Salix and Its Former CFO Charged with Repeatedly Misleading Analysts and Investors
On September 28, 2018, the Securities and Exchange Commission announced that it charged Salix Pharmaceuticals Ltd. (“Salix”) and its former CFO with repeatedly misleading analysts and investors about the company’s future prospects. The former CFO, Adam Derbyshire (“Derbyshire”), will pay more than $1 million to settle the charges.
According to the SEC’s complaint, Salix and Derbyshire lied to analysts and investors during quarterly earnings calls by significantly understating the amount of Salix drugs that wholesaler customers held in inventory. Salix had engaged in a long-standing practice of flooding the distribution channel by using incentives to induce customers to purchase more products, creating a short-term revenue bump but excess supply that imperiled future sales. The complaint alleges that Salix and Derbyshire also failed to disclose in SEC reports that the practice had impacted earnings and presented a significant risk to Salix investors. Salix is now a subsidiary of Bausch Health Companies, which was previously known as Valeant Pharmaceuticals International. The alleged misconduct occurred prior to Salix’s acquisition by Valeant.
To settle the charges, Salix agreed to be enjoined from future violations of the antifraud and corporate reporting provisions of the federal securities laws. The proposed settlement is subject to district court approval.
Derbyshire agreed to a permanent injunction against violations of the antifraud provisions and from aiding and abetting violations of the corporate reporting provisions. He also agreed to pay $558,534 in disgorgement and interest plus a penalty of $494,836, and to be barred for five years from serving as an officer or director of a public company. The proposed settlement is subject to court approval. Derbyshire separately agreed 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. Derbyshire would be permitted to apply for reinstatement after five years.
Walgreens and Two Former Execs Charged with Misleading Investors About Forecasted Earnings Goal
On September 28, 2018, the Securities and Exchange Commission announced that it charged Walgreens Boots Alliance Inc., former CEO Gregory Wasson (“Wasson”), and former CFO Wade Miquelon (“Miquelon”) with misleading investors about increased risk that the company would miss a key financial goal announced when Walgreen Co. entered into a merger with Alliance Boots GmbH in 2012.
Walgreens agreed to pay a $34.5 million penalty to settle the SEC’s enforcement action.
According to the SEC’s order, Walgreens announced a two-step merger with Alliance Boots in June 2012, and at the same time projected that the combined entity would generate $9 billion to $9.5 billion in combined adjusted operating income in the 2016 fiscal year. After completing the first step of the merger, Walgreens’ internal forecasts indicated that the risk of missing its 2016 projection had increasing significantly. But Walgreens, Wasson, and Miquelon repeatedly publicly reaffirmed the projections without adequately disclosing the increased risk. When Walgreens subsequently announced that it was moving forward with the second step of the merger in August 2014, it announced a new earnings per share goal that translated to an adjusted operating income projection of $7.2 billion for fiscal 2016, a 20 percent decline over its initial projection. Walgreens’ stock price dropped 14.3% on the day of the announcement.
Without admitting or denying the findings, Walgreens, Wasson, and Miquelon consented to the entry of an SEC order finding that they violated the antifraud provision contained in Section 17(a)(2) of the Securities Act of 1933, which prohibits the use of untrue statements or omissions in the offer or sale of securities. The SEC’s order requires each of the respondents to cease and desist from further violations of that provision, and also requires Walgreens Boots Alliance to pay a $34.5 million penalty, and Wasson and Miquelon to each pay a $160,000 penalty.
LendingClub Asset Management and Former Executives Charged with Misleading Investors and Breaching Fiduciary Duty
On September 28, 2018, the Securities and Exchange Commission announced that it charged San Francisco-based LendingClub Asset Management LLC (formerly known as LendingClub Advisors LLC) and its former president Renaud Laplanche (“Laplanche”) with fraud for improperly using fund money to benefit LendingClub Corporation, LCA’s parent company that Laplanche founded and for which he served as CEO. LCA and Laplanche along with Carrie Dolan (“Dolan”), LCA’s former CFO, also were charged with improperly adjusting fund returns.
All three have agreed to settle the agency’s charges against them and will pay more than $4.2 million in combined penalties. The SEC also barred Laplanche from the securities industry.
According to the SEC’s order, LCA provides investment advisory services to several private funds that purchase loan interests offered by LendingClub Corporation, a publicly-traded online marketplace lending company. LCA and Laplanche caused one of the private funds it managed to purchase interests in certain loans that were at risk of going unfunded, to benefit LendingClub, not the fund, in breach of LCA’s fiduciary duty. The order also finds that LCA, Laplanche, and Dolan improperly adjusted monthly returns for this fund and other LCA-managed funds to improve the returns they reported to fund investors.
The SEC’s order finds that LCA, Laplanche, and Dolan each violated the antifraud provisions of the Investment Advisers Act of 1940. To settle the SEC’s charges, LCA, Laplanche and Dolan agreed to pay penalties of $4 million, $200,000, and $65,000, respectively. Laplanche also agreed to a securities industry bar and investment company prohibition. The SEC’s order permits Laplanche to apply for re-entry after three years. LCA, Laplanche, and Dolan agreed to the entry of the SEC’s order without admitting or denying the findings.
The SEC’s Enforcement Division determined not to recommend charges against LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation. LCA also reimbursed approximately $1 million to investors who were adversely impacted by the improperly adjusted monthly returns.