As highlighted in this prior post, in April 2011 Harris Corporation completed an acquisition of Carefx and in the process acquired its subsidiaries including Carefx China. In connection with its integration activities and the subsequent audit of the financials of the Carefx China operations, Harris Corp. became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly. In response, Harris Corp. voluntarily disclosed to the DOJ and SEC.
As highlighted in this prior post, a few months ago Harris Corp. disclosed that “during the second quarter of fiscal 2016, the DOJ advised us that they have determined not to take any action against us related to this matter.” The same disclosure stated that the company is “continuing to cooperate with the SEC regarding its investigation.”
In the meantime, earlier this week the SEC announced this administrative action finding that Jun Ping Zhang (pictured – a U.S. citizen and former Chairman and CEO of CareFx China who was terminated in mid-2012) violated the Foreign Corrupt Practices Act. Zhang is currently Senior Vice President, Product Innovation and Chief Technology Officer at MedeAnalytics. (See also here).
The SEC’s order specifically states that as a result of Ping’s conduct “Harris violated the FCPA’s books and records provisions” and elsewhere states that as a result of the alleged improper conduct CareFx was awarded over $9.6 million in contracts.”
Thus, a future FCPA enforcement action against Harris Corp. is perhaps forthcoming. [Corrected: for a subsequent post regarding Harris Corp. see here]
In summary fashion, the SEC’s order states:
“This matter concerns violations of the anti-bribery, books and records, and internal controls provisions of the FCPA by Jun Ping Zhang (“Ping”), a United States citizen and former Chairman and CEO of Harris Corporation’s (“Harris”) wholly owned, China-based subsidiary Hunan CareFx Information Technology, LLC (“CareFx China”). Ping violated the anti-bribery provisions of the FCPA by facilitating an ongoing bribe scheme at CareFx China whereby illegal gifts were given to Chinese government officials to obtain and retain business. In so doing, Ping violated, and caused Harris to violate, the books and records provisions of the FCPA by knowingly allowing and facilitating the entry of false information in CareFx China’s books and records, thereby circumventing Harris’s system of internal accounting controls.”
According to the SEC:
“Between April 2011 and July 2012, Ping was employed at Harris. For the bulk of this time period, Ping served as both Harris’s Vice President of Technology and CareFx China’s Chairman and CEO. However, in April 2012, Harris relieved Ping of his duties as Chairman and CEO of CareFx China, and later terminated his services at Harris in July 2012.”
According to the SEC:
“CareFx Corporation (“CareFx”) was a wholly-owned subsidiary of Harris that delivered interoperability workflow solutions for primarily government healthcare providers in China. Before Harris acquired CareFx in April 2011, CareFx had been a privately-held corporation based in Scottsdale, Arizona. On December 17, 2011, Harris dissolved CareFx as a separate business entity. Before the dissolution, Harris consolidated CareFx’s books and records into its financial statements. CareFx’s revenues accounted for less than 1% of Harris’s gross revenues.”
According to the SEC:
“(“CareFx China”) was registered by CareFx as a Chinese legal entity in April 2008 to develop software in support of CareFx’s operations in the United States. In late 2009, CareFx China also began to pursue opportunities to sell its electronic medical records software in China. CareFx China’s customers were primarily Chinese state-owned hospitals and local Chinese Departments of Health. After the acquisition of CareFx, Harris operated CareFx China as a wholly-owned subsidiary of CareFx and consolidated CareFx China’s books and records into its financial statements through CareFx. In September 2012, Harris sold all of CareFx China’s outward facing operations. On June 12, 2015, Harris terminated all employees in CareFx China and no longer has any active China-based business operations.”
The factual portion of the SEC’s order states in its entirety:
“Harris acquired CareFx in April 2011. At that time, Ping was CareFx’s Executive Vice President and Chief Technology Officer. He also served as the Chairman and CEO for CareFx China. After the acquisition, Ping’s title at Harris was Vice President of Technology.
