The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.
Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.
The latest example concerns Mallinckrodt plc (an Ireland incorporated and Ireland based pharmaceutical company with shares traded on the New York Stock Exchange during the time period relevant to the enforcement action).
This SEC order finds in summary fashion:
“This matter concerns failures by Mallinckrodt, a publicly traded pharmaceutical company during the relevant time period, to properly disclose in its periodic filings with the Commission a material loss contingency stemming from a claim by the Centers for Medicare and Medicaid Services (“CMS”) that Mallinckrodt had been overcharging Medicaid for the company’s flagship drug, Acthar Gel (“Acthar”). By January 2019, Mallinckrodt’s potential liability for this claim had grown to more than $500 million. Mallinckrodt failed to disclose in its periodic filings this potential liability and relatedly that the issue could reduce its future net sales of Acthar, Mallinckrodt’s most important product during the relevant time period, by approximately $100 million a year.
In May 2019, when Mallinckrodt first disclosed its dispute with CMS in conjunction with filing a lawsuit against the agency, the company’s stock price dropped approximately 25%. In June 2020, after losing its lawsuit against CMS at the trial court and while its appeal was pending, Mallinckrodt recorded a $640 million liability.
Under the federal securities laws and Generally Accepted Accounting Principles (“GAAP”), a public company is required to disclose material loss contingencies that are reasonably possible, and trends or uncertainties that are reasonably likely to affect future net sales. By no later than February 2019, Mallinckrodt had a material loss contingency in connection with CMS’s claim that was reasonably possible. This loss contingency and the related potential reduction in future net sales of Acthar should have been, but were not, disclosed in Mallinckrodt’s annual report filed on Form 10-K on February 26, 2019 and the company’s quarterly report filed on Form 10-Q on May 7, 2019. Additionally, Mallinckrodt did not adequately disclose in these periodic filings a False Claim Act investigation by the United States Attorney’s Office for the District of Massachusetts (“USAO for D. Mass”) related to this matter.”
Based on the above, the SEC found that Mallinckrodt violated, among other things, the FCPA’s books and records and internal controls provisions.
Under the heading “Mallinckrodt Lacked Sufficient Internal Accounting Controls and Failed to Maintain Disclosure Controls and Procedures,” the order states:
“During the relevant time period, Mallinckrodt did not have sufficient internal accounting controls and failed to maintain disclosure controls and procedures for loss contingencies. The company’s loss contingencies policy, which implemented ASC 450, required the company to conduct and document in writing an analysis about the likelihood of any material loss contingency. The policy also required consideration of whether contingencies determined to be remote (and therefore not required to be disclosed under ASC 450) should nonetheless be disclosed. No such analysis of a loss contingency was ever documented because there were not adequate procedures that prompted such analysis.
The company also had a disclosure committee responsible for assisting company executives in determining whether the company’s periodic reports contained required disclosures. The disclosure committee’s charter specified that its responsibilities included reviewing draft periodic and current reportsfor compliance with the securitieslaws and also considering whether other issues not already included in a draft report, including contingencies and legal matters, should be disclosed. The disclosure committee met prior to each quarter close to review the draft Form 10-K or Form 10-Q. But there was no policy or procedure for considering new disclosure issues not already identified and included in draft reports reviewed by the disclosure committee. The Acthar rebate issue and possible disclosure of a loss contingency for the underpayment of Medicaid rebates on Acthar sales were never submitted to or considered by the disclosure committee before the 2018 Form 10-K or the Q-1 2019 Form 10-Q.”
Without admitting or denying the SEC’s findings, Mallinckrodt agreed to a cease-and-desist order finding that the company violated, among other things, the books and records and internal controls provisions. As stated in the SEC release:
“Mallinckrodt has agreed to retain a compliance consultant to conduct a comprehensive review of the company’s disclosure and internal accounting controls, and implement the resulting recommendations. The SEC considered the company’s undertakings and its financial condition in determining not to impose a $40 million civil penalty.”
