Ex-Bristol-Myers's Executives Prosecution in Fraud Case Deferred in Deal

U.S. prosecutors agreed to drop five-year-old fraud charges against former Bristol-Myers Squibb Co. executives Frederick S. Schiff and Richard Lane, who must pay money to a settlement fund under a court-approved deal.

Schiff, 62, a former finance chief, and Lane, 59, a former director of worldwide medicines, were first charged in 2005 with fraud and conspiracy. Prosecutors accused them of failing to tell investors in 2000 and 2001 that Bristol-Myers arranged tens of millions of dollars in incentives to spur wholesalers to buy more drugs than needed, a practice known as channel stuffing.

Under deferred-prosecution agreements approved today in federal court in Newark, New Jersey, U.S. Attorney Paul Fishman will drop charges in one year as long as Schiff pays $225,000, Lane pays $175,000, and both abide by their terms of pre-trial release. Neither can serve as a chief executive officer or chief financial officer of a publicly traded company for two years.

“This misguided prosecution should have never happened in the first place,” said Schiff attorney, David M. Zornow of Skadden, Arps, Slate, Meagher & Flom LLP in New York. “It has been a nightmare, and no one can give him back those years but he is extremely gratified today that he has been vindicated this way.”

Lane’s attorneys, Richard Strassberg and Robert Braceras of Goodwin Proctor LLP, called the agreement a “tremendous vindication” for their client.

“It vividly demonstrates what we have always maintained -- that at all times Mr. Lane acted properly and in the best interests of Bristol-Myers Squibb and its shareholders,” the attorneys said in a statement.

Pre-Trial Rulings

Pre-trial rulings by U.S. District Judge Faith Hochberg narrowed the securities fraud case and meant prosecutors couldn’t argue that Schiff and Lane were required to correct statements made by others to investors. She also barred prosecutors from using the phrase “channel stuffing” at the trial.

Hochberg separated the cases and set Schiff’s trial before Lane’s. Her 2008 ruling narrowing the case was upheld in April by the U.S. Court of Appeals for the Third Circuit.

‘Musical Chairs’

“Throughout the pretrial proceedings, and even in this appeal, the government has engaged in a game of musical chairs with their pursuit of changing legal theories,” according to the 59-page appeals court opinion.

The appellate panel agreed with Hochberg that Schiff didn’t have a fiduciary duty to correct the misstatements of other corporate officers.

“Such a generalized corporate fiduciary duty has few logical boundaries,” the judges wrote. “What would the limiting principle be if we imposed this duty on corporations and its employees?”

The panel also said prosecutors hadn’t laid the proper legal foundation for an expert to testify about the New York- based company’s plunge in market value of $20 billion in April 2002. Hochberg put Schiff’s trial on hold in 2008 while prosecutors appealed her ruling.

“After the Third Circuit opinion affirming the district court’s limitations on the scope of the case and the evidence we could introduce, we determined that this resolution was in the public interest,” Fishman said today in an interview.

Fishman, who took office in October, inherited the case from former U.S. Attorney Christopher Christie, who is now New Jersey’s governor.

‘Great Courage’

Strassberg said Fishman displayed “great courage to re- examine an existing case and do what’s right, even if it may not be the most popular thing.”

Shares of Bristol-Myers fell after the drugmaker disclosed on April 1 and April 3, 2002, that customer inventories were bloated. Hochberg had said prosecutors were unable to show that the stock drop was tied to Schiff’s conduct.

Schiff left the company in 2002. Three years later, he and Lane were charged with fraud and conspiracy.

Bristol-Myers paid $300 million in 2005 to avoid prosecution for channel stuffing, part of the $839 million it spent to resolve investor lawsuits and probes by U.S. prosecutors and regulators. In 2003, Bristol-Myers erased $2.5 billion in revenue from 1999 to 2001 related to the practice.

The money that Schiff and Lane will pay will go to the “Department of Justice Bristol-Myers-Squibb Settlement Fund or such other settlement fund as the United States Attorney directs,” according to their deferred-prosecution agreements.

The case is U.S. v. Schiff, 06-cr-406, U.S. District Court, District of New Jersey (Newark).

To contact the reporter responsible for this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

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