The Securities and Exchange Commission charged Biovail and its former CEO Eugene Melnyk, former chief financial officer Brian Crombie and two current senior executives, controller John Miszuki and CFO Kenneth Howling, with fraud March 24. The complaint filed in New York district court alleges management inflated earnings and hid losses to deceive investors.

Biovail agreed to pay $10 million to settle the charges, relating to schemes that affected financial reporting from 2001 until 2003. The Mississauga, Ontario-based company, while admitting no wrongdoing, also has agreed to retain an independent consultant to examine its accounting and related functions.

The settlement does not extend to the four former and current Biovail executives who still face charges. Miszuki and Howling are being reassigned to different non-officer positions within the company, according to Biovail. VP-Finance and Treasurer Adrian de Saldanha has been appointed interim CFO. Melnyk retired from the company in July after Biovail announced the SEC was investigating the firm.

"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," SEC said in a statement.

Tale of a truck crash

Among the schemes mentioned in the complaint is an attempt by management to hide Biovail's failure to meet third-quarter 2003 earnings guidance by attributing the lackluster performance to a truck accident involving a shipment of Wellbutrin XL .

In actuality, the accident had no impact on the quarter's performance for several reasons, among them the timing of the accident and the fact that the title to the product and risk associated with the accident passed to the distributor as soon as the truck left Biovail's plant, according to the complaint. In addition, while the value of the shipment was about $5 million, management overstated the value of the shipment at $10 million to $20 million.

The SEC complaint also alleges that Biovail moved approximately $47 million in R&D expenses off its financial statement and onto the financial statements of a special purpose entity, Pharmaceutical Technologies Corp. (known as Pharmatech), over several reporting periods in 2001 and 2002. The firm also allegedly moved more than $51 million in related liabilities into Pharmatech during that period.

"Crombie and Biovail deliberately and fraudulently orchestrated the Pharmatech arrangement as a means fraudulently to avoid recording on Biovail's books and records and reporting on its financial statements the expenses and liabilities related to the research and development of certain Biovail products," the complaint says.

Additionally, in the second quarter of 2003, the commission alleges that Biovail, in danger of missing earnings expectations, fraudulently recorded approximately $8 million in additional revenue from a phony sale of Wellbutrin XL.

Third quarter 2003 understated by 80%: SEC

"As a result, for the quarter ended June 30, 2003, Biovail's net loss was intentionally and materially understated by approximately 80 percent in its interim financial statements," the complaint alleges.

The commission is seeking a final judgment permanently enjoining all defendants from future violations of securities laws and ordering them to pay civil penalties. The commission also is seeking to bar the four executives from serving as officers or directors of a public company.

The Ontario Securities Commission also is investigating the company for similar matters. Biovail announced that the U.S. Attorney's Office in Boston is bringing an investigation before a grand jury related to marketing activities surrounding the 2003 commercial launch of Cardizem LA that offered financial incentives to high prescribers of the long-acting antihypertensive (¹ Also see "Biovail’s Cardizem LA Marketing Under State Scrutiny" - Pink Sheet, 1 February, 2008.).

Biovail already took a $10 million charge in the fourth quarter of 2007 to cover a potential deal with SEC, as well as an $83.1 million charge related to a proposed settlement of a U.S. class action shareholder lawsuit. The company also took an impairment charge of $9.9 million related to the write-down of certain assets, including Ultram ODT and Zolpidem ODT .

The company's financial results for the year were announced March 13, with total revenues down 21 percent to $842.8 million and net income down 7.6 percent to $195.5 million.

At the time, the company said it is undertaking a comprehensive review of core strategies, including product development, acquisition targets, and potential infrastructure and commercialization changes. Biovail is a specialty pharma focused on using its advanced drug delivery technology to enhance the efficacy of medicines.

-Jessica Merrill (j.merrill@elsevier.com)

Biovail Settles For $10 Million On SEC Fraud Charges

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