A Disturbing 30 Days: Recent Days Have Been Very Fruitful for Prosecutors and Regulators Enforcing the Securities Acts and Other Laws Designed to Protect Consumers and Investors. the Total Amounts for Fines, Penalties, and Settlements Reported during a Single 30-Day Period Are Staggering

By Verschoor, Curtis C. | Strategic Finance, August 2012 | Go to article overview

A Disturbing 30 Days: Recent Days Have Been Very Fruitful for Prosecutors and Regulators Enforcing the Securities Acts and Other Laws Designed to Protect Consumers and Investors. the Total Amounts for Fines, Penalties, and Settlements Reported during a Single 30-Day Period Are Staggering


Verschoor, Curtis C., Strategic Finance


Within a single 30-day period beginning on June 12, 2012, a number of fraud and ethics-related items made news throughout the business world. To start, three different companies in the pharmaceutical industry--Pfizer, GlaxoSmithKline, and Johnson & Johnson (J&J)--agreed to immense penalties totaling approximately $4 billion for breaking various laws designed to protect patients. The laws they allegedly violated include statutes preventing the marketing of drugs for uses that haven't been approved by the U.S. Food and Drug Administration (FDA) as well as tort claims alleging that certain drugs did more harm than good.

A report about the world's largest drug maker, Pfizer, notes that the company said in a securities filing that it has paid $896 million to resolve about 60% of the cases that allege its drugs to treat symptoms of menopause in women were responsible for causing cancer. The report also states the company has provided an additional $330 million to resolve the remaining lawsuits, for a total cost of $1.2 billion.

Meanwhile, the U.S. operations of GlaxoSmithKline plc, the largest drug manufacturer in the United Kingdom, agreed to plead guilty and pay fines of $3 billion to resolve fraud allegations and for failure to report safety data. This is the largest healthcare fraud settlement in U.S. history. The U.S. Department of Justice (DOJ) asserts the company failed to provide regulators with adverse data concerning its diabetes drug Avandia, marketed its antidepression treatment Wellbutrin for weight loss, and illegally promoted its antidepressant Paxil to children. Although criminal, these are misdemeanors, not felony-level crimes. A felony conviction would preclude the firm from selling to the U.S. government's health programs, such as Medicare.

Then there are the reports of an imminent blockbuster settlement from Johnson & Johnson, which has been accused of marketing Risperdal, its once best-selling antipsychotic schizophrenia drug, to nursing homes. The homes would allegedly use it to calm anxiety among patients having Alzheimer's disease or for general dementia, which aren't approved uses. There was an earlier probe into whether J&J paid tens of millions of dollars in kickbacks to boost sales of certain J&J medicines to nursing home patients. A final settlement hasn't been announced, but the estimated amounts varied from $1.5 billion to more than $2 billion.

As the pharmaceutical giants faced their difficulties, the global banking industry also faced some unsettling news items. The biggest item was the fine of [pounds sterling]290 million ($451.4 million) imposed on Barclays plc, Britain's second-largest bank. It's the largest penalty ever assessed by U.S. and U.K. financial regulators. Barclays admitted submitting false information about its interbank borrowing rates, which masked the bank's true financial health and increased trading profits. The interbank rate, called LIBOR (London InterBank Offered Rate), is used as the benchmark for setting the rate on approximately $350 trillion of debt and derivative securities. Many of these instruments have adjustable rate terms that change as often as daily.

Chancellor of the Exchequer George Osborne told Parliament that "The behavior of some in the financial services has damaged the reputation of an industry that employs hundreds of thousands of people and is vital to the economic prosperity of the country...It's time to deal with the culture that flourished in the age of irresponsibility and hold those who allowed it to do so to account."

The investigation involved the U.K. Financial Services Authority (FSA) as well as the U.S. Commodity Futures Trading Commission (CFTC) and U.S. Department of Justice (DOJ). The settlement is being split as follows: $200 million to the CFTC, $160 million to the DOJ, and the rest to the FSA.

A statement regarding the Order issued against Barclays by the CFTC said, "Barclays, through its traders and employees responsible for determining the Bank's LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank's derivatives trading positions by either increasing its profits or minimizing its losses. …

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A Disturbing 30 Days: Recent Days Have Been Very Fruitful for Prosecutors and Regulators Enforcing the Securities Acts and Other Laws Designed to Protect Consumers and Investors. the Total Amounts for Fines, Penalties, and Settlements Reported during a Single 30-Day Period Are Staggering
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