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Issues To Consider From The Olympus Enforcement Action

Issues

This prior post went in-depth into the recent $22.8 million Foreign Corrupt Practices Act enforcement action against Olympus Latin American Inc.

This post continues the analysis by highlighting various issues to consider.

20th Enforcement Action

Certain people seem to be confused about the reasons why Foreign Corrupt Practices Act enforcement has generally increased over the past decade.

However, there are several practical (as well as provocative) reasons.

Among the more obvious practical reasons (no doubt it is provocative as well) is that in 2002 the FCPA enforcement agencies came up with the theory that employees (such as physicians, nurses, mid-wives, lab personnel, etc.) of certain foreign health care systems are “foreign officials” under the FCPA and thus occupy a status equal to Presidents, Prime Ministers, and other bona-fide foreign officials that Congress had in mind when passing the FCPA in 1977.

It is one of the more aggressive and dubious FCPA enforcement theories there is.  It has never been subjected to judicial scrutiny and perhaps most telling as to its validity and legitimacy, the DOJ has never charged an individual with an FCPA violation based on this theory.

Nevertheless, the theory is frequently used in FCPA enforcement actions and the Olympus enforcement action represents the 20th time it has been used in a corporate enforcement action.

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Olympus Latin America Pays $22.8 Million In Latest FCPA Enforcement Action To Allege That Health Care Professionals Are “Foreign Officials”

olympus

Earlier this week, the DOJ announced (as part of a much larger enforcement action) a Foreign Corrupt Practices Act action against Olympus Latin American Inc. (OLA), a Miami-headquartered company that distributes medical imaging equipment in the Caribbean, Central America, and South America for Olympus Corporation (a Japanese company).

This post highlights the OLA enforcement action (the latest FCPA enforcement based on the theory that certain health care professionals are “foreign officials” under the FCPA) in which the DOJ charged the company in this criminal complaint with conspiring to violate the FCPA’s anti-bribery provisions and violating the FCPA’s anti-bribery provisions. The charges were resolved via this deferred prosecution agreement in which OLA agreed to pay $22.8 million.

According to the charging documents, from 2006 to 2011 OLA provided approximately $3 million in “hundreds of unlawful payments” to publicly employed healthcare professionals in Brazil, Bolivia, Colombia, Argentina, Mexico, and Costa Rica to “induce the purchase of Olympus products, influence public tenders, or prevent public institutions from purchasing or converting to the technology of competitors.” According to the charging documents, OLA recognized approximately $7.5 million in profits as a result of the alleged unlawful payments.

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Issues To Consider From The SciClone Enforcement Action

IssuesThis recent post highlighted the SEC’s $12.8 million Foreign Corrupt Practices Act enforcement action against SciClone Pharmaceuticals.

The action was based on the marketing and promotional activities of a subsidiary that provided various things of value to healthcare professionals employed by state-owned hospitals in China including weekend trips, foreign language classes, “golf in the morning and beer drinking in the evening,” and travel to the Grand Canyon and Disneyland.

This post continues the analysis of the enforcement action by highlighting various issues to consider.

Time Line

In August 2010, SciClone disclosed that the SEC had issued the company a subpoena inquiring about its business practices in China.

If the SEC wants the public to have confidence in its SEC enforcement program, it must resolve instances of FCPA scrutiny much quicker. 5.5 years is simply inexcusable.

For instance, SciClone previously disclosed that in “July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement” and its disclosure specified the exact amount in last week’s settlement.

Should it really take 7 months to finalize an agreement in principle to settle?

Nearing 20

According to my figures, SciClone is the 18th corporate FCPA enforcement action based on the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA.

This enforcement theory has never been subjected to any meaningful judicial scrutiny and, perhaps most telling as to its validity and legitimacy, is that none of the corporate enforcement actions based on this theory have resulted in related charges against an individual.

Initial Disclosure of Settlement Amount

In March 2014, SciClone disclosed, in connection with its FCPA scrutiny, “that a payment of $2.0 million to the government in penalties, fines and/or other remedies is probable.”

As highlighted above, the final settlement was $12.8 million.

Anything of Value

The enforcement action contains the following list of things of value.

