Bristol-Myers agrees to pay fine

$150 million payment settles federal fraud case

August 05, 2004|By Andrew Countryman | Andrew Countryman,CHICAGO TRIBUNE

Drug giant Bristol-Myers Squibb Co. agreed yesterday to pay $150 million to settle federal regulators' allegations that it engaged in fraud by inflating revenues and profits by hundreds of millions of dollars over two years.

The penalty, which will go into a fund to be distributed to investors, is the second-largest in a U.S. accounting fraud case, behind the $750 million in cash and stock assessed last year to WorldCom Inc., now known as MCI Inc.

The Securities and Exchange Commission alleged that the New York-based maker of Excedrin headache medicine and the Pravachol cholesterol drug improperly accounted for $1.5 billion in revenue in 2000 and 2001 from excess products it shipped to wholesalers. It also alleged that the company boosted profits by dipping into "cookie jar" reserves to meet Wall Street earnings projections.

"Bristol-Myers' earnings management scheme distorted the true performance of the company and its medicines business on a massive scale and caused significant harm to the company's shareholders," said SEC Enforcement Director Stephen M. Cutler. "The company's conduct warrants a stiff civil sanction."

Bristol-Myers, which neither admitted nor denied the allegations, stressed the changes it has made in its policies and procedures, as well as in senior management, in recent years.

"BMS has cooperated fully with the SEC and is pleased to have resolved this matter," the company said in a statement. "The company has implemented a series of internal controls and procedures designed to ensure that its financial reporting processes meet the highest standards of integrity and professionalism."

The firm said it is cooperating with a continuing investigation by the U.S. attorney's office in New Jersey, and the SEC said it is continuing to investigate individuals responsible for the company's actions.

Last week, Bristol-Myers announced a $300 million settlement in related class-action litigation.

The SEC alleged that Bristol-Myers, despite the objections of some executives, engaged in widespread "channel stuffing," in which it gave wholesalers incentives to accept shipments of excess products, particularly toward the end of a quarter, to help meet its sales targets.

By the end of 2000, the SEC said, the excess inventory reached roughly $500 million.

Those efforts weren't always enough, the SEC complaint said, so the company "created phony divestiture reserves that could be reversed into earnings in subsequent quarters when the company needed a penny or two per share of earnings" to meet analysts' expectations.

In March last year, the firm filed documents with the SEC acknowledging "errors and inappropriate accounting" when senior management set aggressive growth targets based on "unrealistic expectations."

It restated results for 1999 through the first six months of 2002, wiping out $707 million in net income and $1.5 billion in revenue. From 1999 to 2001, the reductions eliminated about 7 percent from the originally reported net income, covering 51 cents a share.

The firm said it has made significant changes, instituting a "bottom-up approach" to budgeting, strengthening its internal financial reporting controls, hiring a former federal judge as an independent adviser on accounting issues and bringing in new executives.

But the chief executive, Peter R. Dolan, assumed that post in May 2001, during the period covered by the SEC settlement.

Analyst Albert Rauch at A.G. Edwards & Sons said that the March 2003 restatement reflects on Dolan's credibility. "Either he wasn't watching people he was managing very well, or he wasn't managing the company very well," he said.

Timothy Warren, associate regional director of the SEC's Midwest office in Chicago, said the $150 million reflects "a quite deliberate earnings management scheme," exacerbated by the amount of the restatement, the size of the firm and the loss in value to shareholders.

Bristol-Myers' stock topped $70 a share during the period covered by the settlement, but closed at $22.61 the day it filed its restatement. Yesterday, the shares added 16 cents, to $23.30.

Less than two years ago, the largest penalty levied by the SEC in an accounting case was $10 million against Xerox Corp., which overstated its revenue and profit by about twice as much as Bristol-Myers.

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