Pharma

GSK subsidiary Stiefel Labs charged in $110M stock scheme

The U.S. Securities and Exchange Commission has charged GlaxoSmithKline (NYSE:GSK) subsidiary Stiefel Laboratories with defrauding […]

The U.S. Securities and Exchange Commission has charged GlaxoSmithKline (NYSE:GSK) subsidiary Stiefel Laboratories with defrauding its shareholders of more than $110 million in an alleged stock scheme that started before the firm’s 2009 $2.9 billion acquisition by GSK.

The complaint, filed today in U.S. District Court for the Southern District of Florida, claims that family owned Stiefels used low and outdated valuations to buy back stock from its employees and other shareholders between November 2006 and April 2009. The SEC claims that when the sale of the Coral Gables, Florida company closed that summer, then Chairman and CEO Charles Stiefel and other family members cashed out at the higher valuation.

“Private companies and their officers must understand that they are not immune from the federal securities laws, which protect all shareholders regardless of whether they bought stock in the open market or earned shares through a company’s stock plan,” Eric Bustillo, director of the SEC’s Miami Regional Office said in a statement.

In a response to the complaint, Stiefel Labs, through GSK, issued a statement:  “Stiefel denies that it or Charlie Stiefel acted improperly or did anything to violate the securities laws.  Stiefel intends to vigorously defend itself against the SEC’s complaint.” GSK vice president of external relations, Kevin Colgan, notes that GSK had previously disclosed the allegations in the company’s annual report. He added that there is no suggestion that GSK acted improperly in the time period of the allegations outlined in the SEC complaint.

Stiefel Labs’ headquarters is now in North Carolina, in proximity to GSK’s U.S. headquarters in Research Triangle Park. Stiefel Labs was founded in 1847 and grew to become the world’s largest private manufacturer of dermatology products before its acquisition by GSK. The company began offering employees Stiefel stock in 1975 under a defined contribution plan. Charles Stiefel, as trustee of the plan, was responsible for determining the fair market value of the stock, which in 2006 was $13,012 per share. But that year, five private equity firms made offers to buy $200 million of preferred stock in the company based on equity valuations between 50 percent and 200 percent higher than the $13,012 per share price. The SEC notes that Stiefel Labs did not proceed with a private equity deal “in part because it did not believe the investment firms were assigning a high enough valuation to the company.”

In 2007, Stiefel again sought private equity investment and ultimately reached a deal with Blackstone Healthcare Partners, whose $500 million investment represented a 19 percent stake in the company based on a valuation of the company at $2.6 billion. According to a third-party accountant, Stiefel Labs was valued  at $14,517 per share as of March 31, 2007.

The SEC claims that between July 2007 and June 2008, Stiefel Labs purchased more than 350 additional shares at $14,517 per share and also bought more than 1,000 shares from shareholders outside the plan at even lower prices. But according to the complaint, Charles Stiefel knew about the higher valuations from private equity, including the Blackstone valuation that was more than 300 percent higher than the price the company used for stock buybacks, yet did not disclose any of the information to the accountant or to shareholders.

Between Dec. 3, 2008 and April 1, 2009, Stiefel Labs bought back more stock at $16,469 a share. The SEC said that Stiefel knew that that valuation was low because at the time, he was negotiating a sale of the company. Meanwhile, Charles Stiefel ordered that sale negotiations not be disclosed to employees and the SEC says that “he misled shareholders to believe the company would remain family owned.”

Stock buybacks had previously been limited to shareholders who retired, were terminated or otherwise left the company. But in November 2008, the company announced it would buy back stock from current Stiefel Lab employees, a change the company claimed would give shareholders more flexibility to manage their retirement investments.

“In reality, this change allowed the company to acquire more stock at artificially low prices,” the SEC complaint said. “The remaining shareholders, such as Stiefel and his family, also stood to make even more money when the company was sold.”

When GSK’s acquisition of Stiefel Labs was announced on April 20, 2009, the sale price valued the company at $68,000 per share — more than 300 percent higher than the price the company paid in stock buybacks.

The SEC is seeking permanent injunctive relief, financial penalties and disgorgement of ill-gotten gains.

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