  • “weekend trips, vacations, gifts, expensive meals, foreign language classes, and entertainment”
  • attendance at “the annual Qingdao Beer Festival consisting of golf in the morning and beer-drinking in the evening”
  • “vacations to Anji, China”
  • “paying for family vacations and regular family dinners”
  • “$8,600 in lavish gifts”
  • non-business “travel to Las Vegas and Los Angeles with tours of the Grand Canyon or Disneyland.”
  • “sightseeing and [travel to] tourist locations such as Mt. Fuji.”
  • “a weekend stay on the island of Hainan, a resort destination”

Chinese Travel Companies

Purported travel companies, as well as the fapiao’, are well-known compliance risks in China. On these issues, the SEC’s order states:

“Local Chinese travel companies were routinely hired to provide services (such as arranging transportation, accommodations, and meals for HCPs) in connection with what were ostensibly legitimate conferences, seminars, and other events. In addition to a lack of due diligence for these third party vendors … there was a lack of controls over the events to ensure they had an appropriate business purpose and that the events actually occurred. Many events did not include a legitimate educational purpose or the educational activities were minimal in comparison to the sightseeing or recreational activities.”

[…]

As part of its remedial efforts, SciClone conducted a detailed, comprehensive internal review of promotion expenses of employees … This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings.”

Professional Fees and Expenses

Even though SciClone, in its March 2015 annual report, disclosed for the FY ended December 31, 2013 “$5.3 million related to legal matters associated with the ongoing government investigation and our ongoing improvements to our FCPA compliance efforts,” the company’s other disclosures over its long period of FCPA scrutiny lack specifics regarding pre-enforcement action professional fees and expenses.

Nevertheless, it is a safe assumption that the aggregate of such fees and expenses exceeded the $12.8 million settlement amount. Add to this SciClone’s post-enforcement action reporting obligations and the biggest “winner” of SciClone’s FCPA journey would appear to be the law firm representing SciClone.

Other Ripples

FCPA Professor has followed SciClone’s FCPA scrutiny since day one in August 2010 (see here).

As chronicled on FCPA Professor, the biggest storyline was how SciClone’s disclosure of the SEC subpoena triggered a nearly 40% drop in the company stock price, resulting in an absolute feeding frenzy of plaintiff lawyers filing FCPA-related civil claims. (See here and here).

Indeed, SciClone’s FCPA scrutiny is prominently featured in the article “Foreign Corrupt Practices Act Ripples“ which highlights how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.

Nevertheless, savvy investors know that FCPA-induced dips often present buying opportunities and SciClone’s stock closed last Friday (the first day of trading after announcement of the FCPA enforcement action) up 8% and substantially higher compared to its August 2010 close (recognizing of course that a number of factors can influence a company’s stock price over the course of nearly 6 years).

For Your Viewing Pleasure

In this 2014 video, SciClone’s CEO talks about the company’s FCPA scrutiny and, more generally, compliance.

Next Up – Bristol-Myers

BMS

First it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).

Then it was Smith & Nephew (see here – $22 million enforcement action in February 2012).

Then it was Biomet (see here – $22.8 million enforcement action in March 2012).

Then it was Pfizer / Wyeth (see here  – $60 million enforcement action in August 2012).

Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).

Then it was Stryker (see here – $13.2 million enforcement action in October 2013).

Then it was Mead Johnson (see here – $12 million enforcement action in July 2015).

The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Bristol-Myers Squibb Co. (“BMS”).

Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”

Yesterday, the SEC announced this administrative cease and desist order in which BMS agreed, without admitting or denying the SEC’s findings, to pay approximately $14.7 million.

The order states in summary fashion as follows.

“These proceedings arise out of violations of the internal controls and recordkeeping provisions of the FCPA by BMS and its majority-owned joint venture in China. Between 2009 and 2014, BMS failed to design and maintain effective internal controls relating to interactions with health care providers (“HCPs”) at state-owned and state-controlled hospitals in China. Through various mechanisms during this period, certain sales representatives of the joint venture improperly generated funds that were used to provide corrupt inducements to HCPs in the form of cash payments, gifts, meals, travel, entertainment, and sponsorships for conferences and meetings in order to secure new sales and increase existing sales. BMS falsely recorded the relevant transactions as legitimate business expenses in its books and records.”

