SEC Charges Glaxo Unit & Former CEO With Fraud

SEC Charges Glaxo Unit & Former CEO With Fraud

December 14th, 2011 // 1:09 pm @

You never know what can happen after you buy a company. But the US Securities and Exchange Commission has charged Stiefel Laboratories, which GlaxoSmithKline bought two years ago, with using low valuations for stock buybacks between November 2006 and April 2009, according to a complaint filed today in federal court. Employees allegedly lost more than $110 million based on misleading valuations.

The family-owned business allegedly omitted key info that would have alerted employees that their stock was actually worth much more than they knew. Instead, only Charles Stiefel, who was the ceo at the time, and some of his family members and senior execs were aware. At the time, Stiefel Labs was the world’s largest private manufacturer of dermatology products, according to the SEC.

A few details: Stiefel Labs bought more than 750 shares of its stock from shareholders between November 2006 and April 2007 at a price of $13,012 per share. Charles Stiefel allegedly knew that five private equity firms had submitted offers to buy preferred stock in November 2006 based on valuations that were 50 percent to 200 percent higher than a valuation later used.

There’s more. Between July 2007 and June 2008, Stiefel Labs bought another 350 shares from shareholders under the employee stock plan at $14,517 per share, and more than 1,050 shares from shareholders outside the plan at even lower stock prices. At the time of these buybacks, Charles Stiefel knew not only about the November 2006 private equity valuations, but that a private equity firm had bought preferred stock based on an equity valuation more than 300 percent higher than that used for stock buybacks.

The SEC’s complaint further alleges that between Dec. 3, 2008 and April 1, 2009, Stiefel Labs purchased more than 800 shares of its stock from shareholders at $16,469 a share even though Charles Stiefel knew that equity valuation was low and misleading, in part because he was negotiating the sale of the company to Glaxo.

Meanwhile, as late as March 16, 2009, Charles Stiefel ordered that ongoing negotiations not be disclosed to employees, and the SEC alleges he misled shareholders to believe the company would remain family-owned. On April 20, 2009, Stiefel Labs announced a sale to Glaxo for a value that amounted to more than $68,000 per share. This price was more than 300 percent higher than the share price that Stiefel Labs had been paying to buy back shares from its shareholders.

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