Dive Brief:

• The Securities and Exchange Commission (SEC) hit healthcare products company Baxter International with an $18 million fine for inadequate controls over its foreign currency exchange process, which the agency says led the company to inflate its earnings $517 million over nine years.
• Separately, the SEC fined the company’s former assistant treasurer $100,000 for allegedly manipulating Baxter’s currency transactions with the sole purpose of increasing the company’s earnings or avoiding losses, and the former treasurer $125,000 for failing to act against the improper transactions.
• The SEC credited the company’s leadership with acting quickly when it learned what was going on. "Baxter’s self-reporting and substantial cooperation in working with the staff in this complex investigation was an important consideration in assessing the appropriate sanctions for this case," said Paul Montoya, the agency’s associate regional director in Chicago.

Dive Insight:

Most of the company’s earnings come from sales outside the U.S. Beginning around 2009, Jeffrey Schaible, a treasury executive and later the company’s assistant treasurer, would generate foreign exchange gains by moving U.S. dollars to a foreign partner, which would enter into simultaneous transactions with a cash pooling entity to trade the dollars for the other currency. 

Depending on whether the dollar was strengthening or weakening against the other currency, the process could differ. After a few additional steps, the treasury group would unwind the transaction at month’s end. 

On the basis of the process, the company’s treasury team knew the foreign exchange rates that would apply to month-end transactions before they happened, enabling staff to execute exchange transactions to generate specific amounts of accounting gains or avoid losses, a violation of generally accepted accounting principles (GAAP). 

“Foreign currency transactions in a given month were initially measured using exchange rates from a specified date near the middle of the previous month as opposed to the exchange rate on the date of the transaction,” the SEC said. “Additionally, foreign currency denominated assets and liabilities were subsequently remeasured at the end of each month using exchange rates from a specified date near the middle of the then current month … and not at the end of the reporting period.”

Although the manipulation happened without leadership’s knowledge, the company should have had controls in place to spot, and then stop, that kind of operation from happening. 

“Baxter did not have sufficient internal accounting controls over intra-company transactions,” the complaint said. “It also did not have adequate internal controls to monitor and quantify the difference between the foreign exchange gains and losses that it reported using its FX convention and the gains and losses it would have reported using exchange rates in accordance with GAAP. Baxter’s internal accounting controls failed to identify that the foreign exchange gains generated by the FX transactions were improper.”

In addition to the $100,000 penalty, Schaible was ordered to disgorge $76,404 and pay $12,955 in prejudgment interest. 

The company’s former treasurer, Scott Bohaboy, was assessed the $125,000 penalty for his failure to respond to the scheme. 

“During his time as Treasurer …  Bohaboy was aware of the consistent gains, but never considered how the Treasury department was able to consistently generate gains, or whether the transactions that generated the gains were permissible,” the SEC said.