UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges that:
JURISDICTION AND VENUE
1. This Court has jurisdiction over this action pursuant to Sections 21(d)(3) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(3) and 78aa.
2. Venue is proper because defendant, Andrx Corporation ("Andrx"), and its subsidiary, Cybear, Inc. ("Cybear"), conduct business and maintain offices in Ft. Lauderdale, Florida and Boca Raton, Florida, respectively.
3. Andrx, based in Fort Lauderdale, Florida, owns multiple subsidiaries that distribute and manufacture generic and brand name pharmaceuticals. On September 5, 2000, pursuant to a corporate reorganization ("Reorganization"), Andrx became a Delaware holding company and acquired all of the outstanding shares of Cybear. Between September 7, 2000 and May 17, 2002, Andrx maintained two classes of common stock, both of which were listed on the NASDAQ National Market System ("NASDAQ"): Andrx Group Common Stock, which tracked the performance of all Andrx divisions except Cybear, and Cybear Group Common Stock, which tracked the performance of Cybear and several other related entities. Effective May 17, 2002, Andrx converted all of the outstanding shares of Cybear Group Common Stock into shares of Andrx Group Common Stock, which currently is listed for trading on NASDAQ and is the only outstanding class of common stock of Andrx.
OTHER RELEVANT ENTITY
4. Cybear, located in Boca Raton, Florida, is an information technology company providing Internet products and services to the healthcare industry. Before the Reorganization, Cybear was 73% owned by Andrx, and it filed periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. In September 2000, Cybear became a wholly-owned subsidiary of Andrx and no longer files separate periodic reports with the Commission. Andrx continues to file consolidated financial statements with the Commission that include Cybear's results. During the course of the Commission's investigation of the conduct alleged in this complaint, Cybear's cooperation with the Commission's inquiry was at times less than complete.
The Cybearclub Joint Venture
5. In August 1999, Andrx and Cybear formed a joint venture, Cybearclub LLC ("Cybearclub"), for the purpose of selling vaccines and injectibles distributed by Andrx through Cybear's Internet website. In September 1999, Cybearclub began using Andrx's in-house telemarketing staff, who solicit physicians and pharmacies by telephone to buy generic pharmaceuticals from Andrx, to solicit existing Cybear and Andrx physician customers, as well as new customers, to purchase injectibles and vaccines through Cybear's website. The parties intended that, through the introductory efforts of telemarketers, and lower pricing of Internet-ordered products, physician customers would purchase goods over the Internet rather than through telemarketers.
6. At the time the parties established the joint venture, Andrx and Cybear intended that Cybear would recognize the revenue from purchases made through Cybear's website, while Andrx would continue to recognize the revenue from orders that customers placed over the telephone.
7. Cybear disclosed the joint venture for the first time in its Form 10-Q for the quarter ended September 30, 1999, which described the joint venture as "an arrangement with Andrx for the sale of products to physician offices on orders placed through Cybear's Physician Practice Portal product." The Form 10-Q separately classified the joint venture's revenue as "e-commerce revenues."
8. During 1999 and early 2000, Andrx telemarketers encountered numerous problems in convincing potential customers to order products through Cybear's website. Among other things, Cybear's website experienced frequent technical problems, the on-line registration process was lengthy and complicated, and many of the physician offices did not have the time, desire, or proper computer equipment to access Cybear's website. As a result, Cybear recognized less than $81,000 in revenues from Cybearclub during all of 1999.
Internally-Entered Cybearclub Orders
9. In an effort to overcome the technical problems and to increase Cybearclub sales, in approximately March 2000, Cybear employees began a practice of entering onto Cybear's website all first-time physician customer orders for any Andrx-distributed product available through Cybearclub, even though the customer placed his or her order over the telephone instead of through the Internet. The Andrx telemarketers accepted such orders from customers over the telephone and then handed the order tickets to a Cybear employee, who then entered the order onto Cybear's website.
10. This practice, however, was not limited to first orders and evolved into telemarketers accepting subsequent orders over the telephone and routing those orders to Cybear employees for entry onto Cybear's website. In some instances, Cybear employees input orders onto Cybear's website for customers who did not have Internet access or the required computer equipment to input the order themselves. The internally-entered Internet orders occurred without the knowledge or approval of senior management of either Cybear or Andrx.
11. Cybear failed to implement internal controls to prevent it from recognizing revenues from the internally-placed orders, which should have been recognized by Andrx according to the joint venture agreement.
12. At least partly because of Cybear employees inputting Internet orders for physicians, the revenues that Cybear recognized from Cybearclub increased to approximately $215,000 in the first quarter of 2000, and to more than $1.1 million in the second quarter of 2000. Cybearclub revenues constituted more than 80% of Cybear's total revenues in each of these quarters.
13. In late July 2000, senior management of Andrx and Cybear were informed for the first time that a majority of Cybearclub's sales resulted from orders that were entered internally through Cybear's website. Upon learning this information, senior management of Cybear and Andrx engaged in internal discussions to determine whether Cybear could recognize the revenues from internally-entered Cybearclub orders. In addition, Andrx and Cybear consulted with their outside auditor. Based on these discussions, Andrx and Cybear determined that Cybear could record revenues from internally-entered Cybearclub orders in its From 10-Q for the quarter ended June 30, 2000. However, Andrx and Cybear agreed to evaluate whether Cybear could continue recognizing revenues from internally-entered Cybearclub sales in future quarters.
