The Buxton Helmsley Group, Inc. (together with certain of its affiliates and clients, “BHG” or “we”), the New York City-based investment advisor to clients with financial interests in Mallinckrodt Plc., issued an open letter to shareholders and creditors of the Company, relating to Post-Reorganization Financial Disclosure Violation Notice – Mallinckrodt Plc.
The full open letter to the company’s new board of directors, along with a letter to the U.S. Senate Finance Committee leading up to this open letter, may be found at: https://www.buxtonhelmsley.com/mnk/.
Q4 2022 hedge fund letters, conferences and more
Ladies and Gentlemen of the Board (the “Board”), Messrs. Olafsson, Reasons, and Speciale:
The Buxton Helmsley Group, Inc. ("BHG" or "we") addresses you with respect to both the pre-and post-reorganization financial disclosures/filings of Mallinckrodt plc. (the "Company") lodged with the U.S. Securities and Exchange Commission (the "Commission"). This letter is being sent after an extensive investigation having been conducted. It turned out that this Company’s insiders’ story of “hopeless insolvency” was not about contingent liabilities at all. The Company was instead “hopelessly insolvent” due to the Company’s long-running failure to disclose billions of dollars in asset value depreciation expenses from the Company’s financial statements being filed with the Commission, which expressly violates the Generally Accepted Accounting Principles (“GAAP”) codified under ASC 350 and 360. Such a failure to disclosure depreciation within Commission filings is dually a violation of the United States’ Regulation S-X (“Regulation S-X”, which is officially codified at 17 CFR § 210), requiring that the Company both comply with GAAP and disclose all accumulated depreciation within Commission filings (there is no GAAP excuse with Regulation S-X’s broad, catch-all disclosure requirements). Not only that, but BHG now has discovered that the Company is “strong[ly] evidence[d]” to be committing the very same concealment of asset value depreciation all over again, now postreorganization, too. Even more interestingly, the Company cannot argue with our “strong evidence” of this Company’s resumed concealment of asset value depreciation from this Company’s financial statements, given that the “strong eviden[tiary]” standard is the Company’s own, and Chief Financial Officer Bryan Reasons has long stood behind that evidentiary standard of determining the truth of the fair value of assets securing the Company’s capital structure interests. If any member of this Company’s post-reorganization Board finds themselves jarred by what they are about to read (as in, the following is news to you), or even barely begins to understand how apparent these violations of accounting standards and securities laws are, and/or is not willing to correct these glaringly apparent issues, they should immediately resign (BHG finds it beyond comprehension that every member of this Company’s leadership could be aware of these issues); if another Wells Notice (from the Commission) shows up for this Company and its leadership (“another”, given what we are about to point out in just a couple paragraphs) over these matters here, the time that further Wells Notice is in-hand is far too late to begin attempting to deny knowledge.
Now that an extensive investigation has determined that this Company indeed failed to uphold financial disclosure obligations to its pre-reorganization investors (by violating GAAP ASC 350, 360, and Regulation S-X, as will be outlined), and given BHG’s discovery of the Company apparently resuming its scheme now post-reorganization (in a mirroring scheme of apparently concealing asset value depreciation from financial statements), too, BHG has filed two final whistleblower filings with the Commission; one regarding the Company’s apparent pre-reorganization financial disclosure violations, and another related to the apparent post-reorganization financial disclosure violations. BHG has also forwarded this letter to:
- The Commission’s Division of Enforcement;
- The Commission’s Office of the Whistleblower;
- U.S. Senator Elizabeth Warren, given her seat on the Senate’s Finance Committee; and
- U.S. Senator Sheldon Whitehouse, given his seat on the Senate’s Finance Committee.The Company’s Board (and its investors) should note that BHG, in mid-2022, exposed financial disclosure violations, inconsistencies, and irregularities, at Endo International PLC. (formerly, NASDAQ: ENDP), with first-lien creditors beginning their seizure of the company within five days of BHG’s initial open letter to Endo’s investors, and with bankruptcy being filed shortly thereafter.1 Endo International was on the radar of BHG due to apparent violations of some of the very same accounting standards and financial disclosure obligations as we will thoroughly evidence and explain here. Failure of Mallinckrodt’s leadership (at the ultimate direction of this Board) to make the appropriate restatements of historical financial statements filed with the Commission (and appropriate adjustments to, also, postreorganization financial statements filed with the Commission) will constitute arguably voluntary, continued violation of those accounting standards and financial disclosure obligations; Endo International has already largely
paved the way for the appropriate accounting adjustments (particularly, asset value impairment charges) to be made at this Company, upon this letter notice. Unlike this Company, Endo International walked into the bankruptcy court with their Commission-filed balance sheet materially in line with their professed enterprise value; that is because Endo International chose to comply with GAAP and Regulation S-X, unlike this Company, very apparently. Whether this Company is forced to return to the bankruptcy court again – after this letter raising such disturbing discrepancies in bookkeeping and accounting practices – is irrelevant; this Company is still entirely obligated to immediately disclose and record asset value impairment “strong[ly] evidence[d]” by the Company’s own priorprofessed “strong eviden[tiary]” standard of determining the fair value of assets securing capital structure interests (as will be thoroughly outlaid); entry into bankruptcy proceedings does not absolve of the illegality of a company’s sudden, mass disclosure of asset value depreciation that a company claims was “strong[ly]” evidence[d]” (this Company’s own words) and determined during prior reporting periods, and therefore already required to be disclosed long before. Even Enron had come clean about their losses within Commission filings before they got to the bankruptcy court.
