Scrutiny alerts and updates, former Bio-Rad general counsel prevails, and light FCPA sentences. It’s all here in the Friday roundup.
Scrutiny Alerts and Updates
USANA Health Sciences
When putting together a list of companies that are likely to become the subject of FCPA scrutiny, small Utah-based companies that sell healthcare products is surely to be at the bottom of the list.
In the latest instance of FCPA scrutiny involving this unique group, USANA Health Sciences Inc., a Utah based nutritional company that manufacturers supplements, personal care and healthy food products, recently disclosed:
“Internal Investigation of China Operations
The Company is voluntarily conducting an internal investigation of its China operations, BabyCare Ltd. The investigation focuses on compliance with the Foreign Corrupt Practices Act (“FCPA”) and certain conduct and policies at BabyCare, including BabyCare’s expense reimbursement policies. The Audit Committee of the Board of Directors has assumed direct responsibility for reviewing these matters and has hired experienced counsel to conduct the investigation. While the Company does not believe that the subject amounts are quantitatively material or will materially affect its financial statements, it cannot currently predict the outcome of the investigation on its business, results of operations or financial condition. The Company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway and intends to provide additional information to both agencies as the investigation progresses. Because the internal investigation is in its early stage, the Company cannot predict the duration, scope, or result of the investigation.”
As sure as the sun rises in the east, plaintiffs’ lawyers are already circling (see here).
As highlighted here, Herbalife, a global nutrition company, also recently disclosed FCPA scrutiny regarding its business operations in China.
Cognizant Technology Solutions
Is it possible to spend $20 million in one quarter conducting an FCPA investigation? Apparently so.
As highlighted here, on September 30, 2016 the company disclosed FCPA scrutiny. McLoughlin also stated: “The investigation has progressed significantly. We have identified a total of approximately $6 million in potentially improper payments relating to Company-owned facilities in India, an increase of $1 million from what we reported at the end of the third quarter.”
As highlighted in this January 2015 post, Cobalt International prevailed over the SEC regarding the company’s FCPA scrutiny. The take-away was this. Just because the SEC thinks your company has violated the FCPA, it isn’t necessarily so and you don’t have to roll over and write a check. To state the obvious, unless a company caves, the SEC actually has to prove an FCPA violation and history has demonstrated that when forced to do, the SEC often fails.
In a February 2015 investor conference call, Cobalt’s CEO viewed the DOJ investigation of the company “largely behind us” and yesterday Cobalt make it official as it disclosed:
“[The company] received a letter from the United States Department of Justice (“DOJ”) advising Cobalt that the DOJ has closed its FCPA investigation into Cobalt’s operations in Angola. This formally concludes the DOJ investigation, which was the last remaining FCPA investigation by any U.S. regulatory agency into Cobalt’s Angolan operations. No regulatory action has been taken against Cobalt as a result of these investigations.
As previously disclosed, the DOJ and the United States Securities and Exchange Commission (“SEC”) began investigating Cobalt’s operations in Angola in 2011 in response to allegations of a connection between senior Angolan government officials and Nazaki Oil and Gaz, S.A., an Angolan company that, until 2014, held a working interest alongside Cobalt on Blocks 9 and 21 offshore Angola. The SEC investigation concluded in January 2015 without any enforcement action.”
In the release, Timothy Cutt (Cobalt’s Chief Executive Officer) stated:
“Like the SEC, the Department of Justice has decided to close its investigation into Cobalt’s Angolan operations. We are obviously pleased with this resolution and the closure of this investigation. Cobalt has been and is firmly committed to conducting its operations in compliance with all applicable laws and regulations, including the FCPA.”
Predictably, some have stated that Cobalt received a “declination” from the SEC and DOJ. This is like stating that the Atlanta Falcons “declined” to win the Super Bowl.
The company disclosed FCPA scrutiny in September 2016 and recently provided the following update:
“For several months, with the assistance of outside counsel, the Company has been conducting the Investigation into the business practices of the independent Chinese entity that previously distributed its products in China and the Company’s knowledge of those business practices, which may have implications under the FCPA, as well as into various internal controls issues identified during the Investigation.
On September 27, 2016 and September 28, 2016, we voluntarily contacted the SEC and the DOJ, respectively, to advise both agencies of these potential issues. We have provided and will continue to provide documents and other information to the SEC and the DOJ, and are cooperating fully with these agencies in their investigations of these matters.
Although our Investigation is complete, additional issues or facts could arise which may expand the scope or severity of the potential violations. The Company could also receive additional requests from the DOJ or SEC, which may require further investigation. The Company has no current information derived from the Investigation or otherwise to suggest that its previously reported financial statements and results are incorrect.
At this stage, the Company is unable to predict what, if any, action the DOJ or the SEC may take or what, if any, penalties or remedial measures these agencies may seek. Nor can we predict the impact on the Company as a result of these matters, which may include the cost of investigations, defense, imposition of fines, civil and criminal penalties, which are not currently estimable, as well as equitable remedies, including disgorgement of any profits earned from improper conduct and injunctive relief, limitations on the Company’s conduct, and the imposition of a compliance monitor. The DOJ and the SEC periodically have based the amount of a penalty or disgorgement in connection with an FCPA action, at least in part, on the amount of profits that a company obtained from the business in which the violations of the FCPA occurred. Since the inception of its distributorship relationship with the prior Chinese distributor in 2012, the Company has generated sales of approximately $8 million from the relationship. We cannot assure you that the DOJ and the SEC will not impose penalties based on the profit derived from these sales.”
