Betting On A Fall

This is a story about a large company accusing another large company of deliberately trying to drive down its stock price to make money. If the allegations are true, it's like fixing a game.

The company being accused is one of the largest hedge funds in the world, called SAC. Hedge funds are exclusive investment pools for the ultra-rich. Virtually unregulated, they operate in secrecy.

Normally when most people buy a stock, they hope the price will go up; but one of the strategies hedge funds use is called "selling short," in which they bet lots of money that a company's stock price will fall.

If you have money in a retirement account or a pension fund, pay attention, because, as correspondent Lesley Stahl reports, hedge funds have become a major force in the market. When they make a move or "take a position," as they say, it can affect your bottom line.

In this case, one of the largest companies in Canada is claiming that the hedge fund SAC was trying to make a killing by killing the company.

"There's a group of people that got together and essentially attacked the company by putting out false reports," says Melnyk. "And we're just fighting back for our shareholders."

"Is your allegation that SAC made up a lot of this stuff in order to depress the stock so they could sell it short?" Stahl asked.

"That's what's alleged in the complaint," he replied.

What this could come down to is a battle of the titans. On one side is Steven Cohen, owner of the hedge fund SAC. He lives all but secluded on a sprawling Greenwich, Conn. estate. His salary last year was reportedly $500 million.

On the other side is Biovail's Eugene Melnyk, also successful and wealthy. While Steven Cohen has a hockey rink on his property, Melnyk owns an NHL hockey team. This fight between the hedge fund owner and the CEO could get brutal.

The alleged conspiracy began in Arizona at Camelback, a stock-analysis firm that publishes supposedly impartial financial reports on various companies to help investors with advice about stocks.

In the spring of 2003, the hedge fund SAC asked them for a report on Eugene Melnyk's company, Biovail. Darryl Smith, a former Camelback salesman, says that during a conference call with an SAC trader it became clear the hedge fund had an agenda.

"Are they pretty clearly saying, 'Give me something that's going to drive the stock down?' Is that at least what you understood?" Stahl asked Smith.

"Oh, there was no question," says Smith.

And Darryl Smith says the hedge fund SAC knew what they wanted the report to say.

"They practically wrote the reports themselves," he says.

"I expected our guys to start talking about what they saw in Biovail. But, no. It was just a one-way download from SAC talking about all the dirt that they dug up and they wanted to get out there. And, as I said, just the analyst furiously writing down notes," says Smith.

"So it's like taking dictation?" Stahl asked.

"Practically, yes," Smith replied.

"From the client?" Stahl asked.

"Yes," Smith answered.

"These are all negative things?" Stahl asked.

"Right, absolutely," Smith said.

Asked if what the analyst wrote down got into the report, Smith says, "No question. Because at that point, a day or two later, the report was compiled. They're, they give me the report. I review it and I see, yeah, that's everything that was talked about in the conference call."

"That's everything SAC wanted in the report?" Stahl asked.

"Right," Smith replied.

The report was replete with comments like this: "history of unusual … aggressive accounting;" "earnings overstated;" "severely negative free-cash flow."

"They were basically a shop for hire. If you pay them a certain amount of money they'll form whatever opinion you want on a stock," says Mark Rosenblum, who was another salesman with the stock analysis company Camelback.

Asked if he had ever heard of anything like that before, Rosenblum said, "No, not in my 14 years of work experience involved in the equity markets."

Camelback not only sold itself as a firm that disseminated impartial, unbiased reports, it also said that the people who wrote those reports were experienced, with sterling credentials. Two other former salesmen, Robert Ballash and Demitri Anifantis, say that was far from the truth.

"Most of 'em straight out of college. No Wall Street experience. Did not understand sectors or industries that these specific companies were in," says Anifantis.

"I'd call 'em monkeys on a typewriter, 'cause they'd just take the information and just process it through and not really analyze it," says Smith.

The lawsuit charges that in addition to influencing the content of the report, the hedge fund SAC weighed in on when it would be published.

"SAC said 'Can you just wait a few more days? We want to be able to get into this,'" says Smith.

"So they chose the timing of the release on top of the wording of the release?" Stahl asked.

"Right. Exactly," says Smith.

"What does it mean that SAC was asking you to hold the report?" Stahl asked.

"What it means is they need some time. As a big hedge fund you need several days to get your position in," Smith replied.

Smith says SAC needed more time to make its bet even larger that Biovail's stock would go down.

"So they were just waiting to get the optimum time to do this selling-short transaction?" Stahl asked.

"Right," Smith answered. "Because these are big, big hedge funds. And they have to make some big trades. And they can't do them all in one trade without the market seeing that. So, they have to move into the stocks over a period of a few days."

This was June 2003, a time when most other analysts were writing favorably about Biovail. The company was about to introduce a new time-release version of the anti-depressant Wellbutrin into the U.S. market.

But Camelback's so-called "impartial" report was giving the company an "F" – usually a sign to investors to dump the stock, now. According to the lawsuit, that report was sent out to all of Camelback's subscribers – banks, big mutual funds - but without telling them that SAC had ordered it.

"Did the Biovail report go to anybody outside of your client circle?" Stahl asked Anifantis.

