It’s typical to put the moral of the story at the end, but in this particular saga, I think this needs to be said upfront: Whenever somebody tells you about a small company being “targeted by short-sellers,” run the other way.

Last week, we saw the final act of a long-running saga involving a small Canadian biotech company called Biovail and the hedge fund and analytical firm that supposedly conspired with each other to put Biovail out of business. Like all such stories, this one began with a great thunderclap of publicity.

In late March of 2006, the CBS News program 60 Minutes broadcast a segment called “Betting on a Fall.” It was a gruesome story that must have horrified millions of small-business people throughout the nation, particularly if they contemplated raising capital in the stock market. It described how Biovail was under attack by SAC Capital, a large hedge fund run by New York mogul Steven A. Cohen, in cahoots with an independent analyst firm called Gradient Analytics (referred to in the segment by its former name, Camelback). Biovail was, of course, suing the blackguards.

This heart-tugging, nationally televised segment, hosted by Leslie Stahl, instantly turned Biovail into the blogosphere poster child of a small company fighting rapacious hedge funds. Gradient, which had questioned Biovail’s accounting and business practices, immediately slammed 60 Minutes for omitting pertinent details, contending that Biovail was seeking to divert attention from its own regulatory and business problems. Gradient’s research had found that Biovail, a diversified pharmaceutical company, had a history of unusual and aggressive accounting, had overstated its earnings, and was under investigation by the SEC. But the 60 Minutes segment paid little attention to those issues. The drama surrounded Gradient’s supposed collusion with SAC Capital, one of the biggest hedge funds in America, in the latter’s massive bets that Biovail stock would decline. Gradient and SAC vigorously denied that they were in collusion.

Neither did it get much attention when, over the next few years, a bunch of things happened that didn’t exactly support the Biovail cause. In 2008, the Securities and Exchange Commission sued the company, alleging accounting fraud. The complaint said that “present and former senior Biovail executives, obsessed with meeting quarterly and annual earnings guidance, repeatedly overstated earnings and hid losses in order to deceive investors and create the appearance of achieving earnings goals. When it ultimately became impossible to continue concealing the company's inability to meet its own earnings guidance, Biovail actively misled investors and analysts about the reasons for the company's poor performance.”

Biovail agreed to pay a $10 million penalty, without admitting or denying the allegations. That received little attention.

Neither did it cause much of a ripple when Biovail pleaded guilty to federal kickback charges or when the suit against SAC and Gradient was thrown out of court. In dismissing the suit, the judge observed that the lawsuit had “a tainted origin and, as events following its filing confirm, are incompatible with Biovail’s admission of guilt in a kickback scheme that the Amended Complaint accuses Defendants of falsely reporting and with Biovail’s admissions, in connection with the settlement of the SEC enforcement action, of making false statements that inflated its stock price.”

Gradient and SAC sued for malicious prosecution. Last week, this long and sordid story came to an end, with a total vindication for both SAC and Gradient, a small firm that—unlike the mega-hedge fund SAC—saw its business “suffer significantly” during its battle with Biovail. And, yep, you guessed it, this definitive end to the Biovail saga has received far less attention than the Götterdämmerung of media frenzy that surrounded Biovail’s assault on SAC and Gradient—even though it contains an unusual element that I’ve yet to see in the short-seller wars.

In a settlement of a malicious prosecution lawsuit brought by Gradient, Biovail’s successor company, Valeant Pharmaceuticals, a multinational specialty pharmaceutical company, put an end to this ridiculous saga in unprecedented fashion—by actually issuing a public apology to both Gradient and SAC.

Valeant’s CEO, Michael Pearson, said in a joint statement with Gradient that “the initiation of litigation against Gradient, its founders Dr. Carr Bettis and Dr. Donn Vickrey, and others in 2006 by Biovail’s management at the time was regrettable.”

SAC’s suit was simultaneously settled with an almost identically worded apology—and payment of $10 million from Valeant. That’s peanuts for a big kahuna like SAC. It is the apology that lifts eyebrows.

SAC and Gradient spokespeople declined to comment beyond the statements, citing the terms of the settlements, and a Valeant spokesperson did not return a call. Not that it matters—the settlement pretty well speaks for itself. SAC said in a joint statement with Valeant that it "continues to believe that Biovail's lawsuit and the media campaign that accompanied it were designed to distract critics from the company's own conduct. We are pleased with this outcome."

SAC and Gradient have reason to gloat, but, in retrospect, I’d say the whole thing stinks to high heaven.

It’s an example of how the rules against “SLAPP” suits—lawsuits aimed at silencing free speech—need to be strengthened. It is an example of how the SEC needs to give stronger emphasis to what has come to be known in the analyst community as “issuer retaliation”—companies suing or harassing analysts to prevent them from telling the truth.

But more than anything, it's the best example I can find of how the media can be easily suckered by an anti-short-seller sob story. The problem with stories like this is that they play out over a period of years, and it’s appalling how little skepticism is applied to self-serving claims by companies claiming attacks by shorts.

A few months before CBS News broadcast its atrocious Biovail segment, Dateline NBC ran a segment about the equally sad story of Eagletech Communications, a company with a “hot new invention” that was supposedly under attack by short-sellers. But the NBC program omitted a bunch of stuff, including the fact that registration of Eagletech’s shares had just been revoked for failure to file required reports with the SEC. (An appeal by Eagletech, blaming the short-sellers for its troubles, was rebuffed.)

NBC has never revisited its Eagletech story, and neither has CBS clued in its viewers on the denouement of its Biovail story, either on the air or in the long article that CBS published on its website at the time of the broadcast. Not one word about the guilty plea, the SEC woes, or last week’s apologies.

It seems to me that another apology is needed: an apology from CBS, not to Gradient or SAC, but to its viewers.

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