Betting On A Fall

Lesley Stahl On One Company's Lawsuit Against A Hedge Fund

(CBS)  This is a story about a large company accusing another large company of deliberately trying to drive down its stock price to make money. If the allegations are true, it's like fixing a game.

The company being accused is one of the largest hedge funds in the world, called SAC. Hedge funds are exclusive investment pools for the ultra-rich. Virtually unregulated, they operate in secrecy.

Normally when most people buy a stock, they hope the price will go up; but one of the strategies hedge funds use is called "selling short," in which they bet lots of money that a company's stock price will fall.

If you have money in a retirement account or a pension fund, pay attention, because, as correspondent Lesley Stahl reports, hedge funds have become a major force in the market. When they make a move or "take a position," as they say, it can affect your bottom line.

In this case, one of the largest companies in Canada is claiming that the hedge fund SAC was trying to make a killing by killing the company.

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"When you've got these companies, these people out there trying to bring you down, we're lucky we survived," says Eugene Melnyk, the CEO of Biovail, the Canadian pharmaceutical company that's suing the hedge fund SAC, and others.

"There’s a group of people that got together and essentially attacked the company by putting out false reports," says Melnyk. "And we’re just fighting back for our shareholders."

"Is your allegation that SAC made up a lot of this stuff in order to depress the stock so they could sell it short?" Stahl asked.

"That’s what’s alleged in the complaint," he replied.

What this could come down to is a battle of the titans. On one side is Steven Cohen, owner of the hedge fund SAC. He lives all but secluded on a sprawling Greenwich, Conn. estate. His salary last year was reportedly $500 million.

On the other side is Biovail's Eugene Melnyk, also successful and wealthy. While Steven Cohen has a hockey rink on his property, Melnyk owns an NHL hockey team. This fight between the hedge fund owner and the CEO could get brutal.

The alleged conspiracy began in Arizona at Camelback, a stock-analysis firm that publishes supposedly impartial financial reports on various companies to help investors with advice about stocks.

In the spring of 2003, the hedge fund SAC asked them for a report on Eugene Melnyk’s company, Biovail. Darryl Smith, a former Camelback salesman, says that during a conference call with an SAC trader it became clear the hedge fund had an agenda.

"Are they pretty clearly saying, 'Give me something that’s going to drive the stock down?' Is that at least what you understood?" Stahl asked Smith.

"Oh, there was no question," says Smith.