On Sept. 27, 2019, the Securities and Exchange Commission (SEC) announced that Mylan N.V., a global pharma company that manufactures and sells EpiPen, which is used to treat serious allergic reactions, agreed to pay $30 million to settle an SEC complaint in which it was charged with violating Sections 17(a)(2) and (a)(3) of the Securities Act and other violations based on multiple failures to timely disclose in its periodic reports a material loss contingency arising out of a Department of Justice (DOJ) investigation and based on allegedly misleading risk factor disclosures. Mylan did so without admitting or denying the factual allegations in the complaint. The case highlights the SEC’s views on how public companies should balance whether and when to disclose pending investigations and update their risk factors when potential risks materialize.

In 2013, the Centers for Medicare & Medicaid Services (CMS) questioned Mylan’s classification of EpiPen as a generic instead of a branded drug and, in late 2014, advised Mylan that it viewed EpiPen as being misclassified. Beginning in November 2014, the DOJ launched a False Claims Act investigation focusing on EpiPen’s misclassification. In August 2015, the DOJ declined Mylan’s request to close the investigation and asked Mylan to enter into a tolling agreement, which it did. In July 2016, the DOJ provided Mylan with a damages estimate and advised that it was prepared to sue if Mylan did not settle. Mylan made a settlement offer later that month, and the DOJ made a counteroffer in August 2016. In October 2016, Mylan reached a settlement with the DOJ that called for the company to pay $465 million, leading Mylan to disclose for the first time the investigation and its resulting liability. At the end of September 2019, the SEC announced that it had filed a complaint against Mylan for accounting and disclosure failures relating to the DOJ investigation, and Mylan agreed to pay $30 million to settle the SEC’s charges.

The SEC alleged that Mylan’s risk disclosures relating to the classification of EpiPen on its 2014 and 2015 annual reports on Form 10-K were misleading under Regulation S-K Item 303, which requires public companies to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” The company’s risk disclosures were alleged to be misleading because they described risks of incorrect submissions by the company as merely potential when in fact there was an actual disagreement between CMS and Mylan regarding the classification of EpiPen. In addition, the SEC alleged that Mylan’s risk factors stating that “a governmental authority may take a position contrary to a position we have taken” with respect to payments to Medicaid were misleading.

The SEC also alleged in its complaint that Mylan should have disclosed a material loss contingency related to the DOJ’s investigation and accrued it in its periodic reports prior to its disclosure of the DOJ settlement. According to the SEC’s complaint, under Accounting Standard Codification (ASC) 450, a material loss contingency, including pending and threatened litigation and governmental proceedings, must be disclosed if a loss is “reasonably possible” (i.e., more than “remote” but less than “probable”). In addition, if the loss is “probable” and “reasonably estimable,” ASC 450 requires that the company also accrue a charge against income.

The SEC alleged that Mylan should have disclosed the DOJ investigation in its third-quarter 2015 Form 10-Q because by that time the loss became “reasonably possible.” The SEC noted that Mylan had provided the DOJ with estimates of a range of potential damages for one quarter in 2015 and for the full year 2016. In addition, the SEC took the position that by the time Mylan filed its second-quarter 2016 Form 10-Q, the company should have known that a loss was “probable” and “had sufficient information in its possession to estimate a range of losses.” According to the SEC’s complaint, even if Mylan did not have a best estimate of the loss, under ASC 450, Mylan should have accrued the low end of the estimated range as a charge against income.