Feb. 20 (Bloomberg) -- A federal judge threw out a Biovail Corp. shareholder lawsuit against a group of hedge funds including SAC Capital Advisors LP in which investors in the Canadian drugmaker accused them of driving down its share price.

U.S. District Judge Stanley Chesler in Newark, New Jersey, yesterday dismissed the complaint in its entirety, saying the plaintiffs’ lawyers failed to investigate the allegations and violated a New York judge’s sealing order by including certain information in its filings. Chesler rejected the investors’ argument that the information was drawn from the public domain.

“This argument insults this court and, moreover, mocks the judicial system,” the judge wrote in the 25-page opinion. The lawyers’ “conduct is so egregious, and the futility of imposing alternate sanctions so clear, that dismissal is the only appropriate sanction.”

The Biovail shareholders had accused SAC of helping “ghostwrite” negative and false analyst reports in 2003 and 2004 to lower the share price after the Stamford, Connecticut- based hedge fund manager took short positions in the stock. Short sellers borrow shares in anticipation of making a profit by paying for them after the price drops.

“We are gratified that the court has seen through this charade,” SAC spokesman Jonathan Gasthalter said in a statement. “These claims were a cynical attempt to manipulate the legal process in order to divert attention from the company’s own improper conduct.”

Truck Crash

Biovail shares fell 68 percent between June 2003 and December 2003 as earnings slumped. A truck carrying a shipment of its Wellbutrin XL antidepressant crashed and a shipment of Cardizem was delivered late.

A shareholder suit, first filed in 2003, alleged Biovail and some of its officers and directors lied to investors about the effectiveness of Cardizem, which is used to treat hypertension.

Biovail sued Banc Of America Securities Inc., David Maris, a former analyst at the bank, and other funds in February 2006, accusing them of illegally conspiring to drive the stock down. Biovail settled with Banc of America and Maris in 2007. Banc of America Securities is a unit of Charlotte, North Carolina-based Bank of America Corp.

“I always knew these claims were baseless and I stand behind my research,” Maris, who now consults for “a couple” of hedge funds, said today in a phone interview.

Shareholder Guy Del Giudice sued SAC in March of 2006, on behalf of others who sold Biovail stock, with a similar complaint to that of Biovail.

Confidential Documents

In January 2007, U.S. District Judge Richard Owen ruled Biovail used Banc of America’s confidential documents as the basis for the New Jersey lawsuit against SAC. Owen had ordered those documents sealed and prohibited the use of the information in other cases.

William Federman and Evan Smith, lawyers for the plaintiffs, basically copied the Biovail lawsuit in the Del Giudice complaint, including information that had been ordered sealed by Owen, Chesler said.

The Biovail and Del Giudice suits were “all part of a choreographed strategy by Biovail and its attorneys” as a counterattack to the shareholder suit against Biovail, Chesler wrote.

Biovail spokesman Nelson Isabel didn’t immediately respond to a request for comment.

SEC Settlement

Biovail agreed to pay $138 million in 2007 to settle the investor lawsuit. In March 2008 the company agreed to pay $10 million to settle Securities and Exchange Commission charges that it lied to investors to boost its share price in 2003 and 2004. In January the drugmaker agreed to pay $5.4 million to settle the same charges with the Ontario Securities Commission.

Biovail also pleaded guilty to criminal charges of paying doctors in 2002 and 2003 to buy Cardizem. It was fined $24.6 million.

Federman, of Federman & Sherwood in Oklahoma City, said in a telephone interview today Chesler ignored hundreds of precedents which allow the use of publicly available information in the drafting of a complaint. He said the lawyers used the Biovail suit as the basis for their complaint and didn’t know it included information that had been sealed by Owen.

“He’s going more on a criminal law standard, which simply doesn’t exist in civil law,” Federman said of Chesler’s opinion. “But it’s simply an opinion of one judge and doesn’t have much precedential value.”

Federman said he hasn’t decided whether he will appeal. The plaintiffs have 30 days to make a decision.

Smith, in an e-mail, referred inquiries to the lead lawyer in the case, saying he was liaison counsel.

Biovail shares fell 58 cents, or 4.2 percent, to C$13.31 at 4:10 p.m. in trading on the Toronto Stock Exchange.

The case is Guy Del Giudice v. SAC Capital Management LLC, 06-01413, U.S. District Court for the District of New Jersey (Newark).

To contact the reporter on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net.

Last Updated: February 20, 2009 17:17 EST