From at least April 2011 through April 2012, Ping facilitated a pattern and practice at CareFx China of giving gifts to Chinese government officials to obtain or retain a business advantage. Specifically, Ping directly authorized or indirectly allowed between $200,000 and $1 million in improper gifts to government officials at Chinese state-owned hospitals and regional Departments of Health.
With Ping’s knowledge and under his management, CareFx China sales staff submitted bogus expense receipts labeled as “entertainment,” “office expenses,” or “transportation” to CareFx China’s accounting department for cash reimbursement. CareFx China’s sales staff used the cash generated from these sham expense reimbursements to pay for gifts to government officials. Ping and the supervisors that he managed authorized the bogus expense claims, knowing that they were fabricated and that the “reimbursed” funds were used to pay for gifts to government officials to influence their decisions to purchase CareFx China’s products and services.
Ping knew that these bogus expenses were improperly recorded in CareFx China’s books and records as legitimate sales expenses or consulting fees and that, as a result, their true nature would not be disclosed to Harris. After the Harris acquisition, it was Ping’s responsibility to review CareFx China’s monthly expense summary reports before they were submitted to Harris. Ping consistently permitted these monthly expense summary reports to be submitted despite knowing that they contained false information. By doing so, Ping enabled CareFx China to cloak its illicit gifts to government officials in the guise of legitimate business expenses and, thereby, hide the practice from Harris.
Moreover, Ping did not disclose this bribery scheme to Harris’s attorneys during the pre-acquisition due diligence process. Ping failed to disclose to Harris any information about the improper gifts or the use of bogus expense invoices used to pay for them. In addition, Ping cautioned employees not to give gifts that were too large and told them not to get caught. Harris nonetheless discovered the illicit conduct at CareFx within a few months of the acquisition.
Although Ping did not need to authorize every payment (sales staff had blanket approval for smaller gifts), he was aware that CareFx sales staff were giving gifts to government officials, and he authorized several of them.
On March 23, 2011, a CareFx China sales manager sent an email, on which Ping was copied, to other managers requesting approval for 20-30,000 Yuan (approximately $3,000 to $4,600) to buy the director of Zhongnan Hospital of Wuhan University (“Zhongnan Hospital”) replacements for his recently stolen laptop, cell phone, and camera. The sales manager noted that “if we don’t do this, sooner or later some other company will. This is how the business environment is in China.” The sales manager further stated that some of the funds would also be used to cover the vacation travel of other high-level staff at Zhongnan Hospital. Ping responded to the email that same day with the message “You are doing a great job. This is very exciting. Thanks.” On April 19, 2011, the sales manager submitted a reimbursement form for 30,000 Yuan, (approximately $4,600), which included a note stating that Ping and another manager had authorized the claim and which falsely characterized the expenses as “business meeting receipts.” This amount was subsequently increased to 36,100 Yuan (approximately $5,600), on July 21, 2011, to include additional funds to cover vacation travel and entertainment expenses for several Zhongnan Hospital government officials. On August 31, 2011, CareFx China incorrectly recorded these illicit gifts on its books and records as “office expenses” and “conference expenses.” In August and December 2011, CareFx China signed contracts with Zhongnan hospital worth approximately $165,000.
On October 18, 2011, Ping received an email from a CareFx China sales manager regarding a potential upcoming project for the Nansha District Health Bureau (“Nansha District”). The sales manager had just purchased meals for several of the Nansha District government officials responsible for awarding the Nansha District project. He was told that the Nansha District’s Deputy Director “made a promise [to] let [CareFx China] have the project.” On October 21, 2011, the CareFx China sales manager requested approval of approximately $2,300 for three iPhones because “the Nansha project has currently entered its bidding stage” ” and “we will need strong cooperation and support from [the Nansha District officials].” On January 2, 2012, Ping responded to an email regarding the sales staff’s plan to use government officials to manipulate the Nansha Project bidding process by noting the “great significance of Nansha District Project for our business.” On January 12, 2012, CareFx China won the Nansha District contract, which was worth $93,000.
