This 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.
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?
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.
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.