by T. GormanPosted on Posted in SECActions

Two firms are named as Respondents in the Order, Franklin Advisers, Inc., or FAV, and Franklin Templeton Investments Corp. or FTIC. The former is a registered investment adviser. The latter is a subsidiary of Franklin Resources, Inc., Toronto, also a registered investment adviser.

The proceedings here center on Section 12(d)(1)(A) of the Investment Company Act which, generally, limits an investment firm’s ownership interests in other investment companies. Over an eleven month period, beginning in December 2014, the Allocation Funds (a particular series of Templeton funds) and eight LifeSmart Retirement Target Date Funds (another series) purchased shares of three ETFs each of which is a registered unaffiliated investment company. FAV sought to rely on Section 12(d)(1)(F) to exceed the limits of Section 12(d)(1)(A)(iii). The former permits a registered investment company to invest in unaffiliated investment companies in excess of certain limits if the acquiring company and its affiliates do not own more than 3% of the outstanding shares of the acquired company. The latter prohibits the purchase when the “acquisitions results in the acquired company and all other investment companies having an aggregate value of more than 10% of the total assets of the acquiring company” – a pyramiding limitation. The provisions of 12(d)(1)(F) could not be relied on, however, since FAV’s aggregate purchases of the three ETFs caused the Franklin Funds to exceed the firm wide 3% ownership limits of Section 12(d)(1)(F) for each ETF.

At the time of the transactions FAV was responsible for implementing written policies and procedures designed to ensure compliance with the sections cited above. In late November 2015 the compliance department discovered the breach of the statutory limits. The client positions were reduced, generating losses of over $2.1 million for ETF No. 1 and gains of over $3.7 and $4.7 million for ETFS Nos. 2 and 3 respectively.

FAV assessed the situation and decided not to reimburse the losses. That determination created an undisclosed conflict and was contrary to its disclosed policies and procedures that required reimbursement. There was no disclosure until mid 2016. The Order alleged violations of Investment Company Act Section 12(d)(1)(A) and Advisers Act Sections 206(2) and 206(4). After the Commission’s investigation began Franklin Funds’ board fully reimbursed the losses of the Allocation Funds, including interest.

After taking certain remedial procedures, Respondents each resolved the proceedings. FAV consented to the entry of a cease and desist order based on the sections cited and a censure. FTIC also consented to the entry of a cease and desist order but only one based on the Investment Company Section cited. FAV also agreed to pay a penalty of $250,000 while FTIC will pay $75,000.

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by T. GormanPosted on Posted in SECActions

The Commission filed a settled FCPA enforcement actions just prior to the July 4th holiday. The action centered on false books and records and inadequate internal controls, although the Order speaks of bribery. In the Matter of Alexion Pharmaceuticals, Inc., Adm. Proc. File No. 3-19852 (July 2, 2020). The Order also presents unanswered question regarding compliance with the Supreme Court’s recent decision on disgorgement in Liu v. SEC, No. 18 – 1501 (Decided June 22, 2020).

Alexion is a global biopharmaceutical company. Drugs developed by the firm serve patients with life-threatening, rare and ulta-rare diseases. The transactions here involve a drug called Soliris, developed and approved to treat two diseases, paroxysmal nocturnal hemoglobinuria or PNH and atypical hemolytic uremic syndrome or aHUS.

Sales of Soliris during the period 2010 through 2015 were effected through local subsidiaries. In Turkey the firm entered the market in 2009. Sales lagged. The next year a senior Ministry of Health official suggested making payments to government officials.

The firm retained a consultant who was paid over $1.3 million, portions of which went to local government officials. Two employees of the local subsidiary made some of the payments to the consultant by having local reimbursement records falsified. To facilitate that process the records were made in pencil. Little documentation was furnished to substantiate the claim that expenses were being reimbursed. The managers, in addition to the consultant, were compensated for their services. Overall, the Turkish subsidiary of the firm was “unjustly enriched by over $6.6 million” as a result of the scheme, according to the Order.

In Russia, the local subsidiary of the firm also paid officials to sell the drug. Soliris was sold through an NPS process. Reimbursements were made through regional healthcare spending. The regions had to allocate funds to Soliris in the local budget.

The Alexion subsidiary paid HCPs employed at state-owned healthcare institutes for various services. Some of those officials also provided expert opinions relied on by the local officials making budget allocations. Alexion’s Russian subsidiary thus made over $1 million in payments to these officials over a four-year period, beginning in 2011, to increase the number of approved prescriptions. The payment records were falsified. As a result, Alexion was “unjustly enriched by over $7.5 million” through its Russian subsidiary.

Finally, in the firm’s Brazil and Columbia subsidiaries, the record and control systems were inadequate. This permitted employees to divert funds from proper business purposes to other matters. This continued over a two-year period, beginning in 2014. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).

In resolving the matter Alexion undertook certain remedial efforts and cooperated with the staff’s investigation. For example, the firm provided regular briefings to the staff regarding the facts developed during their investigation. Alexion also strengthened and expanded its global compliance organization, enhancing its polices and procedures.

To resolve the matter, the firm consented to the entry of a cease and desist order based on the sections cited in the Order. Alexion will also pay disgorgement of $14,210,194 and prejudgment interest of $3,766,337. The funds will be paid to the U.S. treasury, “subject to Exchange Act Section 21F(g)(3). The firm will also pay a penalty of $3.5 million. That amount will be paid to the U.S. treasury, “subject to Exchange Act Section 21F(g)(3).

The disgorgement Respondent is required to pay here is described only as “ill-gotten” gains in the Order. There is no indication of the manner in which the sums were tabulated. Those sums, along with the penalty imposed are “subject to” an Exchange Act Section dealing with whistleblowers. Whether sums imposed as disgorgement equal the “net profits” as directed by Liu is unclear; if the sums were for victims is not specified, although there is a citation to the whistleblower statutes.

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