Court Hands Bosses Who Lie to Investors a Get Out of Jail Free Card

(MoneyWatch)  A federal appeals court has handed a "Get Out of Jail Free" card to any corporate executive who tells lies by omission in their SEC disclosures but who hints vaguely at the truth in a conference call with Wall Street analysts.

• Download the ruling in U.S. v. Schiff here.

The decision -- a disaster for investors who believe company bosses should be held to account for misleading shareholders -- came in a case involving former Bristol-Myers Squibb (BMY) CFO Frederick Schiff. He was booted out of the company in 2002 after it was revealed that BMS had been "channel stuffing" its wholesalers. BMS had paid tens of millions to wholesalers to get them to order more drugs than they needed. This allowed BMS to overstate its revenues by $2 billion. BMS stock bellyflopped the day this was revealed and Schiff and BMS president Rick Lane were indicted for securities fraud.

While the ruling does not completely let top executives off the hook -- Schiff still faces charges of making misleading statements in his conference calls -- it does prevent prosecutors from presenting the calls and the SEC filings together in the case. The ruling indicates that BMS's SEC filings were technically GAAP compliant, and therefore not misleading, and therefore Schiff may not be charged with lying in them by omission or otherwise, even if they are misleading when cross-referenced with his conference calls.

This is, of course, totally insane.

Everyone knows that even in the U.S., the most transparent nation of all for investors, it's extremely difficult to get an accurate picture of what's really going on inside a company. Investors take conference calls, SEC filings and press releases together when they make judgments about a company. If an executive says "we don't see anything unusual," as Schiff did when asked about wholesaler inventories, and he then neglects to fully explain his company's channel stuffing policy in a later SEC filing, then that looks to me like a lie.

Here are some recent examples of disclosure that, to put it politely, understate what's really going on:

• Merck (MRK) disclosed it was being sued over its Nuvaring contraceptive, but neglected to say that the litigation involves more than 300 cases, some alleging fatalities.
• Sequenom (SQNM) disclosed that mistakes in its data required it to start over on development of a new test for Down syndrome, but has yet to disclose how those mistakes were made. Investors are currently flying in the dark on this company.
• Elan (ELN) disclosed it had loaded itself up with another poison pill, this one courtesy of Johnson & Johnson (JNJ), but didn't tell investors for five months.
• And Pfizer (PFE) CFO Frank D'Amelio told Wall Street analysts that he included Wyeth's Animal Health unit in his revenue estimates for the merger of the two companies even though he knew the unit would have to be divested, according to a transcript of a recent conference call.

These are not technical issues. These are all disclosures that go to the heart of the integrity of a company's financial statements. To see just how far in favor of corporate (alleged) criminals the Third Circuit Court of Appeals leaned, read what Schiff and Lane actually told Wall Street during the period their channel stuffing scheme was in operation:

4/25/01 Schiff ?€" "We look at, very closely, the wholesaler stocking inventories. ... [T]here are no unusual items that we see in the inventory levels."

7/25/01 Schiff ?€" "we don't see anything unusual" in the "wholesaler inventories."

Lane ?€" when asked whether there were inventory issues, he responded "no."

10/23/01 Schiff ?€" inventory was "up a couple of weeks" and expected "to be lower in the fourth quarter."

12/13/01 Schiff ?€" "We don't see any significant changes" in the prior call's statements that "inventory levels are slightly higher" and "would be reduced by the end of the year."

You can see how helpful it would have been if Schiff had chosen to "elaborate" on his remarks. But he didn't. On April 1, 2002, BMS came clean and president Rick Lane left the company. The stock plunged on the news.

• Previously:
• BMS Is Losing Suits in Plavix-Apotex Fiasco; Another $125M Down the Toilet
• Judge Orders BMS's Bodnar to Write a Book Explaining Lies He Told the Feds
• BMS's Bodnar Caught in His Own Lies on Apotex-Plavix Deal
• BMS Settles Plavix Allegations for Pennies; Ex-CEO Dolan Vindicated (Slightly)