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NORDAM Group Resolves Enforcement Action Through A Non-Prosecution Agreement

By on July 19, 2012 in 2012 Enforcement Actions, Airline Industry, China, DOJ Enforcement Action, Non-Prosecution Agreement, NORDAM Group

Earlier this week, the DOJ announced (here) that NORDAM Group. Inc. (here) (a Tulsa, OK based privately held provider of aircraft maintenance, repair and overhaul (MRO) services that employs approximately 2,500 people) agreed to enter into a non-prosecution agreement (here) and pay a $2 million penalty “to resolve violations of FCPA.”

The DOJ has previously stated that its DPAs and NPAs benefit the public and industries by “providing guidance on what constitutes improper conduct” (see this GAO report (Appendix III) and that it provides “clear guidance to companies with respect to FCPA enforcement through a variety of means” including “charging documents, plea agreements, deferred prosecution agreements and non-prosecution agreements, press releases, and relevant pleadings and orders” that “are lengthy and detailed.”

If the DOJ wants all to have full confidence in its FCPA enforcement program and if it is genuinely interested in providing transparent guidance through its enforcement actions, the DOJ can do much better than its effort in the NORDAM NPA.  It is not as bare-bones as the Lufthansa Technik NPA (see here for the prior post), but close.

The substantive statement of facts (here) (all two pages) state as follows.

“NORDAM’s customers in China include state-owned and -controlled entities, including airlines created, controlled, and exclusively owned by the People’s Republic of China.  […]  From 1999 until 2008, employees at NSPL [NORDAM Singapore Pte. Ltd., a wholly owned subsidiary of NORDAM that provides MRO services to customers in the Asia Pacific region, including China]  and WAAPL [World Aviation Associates Pte. Ltd., an affiliate of NORDAM that performs marketing and sales services for both NORDAM and NPSL in the Asia Pacific region, including in China] paid bribes to employees of state-owned and -controlled entities in China in order to obtain or retain MRO business with those customers. Several NORDAM employees in the United States were made aware of and approved these bribes. The bribes were referred to internally as “commissions” or “facilitator fees.” The facilitator fees were paid to “facilitators” who, in fact, were employees of customers. These facilitators were also referred to internally as “internal guys,” “internal ghosts,” or “our friends inside.”  The facilitator fees either were paid directly to the customer’s employee by wire transferring money to the employee’s bank account or were paid indirectly by first depositing the money into the personal bank accounts of WAAPL employees, who would then withdraw all or a portion of these fees to pay the customer employees in cash.  In or about 2002, in an effort to further disguise the payments to customer employees, three WAAPL employees created fictitious entities and entered into sales representation agreements with those entities. The commissions that NORDAM paid to these fictitious entities were used, at least in part, to pay employees of customers to assist in securing contracts for NORDAM and NSPL.  Although many of the bribe payments were paid out of NORDAM’s and NSPL’s gross profits, in some instances NORDAM, NSPL, and WAAPL artificially inflated the customer invoice to offset the bribes paid to those customers’ employees. As a result, in these instances, NORDAM’s customers were unknowingly reimbursing NORDAM for the bribes that NORDAM paid to customer employees to secure the projects.  On or about April 22, 2004, a NORDAM employee sent an e-mail to two WAAPL employees, stating, “[d]o what you have to do to get the business. If that means using an agent, then let’s make sure we are discrete when communicating the information in trip reports. I agree . . . that we should not require an agent at every account, however, I also understand the reality of doing business in Asia. I trust your judgment, it is your call.”  On or about December 30, 2004, an agent of WAAPL sent an e-mail to a NORDAM employee and two WAAPL employees, stating, “[o]n this deal we also need to cover our friends inside.”  On or about December 30, 2004, the NORDAM employee responded to the email …  stating, “I don’t see where our friends have done anything to help us here. If our friends can help us, I will agree to split 50/50 with you any amount we get over $160K.”  In all, NORDAM, NSPL, and WAAPL paid as high as $1.5 million in bribes to secure roughly $2.48 million in profits from state-owned and controlled customers in China.”

Who were the state-owned and controlled entities in China?  What attributes of those entities made them state-owned or controlled?.  As to the employees at NSPL and WAAPL, what types of employees, what was their job function?  As to the NORDAM employees in the U.S. “made aware of and approved these bribes” what types of employees, what was their job function?  How did they become aware of the bribes?  How did they approve the bribes?

