Biovail Sues Hedge Fund
SHAWN MCCARTHY, Globe and Mail Update

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New York  After taking numerous legal broadsides itself, Biovail Corp. has launched a massive counterattack, with a $4.6-billion (U.S.) lawsuit against a top Wall Street hedge fund and industry analysts in which it alleges a wide-ranging conspiracy to attack vulnerable companies.

In a complaint filed yesterday in New Jersey state court, the Mississauga-based pharmaceutical company named among the defendants Steven Cohen, a billionaire hedge fund founder who is one of the most successful and aggressive stock traders in the market.

Biovail alleges Mr. Cohen's SAC Management LLC used its tremendous market clout to execute co-ordinated and illegal attacks on the company for several years, causing the stock price to slump and business prospects to wither.

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 SAC Capital and other extremely powerful hedge funds, the Biovail complaint says.

None of the allegations have been proved.

SAC said in a statement yesterday, The allegations of the complaint against SAC are outrageous and defamatory and SAC will defend itself and its investment practices vigorously. Biovail's true issue is the valuation that the public market place on their common stock. That disagreement should be resolved in the public markets, not in litigation, especially not in litigation dressed up with false allegations.

The announcement was made after markets closed in Toronto yesterday.

Biovail and its high-flying chairman, Eugene Melnyk, are no strangers to legal controversy.

After its stock price plummeted in 2003, investors in the United States and Canada launched lawsuits against it. It is also the subject of regulatory investigation by the Securities and Exchange Commission and the U.S. Department of Health and Human Services, and is fighting a series of patent challenges on some of its leading products.

Mr. Melnyk has been named in an Ontario Securities Commission investigation into trading, reporting and disclosure issues related to Biovail shares.

But the company blames much of its trouble on SAC and its putative partners in the alleged conspiracy, Gradient Analytics Inc. of Phoenix (formerly known as Camelback Research Alliance Inc.), and David Maris, a pharmaceutical analyst with Banc of America Securities LLC.

A spokesman for Gradient could not be reached.

Mr. Melynk and other Biovail executives did not comment on the lawsuit. The company has hired Manhattan law firm Kasowitz Benson Torres & Friedman LLP, which spent months preparing the case. Biovail also brought in public relations firm Fleishman-Hillard Inc., which has established a war room in the law firm's midtown office, to ensure the media was alerted to the lawsuit.

The 87-page statement of complaint lays out in considerable detail the alleged conspiracy, and includes references to e-mail correspondence between Timothy McCarthy, a fund manager at SAC HealthCo, and both Camelback and Mr. Maris. It also claims eyewitness accounts of Camelback's strategy of producing hatchet jobs on companies on behalf of short sellers.

In its complaint, Biovail alleges that SAC and its partners targeted many dozens and likely hundreds of other firms with short-selling campaigns based on false information and market manipulation. They include companies like Overstock.com and Taser International Inc., both of which have lost favour with investors in recent years.

Biovail alleges that in 2003, Mr. McCarthy prepared a series of reports on the company which contained false information. He then conspired with independent research firm Camelback to publish those reports under Camelback's name.

The suit further alleges that Mr. McCarthy persuaded Camelback to release the negative report after SAC had built up a substantial short position in Biovail.

Biovail also claims that Mr. Maris  who once worked with Mr. McCarthy at Credit Suisse First Boston  conspired with the SAC fund manager to undermine Biovail stock by releasing false information into the marketplace.

Brandon Ashcroft, spokesman for Banc of America, said the brokerage had not yet seen the complaint. However, we have a highest degree of confidence in the integrity of Davis Maris's research, he said.

Biovail's shares closed yesterday at 29.44 (Canadian) on the Toronto Stock Exchange, up 69 cents for the day. In the last five years, the shares traded as high as $91 and as low as $16.90.



March 26, 2006
True or False: A Hedge Fund Plotted to Hurt a Drug Maker?
By JENNY ANDERSON
Scottsdale, Ariz.

AS they tell the story, it seemed like just an office turf war.

