing I’ve ever seen.]
OTTAWA — The Securities and Exchange Commission and a Canadian regulator accused the drug maker Biovail and four executives of accounting fraud on Monday, citing deceptions that included attributing a quarterly earnings shortfall to a fatal truck accident near Chicago.
Without admitting or denying wrongdoing, Biovail agreed to pay a $10 million penalty to settle the case with the S.E.C. Among the current and former executives facing accusations is Biovail’s founder and former chief executive, Eugene Melnyk. The Ontario Securities Commission filed a similar case against the four executives.
In a filing, the S.E.C. said that the executives “overstated earnings and hid losses in order to deceive investors and create the appearance of achieving earnings goals.”
It added: “When it ultimately became impossible to continue concealing the company’s inability to meet its own earnings guidance, Biovail actively misled investors and analysts about the reasons for the company’s poor performance.”
One such deception, the regulators said, came in 2003 when Biovail reported third-quarter earnings.
In a news release and during a conference call with investors, Mr. Melnyk said the company’s earnings faced a $15 million to $20 million shortfall. He said that was the value of a drug, a treatment for depression, that had been destroyed or damaged in a highway accident near Chicago.[But the truck accident occurred after the end of the quarter!]
The S.E.C., however, disagreed. “The accident, in fact, had no effect on third-quarter earnings,” it said.
Lanny A. Breuer, a lawyer for Mr. Melnyk, said Monday in an interview that “confusion” surrounding the truck accident led his client to provide incorrect information.
While some of the depression drug was destroyed in the crash, most of the earnings shortfall, Mr. Breuer said, was ultimately found to be caused by delayed, but accident-free, truck shipments to Chicago from a Biovail plant in Canada.
“They missed the quarter simply because the trucks came too late,” Mr. Breuer said[LMAO]. Mr. Melnyk, he added, believes he did not mislead investors because he disclosed the revenue shortfall, even if his description of its chief cause was wrong.
The complaint also describes three accounting schemes from 2001 to 2003 that, it said, were used to disguise the company’s true financial condition.
The complaint comes days after Mr. Melnyk, who remains a significant Biovail shareholder, announced that he would propose an alternate slate of directors for the company at its annual meeting in June.
Mr. Melnyk, who is best known in Canada as the owner of the Ottawa Senators hockey team, left Biovail in 2007 after settling an earlier action by the Ontario Securities Commission.
He agreed to pay a fine of 1 million Canadian dollars and not serve as a Biovail director after being accused of failing to report Biovail trades in trust accounts based in the Cayman Islands.
The Canadian regulator accepted that Mr. Melnyk, who lives in Barbados, did not direct trading activity in the trust accounts. But it found that he had the power to stop their speculative trades. Part of the S.E.C. complaint filed Monday also relates to those trusts.
Along with Mr. Melnyk, the S.E.C. has filed a complaint against Brian H. Crombie, the company’s former chief financial officer; Kenneth G. Howling, the current chief financial officer; and John R. Miszuk, the company’s controller.
In a statement, Biovail said that Mr. Howling and Mr. Miszuk “are being reassigned to different non-officer positions within the company.”
The regulatory case is the latest piece of litigation connected to Biovail’s performance. In 2006, Biovail sued several prominent hedge funds, including SAC Capital, contending that they colluded with independent research analysts to produce false research in an effort to drive down the company’s stock price.
The hedge funds, the suit contended, profited because they had placed bets that the price would fall.
Independent research firms like Gradient Analytics, which was named in Biovail’s suit, had argued that the stock’s precipitous plunge was caused by the company’s poor performance and dubious efforts to cover it up, not because of negative research.
“Today’s S.E.C. litigation release further confirms that Gradient has done nothing more than its job of conducting independent research,” Brad Forst, the chief executive of Gradient Analytics, said in a statement.
In the Biovail case, the S.E.C. terminated its investigation of Gradient Analytics in February 2007. No complaints have been brought against any hedge funds.
A spokesman for SAC Capital said: “The S.E.C.’s and O.S.C.’s charges and the company’s $10 million settlement are further evidence that Biovail’s claims are wholly without merit and were nothing more than a brazen attempt to distract from its own problems.” <<
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