This previous post  went in-depth into the $519 million Foreign Corrupt Practices Act enforcement action against Teva Pharmaecutical (the first-ever FCPA enforcement action against an Israeli company, by far the largest-ever FCPA enforcement action against a pharmaceutical company, and 4th largest FCPA settlement of all-time).
Set forth below are additional issues to consider.
As highlighted in this prior post , Teva’s FCPA scrutiny began in July 2012. Thus from start to finish the company’s FCPA scrutiny lasted approximately 4.5 years. If the DOJ and SEC want the public to view its FCPA enforcement program as legitimate, credible, and effective, it must resolve instances of FCPA scrutiny much faster.
This is particularly true when a company like Teva, in the words of the DOJ, voluntarily made U.S. and foreign employees available for interviews; collected, analyzed, translated and organized “voluminous evidence from multiple jurisdictions;” provided updates to the DOJ as to the conduct and results of the company’s internal investigation; and disclosed to the DOJ “conduct in Russia and Ukraine of which the [DOJ] was previously unaware.”
Regarding the last sentence above – that Teva disclosed to the DOJ “conduct in Russia and Ukraine of which the [DOJ] was previously unaware” – this DOJ statement stands in contrast with the following DOJ statement also in the resolution documents: “Teva did not timely voluntarily self-disclose the FCPA violations to the Fraud Section, and as a result the Company and the Defendant were not eligible for a more significant discount on the fine amount or the form of resolution.”
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Incorrect Statutory Language
Pardon me for being “that guy” but is it asking too much for the DOJ and SEC to use the correct statutory language in FCPA resolution documents?
For instance, a separate section of the DOJ’s DPA is titled “Teva’s Failure to Implement Adequate Internal Accounting Controls in Mexico” and it states in pertinent part that “Teva knowingly and willfully failed to implement an adequate system of internal accounting controls and failed to enforce the internal accounting controls it did have in place, which in turn failed to prevent improper payments from being made in Mexico.”
Elsewhere, the DPA states:
“Numerous Teva executives involved in developing, approving and implementing the Company’s anti-corruption program, including Teva Executive, were aware that the policies and procedures they approved were not adequate to prevent or detect improper payments to foreign officials.”
Similarly, the SEC’s complaint states in summary fashion:
“Teva’s internal accounting controls were inadequate because they failed to prevent such payments or detect red flags which should have alerted its employees that these payments, in whole or in part, were bribes to foreign government officials.”
Teva also violated [the internal controls provisions] by failing to have sufficient internal accounting controls in place to detect and prevent the authorization or payment of illegal payments in Russia, Ukraine, and Mexico.”
Likewise, the complaint contains a separate section titled “Failure to Maintain Adequate Internal Controls.”
None of these highlighted words or phrases appear in the FCPA.
Rather, the FCPA’s internal controls provisions state that issuers shall “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances“ that the four specified statutory objectives are met.
The FCPA then defines “reasonable assurance” 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.”
The differences between the language the DOJ and SEC used and the actual statutory language likely had little practical impact regarding the conduct at issue.
But gosh, it’s just outlandish that the DOJ and SEC seem incapable (and this is certainly not the first instance I’ve written about this point) of using the correct statutory language in FCPA resolution documents.
Most corporate FCPA enforcement actions involve companies that are otherwise viewed as selling the best product or service for the best price. I’ve been arguing since at least 2010 (see here ) that an issue in need of deeper analysis in most corporate FCPA enforcement actions involving a disgorgement component is the commonly held enforcement view that the business allegedly obtained or retained because of improper payments (and thus the net profits of the business) was solely because of the alleged improper payments.
Such a simplistic but for enforcement view ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract?
Related to this issue, FCPA Professor has long highlighted the work of economists on FCPA settlement amount issues. For instance, as highlighted her e in a piece titled “Economic Analysis of Damages under the Foreign Corrupt Practices Act,” the authors note that “to date there has been little consideration of the true benefit of the bribe” but “with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe.” The authors note that “while a bribe may have led to very high gains, the but-for profits could have been high (and the gain from the bribe low) if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable.”
More recently, Peter Koenig, a PhD economist and of counsel at Squire Patton Boggs writes : “maybe now is a good time to subject FCPA enforcement to robust economic analysis.”