Is it asking/expecting too much for the DOJ to set forth such information in its resolution documents?

The NPA (which has a term of three years) states as follows.

“The Department enters into this [NPA] based, in part, on the following factors:  (a) the Company’s timely, voluntary, and complete disclosure of the conduct; (b) the Company’s real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, and collecting and analyzing voluminous documents and information for the Department; (c) the Company’s remedial efforts already undertaken, including enhancing its internal audit function, its compliance program, and its due diligence protocol for third-party agents, and to be undertaken, [pursuant to the NPA]; (d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures [pursuant to the NPA]; and (e) the Company has agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to violations of the FCPA.

As noted in the DOJ’s release, the NPA “recognizes that a fine below the standard range under the U.S. Sentencing Guidelines is appropriate because NORDAM fully demonstrated to the department, and an independent accounting expert retained by the department verified, that a fine exceeding $2 million would substantially jeopardize the company’s continued viability.”  As to the fine reduction, the NPA further states as follows.  “This discount recognizes that, over a period of months, the Company fully cooperated with the Department and with an independent accounting expert that the Department retained to review the Company’s financial condition.  Following that review, the Department and its independent expert both concluded that this discount was appropriate under the Sentencing Guidelines.”

What was the discount?  There is no information in the NPA or associated documents that shed light on this issue.

This Tulsa World article states as follows.

“NORDAM executives said all but three of the employees involved in the bribery schemes had left the company when the scandal was discovered in 2008. The three employees still with the company were fired, they said.  NORDAM officials said three employees of World Aviation Associates created fictitious companies and entered into agreements with the companies under which the companies would be paid commissions for sales of NORDAM products and services to customers. The arrangements made it difficult to trace the money, company executives said.”

The article further states as follows.

“NORDAM CEO Meredith Siegfried said it is “disheartening” for a company that has prided itself on its values and integrity to discover the violations of federal law. “At the same time, our determination and efforts to make sure no such event would ever occur again have given us a significantly higher level of alertness and much improved procedures and processes,” she said. “We are striving to have a robust compliance program which is considered to be an industry benchmark.” In a letter to NORDAM employees, Siegfried said everybody at NORDAM is receiving training to comply with the Foreign Corrupt Practices Act. “Every stakeholder has also signed a statement that the requirements are understood and agreed to, and this statement is required to be signed annually by all of us,” Siegfried said. “We have also revised our policies and procedures regarding our use of agents and conducted a comprehensive review of the agents we use in other countries. These agents have also received training regarding the FCPA. “We also brought in outside counsel to conduct a comprehensive investigation of all the issues connected to these violations. It is important for you to know that the investigation concluded that no individual associated with NORDAM’s leadership or governance since 2008 was ever involved in, or approved of, any of the illegal activities.

Carlos Ortiz (LeClairRyan – here) represented NORDAM.

NORDAM has an active military aircraft business (see here) and has received, including recently and during the time period relevant to the conduct at issue, numerous federal government contracts.

Orthofix International Resolves Enforcement Action Based On The Conduct Of Its Mexican Subsidiary

By on July 12, 2012 in 2012 Enforcement Actions, Deferred Prosecution Agreements, DOJ Enforcement Action, Medical Device Industry, Mexico, Orthofix International, SEC Enforcement Action, Voluntary Disclosure

Earlier this week, Orthofix International N.V. (“Orthofix”), a limited liability orthopedic medical device company formed under the law of Netherlands Antilles with administrative offices in Lewisville, Texas and common stock traded on Nasdaq, agreed to resolve DOJ and SEC FCPA enforcement actions.  The conduct at issue focuses on Promeca S.A. de C.V., a wholly-owned subsidiary of Orthofix headquartered in Mexico City.  According to the SEC, “during the relevant time period, Promeca was subject to Orthofix’s control, including the implementation of internal controls at Promeca” and the “financial results of Promeca were a component of the consolidated financial statements included in Orthofix’s filings with the SEC.’

Total fines and penalties in the Orthofix enforcement action were approximately $7.4 million ($2.2 million via a DOJ deferred prosecution agreement, and $5.2 million via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information against Orthofix resolved through a deferred prosecution agreement.