The findings focus on Bristol-Myers Squibb (China) Investment Co. Limited (“BMS China), a company through which BMS conducts business in China, and how BMS China, in turn, primarily operates in China through Sino-American Shanghai Squibb Pharmaceuticals Limited (“SASS”), a majority-owned joint venture.

According to the Order:

“BMS holds a 60% equity interest in SASS and has held operational control over this entity since 2009 when it obtained the right to name the President of SASS and a majority of the members of SASS’s Board of Directors.

BMS began operating in China in 1982 when it formed SASS, the first SinoAmerican pharmaceutical joint venture. Following a successful product launch in 2005, BMS China’s business grew quickly. By 2009, BMS China had 1490 full-time employees and net sales of more than $200 million. This upward trend continued through 2014 when the number of full-time employees expanded to 2464 and net sales reached nearly $500 million.

Certain BMS China employees achieved their sales, in part, by providing HCPs and other government officials with cash and other inducements in exchange for prescriptions and drug listings.”

Under the heading “Failure to Respond to Red Flags,” the Order states:

“BMS China failed to respond effectively to red flags indicating that sales personnel provided improper payments and other benefits in order to generate sales from HCPs. In 2009, BMS China initiated a review of travel and entertainment expenses submitted for reimbursement by its sales personnel and found non-compliant claims, fake and altered invoices and receipts, and consecutively numbered receipts. Shortly thereafter, BMS China retained a local accounting firm to conduct monthly post-payment reviews of all claims for travel, entertainment, and meeting expenses to identify false, improperly documented, and unsubstantiated claims. BMS China brought this function in-house in early 2011 and the results of both the external and internal reviews were provided to management of BMS China as well as regional compliance and corporate business managers who reported directly to senior management of BMS.

During the period between mid-2009 and late 2013, BMS China identified numerous irregularities in travel and entertainment and event documentation, including fake and altered purchase orders, invoices, agendas, and attendance sheets for meetings with HCPs that likely had not occurred. BMS China inaccurately recorded the reimbursement of these false claims as legitimate business expenses in its books and records, which were then consolidated into the books and records of BMS.

Certain BMS China employees admitted that they had submitted false reimbursement claims and used the funds for the benefit of HCPs in support of sales by BMS China. They also alleged that the use of false reimbursement claims to fund payments to and for the benefit of HCPs in order to secure prescription sales was a widespread practice at BMS China. In emails to the BMS China President in November 2010 and January 2011, certain terminated employees wrote that they used the funds to pay rebates, provide entertainment, and fund gift cards for HCPs, as there was no other way to meet their sales targets. Citing the “open secret” that HCPs in China rely upon the “gray income” to maintain their livelihood, they said that they tried to meet the demands of the HCPs for the benefit of BMS China. Despite the widespread exceptions and serious allegations of potentially widespread bribery practices, BMS China did not investigate these claims.”

Under the heading “Compliance and Controls Environment,” the Order states:

“Despite its longstanding presence in China, BMS did not implement a formal FCPA compliance program until April 2006 when it adopted its first standalone anti-bribery policy and corresponding corporative directive. At approximately the same time, BMS began conducting compliance assessments and audits of BMS China that included a review of internal controls relating to anti-bribery risks. These internal reviews revealed weaknesses in the monitoring of payments made to HCPs, the lack of formal processes around the selection and compensation of HCPs as speakers, deficiencies in obtaining and documenting the approval of donations, sponsorships, and consulting arrangements with HCPs, and the failure to conduct post-event verification of meetings and conferences sponsored by sales representatives. Reports of these findings were provided to senior management of BMS China as well as members of BMS’s global compliance department.

These identified controls deficiencies were not timely remediated and compliance resources were minimal. The corporate compliance officer responsible for the Asia-Pacific region through 2012 was based in the U.S. and rarely traveled to China. There was no dedicated compliance officer for BMS China until 2008, and no permanent compliance position in China until 2010. In addition, the BMS sales force in China received limited training and much of it was inaccessible to a large number of sales representatives who worked in remote locations. For example, when BMS rolled out mandatory anti-bribery training in late 2009, 67% of employees in China failed to complete the training by the due date.

