ADMINISTRATIVE PROCEEDING
File No. 3-21806

November 30, 2023 - The Securities and Exchange Commission today announced charges against pharmaceutical company Mallinckrodt plc for failing to disclose a potential liability for overcharging Medicaid for its flagship drug, Acthar Gel, that ultimately grew to more than $500 million. The SEC considered the company's financial condition and undertakings to retain a compliance consultant in determining not impose a $40 million civil penalty.

According to the SEC's order, the Centers for Medicare and Medicaid Services (CMS) notified Mallinckrodt on multiple occasions that it was using an incorrect rebate rate in connection with sales of Acthar through Medicaid, which resulted in overcharges to state Medicaid programs. As set forth in the SEC's order, correcting the rebate rate would have created a significant liability for Mallinckrodt as a result of several years of underpayments. Under the federal securities laws and Generally Accepted Accounting Principles, a public company is required to disclose material loss contingencies that are reasonably possible, as well as trends or uncertainties that are reasonably likely to affect future net sales. The SEC order finds that in November 2018, CMS directed Mallinckrodt to correct the rebate rate and notified Mallinckrodt of action the agency intended to take, which would have prevented further sales of Acthar through Medicaid, if the company did not comply. In the meantime, according to the SEC order, in January 2019, a U.S. Attorney's Office had issued to Mallinckrodt a civil investigative demand under the False Claims Act, requesting, among other things, documents related to Mallinckrodt's calculation of Acthar Medicaid rebates. Mallinckrodt had a material loss contingency in connection with the CMS claim that was reasonably possible. The SEC order finds that this loss contingency, which ultimately reached more than $500 million, should have been, but was not, disclosed in Mallinckrodt's annual report filed on February 26, 2019, and the company's quarterly report filed on May 7, 2019. The SEC order further finds that Mallinckrodt also failed to disclose a potential reduction in future net sales of Acthar of approximately $100 million as a result of the rebate issue. According to the SEC's order, Mallinckrodt's filings also contained other related material misstatements, including a misleading risk disclosure and an inadequate disclosure concerning a government investigation related to the CMS matter. The SEC order finds that Mallinckrodt did not have sufficient accounting controls and failed to maintain disclosure controls for loss contingencies.

As set forth in the SEC order, when Mallinckrodt later disclosed its dispute with CMS in conjunction with filing a lawsuit against the agency, the company's stock price dropped approximately 25%. In June 2020, according to the SEC order, after the company lost its lawsuit against CMS, Mallinckrodt recorded a $640 million liability, and four months later filed for bankruptcy protection.

Without admitting or denying the SEC's findings, Mallinckrodt agreed to a cease-and-desist order finding that the company violated the ani-fraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933; the reporting and disclosure control provisions of Sections 13(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a); and the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act. Mallinckrodt has agreed to retain a compliance consultant to conduct a comprehensive review of the company's disclosure and internal accounting controls, and implement the resulting recommendations. The SEC considered the company's undertakings and its financial condition in determining not to impose a $40 million civil penalty.

The SEC's investigation was conducted by Darren Long, David Frisof, and David Estabrook, with assistance from Eugene Hansen, James Carlson, and Steven Rapkin. The case was supervised by Brian Quinn and Carolyn Welshhans.

• Order - Mallinckrodt plc