The specifics of the DOJ’s case against Orthofix are not known at this time as the Eastern District of Texas, where a criminal information has been filed, has a standing order that criminal informations remain sealed until a plea is entered in open court.  Nevertheless, Orthofix did file the deferred prosecution agreement as an exhibit (see here) to its recent SEC filing.  The DPA indicates that the information concerns one count of violating the FCPA’s internal control provisions.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: “(a) following reports of bribery by [Promeca] employees … Orthofix made a timely and voluntary disclosure to the Department and the United States Securities and Exchange Commission (“SEC”) about potential misconduct; (b) Orthofix conducted an investigation concerning bribery and related misconduct; (c) Orthofix reported its findings to the Department and the SEC; (d) the extent of the conduct; (e) Orthofix undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures, as may be necessary under [the DPA]; and (f) Orthofix agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Orthofix’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $2.22 – $4.44 million.  The DPA states as follows.  “Orthofix and the DOJ agree that this fine is appropriate given the nature and extent of Orthofix’s cooperation in this matter and the remediation undertaken by Orthofix.”  Of note, the guidelines calculation indicate that “an individual within high-level personnel condoned or was willfully ignorant of the offense.”  Although a compliance monitor was not required pursuant to the DPA, Orthofix did agree that it will report to the DOJ annually during the term of the DPA regarding remediation and implementation of the compliance measures required under the DPA.

As is customary in FCPA DPA’s, Orthofix agreed not to make any public statement contradicting its acceptance of responsibility for the conduct at issue in the DPA.

SEC

The SEC’s settled civil complaint (here) against Orthofix alleges, in summary fashion, as follows.

“This matter involves violations of the books and records and internal controls provisions of the FCPA by Orthofix, an orthopedic medical device company. From 2003 to 2010, [Promeca], repeatedly paid bribes totaling approximately $317,000 to Mexican officials in order to obtain and retain sales contracts from Instituto Mexicano del Seguro Social (“IMSS”) [here], the Mexican government-owned healthcare and social services institution. Promeca employees referred to these payments as ‘chocolates.’  These improper payments, falsely recorded on the company’s books as cash advances to Promeca executives or training and promotions expenses, generated approximately $8.7 million in gross revenues for Orthofix and resulted in illicit net profits of about $4.9 million.”

According to the SEC, Promeca sold Orthofix’s products to government and private hospitals in Mexico and “approximately 60% of Promeca’s revenues came from IMSS, the Mexican government-0wned medical care and social services provider.”

Under the heading “bribery scheme” the complaint alleges as follows.

“From at least 2003 to 2007, … Promeca, regularly paid bribes to IMSS hospital employees in the form of cash and/or gifts, in order to secure sales contracts from IMSS hospitals.  The bribe amounts, referred to internally at Promeca as ‘chocolates,’ ranged from 5% to 10% of the collected sales for the hospital in question.  In order to obtain cash for the illicit payments, Promeca executives wrote checks to themselves, which they justified as cash advances.  They later submitted falsified receipts for imaginary expenses including meals and new car tires, which were accounted for in Promeca’s books and records. As the bribes increased, it became difficult for Promeca executives to invent new receipts to justify the advances. Eventually, the bribes became too large, forcing the Promeca executives to devise another justification methodology, and hence they began falsely accounting for the payments as promotional and training expenses. Because of the bribery scheme, Promeca’s training and promotional expenses were significantly over budget. In one instance, Orthofix launched an inquiry into these expenses, but did not control them.  In 2008, IMSS began purchasing medical products under a new national tender system, where a special IMSS committee, rather than the individual hospitals, selected the winning bidder who would cover IMSS nationally. Promeca then established a new system of bribery to ensure that it was awarded the business under the national tender system. To achieve this, Promeca made payments to three front companies, which were controlled by certain IMSS officials. Promeca won the national tenders for 2008 and 2009 and paid the front companies 5% and 3%, respectively, of the collected sales from those tenders. The front companies concealed these bribes by submitting false invoices, characterizing them as training and other promotional expenses that Promeca never received. Promeca falsely recorded the bribes on its books as payments for training courses, meetings and congresses, and promotional costs.  In addition, between 2003 and 2010, Promeca expended approximately $80,050 on gifts and travel packages, some of which were intended to corruptly influence IMSS employees in order to retain their business. The various gifts included vacation packages, televisions, laptops, appliances, and in one case, the lease of a Volkswagen Jetta. These payments were falsely accounted for in Promeca’s books and records as promotional and training expenses.  In all, the improper payments, totaling about $317,000, generated approximately $8.7 million in gross revenues and resulted in illicit net profits to Orthofix of about $4.9 million.”

