U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19066 / February 8, 2005
Accounting and Auditing Enforcement
Release No. 2181 / February 8, 2005
Securities and Exchange Commission v. Elan Corporation, plc, United States District Court for the District of Columbia, Civil Action No. 1:05CV00282
SEC FILES DISCLOSURE FRAUD CASE AGAINST ELAN CORPORATION; COMPANY AGREES TO SETTLE CHARGES AND PAY A $15 MILLION PENALTY
The Securities and Exchange Commission today announced the filing of a settled civil action against Elan Corporation, plc, a pharmaceutical company headquartered in Dublin, Ireland. The Commission charged Elan with violating the antifraud provisions of the federal securities laws for failing to disclose material information about the company's financial results in periodic reports filed with the Commission and in quarterly earnings press releases disseminated to investors in the United States.
According to the complaint, during 2000 and 2001, Elan represented in its public statements that it was generating record amounts of revenue, net income and operating cash flow from drug sales and licensing activities. Elan also claimed that it was making significant progress towards achieving its goal of transforming itself into a fully integrated pharmaceutical company and generating $5 billion of annual revenue by 2005. The complaint alleges that these statements were materially misleading because Elan failed to disclose, or inadequately disclosed, certain transactions that were critical to Elan's perceived success. As a result, investors were led to believe that Elan had achieved record results through improvements in the company's business, when in fact it had not.
The complaint, which was filed in the United States District Court for the District of Columbia, describes three principal disclosure failures, and alleges that:
- Elan failed to disclose to investors that a substantial portion of its reported product revenue was generated by selling partial royalty rights to some of its most important products and by selling off other drug product lines entirely. Despite the fact that these transactions were non-recurring, Elan classified the proceeds received from them as product revenue on its income statement. As a result, investors were falsely led to believe that the company's product revenue growth was due to drug sales in the normal course of business.
- Elan misled investors about its joint venture program, which generated approximately $490 million of revenue during 2000 and 2001. The company failed to disclose that it required its joint venture partners to engage in "round-trip" transactions, in which the ventures paid license fees to Elan using money that Elan had provided to the partners. Elan also failed to disclose that none of the partners or joint ventures ever used any of their own assets to pay for the license fee (most of them did not have the financial resources to do so), that the company never sold a license for its drug delivery technology to any unaffiliated entity at the prices charged to the joint ventures ($10-15 million, in most cases), and that during 2000 and 2001, Elan did not sell any such licenses other than through the joint venture program. By failing to disclose these facts, Elan obscured the true demand for the licensed technology and its ability to generate license revenue in the future, thereby misleading investors about the quality of the revenue, earnings and cash flow generated by the joint venture program.
- During June 2002, Elan facilitated an artificial sale of certain joint-venture related securities between one of its off-balance sheet subsidiaries and an ostensibly independent third party in an attempt to continue favorable accounting treatment. Elan publicly stated that the subsidiary had sold the securities at "estimated fair value" (approximately $148 million) to an "unaffiliated third party." These statements were materially false and misleading because Elan failed to disclose that: (i) the purchaser was not an "unaffiliated third party" because Elan created it (and was required to consolidate it under applicable accounting rules); (ii) Elan paid the purchaser $1 million to participate in the transaction; (iii) the purchaser did not negotiate the $148 million purchase price, which was fixed by Elan; and (iv) the claimed "estimated fair value" did not reflect what a willing buyer would pay to acquire the securities, which was substantially less than $148 million. Subsequently, in September 2003, Elan restated its financial results due to this transaction, which reduced its 2001 net income by $73.9 million, or 22%.
Without admitting or denying the allegations in the complaint, Elan consented to the entry of a final judgment that permanently enjoins the company from violating the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as the reporting and internal controls provisions, Sections 13(a) and 13(b)(2)(B) of the Exchange Act and Rules 12b 20, 13a 1 and 13a 16 thereunder. The judgment also orders Elan to pay $1 in disgorgement and a $15 million civil penalty, which is intended to be distributed to investors harmed by the alleged violations. The final judgment is subject to Court approval.
SEC Complaint in this matter