SEC Brings Enforcement Action for Loss Contingency Disclosure
The SEC recently settled an enforcement action against Mylan N.V., claiming Mylan failed to timely disclose to investors a possible loss relating to a nearly two-year Department of Justice probe into whether Mylan overcharged Medicaid by hundreds of millions of dollars for sales of EpiPen Auto-Injector by misclassifying EpiPen as a “generic” or “non-innovator” drug.
The SEC’s complaint notes a public company facing a material loss contingency, such as one arising from a lawsuit or government investigation, is required under accounting principles and the securities laws to:
- disclose the loss contingency if a loss is at least reasonably possible, and
- record an accrual for the estimated loss if a loss is probable and reasonably estimable.
The SEC complaint includes a detailed timeline of the DOJ’s investigation. In August 2015, Mylan’s counsel made a presentation to DOJ, setting forth detailed arguments about why DOJ had no basis to bring any claims. DOJ, however, rejected Mylan’s request that it close the investigation, and requested that Mylan sign a tolling agreement that stopped the statute of limitations from running and thus would permit DOJ to charge Mylan for conduct spanning a longer time period. In October 2015, Mylan produced an analysis to DOJ, showing that for just one quarter in 2015, potential damages owed to the government from Mylan’s classifying EpiPen as a generic rather than a branded drug ranged from approximately $12 million to $42 million.
According to the SEC, by at least the filing of its Form 10-Q for the third quarter of 2015, Mylan knew or should have known that the likelihood of a material loss relating to Mylan’s EpiPen classification and DOJ investigation was reasonably possible. The SEC thus infers signing a tolling agreement and calculating damages for discussion purposes is enough to know a loss is reasonably possible.
In May 2016, DOJ requested a meeting to discuss the investigation, including potential resolution of the matter, and requested that Mylan provide additional information relevant to calculating damages in advance of the meeting. In response, in June 2016, Mylan provided additional data, including an estimate that non-trebled damages for the year 2015, alone, would range from about $114 to $260 million.
Mylan also consented to an extension of the tolling agreement in June 2016 and agreed to a meeting on July 12, 2016. Mylan executives, including those involved in the preparation and review of Mylan’s financial statements, were involved in preparations for the DOJ meeting. During the July 12, 2016 meeting, DOJ made a detailed presentation to Mylan, setting forth the bases for its claims. DOJ also provided damages estimates and indicated that it was prepared to sue Mylan unless Mylan made a settlement offer. On July 29, 2016, Mylan offered $50 million to settle DOJ’s claims. On August 3, DOJ rejected the $50 million offer and counter-offered at a significantly higher amount. The parties continued to negotiate until they reached a settlement in principle for $465 million in October 2016. On October 7, 2016, Mylan, for the first time, disclosed DOJ’s investigation and Mylan’s liability resulting from its misclassification of EpiPen.
According to the SEC, by at least the filing of the Form 10-Q for the second quarter of 2016, Mylan knew, or should have known, that a material loss resulting from the DOJ investigation and claims that Mylan incorrectly classified EpiPen was probable. Mylan also knew, or should have known, that a loss was reasonably estimable, as Mylan had sufficient information in its possession to estimate a range of losses. Therefore, the SEC stated, Mylan should have accrued its best estimate of the loss (or, if it did not have a best estimate, the minimum amount of the loss within the estimated range of losses).
The SEC also alleged Mylan’s 2014 and 2015 risk factor disclosures that a governmental authority may take a contrary position on Mylan’s Medicaid submissions, when Mylan had already been informed EpiPen was misclassified, were misleading.
Mylan agreed to the entry of a final judgment ordering a $30 million penalty and permanently enjoining it from violating certain securities laws.
Contact Steve Quinlivan for more information.