NEW YORK (HedgeWorld.com)–A federal judge sentenced the former president of Impath Inc., New York, a provider of cancer-related laboratory services, to more than three years in prison May 30 [Tuesday] on charges of conspiracy, securities fraud, and the filing of false statements with the U.S. Securities and Exchange Commission–a sentence that may have the incidental effect of enlivening debate about a civil lawsuit over the independence (or otherwise) of the research reports of Gradient Analytics Inc., of Scottsdale, Ariz.
The sentence may be of more than passing interest to short sellers and their critics, because Impath was cited in a pending lawsuit against SAC Capital Management LLC and others in February, the complaint that was featured in a "60 Minutes" segment and a lengthy New York Times report in late March.
In that complaint, Biovail Corp., Mississauga, Ont.-based company that develops and manufactures controlled-release pharmaceuticals, said that it was one of a number of victims of "hatchet jobs"–i.e., highly negative reports prepared within SAC or other short-selling hedge funds in order to drive down the price of target companies' stock, and then laundered through a purportedly independent research firm, Gradient, formerly known as Camelback Research Alliance Inc.
Paragraph 61 of the Biovail complaint cites Impath as another target of "custom hatchet jobs for numerous other hedge funds."
The former president and chief operating officer of Impath, Richard P. Adelson, took part–along with the former chief executive Anuradha D. Saad and the former chief financial officer, David J. Cammarata–in a conspiracy to inflate the reported results of Impath. As a result of this conspiracy, in the words of the civil complaint of the Securities and Exchange Commission, which parallels the criminal charges, "Impath falsely reported multi-million dollar profits when it actually suffered huge losses."
On March 14, 2003, a report by Gradient gave a grade of "F" to the quality of Impath's reported earnings. The report said, for example, that the quality of accounts receivable was extremely low "as evidenced by a significant increase in contractual allowances, an inability to accurately forecast the level of bad debts, and two highly material bad debt charges taken in the past two years." It also warned that a "high level of excluded expenses indicates that 'street earnings' significantly overstates the firm's underlying profitability" and it complained that both the audit committee and the board of directors had limited independence.
Impath filed for bankruptcy in September 2003. By that time, both the SEC action and a criminal investigation were under way. Gradient might well use this sequence of events to argue that in general its reports didn't harm companies–its reports warned investors about companies that were in the process of harming themselves.
Mike Sitrick, a spokesman for Biovail, said Thursday [June 1] that he doesn't believe the Impath sentencing affects Biovail's case against Gradient. "The lawsuit does not assert that every Gradient report on every company contained only false information," he said.