Three summers ago, Daryl Smith, a sales representative for Gradient Analytics, a small independent research firm here, says he participated in a conference call with his biggest prospective client, a unit of SAC Capital Advisors, a powerful hedge fund on Wall Street.

Mr. Smith listened eagerly, he says, but was troubled by what he heard: his boss was agreeing to delay the release of a report that was largely negative about a pharmaceutical company, Biovail, in order to allow SAC to build a position to profit should that report then cause the stock to fall. Even worse: that report, he contends, was essentially created by SAC.

He dashed down the hall to tell his friend Robert Ballash, another salesman at the firm, about the call. Mr. Ballash was incensed. "I have clients, too," he recalls yelling at Mr. Smith, apparently with some envy at the advantage his colleague's client seemed to be about to enjoy. "Why are you getting a three-day advance?"

That intraoffice turf war  if it took place, which Gradient adamantly denies  has metastasized into an ugly legal war. The company that was the subject of the report is not only taking on the $8 billion SAC hedge fund and the research firm, Gradient, but also a Bank of America analyst and others.

At the heart of Biovail's racketeering lawsuit, filed last month in New Jersey Superior Court in Newark, is an audacious claim: that some of the nation's biggest hedge funds colluded with independent research firms and analysts at big banks to produce purposely misleading research with the sole object of driving down a company's stock price. Hedge funds do so, the suit contends, to profit from their huge short positions on these companies, essentially bets that the stocks will drop.

SAC, Bank of America and Gradient vehemently deny the accusations. Carr Bettis, a founder of Gradient, says the lawsuit reads like a "fiction novel," and his business partner and co-founder, Donn W. Vickrey, says the conference call that Mr. Smith cites never took place. Mr. Vickrey further said that the practices alleged by Mr. Smith did not occur.

Daniel J. Kramer, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison who represents SAC, says Biovail's allegations of manipulation are "false and implausible." He adds that the company's stock dropped in 2003 because of its publicly disclosed earnings disappointments and regulatory problems, not because of any supposed conspiracy.

Biovail's lawsuit does have a familiar plot line: it aims at analysts who write negative research  something that regulators have tried to encourage, because too-positive research has historically been a problem.

The suit also takes aim at some familiar targets. Whenever companies are in trouble or there is panic in the market  from the bursting of the South Sea bubble in London in 1720 to the plunge in markets after the Sept. 11, 2001, attacks  critics are often quick to vilify short-sellers as market manipulators. Recently, companies have even hired public-relations firms to spread the contentions.

In a short sale, an investor borrows shares and then sells them, hoping to buy them back at a lower price before having to return them, and aiming to profit from the difference. If buying a stock  going long  represents faith in the future of a company, then going short signals skepticism about those prospects. Short-sellers recognized Enron's problems long before investigators issued any subpoenas.

"Short-selling makes the market more efficient and more liquid," said Owen A. Lamont, a professor of finance at the Yale School of Management who has studied short-selling. "It helps get the opinions of the pessimists into the market so that prices can be more accurate."

Biovail's chief executive, the Canadian billionaire Eugene N. Melnyk, says that the suit is not about short-selling. "We are talking about misinformation put into the marketplace," he said. (Mr. Melnyk has sued a short-seller in the past.)

The Securities and Exchange Commission is investigating some of the allegations made by Biovail and Overstock.com, which has filed a similar lawsuit against short-sellers and analysts. At the same time, the S.E.C. is investigating Biovail for its own accounting practices, one further twist in a knot of a case.

Surrounding these claims about short-selling and market manipulation is an anxiety about the growing power of hedge funds. These funds, private investment pools for institutions and the wealthy, have increased sharply in number, size and effect on the market: according to New York Stock Exchange officials, they constitute from one-quarter to one-half of all trading on that exchange every day.

Hedge funds operate with a fair amount of secrecy, which naturally shrouds them in mystery and, often, suspicion. Combine that with the veiled practice of shorting and the devaluation of stock research since the market collapse, and it becomes a recipe for concern  if not paranoia.

