In July  2020, a publicly traded pharmaceutical company entered into a settlement with the Securities and Exchange Commission, without admitting or denying findings, and agreed to pay a financial penalty relating to various charges of accounting misstatements, including violations of the antifraud provisions of Sections 17(a)(2) and (a)(3) of the Securities Act and Rule 100(b) of Regulation G. The pharmaceutical company, which relied on an acquisition strategy, supplemented its GAAP disclosures with non-GAAP financial measures, including same store organic growth (growth rates for businesses owned for one year or more) and cash EPS (excluding costs associated with business development, among other things), but was alleged to have failed to disclose to investors material information about these measures.  In addition, the pharmaceutical company helped establish a mail order pharmacy business, and entered into agreements with the mail order business to dispense its products.  Sales to the mail order business increased significantly but the pharmaceutical company failed to disclose for some time that it had an option to purchase the mail order business.  In response to investor interest in its relationship with the mail order business, the pharmaceutical company gave an investor presentation during which it discussed the details.  Shortly thereafter it restated its financial statements to reduce previously report revenue from sales to the mail order business due to such revenue having been recognized prematurely.  This led to disclosure of material weaknesses in internal control over financial reporting, and the pharmaceutical company disclosed for the first time the existence of price appreciation credits, or PACs.  However, it did not disclose the effect of these PACs on certain GAAP and non-GAAP financial measures.  The SEC order addresses the registrant’s failure to disclose certain required information in the MD&A section of various periodic reports, the improper recognition of revenue and net income relating to the mail order business, the use of misleading non-GAAP financial measures, and the issues relating to improper disclosures relating to the PACs.  The SEC order notes that the registrant did not design and maintain sufficient internal accounting controls, and had ineffective internal control over financial reporting and disclosure controls and procedures.   The company cooperated with the SEC to address these issues and took remedial measures.  See the order, available here.

In September 2020, the SEC charged a registrant in the LED lighting solutions sector in connection with an accounting fraud for falsely inflating its reported revenues over four years.  The company recognized revenue for sales earlier than permitted under accounting rules and under its own written revenue recognition policies.  The complaint alleges that as the company approached the end of each fiscal quarter during the period, it pressured certain officers and sales personnel to record improperly future sales as current “bill and hold” sales to the company’s auditor.  The company also failed to disclose its reliance on reporting uncompleted sales as bill and hold transactions.  The SEC order relates to violations of Section 17(a) of the Securities Act, as well as Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (the “Exchange Act”).  See the order here.

In September 2020, the SEC settled accounting fraud charges related to an engine manufacturing company’s overstatement of revenues.  Former executives of a public company were alleged to have fraudulently inflated the company’s revenues in order to meet the company’s prior revenue guidance and analysts’ revenue expectations.  As a result of this, the company’s public filings contained materially misstated financial statements.  As revenue targets became harder to meet, the company pressured sales personnel to provide customers incentives to take additional product before the end of quarters, including creating incentives for customers to place additional product that they did not need and pushing customers to take delivery of ordered product earlier than desired, which resulted in sales being “pulled ahead” to current quarters.  The accounting misstatements came to light in various Forms 8-K.  The SEC order identifies violations of Section 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 under the Exchange Act.  See the order here.

In September 2020, the SEC announced a settlement with a car maker.  Without admitting or denying the findings, the car maker agreed to payment of an $18 million penalty.  The order alleges that the company engaged in an effort to increase the number of publicly-reported retail vehicle sales in the United States.  Faced with shortfalls in connection with its internal retail sales volume targets, the company used various techniques to boost sales figures.  For example, the company offered its dealers financial incentives to report vehicles as demonstrators or service loaners, which were included in its reported retail sales.  In addition, during certain periods, the company used an excess reserve of previously unreported retail sales to manage its retail sales volume.  When total retail sales reported by dealers exceeded the internal retail sales targets, the company selected which  numbers to report publicly and held back the remaining retail sales.   The company is not subject to SEC reporting; however, it conducted various Rule 144A offerings in the United States.  As a result of its conduct, the company violated Section 17(a)(2) and 17(a)(3) of the Securities Act.  See the order here.

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