Betting On A Fall

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

(CBS) 
This was June 2003, a time when most other analysts were writing favorably about Biovail. The company was about to introduce a new time-release version of the anti-depressant Wellbutrin into the U.S. market.

But Camelback's so-called "impartial" report was giving the company an "F" – usually a sign to investors to dump the stock, now. According to the lawsuit, that report was sent out to all of Camelback’s subscribers – banks, big mutual funds - but without telling them that SAC had ordered it.

"Did the Biovail report go to anybody outside of your client circle?" Stahl asked Anifantis.

"Yes, media. A lot of media outlets had access to the service as well," he replied.

"So, in other words, Camelback was trying to generate this publicity… that further helped SAC," Stahl asked.

"Sure, sure," Smith said.

It’s difficult to prove a direct cause and effect between the dissemination of a research report like this one and a stock going up or down. In fact, Biovail’s stock didn’t begin to sink for 20 days. Darryl Smith, watching the market, called an SAC trader.

"Thank goodness, you know, it had gone down since we released the report," Smith said.

"Thank goodness!?" Stahl asked.

"Yeah. Because then I, you know, wanted him to be happy. And I said, 'Hey Tim, how are you doing in that stock?' He says, 'Oh, we’re making some money. It’s a good start but we want it to go down further,'" Smith said.

So there were more reports and Biovail’s stock continued to tank, falling 50 percent in six months, but in that time Biovail issued two disappointing earnings statements. And yet CEO Melnyk insists it was the Camelback reports that triggered the sell off.

"The damage that was suffered by the company we—we can attribute directly to the reports that came out," says Melnyk.

"Several big-name banks began to advise their clients to get out of Biovail, not people who necessarily got these reports from Camelback," Stahl said.

"When you see a tidal wave coming, a tidal wave of negative publicity, a tidal wave of misinformation and word gets out that the gorilla is about to stomp on you, a lot of people run for the hills," Melnyk said.

60 Minutes has learned that on top of Biovail’s civil suit, the Securities and Exchange Commission is investigating the case, looking into possible stock manipulation and conflict of interest. But proving outright securities fraud in this case won't be easy. Remember, hedge funds are barely regulated and operate under a veil of secrecy.

And, according to Richard Blumenthal, the Attorney General of Connecticut – home of SAC - the issue of what’s actually illegal here is not so clear.

"There is no prohibition against anyone calling an analyst and providing information and that kind of free flow of information often can do the market good," says Blumenthal.

"I’m curious to know whether it matters that the information was true or false for law enforcement?" Stahl asked the attorney general.

"It matters a lot whether the information was true or false," Blumenthal said.

"So sharing in and of itself is okay, but if they’re feeding false information—" Stahl said.

"With the knowledge it’s false—" Blumenthal said.

"With the knowledge that it’s false—"Stahl replied.

"For the purpose of driving down the stock and with a position in the stock," Blumenthal said.

"All of that together is a crime?" Stahl asked.

"Within— well, it may not— it depends on who knows what, what the criminal intent may be, if it’s there," Blumenthal answered.

"This is not going to be easy to prove is what you’re saying," Stahl said.

"None of these securities violations is a slam dunk, ever, under the best of circumstances," he replied.