Next Up – Biomet
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.”
In Depth On The Siemens Argentina Enforcement Action
Yesterday’s post (here) covered the DOJ indictment and SEC civil complaint against former Siemens’ executives and agents. This post provides a more in-depth analysis of the allegations. Every enforcement action needs a name, so let’s call this large case the Siemens Argentina Enforcement Action, recognizing that Siemens itself resolved its exposure for the conduct described below in 2008 and is not a part of the current matter.
DOJ Indictment
As noted in the previous post, the DOJ indictment (here) charges the following individuals. Uriel Sharef, Herbert Steffen, Andres Truppel, Ulrich Bock, Stephan Signer, Eberhard Reichert, Carlos Sergi and Miguel Czysch.
The below defendants are described as “officers, directors, employees and agents” of an “issuer” (Siemens AG).
According to the indictment, Sharef (a dual citizen of Israel and Germany) was employed by Siemens from 1978 to December 31, 2007. The indictment alleges that from 2000 until his departure from Siemens, Sharef was a member of Siemens AG’s Managing Board and Corporate Executive Committee (“CEC”), with oversight responsibilities for Siemens AG’s power operations group, including Siemens Power Transmission and Distribution (“Siemens PTD”), and Siemens AG’s operations in the Americas region, including Siemens Argentina.
According to the indictment, Steffen (a German citizen) was a long-time Siemens employee who left the company in 2003. The indictment alleges that Steffen, at various times, was: group president of Siemens AG’s transportation systems operating division; group president of Siemens PTD; CEO of Siemens Argentina; and chairman of the Supervisory Board of Siemens Argentina.
According to the indictment, Truppel (a dual citizen of Germany and Argentina) was employed by Siemens until 2002 when he then became a consultant to Siemens until 2004. The indictment alleges that until his “shift to consultant status” Truppel was CFO of Siemens Argentina.
According to the indictment, Bock (a German citizen) was a long-time employee of Siemens until 2001 when he then became a paid consultant to Siemens until 2007. While a Siemens employee, Bock was commercial head of Siemens Business Services (“SBS” – a wholly-owned subsidiary of Siemens AG and a unit in Siemens information and communications operating group).
According to the indictment, Reichert (a German citizen) was a long-time Siemens employee until 2001. He was the technical head of SBS’s Major Projects subdivision.
According to the indictment, Signer (a German citizen) was a long-time Siemens employee until 2011. The indictment alleges that from 2000 to 2007, Signer worked for SBS as a commercial director in various capacities.
The below defendants are described as “agents” of Siemens AG who served as “intermediaries between Siemens and officials of the Government of Argentina” – the so-called “Intermediary Defendants.”
According to the indictment, Sergi (a citizen of Argentina) “was a prominent businessman in Latin America with extensive high-level government contacts in Argentina.” The indictment states that Sergi was for a 15 year period ending in 2003 a member of the Supervisory Board of Siemens Argentina along with Sharef.
According to the indictment, Czysch (a German citizen and resident of Switzerland) was a business associate of Sergi.
For both set of defendants, the indictment invokes 78dd-1 of the FCPA. The jurisdictional hook under 78dd-1 for non-U.S. “issuers” is “use of the mails or any means or instrumentality of interstate commerce” in furtherance of a bribery scheme. As described below, the indictment alleges certain conduct in the U.S. as well as wire transfers of money through U.S. bank accounts in furtherance of the bribery scheme.
The indictment also refers to six unindicted co-conspirators (two individuals described an attorneys in Argentina and former senior officials in the Argentine Ministry of Justice; a former CEO of Siemens Argentina; a former deputy general counsel in the Legal Services office at Siemens AG headquarters; a business partner of Sergi; and a business partner of Czysch).
Under the heading “Overview of the Conspiracy” the indictment alleges as follows. “In or about August 1994, the Government of Argentina issued a tender for bids to replace an existing system of manually created national identity booklets with state-of-the-art national identity cards” – the so-called DNI (Documento Nacional de Identidad) project. According to the indictment, the “total estimated value of the DNI project was approximately $1 billion.” In 1998, the President of Argentina issued a decree awarding the DNI project to Siemens IT Services S.A. (“SITS”), a special-purpose subsidiary created by SBS for the purpose of bidding on the DNI project. According to the indictment, from 1996 to 2009, the defendants and others “engaged in a conspiracy on behalf of Siemens to obtain the lucrative proceeds of the DNI project, and to foster future business, by means of bribery, fraud, and other forms of corruption.”
