Greetings FullSteamAhead - Biovail suesBiovail sues fund, others
Suit alleges hedge fund, analysts issued false reports to lower firm's shares
Feb. 23, 2006. 07:28 AM
MADHAVI ACHARYA-TOM YEW
BUSINESS REPORTER
Biovail Corp. has filed a $4.6 billion (U.S.) lawsuit against a major Wall Street hedge fund and others, alleging a conspiracy to drive down the stock price of one of Canada's leading pharmaceutical companies.
Mississauga-based Biovail filed the lawsuit yesterday against S.A.C. Capital, alleging the hedge fund has been at the centre of a three-year conspiracy.
Biovail alleges in the suit that S.A.C. Healthco, one of S.A.C.'s funds, secretly orchestrated the release of inaccurate reports by an independent research firm and worked with a Banc of America Securities analyst to publicly spread false rumours about the company.
The allegations, which haven't been proven in court, are detailed in a complaint filed in New Jersey state court after the close of trading yesterday. The defendants have not responded to the court filing
The lawsuit names 22 defendants, including Steven A. Cohen, the billionaire who founded Connecticut-based S.A.C. and is considered one of the most successful traders on Wall Street.
Also named are Gradient Analytics Inc., an Arizona-based independent research firm, formerly called Camelback Research Alliance Inc., and David Maris, a Banc of America Securities analyst who covers the pharmaceutical industry. S.A.C., Cohen, Gradient and others could not be reached for comment. Banc of America spokesperson Brandon Ashcroft issued a statement yesterday saying, "We haven't received a copy of the complaint. However we have the highest degree of confidence in the integrity of David Maris's research."
Biovail is being represented by high-profile U.S. law firm Kasowitz, Benson, Terres & Friedman.
The complaint alleges that S.A.C. Capital used similar tactics to target "many dozens and likely hundreds" of other firms.
"This action arises from a massive, illegal and continuing stock market manipulation scheme, which has targeted and severely harmed Biovail, among other companies, and which has resulted in immense ill-gotten profits for S.A.C. Capital and other extremely powerful hedge funds," the lawsuit alleges.
At the heart of the scheme, the complaint alleges, were biased analyst reports that were released only after the hedge funds had taken substantial short positions in Biovail's stock.
Short selling is essentially a bet that a company's shares will decline in price. Traders sell borrowed shares, then buy them back for less when the price falls, profiting by the difference.
S.A.C. Capital controls at least $7 billion, with its trading activity regularly accounting for 3 per cent of the daily volume of the New York Stock Exchange, according to the lawsuit.
Shares of Biovail fell from a high of $64.09 in May 2003 to a low of $17.56 in April 2005.
In that time, Biovail and its chairman, Eugene Melnyk, who is also owner of the Ottawa Senators NHL hockey team, faced lawsuits by investors alleging accounting irregularities. The U.S. Securities and Exchange Commission also launched an investigation, which is ongoing. In 2005, Biovail halted plans to expand its U.S. distribution chain for its pharmaceuticals.
"In spring 2003, when Biovail in fact was poised for substantial growth, S.A.C. Capital and other defendants launched a devastating attack on Biovail, its business, and its stock," the complaint alleges. "... After having taken short positions, defendants manipulated the market for Biovail Corp. stock and artificially lowered its stock price by, among other things, disseminating materially false and misleading information concerning Biovail ...."
Biovail alleges that Tim McCarthy, a fund manager at S.A.C. Capital, ghost wrote a false and negative research report, which was then released through independent analysts at Camelback and Gradient in June 2003.
"In fact, Camelback and Gradient were anything but independent," the lawsuit alleges. The ghost-written reports were known at the research firm as "hatchet jobs," the suit says.
"In early June, McCarthy dictated virtually all of the information and opinions to be included in the first of these Biovail `hatchet jobs' to a young inexperienced Camelback `analyst' with no investment analyst credentials or material forensic accounting experience," the complaint alleges.
The lawsuit says that McCarthy instructed Camelback to hold the report for about three to seven days so S.A.C. could take up short positions in the company's shares. Camelback complied, and the report was issued June 20, 2003, it alleges.
By the end of July, Biovail's stock price had declined by about 20 per cent.
Biovail also alleges in the lawsuit that the defendants spread negative rumours that the company was inappropriately paying doctors to write prescriptions for one of its drugs.
The complaint also alleges that McCarthy and Maris, who formerly worked together at Credit Suisse First Boston, conspired to release false information to investors through two research reports in October 2003.
"Biovail was ultimately forced to lay off hundreds of employees and cut back on its operations," the suit alleges, and the conduct "also substantially contributed to many of the regulatory investigations and class-action lawsuits initiated against Biovail.