The U.S. Securities and Exchange Commission has charged Biovail Corp., its founder Eugene Melnyk, and three other current and former executives with accounting fraud.
The regulator said that the company has settled its case, and will pay a $10-million (U.S.) fine, but the charges against Mr. Melnyk, former chief financial officer Brian Crombie, current controller John Miszuk, and current chief financial officer Kenneth Howling remain outstanding.
None of the allegations has been proved in court or in regulatory proceedings.
The SEC alleges that the executives, "obsessed with meeting quarterly and annual earnings guidance, repeatedly overstated earnings and hid losses in order to deceive investors and create the appearance of achieving earnings goals." When it became impossible to continue concealing Biovail's inability to meet its own earnings guidance, the company "actively misled investors and analysts about the reasons for the company's poor performance," the SEC said.
The Ontario Securities Commission has also filed a statement of allegation against the company and the same employees, with many of the same claims.
The SEC charges, filed in the United States district court for the southern district of New York, say that in October, 2003, Biovail and some of its executives falsely attributed its failure to meet third-quarter earnings guidance to an accident involving a truck that contained a shipment of the company's Wellbutrin XL product. The accident actually had no effect on the earnings, the SEC alleges.
There are also allegations that the company engaged in three other "accounting schemes" between 2001 and 2003. These involved improperly moving $47-million of research and development expenses off its financial statement and onto the statement of a special purpose entity, concocting a fictitious transaction to record $8-million in revenue, and misstating foreign exchange losses.
These moves were "engineered by Biovail's senior management in order to inflate Biovail's reported earnings," the SEC said in a statement.
Biovail's management also "intentionally deceived its auditors" about these transactions, the SEC alleged. And it also charged Mr. Melnyk with violating disclosure provisions by failing to properly identify some holdings in a trust.
The SEC wants the 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.
In a statement Monday, Biovail said it has not admitted to the charges in the complaint, but agreed to the $10-million payment to "fully settle the matter."
As part of the settlement, Biovail has agreed to an examination of its accounting functions by an independent consultant.
Mr. Howling and Mr. Miszuk, who still work at Biovail, have been reassigned to "different non-officer positions," the company said.
Mr. Melnyk issued a statement Monday saying that "the vast majority of the allegations made by the SEC and OSC do not pertain to me."
Referring to the truck incident, he said that "during a short, intense and chaotic period following a truck accident involving a shipment of Wellbutrin five years ago, 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."
Mr. Melnyk said he intends to try to resolve the issue surrounding his reporting of the trust holdings.