Probes Reporter Perspective reports identify and summarize those SEC-related risk factors that we believe hold the potential to destabilize a company, distract its management, and/or interfere with underlying fundamentals. Our reports otherwise take no view on a public company’s fundamental outlook or whether you should buy, sell, or hold its securities. They are typically based on a combination of public company disclosures and/or documents we acquired from the SEC under the Freedom of Information Act (FOIA).

As a reminder, at present, this report is posted in real-time for free.  In the future, and by necessity, we expect Probes Reporter will likely become a paid subscription service.  If we move toward a paid service, you should expect both timing and access to our content that you enjoy today for free will gradually change.

Akorn, Inc. (AKRX) 
Probes Reporter Perspective

PR’s Perspective:  Akorn, Inc. (AKRX) acquired Hi-Tech Pharmacal Co. (HITK) in Apr-2014 for $640 million. Our latest information points ot a Confirmed and Undisclosed SEC Investigation at Hi-Tech Pharmacal.  Earlier research into Hi-Tech points to potential SEC issues as far back as Aug-2013.  This implies Akorn knew they were buying a potential problem with Hi-Tech at the time they made the purchase.  Unfortunately, that problem at Hi-Tech is lingering. (Note: We've not previously researched Akorn so we have no data on them.)

See below for the difference between a "Possible" versus "Confirmed" SEC probe.  

The Facts:  In a letter dated 25-Sep-2014, the SEC cited the "law enforcement exemption" of the FOIA as basis to deny the public access to the detailed records we sought on Hi-Tech Pharmacal Co..  As a matter of law, they are acknowledging some sort of investigative activity.  This is consistent with a reply we also received 13-Aug-2013.

We filed an administrative appeal to challenge this denial.  In our experience, about two-thirds of these SEC responses are confirmed on appeal.  This is one of them.

In a letter dated 29-Oct-2014, the SEC confirmed that Hi-Tech Pharmacal Co was somehow involved in a recently active and ongoing investigation.  A confirmed investigation is the highest standard we can achieve regarding undisclosed SEC activity at a public company.  No disclosures of SEC investigative activity were found in the past two years of either company’s SEC filings.

Akorn, Inc. is now added to our Watch List of companies with undisclosed SEC probes due to a confirmed and undisclosed investigation of Hi-Tech Pharmacal.

Analyst Observations:  Acquisitions are inherently difficult to integrate even without an SEC challenge potentially mucking up the works. While true that some SEC investigations go no where, we do view long-running ones as a red flag.  This opens the question of whether an undisclosed SEC probe at Hi-Tech is now undermining the integration and/or expected merits of the transaction.  If so, this could easily hurt the fundamentals of Akorn in ways investors can neither analyze nor forecast.  Those with an interest should insist that management speak to this. 

What’s the Difference Between a “Possible”
Versus a “Confirmed” SEC Investigation?

When we report on risk of undisclosed SEC investigative activity for a company, it is based upon a response from the United States Securities and Exchange Commission (SEC) to one of the approximately 2,500 Freedom of Information Act (FOIA) requests we file with the agency each year seek.  Our requests seek information concerning the conduct, transactions, and/or disclosures of public companies.

There are many legitimate reasons for the government to deny a FOIA request.  One reason often cited by the SEC is the so-called “law enforcement exemption” of the FOIA.   As a matter of law, the SEC is acknowledging some sort of investigative activity when it asserts this exemption. To learn more about FOIA exemptions, go to FOIA.gov.  To learn more about the law enforcement exemption specifically, see also Department of Justice Guide to the Freedom of Information Act, Exemption 7(A).

We know from experience there can be many reasons for the FOIA office of the SEC to assert the law enforcement exemption.  Some would be of little to no consequence to investors.  Others would be of great concern, and can have meaningful negative consequences for investors.

If the SEC cited the law enforcement exemption to deny the public access to records on a public company, and if no disclosures of SEC investigative activity were found in the past two years of this same company’s SEC filings, we then add the company to our Watch List as a company with a "Possible Undisclosed SEC Investigation".

Again, to say a company has a possible SEC probe is not the same as when we say it has a "Confirmed Undisclosed SEC Investigation".  As we say in our reports, a confirmed investigation is the highest standard we can achieve regarding undisclosed SEC activity at a public company.  Here's why --

When the SEC asserts a law enforcement exemption, if warranted, we then file an administrative appeal with the SEC’s Office of General Counsel. The appeal process allows a different set of eyes within the SEC to manually review our request and the initial denial.  In response to our administrative appeal, the SEC typically does one of the following – 

• The SEC can deny our appeal by saying, "We have confirmed with staff that the responsive matter remains open and that releasing the withheld information could reasonably be expected to interfere with the on-going enforcement proceedings."
  
  This is why we say this is the highest standard of affirmation we can achieve regarding undisclosed SEC activity at a public company.  We interpret this appeal response to mean the company is involved in an SEC investigation that somehow involves its conduct, transactions, and/or disclosures.   Companies on which we receive this response are maintained on our Watch List.
   
• The SEC may deny our appeal on grounds there are no records responsive to our request.  This may be because the Company was incidentally named or tangentially listed in an SEC investigation of some other person or entity; or, there was an investigation that concluded in the past but the SEC’s computerized records were not current at the time of our request.   Companies on which we receive this appeal response are removed from our Watch List.
   
• We may be informed the law enforcement exemption no longer applies and our request has been remanded back to the FOIA office for further processing.  We interpret this response to mean there was an investigation that is now over and records from that investigation may now be provided to us.  Companies on which we receive this appeal response are removed from our Watch List.
   
• Finally, the SEC could inform us the law enforcement exemption was cited in error.  We rarely see this but it does happen.  Companies on which we receive this appeal response are removed from our Watch List.

Notes: The SEC did not disclose the details on investigations referenced above. The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security.  New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.

To learn more on our process and what our findings mean, click here.