The SEC’s Drive to Year End: Large Groups of Cases Filed, Part II

The Commission appears to have made the typical year end push to file cases. Yesterday Part I of this series reviewed a number of those actions, primarily civil injunctive actions filed on the last day of the fiscal year. This segment reviews a second group of the cases largely filed on the second to last business day of the Government fiscal year.

Loss contingency: SEC v. Mylan N.V., Civil Action No. 1:19-cv-02904 (D.D.C. Filed Sept. 27, 2019) is an action which names the global pharmaceutical firm as a defendant. The case centers on a DOJ inquiry into whether the firm classified its EpiPen product properly and may have under paid Medicaid. Specifically, the DOJ conducted a two-year probe into whether the firm properly paid certain rebates tied to the product. Mylan classified the drug as a “generic.” The product is used to treat severe allergic reactions. It is one of the largest revenue and profit drivers for the firm. When sold to Medicaid the firm was paid from taxpayer funds. Mylan was required to rebate a portion of the revenues to the Government. By classifying the drug as a generic the firm rebated a much lower amount of the price. During the period Mylan raised the price about 500%. Over the course of the investigation Mylan received multiple subpoenas. The company also furnished the DOJ with damage estimates. Yet Mylan failed to disclose the potential loss. Even after being told by the DOJ that the pens were misclassified Mylan only disclosed that it “may” need to reclassify. By failing to disclose the loss contingency, which eventually became a $465 million settlement, the firm’s disclosures were false and misleading. The company also made false statements regarding the probe. The complaint alleged violations of Securities Act Sections 17)(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the action Mylan consented to the entry of a permanent injunction based on the sections cited in the complaint and agreed to pay a $30 million penalty.

False statements: In the Matter of Herbalife Nutrition Ltd., Adm. Proc. File No. 3-19536 (Sept. 27, 2019) is a proceeding which names as a Respondent the LA based multi-level sales firm. Herbalife operates in about 90 countries using essentially the same multi-level marketing system. China is the firm’s largest revenue source. Over a four-year period, beginning in 2012, Herbalife asserted in its public filings that its method of operations and compensation in that country differed significantly from those typically used. In fact, those repeated disclosures are false statements. The company used essentially the same compensation model used in other countries. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceedings the Herbalife consented to the entry of a cease and desist order based on the sections cited in the Order and agreed to pay a $20 million penalty.

FCPA: In the Matter of Westport Fuel Systems, Inc., Adm. Proc. File No. 3-19543 (Sept. 27, 2019) names as Respondents the Vancouver based manufacturer of clean fuel systems, and its COO, Nancy Gougraty. The action centers on a transaction which began in 2012 and continued for the next several years. It focused on efforts by the company to secure a larger payment from the joint venture it had with a China state owned entity. In seeking to obtain a larger payment Westport agreed to transfer a number of its shares at a low valuation to venture where a Government official was located. It was believed that official could influence the amount of the payment and execute a framework agreement. The order alleges violations of Exchange Act Section 30A, 13(b)(2)(A) and 13(b)(2)(B). The order as to Ms. Gougraty also included Exchange Act Section 13(b)(5). To resolve the proceedings Westport agreed to implement certain undertakings. Each Respondent consented to the entry of a cease and desist order based on the section cited in the Order. The firm also agreed to pay disgorgement of $2,350,000, prejudgment interest of $196,000 and a penalty of $1.5 million. Ms. Gougarty agreed to pay a penalty of $150,000.