3rd Circuit Rejects Government Liability Theories in Bristol-Myers CFO's Criminal Trial

In a pre-trial interlocutory appeal, a 3rd Circuit panel rejected the legal theories underlying several fraud charges against the former CFO of Bristol-Myers Squibb. The court also found that the trial judge properly excluded testimony from a government expert witness. U.S. v. Schiff.

The charges arose from statements made by Frederick Schiff, the former CEO, concerning Bristol-Myers inventory backlog. As alleged, Schiff and others offered incentives to their wholesalers to carry larger than normal inventories to conceal the negative impact that the backlog would have on future sales. The officers then allegedly made material misstatements and omitted material facts concerning the inventory situation in analyst calls.

With regard to the claimed omissions, the 3rd Circuit initially held that Schiff had no fiduciary duty to rectify the allegedly material misstatements made by another executive during the analyst calls. The panel referred to the 3rd Circuit's 2000 decision in Oran v. Stafford, where the court determined that a duty to disclose existed when there is 1) insider trading, 2) a statute requiring disclosure or 3) an inaccurate, incomplete or misleading prior disclosure. The government argued that Schiff’s duty to disclose arose from a general fiduciary obligation of “high corporate executives” to the company’s shareholders. The court rejected the government's argument that the Oran factors were not exclusive, and that this fiduciary duty qualified as a fourth circumstance. Stating that "such a generalized corporate fiduciary duty has few logical boundaries," the court found the government's position too broad and vague to support an extension of the Oran factors.

The 3rd Circuit also rejected the government's claim that Schiff should have made corrective disclosures in the company's Form 10-Q filing concerning his statements in the analyst calls. However, because the government stipulated that Schiff was not charged with affirmative misstatements in the company's SEC filings, the alleged omissions were not tied to any purported misleading statements in those filings.

Finally, the court held that the trial judge properly excluded proffered expert testimony from a government witness. The government sought to present an expert to testify on materiality and the company's stock price drop following the disclosures, but the appeals panel found that the expert's evidence was not sufficiently tied to the facts of the case and would not aid the jury in resolving factual disputes. The appellate court noted, however, that the trial judge stated that if the government properly laid the foundation for the expert's testimony at trial, then it could make a renewed application to the court to present the stock price drop through the expert as evidence of materiality.

The case will, however, go forward on the government's legal theories related to the alleged conspiracy, other misstatements and omissions, aiding and abetting and other charges.