Bristol-Myers Squibb Co. yesterday agreed to pay $150 million to settle Securities and Exchange Commission charges that the drugmaker fraudulently boosted earnings by more than $1 billion over 2000 and 2001.
The $150 million settlement is the second-largest penalty that federal securities regulators have ever ordered in a financial fraud case. SEC officials said they hoped the sanction would help deter other companies from misusing cash reserves and employing accounting gimmicks to inflate revenue. As part of the settlement, New York-based Bristol-Myers also hired a former judge to monitor its accounting practices. The company did not admit or deny wrongdoing.
SEC enforcement chief Stephen M. Cutler warned in a written statement that the agency's probe is not over and that people "responsible for the company's failures" are in regulators' sights. Sources familiar with the investigation, who spoke on condition of anonymity because the probe is continuing, said that includes former finance chiefs and other top executives in charge at the time of the alleged fraud.
"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," Cutler said.
Federal prosecutors in New Jersey, where Bristol's big pharmaceutical sales unit is based, also are continuing to investigate. A Newark grand jury has been hearing evidence about the company's accounting practices this year.
In a statement, Bristol said it has "cooperated fully with the SEC and is pleased to have resolved this matter. 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."
Last week, Bristol said it would pay $300 million to settle shareholder lawsuits stemming from related accounting and inventory issues. The company said yesterday it had about $20 million left in litigation reserves set aside to cover various lawsuits.
The conduct underlying the SEC charges dates to 2000, when regulators claim that Bristol's business units came under increasing pressure from corporate officials to meet or beat Wall Street earnings targets.
Bristol allegedly used a series of deceptive tactics to achieve those goals. Court papers said the company paid two big drug wholesalers to accept excess inventory at the end of each financial quarter, improperly booking $1.5 billion in revenue on those sales. The company also tapped cash reserves to plug gaps in earnings.
The scheme helped Bristol announce "record-breaking results" for the first quarter of 2001 and spurred the company's then-chief financial officer to mislead analysts in telephone conference calls about the health of the business, the 17-page SEC complaint said.
In the course of the fraud, Bristol sold $5 billion worth of bonds at the same time it disseminated misleading financial statements to investors and analysts, regulators said.
"For two years Bristol-Myers deceived the market into believing that it was meeting its financial projections and market expectations, when, in fact, the company was making its numbers primarily through channel-stuffing and manipulative accounting devices," said Timothy L. Warren, associate regional director of the SEC's Midwest office.
Warren said the $150 million penalty will be put into a fund to be distributed to Bristol shareholders. The company's stock price began to fall in April 2002, when it announced its earnings targets were "dramatically off track." Bristol eventually restated its earnings downward by $2.5 billion from 1997 to the first two quarters of 2002, further driving down the stock price, regulators said.