On September 30, 2010, a Panel of the Ontario Securities Commission (the OSC or the Commission) released its decision in the Matter of Biovail Corporation and Eugene N. Melnyk, et al. The hearing was held over 27 days in March, April and June, 2009 and centred on whether Biovail Corporation (Biovail) and its founder and then Chairman and CEO, Eugene Melnyk (Melnyk) made statements that were, in a material respect, misleading or untrue. Although Biovail and other senior officers had previously entered into settlements with the OSC, the Commission found it was necessary to make certain findings in relation to Biovail's conduct in order to render a decision on whether Melnyk had breached provisions of the Ontario Securities Act (the Act), or alternatively, acted contrary to the public interest.
The allegations against Melnyk arose, perhaps improbably, from a traffic accident in the United States (the Accident). On October 1, 2003, a truck carrying a shipment of a new antidepressant drug (WXL) from a Biovail facility in Manitoba to a distributor in the United States (GSK) was in an accident requiring it to return to Manitoba so the shipment could be inspected for damage. As a result, GSK did not receive the full shipment of WXL as anticipated. In the days, weeks and months after the Accident, Biovail made press releases and statements on analyst calls attributing Biovail's failure to meet its 2003 third quarter revenue and earnings guidance in part on the Accident as well as providing estimates as to the revenue associated with the WXL involved in the Accident. Staff of the OSC alleged that those releases and statements were misleading or untrue in a material respect and thus made in contravention of section 122(1)(b), or alternatively section 122(1)(a) of the Act.
In rendering its decision, the Commission considered a number of issues, including: 1) the standard of proof to be applied (it concluded the appropriate standard was on a balance of probabilities); 2) the standard of materiality to be applied to the statements; 3) whether the impugned releases and statements were, in a material respect and at the time and in the light of the circumstances under which they were made, misleading or untrue or whether they failed to state a fact that was required to be stated or that was necessary to make the statement not misleading; 4) whether Melnyk knew or should have known that the statements were misleading or untrue; 5) whether Melnyk authorized, permitted or acquiesced in the statements made by Biovail; 6) whether Melnyk had acted contrary to the public interest; and 7) whether Melnyk was entitled to advance a due diligence defence to allegations that he acted contrary to the public interest and, if so, whether he had established that he had exercised due care and diligence in the circumstances.
The Commission reviewed the events surrounding the Accident and the subsequent public releases and statements in some detail. Central to the Commission's analysis were the shipping terms in Biovail's contract with GSK. Pursuant to the terms of that contract, Biovail was not permitted to account for the revenue associated with WXL until it had been delivered to GSK. Because the WXL shipment at issue was still in transit at the end of the third quarter, that revenue would have been properly accounted for in the fourth quarter results (i.e., the quarter in which GSK received the shipment). As such, Biovail could not have attributed the revenue related to the WXL shipment in its third quarter results even had the Accident not occurred, and thus the Accident in no way contributed to Biovail missing its third quarter guidance. The Commission determined that, although Melnyk initially misunderstood the relevant terms of the contract with GSK, shortly thereafter he knew or should have known that the Accident had no impact on Biovail's third quarter results. Despite that, Biovail continued to make statements that Melnyk knew or should have known were misleading or untrue.
The Commission next considered whether the statements at issue were misleading or untrue in a material respect, as per the wording of section 122(1) of the Act. After reviewing previous decisions, the Commission concluded that a statement was material if there was a substantial likelihood that a reasonable investor would consider the statement to be important in making an investment decision. It further noted, however, that the meaning of "in a material respect" is contextual and will vary depending on the nature of the document in which the statement is made, the nature of the statement itself and the circumstances in which the statement is made. Applying that test, the Commission found that the statement that the Accident contributed significantly to the unfavourable variance in third quarter revenue and earnings and that the revenue associated with the shipment was in the range of $10 to $20 million, was misleading or untrue in a material respect. Other statements that encompassed only parts of the above, while misleading or untrue, were not misleading or untrue in a material respect.
Despite finding that Biovail made at least some statements that were misleading or untrue in a material respect, and that Melnyk knew or should have known that the statements were misleading or untrue in a material respect, the Commission held that there was no breach of section 122 of the Act because: 1) the statements were not made in documents that were "required to be filed or furnished under Ontario securities law" (as required in subsection 122(1)(b) of the Act), and; 2) the statements were not in documents "submitted" to the OSC (as required in subsection 122(1)(a) of the Act) as filing a document on SEDAR does not automatically mean that the document has been submitted to the OSC. Nonetheless, the Commission concluded that Melnyk's conduct was contrary to the public interest within the meaning of section 127 of the Act. It stated:
There should be no doubt in the minds of market participants that the Commission is entitled to exercise its public interest jurisdiction where any inaccurate, misleading or untrue public statement is made, whether or not that statement contravenes Ontario securities law.
If a reporting issuer makes a public statement or discloses information that is relevant to investors, it should take appropriate steps to ensure that the statement or information is accurate and not misleading or untrue. In our view, that obligation applies to a statement or information that is material to investors as well as to a statement or information that may not meet the applicable standard of materiality.
Finally, the Commission agreed with Melnyk that it should consider whether he had been duly diligent in the context of a public interest hearing and if it was satisfied that he had exercised due care and diligence, it would not be in the public interest to make an order against him under section 127. It concluded that Melnyk had not established that he had acted with due care and diligence in the circumstances.
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