The indictment specifically alleges as follows. “Members of the conspiracy won the DNI project for Siemens by bribing Argentine government officials. They paid more bribes in the hope of reviving the project when, in or about 2001, the DNI project was stalled. Ultimately […] the DNI project was terminated altogether. Even after this point, members of the conspiracy continued to pursue the profits that Siemens had expected to gain from the project. They did so through additional bribes and corrupt conduct, including the pursuit of a fraudulent arbitration in Washington, D.C. against the Argentine government, demanding nearly $500 million while actively hiding the corruption from the tribunal.”
According to the indictment, “some of conspirators were employed by Siemens as executives, lawyers, and managers working on DNI project matters; others served as agents and conduits for the payment of bribes to Argentine government officials who were in a position to influence the direction of the DNI project.” The indictment alleges as follows. “Integral to the conspiracy, and to the concealment of the illegal objects of the conspiracy, was the conspirators’ use of at least 17 conduit entities (collectively, the ‘Conduit Entities’) controlled or otherwise affiliated with the Intermediary Defendants and with various Argentine government officials and candidates for office who were the recipients or intended recipients of bribe payments (the ‘Argentine Officials’).
The conduct alleged in the indictment starts with “initial bribe commitments and payments.” The indictment alleges that various co-conspirators “committed Siemens to paying nearly $100 million in bribes to sitting officials of the Argentine government, members of the opposition party, and candidates for office who were likely to come to power during the performance of the project.” According to the indictment, many of these payments were made pursuant to “black contracts, that is unwritten contracts” with third-parties who later sought reimbursement from Siemens.
Argentine officials described in the indictment are “Argentine Official A” (a senior official in the Office of the President and thereafter a candidate for office and member of the Argentine Congress), “Argentine Official B” (a senior official in the Ministry of Interior and thereafter a member of the Argentine Congress); and “Argentine Official C” (a senior official in the Ministry of Migration and the Office of Internal Security and thereafter a member of the Argentine Congress). The indictment alleges that certain defendants “caused SBS to transfer two wires in the aggregate amount of approximately $7.4 million to a bank account in Manhattan, New York” in furtherance of the bribe scheme.
The indictment next alleges that in 1999 “with work on the DNI project underway, the Government of Argentina suspended the project, as the country faced a mounting economic crisis and a presidential election” and that a “new administration, which came to power […] maintained the suspended status of the DNI project.” The indictment alleges that Sharef and Steffen “led a campaign on Siemens’s part to restart the DNI project” and that “renegotiation of the contract governing the DNI project was a part of the campaign.” The indictment charges that various defendants “lobbied Argentine government officials” and that Sharef met with a “Argentine Official D” (a senior official in the office of the Argentine President). According to the indictment, “the meeting engendered optimism at Siemens that the President of Argentina would soon issue a decree authorizing the resumption of the DNI project” and that “continuing the payment of bribes was part of the conspirators’ effort to revive the DNI project.”
According to the indictment, the conspirators committed to pay additional bribes to Argentine Officials A, B, C, D, as well as “Argentine Official E” (a senior official in the Ministry of the Interior and thereafter a member of Congress), “Argentine Official F” (a senior official in the Ministry of the Interior and thereafter a candidate for office in the Argentine Congress), and “Argentine Official G” (a senior official in the Ministry of Interior). According to the indictment, conspirators “agreed to funnel payments on all existing and new bribe obligations through the Intermediary Defendants” and “also agreed to conceal the bribe payments under a ‘white contract’ – that is, a contract that appeared legitimate on its face, but which did not reflect an actual transaction of business.”
The indictment next alleges that in 2001 “the anticipated decree authorizing the resumption of the DNI project still was not issued.” According to the indictment, “the Argentine government was instead conducting an assessment of the merits of continuing the DNI project through a body” called the General Accounting Agency of the Nation (“SIGEN”) and that “in a further effort to prevent termination of the DNI project, members of the conspiracy determined to influence SIGEN’s assessment in Siemens’s favor by bribing a SIGEN board member (“Argentine Official H”).
According to the indictment, “despite Siemens’s efforts and bribe payments intended for various foreign officials, the Government of Argentina officially terminated the DNI project” in 2001. Nevertheless, the indictment alleges that certain defendants and conspirators assembled a Crisis Management Team (“CMT”) continued a bribe scheme to “(i) ensure that Siemens recognized the economic benefits of the contract for the DNI project, notwithstanding its termination and the corrupt manner by which it had been procured, (ii) prevent public disclosure of the bribery associated with the DNI project, and (iii) ensure Siemens’s ability to secure future government contracts in Argentina and elsewhere in the region.” According to the indictment “the conspirators sought to achieve these related goals by paying down outstanding bribe obligations to Argentine Officials through a complex series of transactions, paying down bribe obligations through a sham arbitration in Switzerland, and seeking to recoup the anticipated financial benefits of the DNI project through a fraudulent arbitration in Washington D.C.”
