OSC commences proceedings against Biovail and officers

The U.S. Securities and Exchange Commission today charged Canadian pharmaceutical company Biovail Corp. 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 SEC’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 SEC’s charges and will pay a US$10 million penalty.

Four current or former Biovail senior executives still face SEC charges: former chairman and CEO Eugene Melnyk; former CFO Brian Crombie; current controller John Miszuk; and current CFO Kenneth Howling.

“This is another case involving the tone at the top of a public company. It demonstrates the Commission’s commitment to holding individuals accountable when they create a corporate culture of fraud and deceit,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a release.

“We allege that Biovail and senior executives engaged in a pattern of systemic, chronic fraud that impacted its public filings of quarterly and annual reports over the course of four years,” added Mark Schonfeld, director of the SEC’s New York Regional Office. “In an effort to conceal the fraud, Biovail’s senior officers intentionally misled the company’s auditors and the investing public, showing their complete disregard for their responsibilities to shareholders.”

The SEC’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.

Meanwhile, The Ontario Securities Commission today issued a notice of hearing and related statement of allegations against Biovail Corp., Melnyk, Crombie, Miszuk and Howling.

The allegations involve four central issues:

> the failure to account properly in Biovail’s 2001 and 2002 financial statements for a special purpose entity that Biovail created called Pharmaceutical Technologies Corp.;

> the improper recognition of revenue relating to a purported “bill- and-hold” sale of one of Biovail’s drugs, Wellbutrin XL, in June of 2003;

> the failure to correct and disclose an error in Biovail’s 2003 financial statements relating to a foreign currency denominated obligation; and

> misleading or untrue statements made in press releases, investor meetings and an analyst conference call concerning the reasons for Biovail’s earnings miss in October of 2003.

OSC staff further allege that Biovail provided misleading responses to questions that Staff posed regarding three of these issues in the course of a continuous disclosure review conducted in 2003 and 2004.

The OSC says it will set date for the hearing on April 22.