Legal News

Court Rules Against DOJ in Case of Former Bristol Exec

By Amir Efrati

We have a small dose of white-collar news from Jersey to pass along this afternoon.

Earlier today a federal appeals court affirmed a lower-court decision that we told you about a mere two years ago.

The Third Circuit Court of Appeals today rejected the Justice Department’s attempt to reinstate part of its prosecution of Frederick Schiff, former chief financial officer at Bristol-Myers Squibb, the large pharmaceuticals company.

The Third Circuit, in a unanimous decision, wrote in a 59-page opinion that prosecutors overreached in part of their case. Prosecutors from the New Jersey U.S. attorney’s office argued that Schiff had a duty to disclose an inventory-related issue in regulatory filings, such as the 10-K or 10-Q, because he had “a general fiduciary obligation of ‘high corporate executives’ to the company's shareholders” under Rule 10b-5 of the Securities and Exchange Act.

The Third Circuit stated: “This argument reaches too far.”

In 2005 Schiff was indicted with another former executive on securities-fraud charges for their role in the company's use of incentives to get wholesalers to buy more products than needed. The practice, known as "channel stuffing," inflated sales by $2.5 billion and earnings by $900 million from 1999 to 2001, the government alleged.

In 2008 the trial judge, Faith Hochberg, whittled down the case against Schiff by preventing prosecutors from introducing certain evidence and arguments because their legal theories had continued to "morph" until the eve of the trial.

The judge ruled that prosecutors couldn't tell jurors about Bristol's stock drop on April 3, 2002, the day the company made a disclosure about the inventory issue. Hochberg also ruled that prosecutors couldn’t make the argument that Schiff made material "omissions" in filings with the Securities and Exchange Commission, such as the 10-K.

As it stands now, the whittled-down case against Schiff, repped by Skadden’s David Zornow, largely rests on alleged misrepresentations he made nine years ago during analyst calls, which allegedly misled investors about the inventory issue.

A spokeswoman for the U.S. attorney’s office, now run by Paul Fishman, said it was reviewing the opinion and considering its options.

Full post as published by Law Blog - WSJ.com on April 07, 2010 (boomark / email).