he US Securities and Exchange Commission has charged GlaxoSmithKline's Stiefel Laboratories subsidiary and its former chief executive with defrauding employees and other shareholders by buying back stock at "severely undervalued prices".
The antitrust agency alleges that Stiefel, prior to being bought by GlaxoSmithKline two years ago for an initial $2.90 billion, used low valuations for stock buybacks from November 2006 to April 2009. It is argued that key information that would have alerted employees their stock was actually worth much more "was confined to then-CEO Charles Stiefel and certain members of his family as well as some senior management". At the time, it was the world’s largest private manufacturer of dermatology products.
The SEC’s complaint, filed in a Florida court, lists a number of allegations. First up, it notes that Stiefel purchased more than 750 shares from shareholders between November 2006 and April 2007 at $13,012 per share, adding that Mr Stiefel knew five private equity firms had submitted offers to buy preferred stock in November 2006 based on equity valuations that were "50% to 200% higher than the valuation later used for stock buybacks".
Furthermore, the SEC alleges that between late July 2007 and June 2008, Stiefel purchased more than 350 additional shares from shareholders under its employee stock plan at $14,517 per share. It also bought more than 1,050 shares from shareholders outside the plan at even lower stock prices. However, at the time of these buybacks, Charles Stiefel knew not only about the aforementioned November 2006 valuations, "but that a prominent private equity firm had bought preferred stock based on an equity valuation" for the company that was "more than 300% higher than that used for stock buybacks".
Misled about sale to GSK
The SEC’s complaint further alleges that between December 3, 2008 and April 1, 2009, Stiefel purchased more than 800 shares of its stock from shareholders at $16,469 apiece "even though Charles Stiefel knew that equity valuation was low and misleading, in part because he was negotiating the sale of the company".
Beginning in late November 2008, Stiefel decided to seek acquisition bids, it is claimed, and on January 28, 2009, GSK expressed interest and signed a confidentiality agreement. However, "as late as March 16, 2009, Charles Stiefel ordered that the ongoing negotiations not be disclosed to employees, and he misled shareholders to believe the company would remain family-owned".
On April 20 that year, Stiefel announced GSK would acquire the company for a value that amounted to more than $68,000 per share, more than 300% higher than the price the owners had been paying to buy back stock from its shareholders. The SEC complaint concludes by noting that it "seeks permanent injunctive relief, financial penalties and the disgorgement of ill-gotten gains with prejudgment interest against both defendants, and an officer and director bar against Charles Stiefel".
Eric Bustillo, director of the SEC’s Miami office, said the company and Mr Stiefel "profited at the expense of their employee shareholders who lost more than $110 million by selling their stock based on the misleading valuations they were provided". He added that "private companies and their officers must understand that they are not immune from the federal securities laws, which protect all shareholders regardless of whether they bought stock in the open market or earned shares through a company’s stock plan".
Stiefel had not responded to a request for comment ahead of publication but Kevin Colgan, a spokesman for GSK, was quoted by the Wall Street Journal as saying that the company "denies that it or Charlie Stiefel acted improperly or did anything to violate the securities laws".
Tuesday, December 13, 2011
GSK unit charged with fraud by US antitrust agency