A Medical Device Daily
The SEC has filed a settled civil injunctive action in the U.S. District Court for the Southern District of New York vs. Tyco International (Pembroke, Bermuda), alleging that, from 1996 through 2002, the company violated securities laws by using various improper accounting practices and a scheme to overstate its reported financial results by at least $1 billion.
Without admitting or denying the allegations in the complaint, Tyco has consented to a judgment enjoining it from violating antifraud, proxy disclosure, periodic reporting, corporate recordkeeping and anti-bribery laws and will pay $1 in disgorgement and a $50 million civil penalty.
“This enforcement action shows that, in addition to looting the company, Tyco's Kozlowski-era management lied about the company's financial results,“ said Linda Chatman Thomsen, the SEC's director of enforcement, referring to the former head of the company, Dennis Kozlowski, who is currently serving jail time. “Tyco benefited from this fraud, as the penalty in this case reflects.“
Scott Friestad, associate SEC enforcement director, said the fraud was orchestrated at the highest levels of the company, but carried out at numerous operating units and management levels of the company. He termed these “push down“ frauds, saying they are “especially difficult to detect and investigate.“
The commission's complaint alleges that Tyco inflated its operating income by at least $500 million as a result of improper accounting related to some of the many acquisitions that Tyco engaged in during the period, including undervaluing acquired assets, overvaluing acquired liabilities and misusing accounting rules. The complaint says that it improperly established and used various kinds of reserves to make adjustments at the end of reporting periods to enhance its forecasts.
The complaint alleges that Tyco inflated its operating income by $567 million from its FY98 through its fiscal quarter ended Dec. 31, 2002, via connection fees that Tyco's ADT Security Services subsidiary charged to dealers from whom it purchased security monitoring contracts that the SEC determined had no economic substance. In 2003, Tyco restated its operating income and cash flow relating to the connection fees.
The complaint further alleges that, from September 1996 through early 2002, Tyco failed to disclose in its proxy statements and annual reports certain executive compensation, executive indebtedness, and related party transactions of its former senior management. Tyco also incorrectly accounted for certain executive bonuses it paid in its FY00 and FY01, excluding from its operating expenses the costs associated with those bonuses. Finally, the complaint alleges that Tyco violated the antibribery provisions of the Foreign Corrupt Practices Act.
In other legalities:
• The beginning of the first trial in Texas against Guidant (Indianapolis) alleging faults in its defibrillators was postponed last week. A judge in Corpus Christi postponed the start of the case because a witness was unavailable over Passover.
Two patients implanted with the company's implanted defibrillators have charged that the company caused them pain and suffering for not promptly disclosing operating problems in the devices.
The case is the first of about 200 pending lawsuits to go to trial stemming from recalls Guidant issued last year for flaws in its heart defibrillators and pacemakers.
Bob Hilliard, a Corpus Christi attorney, has said that if the suit is successful, any damages levied on the company would establish similar compensation packages in the other suits filed against Guidant.
• Kyphon (Sunnyvale, California) acknowledged a lawsuit brought against it by Medtronic (Minneapolis) and related corporate entities for allegedly infringing three angioplasty dilatation catheter patents and a patent relating to accessing and distracting the intervertebral disc space.
The suit asks for a ruling that a Medtronic “osteotome“ does not infringe five Kyphon patents covering various aspects of kyphoplasty, a minimally invasive procedure for treating spinal fractures that Kyphon has developed. The complaint was filed in the U.S. District Court for the Northern District of California (Medical Device Daily, April 17, 2006).
David Shaw, Kyphon's vice president, legal affairs and general counsel, denied the validity of the claims and said it is obvious “that our bone tamps are not balloon dilatation catheters, which are typically used in percutaneous transluminal coronary angioplasty. We also believe there is no basis on which to seek a declaratory judgment, since we have not directly or indirectly threatened Medtronic with any of our own patents.
The company noted that last November it and Dr. Harvinder Sandhu filed suit against Medtronic Sofamor Danek (Memphis, Tennessee) and other related corporate entities in Tennessee seeking compensatory and punitive damages and injunctive relief for breach of contract and related covenants, trade secret theft, fraud and correction of inventorship of several patents and patent applications presently owned by Sofamor Danek. A trial date has been set in that case for April 16, 2007.