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Issues To Consider From The Stryker Enforcement Action

Issues

This previous post highlighted the SEC’s recent $7.8 million enforcement action against medical device company Stryker.

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

Two Ways to Look at Repeat Offenders

As highlighted in the prior post, Stryker is now in the FCPA repeat offender club. There are two ways to look at certain of the companies on the list.

On the one hand, one could view these companies as corrupt companies without a commitment to compliance who did not learn any lesson from the first time the company resolved an FCPA enforcement action.

On the other hand, one could view FCPA repeat offenders trough the prism of expansive enforcement theories (not the actual statute), respondeat superior liability principles, and argue that given both of those dynamics 99.9% of issuers are likely in technical violation of the FCPA as enforced particularly the books and records and internal controls provisions.

Standardless?

Related to the above point, set forth below is what the SEC acknowledged, among other things, in the administrative order.

“Stryker’s policies, which applied to its global operations, prohibit bribery and other improper payments. As part of its internal accounting controls, the company had policies, which applied to its subsidiaries, requiring, among other things, proper documentation of transactions; written agreements with distributors and sub-distributors that included anticorruption provisions and review rights to determine compliance; and due diligence and approval of, and anti-corruption training for, all distributors and sub-distributors.”

Stryker India had a “policy of prohibiting dealers from making, requesting, or accepting any “improper payments to government or non-government officials, employees, or entities.”

“Stryker’s policies required Stryker and its subsidiaries, including Stryker India, to maintain sufficient internal accounting controls. Stryker India was also subject to Stryker’s code of conduct, which required, among other things, that Stryker India take steps to ensure that all payments made to government or non-government officials, employees, customers, and other persons and entities were proper. Further, Stryker India was required to generate or obtain proper documentation to provide assurances that all transactions and business relationships with dealers, HCPs, consultants, and other third parties were legitimate”

“[Relevant] contracts obligated dealers to “maintain complete and accurate records relating to [their] promotion, marketing, use and distribution of [Stryker] Products.” Finally, under its contracts with dealers, Stryker India held audit rights to inspect the books and records of any of the 198 dealers through which Stryker products were sold in India.”

“In 2012, in response to allegations of misconduct concerning Stryker India’s dealers, Stryker exercised its audit rights over three dealers in India. Those audits revealed insufficiencies in the financial record-keeping and internal accounting controls of all three dealers. Additionally, Stryker identified suspicious expenses by one dealer and instances of another dealer over-billing a hospital upon the hospital’s request.” Stryker took some corrective actions including terminating certain of the dealers.

Stryker had policies which required sub-distributors to be “vetted, approved, or trained.”

“Stryker had in place certain internal accounting controls relating to third parties that limited transactions to those that complied with their contractual undertakings to adhere to Stryker’s anti-corruption policies and procedures.”

You can bet that if Stryker did not have or engage in any of the above steps (and most certainly all of the steps mentioned above) the SEC would have found that Stryker violated the FCPA’s internal controls provisions which state that issuers shall “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” certain financial objectives are met. The FCPA then defines “reasonable assurances” and “reasonable detail” to “mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”

Yet Stryker did all of the above things and yet the SEC still found the company to be in violation of the internal controls provisions because certain foreign subsidiaries ignored the company’s policies and procedures or – with the benefit of hindsight – the SEC believes that Stryker “woulda, coulda, shoulda” done more.

In so finding, the SEC once again invoked a legal standard that does not even exist in the FCPA! In the words of the SEC:

“Stryker failed to devise and maintain a system of internal accounting controls sufficient to detect, address, and prevent this widespread practice at the dealer level, which violated Stryker’s own policies governing the activities of Stryker India’s dealers.”

“Stryker failed to sufficiently implement its policies to detect and prevent the use of these unauthorized sub-distributors in China.”

“Stryker failed to devise and maintain a system of internal accounting controls designed to detect and prevent dealers from engaging in the practice of inflating invoices to certain private hospitals for the sale of Stryker orthopedic products.”

No Disclosure

Based on a general review of Stryker SEC filings, it does not appear that Stryker disclosed that it again was under FCPA scrutiny. It is rare (although not unprecedented) for an issuer not to disclose FCPA scrutiny.

Because it does not appear that Stryker disclosed its FCPA scrutiny, it is not possible to calculate the length of time the company was under scrutiny (a statistic FCPA Professor generally provides in connection with all enforcement actions).

Stock Price

Wondering what happens to a company’s stock price upon becoming an FCPA repeat offender? On the day the enforcement action was announced Stryker’s stock closed up 1.45%

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