Bristol-Myers Squibb Co. is paying $150 million to settle a major alleged accounting fraud as federal regulators accused the company yesterday of manipulating its inventory of drugs to inflate earnings and meet Wall Street targets.
The pharmaceutical giant, which also recently settled a lawsuit by shareholders for $300 million, still faces a criminal investigation by the Justice Department. In its settlement of the civil case with the Securities and Exchange Commission, Bristol-Myers agreed to pay a $100 million civil fine and an additional $50 million, both of which will go into a fund for shareholders. Bristol-Myers neither admitted nor denied wrongdoing but did agree to abide by a permanent injunction against future violations.
It is one of the largest SEC penalties in recent years for alleged accounting violations against a company that continues to operate. The $150 million Bristol-Myers is paying dwarfs the $10 million fine levied on Xerox Corp. in 2002, which was the largest ever at the time, to resolve allegations of accounting fraud.
Bristol-Myers is based in Manhattan, but its largest division, the U.S. Medicines Group, is located in New Jersey. Ranked No. 92 on the Fortune 500 list, Bristol-Myers had revenue of $20.7 billion last year.
The SEC sued Bristol-Myers in federal court in Newark, N.J., alleging that the company sold excessive quantities of drugs to wholesalers and improperly booked revenue from $1.5 billion of those sales to its two biggest wholesalers.
Bristol-Myers covered the wholesalers’ carrying costs and guaranteed them a return on investment until they sold the products, the SEC said in the suit. In booking the $1.5 billion in revenue at the point of shipment, the company violated generally accepted accounting principles, the regulators said.
They also accused Bristol-Myers of using so-called “cookie-jar” reserves in a drive to meet its internal sales and earnings targets as well as Wall Street analysts’ earnings forecasts. The SEC maintains that the use of such reserves – overstating income in some quarters and understating it in others – gives investors an inaccurate picture.
“Bristol-Myers’ earnings-management scheme distorted the true performance of the company and its medicines business on a massive scale and caused significant harm to the company” and its shareholders, SEC enforcement director Stephen Cutler said in a statement. “As our investigation continues we will be focusing on, among other things, those individuals responsible for the company’s failures.”