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Issues To Consider From The Novartis Enforcement Action

Issues

This recent post highlighted the $347 million Foreign Corrupt Practices Act enforcement action against Novartis – the second time the company has resolved an FCPA enforcement action.

This post highlights additional issues to consider.

Timeline

In its most recent annual report, the company disclosed:

“In 2016, the Seoul Western District Prosecutor initiated a criminal investigation into, among other things, allegations that Novartis Korea utilized medical journals to provide inappropriate economic benefits to HCPs, which resulted in a non-material fine in January 2020. Novartis has received requests for information from the DoJ and the SEC regarding this matter, and is cooperating with their ongoing inquiry.

[…]

Novartis is investigating allegations of potentially inappropriate economic benefits to HCPs, government officials and others in Greece. Novartis is providing information to the Greek authorities investigating these allegations, including the Greek Coordinating Body for Inspection and Control, and the Greek Body of Prosecution of Financial Crime, from which it received a summons in 2018. Novartis is also responding to subpoenas and document requests from the SEC and DoJ that it received beginning in 2016 in connection with such allegations, and is cooperating with their investigation.”

Thus, from start to finish, the company’s FCPA scrutiny appears to lasted approximately 4 years.

Whistleblower?

Previous FCPA enforcement actions have mentioned whistleblowers. There was no mention of a whistleblower in the Novartis enforcement action, but on the same day of the enforcement action a law firm issued this release titled “Whistleblowers’ Vindicated in Novartis Foreign Corrupt Practices Act Case” which states:

“Today, the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) announced settlements with the global pharmaceutical and healthcare company Novartis AG (“Novartis”) for violations of the Foreign Corrupt Practices Act (“FCPA”). Novartis, headquartered in Switzerland, agreed to pay over $225 million to settle the Department of Justice FCPA charges for bribery in Greece. The SEC sanctioned Novartis approximately $85 million for Greek related bribery. The total sanctions, with interest, are over $300 million.

“The confidential and anonymous Greek whistleblowers who documented these crimes are heroes. They put their reputations and careers at risk to inform law enforcement about widespread bribery schemes in Greek healthcare programs. Even today, their safety is under threat from corrupt officials who stole from the health care system and took bribes,” said whistleblower attorney Stephen M. Kohn, a founding partner in the qui tam whistleblower law firm of Kohn, Kohn, and Colapinto.

Kohn, who is the U.S. based attorney for the Greek whistleblowers, said: “The government of Greece must immediately stop retaliatory actions against the people they think are the whistleblowers. Instead the Greek government must publicly hail the whistleblowers as the heroes they are.”

In Greece, the whistleblowers were represented by the law firm of Pavlos K. Sarakis & Associates who are also issuing a statement today.

“The SEC and DOJ sanctions should serve as a wakeup call throughout Europe and the entire international community. Whistleblowers can confidentially and anonymously report bribery and hold multinational corporations accountable. The time has come for the millionaires and billionaires, who profit from bribery and undermine the rule of law by corrupting democratic institutions to be held fully accountable,” Kohn continued.

“The SEC and DOJ worked effectively with the whistleblowers. This case once again demonstrates the effectiveness of the Dodd-Frank Act and U.S. whistleblower laws in holding corrupt officials and corporations accountable,” Kohn said.”

“No-Charged Bribery Disgorgement”

The Novartis enforcement action represents yet another so-called “no-charged bribery disgorgement action.”

In other words, the approximate $113 million SEC settlement amount consisted entirely of disgorgement (and associated prejudgment interest) even though the SEC only found violations of the FCPA’s books and records and internal controls provisions.

As highlighted in this previous post (and numerous prior posts thereafter), no-charged bribery disgorgement is troubling. Among others, Paul Berger (here) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

No Liu Impact

Granted the June 25th Novartis enforcement action occurred just three days after the Supreme Court’s decision in Liu in which the court held – as to the statutory scheme relevant to SEC federal court actions – that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under the relevant statutory scheme. (See here for the prior post).

Despite commentary that Liu will make “a significant change to how corporate FCPA settlements will be reached” with the SEC, the prior post predicted Liu will not have a meaningful impact on administrative actions brought by the SEC (as the Novartis and nearly all issuer enforcement actions are) and that the Supreme Court’s most FCPA relevant observations in Liu were merely dicta.

Liu did not seem to have an impact on the disgorgement amount in the Novartis enforcement action.

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