Deep Within Its Section 1504 Final Rules, The SEC Adopts An FCPA Reform Proposal Advanced By The Chamber And Contradicts An Enforcement Theory At Issue In Several Of Its Prior FCPA Actions
In late August, the SEC adopted final rules implementing Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions. A future post will discuss the final rules as to this provision which was tacked to the end of the massive financial regulation bill at the last minute as a “miscellaneous provision” (see here for a prior post).
This post highlights that deep within the 232 pages of Section 1504 SEC final rules, the SEC adopted an FCPA reform proposal advanced by the Chamber of Commerce as well as contradicts an enforcement theory at issue in several of its prior FCPA actions.
First a bit of background.
In “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act” (here), the Chamber proposed to clarify the definition of “foreign official.” In Congressional testimony, former Attorney General Michael Mukasey, testifying on behalf of the Chamber, stated as follows. “The FCPA therefore should be amended to clarify the meaning of ‘foreign official,’ indicate the percentage of ownership by a foreign government that would qualify the entity as an instrumentality. We think majority ownership is the most plausible threshold.” (See here for the hearing transcript).
In the aftermath of the House hearing, and in response to questions from Capital Hill, SEC Chairman Mary Schaprio stated that the FCPA “sufficiently defines the term foreign official” and further stated as follows. “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.” (See here for the prior post).
Back to Section 1504. It defines “foreign government” to mean a “department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission.” On page 101 of its recently issued final rules (here), the SEC states as follows. “[T]he final rules clarify that a company owned by a foreign government is a company that is at least majority-owned by a foreign government.”
By so concluding, not only did the SEC quietly adopt an FCPA reform proposal advanced by the Chamber, but it also contradicted an enforcement theory at issue in several of its prior FCPA actions.
For instance, in the several Bonny Island, Nigeria enforcement actions (see here for a summary) the SEC alleged that employees of Nigeria LNG Limited (“NLNG”) were “foreign officials” despite the fact that NLNG was owned 51% by a consortium of private multinational oil companies.
In the Alcatel-Lucent enforcement action, the SEC alleged that employees of Telekom Malaysia Berhad were “foreign officials” in that the entity was a state-owned and controlled company even though the Malaysian Ministry of Finance owned only 43% of the company’s shares. (See here for the prior post).
The Comverse enforcement action focused on Hellenic Telecommunications Organization (“OTE”) and allegations that the Greek Government was OTE’s largest shareholder and controlled the company. The SEC suggested that employees of OTE were “foreign officials” even though, during the relevant time period, the Greek Government held only 33% – 38% of the company’s shares. (See here for the prior post).
With the SEC’s conclusion in its Section 1504 final rules that a company owned by a foreign government is a company that is at least majority-owned by a foreign government, the SEC will be hard pressed to allege in future FCPA enforcement actions that an entity with less than 50% foreign government ownership or control is an instrumentality of a foreign government and that its employees are “foreign officials” under the FCPA. This is assuming of course that the SEC cares about intellectual honesty and consistency.
As noted in previous posts, Section 1504 of course also demonstrates that when Congress wants to, it knows how to pass a bill that captures state-owned or state-controlled enterprises (SOEs). Congress is presumed not to use redundant or superfluous language in enacting statutes. If instrumentality include SOEs (as the enforcement agencies maintain), then Congress violated this legislative maxim by using redundant or superfluous language in Section 1504. Congress did not violate this maxim in Section 1504 because instrumentality does not include SOEs and there is no support in the voluminous FCPA legislative history to support such a claim. (See here for my foreign official declaration).
In its 11th Circuit “foreign official” response brief (here) the DOJ merely states, in a footnote, the following as to Section 1504. “[Section 1504’s] definition of “foreign government,” enacted more than 30 years after the FCPA and in a very specific and unrelated context, has no bearing on the meaning of instrumentality in the FCPA.”
DOJ Files Response Brief In Historic 11th Circuit “Foreign Official” Appeal
This previous post detailed the appeal of Carlos Rodriguez and Joel Esquenazi to the 11th Circuit on a host of issues, including whether the trial court erred as a matter of law in its jury instruction regarding what constitutes an “instrumentality” of a foreign government – and thus who are “foreign officials” under the FCPA. As noted in the post, this is a historic appeal, the first time in the FCPA’s history that “foreign official” will be squarely before an appellate court. Certain of the appellant’s arguments are based on my “foreign official” declaration – see here.
