The Securities and Exchange Commission alleges that Stiefel Laboratories Inc., a privately-held company prior to being purchased by GlaxoSmithKline two years ago, used low valuations for stock buybacks from November 2006 to April 2009. The SEC has charged the GlaxoSmithKline subsidiary and the former chairman and CEO, Charles Stiefel, with defrauding shareholders.
“Private companies and their officers must understand that they are not immune from the federal securities laws, which will protect all shareholders regardless of whether they bought stock in the open market or earned shares through a company’s stock plan,” according to Eric I. Bustillo, the director of the SEC office in Miami.
The SEC complaint alleges that Stiefel Labs, under the direction of Charles Stiefel, repurchased shares from employees and other shareholders at values which the company knew were low based on a preferred stock investment by a private equity firm and conversations underway with potential acquirers. Ultimately, GlaxoSmithKline purchased the company at a price which was more than 300% higher than the per share price at which Stiefel Labs had been repurchasing shares.
In a separate federal civil trial brought by a former Stiefel Labs employee, a jury awarded a $1.5 million verdict on May 16, 2012. Other employees are pursuing separate actions on the same grounds.
The SEC action against Stiefel Labs and its former CEO is considered unusual because it involves the stock of a privately-held company, not a publicly-traded company. However, the SEC lately has begun taking a closer look at valuations and transactions in privately-held entities. The SEC charged SharesPost and two funds with securities laws violations for their activities in the shares of privately-held companies. Earlier, the SEC reached a settlement with an investment manager about misstated valuations of two private portfolio companies. And in February 2012, it was learned that the SEC had launched an informal inquiry into how the private equity industry values privately-held companies for reporting purposes.
IRS Circular 230 Disclaimer: Pursuant to regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the Internal Revenue Service, unless otherwise expressly stated, any U.S. federal or state
