WASHINGTON – Drug giant Bristol-Myers Squibb Co. (BMY) is paying $150 million to settle federal regulators' charges that it manipulated its inventory of medicines in a fraudulent scheme to inflate earnings and meet Wall Street targets, the Securities and Exchange Commission (search) announced Wednesday.
Bristol-Myers agreed in its settlement with the SEC to pay a $100 million civil fine and an additional $50 million, both of which will go into a fund for shareholders — who recently won $300 million from the company in a class-action lawsuit. Bristol-Myers neither admitted nor denied wrongdoing in the accord but did agree to abide by a permanent injunction against future violations.
It was one of the largest SEC penalties in recent years for alleged accounting violations against a viable company that continues to operate. The $150 million Bristol-Myers is paying dwarfs the $10 million fine levied on Xerox Corp. in 2002, which was the largest ever at the time, to resolve allegations of accounting fraud.
New York-based Bristol-Myers faces a related criminal investigation by the Justice Department (search).
The company's largest division, the U.S. Medicines Group, is headquartered in New Jersey. The SEC sued Bristol-Myers in federal court in Newark, N.J., alleging that the company sold excessive quantities of drugs to wholesalers and improperly booked revenue from $1.5 billion of those sales to its two biggest wholesalers.
The maker of Excedrin, Plavix and Pravachol disclosed in March 2003 that it had overstated revenue for 1999-2001 by $2.5 billion as a result of the discounts to wholesalers. Ranked No. 92 on the Fortune 500 list, Bristol-Myers had revenue of $20.7 billion last year.
Bristol-Myers covered the wholesalers' carrying costs and guaranteed them a return on investment until they sold the products, the SEC said in the suit. In booking the $1.5 billion in revenue at the point of shipment, the company violated generally accepted accounting principles, the regulators said.
They also accused Bristol-Myers of using so-called "cookie-jar" reserves in a drive to meet its internal sales and earnings targets as well as Wall Street analysts' earnings forecasts. The SEC maintains that the use of such reserves — overstating income in some quarters and understating it in others — gives investors an inaccurate picture of a company's financial performance.
Bristol-Myers also agreed in the settlement to appoint an independent adviser to monitor its accounting practices, financial reporting and internal controls.
"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" and its shareholders, SEC enforcement director Stephen Cutler said in a statement. "As our investigation continues we will be focusing on, among other things, those individuals responsible for the company's failures."
The SEC, the Justice Department and the U.S. Attorney's Office in New Jersey have been investigating a Bristol-Myers program that offered wholesalers huge discounts to buy more prescription medicines than they could sell. A federal grand jury convened in Newark early this year to pursue a criminal investigation.
The company said Wednesday that it continues to cooperate with that inquiry.
Regarding the settlement with the SEC, Bristol-Myers said in a statement that it has cooperated fully with the agency 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," it said.
The inventory manipulation, known as "channel stuffing," is not illegal, but some industry observers have called the level at Bristol-Myers excessive. It occurred during a period when the company was trying to keep pace with rivals posting double-digit growth in profits. Some industry experts have questioned whether key Bristol-Myers managers benefited financially through bigger bonuses based on company sales levels.
Last month, Bristol-Myers said it would pay $300 million to settle a class-action lawsuit by shareholders that accused the company of lying about accounting and its investment in ImClone Systems Inc. The suit stemmed from a 2001 announcement in which Bristol-Myers said it would invest $2 billion in ImClone to gain marketing rights for the ImClone colon-cancer drug Erbitux (search).
The shareholders contended that Bristol-Myers made overly optimistic statements about the drug's chances for approval by the Food and Drug Administration (search).
The FDA declined in December 2001 to review ImClone's application for approval for Erbitux. Martha Stewart's (search) sale of ImClone stock one day before that announcement led to her recent conviction for lying to federal investigators. The FDA approved the drug earlier this year.
Bristol-Myers neither admitted nor denied wrongdoing in the settlement with shareholders.
During 2003's fourth quarter, Bristol-Myers took a $225 million charge to establish reserves for liabilities stemming from the pending government investigations and civil litigation.
In late trading on the New York Stock Exchange, Bristol-Myers shares were up 22 cents to $23.36.