Yesterday, the SEC announced a settlement in its case against John Miszuk, former controller and VP at Biovail Corp. The SEC alleged in 2008 that back in the second quarter of 2003, Miszuk and others engaged in two separate accounting fraud schemes that resulted in Biovail materially misstating its financial statements by overstating its revenue and understating its loss for that quarter. The SEC noted that its case against former Biovail chairman and CEO Eugene N. Melnyk and former CFO Brian Crombie "remains pending."

One of the schemes that Melnyk, Crombie and others allegedly carried out--the now-famous "truck accident" scheme--is particularly interesting and has the makings of a great law school exam question.

The SEC's complaint states that on September 30, 2003, a truck carrying $5 million worth of Biovail's Wellbutrin XL product left its Steinbach, Manitoba, plant bound for the North Carolina facility of one of Biovail's major distributors. On October 1, however, while en route to North Carolina, the truck was involved in a traffic accident on a highway in Illinois, destroying the Wellbutrin XL.

Soon thereafter, Melnyk, Crombie and others allegedly made numerous public statements "declaring that the loss of revenue and income associated with the truck accident contributed significantly to Biovail's substantial revenue shortfall for the third quarter of 2003 in the amount of $10 million to $20 million, or about 23% to 38% of the total announced revenue shortfall for the quarter." The SEC charged, however, that these statements were materially false and misleading for two reasons:

1. Under GAAP, revenue may be recognized on the sale of a product like Wellbutrin XL when, among other things, delivery of the product by the seller to the buyer has occurred. Biovail's agreement with the distributor stated that all deliveries of Wellbutrin XL were "F.O.B., [the Distributor's] facilities in the U.S.A. (freight collect)." As the SEC points out, and as I very vaguely recall from my U.C.C. class in law school, the "F.O.B. Destination" delivery term means that delivery occurs and revenue may be recognized only when the product reaches the buyer's facility.

Thus, the SEC alleged, the truck accident could not have impacted Biovail's third quarter financial results because the truck left Manitoba for North Carolina on September 30--too late to possibly reach North Carolina prior to the end of the quarter.

2. The SEC also alleged in its complaint that even if the the shipping terms had been "F.O.B. Biovail," meaning that Biovail could have recognized the revenue from the sale at the moment the product left Biovail's facility, the truck accident still could not have impacted Biovail's third quarter financial results. The SEC alleged that even in this scenario, "the truck accident would have had no impact on Biovail's third quarter financial results because the title to the product -and the risk associated with the accident -would have passed to the Distributor as soon as the truck left Biovail's Manitoba plant. Under those circumstances, Biovail could have recognized revenue resulting from the shipment regardless of the accident."