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.

The FCPA: The New SEC and DOJ Enforcement Priority – Part VIII: Focus on Individuals

Industry wide cases are only one area of focus for the SEC and DOJ as they increase their FCPA enforcement efforts. Enforcement officials have made its clear that another key focus of their new enforcement efforts is individuals.

Recent DOJ cases include:

—U.S v. Si Chan Wooh, No. 07-244 (D. Or. Filed June 26 2007); see also SEC v. Si Chan Wooh, No. 07-957 (D. Or. Filed June 29, 2007). This case was brought against a former executive of Schnitzer Steel in Portland, Oregon. The one count information alleges conspiracy to violate the FCPA by paying over $200,000 in bribes and gifts to managers of government owned steel mills in China to induce them to buy scrap metal. In addition, the defendant is alleged to have made about $1.7 million in other payments to privately owned steel mills in China and South Korea. Mr. Wooh pled guilty to the information and is cooperating with the government. To resolve the SEC enforcement action he consented to an injunction barring FCPA books and records violations and agreed to disgorge over $14 million in bonuses plus prejudgment interest and a civil penalty of $25,000.

—U.S. v. Jason Edward Steph, No. 07-00307 (S.D. Tex. Filed July 18, 2007). In this case a former executive of Willbros Group was named in a four count indictment which alleges conspiracy to pay over $6 million in bribes to Nigerian officials to obtain and retain gas pipeline construction business controlled by a government company. The defendant pled guilty to Count I, conspiracy to violate the FCPA and is cooperating with the government.

—U.S. v. Roger Michael Young, No. 07-609 (D.N.J. Filed July 25, 2007); U.S. v. Steven J. Ott, No. 07-608 (D.N.J. Filed July 25, 2007); see also U.S. v. Yaw Osei Amoako, No. 05-1122 (D.N.J. Filed June 28, 2006). Each defendant is a former executive of ITXC Corp., a global telecommunications company. Each was charged in an information alleging that that he conspired to violate the FCPA and the Travel Act by paying about $266,000 in bribes to foreign officials of state owned and foreign owned telecommunications carriers in Nigeria Rwanda and Senegal to obtain/retain business for ITXC. Messrs. Ott and Young pled guilty on July 25, 2007. Yaw Osei Amoako pled guilty in 2006 and was sentenced to 18 months in prison. See also SEC v. Ott and Young, Civil Action No. 06-4195 (D.N.J. Filed Sept. 6, 2006); SEC v. Yaw Osei Amoako, Civil Action No. 05-4284 (D. N.J. Filed Sept. 1, 2005).

SEC actions (in addition to those listed above):

SEC v. Martin, Civil Action No. 07-0434 (D.D.C. Filed March 6, 2007). The SEC’s complaint alleged that the former government affairs director of Asia for Monsanto Co. paid a $50,000 bribe to a senior Indonesian official as part of a failed effort to repeal an unfavorable consent decree. The action was settled with a statutory injunction prohibiting future violations of the FCPA books and records provisions and the payment of a $30,000 civil penalty. The company settled in a separate administrative proceeding.

SEC v. Srinivasan, Civil Action No. 07-01699 (D.D.C. Filed September 25, 2007). Here, the SEC named the former president of A.T. Kearney India, a subsidiary of EDS as a defendant. The complaint alleged the subsidiary paid $720,000 in illicit payments to senior employees of Indian state-owned enterprises to avoid having contracts canceled. The action was settled with an injunction prohibiting future violations of the FCPA books and records provisions and the payment of a $70,000 civil penalty. The company also settled in a separate administrative proceeding.

SEC v. Monty Fu, Civil Action No. 07-01735 (D.D.C. Filed Sept. 28, 2007). This settled civil action was brought against the founder and former chairman of Syncor International. The complaint alleged that payments were made over a seventeen year period to doctors employed in private and public hospitals in Taiwan as commissions and referral fees. The company recorded the payments as “advertising and promotional expenses.” To settle the action the defendant consented to the entry of an injunction prohibiting future violations of the FCPA books and records provisions and the payment of a civil penalty of $75,000.

Next: Other recent significant cases.