Former Bio-Rad Counsel Prevails
This June 2015 post noted that in recent years several terminated corporate employees have alleged unfair employment practices in connection with some aspect of Foreign Corrupt Practices Act scrutiny or enforcement. The post then highlighted the lawsuit brought by Sanford Wadler, the former General Counsel and Secretary of Bio-Lab Laboratories, against the company and certain executive officers and board members alleging various unfair employment practices.
In summary fashion, the Wadler’s complaint alleged:
“This matter presents the classic case of whistleblower retaliation. After learning of his employer Bio-Rad’s involvement in extensive bribery occurring in Russia, Thailand, and Vietnam, Wadler investigated evidence of similar violations of the Foreign Corrupt Practices Act (“FCPA”) in China, where corruption is notoriously endemic. Key Bio-Rad officers and directors wanted Wadler to turn a blind eye to this misconduct or sweep it under the rug, but he refused. Instead, and following his mandatory duties under federal securities laws as the Company’s chief legal officer, Wadler investigated this potential criminal activity and reported it up the ladder. When Wadler reasonably began to believe that the conspiracy to violate the FCPA went all the way to the top of the corporate hierarchy, he reported his concerns to the Company’s audit committee. Then, just shortly before Bio-Rad was scheduled to present to the SEC and DOJ regarding the Company’s investigation into potential FCPA violations, the Company fired Wadler precisely because he refused to be complicit in its wrongdoing. A company is not allowed to attempt to silence whistleblowers in this manner.”
It was further noted that Wadler’s complaint contained interesting allegations as to the inner-workers of how FCPA allegations were handled at Bio-Rad as well as critical allegations concerning the law firms hired by Bio-Rad to conduct the FCPA internal investigation.
As reported here by Corporate Counsel:
“After deliberating for less than three hours, a federal jury has sided with former Bio-Rad Laboratories Inc. general counsel Sanford “Sandy” Wadler in his whistleblower retaliation lawsuit against the company. The jury awarded Wadler $2.9 million in back pay and stock compensation and $5 million for punitive damages. The jury awarded Wadler zero dollars for future losses and emotional distress.
“I’m extraordinarily grateful to the jury for its very thoughtful verdict in finding that whistleblowers need protection,” lead attorney James Wagstaffe said immediately after the verdict was read. “You’re not supposed to fault whistleblowers for raising legitimate concerns about potential corruption.” Wagstaffe also said that back pay damages are doubled, increasing the total award to $10.8 million.
Wadler, who was fired from his post at the Hercules-based life sciences company in June 2013, maintains that he was forced out because he blew the whistle on potential Foreign Corrupt Practices Act violations by the company in China.
Jurors found that Wadler’s February 2013 report to the audit committee of the company’s board about his suspicions was protected whistleblower activity under the Sarbanes-Oxley Act. The jury also found that his whistleblowing activities were a significant reason the company fired him in June of that year.
Before the jury reached its verdict, the panel asked about a contentious issue related to the timing of Wadler’s most recent performance evaluation. According to Wagstaffe, metadata showed the document was created in July 2013, a full month after Wadler’s termination. The jury asked if the date referred to the document’s creation or its modification. It referred to creation, said U.S. Magistrate Judge Joseph Spero, who presided over the case.
During the course of the three week trial, Bio-Rad’s lawyers at Quinn Emanuel sought to discredit Wadler with testimony that he clashed with coworkers and had been prone to loud outbursts during his final six months of employment at Bio-Rad. Wadler’s coworkers testified that his work had become erratic and that he had caused some of the company’s public securities to be filed late.
Wadler’s lawyers at Kerr & Wagstaffe, however, were able to undermine some company testimony by pointing to a lack of documentation about Wadler’s alleged outbursts. Wagstaffe also repeatedly returned to the last review that Wadler received while on the job in December 2012, which was largely positive.
The trial presented a rare opportunity to see behind the scenes of an internal company investigation of foreign bribery allegations and featured testimony from two of the company’s outside lawyers.
Patrick Norton, a former Steptoe & Johnson attorney hired for an initial investigation into Bio-Rad’s broader FCPA violations, testified that Wadler’s allegations to the board indicated that he did not understand the way business works in China. Norton suggested to the company’s board and CEO that Wadler be fired because of the company’s serious lapses elsewhere in FCPA compliance.
Davis Polk & Wardwell partner Martine Beamon, who assisted on a second investigation after Wadler’s February 2012 report to the company’s board, testified the she ultimately found Wadler’s allegations to the audit committee “meritless.”
Light FCPA Sentences
This previous post highlighted the December 2015 FCPA enforcement action against various individuals (Daniel Perez, Kamta Ramnarine, Victor Valdez, and Douglas Ray) associated with Hunt Pan Am Aviation Inc.
Earlier this week, Daniel Perez and Kamta Ramnarine were both sentenced to three years probation. Sentencing documents were filed under seal. Valdez is scheduled to be sentenced on February 23rd and Ray after March 27th.
A good weekend to all.
Stay Informed About FCPA Current Events
This approximate two hour engaging video tutorial provides a summary of all 2016 corporate FCPA enforcement actions and enforcement agency policy developments; various issues to consider; and compliance take-away points.