Month: January 2019

Securities Exchange Commission Brings 10b 5 Enforcement Action

The SEC filed securities fraud charges based on 10B-5 against Stiefel Laboratories Inc. ("Stiefel"), a manufacturer of dermatology products, and Charles Stiefel, the former chairman and CEO, alleging they defrauded stockholders out of over $110 million by repurchasing shares of company stock from current and former employees at undervalued prices and then selling the company for a 300% premium.

According to the SEC complaint, from November 2006 through April 2009, Stiefel repurchased stock through the company's employee stock bonus plan. A third party valuation firm determined the share price. Stiefel allegedly failed to let the valuation firm know material, nonpublic information that should have been used in valuing the stock, including that five private equity firms offered to purchase the company's preferred shares at valuations ranging from 50% to 200% higher than the price determined by the valuation firm as the fair market value. The failure to disclose, according to the complaint, resulted in an artificially low repurchase price. This led to Stiefel repurchasing shares at a discount. The repurchased shares were either cancelled or distributed to senior officers and employees, including the former CEO, and his two sons.

In July 2009, GlaxoSmithKline PLC ("Glaxo") bought Stiefel's outstanding shares for $2.9 billion. This was a 300% premium over the price per share paid by the corporation in connection with its share repurchase. Glaxo agreed to assume $400 million of the company's debt and pay the company's remaining shareholders another $300 million upon achieving certain performance milestones.

The complaint charged the company with violating, and Charles Stiefel with aiding and abetting the company's violations of, Section 10(b) of the Securities and Exchange Act of 1934 (the "34 Act") and its Rule 10b-5. Section 10(b) and Rule 10b-5 do not allow any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. It does not matter if the security is in a public or private offering. Potential penalties for violations include permanent injunctive relief, and being barred from serving as an officer.

You should consult with an experienced consumer fraud attorney if you become a victim of financial or other consumer fraud.