Claiming Stock Manipulation, Biovail Sues Hedge Fund

The New York Times
By Jenny Anderson
February 23, 2006

The Biovail Corporation, a Canadian pharmaceutical company, has sued SAC Capital Management, one of the most powerful hedge funds on Wall Street, accusing it of colluding with independent research providers to issue misleading reports to drive down the price of Biovail's stock.

The lawsuit, filed yesterday in New Jersey Superior Court in Newark, lays out a scheme by several hedge funds to send "ghost written" research reports — all negative — to Camelback, an independent investment research firm based in Arizona now known as Gradient Analytics. Camelback would wait for the hedge funds to accumulate a short position on the stock — a technique that allows traders to make money if the stock price falls — and then Camelback would release the report, the suit says. As a result of the reports of Camelback, as well as subsequent reports by David W. Maris, an analyst with Banc of America Securities, shares of Biovail stock fell more than 50 percent between 2003 and the spring of 2004, resulting in its business reputation being "devastated" and curtailing its ability to access capital, the lawsuit says.

"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 lawsuit says.

Ed Tagliaferri, a spokesman for SAC, said: "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 markets 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 litigation is another battle in a larger war that is often waged between companies and short sellers. Last year, for example, the chief executive of, an Internet retailer, blamed short sellers for "manipulating" his company's stock and sending it down.

Yet in cases when a company has problems — and when short sellers aggressively highlight those problems — it may be unclear whether the stock price is falling because of fundamental problems with a company or because short sellers have simply persuaded other investors that the price is headed down.

In late October 2003, Biovail reported quarterly earnings that were weaker than expected and its stock fall sharply. The company, whose American operations are based in Bridgewater, N.J., is currently being investigated by the Securities and Exchange Commission and the Federal Trade Commission. Biovail, however, sees another force behind the decline in the stock: it accuses the hedge funds of conspiring with proclaimed "independent" research providers to create reports with the express purpose of battering its stock price.

The complaint, which seeks damages of $4.6 billion, lists 22 defendants, including Steven A. Cohen, the founder of SAC (the initials are his); various of his affiliate funds and their employees; Gradient, which was formerly Camelback; James Carr Bettis, founder and chief executive of Gradient and Donn Vickrey, founder and co-owner of Gradient, Mr. Maris of Banc of America Securities, the investment banking arm of Bank of America; and the Gerson Lehrman Group, a company based in New York that connects investors with experts in fields like pharmaceuticals.

A Bank of America spokesman said it had not received a copy of the lawsuit but added that "we have the highest degree of confidence in the integrity of David Maris's research."

A lawyer for Gerson Lehrman declined to comment.

According to the complaint, analysts at Camelback Research regurgitated reports from hedge funds, including SAC, reports that Camelback employees referred to as "hatchet jobs."

"The analyst contributed no meaningful analysis to the report but merely served as a scrivener of the client's stated position," the lawsuit says.

Biovail also accuses Camelback of holding up the release of its reports to allow clients to build meaningful positions in stocks to maximize the benefit of the negative impact from the report and contends that the research firm misrepresented to clients that it did not manage money. Mr. Bettis and Mr. Vickrey managed various hedge funds including Pinnacle, Helios and Hallmark from the same office where the independent research was being conducted, according to the lawsuit.

"These charges are completely false, malicious and they misrepresent the relationships between Gradient, its clients and owner-affiliates," said Karen Hinton, a spokeswoman for Gradient. "The patently false claims are made by a troubled company with a history of questionable accounting practices and book-cooking incidents that have been the subject of regulatory scrutiny in the United States and Canada and numerous class-action lawsuits."

The lawsuit accuses the Gerson Lehrman Group and other defendants of paying two doctors in 2003 to give false information to reporters suggesting Biovail had set up a program to bribe them to prescribe a Biovail drug. Camelback issued another negative report on Biovail with details of the bribes in late July.

The suit takes personal aim at Mr. Cohen, whose management fee for running his fund has "regularly" exceeded $400 million and is one of Wall Street's most powerful customers, doling out $150 million in commissions annually.

"Cohen uses his enormous financial leverage to support SAC's trading strategies by demanding access to material nonpublic information from the financial institutions with whom SAC does business, including nonpublic inside information concerning public companies and other clients to whom those institutions owe fiduciary and other duties of nondisclosure," the suit says.

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