U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20506 / March 24, 2008
Accounting and Auditing Enforcement Release No. 2801 / March 24, 2008
SEC v. Biovail Corporation, Eugene Melnyk, Brian Crombie, John Miszuk, and Kenneth G. Howling, 08 Civ. 02979 (LAK) (S.D.N.Y. filed March 24, 2008)
SEC Charges Biovail Corporation and Its Former CEO, CFO and Two Current Senior Executives With Securities Fraud
Biovail Settles Charges and Agrees to Pay $10 Million Civil Penalty
The Securities and Exchange Commission today charged Canadian pharmaceutical company Biovail Corporation and its former CEO, former CFO, and two current senior executives with engaging in a number of fraudulent accounting schemes and making a series of misstatements to analysts and investors.
The Commission's complaint alleges that present and former senior Biovail 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 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.
Biovail settled the Commission's charges and will pay a $10 million penalty. Four current or former Biovail senior executives still face SEC charges: former chairman and chief executive officer Eugene Melnyk; former chief financial officer Brian Crombie; current controller John Miszuk; and current chief financial officer Kenneth G. Howling.
The Commission's complaint alleges that in October 2003 Biovail and some of its executives schemed to deceive investors and analysts by falsely attributing nearly half of Biovail's failure to meet its third quarter 2003 earnings guidance to a truck accident involving a shipment of one of Biovail's products. Led by Melnyk, Biovail intentionally misstated both the effect of the accident on Biovail's third quarter earnings as well as the value of the product involved in the truck accident. The accident, in fact, had no effect on third quarter earnings.
The Commission's complaint also alleges three accounting schemes that affected reporting periods from 2001 to 2003.
- Biovail, over several reporting periods in 2001 and 2002, improperly moved off its financial statements and onto the financial statements of a special purpose entity approximately $47 million in expenses incurred in the research and development of some of Biovail's products.
- Biovail concocted a fictitious bill and hold transaction to record approximately $8 million in revenue in the second quarter of 2003.
- Biovail intentionally misstated foreign exchange losses that caused its second quarter 2003 loss to be understated by about $3.9 million.
The Commission's complaint alleges that each of Biovail's fraudulent accounting schemes had a material effect on Biovail's financial statements for the relevant quarters and years and was engineered by Biovail's senior management in order to inflate Biovail's reported earnings. Biovail management also intentionally deceived the company's outside auditors as to the true nature of the transactions. The truck accident misstatements were intended to mislead investors about the significance of Biovail's failure to meet its own earnings guidance.
According to the Commission's complaint, Melnyk violated shareholder disclosure provisions by failing to include in his Schedule 13D filings Biovail shares held by several off-shore trusts that Melnyk controlled. Because Melnyk exercised both investment and trading authority over the shares in the trusts, Melnyk was a beneficial owner of the securities and was required to disclose that ownership in his Schedule 13D filings with the Commission.
The Commission seeks a final judgment permanently enjoining all defendants from future violations of the Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5; Melnyk, Crombie, Miszuk, and Howling from aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5; Biovail from violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-16; Crombie and Biovail from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"); Crombie from violating Rule 13a-14; Melnyk from violating Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2; Crombie and Miszuk from violating Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-16; and ordering them to pay civil penalties and disgorgement of any ill-gotten gains with prejudgment interest. The Commission also seeks a judgment barring Melnyk, Crombie, Howling, and Miszuk from serving as officers or directors of any public company.
Without admitting or denying the allegations in the Commission's complaint, Biovail agreed to settle this matter by consenting to a final judgment requiring it to pay a penalty of $10 million and disgorgement of $1, ordering it to comply with certain undertakings, including the retention of an independent consultant, and permanently enjoining it from future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-16, and Rule 302(b) of Regulation S-T.
The Commission acknowledges the assistance of the Ontario Securities Commission in this matter.