Specifically, the indictment charges that certain defendants met with Sergi and Czysch in Miami, Florida to “re-negotiate the amount of outstanding bribe commitments to the Argentine Officials.” The indictment further alleges certain “wire transfer instructions for payment through a bank account in Manhattan, New York” and payments through a New York-based account. The indictment further alleges that one of the Conduit Entities had Miami, Florida addresses. The indictment further alleges that certain defendants also met in Manhattan, New York “to discuss the outstanding bribe obligations.”
Thereafter, the indictment alleges that Sergi (the prominent businessman in Latin America with extensive high-level government contracts in Argentina who served as an agent of Siemens AG) filed a formal claim against SBS in a Swiss arbitral tribunal in 2005 to recover under a sham contract used to make certain bribe payments. The indictment states that “although the members of the conspiracy knew that none of the services described in the contract were performed and were not expected to be performed, and that the contract was a sham used to disguise illegal bribe obligations, none of the conspirators acknowledged as much before the Swiss tribunal.” According to the indictment, SBS settled the claim for approximately $8.8 million, but that the “settlement was actually a mechanism to disguise a partial payment of bribe obligations to the Argentine Officials.” According to the indictment, certain of the settlement money passed through bank accounts in Manhattan, New York.
As to the Washington D.C. arbitration, the indictment alleges that certain of the defendants and co-conspirators “orchestrated the filing of a fraudulent arbitration claim in Washington D.C. in 2002 to cause the Argentine government to pay Siemens AG damages in an amount equivalent to incurred expenses and the total profits the company would have earned from the DNI project had it not been terminated.” According to the indictment, “exposure of the bribery associated with the DNI project would have likely rendered the arbitration claim futile because the contract would have been procured through illegal corruption.” The indictment alleges that certain defendants and co-conspirators “successfully kept evidence of bribery out of the arbitration in Washington D.C.” by filing witness statements containing “material misrepresentations and omissions relating to the DNI’s project origins, among other matters.” According to the indictment, despite later claims by Argentina that the DNI project bidding was corrupted – claims Siemens denied, the arbitral tribunal sided with Siemens AG and on February 2007 it awarded Siemens AG approximately $218 million in loss of investment, plus interest. However, the factual portion of the indictment ends with the following statement – in August 2009 “Siemens AG personnel who were not members of the conspiracy caused the company to waive its right to the award.”
Based on the above conduct, the indictment charges the defendants with conspiracy to violate the FCPA’s anti-bribery, books and records and internal control provisions; conspiracy to commit wire fraud; conspiracy to commit money laundering; and substantive wire fraud.
SEC Complaint
The SEC’s complaint (here) is based on the same core conduct alleged above. Reichert and Czysch are not named as defendants in the SEC action, but the SEC complaint includes as a defendant Bernd Regendantz (the CFO of SBS who allegedly authorized certain bribe payments). Each of the SEC defendants are charged with violating the FCPA’s anti-bribery provisions; aiding and abetting Siemens’ FCPA violations – both anti-bribery violations and books and records and internal controls; and violating other securities laws by falsifying documents, including invoices and sham consulting contracts in furtherance of the bribery scheme.
According to the SEC, “over the course of the bribery scheme, Siemens paid an estimated total of over $100 million in bribes, approximately $31.3 million of which were made after […] Siemens became subject to the U.S. securities laws.”
In addition, Regendantz is charged with violating Rule 13b2-2 by signing false internal certifications pursuant to SOX. As to Regendatz, the SEC complaint alleges that he “had no prior dealings with the DNI contract” when he became CFO of SBS in 2002 and that he had resisted other defendants pressure to authorize additional bribe payments. According to the complaint, “Regendantz sought guidance from Siemens’ Head of Compliance, Chief Financial Officer, Chief Executive Officer, and two members of the Managing Board.” The complaint alleges that “in each instance, Regendantz explained that the payment demands lacked any legitimate commercial basis and that he was reluctant to authorize them.” The complaint then states as follows. “In each instance, Regendantz explained that the payment demands lacked any legitimate commercial basis and that he was reluctant to authorize them. In each instance, Regendantz’s superiors gave every indication that they were familiar with the DNI Contract and with the nature of the payment demands. And in each instance, his superiors told Regendantz that it was his responsibility to find a solution to the problem. Regendantz understood these responses from his superiors to be an instruction that he authorize the bribe payments.”
