Baxter International will pay the U.S. Securities and Exchange Commission (SEC) a penalty of $18 million after settling charges over the medtech giant’s alleged decades-long practice of improperly inflating its reported net income.
According to the SEC, from at least 1995 until 2019, Baxter converted its internal foreign transactions, assets and liabilities into U.S. dollars on its financial statements using a method that “was not in accordance with U.S. GAAP or generally accepted accounting principles.”
Furthermore, dating back at least to 2009, the company went on to “exploit” that practice, the SEC claimed, by entering into foreign exchange transactions for the sole purpose of either adding accounting gains to its bottom line or avoiding losses.
The alleged practices violate anti-fraud and internal accounting controls provisions of federal securities law, the agency said.
Despite agreeing to “cease and desist” from the outlined violations and cooperating with the SEC throughout its investigation, Baxter stopped short of admitting or denying the findings. In its annual report (PDF) published this week, Baxter said it is fully accrued for the $18 million penalty as of the end of 2021 and expects to complete payment in the first quarter of this year.
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Baxter first alerted the SEC to the potential discrepancies in its past financial reports in October 2019.
After the first few months of its internal probe into the issue, the company described in an SEC filing its findings of “misstatements of foreign exchange gains and losses” and its own belief that the practice had been used explicitly to generate gains and avoid losses for at least 10 years.
In the filing, Baxter outlined the differences in its previously reported and actual income from 2016 through the first half of 2019. For example, the biggest discrepancy during that period came in 2017, when it uncovered $113 million in foreign exchange gain and loss misstatements, cutting out a solid chunk of the $1.2 billion it had originally reported in income for the year.
“Baxter’s self-reporting and substantial cooperation in working with the staff in this complex investigation was an important consideration in assessing the appropriate sanctions for this case,” Paul Montoya, associate regional director of the SEC’s Chicago office, said in a statement.
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Last year, Baxter settled a class-action lawsuit (PDF) over the violations. That settlement allotted another $16 million to anyone who purchased the company’s stock during the eight months leading up to the launch of its internal investigation in October 2019.
Additionally, in a year-end financial update published last week, Baxter noted that it spent a total of $31 million on investigations and related costs in 2021 and $23 million in 2020, which primarily related to its probe into the foreign exchange gains and losses.
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Alongside the company’s settlement with the SEC, two of its former employees also settled charges with the agency for their alleged participation in the income inflation scheme.
Scott Bohaboy will pay a civil penalty of $125,000. He spent nearly 14 years at Baxter, from 2006 until early 2020, in various leadership roles, including senior vice president of finance and treasurer.
Jeffrey Schaible, meanwhile, agreed to a civil penalty of $100,000, plus disgorgement of $76,404 and prejudgment interest of $12,955, for a total payment of almost $190,000. He worked in Baxter’s treasury department from 2005 to October 2019.
The SEC concluded that while Schaible was allegedly “primarily responsible for executing the transactions,” Bohaboy, for his part, “did not take any steps to investigate how Baxter’s treasury department generated consistent gains or whether the transactions that generated the gains were permissible.”
The penalty payments will be redistributed to investors.