June 16, 2005
Fraud Case Filed Against Ex-Officers of Bristol
By STEPHANIE SAUL, NY TIMES

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Two former executives of the Bristol-Myers Squibb Company were indicted yesterday on conspiracy and securities fraud charges related to a wholesale inventory manipulation that artificially inflated company revenues by millions of dollars.

Bristol-Myers, meanwhile, agreed to pay $300 million in penalties but avoided indictment in connection in the case.

The accusations, filed in Newark, charge that Frederick S. Schiff, the company's former finance chief, and Richard J. Lane, who ran its worldwide medicines group, misled investors by concealing the excess inventory held by Bristol-Myers wholesalers, a result of an aggressive program of rebates and discounts offered by the company to meet its sales targets.

The $300 million will compensate shareholders financially harmed by the manipulation as part of a "deferred prosecution" agreement. In addition, Bristol-Myers agreed to establish an endowed chair in business ethics at the Seton Hall University Law School in Newark.

With the $300 million, Bristol-Myers will have paid a total of $839 million in penalties related to the scheme, involving a practice called channel stuffing, which occurred from 1999 to 2001. A spokesman for Bristol-Myers, Tony Plohoros, said yesterday that it planned to take a charge of $249 million in the current quarter to cover the settlement.

Also as part of the agreement, the chief executive, Peter R. Dolan, will give up his title as chairman. That job will be filled by the former American Express chief, James Robinson III. The agreement, which was reached between Bristol-Myers and Christopher J. Christie, the United States attorney in Newark, lifts a cloud that has hung over the company since April 2002, when Mr. Dolan announced that sales would be sharply lower than expected because wholesalers had been stocking excess inventories of its products.

The company, based in New York, later restated results, lowering revenue by $2.5 billion and profit by $900 million.

Mr. Dolan's announcement led to investigations, both by Mr. Christie's office and by the Securities and Exchange Commission, as well as investor lawsuits.

The case also had a profound impact on the pharmaceutical industry, essentially bringing to an end a common practice known as speculative buying in which wholesalers held excess inventory in advance of price increases. Speculative buying was the way wholesalers made much of their profits. With the elimination of the practice, manufacturers have been forced to enter agreements to compensate wholesalers in other ways.

Inventory practices at Bristol-Myers went beyond those of other companies, Mr. Christie's office charged, employing accounting and bookkeeping gimmicks to mask the increasing rise in wholesaler inventory levels.

In announcing the agreement and related indictments yesterday, Mr. Christie said the scheme reflected a corporate culture at Bristol-Myers at the time that emphasized higher sales at all costs as the company strove to meet Wall Street profit forecasts. The inventory manipulation made it appear that demand for Bristol-Myers's products was greater than it actually was, raising the company's sales and outlook.

"These people had knowledge which they should have disclosed to the investing public, which they did not," Mr. Christie said. "It's not a channel-stuffing case. It's a failure-to- disclose case."

Mr. Schiff, 57, of Manhattan and Mr. Lane, 54, of Doylestown, Pa., were expected to appear in United States District Court in Newark today to answer the accusations, which could result in up to 10 years in prison and fines of up to $1 million.

The indictment accuses both men of misleading investment analysts.

In October 2000, the indictment said, Mr. Lane responded to an analyst's question about wholesaler inventories by saying, "I don't think there was any significant wholesaler inventory activity in the quarter."

In April 2001, Mr. Schiff responded similarly when asked by an investment analyst, the indictment charged, saying, "There are no unusual items that we see in the inventory levels."

A lawyer for Mr. Schiff, David M. Zornow, issued a statement yesterday that his client vigorously denied wrongdoing and accused the government of "overreaching."

"Mr. Schiff did not operate in a vacuum; his conduct was appropriate at all times and known to many others, both inside and outside the company," the statement said.

Mr. Lane's lawyer, Richard M. Strassberg, said his client was "innocent of all charges" and "intends to fight them."

At one point, it was believed that Mr. Dolan and his predecessor, Charles A. Heimbold Jr., were under investigation. Mr. Christie said yesterday that he would not comment on any individuals who were not charged.

Under the deferred-prosecution agreement, Mr. Christie's office filed a criminal complaint against Bristol-Myers, but agreed not to prosecute it for two years. If the company complies with its obligations to the government, the criminal charges will be dismissed.

In addition to the $300 million fine, the chair at Seton Hall, and the appointment of Mr. Robinson as a non-executive board chairman, the company agreed to continue employing a former United States district judge, Frederick B. Lacey, to monitor its operations.

The company is also required to appoint an additional nonexecutive director acceptable to Mr. Christie's office.

Deferred-prosecution agreements are becoming increasingly common in corporate prosecutions. While some have criticized them as slaps on the wrist, the arrangements were defended by Mr. Christie yesterday in a statement.

"We balanced the need for punishment with an acknowledgement that this company provides great value and that its work should continue," he said.