The SEC’s release noted that Regendantz settled the SEC charges without admitting or denying the allegations and consented to entry of a final judgment that enjoins him from future violations. The release states that Regendantz previously paid a $40,000 administrative fine ordered by the Munich prosecutor.
Former Siemens Executives and Agents Charged
In December 2008, Siemens resolved the largest ever (in terms of fines and penalties) FCPA enforcement action. See here and here. A portion of the improper conduct focused on Argentina and allegations that Siemens S.A. (Argentina), and those acting on its behalf, engaged in a bribery scheme in connection with an Argentine government contract to produce national identity cards.
Since the 2008 enforcement action, U.S. enforcement authorities have been under pressure to charge culpable individuals. See here for a prior post and here for the transcript of the November 2010 Senate FCPA hearing during which former Senator Specter again called for individual accountability, an occurrence which prompted him to ask me several questions after the hearing about the “most egregious examples of individual conduct associated with the Siemens prosecution.” See here for my responses.
Today, the DOJ announced that “eight former executives and agents of Siemens AG and its subsidiaries have been charged for allegedly engaging in a decade-long scheme to bribe senior Argentine government officials to secure, implement and enforce a $1 billion contract with the Argentine government to produce national identity cards.”
The defendants charged in the indictment (here) are: Uriel Sharef (a former member of the central executive committee of Siemens AG); Herbert Steffen (a former chief executive officer of Siemens Argentina); Andres Truppel (a former chief financial officer of Siemens Argentina); Ulrich Bock, Stephan Signer and Eberhard Reichert (former senior executives of Siemens Business Services); and Carlos Sergi and Miguel Czysch (who allegedly served as intermediaries and agents of Siemens in the bribe scheme). None of the individuals are U.S. citizens and during a press conference today Assistant Attorney General Lanny Breuer indicated that none of the defendants are in U.S. custody.
The indictment, filed in the Southern District of New York, charges the defendants and their co-conspirators with conspiracy to violate the FCPA and the wire fraud statute, money laundering conspiracy and wire fraud.
In the DOJ release, Assistant Attorney General Lanny Breuer stated as follows. “Today’s indictment alleges a shocking level of deception and corruption. The indictment charges Siemens executives, along with agents and conduits for the company, with committing to pay more than $100 million in bribes to high-level Argentine officials to win a $1 billion contract. Business should be won or lost on the merits of a company’s products and services, not the amount of bribes paid to government officials. This indictment reflects our committment to holding individuals, as well as companies, accountable for violations of the FCPA.” During the press conference, Breuer stated that today’s action is the “first time a former Board member of a Fortune 50 company” has ever been charged with FCPA violations. Breuer also stated that “Siemens was a remarkably cooperative and helpful party throughout our investigation.”
In a parallel civil enforcement action also announced today (here), the SEC charged seven former Siemens executives with violating the FCPA for their involvement in the same bribery scheme. The following individuals are charged in the civil action: Sharef, Bock, Signer, Steffen, Truppel, Sergi and Bernd Regendantz (a former chief financial officer of Siemens Business Services). The civil complaint (here) alleges FCPA anti-bribery violations, aiding and abetting Siemens’ FCPA anti-bribery violations, as well as other charges. Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “Business should flow to the company with the best product and the best price, not the best bribe. Corruption erodes public trust and the transparency of our commercial markets, and undermines corporate governance.” During today’s press conference, Khuzami called the action the “largest [SEC] action ever against individuals” in the FCPA’s history.
Additional analysis of the DOJ and SEC enforcement actions will follow.
Friday Roundup
ConocoPhillips is hit with an FCPA related shareholder proposal, add Wal-Mart to the list, and more on Embraer … it’s all here in the Friday Roundup.
ConocoPhillips Shareholder Proposal
Last week ConocoPhillips was hit with an FCPA shareholder proposal – see here. In the letter, titled “Shareholder Proposal and Statement for Publication in 2012 Proxy Materials Recommending an Audit of Controls on U.S. Foreign Corrupt Practices Act Violations,” the shareholder – Roger Parsons, a former Conoco employee who runs a website “The Iran-Conoco Affair” (here) – recommends “that the Board commission a forensic audit of ConocoPhillips compliance controls that failed to identify violations of the United States Foreign Corrupt Practices Act of 1977 (“FCPA”) arising from James J. Mulva ‘s peddling influence with the Bush Administration to obtain Executive Order 13477 on behalf of Muammar al-Qadhafi.” Mulva is currently ConocoPhillips Chairman and Chief Executive Officer.
