Re: An Open Letter to the Ontario Securities Commission, the U.S. Securities and Exchange Commission, and the Board of Directors of Concordia International.
On April 29, 2016, I was interviewed by Frances Horodelski, a reporter for Business News Network (BNN). Ms. Horodelski started the interview by quoting something that Mark Thompson, Concordia International Corp.’s CEO, said that day at the company’s annual general meeting: “If you are a chicken farmer, your chickens will come home to roost.”
As Ms. Horodelski correctly observed, that public comment was “directed very specifically” at me. I’ve got a farm in California and raise chickens. I also research companies, make investments based on my research, and share what I’ve found with the public and securities regulators. I don’t run a fund; I don’t have investors; I’m just a single person interested in the marketplace, with a focus on companies whose share prices don’t reflect their true value.
In my past, I have shared information I developed with the public and regulators about notorious companies engaged in fraudulent accounting and business practices, such as Lernout & Hauspie, Media Vision Technology, and NovaStar Financial. The Harvard Business School published a case study about my efforts in NovaStar Financial: A Short Seller’s Battle in March 2013 (copy enclosed as Exhibit 1).
Saying someone’s “chickens will come home to roost” is an expression from Chaucer’s Parson’s Tale, written in 1390, and it means a man’s bad deeds will come back to haunt him – a kind of threat. Mr. Thompson therefore claimed publicly that I lied, and he was referring to my criticism of Concordia’s business in a 2015 interview by Graham & Doddsville, Issue 27 (an investment newsletter published by the Columbia Business School) where I said that Concordia was overleveraged and its management seemed lost.
In response to her request for my reaction to Mr. Thompson’s “chicken” comment, I told Ms. Horodelski that, “I bet the jockey and not the horse.”2 I used my experience with Biovail as a reference point. I explained that I had a short position in Biovail. In 2006, Biovail’s management sued some of its critics (not me) to try to stifle them, and cost innocent people a lot of money in legal fees and lost time. But then in 2008, the OSC and SEC blew the whistle on Biovail and its management and sued them for accounting fraud and material misstatements. When the truth about Biovail was revealed, its lawsuit against critics crumbled, and Biovail’s new management ultimately paid $10 million to its critics to settle the critics’ malicious prosecution lawsuit. Biovail’s new management admitted that its lawsuits against critics was “regrettable.” (Biovail became Valeant through a merger).
I told BNN that the management of Concordia had a “past gig” at Biovail, and Thompson has a “history of nonsense” because of his association with Biovail. The “nonsense” to which I referred was the nonsensical tactic of attacking one’s critics: that tactic detracts from a manager’s job to properly run his business and only brings more scrutiny on the manager.
Mr. Thompson was the Associate General Counsel at Biovail under Eugene Melnyk. Biovail’s new management euphemistically referred to Melnyk as the person who played a “central role in creating the operating, financial and legal challenges” that the board had to address.3 That included paying damages to Biovail’s critics because of Biovail’s false allegations about investors who had criticized Biovail.
In about June 2008, Melnyk (who was still a large shareholder of Biovail) proposed a slate of his own candidates for the board, including Mark Thompson. The proxy statement is enclosed as Exhibit 3.
I suggested in my interview with BNN that Mr. Thompson “focus a little more on running his business and a little less on me.” In other words, don’t employ the same “best defense is a good offense” tactic of suing a company’s critics in the face of solid doubts about the company.
Why have I been critical of Concordia? Concordia is a company that modeled itself on Valeant (a company devoted to inflating the sales price of long-established drugs) and has done so in a way that hurts its shareholders: it incurred huge debt to buy up companies and prescription drugs that sold for modest amounts, with the hope of earning large profits by increasing the price of these well-established drugs by 1000% or more. According to Mr. Thompson, this business model would work because the company would increase prices with little or no reduction in sales. That turns out not to be true. In its 2015 audited financial statements, Concordia reported that drug sales in the United States fell dramatically (by 18.1%) from the third quarter.
My research also revealed that Concordia may have used, or reversed, reserve accounts in ways that made it appear that Concordia’s revenues were better than they really were in the last two years. Accounts receivable have increased dramatically in the last two years, which is a troubling sign for a company selling supposedly wellestablished prescription drugs. Concordia has had two different auditing firms in the last few years and replaced its CFO with someone who was the CFO at Biovail – these are signs of possible instability and disagreements with those responsible to prepare and review the company’s financial statements.
Why do I write this letter? In July 2016, Mr. Thompson sued me for defamation for my comments to BNN in the Superior Court in Toronto.4 Mr. Thompson knows that he would have no chance of winning a defamation case against me in the United States because what I said was true, I was speaking about a matter of public concern, and I spoke about managers of Concordia who chose to become public figures regarding their company. So Mr. Thompson evidently believes that he can silence his and Concordia’s critics through a lawsuit – just like the managers of Biovail (and other companies) have done over the years.
Mr. Thompson figures he has a better chance of winning in Canada – even though Canada’s law protects people who speak the truth – or he figures that I won’t bother to engage in a lawsuit in a foreign country. I’ve written this letter to notify regulators and Concordia’s Board of Directors about Mr. Thompson’s tactic of threatening critics in an effort to silence them.
The Ontario Securities Commission has a new whistleblower provision. Like the American law on the same subject, it protects employees from employers who retaliate against them for exposing fraud. I’m not an employee of Concordia, but I have, on occasion, been a shareholder. More important though is the principle behind the OSC’s whistleblower rule: it wants to stop the bullying, threats, and lawsuits by rich managers of marginal companies who love good publicity, but hate any negative criticism. Seven years ago, SEC Chairman Cox said that the SEC would address analyst bullying by companies. SEC to Tackle Analyst Bullying.
The SEC even has a rule (Rule 27F-17) that prohibits any person from taking any action to “impede an individual from communicating directly with the Commission staff about a possible securities law violation.”
I ask you – the regulators and Directors who oversee Concordia – to take action to stop Mr. Thompson from trying to intimidate his company’s critics. I believe in the free flow of information and opinion about businesses. Without it, investors who don’t have the time or skill to research financial statements fly blind; they make investment decisions based on the thinnest knowledge and evidence. Mr. Thompson’s tactics deprive investors of healthy discussions about businesses and share prices. If Mr. Thompson goes on unrestrained, then people will suffer more than they already have.
Very truly yours,
Marc Cohodes
https://www.valuewalk.com/2016/07/concordia-marc-cohodes/?all=1