Annual internal audits of BMS China repeatedly identified substantial gaps in internal controls, and the results were reported to the Audit Committee and senior management of BMS. In connection with each audit, the audit team cited a lack of effective controls and documentation relating to interactions with HCPs and the monitoring of potential inappropriate payments to HCPs. Among Internal Audit’s conclusions were that BMS China’s controls around the review and approval of travel and entertainment expenses and gifts to HCPs were not effective and that it failed to track payments to HCPs, including high-risk payments, in its quarterly review of potential inappropriate payments, and to enforce controls relating to the documentation, approval, and payment of distributor rebates. Internal Audit also cited the lack of due diligence assessments of distributor compliance, including anti-bribery compliance, the failure to properly document and approve agreements with HCPs who served as speakers, and the lack of a mechanism to ensure that services were received in exchange for sponsorships. As a result, Internal Audit issued a series of qualified opinions in connection with its annual audits of BMS China between 2009 and 2013.”

Under the heading “Internal Documents Reveal Improper Benefits Provided to HCPs,” the Order states:

“Emails and other BMS China documents detail, among other things, proposed “activity plans,” “action plans,” and plans for “investments” in HCPs to increase prescription sales. These contemporaneous documents were prepared at the direction of, and sometimes transmitted to, district and regional sales managers of BMS China, and show that sales representatives used funds derived from travel and expense claims to make cash payments to HCPs and to provide gifts, meals, entertainment, and travel to HCPs in order to induce them to prescribe products sold and marketed by BMS China. The sales representatives provided a variety of benefits to HCPs, ranging from small food and personal care items to shopping cards, jewelry, sightseeing, and cash payments, in exchange for prescription sales. This kind of conduct was captured in a July 2013 email from a sales representative to a regional manager. The sales representative explained that a former sales representative had offered cash for sales to HCPs at a local hospital and “the attitude of the director of the infectious diseases department was extremely clear when I took over: ‘No money, no prescription.’” Similarly, the work plans prepared by other sales representatives also identified correlations between the value of the benefits provided to specific HCPs and the volume of prescription sales expected.

Certain documents within BMS China were replete with references to “investments” made in order to obtain sales, such as offering speaking engagements and sponsorships for domestic and international conferences and meetings in exchange for prescriptions. Some sales representatives also sought to increase prescription sales and maintain drug listings at pharmacies by hosting cash promotions and events for pharmacy employees. Based on the volume of prescriptions, certain BMS China sales representatives gave cash, shopping cards, and foodstuffs as promotional prizes to pharmacy employees; at least one sales representative characterized the expenses as a “departmental development fee” in contemporaneous documents.”

Based on the above, the Order finds:

“As described herein, BMS, through the actions of certain BMS China employees, violated [the FCPA’s books and records provisions] by falsely recording, as advertising and promotional expenses, cash payments and expenses for gifts, meals, travel, entertainment, speaker fees, and sponsorships for conferences and meetings provided to foreign officials, such as HCPs at state-owned and state-controlled hospitals as well as employees of state-owned pharmacies in China, to secure prescription sales. BMS also violated [the FCPA’s internal controls provisions] by failing to devise and maintain a system of internal accounting controls relating to payments and benefits provided by sales representatives at BMS China to these foreign officials. As identified in various internal reviews, audits, and investigations conducted since at least 2009, BMS lacked effective internal controls sufficient to provide reasonable assurances that funds advanced and reimbursed to employees of BMS China were used for appropriate and authorized purposes.”

Under the heading “Remedial Efforts,” the Order states:

“BMS has implemented significant measures to enhance its anti-bribery and general compliance training and policies and to strengthen its accounting and monitoring controls relating to interactions with HCPs, including travel and entertainment expenses, meetings, sponsorships, grants, and donations funded by BMS China. BMS took numerous steps to improve the internal controls and compliance program at BMS China. Examples include a 100% pre-reimbursement review of all expense claims; the implementation of an accounting system designed to track each expense claim, including the request, approval, and payment of each claim; and the retention of a third-party vendor to conduct surprise checks at events sponsored by sales representatives. Additionally, BMS terminated over ninety employees, and disciplined an additional ninety employees, including sales representatives and managers of BMS China, who failed to comply with or sufficiently supervise compliance with relevant policies. In addition, BMS replaced certain BMS China officers as part of an overall effort to enhance “tone at the top” and a culture of compliance. Further, BMS revised the compensation structure for BMS China employees by reducing the portion of incentive-based compensation for sales and distribution, eliminated gifts to HCPs, implemented enhanced due diligence procedures for third-party agents, implemented monitoring systems for speaker fees and third-party events, and incorporated risk assessments based on data analytics into its compliance program.”

