Risk & Compliance

SEC Charges Biovail, Four Execs with Fraud

The drug company settles with the commission for $10 million, and demotes its CFO and controller.
Sarah JohnsonMarch 24, 2008

A Canadian drug company will pay the Securities and Exchange Commission $10 million to settle claims that it improperly recognized revenue and misled analysts and investors by not being truthful in press releases and conference calls.

The regulator’s charges against Biovail Corp. stem from financial transactions made more than four years ago, involving its founder, two former CFOs, and a former controller. On Monday, Biovail acknowledged the settlement without admitting to or denying the allegations. The company — which has its stock listed on the New York and Toronto exchanges — also announced that it has demoted two individuals named in the SEC’s complaint, filed with the U.S. District Court of the Southern District of New York. In addition to the $10 million penalty, Biovail will pay the SEC $1 in disgorgement.

The SEC wants the court to require Biovail’s former executives to also pay penalties and disgorgement. In addition, they could be permanently barred from serving as public-company officers or directors. The complaint accuses founder and former chairman and CEO Eugene Melnyk, former CFOs Brian Crombie and Kenneth Howling, and former controller John Miszuk, of misleading investors in a series of actions made because they were “obsessed with meeting quarterly and earnings guidance.”

Melnyk, who also owns the Ottawa Senators hockey team, retired from Biovail last year. Crombie, who was demoted from CFO to senior vice president for strategic development in 2004, left the company last May. Both Howling and Miszuk are still with the company, but have been re-assigned to non-officer positions, Biovail said on Monday. Adrian de Saldanha, Biovail’s vice president of finance and treasurer, has been appointed interim CFO. None of the executives’ attorneys responded to CFO.com’s request for comment.

According to Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, the Biovail case reflects a “tone at the top” problem at Biovail. The SEC’s complaint includes several examples of executives under Melnyk not speaking up during conference calls or before the issuance of press releases and financial statements to correct the founder’s or their colleagues’ alleged misstatements.

One of those instances occurred after a multi-vehicle accident that kept one of Biovail’s product shipments from reaching a distributor. On several occasions, Biovail and some of its executives blamed the accident for the company not meeting third-quarter 2003 earnings guidance, the first time it had failed to do so.

A press release issued shortly after the accident claimed the value of the non-shipped items was between $10 million to $20 million when in fact the value was $5 million, the SEC says. On top of those accusations, the SEC claims Biovail would not have been able to recognize the revenue from the sale in the third quarter even if the shipment had been made because of GAAP constraints.

Moreover, the SEC says Biovail “improperly” moved approximately $47 million worth of research and development expenses to a special purpose entity between 2001 and 2002. During that time, the SEC says, Crombie hid crucial details of the arrangement from Biovail’s auditor.

The commission also accuses Crombie and Miszuk of understating the company’s net loss by 80 percent by “fraudulently” recognizing and recording $8 million in revenue from a “sham” bill and hold transaction made in 2003. In another matter that year, Biovail did not properly apply GAAP when figuring out its foreign exchange loss between Canadian and U.S. dollars, the SEC says. The error resulted in Biovail understating its second quarter by about $3.9 million.

Melnyk is also accused of violating disclosure requirements for securities he owned. The SEC says his Schedule 13D filings did not include shares held by several off-shore trusts that he controlled.

Biovail and the former executives are also under investigation by the Ontario Securities Commission.