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 books and records and internal controls provisions are among the most generic legal provisions one can possible find. The provisions generally require issuers to: (i) maintain books and records which, in reasonable detail, accurately and fairly reflect issuer transactions and disposition of assets (the books and records provisions); and (ii) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for (the internal controls provisions).
Because of these provisions, 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, let’s call such actions “non-FCPA FCPA enforcement actions.” These actions are not dissected in the FCPA space and do not appear on the DOJ or SEC’s FCPA websites (here  and here ). However, non-FCPA FCPA enforcement actions are common.
In the latest example, the SEC recently announced  that Bausch Health (formerly Canada-based Valeant Pharmaceuticals) agreed to pay a $45 million civil penalty to settle charges of improper revenue recognition and misleading disclosures in SEC filings and earnings presentations.
In summary fashion, the administrative order  finds:
“Respondent is a publicly-traded global pharmaceutical and medical device company that develops, manufactures, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter products, and medical devices. During the relevant period, Respondent was known as Valeant Pharmaceuticals International, Inc. (“Valeant”). Due to its growth-by-acquisition business strategy in 2014 and 2015, Valeant supplemented its disclosures pursuant to Generally Accepted Accounting Principles (“GAAP”) with non-GAAP financial measures as “a meaningful, consistent comparison of the company’s core operating results and trends.” Among those non-GAAP financial measures were same store organic growth (“organic growth”), which represented growth rates for businesses owned for one year or more, and “Cash EPS,” which excluded costs associated with business development, among other things. When announcing certain GAAP and non-GAAP financial measures, Valeant failed to disclose to investors certain material information about these measures.
Valeant helped establish a mail order pharmacy, Philidor Rx Services, LLC, in 2013 and played a significant role in Philidor’s business. In 2013, Respondent provided an advance of $2 million and entered into agreements with Philidor to dispense Valeant’s products. From Q3 2014 through Q3 2015, Valeant expanded its sales to Philidor. Philidor increasingly contributed to Valeant’s U.S. organic growth in particular. By Q3 2015, Valeant announced double-digit U.S. organic growth for the fifth consecutive quarter, with U.S. organic growth of 22%. By this time, Philidor sales had grown to such an extent that it alone accounted for over 14% of U.S. organic growth. Excluding those sales to Philidor, Valeant’s U.S. organic growth for the quarter was over 7%. Valeant disclosed for the first time it had, since December 2014, an option to purchase Philidor in its Q3 2015 earnings call.
In Q2 2015, Valeant recorded revenue resulting from price appreciation credits (“PACs”) it received pursuant to its Distribution Services Agreements (“DSAs”) with its major wholesalers, which impacted certain reported GAAP and non-GAAP measures. A provision in the DSAs provided for Valeant to offset distribution fees owed to wholesalers with credits for price increases on Valeant products held in wholesalers’ inventory. Thus, price increases generated additional net revenue to Valeant not just from prospective products sales at the incrementally higher prices, but also from previously sold products still held by wholesalers. On June 18, 2015, Valeant recorded approximately $110 million in net PAC revenue through a 500% price increase on Glumetza, a drug acquired on April 1, 2015. Rather than reflecting any of the PAC generated by the Glumetza price increase as revenue attributable to Glumetza in its records, Valeant erroneously allocated the entire $110 million Glumetza PAC as net revenue to over 100 other products. The allocation of the Glumetza PAC resulted in numerous misleading disclosures in Valeant’s Q2 2015 earnings presentation and Commission periodic reports filed for Q2 and Q3 2015 and year ended 2015.
On October 26, 2015, in response to media and analyst attention over its relationship with Philidor, Valeant gave an investor presentation concerning Philidor. On April 29, 2016, in its annual report for 2015 (“2015 Form 10-K”), Valeant restated its financial statements for the year ended December 31, 2014 to reduce previously reported fiscal year 2014 revenue from sales to Philidor by approximately $58 million due to such revenue being recognized prematurely. Among other things, Valeant acknowledged the existence of material weaknesses in its internal control over financial reporting. Valeant also disclosed the existence of PACs for the first time but failed to disclose the impact PACs earned in 2015 had on certain GAAP and nonGAAP measures.”
Based on the above findings, the order finds that Valeant violated, among other provisions, the FCPA’s books and records and internal controls provisions. Under the heading “Valeant’s Internal Accounting Control Failures,” the order finds:
“Valeant did not design and maintain sufficient internal accounting controls. Valeant failed to implement accounting controls with respect to the Philidor sales transactions and PACs, sufficient to provide reasonable assurances that transactions were recorded as necessary to, among other things, permit the preparation of financial statements in conformity with GAAP and to maintain the accountability of assets. Valeant did not have sufficient controls relating to non-standard journal entries and manual price changes. Valeant’s existing controls also were not sufficient to address how exceptions to policies and procedures should be documented and approved, which made it possible for management to override internal accounting controls when they approved the Philidor credit limit increases to facilitate sales to Philidor during Q3 and Q4 of 2014.”
Without admitting or denying the SEC’s findings, the company agreed to pay a $45 million civil penalty.
In the SEC’s release, Steven Peikin (Co-Director of the SEC Enforcement Division) stated:
“Public companies and their senior executives have a duty to be truthful to investors. 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.”
Michael Layne (Director of the SEC’s Los Angeles Regional Office) stated:
“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. 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.”
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