Setting aside rhetoric about free speech and accusations of intimidation and retaliation, a simple question emerges: Are independent analysts and sell-side research firms determining the content of the research, or is that content being controlled by the hedge funds who make money from it?

If the Biovail lawsuit can show that hedge funds are persuading analysts to come to predetermined conclusions and then asking that the reports be held so they can make low-risk bets that stocks will fall on the negative news, then the case will open another ugly chapter of corruption and greed on Wall Street. If not, Biovail is another company resorting to lawsuits to silence its critics.

"Experience tells me that a lot of short-sellers, if not most, are totally legitimate," said Arthur Levitt, a former chairman of the Securities and Exchange Commission. "But occasionally there is manipulation going on, and any device which manipulates the market in favor of insiders is bad for the investing public."

BIOVAIL is an unusual pharmaceutical company, and Mr. Melnyk, its founder, is an unlikely pharmaceutical executive. For one thing, he is not a scientist, or even a college graduate. The son of Ukranian immigrants, Mr. Melnyk worked in specialty advertising before starting his own company, the Trimel Corporation, a publishing business focused on summarizing clinical research and making it digestible for doctors. In 1989, he sold the company to the Thomson Corporation for $8 million and used the proceeds to buy shares of Biovail. By 1992, he controlled the company.

Based in Mississauga, Ontario, Biovail does not develop its own drugs. Instead, it produces generic versions or produces its own time-released versions of others' drugs, like an extended release version of Wellbutrin, which was developed by Merck. It is a lucrative niche. Biovail's revenue soared to $788 million in 2002 from $112 million in 1998; over that period, its profit more than sextupled, to $280 million from $45 million.

With the company's success came personal success. Today Mr. Melnyk owns the Ottawa Senators professional ice hockey franchise, hundreds of thoroughbred horses and homes in New York, Toronto and Barbados, where he spends about a third of his time.

In early 2003, Biovail was positioned for a transformational year: it planned to introduce two potential blockbuster drugs, Cardizem LA, a once-daily dosage to treat blood pressure, and Wellbutrin XL, an extended-release version of the antidepressant. Wall Street analysts rated the company a buy and gave aggressive price targets and optimistic projections based on the predicted success of the new drugs.

During the summer, Biovail's stock, which had edged toward $50 in early June, started to fall. Mr. Melnyk said that at the time, he couldn't pinpoint what was driving it, but he received odd calls from major investors questioning the company's accounting. In mid-July, within days of each other, Barron's and The Wall Street Journal ran articles suggesting that doctors were being paid, potentially improperly, to prescribe Wellbutrin XL.

While the news articles knocked down the stock price slightly, the shares really tumbled  falling 10 percent in a day  when the company announced a disappointing quarter a week later.

EARLIER that summer, Mr. Smith says Gradient got a call from a powerful hedge fund in New York asking if it would consider expanding its research on Biovail. Gradient agreed, and on June 10 produced a "client position analysis" for SAC Capital, Mr. Smith said, identifying a number of accounting concerns. Ten days later, Gradient published another report, almost identical in content, giving Biovail an "F."

Biovail's lawsuit contends that these reports, in conjunction with later research by David Maris, an analyst at Banc of America Securities, slowly eroded Biovail's reputation in the marketplace, weakening the stock's ability to recover from market disappointments.

Even straightforward things related to Biovail result in virulent debate. A case in point was a truck accident that killed eight people and destroyed a shipment of Wellbutrin XL in October 2003. Biovail held a conference call two days after the crash to say it would miss its revenue and profit targets that quarter for three reasons, including the accident, which itself could shave up to $20 million of revenue. The stock fell 18 percent.

A few days later, Mr. Maris initiated coverage of Biovail with a sell recommendation, echoing many of the concerns in the Gradient reports and appearing to accuse the company of lying about the volume of product lost in the accident. He said photographs of the crash appeared to show that there was nothing in at least one of the trucks. Mr. Maris's report sent Biovail's stock reeling an additional 14 percent.