“For instance, the FCPA enforcement view is that a business’s full (100%) profit was secured solely (100%) as a result of any bribe. Thus, its full profit (100%) must be disgorged as part of the FCPA remedy. Economics literature on the FCPA objects to that view. The literature notes that companies settling FCPA enforcement actions are often industry leaders, presumably because they offer the best product or service for the best price. That can partially or fully explain how they got business, irrespective of any bribe. The bribe may only partially explain how the business was obtained, or in some cases not at all.”
As relevant to the Teva enforcement action, does anyone truly believe that the only reason the company was able to sell Copaxone (a leading and top selling drug for treatment of multiple sclerosis) in Russia, Ukraine and Mexico was because of the alleged improper payment schemes?
The question, while not relevant to legal liability issues, is most certainly relevant to disgorgement issues and the Teva enforcement action represents once again the enforcement agencies’ assumed causation approach to disgorgement.
Related to the above issue, but technically separate, is the notion that Teva, like most companies subject to both a DOJ and related SEC enforcement action, end up paying the net benefit amount twice – once to the DOJ because net benefit is a major factor in determining the criminal fine amount, and a second time to the SEC as disgorgement.
Jurisdiction for Anti-Bribery Charges
Both Teva LLC and Teva Pharmaceutical are foreign companies and thus the FCPA’s jurisdictional element must be met in order for there to be actual FCPA anti-bribery charges against the companies.
Teva LLC is a limited liability company incorporated in Russia and thus the most logical portion of the FCPA applicable to Teva LLC would be the dd-3 prong of the FCPA. However, that prong of the FCPA has the most demanding jurisdictional element:
“while in the territory of the United States, corruptly … make[s] use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance [of an improper payment scheme.]”
There is nothing in the DOJ’s criminal information suggesting or inferring that Teva LLC took any action in furtherance of a bribery scheme “while in the territory of the U.S.” and thus it appears that the DOJ made Teva LLC an “agent” of Teva Pharmaceutical (an issuer) and thus invoked the dd-1 prong of the FCPA in charging Teva with conspiracy to violate the FCPA’s anti-bribery provisions.
The dd-1 prong of the FCPA contains the following jurisdictional element relevant to non-U.S. companies.
“use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance [of an improper payment scheme]”
In this regard, the DOJ’s criminal information states: “employees and agents of Teva Russia sent e-mails through the United States.” However, beyond this generic statement, none of the e-mails listed in the overt acts portion of the information explicitly mention the U.S.
Equally problematic is the notion that Teva LLC was an “agent” of Teva Pharmaceutical merely because it was a subsidiary. This simplistic theory was rejected by the U.S. Supreme Court in Daimler v. Bauman  in which the court rejected the notion that just because a subsidiary’s services are important to a parent corporation does not mean that the subsidiary is an agent of the parent corporation. In the words of the Supreme Court such an analysis stacks the deck, for it will always yield a pro-agency answer.
Compared to the DOJ’s generic jurisdictional allegations, the SEC’s complaint contains a bit more detail.
Regarding the conduct in Russia, the complaint states:
“Teva directly and indirectly made use of the mails and of the means and instrumentalities of interstate commerce in connection with and in furtherance of its illegal payments to Russian Official through Russian Distributor. Teva sent and responded to a number of emails to the Russian Distributor’s President that were sent through U.S. servers. For example, in or around November 2010, Teva Russia employees corresponded with Russian Distributor’s President about the delivery of Copaxone in Russia using emails sent through U.S. servers.”
Regarding the conduct in Ukraine, the complaint states:
“Teva directly and indirectly made use of the mails and of the means and instrumentalities of interstate commerce in connection with and in furtherance of its illegal payments to Ukrainian Official. For example, although some of the compensation Ukrainian Official received from Teva was in cash, at least seven payments were wired through U.S. correspondent banks.”
Regarding the conduct in Mexico, the complaint states:
“Teva Mexico directly and indirectly made use of the mails and of the means and instrumentalities of interstate commerce in connection with and in furtherance of its illegal payments to Mexican officials. For example, a Teva Mexico manager corresponded with Teva Mexico’s Copaxone distributor in Mexico about the delivery of cash to the Mexican officials using emails sent and stored on U.S. servers.”
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Healthcare Officials As “Foreign Officials”
Among the more obvious practical reasons (no doubt it is provocative as well) reasons for the general increase in FCPA enforcement over the past decade or so 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 Teva enforcement action provides yet example in that the conduct, in part, focused on various things of value provided to a neurologist in Mexico.
According to FCPAnalytics , the number of FCPA enforcement actions based on the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA is approaching 25.