Wal-Mart
Add Wal-Mart to the list of company’s under FCPA scrutiny. In a 10-K filing yesterday, the company disclosed as follows. “During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known,
we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”
Given the reference to permits, licenses and inspections in the disclosure, it is useful to review the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract. In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business. The court specifically stated as follows. “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in betting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
Embraer
Bloomberg has additional information (here) regarding Embraer’s FCPA scrutiny (discussed in this previous post). The article suggests that the “probe started more than a year ago in Argentina with government-controlled Aerolineas Argentinas SA’s $700 million purchase of 20 E-190 jets in 2009.” The airline has switched between private ownership and government ownership a number of times over the years.
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A good weekend to all.
The Stings Before The Sting
A post that will increase your chance of capturing the office FCPA Jeopardy title.
As frequently reported, the Africa Sting case was the first time in the FCPA’s history that undercover investigative techniques were used. As detailed in this prior post, not true, undercover investigative techniques have been used in several other FCPA enforcement actions.
As frequently reported, the Africa Sting case was the first time in the FCPA’s history that a full-blown sting operation was used in connection with an enforcement action. This too is not true as detailed in this post which provides an overview of prior DOJ FCPA sting operations.
Hebert Tannenbaum
In 1996 an FBI spent agent received information from a confidential informant that Tannenbaum (the principal of Long Island based Tanner Management Corporation – a garbage incinerator manufacturer) “had previously made payments to foreign government officials to induce them to purchase garbage incinerators from the defendant.” (See here for the complaint). The informant further advised the FBI that Tannenbaum “had offered to make payments to government officials of various foreign countries in order to sell garbage incinerators in those countries” and during a recorded meeting with the informant Tannenbaum confirmed that he “had previously made a $75,000 cash payment to an official of the Government of Barbados, as an inducement for the purchase by his government of a garbage incinerator.” Thereafter, the informant, acting at the FBI’s direction, recorded a call with Tannenbaum during which Tannenbaum “admitted that he was willing to make payments to sell his garbage incinerators” and the complaint references specific payments in Taiwan and Argentina. During a meeting at the Park Lane Hotel in New York, the informant introduced Tannenbaum to the FBI special agent who was posing “as an Argentine government procurement official who wanted to purchase a garbage incinerator.” During the meeting, Tannenbaum offered to sell the Argentine “procurement official” an incinerator and stated “that he was willing to make a payment to facilitate the deal.” According to the complaint, Tannenbaum, on the way to a bank to open an account to faciliate the deal, told the undercover FBI agent posing as the “procurement official” that “for all he knew [“procurement official”] could have been an FBI agent” and that Tannenbaum was “in his seventies, and did not want to get in trouble.”
Well, Tannebaum did get in trouble.
Based on the above information, Tannenbaum was charged in 1998 via a one count criminal information (here) with conspiracy to violate the FCPA. The information is signed by then U.S. Attorney for the S.D. of New York Mary Jo White currently a partner at Debevoise & Plimpton (here).
Tannenbaum pleaded guilty (see here and here for the DOJ release) and was sentenced to 366 days plus three years of supervised release.
Richard Novak
In 2006, Richard Novak was charged (here) with, among other counts, violating the FCPA. It remains one of the more unusual FCPA enforcement actions ever. Novak and others owned and operated several internet businesses using the names “Saint Regis University,” “Robertstown University” and “James Monroe University.” According to the superseding information “they were diploma mills in that these ‘universities’ had no legitimate faculty members; offered no legitimate academic curriculum or services; required no course work or class work; and were not recognized by the United States Department of Education.” According to the superseding information, Novak made a bribe payment to the “Consult and First Secretary at the Liberian Embassy in Washington D.C. in order to assist Saint Regis University and its owners in fraudulently selling diplomas through their internet businesses.” Elsewhere, the superseding information states that “various foreign government officials who received the bribes held various positions at the Liberian Embassy in Washington, D.C., the Liberian Embassy in Accra, Ghana, and at the Ministry of Education for the Republic of Liberia in Monrovia, Liberia” and that these individuals, among other things, “were in a position to: issue certificates of accreditation and recognition; issue notarial certificates; issue letters claiming that Saint Regis University was fully accredited and recognized by the Ministry of Education in the Republic of Liberia; and cause staff at the Liberian Embassy in Washington D.C. to answer the telephone calls in a positive way when inquiries regarding the legitimacy [of the Universities] were made.”
Although not specifically mentioned in the superseding information, a component of the original indictment (here) against Novak and several others was U.S. Secret Service agents posing as high school dropouts seeking degrees.
Novak pleaded guilty (see here) and was sentenced to three years probation.