The SEC charged a pharmaceutical company and its former Chief Financial Officer ("CFO") with misleading investors and analysts in violation of antifraud and corporate disclosure provisions of the federal securities laws. The cases were brought in the U.S. District Court of the Southern District of New York.

According to the Complaints (see here and here), Salix Pharmaceuticals, Ltd. ("Salix") and its former CFO misled investors during quarterly earnings calls by understating the amount of Salix drugs that wholesaler customers held in inventory. Salix allegedly used incentives to induce customers to purchase more of its products, but that created an excess of customer inventory supply that would impact future sales. Salix and the former CFO allegedly failed to disclose the impact on earnings and the risks to investors.

Under the terms of the settlement, Salix agreed to be enjoined from further violations of the antifraud and corporate disclosure provisions of the federal securities laws. Salix will not be required to pay a civil penalty. The former CFO agreed to pay more than $1 million in disgorgement and civil penalties, a bar from serving as an officer or director in a public company for five years, and to be enjoined from violating the antifraud provisions and from aiding and abetting violations of the corporate disclosure provisions of the federal securities laws. He separately agreed to be suspended from appearing before the SEC as an accountant but can apply for reinstatement after five years.

Commentary / Kyle DeYoung

The financial remedies stand out in this case. The $1 million dollar settlement with the former CFO is significant and is further confirmation of the SEC's focus on individual liability. In contrast, Salix settled the case without paying anything in financial remedies as a result of its self-reporting of the violation and cooperation in the investigation. While companies continue to grapple with whether it makes sense to self-report potential violations, this case is a reminder that it can have significant benefits under the right circumstances.

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