Biovail Corp. founder Eugene Melnyk did not contravene Ontario securities law by issuing a misleading press release about a 2003 truck accident involving a shipment of Biovail drugs, but he did act "contrary to the public interest" in allowing misleading information to be issued, the Ontario Securities Commission has ruled.
The 84-page decision in Mr. Melnyk's long-running legal drama reaches a complex conclusion, criticizing Mr. Melnyk's behaviour when Biovail issued statements in early October, 2003, reporting a serious truck accident would cause the company to miss its third-quarter earnings targets, but also finding the company's former chief executive officer did not breach specific provisions of the Ontario Securities Act.
The decision concludes Mr. Melnyk knew the revenue loss associated with the truck accident would not be as great as the $10-million to $20-million hit Biovail estimated in its Oct. 3 press release disclosing the truck accident. But the commission also said the information was not misleading "in a material respect" based on securities rules at that time.
Nonetheless, Mr. Melnyk's actions were still contrary to the public interest, because he "knew or ought to have known" the company was releasing incorrect information about the accident.
"Melnyk has the onus of establishing that he acted with due care and diligence in the circumstances. In our view, he has not satisfied that onus," the OSC hearing panel wrote.
The case relates to a controversial period in Biovail's history when the company disclosed a truck carrying a valuable shipment of Biovail's Wellbrutrin drug had been in an accident near Chicago, and the accident would cause Biovail to significantly miss its revenue forecasts. The announcement was greeted with skepticism from analysts and investors and quickly attracted the attention of regulators.
Biovail later recorded a $5-million loss from the accident.
The OSC hearing panel wrote in its decision that it was convinced Biovail seized upon the accident as a way of explaining its earnings miss for the third quarter, preferring to blame the miss on a one-time event instead of acknowledging broader problems with weak sales.
And the commission also concluded Mr. Melnyk was personally responsible for allowing misleading information to be issued in news releases, rejecting his claims that other executives had been responsible for the disclosure.
"He was the founder and driving force of Biovail," the OSC panel wrote. "At the end of the day, Melnyk cannot separate himself from the actions of Biovail. He had a heavy responsibility as chairman and CEO to ensure that Biovail did not make inaccurate, misleading or untrue public statements."
The hearing panel said it concluded Mr. Melnyk had not breached specific Securities Act requirements in part because of the value of the shipment would not have been considered a material dollar amount to investors at that time, and also because rules in place at the time only specifically covered disclosures made in documents required to be filed with regulators. Press releases were not among those documents in 2003, although that rule was amended in 2004.
However, the more general finding that Mr. Melnyk acted contrary to the public interest means the commission will still impose a penalty in the case. A date has not yet been set for a sanctions hearing.
A finding of acting contrary to the public interest can result in a wide range of sanctions, including a prohibition from trading securities for a period of time or of acting as a director or officer of a public company.
Mr. Melnyk said in a statement Friday he was pleased the commission did not find he had contravened Ontario securities law.
"I am pleased that the commission found that Biovail acted appropriately in issuing an earnings warning and that numerous aspects of that earnings warning were accurate," he said.
"I am considering my position in respect of the commission's remaining public interest findings."
The panel's decision will likely fuel a long-running legal debate about how the OSC applies its broad powers to find conduct "contrary to the public interest" even when no specific breach of securities laws are found to have occurred.
The hearing panel, led by OSC vice-chairman James Turner, wrote in its decision that it recognized its public interest jurisdiction "must be exercised with some caution and restraint."
But the panel said companies and their top officers have an obligation to take "appropriate steps" to ensure public statements are accurate before making them.
It said the obligation applies even to statements that may not meet the legal standard of financial materiality.
"There is an essential public interest in ensuring that all public statements made by reporting issuers and others are accurate and not misleading or untrue and can be relied upon by investors in making investment decisions," the decision said.
While much of Mr. Melnyk's success in the case hinges on legal interpretations of the materiality of dollar amounts at issue as well as the rules governing press releases at the time, he can also claim some victory in terms of convincing the hearing panel he did not act improperly.
While the hearing panel concluded Mr. Melnyk "knew or should have known" that Biovail was overstating the value of the drug shipment in its press release on Oct. 3, it accepted he may not have known the Sept. 30 shipment could never have been included in third-quarter revenue anyway.
The hearing panel said it accepted that Mr. Melnyk may not have known the details of the delivery agreement before the press release was issued, even though other executives at the company were clearly aware the shipment was irrelevant for the third-quarter financial results.
"While we are skeptical of Melnyk's testimony in this respect, we are prepared to give him the benefit of the doubt," the panel wrote.