Under the heading, “Orthofix’s Remedial Measures to Prevent Corrupt Payments” the complaint states as follows.

“Prior to the discovery of the bribery schemes, Orthofix did not have an effective FCPA compliance policy or FCPA-related training.  Although Orthofix disseminated some code of ethics and anti-bribery training to Promeca, the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English. [For a recent FCPAmericas post on this issue, see here].  Additionally, even though Promeca’s training and promotional expenses, that included the improper payments, were often over budget, Orthofix did very little to investigate or diminish the excessive spending.  Upon discovery of the bribe payments through a Promeca executive, Orthofix immediately self-reported the matter to the Commission staff, and conducted an internal investigation.  Orthofix also implemented significant remedial measures. Specifically, it terminated the Promeca executives that orchestrated the bribery scheme, wound up Promeca’s operations, enhanced its overall FCPA compliance program with mandatory annual FCPA training for all employees and third-party agents, expanded internal audit functions, and implemented other internal control measures.”

Based on the above allegations, the SEC complaint charges violations of the FCPA’s books and records and internal controls provisions.  The SEC complaint states as follows.  “Orthofix’s subsidiary characterized their payments to IMSS as cash advances or training and promotional expenses even though those payments were used as bribes. Orthofix’s books and records did not reflect the true nature of those payments.  Orthofix failed to implement adequate internal controls to prevent the bribery or to ensure that transaction were properly recorded. Orthofix failed to implement an FCPA compliance and training program commensurate with the extent of its international operations and particularly its ownership of Promeca, a subsidiary that had substantial sales to government-owned enterprises. Further, even though Orthofix knew that Promeca’s training and promotional expenses were often over budget, it did nothing to act on the red flag.”

As stated in the SEC’s release (here), Orthofix consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest.  As noted in the release, the final judgment would permanently enjoin the company from violating the books and records and internal control provisions of the FCPA and Orthofix also agreed to certain undertakings, including monitoring its FCPA compliance program and reporting back to the SEC for a two-year period.

In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business.  Orthofix’s lax oversight allowed its subsidiary to illicitly spend more than $300,000 to sweeten the deals with Mexican officials.”

Perhaps the most notable aspect of the Orthofix enforcement action is that neither the DOJ or SEC charged the company with FCPA anti-bribery violations despite allegations that, given the enforcement agencies’ theories, have typically resulted in such violations.

Peter Spivack (Hogan Lovells – here) represented Orthofix.

Data Systems & Solutions LLC Resolves FCPA Enforcement Action

By on June 21, 2012 in 2012 Enforcement Actions, Anything of Value, Data Systems & Solutions, Deferred Prosecution Agreements, DOJ Enforcement Action, Foreign Official, Lithuania, Measuring & Controlling Devices Industry

Earlier this week, Data Systems & Solutions LLC (“DS&S”), a wholly-owned subsidiary of Rolls Royce Holdings and based in Reston Virginia, resolved a DOJ FCPA enforcement action.  The total fine was $8.82 million.

DS&S’s business includes the design, installation, and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants, and other critical infrastructure facilities.  According to the information, “DS&S’s instrumentation and controls business customers included state-owned nuclear power plants in Eastern Europe.”  The charged conduct focuses on DS&S’s business with Ignalina Nuclear Power Plant (“INPP”) described as a “state-owned nuclear power plant in Lithuania and an ‘agency’ and ‘instrumentality’ of a foreign government, as that term is used in the FCPA.”  For more on INPP, see its website here.

According to the charging documents, payments were made by DS&S to various INPP employees primarily through subcontractors.  The INPP employees are described as follows.  Official 1 (the Deputy Head of the Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 2 (the Head of Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 3 (the Director General at INPP with influence over the award of contracts); Official 4 (the Head of International Projects Department at INPP with influence over the award of contracts); and Official A (the lead software engineer at INPP with influence over the award of contracts).  All officials are alleged to “foreign officials as that term is used in the FCPA.”

The DOJ enforcement action involved a criminal information (here) against DS&S resolved through a deferred prosecution agreement (here).

