TORONTO – Ottawa Senators owner Eugene Melnyk has been cleared of allegations that he broke Ontario securities law but the outspoken businessman still potentially faces sanctions for failing to ensure Biovail Corp. acted in the public’s interest in 2003 while he was CEO of the drugmaker.
An Ontario Securities Commission tribunal ruled Thursday that OSC staff hadn’t proven Melnyk broke the law but his conduct was “contrary to the public interest”—a non-criminal infraction under the province’s securities laws.
The commissioners said Melnyk and OSC staff should schedule a hearing to consider sanctions on the “public interest” aspect of the ruling.
The sanctions could include a public reprimand delivered by the commissioners to Melnyk. The Ontario securities law also provides for the OSC to suspend or limit his rights to own or trade in public securities or be a corporate officer or director.
“The decision speaks for itself,” OSC enforcement director Tom Atkinson said in a statement Friday.
“Mr. Melnyk was found not to have contravened Ontario securities law but his conduct was found to be contrary to the public interest. Within 30 days, a sanctions hearing will be set.”
Melnyk issued a statement earlier Friday saying he was “pleased with the Commission’s finding that I did not contravene Ontario securities law at any time.”
“I am considering my position in respect of the Commission’s remaining public interest findings,” Melnyk said.
The outspoken businessman has always said he acted within the law while at Biovail, which was Canada’s largest publicly traded drug company at the time.
The case against Melnyk revolved around statements that Biovail and its executives made—and didn’t make—seven years ago after a traffic accident near Chicago delayed delivery of a valuable load of pills made by Biovail.
At the same time, Biovail announced it would miss earnings estimates for the quarter ended Sept. 30, 2003, and suggested the delayed shipment was to blame—although Melnyk and other Biovail officials said the situation was still unclear.
Biovail stock plunged after the company’s initial warning to the public.
OSC enforcement staff filed allegations against Biovail and individual executives, including Melnyk, in March 2008. The other accused have previously reached settlements with the OSC but Melnyk challenged the allegations against him before a panel of commissioners who have the role of judges.
The panel’s 88-page decision concluded that Melnyk “knew or should have known” that some of the statements issued by Biovail on Oct. 3, Oct. 8 and Oct. 30, 2003, were misleading or untrue or omitted facts.
OSC prosecutors alleged that Biovail was having trouble meeting its earnings and sales target in September, weeks before the traffic accident occurred, and that the company’s public disclosures put too much emphasis on that event.
The panel agreed, saying, the “revenue loss associated by Biovail with the accident was grossly inflated and that was or should have been obvious to Biovail at the time of the October 3 release.”
However, the panel also considered whether a reasonable investor would have considered the impact of the accident—by itself—was so serious that it would affect their decisions.
After hearing testimony by three experts (one for the OSC and two for Melnyk), the panel decided that the truck accident’s impact on revenues was too small for a company of Biovail’s size to sway investors even if they believed the inflated numbers.
“While it is a close call, on balance, we conclude that a reasonable investor would not have considered the Accident Contribution Statement that the Accident contributed significantly to the variance in Biovail’s revenues and earnings for the third quarter, standing alone, to be material in making an investment decision.”
As for Melnyk’s role, the OSC staff asserted that he knew or should have known before Oct. 2, 2003, that the company would likely miss its third-quarter revenue and earnings guidance—a position that Melnyk denied.
The panel acknowledged that Biovail’s team struggled to deal with what was the company’s first-ever earnings miss.
“We accept Melnyk’s testimony that these circumstances created a crisis and a chaotic environmentin which senior management was scrambling to settle the appropriate disclosure and issue the Oct. 3 Release. That does not excuse, however, the making of any misleading or untrue statements in the Oct. 3 release.”
However, the panel said it was prepared to give Melnyk “the benefit of the doubt” when it came to whether he was aware of a last-minute change to Biovail’s usual contract language for the shipment—an alteration that would have prevented the company from recognizing the shipment’s revenue even without the accident.
It said Melnyk may have not known about the change when the initial statements were made on Oct. 3, 2003, but he certainly did later that day and when other statements were issued later that month and the next spring.
However, the panel ruled that the section of the Ontario Securities Act applied in the case against Melnyk was so narrowly framed that it doesn’t apply to the statements issued by Biovail.
“We do not condone any issuer making a misleading or untrue public statement that may be relied upon by investors, whether or not that statement is subject to subsection 122(1)(b). We cannot, however, ignore the clear words of the Act. The legislature could have created an offence for a materially misleading or untrue statement in any document filed under Ontario securities law, but it did not do so.”
On the other hand, the panel did find that Melnyk had acted improperly.
“The Commission is entitled to make various sanctions orders under section 127 of the Act if it is of the opinion that doing so is in the public interest,” the decision says, adding there doesn’t need to be a breach of Ontario securities law.
“Melnyk was the chairman and CEO of Biovail at the relevant time. He was the founder and driving force of Biovail. At the end of the day, Melnyk cannot separate himself from the actions of Biovail. He had a heavy responsibility as chairman and CEO to ensure that Biovail did not make inaccurate, misleading or untrue public statements.”
The panel rejected Melnyk’s submission that Biovail’s disclosure failures were the result only of the failures of others. It also said he had failed to demonstrate that he had acted with “due care and diligence” in the circumstances.
“By reason of the foregoing, Melnyk did not contravene Ontario securities law but his conduct was contrary to the public interest,” the ruling concludes.
The Toronto-area company recently merged with a California-based company and is now called Valeant Pharmaceuticals International (TSX:VRX).
Melnyk no longer has any significant holding in the company and is best known as owner of Ottawa’s NHL hockey team.
Melnyk said Friday in a phone interview from Barbados, where he has a home and spends much of his time, that he was relieved that the OSC had made its decision—co-incidentally, seven years to the day since the truck accident.
“I’m just really pleased it’s now finally, after this kind of overhang, behind me and I can just now move forward and enjoy the coming hockey season and, of course, all my other ventures in the pharma business.”
As for whether he’d appeal, Melnyk said his lawyers would have to go through the panel’s written report before deciding whether to appeal its findings. He noted that he still faces prosecution in the United States on the same issues.
“We’re planning to go to court with that. We’ll see where that ends up, but that would be the final thing.”