On Sept. 30, 2003, a truck containing a load of Wellbutrin XL antidepressant pills left the Biovail Corp. plant in Steinbach, Man., on its way to a GlaxoSmithKline distributor centre in North Carolina.
Just outside of Chicago the next day, tragedy struck as the truck was caught up in a crash that killed eight people aboard a bus. The crash would also end up ensnaring Biovail in what regulators now allege a series of frauds to distort reported earnings and revenue.
Two days after the crash, Biovail executives told analysts on a conference call that $10-million to $20-million worth of pills didn't make it to the distributor, and that was going to force it to cut its third-quarter financial guidance. Months later Biovail acknowledged the value of the pills was only $5-million.
The incident is at the centre of a series of allegations levelled by regulators yesterday against Biovail, its former chairman Eugene Melnyk, and three other current and former executives, who are said to have misled investors, auditors and regulators through a series of accounting schemes.
The U.S. Securities and Exchange Commission accused Biovail of civil fraud, saying executives were "obsessed with meeting quarterly and annual earnings guidance," and engaged in a "corrupt strategy" to do so. Yesterday, the company settled its part of the SEC's allegations and made a $10-million (U.S.) payment, but admitted no wrongdoing.
The Ontario Securities Commission issued similar allegations yesterday, saying Biovail made "materially misleading or untrue" representations in its financial statements, and misled OSC staff during their investigation.
The allegations name the company, Mr. Melnyk and former chief financial officer Brian Crombie, along with John Miszuk and Kenneth Howling, who are still at Biovail.
None of the allegations has been proved in court. Mr. Melnyk said in a statement he will contest the "absolutely false" allegations against him.
Mr. Crombie's lawyer Paul Le Vay said the allegations against his client are "without merit" and he'll vigorously contest them.
"He strongly believes that during his tenure as CFO at Biovail its accounting was in accordance with [generally accepted accounting principles]and disclosure was timely and reflected the facts known at the time," Mr. Le Vay said.
Yesterday, Biovail reassigned Mr. Miszuk and Mr. Howling into "non-officer" positions. Their lawyers could not be reached.
As part of the settlement, Biovail has agreed to an examination of its accounting functions by an independent consultant.
One of the key allegations against Biovail and the executives is that they misrepresented the impact of the truck accident on the company's earnings.
The SEC complaint says that, because the pills would not have arrived at their destination until after the end of the third quarter, their sale would have had no impact on third-quarter results.
In addition, Biovail, Mr. Melnyk and Mr. Crombie "grossly overstated the revenue value of the shipment involved in the truck accident" in press releases and public statements, the SEC alleges. The amount was not corrected until five months later.
Other financial misstatements, according to the SEC and OSC allegations, resulted from the way Biovail moved $47-million in research and development expenses off its books and into a illegitimate special-purpose entity called Pharmaceutical Technologies Corp.
Mr. Crombie and Biovail "deliberately and fraudulently" orchestrated the arrangement to avoid recording the R&D expenses of certain products on Biovail's books, according to the SEC filing.
The regulators also allege that Biovail improperly included about $8-million in revenue in the second quarter of 2003 by creating a fictitious transaction involving the delivery of some sample Wellbutrin XL pills to a distributor.
And they alleged the company misstated about $3.9-million in foreign exchange losses.
Mr. Melnyk's lawyer Kent Thomson pointed out yesterday that his client was named by both the OSC and SEC only in the allegations involving the truck accident accounting.
The SEC also named Mr. Melnyk for allegedly misreporting his Biovail holdings in an offshore trust, an issue settled with the OSC last year when Mr. Melnyk paid a $1-million fine and stepped down as Biovail chairman.
Mr. Thomson said he hopes his client will be able to resolve the reporting issue with the SEC as well.
Referring to the truck incident, Mr. Melnyk said in a statement that during the "short, intense and chaotic period" following the incident, "I ensured that the key facts as I understood them were disclosed promptly to the investing public. I intend to vigorously contest the absolutely false allegations of the SEC and OSC and am confident that I will prevail once all the facts are heard."
The SEC wants all four executives to pay civil penalties and to disgorge any ill-gotten gains, and it wants them barred from serving as directors or officers of a public company.
Mr. Melnyk, who is now locked in proxy battle with the Biovail board, still plans to put forward an alternative slate of directors at the company's annual meeting in June.
SEC-OSC ALLEGATIONS
The truck accident Regulators allege Biovail misrepresented the financial impact of a 2003 crash, which resulted in a shipment of drugs not reaching their destination. The SEC also says the company 'grossly overstated' the value of the shipment.
The offshore connection According to SEC and OSC allegations, Biovail moved $47-million in research and development costs off its books to an illegitimate offshore special-purpose entity
called Pharmaceutical Technologies Corp.
Bill and hold Biovail is alleged to have improperly included $8-million in revenue in the second quarter of 2003 by creating a fictitious transaction involving the delivery of some sample drugs to a distributor.
Currency Regulators allege the company misstated $3.9-million in foreign-exchange losses.
BIOVAIL'S LEGAL WOES
The allegations filed yesterday by U.S. and Canadian regulators are the latest in a series of legal issues surrounding Biovail Corp. and its former chairman Eugene Melnyk.
Cardizem
The company is still under a U.S. grand jury investigation in Boston over allegations concerning a 2003 program Biovail created to get doctors to prescribe its Cardizem LA drug. The company has said it is fully co-operating, but noted that the investigation could lead to a criminal or civil action.
Hedge funds
Biovail filed a $4.6-billion (U.S.) lawsuit in 2006 in New Jersey against hedge fund giant SAC Capital Management, Gradient Analytics and several others, alleging they conspired for years to drive down Biovail's share price.
Jerry Treppel
Biovail and Mr. Melnyk have also waged a five-year legal battle with Jerry Treppel, a former Banc of America analyst. In 2003, Mr. Treppel sued, alleging he lost his job due to pressure from Biovail after he issued a "sell" recommendation and a negative report on the company.
Other suits
Biovail is also embroiled in lawsuits in the U.S. and Canada over patent issues, price-fixing allegations and shareholder complaints.
Settled
Shareholder class action
Last December, Biovail agreed to dole out $138-million to settle a class-action lawsuit launched by U.S. shareholders four years ago, after Biovail's stock lost about 50 per cent of its value when it badly undershot profit forecasts. The settlement contained no admission of wrongdoing or liability by the company or Mr. Melnyk.
OSC
In May, 2007, Mr. Melnyk also settled allegations filed by the OSC concerning his failure to disclose $1.3-billion of trades in Biovail shares. Under the deal, Mr. Melnyk paid a total of $1-million (Canadian) and agreed to step down as a director of the company.
Paul Waldie
BIOVAIL (BVF)
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