In a settlement this week, the government rewards prompt action of a biopharma company by declining a penalty. Although an enforcement action by the Securities and Exchange Commission, the approach corresponds to a recent announcement by the Department of Justice. Companies that self-report, cooperate, and remediate will receive lenient treatment. This settlement makes clear just how valuable those efforts can be, allowing a company to settle violations of accounting controls and disclosure with no financial penalty whatsoever. On the other hand, the settlement confirms the government’s intent to prosecute culpable individuals.
Benefit to Company
According to the SEC’s announcement, from 2012 to early 2016, the former CEO and CFO of Provectus Biopharmaceuticals, Inc. obtained millions of dollars from the company by using insufficient or non-existent expense documentation, causing the company to materially understate their compensation in annual reports and proxy statements. While the SEC order directs Provectus to cease and desist from committing any further accounting controls and disclosure violations, it notably imposes no financial penalty on the company. The SEC’s order states that it took into consideration Provectus’ prompt remedial acts and cooperation with the Commission, including (i) the retention of independent counsel and a forensic accounting firm to conduct an internal investigation; (ii) the replacement of the CFO and CEO accused of wrongdoing; (iii) the decision to hold the former executives accountable through legal process; (iv) the creation of new finance positions; (v) the hiring of new auditing and bookkeeping firms; and (vi) the revamping of internal control measures related to expense reimbursement. The SEC also credits the company for voluntarily sharing the findings of its internal investigation with the Commission, saving the Enforcement staff both time and resources.
Holding Individuals Accountable
In contrast to leniency for the company, the SEC charged the CEO individually in federal court for using the company “as his personal piggy bank.” The government is seeking disgorgement plus interest, penalties, and a officer-and-director bar. Similarly focusing on individual conduct, the SEC settled with the company’s CFO by obtaining disgorgement and interest, a civil penalty, and suspension from practicing before the SEC.
This settlement reminds companies that prompt, thorough, and independent inquiry into potential wrongdoing, swift remedial action, and transparency can substantially mitigate enforcement exposure. It also maintains the focus on holding individuals responsible for their conduct.