Melnyk had no intention to mislead Biovail investors: lawyer
A lawyer for Eugene Melnyk, the owner of the Ottawa Senators, says his client didn't intent to mislead stockholders in his former company, Biovail Corp. when he reported the financial impact of a highway traffic collision that delayed a drug shipment.
Kent Thomson spoke before an Ontario Securities Commission panel hearing allegations that Melnyk, the former Biovail CEO, had given incorrect financial information to investors.
Thomson said that his client had been caught up in the uncertainty and chaos of the collision and was operating to the best of his ability when he relied on the expertise of his fellow executives to offer a loss estimate.
The estimate wound up being much greater than the actual loss.
The multiple-vehicle crash happened outside Chicago on Oct. 1, 2003, and involved a shipment of Wellbutrin XL antidepressant pills, which was then delayed.
At issue is an Oct. 3, 2003, news release in which Biovail said it would fall short of investor expectations for sales and earnings in the quarter that ended Sept. 30. As a result of the miss, Biovail's shares plunged on the Toronto Stock Exchange. The stock, which was well above $50 for months before the earnings shortfall, lost nearly $9 after the crash.
"That's how a chief executive [operates], he relies on his people," Thomson told the court as Melnyk sat nearby.
Thomson said that finding Melnyk responsible for the financial calculations that were later found to be wrong would set a dangerous precedent for executives.
"CEOs are going to run for the hills," he told the court in his closing remarks.
"There is simply no way Mr. Melnyk could have checked or double-checked every calculation provided to him."
Loss greatly overstated
In the October press release, Biovail had said the crash would reduce third-quarter revenue by between $10 million and $20 million US. Later in its 2003 full-year report, the company changed its position and said that the actual loss was determined to be $5 million.
The commission alleges that this shipment could never have counted in third-quarter results and contends that Melnyk used the crash to divert attention from other woes with Wellbutrin, which included production snags.
Thomson told the court that Melnyk was an entrepreneur who dropped out of school in Grade 12 after his father died, and was not a financial expert.
He said Melnyk didn't have training in disclosure obligations, but was instead trying to give investors as much information as possible amid the developing details of the highway traffic crash.
On Wednesday, Thomson argued that uncertainty surrounded a shipping term called "freight on board," which determined who was financially responsible for the drugs after they left Biovail's plant in Manitoba en route to U.S. distributor GlaxoSmithKline, Thomson said.
Thomson said GlaxoSmithKline was ultimately responsible for the drugs, which is why the loss was eventually revised.
He said the drugs were being shipped in a truck that was operating a controlled temperature environment, as per GlaxoSmithKline's request, to ensure the composition of the chemicals weren't changed.
OSC lawyers wrapped up their case on Wednesday, telling the panel that Melnyk had enough information available to him to question the initial calculations made by Biovail's chief financial officer concerning the value of the product damaged in the crash.