As stated in the Order:

“Without admitting or denying the findings, Bristol-Myers Squibb consented to the order and agreed to return $11.4 million of profits plus prejudgment interest of $500,000 and pay a civil penalty of $2.75 million.  Bristol-Myers Squibb also agreed to report to the SEC for a two-year period on the status of its remediation and implementation of FCPA and anti-corruption compliance measures.”

In the SEC’s release Kara Krockmeyer (Chief of the SEC’s FCPA Unit stated):

“Bristol-Myers Squibb’s failure to institute an effective internal controls system and to respond promptly to indications of significant compliance gaps at its Chinese joint venture enabled a widespread practice of providing corrupt inducements in exchange for prescription sales to continue for years.”

Yesterday Bristol-Myers’s stock closed down .47%.

According to reports, Bristol-Myers was represented by F. Joseph Warin of Gibson Dunn.

Next Up – Mead Johnson

Mead

First it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).

Then it was Smith & Nephew (see here – $22 million enforcement action in February 2012).

Then it was Biomet (see here – $22.8 million enforcement action in March 2012).

Then it was Pfizer / Wyeth (see here  – $60 million enforcement action in August 2012).

Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).

Then it was Stryker (see here – $13.2 million enforcement action in October 2013).

The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Mead Johnson Nutrition Company. Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”

Yesterday, the SEC announced that Mead Johnson (a leading pediatric nutrition products) agreed to pay approximately $12 million pursuant to an administrative cease and desist order in which the company neither admitted or denied the SEC’s findings.

The substance of the order is approximately four pages and states in summary fashion as follows.

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Mead Johnson. The violations, which occurred in connection with the operations of Mead Johnson’s subsidiary in China, took place up through 2013.

The conduct at issue relates primarily to the misuse of marketing and sales funds in China. Despite prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson’s majority-owned subsidiary in China, Mead Johnson Nutrition (China) Co., Ltd. (“Mead Johnson China”), made improper payments to certain health care professionals (“HCPs”) at state-owned hospitals in China to recommend Mead Johnson’s nutrition products to, and provide information about, expectant and new mothers. These payments were made to assist Mead Johnson China in developing its business. For the period from 2008 through 2013, Mead Johnson China paid approximately $2,070,000 to HCPs in improper payments and derived profits therefrom of approximately $7,770,000.

Mead Johnson China failed to accurately reflect the improper payments in its books and records. Mead Johnson China’s books and records were consolidated into Mead Johnson’s books and records, thereby causing Mead Johnson’s consolidated books and records to be inaccurate. Mead Johnson failed to devise and maintain an adequate system of internal accounting controls over Mead Johnson China’s operations sufficient to prevent and detect the improper payments that occurred over a period of years.”

Under the heading “Mead Johnson China’s Improper Payments to HCPs,” the order states in full as follows.

“A portion of Mead Johnson China’s marketing efforts during the 2008 to 2013 period was through the medical sector, which included marketing through healthcare facilities and HCPs. Despite the prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson China improperly compensated HCPs, who were foreign officials under the FCPA, to recommend Mead Johnson’s infant formula to, and to improperly provide contact information for, expectant and new mothers.

Funding for those payments came from funds generated by discounts provided to Mead Johnson China’s network of distributors.

Mead Johnson China uses third-party distributors to market, sell and distribute product in China. Some of Mead Johnson China’s funding of its marketing and sales practices were effected through discounts provided to the distributors. Pursuant to contracts between Mead Johnson China and its distributors, Mead Johnson China provided the distributors a discount for Mead Johnson’s products that was allocated for, among other purposes, funding certain marketing and sales efforts of Mead Johnson China. This form of funding was referred to as “Distributor Allowance.”

Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent, and certain Mead Johnson China employees provided specific guidance to distributors concerning the use of the funds. Mead Johnson China staff also maintained certain records related to Distributor Allowance expenditure by distributors. In addition, Mead Johnson China used some of the funds to reimburse Mead Johnson China’s sales personnel for a portion of their marketing and other expenditures on behalf of Mead Johnson China.

