Canadian Pharmaceutical Company Biovail Settles a Financial Fraud Case While Four Of Its Executives Continue To Litigate

Leading Canadian pharmaceutical company Biovail Corporation whose shares are traded on the NYSE and four of its senior executives were named as defendants in a financial fraud complaint. The defendants included Eugene N. Melnyk, the founder and former chairman, Brian Crombie, former CFO and current senior vice president for strategic development, John Miszuk, vice president, controller and assistant secretary and Kenneth G. Howling, recently promoted to senior vice president and CFO. SEC v. Biovail Corporation, Civil Action 08 CV 02979 (S.D.N.Y. Filed March 24, 2009).

The SEC’s complaint alleges that the company was “obsessed with meeting quarterly and annual earnings guidance” and thus repeatedly overstated its earnings and concealed losses by:

–falsely attributing nearly half of its failure to meet third quarter 2003 guidance to a truck accident involving a shipment of one of its products which in fact had nothing to do with the loss;

–improperly moving about $47 million in expenses off its financial statements and onto those of a special purpose entity over several reporting periods in 2001 and 2002;

–creating a fictitious bill and hold transaction to record approximately $8 million in revenue in the second quarter of 2003; and

–intentionally misstating foreign exchange losses in the second quarter of 2003, understating them by about $3.9 million.

According to the complaint each of these fraudulent accounting schemes had a material impact on the financial statements of the company. The complaint also alleges that Mr. Melnyk failed to include in his Schedule 13D filings company shares held by several off-shore trusts that he controlled.

The company settled with the SEC by consenting to the entry of a permanent injunction prohibiting future violations of the antifraud provisions as well as and books and records provisions of the Exchange Act. In addition, the company agreed to pay $1 in disgorgement and a $10 million civil penalty.

The individual defendants did not settle with the SEC. Indeed, each of the individuals remains with the company. Mr. Melnyk, a Canadian citizen and a resident of Barbados, previously agreed to resign as chairman and CEO under a settlement entered into with the Ontario Securities Commission in May 2007, about the time the SEC issued a Wells notice to the company. Messrs. Howling and Miszuk are being reassigned by the company to non-executive positions.