In this country, our market regulators have a lousy reputation. The refrain is so familiar it’s almost a cliché: why don’t we have robust, aggressive market cops like they do in the United States? Why don’t we hold the corporate miscreants’ feet to the fire like they do in the U.S. of A.?
Well, for all the well-financed and highprofile floggings south of the border, the Ontario Securities Commission (our de facto national regulator) is miles ahead of its American counterpart in one important respect— and that difference could be critical to the unfolding case against Biovail Corp. and some of its current and former officers.
In the U.S., securities cops have their own peculiar rituals. Photo ops and massive fines create a crowd-pleasing spectacle of retribution. But the facts, the assignment of blame and acceptance of responsibility are all negotiable-nice to have, but frequently sacrificed for the sake of efficiency. Nobody explains. Nobody apologizes. Maybe some aggressive prosecutor will try to put someone in jail (like Bernie Ebbers Jeff Skilling or Conrad Black), but most of the time, you write a cheque and you’re off the hook.
So it was this week, with the forever-embattled Canadian drug company Biovail, founded by Mr. Ottawa Senator, Eugene Melnyk. On Monday, the U.S. Securities and Exchange Commission brought charges against Biovail, Melnyk and three others for a slew of accounting and securities violations allegedly committed between 2001 and 2004.
The investigation has been crawling along for more than four years now, but no sooner had the SEC announced the charges than Biovail announced it had settled them with a payment of US$10 million to the SEC. (The case against individual executives is still moving ahead.) As usual in such cases, the settlement came with no admission of any wrongdoing. Don’t bother with contrition or even an agreed statement of facts, just skip straight to the penalty and forget about all that messy business of explaining what actually... you know... happened.
As far as the SEC is concerned, this is a reasonable trade-off. Why go through the trouble of a trial when a company is willing to cough up the penalty without a fight? For the companies, it’s a no-brainer. When given a chance
to walk away from an expensive, messy and potentially humiliating court case, without so much as saying “sorry,” you sign the cheque and bless your luck. In recent years, billions of dollars have been handed over to U.S. regulators this way—from the likes of HewlettPackard, HealthSouth and Merrill Lynch, to name a few—all for crimes that may or may not have been committed. The facts, lost in a cloud of hearsay and conjecture, never to see the inside of a courtroom.
But luckily for those interested in justice, the Ontario Securities Commission also began proceedings in the case on Monday. And so,
Was it all a simple misunderstanding or a massive con?
there’s still hope that we might one day learn what exactly transpired, and who was responsible for the decimation of a once-formidable company. Once you consider the seriousness of the allegations, you realize how vitally important that is.
The OSC, for example, alleges that Biovail intentionally inflated its financial results by helping set up a so-called “special purpose entity” to undertake research and development work on its behalf. It thus concealed roughly $47 million in expenses related to that R & D work. This little manoeuvre is distinctly reminiscent of the financial shell game devised by the CFO at a company you may have heard of—it was called Enron.
Then there was the matter of Biovail’s infamous truck accident. Back in 2003, the company missed its third-quarter financial results,
sending the stock tumbling. Executives said it was because a critical shipment of pills was involved in a truck crash at a cost of $10 million to $20 million. Well, according to the OSC, that truck crash had nothing whatsoever to do with the company’s disappointing earnings. The shipment left the factory on the final day of September, meaning the revenue could only have been booked in the fourth quarter, even if the truck had made it safely to the customer. To make matters worse, the OSC accuses Biovail of wildly inflating the amount of loss suffered in the accident.
There are several more allegations of accounting chicanery—a sham transaction, an accounting mistake that went unreported for months—all of it aimed at creating the illusion of a company far healthier than it really was. Throughout this time, Melnyk and others received massive salaries and rich stock options, and if the OSC is to be believed, company executives lied and lied and lied to cover it up once the story began to unravel.
All these allegations are years old now, and they’ve never been tested in court, but the case is anything but ancient history. Three of the four individuals named in the case—Melnyk, Ken Howling and John Miszuk—are all still associated with Biovail. Melnyk is the company’s largest single shareholder, while the other two ex-finance executives now hold “non-officer” positions. And that makes Biovail’s $ 10-million deal with the SEC all the more perplexing. How can Biovail settle charges in one jurisdiction, while still fighting in another, even as three of its insiders stand accused of gross shareholder abuse?
For his part, Melnyk is promising a fight to the very end. “I intend to vigorously contest the absolutely false allegations of the SEC and OSC and am confident that I will prevail once all the facts are heard,” Melnyk said in a statement Monday. And for that, we should thank him. The fight will be illuminating.
Before the Biovail case is over, somebody, somewhere is going to have to stand up and spill the beans. Either all this can be innocently explained away, or it can’t. Either this has been a spectacular bungle by investigators, or it has been an audacious con job by some of the best-known and best-paid executives in the country. That question demands an answer, not a U.S.-style settlement and a vow of silence. Over to you, Mr. Melnyk. Nl
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