By Matthew Garza, J.D.
The SEC settled charges against Walgreens Boots Alliance and two former officers for misleading investors about the company’s progress on hitting a key financial goal announced after a 2012 merger. Walgreens’ two-step merger with European company Alliance Boots was projected to generate between $9 and $9.5 billion in combined adjusted operating income in 2016, but the company’s CEO and CFO failed to disclose that internal projections showed increased risk in hitting that number over multiple reporting periods. By the time the second step of the merger took place in 2014, the projection was down to $7.2 billion, causing a 14.3 percent stock drop the day it was announced (In the Matter of Walgreens Boots Alliance, September 28, 2018).
Increasing risk. The CEO and CFO knew the financial target was a challenge from the beginning, said to the SEC, and from 2013 forward Walgreens’ internal forecasts showed significant and increasing risks to hitting the target. Poor sales and an industry-wide increase in the price of generic drugs placed pressure on the goal, but the company reaffirmed the target on two earnings calls in 2013 without disclosing that the company was seeing a growing risk in hitting it.
The original October 2012 financial targets were referred to internally as “challenging, stretch goals,” and the company’s Financial Planning and Analysis group regularly tracked progress and compared it to the 2012 glide path. By the spring of 2013, the group was seeing lagging performance and began to project significant shortfalls in the glide path targets for 2014-2016. The CEO and CFO were sent an email in May 2013 describing the risks, according to the complaint, and internal forecasts continued to drop through August 2014, when the company shocked investors with the lowered target.
Misleading statements. The risks identified by Walgreens internally were not adequately stated in quarterly disclosures in 2013 and 2014, the SEC charged. In earnings calls in June and October of 2013 the original forecast was reaffirmed without any warning of the risks identified internally. In a December 2013 the company disclosed that it was “tracking a bit below” the necessary pace, but they still thought it attainable. This inadequate disclosure, according to the complaint, was repeated in March 2014.
Sanctions. Without admitting or denying the findings, the company was fined $34.5 million and the CEO and CFO were penalized $160,000 each. The company was granted a waiver from the safe harbor disqualification provisions of Securities Act Section 27A(b) and Exchange Act Section 21E(b), which exclude reliance on the safe harbors for forward-looking statements if the issuer has been subject to a cease and desist order within the past three years.
“As this case shows, we are committed to holding corporate executives accountable when they are in the best position to ensure that disclosures are accurate and not misleading,” said Melissa Hodgman, associate Director of the SEC’s Enforcement Division.