BHG suggests that those various Company executives addressed here (and copied below the signature block on this message) very carefully read this letter concerning this Company’s apparently continued misconduct (the picture is the same, both pre-and post-reorganization). Any insiders (including those merely copied at the bottom) who are receiving (or do receive) post-reorganization equity in this Company, are – after this letter – arguably the knowing beneficiaries of a long-running, apparently still-ongoing scheme violating securities laws and accounting standards. If those Company executives copied on this letter do not understand accounting (which largely boils down to common sense and the lightest application of ethical disclosure practices), they should read this letter very carefully and, in BHG’s opinion, consult independent counsel.
We first note our investigation’s ever-interesting find that Mr. Reasons not only stands behind statements of financials very arguably incompliant with securities laws and accounting standards (yet again, now even postreorganization, by the Company’s own chosen evidentiary standards, as we will discuss), but also behind a façade of apparently false licensing/credential representations actively being made to public investors. Everyone can see the attachments following this letter, where investors are actively being led to believe that Mr. Reasons “is a Certified Public Accountant”, yet – after our mere search of all state licensing databases – Mr. Reasons has a licensing history only in Pennsylvania, and his license has been inactive since year-end 2019… Let us guess: Mr. Reasons “forgot” to make such a material update to his executive profile, the same as he apparently fails to update his signed financial statements with very material multibillion-dollar asset value depreciation (as he is standing behind the Company’s court testimony as to the apparent determination of those losses)? Did you, Mr. Reasons, also apparently “forget” to tell Societal C.D.M.O. (on whose board of directors you serve, apart from your position here at Mallinckrodt) that you are no longer a Certified Public Accountant (everyonecan see your Societal C.D.M.O. director biography, for which we have enclosed a copy of with this letter)? Apparently, Mr. Reasons, you just “forgot” to tell everyone that you lost your Certified Public Accountant status? Such “forgetfulness”, Mr. Reasons, should compel your immediate resignation, before this Company’s Board has the chance to terminate you (this Board certainly knows they will be the ones sizably expelled from this Company, should they fail to act so reasonably upon beholding this message). Investors make decisions based on the representations that companies and their leadership are actively leading them to believe, and the trust that updates to all material changes are ongoingly made. Investors should not have to fact-check a company for material inaccuracies in disclosure, and they are apparently endless at this Company.