Mead Johnson China’s sales personnel marketed product through medical channels, including healthcare facilities. These sales personnel encouraged HCPs at the healthcare facilities to recommend Mead Johnson products to mothers and to collect contact information of the mothers for Mead Johnson China’s marketing purposes. To incentivize HCPs to recommend Mead Johnson product and collect information from the mothers, these sales personnel improperly paid HCPs, providing cash and other incentives, contrary to Mead Johnson’s internal policies. The Distributor Allowance was the funding source for the cash and other incentives paid to HCPs.”

Under the heading “Mead Johnson Failed to Make and Keep Accurate Books and Records and Devise and Maintain an Adequate Internal Control System,” the order states in full as follows.

“The Distributor Allowance funds contractually belonged to the distributors, but were in large part under Mead Johnson China’s control. Mead Johnson China’s employees maintained certain records related to the Distributor Allowance, including records reflecting payments to HCPs. However, those records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies.

Mead Johnson failed to devise and maintain an adequate system of internal controls over the operations of Mead Johnson China to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through its distributors was not used for unauthorized purposes, such as the improper compensation of HCPs. The use of the Distributor Allowance to improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies. Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.”

Notwithstanding the above, the order otherwise specifically states:

“Mead Johnson has established internal policies to comport with the FCPA and local laws, and to prevent related illegal and unethical conduct. Mead Johnson’s internal policies include prohibitions against providing improper payments and gifts to HCPs that would influence their recommendation of Mead Johnson’s products.”

Under the heading “Internal Investigation and Remedial Efforts,” the order states in full:

“In 2011, Mead Johnson received an allegation of possible violations of the FCPA in connection with the Distributor Allowance in China. In response, Mead Johnson conducted an internal investigation, but failed to find evidence that Distributor Allowance funds were being used to make improper payments to HCPs. Thereafter, Mead Johnson China discontinued Distributor Allowance funding to reduce the likelihood of improper payments to HCPs, and discontinued all practices related to compensating HCPs by 2013. Mead Johnson did not initially self-report the 2011 allegation of potential FCPA violations and did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.

As a result of its second internal investigation commenced in 2013, Mead Johnson undertook significant remedial measures including: termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, adding positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-going basis; and providing employees with a method to have immediate access the company’s policies and requirements.

Despite not self-reporting the 2011 allegation of potential FCPA violations or promptly disclosing the existence of this allegation in response to the Commission’s inquiry into this matter, Mead Johnson subsequently provided extensive and thorough cooperation. Mead Johnson voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents. These actions assisted the Commission staff in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

Based on the above findings, the order finds:

“Up through 2013, certain Mead Johnson China employees made payments to HCPs using funds maintained by third parties. These funds and payments from the funds were not accurately reflected on Mead Johnson China’s books and records. The books and records of Mead Johnson China were consolidated into Mead Johnson’s books and records. As a result of the misconduct of Mead Johnson China, Mead Johnson failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions as required by [the FCPA’s books and records provisions].

Up through 2013, Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through third-party distributors was not used for unauthorized purposes, such as improperly compensating Chinese HCPs to recommend Mead Johnson’s products. As a result of such failure, the improper payments to HCPs occurred contrary to management’s authorizations, in violation of [the FCPA’s internal controls provisions].”

In the SEC’s release Kara Brockmeyer (Chief of the SEC Enforcement Divisions’s FCPA Unit) stated:

“Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other health care professionals in China to recommend its baby formula and give the company marketing access to mothers.”

As noted in the release:

“The company consented to the order without admitting or denying the findings and agreed to pay $7.77 million in disgorgement, $1.26 million in prejudgment interest, and a $3 million penalty.”

In this press release, Mead Johnson’s CEO Kasper Jakobsen stated:

“We are pleased to have reached this final resolution with the SEC. Integrity and compliance with laws and regulations are central to the success of our operations around the world. We will continue to reinforce these operating principles in all our interactions with customers and business partners. Our China business is one of Mead Johnson’s most important operations, and we remain confident in its continued long-term growth.”

Yesterday Mead Johnson’s stock closed up .64%.

According to reports, Mead Johnson was represented by F. Joseph Warin, Michael S. Diamant and Christopher W.H. Sullivan of Gibson Dunn.

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