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SEC: Pharmaceutical Company And Former Executives Charged With Misleading Financial Disclosure

The Securities and Exchange Commission today announced that Bausch Health, formerly Quebec, Canada-based Valeant Pharmaceuticals, agreed to pay a $45 million penalty to settle charges of improper revenue recognition and misleading disclosures in SEC filings and earnings presentations. Three former executives – the chief executive officer, chief financial officer, and controller – also agreed to pay penalties to settle charges against them.

According to the SEC’s orders, when announcing certain GAAP and non-GAAP financial measures, Valeant among other things, misstated revenue transactions and included erroneous revenue allocations. For example, the order finds that, for five consecutive quarters, Valeant, former CEO J. Michael Pearson, former CFO Howard B. Schiller, and former controller Tanya R. Carro, touted double-digit same store organic growth, a non-GAAP financial measure that represented growth rates for businesses owned for one year or more.  Much of that growth came from sales to Philidor, a mail order pharmacy Valeant helped establish, fund and subsidize. The orders find that Valeant improperly recognized revenue relating to Philidor sales and did not disclose its unique relationship with or risks related to Philidor in SEC filings and earnings and investor presentations. Valeant ended its ties to Philidor in October 2015 and restated its 2014 financial statements in April 2016, reducing the revenue that was improperly recognized.

The SEC orders also find that Valeant failed to disclose the material impact of certain revenue it received from drug wholesalers following a 500% increase of the price of a single drug that Valeant acquired in April 2015. Valeant erroneously attributed the resulting revenue to more than 100 unrelated products and did not record any as attributable to that drug. Additionally, in its SEC filings and earnings presentations for the second and third quarters of 2015 and its 2015 year-end report, Valeant failed to disclose the impact of that allocation on its GAAP and non-GAAP financial measures.

“Public companies and their senior executives have a duty to be truthful to investors,” said Steven Peikin, Co-Director of the SEC Enforcement Division. “Complete disclosures are critical, and we must hold accountable corporate executives, who are in the best position to ensure accurate information is provided to investors.”

"Valeant’s former top executives chose to present GAAP and non-GAAP financial measures to indicate strong financial results, which misstated Philidor sales and included erroneous revenue allocations,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “When public companies and their senior executives tout strong financial measures, they must provide investors with all of the information needed to make fully informed investment decisions.”

Without admitting or denying the SEC’s findings, all respondents consented to orders finding that they violated antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and, with the exception of Schiller, Rule 100(b) of Regulation G. Valeant also consented to an order that finds reporting, books and records, and internal accounting controls violations, and the individual respondents consented to orders finding that they caused some or all of these violations. Pearson and Schiller agreed to pay civil penalties of $250,000 and $100,000 respectively, and to reimburse Valeant $450,000 and $110,000 respectively, representing a portion of their incentive compensation, pursuant to Section 304 of the Sarbanes-Oxley Act. Carro agreed to pay a $75,000 penalty and to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Carro to apply for reinstatement after one year.

The SEC’s investigation was conducted by Junling Ma, Nick Chung, Lorraine Pearson, and Dora Zaldivar, assisted by senior trial counsel Lynn Dean, and supervised by Diana Tani, Rhoda Chang, Amy Longo, and Alka Patel, all of the Los Angeles Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and Autorité des marchés financiers in Québec.

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