This Company has long claimed that BHG’s whistleblowing has been unwarranted (framing BHG as having some personal vendetta to wrongfully smear this Company, its board, and executives), but that was not accurate; a classic case of a larger adversary framing the other/smaller one as not acting in good faith, perhaps in an attempt to distract (those watching) from the hidden truth coming out from under wraps. Deep in the Company’s recent 10-K filing with the Commission (filed just days ago, on March 3, 2023), on page 131,2 it is disclosed that not only the Company itself, but also current and former executives, received Wells Notices on January 13, 2023, from the U.S. Securities and Exchange Commission, with respect to alleged misconduct surrounding disclosures of Acthar Gel litigation (not near as bad as the findings BHG is about to discuss, after a full, deep-dive investigation). The 10-K Wells Notice disclosure states, in pertinent part, as follows:
“SEC Subpoena. In August 2019, the Company received a subpoena from the SEC for documents related to the Company's disclosure of its dispute with the HHS and CMS (together with HHS, the "Agency") concerning the base date average manufacturer price for Acthar Gel under the Medicaid Drug Rebate Program, which was also the subject of litigation that the Company filed against the Agency. The SEC issued subsequent subpoenas on January 7, 2022 and September 28, 2022, requesting additional documents from the Company. In connection with the investigation, on January 13, 2023, the SEC staff issued Wells Notices to the Company and individuals, including certain of its current and former executive officers, who were employed during 2019 (collectively, the “Individuals”). The notices indicate that the SEC staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company that would allege violations of the federal securities laws, and against the Individuals that would allege violations of the federal securities laws and/or aiding and abetting violations of the federal securities laws. The recommendation as to the Company may involve an injunction, a cease-and-desist order and/or other appropriate relief. The actions recommended by the SEC staff would allege, among other things, that (a) the Company improperly omitted to disclose the dispute with the Agency prior to the litigation filed by the Company in federal court on May 21, 2019, and (b) the Company’s disclosure of the civil investigative demand received from the U.S. Attorney’s Office for the District of Massachusetts in January 2019 (the “Boston CID”) should have stated that the Boston CID related to the Company’s dispute with the Agency.”
The definition of a “Wells Notice” (for those readers who are not familiar), according to the Commission’s very own enforcement manual:
“A Wells notice is a communication from the staff to a person involved in an investigation that: (1) informs the person the [Commission’s] staff has made a preliminary determination to recommend that the Commission file an action or institute a proceeding against them; (2) identifies the securities law violations that the [Commission’s] staff has preliminarily determined to include in the recommendation; and (3) provides notice that the person may make a submission to the Division and the Commission concerning the proposed recommendation.” (emphasis added)
BHG is, quite obviously, far from alone in alleging this Company and its executives apparently violated securities laws and engaged in misconduct. If the Commission has found enough evidence to preliminarily decide to charge concerning Acthar Gel disclosures, we believe they are going to be quite interested in the contents of this letter, which involve significant evidence and findings which have never been publicly discussed by BHG before.
Part I of II:
Pre-Reorganization ~$2.3B Asset Value Depreciation Expense Concealment,
in Violation of GAAP ASC 350, 360, and Regulation S-XBefore we lay out the “strong evidence” (this Company’s evidentiary standard, as will be seen) this Company appears to be actively concealing billions of dollars in asset value depreciation, yet again now (post-reorganization, too), we must first lay out how the Company had, pre-reorganization, failed on its financial disclosure obligations to the Commission and the Company’s pre-reorganization investors (in apparent violation of GAAP ASC 350, 360, and Regulation S-X). It is essential for investors to understand the Company’s apparent pre-reorganization scheme (again, under the same Chief Financial Officer), to understand why BHG is saying this Company is “strong[ly] evidence[d]” to be engaging in the very same asset value depreciation expense concealment scheme, all over again (now, postreorganization, too).
The parties that were principally charged with providing transparent and fluent financial disclosures to public investors, pre-reorganization, include:
- Mr. Bryan Reasons (in his capacity as Chief Financial Officer and Principal Accounting Officer, both presently and throughout the entirety of the Company’s bankruptcy proceedings initiated on October 12, 2020);
- Ms. Kathleen Schaefer (in her former capacity of Senior Vice President of Finance, given her resignation on November 3, 2021, 4 just days after BHG’s very public sounding of the alarm5 over our beginning to uncover
accounting irregularities and discrepancies at the Company); and
- Mr. Mark Trudeau (in his former capacity of Chief Executive Officer, for which he resigned as of the Company’s reorganization effectiveness on June 16, 2022).This Company very apparently understood its requirement to comply with (given itscitation of supposed compliance, within Commission filings) the Generally Accepted Accounting Principles ("GAAP") of the United States. Beyond GAAP, the Company was also required to comply with Regulation S-X, given it being an entity with issued securities being publicly traded in the United States. Regulation S-X not only requires compliance with GAAP, but also requires disclosure of accumulated depreciation of assets (the loss in fair value over the course of an asset being carried on the books of a company).
Read the full letter here by:
Alexander E. Parker
Senior Managing Director
The Buxton Helmsley Group, Inc
