The Commission's charges against Frederick S. Schiff, formerly Chief Financial Officer (CFO) at Bristol-Myers, and Richard J. Lane, formerly President of the company's Worldwide Medicine Group, were filed in the United States District Court for the District of New Jersey.
According to the Commission's complaint, Bristol-Myers, at Schiff and Lane's direction, sold excessive amounts of its pharmaceutical products to wholesalers ahead of demand and improperly recognized revenue from $1.5 billion of such sales to its two largest wholesalers. Moreover, when Bristol-Myers earnings results still fell short of its internal targets and the consensus estimate of Wall Street securities analysts, the company used "cookie jar" reserves at Schiff's direction to further inflate its earnings, the Commission alleges.
The Commission's complaint seeks financial penalties against Schiff and Lane and return of their ill-gotten gains. The complaint also seeks to bar them from serving as officers or directors of publicly traded companies.
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "The desire to meet earnings targets cannot override corporate officers' responsibilities to public shareholders to assure that the company's public pronouncements reflect financial reality."
Merri Jo Gillette, Regional Director of the SEC's Midwest Regional Office, added, "For two years Schiff and Lane led the market to believe that Bristol-Myers 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. The Commission will seek tough sanctions against Schiff and Lane for their misconduct."
The Commission's complaint charges Schiff and Lane with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The Commission's complaint also charges Schiff with lying to the company's auditors, PricewaterhouseCoopers, LLP, in connection with PwC's audits of Bristol-Myers financial statements in 2000 and 2001.
Specifically, the Commission's complaint alleges, among other things, that
- From the first quarter of 2000 through the fourth quarter of 2001, Schiff and Lane engaged in a fraudulent scheme to inflate Bristol-Myers' sales and earnings in order to create the false appearance that the company had met or exceeded its internal sales and earnings targets and Wall Street analysts' earnings estimates.
- At Schiff and Lane's direction, Bristol-Myers' inflated its results primarily by stuffing its distribution channels with excess inventory in amounts sufficient to meet its targets by providing financial incentives to its wholesalers to purchase pharmaceutical products ahead of demand. Schiff and Lane knew, or were reckless in not knowing, that Bristol-Myers was covering the carrying costs of its two largest wholesalers and guaranteeing them a specified return on investment until they sold the products. As a result, Bristol-Myers improperly recognized $1.5 billion in revenue upon shipment to these wholesalers. In addition, despite their knowledge of the increasing size of the excess inventory in Bristol Myers' distribution channel and the costs associated with the financial incentives provided to the wholesalers to continue to accept more products, Schiff and Lane approved additional incentives to wholesalers.
- When Bristol-Myers' results still fell short of the Street's consensus estimate, at Schiff's direction, the company tapped improperly created divestiture reserves and reversed portions of those reserves into income to further inflate its earnings.
- At no time during 2000 or 2001 did Bristol-Myers, Schiff or Lane disclose that: (1) BMS was stuffing its distribution channels with millions of dollars of excess inventory near the end of each quarter to artificially inflate its financial results and meet its internal targets and the consensus estimate of analysts; (2) BMS stuffed its distribution channel by using financial incentives to wholesalers to induce them to buy excess inventory; (3) BMS was covering the costs its two largest wholesalers incurred from carrying the excess inventory and guaranteeing those wholesalers a specified return on any excess inventory they agreed to take, until they sold the products; (4) channel-stuffing was causing an unusual buildup in excess inventory; and (5) this unusual buildup in excess inventory posed a material risk to BMS' future sales and earnings.
On Aug. 4, 2004, Bristol-Myers settled the Commission's action against it by agreeing to pay $150 million dollars and perform numerous remedial undertakings, including the appointment of an independent adviser to review and monitor its accounting practices, financial reporting and internal controls. Bristol-Myers is a New York-based company whose largest division, the U.S. Medicines Group, is based in New Jersey.
