Biovail Shareholders Sue Over Hedge Fund "Conspiracy"

Date: Tuesday, March 28, 2006
Author: HFN Daily Report

Lawyers for shareholders of Canadian drug-maker Biovail announced Friday a $4 billion class-action lawsuit against a hedge fund that allegedly conspired against the troubled company's stock.

Biovail is blaming its flagging share price on a vast conspiracy centered around SAC Capital and stock research firm Gradient Analytics. SAC and other hedge funds shorted Biovail stock, which the company claims fell with the aid of false negative reports. Biovail has already filed its own suit in the matter, seeking $4.6 billion in damages.

The Biovail shareholders are suing SAC Capital, firm founder Steven A. Cohen, Gradient Analytics, Banc of America and B of A analyst David Maris, among others. Also named in the suit are various SAC funds, hedge funds Pinnacle Investment Advisors, Helios Equity Fund and Hallmark Funds, expert-matchmaking company Gerson Lehrman Group and a number of individuals connected with those firms.

The suit heaps a large portion of its vitriol on SAC Capital, which controls $7 billion in capital and whose trading activity can account for 3% of the daily volume of the New York Stock Exchange. According to the suit, SAC Capital and other defendants launched a "devastating attack on Biovail's stock" just as the company was "in fact poised for growth."

According to the suit, the hedge fund defendants ghost wrote negative and false analyst reports issued by Gradient and then profited when Biovail's share price fell.

Banc of America's Maris has been a frequent critic of Biovail, and the suit claims he issued two B of A reports negative about Bioval at the instigation of SAC Capital.

According to earlier reports, Biovail's lawyers hired a private detective agency to investigate Maris and other figures. Maris complained to police about two men constantly parked in a car outside his home and investigators allegedly trailed his wife as she was leaving the house.

A release issued by the shareholders' lawyers, the Newark, N.J.-based firm of Lampf, Lipkind, Prupis & Petigrow, said the suit comes at a time when the Securities and Exchange Commission and various Canadian regulators are attempting to gain more oversight of the hedge fund industry. The release failed to mention, however, that Biovail is currently being investigated by the SEC and the Ontario Securities Commission for accounting and disclosure matters.

Thomas Gentile, a lawyer for the plaintiffs, said he expected the defendants to bring up the regulatory investigations of Biovail at trial, and he said it would be addressed in due time. The suit alleges the defendants were the cause of those investigations, rather than any major irregularities by Biovail sparking the inquiries.

Gentile said the shareholders' allegations are supported by the testimony of whistle-blowing employees from within the various organizations named in the complaint.

"When you listen to what these people have to say, their story is very credible," Gentile said.

SAC Capital had no comment on the suit.

Overstock.com has accused Gradient Analytics of a similar scheme to help Rocker Partners profit by shorting Overstock. Overstock is known for repeatedly missing earnings targets, however, and just last month said certain of its financial statements "should no longer be relied upon."