Source: The Canadian Press

Ottawa Senators owner Eugene Melnyk is appealing an Ontario Securities Commission ruling that found he acted contrary to the public interest in 2003 while he was CEO of Biovail Corp.

Melnyk issued a brief statement Wednesday saying he’s asking an Ontario court to set aside the ruling, which focused on events surrounding Biovail’s announcement that it would miss its 2003 third-quarter earnings target.

The Sept. 30 ruling said that the OSC enforcement branch hadn’t proven Melnyk broke the law but his conduct was “contrary to the public interest” — and ordered the two sides to schedule a hearing to determine sanctions.

In brief, Melnyk’s appeal argues that the panel wasn’t authorized to apply the “public interest” criteria since neither the OSC staff nor the commissioners found his conduct was “abusive of the capital markets” — a requirement in cases where neither the provincial securities act nor regulations have been violated.

The appeal also claims the panel erred in a number of other ways, including when it found Melnyk had failed to establish that he acted with due diligence. Rather, it says, it was the OSC staff who had the burden of proof since there was no law or regulation violated by him.

“The Commission erred in finding that Melnyk bears the burden of ensuring that Biovail did not make inaccurate, misleading or untrue statements,” the seven-page notice of appeal states.

“The Commission further erred in making findings that are internally inconsistent, are not supported by the evidence, and in many cases are contrary to the evidence.”

The commission, a quasi-judicial agency of the provincial government, has the power to publicly reprimand Melnyk, limit his rights to own or trade securities or prevent him from being a corporate officer or director.

The company, now called Valeant Pharmaceuticals Inc. (TSX:VRX), and other former Biovail executives, have previously reached settlements with the securities regulator.

But Melnyk, one of Canada’s most outspoken businessmen and a frequent critic of the people who took over management of Biovail, chose to fight rather than settle.

He indicated soon after the OSC ruling came out that he might appeal the “public interest” findings and noted that he still faces prosecution in the United States on the same issues and planned to go to court on that.

The case against Melnyk revolved around statements that Biovail and its executives made — and didn’t make — seven years ago after a traffic accident near Chicago delayed delivery of a valuable load of pills made by Biovail.

At the same time, Biovail announced it would miss earnings estimates for the quarter ended Sept. 30, 2003, and suggested the delayed shipment was to blame — although Melnyk and other Biovail officials said the situation was still unclear.

Biovail stock plunged after the company’s initial warning to the public.

The OSC panel’s 88-page decision concluded that Melnyk “knew or should have known” that some of the statements issued by Biovail on Oct. 3, Oct. 8 and Oct. 30, 2003, were misleading or untrue or omitted facts.

It said Melnyk may have not known the correct information when the first statements were made on Oct. 3, 2003, but he certainly did later that day and when other statements were issued later that month and the next spring.

However, the panel ruled that the section of the Ontario Securities Act applied in the case against Melnyk was so narrowly framed that it doesn’t apply to the statements issued by Biovail.

“We do not condone any issuer making a misleading or untrue public statement that may be relied upon by investors, whether or not that statement is subject to subsection 122(1)(b). We cannot, however, ignore the clear words of the Act. The legislature could have created an offence for a materially misleading or untrue statement in any document filed under Ontario securities law, but it did not do so.”

On the other hand, the panel found that Melnyk had acted improperly.

“The Commission is entitled to make various sanctions orders under section 127 of the Act if it is of the opinion that doing so is in the public interest,” the decision says, adding there doesn’t need to be a breach of Ontario securities law.

Melnyk’s appeal objects to this assertion, saying the panel had “failed to apply a long line of consistent authority in Commission proceedings dating back at least three decades” that it can “only exercise its public interest jurisdiction against a Respondent if that Respondent has engaged in conduct that is abusive of the capital markets.”