14. Although telephone orders had been routed to Cybear's website and recorded by Cybear as revenue, Cybear's Form 10-Q for the period ended June 30, 2000, which was filed with the Commission on August 14, 2000, did not sufficiently disclose these facts. Prior to the second quarter of 2000, the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") portion of Cybear's periodic filings categorized the revenues from the Cybearclub joint venture as "e-commerce transactions." The notes to Cybear's financial statements further described the joint venture as "an arrangement with Andrx for the sale by Cybear of products to physicians offices on orders placed through Cybear's Physician Practice Portal." After learning of the internal orders, Cybear made changes to its Form 10-Q for the quarter ended June 30, 2000, including changing the description of the joint venture's revenues from "e-commerce" revenues to "Cybearclub" revenues. However, these changes did not sufficiently disclose the facts described in paragraphs 9 through 13, above.
15. Cybear's financial statements included in its Forms 10-Q for the first and second quarters of 2000 were not in conformity with GAAP because they did not properly recognize revenues from internally-entered orders. Under GAAP, Andrx should have recognized these revenues. See Statements of Financial Accounting Concepts, Concept 6, par. 78 (stating a company can recognize revenues only from those activities that constitute its ongoing major or central operations); see also Statements of Financial Accounting Concepts, Concept 2, par. 160 (noting that "the quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance over form").
16. At the end of the third quarter of 2000, Andrx and Cybear decided that Cybearclub could no longer recognize revenues from internally-entered sales. By that time, Andrx had acquired Cybear, and Cybear's financial statements were included in Andrx's periodic filings with the Commission. Andrx's Form 10-Q for the period ended September 30, 2000, disclosed that Cybearclub used Andrx telemarketers to solicit potential customers, and disclosed that a majority of Cybearclub revenues resulted from telephone orders entered internally over Cybear's website.
Inadequate Proxy Statement Disclosures
17. On July 31, 2000, Cybear and Andrx sent their shareholders a joint proxy statement in connection with the proposed Reorganization, pursuant to which Andrx would acquire all of Cybear's outstanding common stock and create a separate class of common stock, Cybear Group Common Stock, to track the performance of Cybear and several other related entities.
18. The "risks" section of the proxy statement warned that the market and price for the newly trading Cybear Group Common Stock could be influenced by any quarterly changes in Cybear's results of operations or changes in financial estimates. The proxy emphasized that Cybear's success would be dependent upon, among other things, Cybear's ability to generate e-commerce revenues. However, the proxy statement did not disclose that the majority of Cybear's "e-commerce" revenues resulted from internally-placed orders that should have been recognized by Andrx, and that Andrx and Cybear were evaluating whether Cybear could recognize those revenues in the future. On September 5, 2000, shareholders for Andrx and Cybear voted to approve the Reorganization.
CAUSES OF ACTION
VIOLATIONS OF SECTION 13(a) OF THE EXCHANGE ACT
19. Paragraphs 1 through 18 are hereby reincorporated and realleged by reference.
20. Section 13(a) of the Exchange Act requires all issuers subject to the reporting requirements of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Rule 13a-13, promulgated pursuant to Section 13(a), requires issuers to file with the Commission quarterly reports. In addition to any required information in a statement or report, Rule 12b-20 requires the addition of such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.
21. At all relevant times, Cybear was an issuer subject to the reporting requirements of Section 13(a) of the Exchange Act and the rules thereunder.
22. Cybear violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 because the financial statements included in its quarterly reports filed with the Commission on Forms 10-Q for the quarters ended March 31, 2000 and June 30, 2000, did not accurately report Cybear's revenues. Further, the MD&A portion of Cybear's Form 10-Q for the period ended June 30, 2000, did not sufficiently disclose the facts described in paragraphs 9-13, above.
23. By reason of the foregoing, Cybear violated Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder.
VIOLATIONS OF SECTIONS 13(b)(2) OF THE EXCHANGE ACT
24. Plaintiff realleges and incorporates by reference paragraphs 1 through 18 above.
25. Section 13(b)(2)(A) of the Exchange Act requires issuers with a class of securities registered under Section 12 of the Exchange Act to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the issuer's assets. Section 13(b)(2)(B) of the Exchange Act requires issuers with a class of securities registered under Section 12 of the Exchange Act, among other things, to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements.
26. At all relevant times, Cybear and Andrx were issuers subject to these recordkeeping requirements.
27. During the first two quarters of 2000, Cybear improperly recognized revenues from telemarketing orders that were internally-entered onto Cybear's website and that, according to GAAP, should have been recognized by Andrx. Cybear also failed to devise and maintain internal accounting controls sufficient to provide reasonable assurances that it properly accounted for revenues in its financial statements in conformity with GAAP.
28. By reason of the foregoing, Cybear violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
VIOLATIONS OF SECTION 14(a) OF THE EXCHANGE ACT
29. Plaintiff realleges and incorporates by reference paragraphs 1 through 18 above.
30. Section 14(a) of the Exchange Act makes it unlawful to solicit proxies in contravention of any rule or regulation promulgated by the Commission. Rule 14a-9 thereunder prohibits the inclusion in a proxy statement of "any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading."
31. Cybear's proxy solicitation did not sufficiently disclose that for the first and second quarters of 2000, a majority of Cybear's Internet sales, which represented nearly all of Cybear's total revenues, were the result of employees inputting customer orders through the Cybear website, rather than customers placing orders over the Internet.
32. By reason of the foregoing, Cybear violated Section 14(a) of the Exchange Act and Rule 14a-9 thereunder.
WHEREFORE, the Commission respectfully requests that the Court:
Enter a Final Judgment ordering Defendant to pay a civil money penalty of $100,000 pursuant to Section 21(d) of the Exchange Act, 15 U.S.C. § 78(d)(3).
Grant such other and further relief as may be necessary and appropriate.
Retention of Jurisdiction
Further, the Commission respectfully requests that the Court retain jurisdiction over this action in order to implement and carry out the terms of all orders and decrees that may hereby be
entered, or to entertain any suitable application or motion by the Commission for additional relief within the jurisdiction of this Court.