Two former Bristol-Myers Squibb executives have been indicted on charges of conspiracy and fraud as part of an accounting scandal at the US drug company. The firm itself has agreed to pay $300 million dollars and undertake a series of corporate reforms to settle the charges that it used dubious means to artificially inflate its sales and profits.

B-MS’ former chief financial officer, Frederick Schiff, and Richard Lane who was president of the company’s worldwide medicines group, were charged with conspiracy and fraud for allegedly planning and executing the so-called “channel-stuffing” scheme to meet aggressive internal sales and earnings targets and Wall Street consensus earnings estimates. If found guilty, the two former executives could face up to 15 years imprisonment and hefty $1 million fines.

Throughout 2000 and 2001, it is claimed that B-MS concealed its use of the so-called “channel stuffing” technique it used to artificially inflate its earnings by using financial incentives to entice its wholesalers to buy more of its drugs than they could hope to sell. By the end of 2001, BMS’ channel stuffing resulted in nearly $2 billion in “excess inventory” at the wholesalers [[25/10/02a]], [[07/05/02e]]. Without the channel stuffing, BMS is widely expected to have missed the Wall Street consensus estimates for its sales and earnings.

The $300 million B-MS has agreed to pay under this latest settlement means that the company had paid a total of $839 million to settle the matter, including an earlier $100 million consent agreement with the Securities and Exchange Commission, and an additional $50 million paid to a shareholder fund [[05/08/04a]]. B-MS said it would set aside a $249 million reserve in the second quarter to cover the settlement, which is known as a “deferred prosecution”, and effectively means that the charges will be dropped after two years, providing the firm agrees to establish more stringent controls to monitor its ethics and corporate disclosure policies. “The government will not pursue its filed criminal complaint if it is satisfied after two years that the company has complied with all of the terms of the agreement,” the US company said in a statement. Part of the agreement calls for chief executive, Peter Dolan, to relinquish his post as chairman – a position that will now be held by long-term company director and board member, James Robinson III.

“We balanced the need for punishment with an acknowledgment that this company provides great value and that its work should continue,” Christopher Christie, US attorney for New Jersey, said in a statement yesterday. “At the same time, we have compensated the victimised shareholders and are prosecuting individuals responsible for the fraud at B-MS. This approach meets the needs of justice, sends a deterrent message to others and does not cause undue harm to an otherwise outstanding company, its shareholders and employees.”

In a statement, Mr Dolan said: “The company is very pleased to have reached this resolution… We are determined that the mistakes of the past not be repeated and that the company’s reputation for adhering to the highest standards of ethical business practices be fully restored.”