SEC clears Biovail target - Recommends no action to be taken against Gradient in research scandal

Date: Thursday, February 15, 2007
Author: Leonard Zehr, Biotechnology Reporter, Globe and Mail

One of the prime targets of Biovail Corp.'s $4.6-billion (U.S.) lawsuit over an alleged Wall Street conspiracy to drive down its stock price has been cleared of any securities wrongdoing by the U.S. Securities and Exchange Commission.

The SEC's San Francisco office recommend that no enforcement action be taken against research house Gradient Analytics Inc. of Scottsdale, Ariz. The decision could represent a legal setback for the drug maker, although Biovail said yesterday that it does not believe it will affect its case.

In an 87-page complaint in New Jersey State Court last year, Mississauga-based Biovail alleged that Wall Street hedge fund SAC Capital Management LLC used its tremendous market clout to entice Gradient to issue false and misleading research reports in 2003 as part of a wide-ranging attack against the company and its shares.

The suit also alleged that SAC had arranged to have the Gradient reports, which Biovail has described as "hatchet jobs," released after it and other stock market players had built up a substantial short position in Biovail.

Short sellers make money if stock prices fall. Biovail's stock price tumbled from $50 in the spring of 2003 to below $20 by the fall on the New York Stock Exchange, after the company encountered several operating and financial setbacks.

SAC and Gradient have denied the allegations, which have not been proven in court.

"We stand by our research," Gradient president and chief executive officer Brad Forst said in a statement. "Independent and objective research may be unpopular with some companies, but it is vital information in the equities market. We are not surprised by the SEC decision. We believe our business conduct has always been conducted with integrity."

Gradient said it co-operated fully with the SEC during the year-long probe of its business practices, which involved handing over hundreds of thousands of documents and interviews with numerous witnesses.

The investigation began after overstock.com, an Internet retailer, sued Gradient and five other defendants in California, alleging stock market manipulation.

Gradient also said the SEC, as part of the investigation, asked for "information related to its analyst reports on Biovail." The SEC doesn't comment on its investigations. In a terse letter to Gradient's lawyers on Monday, SEC associate district administrator Marc Fagel said the investigation has been terminated and no enforcement action has been recommended to the commission.

In a statement, Biovail said it doesn't know what the SEC actually investigated or concluded, but the decision does not affect "in any respect" Biovail's case. "Based on the facts already known to Biovail, it remains confident in the merit of its allegations and of the ultimate success of its claims."

A spokeswoman for Gradient said that on Feb. 5, all 22 defendants in the Biovail case filed motions to dismiss with the New Jersey District Court in Essex County. In California, Gradient is appealing a Marin County District Court decision against its motion to dismiss.