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Exchange Act Revocation Upheld - Cure The Delinquency While The Appeal Is Pending

Impax Laboratories, Inc., Exchange Act Release 57864 (May 23, 2008)

Time Since Appeal Filed - 1 year
Times Since Last Brief - 9 months, 17 days
Pages - 17
Footnotes - 35


This case has some valuable lessons for companies facing revocation due to delinquent filings. If the company is seriously delinquent, has had a significant amount of time to become current, is still delinquent at the time of the decision, and has not been able to credibly state when it will become current - revocation is likely to be a foregone conclusion.

Impax appealed the ALJ's initial decision revoking the company's Exchange Act registration under Exchange Act Section 12(j) for failing to file periodic reports for any period after September 30, 2004.  The company admitted this.  The company claimed it was unable to devise an appropriate revenue recognition policy in connection with a profit sharing arrangement with an Israeli company.  Impax was to develop and manufacture generic drugs that the Israeli company would market.  The Israeli company was to loan money to Impax and purchase a specified amount of its stock.

In February 2005 the company and its auditors Deloitte started discussions about how to account for revenue related to the arrangement.  In March 2005 Deloitte advised the company it could not determine appropriate revenue recognition policies and advised the company to consult the Commission's staff for guidance.  Commission policy requires that companies seeking such guidance have their auditors confirm the accuracy of the submission made to the staff and reach a conclusion on the accounting issue.  In this instance, Deloitte advised management that the submission to the Commission staff was not complete and should not be submitted to the Commission staff because Deloitte had not reached a conclusion on proper accounting treatment.  The company made the submission anyway.  

In June 2005 Commission staff advised the company of specific factual and analytical issues that must be addressed by the company before it could provide a meaningful response and suggested the company make a second submission addressing those issues.  Also in June 2005 the company filed a Form 8-K announcing that it had identified material weaknesses in its internal accounting controls and NASDAQ notified the company that its listing was in jeopardy due to its delinquency in filing with the SEC.

In November 2005 the company made a second submission to the SEC staff, still without a conclusion from Deloitte.  In January 2006 Commission staff told the company that eight of the issues it had previously requested the company address were still unanswered.  The staff suggested that a third submission be made.  Over the next thirteen months the company, Deloitte, and an accounting consultant labored to prepare a third submission to the SEC staff.  

By November 2005 Deloitte notified the company it would resign as auditors after completion of the 2004 year-end audit. In February 2006 the company made a third submission to the Commission staff which included a claim that Deloitte concurred in the proposed accounting treatment. In March 2006 the Commission notified the company it would seek to revoke its registration unless it filed its delinquent periodic reports.  

At trial an expert for the company claimed that the stock traded in an efficient market despite the lack of periodic reports.  The company also claimed at the hearing that it would file all its delinquent reports within eight to twelve weeks after receiving clearance from the Commission staff who were still reviewing its third submission.  Unfortunately for the company, Deloitte testified that it could not estimate how long it would need to complete the 2004 audit.  The company's current auditors said they could not finish the 2005 and 2006 audits until Deloitte concluded its work.

In July 2007, while the appeal was pending, the Commission's accounting staff advised the company that all open accounting questions had been satisfactorily resolved.  Usually Commission staff responds to accounting submissions in less than three weeks.  As of the date of the opinion, Impax had filed none of the delinquent reports.

Despite Impax's efforts to solve its accounting problems, the Commission sustained the ALJ's order revoking the company's registration.  It noted that "[e]ven if the failure were unintentional, it has deprived the investing public of current and accurate information with respect to [its] operations and financial condition for a period of more than three years."  These were serious violations. Here, the company had been delinquent in filing a total of four annual reports and ten quarterly reports (including those that occurred after the enforcement case was instituted). 


The Commission here seems to have resolved some of the ambiguities in its earlier revocation decisions by announcing what amounts to a per se revocation rule when the company is still delinquent by the time of the decision, has been delinquent for a long time, and cannot credibly predict a date when it will become current in its delinquent filings.  

Also, when a company is delinquent over a long period, the Commission puts the burden of making a "strongly compelling showing" of other factors that will justify a sanction less than revocation.  This per se rule was adopted even though the company made significant efforts to solve its accounting problems.  

The Commission discounted the company's undeniable significant efforts to solve its problems because it made no filings even though the Commission staff had agreed with it on an accounting treatment in late July 2007.  Undoubtably this continued delinquency for almost ten months weighed heavily in the Commission's ultimate decision.  This rendered the company's assurances against future violations not credible.  Also significant was the company's inability to identify when it would actually be able to become current.

As to the company's argument that revocation would have a drastic impact on the company, the Commission noted that it could always reregister once it had completed its audits and was able to comply with registration requirements.

Wise defense counsel will focus their efforts in these cases on producing strong and credible evidence of when delinquencies will be cured and will cure while an appeal of an ALJ's revocation order is pending. Failure to cure while an appeal is pending is likely to prove fatal.