Baxter International has a confirmed, undisclosed SEC investigation that was on-going as of 19-May-2014. Timing of company disclosures and SEC responses to us suggests this is separate from a multi-year Foreign Corrupt Practices Act (FCPA) investigation the company claims was resolved this past January.

We also analyzed disclosures made by Baxter regarding its FCPA investigation and concluded it may have been more serious than what was disclosed. This opens the question of whether the longer-term capacity for Baxter to conduct business in some of its foreign markets may have been harmed. Documents in our database regarding other companies' closed FCPA investigations make clear these probes go into the realm of accounting, internal controls, and related disclosures.  As we've said many times, "What's the proper accounting treatment for a bribe?"

None of this surprises us about Baxter.  Going back as far as 2003, we had previously found Baxter's disclosures regarding SEC matters to be weak, if not misleading.  We cited some of Baxter's disclosures in continuing education presentations we gave to CFA and other analyst groups from 2004 to 2011.  At the time we called them, "so smooth as to be slick".  Based on our latest work, little has changed. We break it all down.

The On-Going and Undisclosed SEC Investigation of Baxter

In a letter dated 19-Mar-2014, we first learned of the possibility of a new SEC investigation involving Baxter.  At that time the SEC blocked our access to records by citing the law enforcement exemption of the Freedom of Information Act (FOIA).  To lean more of our process and what these finding mean, click here.

At the time of receiving the SEC's response, we also took note of the following disclosure made by Baxter in its 10-K filed 21-Feb-2014 --

The company was the recipient of an inquiry from the U.S. Department of Justice (DOJ) and the SEC that was part of a broader review of industry practices for compliance with the U.S. Foreign Corrupt Practices Act. In January 2014, the company was notified by both the DOJ and the SEC that their respective investigations were closed as to Baxter without any further action taken by either agency.

Based on our experience in making FOIA requests to the SEC, we knew it possible the SEC's letter to us of 19-Mar-2014 was potentially an artifact from the FCPA matter.  That is, SEC internal records may not have fully reflected the fact the matter was supposedly closed in January.  To rule that out, we followed our standard practice of filing an administrative appeal with the SEC regarding its initial response of 19-Mar-2014. 

It was not an artifact. In letter dated 19-May-2014, we subsequently received confirmation from the SEC of Baxter’s involvement in recently active and on-going SEC enforcement proceedings.  We otherwise have no information on the matter.   (This data point first published 09-Jun-2014.)

Baxter’s FCPA Investigation More Serious than Company Disclosures Would Imply

Baxter characterized the FCPA matter as little more than, “… a broader review of industry practices for compliance with the U.S. Foreign Corrupt Practices Act”. 

Our Take:  This is nothing more than mealy-mouthed, “the SEC’s investigating everyone” whining.  In the place of giving investors something substantive about an exposure management judged as material, Baxter chose to serve-up useless filler instead.  We also know Baxter's investigation lasted at least three years.  That sounds specific to Baxter, not the industry.

Company filings, though not stating as much, tell us Baxter’s SEC /DOJ probe started out as an informal inquiry but became formal.  Here’s how we know --

• In Baxter’s 10-K filed Feb-2011, the company said it received inquiries from the SEC and DOJ “requesting that the company voluntarily provide information about its business activities in a number of countries.” [emphasis added]
   
• A year later, in Baxter’s 10-K filed Feb-2012, you can see the word “voluntarily” had been dropped.  "The company has received an inquiry from the U.S. Department of Justice and the SEC requesting that the company provide information about its business activities in a number of countries."
  
  When you see the word “voluntarily” dropped from a disclosure, as happened here, that tells you Baxter's probe had become formal.  
   
• Public companies and their attorneys are very careful about every word that goes into public filings.  If a probe becomes formal, a company can no longer use the term “voluntarily”.  Thus it was dropped.

Not all companies require subpoenas and formal orders of investigation to get through their FCPA probes. However, there can be good reason for subpoenas or formal orders of investigation that have nothing to do with a company’s behavior.   Baxter’s disclosures left investors to figure out everything about this exposure on their own.