When Biovail confirmed that $7 million in revenue had been lost, both sides claimed victory, Mr. Maris for his questioning of the original estimate and Mr. Melnyk for making conservative estimates with the information he had. In the end, Biovail's third-quarter earnings were lower even than its lowered predictions.

Mr. Maris declined to be interviewed for this article, but his employer was unequivocal in its support of him. "Bank of America wholeheartedly supports David Maris and has the highest degree of confidence in the objectivity and integrity of his research," said Timothy Gilles, a bank spokesman.

Today, Biovail remains under a cloud. The S.E.C. is investigating its accounting; the Ontario Securities Commission is investigating suspicious trading activity. Mr. Melnyk sold three million shares in 2003  when short-sellers were driving down his stock  due to a margin call.

Biovail's stock price has recovered to $25 from a low of $14, but it remains far below the $50 where it once traded; its market capitalization, at $4 billion, is half what it once was. Is that because it failed to execute on its promises or because SAC, in concert with Mr. Maris and Gradient, produced research with the input and knowledge of important trading clients to drive down the stock?

The question will be answered in court, but an independent accountant, with no current ties to any of the parties involved, confirmed that 2003 was an unusually tough year for Biovail, both from operational and accounting standpoints.

"Heading into 2003, repeated product losses indicate that many of the drugs the company had purchased were not finding their hoped-for market," said Charles W. Mulford, a professor of accounting at the Georgia Institute of Technology. "Such problems were manifesting as slowing revenue growth, declining operating profit, negative free cash flow and rising debt levels. I think that there were definite reasons to be concerned."

IN filing its lawsuit, Biovail did not take on just any hedge fund: it challenged SAC Capital, an $8 billion behemoth run by Stephen A. Cohen and shrouded in more mystery and intrigue than almost any other big Wall Street firm.

The hedge fund is considered one of the most powerful on the Street because it is wildly successful and because its aggressive focus on rapid, short-term trading means that it doles out hundreds of millions of dollars in commissions. Money means access on Wall Street, so Mr. Cohen is often first in line for the best information, which is the most valuable commodity in the trading world.

In its suit, Biovail says that SAC was a leading force hammering its stock in 2003, aided by other hedge funds, Gradient and Mr. Maris.

Mr. Bettis and Mr. Vickrey founded their research firm in 1996, attracting clients with their quantitative or mathematical models. In 2002, the company, then called Camelback Research Alliance, started to write research reports, called "earnings quality analytics," which it offered to clients for a subscription fee.

Camelback's own quantitative models determined about 95 percent of the companies it would cover, Mr. Vickrey said. In 2003, however, it also allowed clients to request coverage of stocks, a practice it has ended.

While the firm's client list reads like a Who's Who of successful hedge funds, Mr. Bettis is emphatic that the firm, which changed its name to Gradient in 2004, does not move markets  making the allegation of market manipulation impossible.

From the time the firm issued its first report on Biovail in March 2003, when it rated the company a "D," to its more substantive report in June that year, the stock rose 43 percent. Biovail's stock inched down 0.07 percent after Gradient issued the June report with an "F," the firm's lowest rating, but then the stock rose for two consecutive weeks.

Biovail's allegations of conspiracy rest on the recollections of Mr. Smith, Mr. Ballash and two other former Gradient employees. None of the four quit over their concerns about SAC's influence over the firm: three were fired and the fourth, Mark Rosenblum, left for another job that he secured with the help of a recommendation from Gradient. All but Mr. Rosenblum are cooperating in the Overstock.com suit, which also names Gradient as a defendant.

Mr. Smith, a former account executive at the Principal Financial Group who joined Camelback in 2002, said he got a lead in June 2003 from Timothy McCarthy, an analyst at SAC HealthCo, the healthcare unit of SAC, who was interested in research on Biovail.

A conference call to discuss the drug maker "turned into a one-way download from Tim about funny accounting" at Biovail, Mr. Smith said. Gradient's "client position analysis" of June 10, 2003, contained "everything Tim was talking about on the call," he added.