Criminal Information

The information charges conspiracy to violate the FCPA’s anti-bribery provisions and one substantive FCPA anti-bribery violation.  As to the conspiracy charge, the information alleges that between 1999 to 2004, DS&S and others conspired to “obtain and retain contracts for DS&S from INPP to design, install, and maintain INPP’s instrumentation and controls systems through the promise and payment of bribes to foreign officials employed by INPP.”

According to the information, DS&S would and did attempt to conceal the payments to foreign officials by using Subcontractor A Subcontractor B and Subcontractor C (an alleged U.S. shell company) to funnel bribes from DS&S to INPP officials.  The information further alleges that: (i) “Subcontractor A would and did pay bribes to INPP officials on behalf of DS&S by issuing tens of thousands of dollars in checks to INPP officials for deposit into the officials’ bank accounts in the United States”; (ii) DS&S “would and did pay INPP employees who were also employed by Subcontractor B significantly above-market rates for services performed by Subcontractor B in connection with DS&S contracts with INPP in exchange for the INPP employees’ support for the award of contracts to DS&S” and in a manner designed to allow those employees to avoid taxes on the payments from DS&S; (iii) DS&S “would and did provide gifts, travel, and entertainment to employees of INPP in exchange for those foreign officials’ agreements to help DS&S secure contracts with INPP.  The travel alleged includes trips to Florida and Hawaii and gifts alleged include a Cartier watch.

Executive A (vice president of marketing and business development at DS&S during the relevant time period responsible for marketing and business development efforts in connection with DS&S’s nuclear services, including power plant customers in Eastern Europe) is alleged to have engaged in a variety of the improper conduct.

DPA

The DOJ’s charges against DS&S were resolved via a deferred  prosecution agreement.  Pursuant to the DPA, DS&S admitted, accepted and acknowledged that it is responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) following the receipt of subpoenas in connection with the government’s investigation, DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information; (b) DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the Department in a comprehensive report; and responding promptly and fully to the Department’s requests; (c) DS&S has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments; dissolving the joint venture and reorganizing and integrating the Company as a subsidiary with a more rigorous compliance program; enhancing its due diligence protocol for third-party agents and subcontractors, including CEO review and approval of the retention of any agent or subcontractor; strengthening its ethics policies, including the appointment of a Company Ethics Representative who reports directly to the CEO and provides regulator reports to the Members Committee at each Committee meeting; providing FCPA training for all agents and subcontractors; and establishing heightened review of most foreign transactions; (d) DS&S has committed to continue to enhance its compliance program and internal controls …; and (e) DS&S has agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents and subcontractors relating to violations of the FCPA.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $12.6 – $25.2 million.  The DPA states as follows.  “DS&S agrees to pay a monetary penalty in the amount of $8,820,000, an approximately thirty-percent reduction off the bottom of the fine range […]  DS&S and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the nature and extent of DS&S’s extraordinary cooperation and extensive remediation in this matter.”

Pursuant to the DPA, DS&S agreed to report to the DOJ “periodically, at no less than twelve-month intervals during the two-year term, regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in an attachment to the DPA.    As is customary in FCPA DPA’s, DS&S agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release.  Given the allegation in the information that INPP officials received payments into their bank accounts in the U.S., it will be interesting to see whether the INPP officials are charged with non-FCPA offenses.  Such a U.S. nexus was used to prosecute certain of the “foreign officials” in the Haiti Teleco enforcement action (see here for a summary of those actions) as well as the Siriwan’s in connection with the Green matter (see here for the prior post).

Carl Rauh (Hogan Lovells – here)  represented DS&S.

Too Much Guanxi

By on April 26, 2012 in 2012 Enforcement Actions, China, Declination Decisions, DOJ Enforcement Action, Financial Services Industry, Foreign Official, Garth Peterson, Individual Enforcement Action, Morgan Stanley, SEC Enforcement Action

“In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of “guanxi.”  So begins this 2009 Reuters article that details the rise and fall of Peterson, fired by Morgan Stanley in 2008, “amid suspicions” that he had violated the FCPA.  According to the article, Morgan Stanley, voluntarily reported the case to U.S. authorities after a nine month internal investigation.

Yesterday the DOJ and SEC announced a joint enforcement against Peterson.

DOJ

In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for “conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”

The release states as follows.

“According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials.  Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment.  Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws.  Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times.  During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times.  Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments.  Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”

“According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship.  The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district.  Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney.  After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value.  As a result, the conspirators realized an immediate paper profit of more than $2.5 million.  Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned.  In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.”