On November 17, 2011, Ping authorized a sales manager’s request to “overspend by several thousand yuan this month” to purchase gifts for “leaders in the Health Department” and “hospital leaders.”
On December 25, 2011, Ping received a request from a CareFx China sales member for approval of approximately $2,600 to pay for gifts, shopping cards, and entertainment for government officials at the Yuelu District Health Bureau. On December 26, 2011, Ping instructed his second in command, CareFx China’s Executive Deputy Manager, to “please solve this problem.”
On December 30, 2011, CareFx China’s sales director requested $6,500 to provide “bonuses” to government officials at several hospitals and health offices in the Hubei Province. On December 31, 2011, Ping instructed the sales director to discuss the amounts with Ping’s second in command.
On January 9, 2012, Ping authorized $775 in gifts to the Director and Vice Director of the Shanghai Shenkang Hospital Development Center, who were “responsible for the government’s major projects in 2012.”
In total, CareFx China employees made approximately $200,000 to $1 million in improper gifts to Chinese government officials between April 2011 and April 2012. These payments were incorrectly recorded in CareFx China’s books as legitimate sales expenses and consulting fees and were subsequently consolidated into Harris’s financial statements. CareFx China sales staff made these gifts to Chinese government officials who ultimately awarded CareFx China over $9.6 million in contracts with state-owned entities.”
Based on the above findings, the SEC found that Ping violated the FCPA’s anti-bribery provisions, the books and records provisions, and knowingly falsified books and records and knowingly circumvented internal controls.
Specifically, the SEC’s order states:
“As a result of the conduct describe above, Ping violated [the FCPA’s anti-bribery provisions]. Ping, in his capacity as Vice President of Technology for Harris, and Chairman and CEO of CareFx China, violated [the anti-bribery provisions] when he knowingly facilitated and authorized the giving of improper gifts to Chinese government officials in an effort to obtain and retain business. Ping’s corrupt intent is evidenced by his concealment of the bribe scheme from Harris.”
As a result of the conduct described above, Harris violated the FCPA’s books and records provisions by incorporating CareFx China’s false reimbursement claims into Harris’s books and records. Harris’s books and records violations are evidenced by the mischaracterization in CareFx China’s general ledger of the illicit payments to government officials as legitimate sales expenses and consulting fees.
Ping caused Harris to violate [the FCPA’s books and records provisions]. Under Ping’s watch and with Ping’s approval, Harris’s wholly-owned subsidiary, CareFx China, made improper payments to government officials at Chinese state-owned health-care providers and improperly recorded these payments as legitimate sales expenditures and consulting fees. Accordingly, Ping caused Harris’s failure to make and keep accurate books, records, and accounts …”.
As a result of the conduct described above, Ping violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. Ping knowingly permitted Harris’s books and records to be falsified by facilitating a scheme to hide illicit gifts to Chinese government officials to be financed through the submission and approval of fabricated expense reimbursement requests. Ping also knowingly circumvented Harris’s system of internal controls. As the top manager of CareFx China, Ping was responsible for maintaining and ensuring compliance with Harris’s internal accounting controls. Instead, Ping knowingly circumvented Harris’s system of controls by permitting the submission of expense reports that contained fabricated expense claims. Ping was Harris’ gatekeeper at CareFx China, but he nonetheless authorized false expense claims that he knew were going to be used to provide gifts to government officials. Moreover, Ping helped his subordinates at CareFx China hide the bribe scheme from Harris auditors and employees. Accordingly, Ping violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.
Without admitting or denying the SEC’s findings, Ping agreed to pay a $46,000 civil penalty and cease and desist for committing any future FCPA anti-bribery violations and books and records violations.