Dermatology firm skinned its employees in stock buyback: SEC

A subsidiary of GlaxoSmithKline PLC and its former top executive defrauded shareholders out of $110 million over two years by buying back shares of the dermatology firm's private stock from employees and former employees at artificially low prices, regulators said today. In late 2008 and early 2009, Stiefel Laboratories Inc. purchased 800 shares for about $16,469 without telling those shareholders that it was negotiating to sell the company for 300% more than that, the Securities and Exchange Commission alleged in a complaint. Stiefel Labs announced in April 2009 that GlaxoSmithKline was buying the firm for $68,000 a share. A preliminary deal had been struck with the pharmaceutical giant in January 2009, but chief executive Charles Stiefel would not allow employees to be told. During this period, he led shareholders to believe the firm would remain company-owned, according to the SEC. Even before then, the firm bought shares at prices it knew were a substantial discount, the SEC said. Artificially low buybacks began in November 2006, the commission alleges. Stiefel Labs hired a firm to value shares it purchased but failed to disclose to that consultancy information which was crucial for an accurate valuation, the regulator said. Namely, Stiefel Labs didn't disclose that it was looking to sell the firm to a large pharmaceutical company. The SEC also claims that company management failed to reveal it had offers for the firm, that it had sold 19% of the firm in a deal that based the company's equity at $2.6 billion, or that five investment firms had offered to buy stock in November 2006. Those firms' bids placed a value on Stiefel that was 50 to 200 times higher than the buyback price, according to the SEC. Stiefel Labs gave a portion of the stock it bought from shareholders to its senior officers and employees, including to Mr. Stiefel and his two sons, and retired or cancelled the rest of the stock it bought back, the SEC said. “Private companies and their officers must understand that they are not immune from the federal securities laws, which protect all shareholders regardless of whether they bought stock in the open market or earned shares through a company's stock plan,” said Eric Bustillo, the director of the SEC's regional office in Miami. The firm denies it did anything wrong and plans to fight the allegations, which were filed in U.S. District Court in Fort Lauderdale, Fla., today. “Stiefel denies that it or Charlie Stiefel acted improperly or did anything to violate the securities laws,” said GlaxoSmithKline spokesman Kevin Colgan. “Stiefel intends to vigorously defend itself against the SEC's complaint.” Attorneys for Mr. Stiefel, who the SEC said now is acting as a senior adviser for a private-equity firm, did not return a call seeking comment. Stiefel Labs, which was the world's largest maker of dermatology products with $1 billion in revenues and 4,000 employees before being purchased, was founded by the Stiefel family in 1847.