Assistant Attorney General Lanny Breuer stated as follows.  “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.  As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit.  Because of his corrupt conduct, he now faces the prospect of prison time.”

Peterson is to be sentenced on July 17th.

As to Morgan Stanley, the release states as follows.

“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

Kudos to the DOJ.  Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?

SEC

In this complaint, the SEC alleged in summary as follows.

“From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. In exchange for offers and payments from Peterson, the Chinese Official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”

Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.

In this release, the SEC noted that Peterson agreed to a settlement of the SEC’s charges “in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct.”

Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows.  “Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients.  This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company’s internal controls.”

Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated as follows.  “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”

As to Yongye and the Chinese Official, the complaint states as follows.

“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China.  Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government.  Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”

“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”

The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.

“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:

(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.

(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.

(3) A Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA.

(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.

(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.

Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA.  Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests.  Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”

Next Up – Biomet

By on March 27, 2012 in 2012 Enforcement Actions, Argentina, Biomet, Brazil, China, Deferred Prosecution Agreements, Distributor Issues, DOJ Enforcement Action, Industry Sweeps, Medical Device Industry, Monitor, SEC Enforcement Action

First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011).  Then it was Smith & Nephew (see here – $22 million in combined fines and penalties in February 2012).  Next up in the sweep of the medical device industry – based on the enforcement theory that certain foreign health care providers are “foreign officials” –  is Biomet.  Biomet (here) is an Indiana-based company that designs, manufactures and markets products used primarily by musculoskeletal medical specialists in both surgical and non‐surgical therapy.

Total fines and penalties in the Biomet enforcement action were approximately $22.8 million ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information (here) against Biomet resolved through a deferred prosecution agreement (here).

Criminal Information

In substance, the information begins as follows.  “Argentina has a public healthcare system wherein approximately half of hospitals are publicly owned and operated.  Health care providers (“HCPs”) who work in the public sector are government employees, providing health care services in their official capacities.  Therefore, such HCPs in Argentina are ‘foreign officials’ as that term is defined in the FCPA.”  “Brazil has a socialized public healthcare system that provides universal health care to all Brazilian citizens, and the majority of hospitals are publicly-controlled.  HCPs who work in the public sector are government employees, providing health care services in their official capacities.  Therefore, such HCPs in Brazil are ‘foreign officials’ as that term is defined in the FCPA.”  “China has a national healthcare system wherein most Chinese hospitals are publicly owned and operated.  HCPs who work at publicly-owned hospitals are government employees, providing health care services in their official capacities.”

The information charges one count of conspiracy to violate the FCPA, three substantive FCPA anti-bribery charges (one charge focused on conduct in Argentina, one charge focused on conduct in Brazil, and one charge focused on conduct in China) and one charge of violating the FCPA’s books and records provisions.

As to the conspiracy charge, the information alleges that between 2000 to 2009, Biomet and others conspired to “secure lucrative business with hospitals in the Argentine, Brazilian, and Chinese public health care systems by making and promising to make corrupt payments of money and things of value to publicly-employed HCPs.”

According to the information, it was part of the conspiracy that “Biomet, certain of its executives, employees, and subsidiaries” – (1) “agreed to pay publicly employed Argentine HCPs 15-20 percent commissions in exchange for the purchase of Biomet products” (2) “agreed to pay Brazilian HCPs 10-20 percent commissions through Brazilian Distributor [a Brazilian company that had exclusive distribution rights for Biomet reconstructive products in Brazil] in exchange for the purchase of Biomet products” and (3) “agreed to pay Chinese HCPs commissions through Chinese Distributor [a Chinese company that acted as a distributor of Biomet products in China], and paid for travel for Chinese HCPs, in exchange for the purchase of Biomet products.”

The information also alleges that it was further part of the conspiracy that at the end of Biomet’s fiscal year from 2000 to 2009 “Biomet, its executives, employees, and subsidiaries falsely recorded the payments on its books and records as ‘commissions,’ ‘royalties,’ ‘consulting fees,’ ‘other sales and marketing,’ and ‘scientific incentives,’ in order to conceal the true nature of the payments in the consolidated books and records of Biomet Argentina [a wholly-owned Argentine subsidiary of Biomet through which Biomet conducted business in Argentina], Biomet International [a wholly-owned Delaware subsidiary of Biomet through which Biomet sold products into Brazil], Scandimed [a wholly-owned Swedish subsidiary through which Biomet sold products into China and elsewhere], and Biomet China [a wholly-owned Chinese subsidiary through which Biomet sold products into China], which books and records were incorporated into the books and records of Biomet for purposes of preparing Biomet’s year-end financial statements, which were filed with the SEC …”.

