New York – Gradient Analytics, a leading forensic research firm, and Valeant Pharmaceuticals, the successor to Biovail Corporation, announced that they have settled Gradient’s lawsuit against Valeant for malicious prosecution for two earlier actions initiated by Biovail. The settlement puts to rest one attempt by an issuer to punish a research firm for sell recommendations made on its stock.
Valeant and Biovail recently merged, and the new management decided to put the matter behind them, issuing a statement that Biovail’s original litigation against Gradient was ‘regrettable’. Valeant also settled a similar suit with SAC Capital, agreeing to pay SAC $10 million for legal fees expended by SAC.
Biovail filed a lawsuit in 2006 in which alleged that Gradient was colluding with hedge funds, such as SAC Capital, to wrongfully drive down Biovail’s stock. The lawsuits triggered a Securities and Exchange Commission inquiry which ended with no actions taken against Gradient.
Biovail, which was run by its founder Eugene Melnyk, who owns racehorses and the Ottawa Senators hockey team, appeared to be mirroring a lawsuit filed the previous year by Overstock.com’s flamboyant Patrick Byrne. Byrne became a virulent critic of short sellers and analysts, calling them “lickspittle,” “condoms” and “jackanapes” and claimed a group of hedge funds were working under the direction of an unnamed “Sith Lord” to destroy Overstock’s share price.
Melnyk resigned from Biovail in 2007, revealing in his resignation letter that he had received a “Wells Notice” from the SEC indicating that it intended to bring civil charges against him. In 2008, the SEC initiated enforcement action against Biovail, Melnyk and other company management alleging that Biovail had issued false financial statements from 2001 to 2003 that artificially inflated its stock price.
The SEC’s enforcement action vindicated Gradient’s original analysis of Biovail, made six years prior to the SEC’s suit. Of the three accounting fraud charges leveled against Biovail by the SEC, Gradient identified two, beginning in December 2002. Gradient had challenged Biovail’s claim that it had suffered between $10 million and $20 million in losses as the result of an accident by a truck transporting one of its drugs. Gradient’s analysis indicated that the loss from the truck accident would have much smaller, and non-material. The other charge, a phony bill and hold transaction, also was reflected in the unusual trends in accounts receivable noted by Gradient at the time.
The good news is that Gradient Analytics has been doing just fine, thank you, despite extensive legal costs and distractions from the lawsuits from Biovail and Overstock.com. Gradient, which has strong quantitative research capabilities in addition to the forensic research products attacked by Biovail and Overstock, continued to grow its business despite the negative press generated by Biovail.
Nevertheless, issuer retaliation remains a key concern for securities analysts generally, and independent research particularly. Investorside, the trade association for independent research providers, issued a statement yesterday commending the settlement, and publicizing a white paper issued on issuer retaliation. The Investorside press release can be seen by clicking here.
The text of the Valeant/Gradient release follows:
Valeant Pharmaceuticals and Gradient Analytics Settle Lawsuit
TORONTO, Nov. 4, 2010 /PRNewswire-FirstCall/ — Gradient Analytics, Inc. and Valeant Pharmaceuticals International, Inc., (NYSE: VRX) (TSX: VRX) formerly known as Biovail Corporation, have agreed to settle Gradient’s Arizona action against Valeant for malicious prosecution arising out of two earlier actions filed by Biovail and its shareholders in state and federal courts in New Jersey. Gradient was represented by Michael O. Kassak, Esquire of White and Williams LLP in both the Arizona malicious prosecution action and the earlier New Jersey lawsuits.
“The initiation of litigation against Gradient, its founders Dr. Carr Bettis and Dr. Donn Vickrey, and others in 2006 by Biovail’s management at the time was regrettable. We would like to put this incident behind us,” stated J. Michael Pearson, Valeant’s chief executive officer. “With the merger between Valeant and Biovail now complete and a new management team in place, we have the opportunity to settle this matter and, instead, focus all of our efforts on growing Valeant’s core businesses and enhancing value for our shareholders.”
Gradient’s President and CEO Tom Barrett said: “Our business, founders and employees suffered significantly as a result of the actions of Biovail, its attorneys, private investigators and public relations agents. However, we are pleased to put this matter behind us and move forward. As has been the case throughout this trying period, we remain resolute in our right to freely express our opinions about publicly traded companies and will continue to do so in the future.”
Valeant Pharmaceuticals International, Inc. (NYSE/TSX:VRX) is a multinational specialty pharmaceutical company that develops and markets a broad range of pharmaceutical products primarily in the areas of neurology, dermatology and branded generics. More information about Valeant can be found at www.valeant.com.