Glaxo Subsidiary Stiefel’s Former CEO Faces Securities Fraud Charges

The Securities and Exchange Commission alleges Charles Stiefel, former chairman and CEO of family-owned Stiefel Labs, did not disclose to employee-shareholders material information on the value of the firm’s shares as it was buying back shares before being acquired by GlaxoSmithKline.

Federal officials allege Stiefel and its former CEO defrauded employees out of more than $110 million by buying back stock at undervalued prices before GlaxoSmithKline Inc. acquired the OTC skin-care product firm in 2009 for $2.9 billion.

According to the Securities and Exchange Commission, Charles Stiefel, who was chairman and CEO of family-owned Stiefel, did not disclose material information on the value of the firm’s shares to employee-shareholders.

SEC Regional Director Eric Bustillo says Stiefel and other executives used that information to realize a higher profit on the firm’s sale.

“The difference in price between what many of these employee-shareholders sold their stock at and what it ultimately became was significant,” Bustillo said in a Dec. 12 interview.

The information was “crucial for their determination as to whether to sell shares back at the time that they did.”

The alleged violations are not considered insider training, Bustillo noted.

According to the civil complaint filed the same day in U.S. District Court for the District of South Florida, Stiefel Labs informed employee-shareholders in March 2006 that the shares deposited in their retirement accounts were valued at $13,012 each. The firm bought back more than 750 shares at that price from November that year through April 2007.

The firm also bought back more than 350 shares at $14,517 each between July 2007 and June 2008, and more than 800 shares at $16,469 each between December 2008 and April 2009. During both of those periods, the firm kept from its employees that it was considering acquisition offers at higher per-share prices, SEC alleges.

Bustillo said that after Stiefel Labs and Charles Stiefel are served with the complaint, they will have an opportunity to answer the charges before the case would proceed to a trial. He declined to say whether SEC expects a settlement in this case or when a trial would begin.

“The difference in price between what many of these employee-shareholderssold their stock at and what it ultimately became was significant.” – SEC Regional Director Eric Bustillo

Glaxo’s acquisition price ultimately equaled $68,131 per share for employees in Stiefel’s retirement plan, and $64,933 per share for other shareholders, including Stiefel and his two sons – Brent Stiefel, who was chief of pharmaceutical operations, and Todd Stiefel, the chief strategy officer – as well as other executives.

The SEC alleges that employee-shareholders who sold shares back to Stiefel at prices the firm stated were current lost more than $110 million compared with the per-share price Glaxo paid for the firm.

The civil complaint holds that Charles Stiefel and the firm committed fraud by scheming to, making and continuing to make “untrue statements of material facts” in connection with the purchase or sale of securities.

In addition to a monetary penalty based on the actual value of the shares the employee-shareholders sold back to the firm, SEC asks the court to bar Charles Stiefel from acting as an officer or a director of any firm issuing shares and to order him and the firm to disgorge “ill-gotten profits or proceeds,” with interest.

“Our goal would be to use that recovery to pass it on to aggrieved investors” Bustillo said.

The SEC charges follow a lawsuit that former Stiefel Labs employees filed in July 2009 against the firm and its executives, alleging violations of the Employee Retirement Income Security Act and federal and state securities laws. According to court records for the employees’ complaint also filed in District of South Florida federal court, a trial is scheduled to begin May 7, 2012, and is expected to last two weeks.

In April 2009, GSK reached an agreement to acquire Coral Gables, Fla.-based Stiefel for $2.9 billion, about 3.5 times Stiefel’s revenues for the previous year. Glaxo closed the deal in July of that year, expecting Stiefel’s business to more than double its dermatology sales to $1.5 billion (Also see "GSK Gains Foothold In U.S. Skin Care With Stiefel Deal" - HBW Insight, 27 Apr, 2009.).

The deal added hundreds of marketed dermatology products to GSK’s portfolio, including its Revaleskin anti-aging line formulated from the coffee berry, distributed through dermatologist offices without prescription (Also see "Stiefel Uses Coffee Berry, Connetics Buy To Close In On Aesthetic Market" - HBW Insight, 15 Jan, 2007.).

GSK also picked up OTC products such as Sarna (pramoxine hydrochloride) anti-itch items, PanOxyl (benzoyl peroxide) acne scrubs and Zeasorb (miconoazole nitrate) perspiration-absorbing gels.

GSK Notes Employees’ Claim Against Stiefel

SEC identifies Stiefel as a GSK subsidiary, but does not include GSK in any allegation of securities law violations.

Glaxo spokesman Kevin Colgan said Stiefel will defend itself against the complaint. “Stiefel denies that it or Charlie Stiefel acted improperly or did anything to violate the securities laws,” Colgan, GSK’s VP for external communications, said in an email.

In its 2010 annual report, Glaxo noted the former employees’ complaint against Stiefel Labs. The court in January 2010 said the ERISA claims and the federal securities claims against the individual defendants and the firm could, but dismissed the claims for state securities violations and common law breach of fiduciary duty, according to GSK’s report.

Judge James Lawrence King in July 2011 denied the plaintiffs’ motion for class-action status but allowed to stand the claims filed jointly multiple former Stiefel Labs employees. The judge wrote that he found the plaintiffs “failed to demonstrate either that their alleged commonalities predominate over individual considerations, or that class action is superior to individual action.”

Privately held Stiefel Labs' stock did not trade on public markets, so the firm’s buy-back purchases were the only way for current and former shareholders to liquidate their shares, SEC explains. Under the firm’s retirement plan, Stiefel Labs' U.S. employees began receiving common stock after a year of employment.

From 1975 to 2008, the firm made contributions of stock and cash to the retirement accounts, but in 2008 for the first time Stiefel Labs contributed only cash. Also that year for the first time, the firm offered to buy shares back from current employees. Previously, only retired or other former employees were allowed to sell back their shares, according to the SEC complaint.

The agency says the third-party accountant Stiefel Labs hired to determine the price the firm would pay for employees’ shares used a flawed method. Moreover, from 2006 through 2008 the firm’s executives reported to the employees a share price that was 35% lower than the price determined by the accountant.

Emails between Charles Stiefel, his sons and other executives showed that they sought at multiple points to conceal from employees information about the value of the shares and the sale of the company, SEC says.

A Feb. 13, 2009 email from Todd Stiefel advised that if employees asked about a potential sale, executives “should, among other things, ‘blow it off as if it [is] not an issue or as if it is plain silly’ and if necessary, ‘flatly deny it.’”

While his father and uncle “for decades … refused to even entertain offers” to buy the firm, Charles Stiefel began seeking investors and offers to acquire Stiefel Labs after he became head of the company in 2006. However, he did not disclose this to employee-shareholders, “so they had no reason to believe that under Stiefel’s leadership the company might have been for sale,” the SEC asserts.

Further, following a Wall Street Journal March 20, 2009 report that several pharma firms were interested in acquiring Stiefel Labs at a price of $3 billion to $4 billion, Todd Stiefel sent an email to all employees stating that the company had not received any offers, according to the complaint.