May 8 (Bloomberg) -- An Ontario Securities Commission panel rejected a settlement with Biovail Inc. founder and chairman Eugene Melnyk over claims he failed to report trading in company shares and didn't disclose that some stock was held offshore.

The three-member panel didn't give a reason for rejecting the agreement, Wendy Dey, a spokeswoman for the commission, said today. The panel held a four-hour, closed-door hearing in Toronto to consider the settlement, which was announced May 4.

``There will be a contested hearing June 4,'' Dey said. At that time commission staff will present its case against Melnyk to the panel.

It's the first time in 3 1/2 years that an OSC panel has rejected a proposed agreement between the commission's staff and a person or company accused of breaking securities laws, according to a search of the regulatory agency's Web site. An OSC panel rejected a settlement Oct. 1, 2003, with Marlene Berry, who was accused of being involved in the illegal distribution of securities.

Melnyk, 47, who also owns the National Hockey League's Ottawa Senators, quit as chief executive officer of Mississauga, Ontario-based Biovail in October 2004, without giving a reason. The company makes the antidepressant Wellbutrin XL under an agreement with GlaxoSmithKline Plc.

Melnyk refused to speak with reporters. His spokeswoman said a statement would be issued later today.

Conference Canceled

Melnyk's lawyer, Kent Thomson, had planned to hold a news conference after the hearing and issue a statement on Melnyk's behalf. The news conference was canceled when the panel issued its decision.

The three-member OSC panel, headed by Vice Chairman James Turner, heard about two hours of arguments from Melnyk's lawyers and commission staff before breaking for deliberations. Members of the media and the public were told to leave the room after Thomson requested that the hearing be private. After two hours the panel issued its decision.

OSC rules allow for the settlement agreement and transcripts of the hearings to remain sealed if commissioners reject a proposal.

At issue in the OSC trading investigation were four trusts Melnyk created in 1996, whose beneficiaries include his wife, children and friends. The trusts were incorporated in the Cayman Islands and the trustees were located there, the OSC said.

4 Million Shares

In September 1996, more than 4 million Biovail shares, representing about 19 percent of outstanding stock, were transferred to the trusts, the OSC said.

During 2002, 2003 and 2004, millions of Biovail shares, worth hundreds of millions of dollars, were bought and sold from the trust accounts, the OSC said. These included trades that occurred during company-imposed blackout periods when senior management had information that wasn't available to the public, the OSC said, listing 18 examples.

``I can't think of another CEO who trades his own stock like this,'' Jerry Treppel, who runs Wheaten Capital Management LLC in New Jersey, told reporters. Treppel, a former Bank of America Corp. analyst, was fired in 2002 after he cut his rating on Biovail to ``sell'' and the company complained. He sued Biovail and Melnyk in 2003, saying he was defamed.

``He's a gambler,'' Treppel said of Melnyk.

Melnyk said he wasn't a beneficiary of the trusts during the period in question and didn't know about the trades until months after they occurred.

Melnyk borrowed $88.3 million from the trusts between April 1998 and December 2003, and still owed $100 million as of Dec. 7, 2005, the OSC said. Melnyk exercised or shared control of the trusts, the OSC said.

Melnyk faced a fine of as much as C$1 million ($903,000) and could have been banned from trading Biovail shares until the disclosure requirements were remedied.

To contact the reporter on this story: Joe Schneider in Toronto at schneider5@bloomberg.net.

Last Updated: May 8, 2007 16:58 EDT