Mr. Vickrey denies that he and Mr. Smith were ever on a call together with Mr. McCarthy, and both Mr. Bettis and Mr. Vickrey deny that their firm's research was delayed for any client or concocted with any predetermined outcome. Susan Brune, a lawyer for Mr. McCarthy, said: "The allegations as they relate to Mr. McCarthy are simply wrong."

Mr. Vickrey acknowledged that he and his analysts would engage in conversations with clients about issues in reports, and he conceded that "there were times when they could have seen drafts of the reports." But, he added, "there has never been a case when a client has had influence on the direction of a report."

Mr. Rosenblum tells a different story, based on a personal meeting he says he had with Mr. McCarthy in New York. Mr. Rosenblum said that he and Scott Vorhauer, Gradient's head of products and operations, discussed with Mr. McCarthy stocks that SAC HealthCo would be interested in seeing Gradient cover.

"In no unclear terms, McCarthy set the ground rules" about how the research would be done, Mr. Rosenblum said, echoing claims in the lawsuit. " 'We'll provide you information. We'll decide when we want you to release the report and who to release it to.' I am 110 percent convinced in my mind that the relationship with SAC HealthCo and Camelback was improper."

Mr. Vorhauer denies that Mr. McCarthy provided specific information about a company or told him when to release reports. "If he had, I would never have agreed to it," he said.

Mr. Rosenblum did not question the activities he saw at Gradient at the time. "I wish I did," he said. He added that he left Gradient  on amicable terms  because he did not have success selling its research, and said that he had remained on friendly terms with the principals at Gradient since his departure.

His decision to cooperate was not easy, he says; he did it because he was tired of watching his former colleagues getting "dragged through the mud" for speaking up, he said. "Have I jeopardized my job? Maybe," Mr. Rosenblum said. "Have I jeopardized my career in the securities industry? Maybe. Have I financially benefited from this? No.

"It was the right thing to do," he added of his decision to testify against his former employers. "I only hurt myself."

California Court Allows Overstock.com Lawsuit Against Gradient Analytics, Rocker Partners, et al. to Proceed

Gradient Lawyers Resign

Mark Cuban Blog

Short Stocks

Overstock's Patrick Byrne

SEC Tells Agents To 'Check Yourself Before You Wreck Yourself'

Overstock.com to Gradient Analytics and Rocker Partners: Where's the Countersuit You Threatened?
March 8, 2006: 9:29 p.m. EST

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SALT LAKE CITY (PRNewswire) - SALT LAKE CITY, March 8 /PRNewswire-FirstCall/ - Overstock.com(R) President Patrick Byrne issued the following response to Gradient Analytics' notice of appeal, filed in response to the California Superior Court ruling denying Gradient's Anti-SLAPP Motion to Strike all causes in the Overstock.com lawsuit:

"Eight months ago Gradient and Rocker were thumping their chests threatening to counter-sue us. I said at the time that they would not because these miscreants could not survive the discovery a counter-suit
would trigger. They still have not filed suit, and now, once again, they are doing whatever they can to stall the discovery process. I once again invite them to counter-sue, and let us move to discovery quickly."

"In addition, while Gradient, Rocker and their cronies attempt to spin this as a First Amendment issue, let me remind observers that the activities described in our witness's declarations are covered by a
technical term: 'illegal.' It is 'illegal' to let favored clients doctor research then publish it as independent; it is 'illegal' to permit such clients to front-run that same research; it is 'illegal' to front-run it themselves through hedge funds they secretly control. Their arguments that this conduct is somehow all protected by the First Amendment were roundly rejected by the Honorable Vernon Smith, whose decision these
blackguards now dismiss as an 'erroneous trial-court ruling.' Good luck with that, fellows."

Overstock.com filed its original lawsuit against research firm Gradient Analytics and hedge fund Rocker Partners in August 2005 when it learned the firms colluded to publish false and misleading research in a scheme to engineer stock fluctuations from which Rocker and Gradient's owners could front-run stock trades while harming Overstock's reputation with consumers, suppliers, and employees.

About Overstock.com

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