"Yes, media. A lot of media outlets had access to the service as well," he replied.

"So, in other words, Camelback was trying to generate this publicity… that further helped SAC," Stahl asked.

"Sure, sure," Smith said.

It's difficult to prove a direct cause and effect between the dissemination of a research report like this one and a stock going up or down. In fact, Biovail's stock didn't begin to sink for 20 days. Darryl Smith, watching the market, called an SAC trader.

"Thank goodness, you know, it had gone down since we released the report," Smith said.

"Thank goodness!?" Stahl asked.

"Yeah. Because then I, you know, wanted him to be happy. And I said, 'Hey Tim, how are you doing in that stock?' He says, 'Oh, we're making some money. It's a good start but we want it to go down further,'" Smith said.

So there were more reports and Biovail's stock continued to tank, falling 50 percent in six months, but in that time Biovail issued two disappointing earnings statements. And yet CEO Melnyk insists it was the Camelback reports that triggered the sell off.

"The damage that was suffered by the company we—we can attribute directly to the reports that came out," says Melnyk.

"Several big-name banks began to advise their clients to get out of Biovail, not people who necessarily got these reports from Camelback," Stahl said.

"When you see a tidal wave coming, a tidal wave of negative publicity, a tidal wave of misinformation and word gets out that the gorilla is about to stomp on you, a lot of people run for the hills," Melnyk said.

60 Minutes has learned that on top of Biovail's civil suit, the Securities and Exchange Commission is investigating the case, looking into possible stock manipulation and conflict of interest. But proving outright securities fraud in this case won't be easy. Remember, hedge funds are barely regulated and operate under a veil of secrecy.

And, according to Richard Blumenthal, the Attorney General of Connecticut – home of SAC - the issue of what's actually illegal here is not so clear.

"There is no prohibition against anyone calling an analyst and providing information and that kind of free flow of information often can do the market good," says Blumenthal.

"I'm curious to know whether it matters that the information was true or false for law enforcement?" Stahl asked the attorney general.

"It matters a lot whether the information was true or false," Blumenthal said.

"So sharing in and of itself is okay, but if they're feeding false information—" Stahl said.

"With the knowledge it's false—" Blumenthal said.

"With the knowledge that it's false—"Stahl replied.

"For the purpose of driving down the stock and with a position in the stock," Blumenthal said.

"All of that together is a crime?" Stahl asked.

"Within— well, it may not— it depends on who knows what, what the criminal intent may be, if it's there," Blumenthal answered.

"This is not going to be easy to prove is what you're saying," Stahl said.

"None of these securities violations is a slam dunk, ever, under the best of circumstances," he replied.

In its defense, Camelback had already written a negative report on Biovail that pre-dates this alleged conspiracy. Camelback told 60 Minutes: everything in our reports was true; we and no one else wrote those reports; "nothing we did was illegal."

SAC says that in 2003 Biovail's stock was overvalued.

"What do you say to people who say that Biovail was overvalued and that the hedge funds actually performed a service here in pointing this out?" Stahl asked Melnyk.

"I don't think there was any service that was performed here—I can tell you that. I think—," he said.

Asked if Biovail was overvalued, Melnyk said, "There is virtually no analyst out there that thought that the stock was overvalued."

Well, no one considered it a blue chip stock; some analysts thought it was risky; and Melnyk has been accused of just trying to silence his critics. Several Wall Street investors call CEOs like Melnyk "cry babies" for suing when their stock goes down. And it is true that this is not Melnyk's first lawsuit. Ten years ago, he sued another hedge fund, accusing it of spreading rumors about his stock in order to sell it short.

"The point is that you sue," Stahl said.

"Oh," Melnyk said.

"This is what you do," Stahl said.

"No, that's just not right," Melnyk replied. "We don't sue just for the purpose of suing somebody. This is something that was carefully thought through, was very well researched, was extremely well lawyered. I can't wait for our day in court."

The Camelback insiders 60 Minutes spoke to are all cooperating with Biovail in its lawsuit. None of them still works for the company.

"Each of us was released by the company," Anifantis said.

Asked if he means fired, Anifantis said yes.

Camelback says their former employees are quote: "lying" and "disgruntled," that Demitri and Bob were fired because of unethical conduct; Darryl for poor performance; Mark was laid off; but they say they were let go after they complained to their bosses about the company's practices.

Connecticut Attorney General Richard Blumenthal has begun an investigation not of this case, but of hedge funds in general. He thinks it's time to start regulating that industry, to start trimming the hedges.

"Joe Mainstreet can be impacted by hedge funds as never before. They control more money, they have more power. They're the elephant in the room that is unacknowledged a lot of the time," says Blumenthal. "But they can hold huge market sway and that's the reason why we need to know more about 'em, and I'm investigating so that hopefully there is more disclosure and transparency."

The hedge fund SAC denies all the charges in Biovail's lawsuit and says that the decline in the company's stock was due to earnings shortfalls and investigations by authorities, including the Securities and Exchange Commission, "not any conspiracy."

It's worth noting that Camelback, which is now called Gradient, has been sued by another company with charges that parallel the Biovail case.
Produced By Janet Klein