According to the SEC's complaint, Mylan classified EpiPen as a "generic" drug under the Medicaid Drug Rebate Program, which resulted in Mylan paying much lower rebates to the government than if EpiPen had been classified as a "branded" drug. The complaint alleges that in October $2014,$ the Centers for Medicare and Medicaid Services $($CMS$)$ informed Mylan that EpiPen was misclassified as a generic drug. Starting in November $2014,$ and continuing for nearly two years, the DO$]$ conducted a civil investigation into whether Mylan misclassified EpiPen and thereby overcharged the government for EpiPen sales to Medicaid patients. During the investigation, DO$]$ issued multiple subpoenas and investigative demands, rejected Mylan's arguments to close the investigation, and indicated its intent to sue Mylan if Mylan failed to make a settlement offer. As alleged in the complaint. Mylan produced documents and other information to DO$],$ including providing potential damages calculations and making offers of settlement.

As alleged in the complaint, public companies facing possible material losses from a lawsuit or government investigation must $(1)$ disclose the loss contingency if a loss is reasonably possible; and $(2)$ record an accrual for the estimated loss if the loss is probable and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DO$]$ investigation before October $2016,$ when it announced a $$465$ million settlement with DOJ. As a result, Mylan's public filings were false and misleading. Further, as alleged in the complaint, Mylan's $2014$ and $2015$ risk factor disclosures that a governmental authority may take a contrary position on Mylan's Medicaid submissions, when CMS had already informed Mylan that EpiPen was misclassified, were misleading.

$"$As alleged in our complaint, investors were kept in the dark about Mylan': EpiPen misclassification and the potential loss Mylan faced as a result of the pending investigation into the misclassification," said Antonia Chion, Associate Director in the SEC's Division of Enforcement. $\text{'}$It is critical that public companies accurately disclose material business risks and timely disclose and account for loz$=$ contingencies that can materially affect their bottom line." The SEC's complaint, filed in federal courtin Washington, D$.$C$.$ charges Mylan with violating Sections $17($a$)(2)$ and $17(1)(3)$ of the Securities Act of $1933,$ Sections $13($x$)13(6)(2)($A$)$ and $13(6)(2)(8)$ of the Securities Exchange Act of

$1934,$ and Rules $12$b$-20,13$a$-1,13$a$-11$ and $13$a$-13$ thereunder. Without admitting or denying the SEC's allegations, Mylan has agreed to the entry of a final judgment ordering a $$30$ million penalty and permanently enjoining it from violating those provisions.

The SEC's investigation was conducted by lan Dattner and Daniel Maher, under the supervision of Lisa Deitch, Peter Rosario, and Antonia Chion.

Both management and the external auditor stated that the internal control was effective for years, $2014,2015,$ and $2016,$ despite a complaint as early as October $2014$ that Mylan was incorrectly classifying the EpiPen to the Centers for Medicare and Medicaid Services. I include this snip of the internal control opinions that state that management and the auditors were willing to state that internal control was functional. Management was overriding appropriate accounting requirements and not recording the loss.

I saw these seports on internal coutrol over Enancial xpert on the Mylas aanual gat$$

Manugement stated

DELOITTE & TOUCHE LIP stated

$2014$

management has concluded that the Company maintained effective internal control over financial reporting as of December $31.2014$

our report dated March $2,2015$ expressed an

ungated orun on the Compay's intemal

control over Faxocial reporting.

$2015$

management has concluded that the Company maintained effective internal control over financial reporting as of ecember $31,2015$

our report dated Felizay $15,3916$ expressed an unqualified epinion on she Company'$\%$

internal control over tinsancial reporting

$2016$

Company mamtained effective internal control over financial reporting as of December $31,2016)$

our report dated Manch $1,2017$ expressed an

$$ agraoun co the Compan's iniena

other than what is reported in the press release, so let's take the information as an adequate representation.

$1.$ What would have been the financial affect of accruing the loss?

$2.$ Why might management prefer not to record the loss? Feel free to pick one or more of the following thoughts or describe your own ideas. Management might not want to record the loss

$$ because management was concerned with their reputation for competency or honesty, having misclassified drugs to the CMS$,$

$-$ because investors might react to the loss by reducing the value of the stock, making it more difficult to raise capital

$$