Baxter Settles Financial Fraud Action

The Commission has been focusing its enforcement efforts in traditional areas. Those include offering frauds, insider trading, and financial fraud. The latter is an area in which the agency has repeatedly tried to replicate its success from earlier years. Yet, the Report issued by Cornerstone Research discussed in the article published on Tuesday notes that the number of cases brought last year in this area was down significantly. Nevertheless, the Commission continues to focus on this important area. Its latest case in the area is In the Matter of Baxter International Inc., Adm. 3-20781 (February 22, 2022).

Baxter is a healthcare company that generates most of its income outside the United States. Many of its subsidiaries are based in foreign countries. Those entities generate revenue in foreign currencies. The result was two difficulties impacting its financial statements. First, beginning in 1995 and continuing through 2019 Baxter recorded the revenues from subsidiaries in their functional currencies. The method used to translate those currencies to U.S. dollars was not in accord with GAAP.

Second, beginning in 2009, and continuing for the next ten years, the firm engaged in intra-company transactions for the purpose of generating foreign exchange accounting gains or to avoid losses. Those transactions caused the firm’s accounting statements to be materially misstated.

In late 2019 Baxter conducted an internal investigation. At its conclusion the company announced that it would have to restate its financial statements As a result the company reduced previously reported net income for 2017 through June 30, 2019 and retained earnings as of January 1, 2017 by $582 million, collectively. Part of that amount was attributable to the FX transactions. After the restatement the firm took remedial actions and provided substantial cooperation to the Commission. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a) and 13(b)(2).

To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, the company will pay a penalty of $18 million. See also In the Matter of Jeffrey Schaible, Adm. Proc. File No. 3-20782 (February 22, 2022)(proceeding naming as Respondent an employee in the Treasury Department of Baxter based on essentially the same facts as above; resolved with the entry of a cease-and-desist order based on the same Sections cited above; Respondent also agreed to pay disgorgement of $76,404, prejudgment interest of $12,955 and a penalty of $100,000); In the Matter of Scott Bohaboy, Adm. Proc. File No. 3-20783 (February 22, 2022)(Respondent was the Treasurer of the firm; the proceeding is based on the same facts and alleged violations as above; resolved with a cease-and-desist order based on the same sections as above and the payment of a penalty of $125,000).

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