The information alleges as follows.  “In total, from 2000 to 2008, Biomet, Biomet Argentina, Biomet International, Scandidmed, and Biomet China, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of at least $1.5 million, some or all of which was paid to publicly-employed HCPs to induce the purchase of Biomet products.”

As to Argentina, the information largely focuses on internal e-mails or memos which indicated that “royalties are paid to surgeons if requested” and that the payments “are disclosed in the accounting records as commissions.”  The information details a 2005 internal investigation into certain allegations of improper conduct, but alleges that thereafter problematic payments continued to be made.  For instance, a 2007 internal e-mail states as follows.  “Doctors receive a ‘consulting fee’ for every surgery.”  According to the information, in August 2008 “Biomet distributed new compliance guidelines that emphasized the FCPA and related issues, and the company’s managing director for Argentina sought advice from the company’s lawyers, causing Biomet to suspend payments to Argentine doctors.”

As to Brazil, the information largely focuses on internal e-mail or memos noting that the Brazilian Distributor was paying commissions to doctors and that the Brazlian Distributor admitted that it “paid doctors for buying Biomet products and described the payments as ‘scientific incentives.”

As to China, the information discusses various internal e-mails which reference: the China Distributor “paying a 10-15% ‘rebate’ to surgeons on the sale of Biomet artificial hips;” a Scandimed employee stating that, regarding commissions to surgeons, “Scandimed has no control over this … as we understand it, giving commissions or gifts of various kinds to surgeons is common in China;”the China Distributor stating that a “Doctor will become the most loyal customer of Biomet if we send him to Switzerland”;  and the China Distributor stating as follows – “Doctor is the department head of [public hospital] and that Doctor uses about 10 hips and knees a month and its on an uptrend, as he told us over dinner a week ago … Many key surgeons in Shanghai are buddies of his.  A kind word on Biomet from him goes a long way for us.  Dinner has been set for the evening of the 24th.  It will be nice.  But dinner aside, I’ve got to send him to Switzerland to visit his daughter.”  The information also references a distribution memo which states that “Chinese surgeons typically receive a commission on sales, which can range from 5% to 25% and that distributors are expected to hold banquets for surgeons and to sponsor meetings.”  Another internal e-mail discusses “consulting fees paid to doctors for conducting clinical trials” and a “proposal for a two week visit for Chinese doctors to the United Kingdom, with the second week being a ‘holiday’ paid for by Chinese Distributor.”  The information also alleges that in October 2007 “Biomet China sponsored the travel of 20 surgeons to Barcelona and Valencia for training, including a substantial portion of the trip being devoted to sightseeing and other entertainment at Biomet’s expense.”  According to the information, in 2005 “Director of Internal Audit [based in Warsaw, Indiana] instructed an auditor to classify improper payments being made to doctors in connection with certain clinical trials as ‘entertainment’ and in 2007, the product manager for Biomet China sent an e-mail to [an Associate Regional Manager based in Hong Kong] “discussing ways to evade efforts by the Chinese government to halt corruption in health care by requiring all international companies to declare actual cost for import to the government, noting, ‘obviously, China government doesn’t have ability to forbid the corruption from hospitals & surgeons …’ and proposing four methods for avoiding the regulation, including falsified invoices.

DPA

The DOJ’s charges against Biomet were resolved via a deferred  prosecution agreement.  Pursuant to the DPA, Biomet admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agent, and  wholly-owned subsidiaries” as set forth in the information.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: Biomet investigated and disclosed to the DOJ and SEC the misconduct, “a portion of which was voluntarily disclosed”; Biomet reported its findings to the DOJ and SEC; Biomet cooperated fully in the DOJ and SEC investigation; Biomet undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures as set forth in the DPA; Biomet agreed to continue to cooperate with the DOJ, SEC, and foreign authorities in any related investigations; “Biomet has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s investigations of other companies and individuals in connection with business practices overseas in various markets;” and “were the DOJ to initiate proseuction of Biomet and obtain a conviction, instead of entering into the agreement to defer prosecution, Biomet would potentially be subject to exclusion from participation in federal health care programs pursuant to 42 USC 1320a-7(a).”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $21.6 – $43.2 million.  The DPA states as follows.  “Biomet agrees to pay a monetary penalty in the amount of $17.28 million, a 20 percent reduction off the bottom of the fine range.  Biomet and the DOJ agree that this fine is appropriate given Biomet’s extensive internal investigation, the nature and extent of Biomet’s cooperation in this matter, Biomet’s cooperation in the DOJ’s investigation of other companies … and Biomet’s extraordinary remediation.”    The guidelines calculation notes that Biomet received a credit for “substantial assistance in the prosecution of others.”

