By Dan Primack
December 13, 2011

SEC charges shareholder fraud against former healthcare company executive.

The Securities and Exchange Commission yesterday made some very disturbing allegations against Stiefel Laboratories, a skincare company acquired two years ago by GlaxoSmithKline (GSK) for $2.9 billion.

According to a complaint filed in U.S. District Court, Stiefel and its former CEO defrauded employees and other stockholders by repurchasing shares in the private company at below-market rates.

Basically, here’s the alleged scam: Stiefel granted shares to employees, who were allowed to sell back their shares to the company upon leaving the company. The price per share was largely determined by Stiefel itself, and only updated at the end of each fiscal year. At the end of March 2006, for example, Stiefel priced its shares at $13,012 a piece.

Just a few months later, however, Stiefel received buyout interest from five private equity firms – each of which valued the company between 50% and 200% higher. Stiefel did not change its buyback price, nor did it inform employees of the offers. In March 2007, the share price was listed as $14.517.

That same year, The Blackstone Group (BX) agreed to buy a 19% stake in Stiefel for approximately $60,000 per share (that’s my calculation, not from the complaint). Stiefel did not tell its employees, nor update its buyback price. Later Charles Stiefel and other members of senior management would quietly retain Blackstone’s advisory arm to solicit takeover bids from strategic buyers – but dismissed such truths as “rumor” when confronted by employees.

Stiefel also allegedly began buying back shares from current employees at below-market prices – actually increasing its budget for such purposes by 40% — before selling the company to GSK at a whopping $68,131 per share.

It’s important to note that neither Blackstonenor GSK are implicated in the alleged fraud. But these allegations are very serious, and could be a major problem for Charles Stiefel – the CEO who currently serves as a senior adviser at RoundTable Healthcare Partners. Maybe it’s a good case for disclosing enterprise valuations in private equity transactions (I kid, I kid… sort of).

Neither GlaxoSmithKline nor RoundTable Healthcare Partners has returned requests for comment.

Update: GSK has issued the following statement: “Stifel denies that it or Charles Stiefel acted improperly or did anything to violate the securities laws. Stiefel intends to vigorously defend itself against the SEC’s complaint.”


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