John F. Savarese and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.
An SEC enforcement action announced today highlights a continuing focus on timely disclosure of contingent liabilities. The SEC’s order in In the Matter of Healthcare Services Group, Inc. found that HSG improperly delayed recording or disclosing anticipated losses in pending litigation. The SEC noted that the case resulted from its EPS Initiative, in which the agency deploys data analytics to search for indicators of improper earnings management. The SEC also charged HSG’s CFO, for deciding not to record the loss contingency, and the company’s controller, for a separate series of violations involving improper reductions in other expenses. The parties settled without admitting or denying the SEC’s findings, and HSG agreed to pay a $6 million civil penalty.
As the SEC Order recites, HSG was a defendant in several class action lawsuits alleging claims under various wage-and-hour labor laws. On two different occasions, HSG entered into proposed settlement agreements relating to certain of these lawsuits. Court approval was required for each settlement to become final. In several reporting periods, HSG did not accrue any loss contingency despite entry into settlement agreements, submission of those agreements for court approval, and grants of preliminary approval by the court.