Pursuant to the DPA, Biomet agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures as described in an attachment to the DPA.  As is customary in FCPA DPA’s, Biomet agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release.

SEC

The SEC’s settled civil complaint (here) against Biomet is based on the same core conduct as described above.  In summary it alleges “violations of the FCPA by Biomet and four of its subsidiaries to obtain sales for their medical device business” and that from “2000 through August 2008, Biomet and its four subsidiaries paid bribes to public doctors employed by public hospitals and agencies in Argentina, Brazil, and China.”

Among other things, the SEC’s complaint alleges that “executives and auditors at Biomet’s Indiana headquarters were aware of the Argentine payments to doctors as early as 2000.”    The SEC alleges as follows.  “Internal audit took no steps to determine why royalties were paid to doctors purchasing Biomet medical devices, or why the payments to the doctors were 15-20 percent of sales.  The internal auditors did not obtain any evidence of services provided for the payments.  In fact, the internal audit report concluded that there were adequate controls in place to properly account for royalties paid to surgeons without any supporting documentation.”  Elsewhere, the SEC alleges that “despite the bribery” [the] Latin America Auditor’s only recommendation was to change the journal entry from ‘commission expenses’ to ‘royalties.'”

The SEC complaint references the September 2007 letter “Commission staff” sent to Biomet “inquiring of payments made to public doctors” but that “while the inquiry was underway in certain countries, additional conduct was occurring at Biomet Argentina.”  For instance, the complaint alleges that in March 2008, “Managing Director of Biomet Argentina again reported the payments to surgeons to internal compliance personnel but no efforts were made by compliance to stop the practice.”

As to Biomet’s FCPA anti-bribery violations, the SEC complaint alleges that “Biomet employees who were U.S. nationals approved the payments to Argentine doctors and the arrangements with the Brazilian Distributor and Chinese Distributor that included payments to doctors.”

As to Biomet’s failure to maintain adequate internal controls, the complaint alleges as follows.  “Biomet failed to implement internal controls to detect or prevent bribery.  Biomet and four subsidiaries were involved in bribery that lasted for over a decade.  The conduct involved employees and managers of all levels involved in Biomet’s sales in Argentina, Brazil and China.  False documents were routinely created or accepted that concealed the improper payments.”

Based on the above allegations, the SEC complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, Biomet consented to the entry of a court order requiring payment of approximately $4.4 million in disgorgement and approximately $1.1 million in prejudgment interest.

The SEC’s release states as follows.  “Biomet’s compliance and internal audit functions failed to stop the payments to doctors even after learning about the illegal pratices.”  Kara Brockmeyer (Head of the SEC’s FCPA Unit) stated as follows.  “A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem.”

In this release, Biomet’s President and Chief Executive Officer, Jeffrey R. Binder, stated: “Biomet has long been committed to upholding the highest standards of ethical and legal conduct both in the United States and abroad. Over the past several years, we have significantly enhanced our global compliance procedures and financial controls, and we fully intend to work with the independent monitor and the Department of Justice and Securities and Exchange Commission to bolster our FCPA compliance practices and procedures. Moving forward, we intend to continue to adhere to our enhanced global compliance procedures, and to promote the Company’s commitment to the highest ethical standards in all the markets that we serve.”

Laurence Urgenson (Kirkland & Ellis – here) and Asheesh Goel (Ropes & Gray – here) represented Biomet.

As to the origins of the FCPA inquiry, Biomet’s most recent quarterly filing stated as follows.  “On September 25, 2007, Biomet received a letter from the SEC informing the Company that it is conducting an informal investigation regarding possible violations of the Foreign Corrupt Practices Act in the sale of medical devices in certain foreign countries by companies in the medical devices industry. […]  On November 9, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC be provided to the Department of Justice on a voluntary basis.”

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