SEC Sues Private Firm and Its CEO for Fraudulent Stock Repurchases

The SEC brought a fraud action against a company and its Chairman and President for defrauding company shareholders out of more than $110 million in the sale of their shares to the company by paying prices which were as much as 300% under value. The suit charges that the purchases were made at the time the company and its then Chairman knew facts which significantly altered the values paid by the shareholders without disclosing those facts. The company was privately owned Stiefel Laboratories Inc., and the Chairman was one of its long time principles, Charles Stiefel. The pharmaceutical company has since been acquired by GlaxoSmithKline plc. The case is in litigation. SEC v. Stiefel Laboratories Inc., Case No 1:11-cv-24438 (S.D. Fla. Filed Dec. 12, 2011).

Stiefel Labs was a closely held private manufacturer of dermatology products. Company employees acquired shares of its stock through a defined contribution pension plan which was controlled by a trustee selected by the company board of directors. Defendant Charles Stiefel served as trustee of the plan from 2001 through late 2008, during which time most of the stock purchases at issue here were made. The trustee had a fiduciary duty to plan participants. The trustee also had a duty to employees to determine in good faith the market value of the shareholder's common stock. The Summary Plan Description signed by Mr. Stefel and given to employees informed participants that they could sell their stock to the company at "current fair market value." Fair value of the shares was determined by a third party retained by the defendants.

Beginning in 2006 and continuing through 2009 Stiefel repurchased shares of stock from its shareholders in four instances. During the period the company knew key information regarding the valuation of those shares which was not disclosed to the retained consultant or the selling shareholders:

  • From November 2006 through April 2007 the company purchased 750 shares at $13,012. Those shareholders were not told that in November 2006 five private equity firms had submitted offers to buy preferred stock based on equity valuations of the company at prices which ranged from 50% to 200% higher than the valuations used in the buybacks. The shareholders were also not told that the valuations of company stock made from 2006 through 2008 had been discounted by 35%.
  • From late July 2007 through June 2008 350 shares were repurchased under the plan at $14,517 per share. An additional 1,050 shares were acquired outside the plan at lower prices. In addition to the interest of the five firms, Mr. Stiefel knew that a prominent private equity firm had invested $500 million in the company in late August based on an equity valuation that was 300% higher than the price paid shareholders.
  • From December 2008 through April 2009 the firm repurchased another 800 shares at $16,469 per share. Shareholder had always been informed that the company would remain private. Yet during this period the company was seeking bids and negotiating its sale. On April 20, 2009 Stiefel announced that Glaxo, which first expressed interest in January 2009, would acquire the company at $68,000 per share. During the discussions the company increased its budget to repurchase stock despite undergoing financial distress.

The complaint alleges violations of Exchange Act Section 10(b).

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