UPDATE 2-Biovail's Melnyk to pay C$1 million in settlement

(Adds details, background)

By Lynne Olver

TORONTO May 18 (Reuters) - The Ontario Securities Commission approved a deal on Friday that settles trading-disclosure allegations against Eugene Melnyk, chairman of drug maker Biovail BVF.TO and owner of the Ottawa Senators National Hockey League team.

The agreement with the OSC, Canada's major securities regulator, calls for Melnyk to pay an administrative penalty of C$750,000 ($688,000) as well as C$250,000 to partially cover the commission's costs in the case. He also cannot be a Biovail director for a one-year period, starting from June 30.

The remedies "far exceed" any sanctions imposed by the securities commission for previous similar cases, and are designed to deter similar behavior, said James Turner, chairman of the three-member OSC panel.

According to the settlement agreement, Melnyk violated Ontario securities law by failing to disclose trading in Biovail shares done by four offshore trust accounts that he had set up in 1996 on behalf of his family and certain friends.

Melnyk also agreed that he engaged in conduct contrary to the public interest by permitting "substantial trading" in Biovail shares from 2002 to 2004, without taking greater steps to ensure whether the trusts were in compliance with securities laws.

Given Melnyk's position as a Biovail director, executive and significant shareholder, he should not have permitted such "extensive and speculative" trading by the trusts, valued at more than C$1 billion over a three-year period, Turner said.

Although Melnyk did not direct the trading, he was aware of "some" of that trading and could have stopped it if he wished, Turner said.

Turner formally reprimanded Melnyk for his conduct as the former Biovail chief executive stood in a downtown Toronto hearing room.

The panel also expressed concern that Melnyk took steps to mislead the Investment Dealers Association when it was investigating the beneficiaries of the offshore trusts. Melnyk's U.S. lawyer sent the IDA an "incomplete and misleading" letter in 2000 saying Melnyk was not a beneficiary of two of the offshore trust accounts.

Melnyk agreed to write a letter of apology to the IDA.

Earlier this week, Melnyk said that he would step down in June as chairman of the drug company he founded to spend more time with his family and focus on other interests.

In a written statement on Friday, he said that his decision to retire as chairman was not prompted by the OSC settlement.

He also said he was pleased that the issues have been resolved, and maintained that he did not control or direct the Biovail shares in question.

Melnyk's regulatory troubles are not over with the Ontario settlement.

The U.S. Securities and Exchange Commission recently gave notice that it may take civil action against Melnyk related to his trading and ownership of Biovail stock.

The first page of the OSC settlement agreement states that Melnyk agreed with the facts and conclusions only for the OSC proceeding, and "expressly denies" that the terms are intended to admit wrongdoing in any other context.

($1=$1.09 Canadian)