Earlier today, the DOJ filed its response brief – here.
In summary, the DOJ states as follows as directly relevant to “foreign official.”
“The district court’s instructions on the meaning of ‘instrumentality of a foreign government’ were correct. The instructions stated that an instrumentality must perform a governmental function and provided a nonexhaustive list of relevant factors for the jury to consider in deciding whether Teleco was an instrumentality of the government of Haiti. Courts have used similar tests to determine whether an entity is an instrumentality in other contexts and relied on many of the same factors. The evidence sufficiently established that Teleco was an instrumentality of Haiti during the relevant time period. The government, through its national bank, owned 97% of Teleco’s shares, and, if Teleco had been profitable, those profits would have accrued to the government and the national bank. Because it was not, the national bank subsidized Teleco. Haiti’s president and high-level ministers controlled Teleco through their appointment of Teleco’s board of directors and general director. Teleco’s status as a government instrumentality is also reflected in Haitian law that subjected Teleco officials to its prohibitions against official corruption. Defendants’ narrow construction of the term ‘instrumentality’ is inconsistent with the terms of the FCPA and Congressional intent. The prohibitions in the FCPA are expressed broadly and reflect Congress’s purpose to combat the problem of pervasive foreign bribery. Defendants’ interpretation of the statute is also inconsistent with the provisions of an international treaty and with Congress’s explicitly-stated intent, when amending the FCPA, to conform the statute to the treaty. The term ‘instrumentality’ is also not unconstitutionally vague. It provided fair notice that defendants’ bribery scheme, which involved intentional conduct and had no innocent explanation, was illegal. Moreover, defendants cannot complain that they were left guessing about the legality of their actions when they could have requested an opinion on that question from the Attorney General but did not do so.”
“The instructions on the knowledge element of the FCPA were not plainly erroneous. The government was not required to prove that defendants knew that the recipients of the bribes were “foreign officials” under the statute’s legal definition, and the instructions, when viewed as a whole and in the context of the entire trial, made clear that the jury had to find that defendants believed they were bribing an employee of a foreign government instrumentality. Overwhelming evidence supported the jury’s finding on that element. Defendants applied for political risk insurance, which was needed only because a foreign government was a party to the Terra-Teleco contract, and they repeatedly referred to Teleco as a government-owned entity during the application process. Esquenazi also testified that Teleco was government-owned at a deposition. The court did not err in giving a deliberate ignorance instruction. It was appropriate as to the FCPA counts without a showing that defendants purposely avoided learning all the facts because the statute explicitly equates knowledge of a circumstance with awareness “of a high probability” that the circumstance exists. […] The evidence also supported the instruction. Despite the highly suspicious circumstances surrounding the payments that Rodriguez authorized to the third-party intermediaries, he claimed that, although he was in charge of Terra’s finances, he did not know their true purpose. Even if the court erred in giving the instruction, any error was harmless because the evidence also established that Rodriguez knew that the payments to the intermediaries were bribes.”
As to my “foreign official” declaration, the DOJ states as follows.
“Defendants rely on a 144-page declaration by Professor Michael J. Koehler that was filed on behalf of the defendants in Carson […]. That declaration is not part of the record in this case, and this Court should not consider it. Although defendants suggest that this Court may take judicial notice of the declaration because it relates to legislative history, the declaration selectively reviews the legislative history and draws inferences in support of a defense motion to dismiss the indictment. As such, it is not necessarily the statement of a disinterested expert, it was not reviewed as a scholarly article, and it was never subject to impeachment in the case below. Even the district court in Carson did not rely on the declaration because it concluded that ‘resort to the legislative history of the FCPA [was] unnecessary.’ […] If the Court is inclined to consider the Koehler affidavit, the government asks the Court to similarly consider the declaration of FBI Special Agent Brian Smith, also filed in Carson, that discusses references to SOEs in the legislative history.” See here for a copy of Smith’s declaration.
[In Kiobel v. Royal Dutch Shell, the Second Circuit stated as follows concerning reliance of professor expert declarations filed in another case being used in the case – “we fail to see how statements made in an affidavit, under penalty of perjury, are any less reliable than published works whose accuracy is confirmed only by efforts of the student staff of law journals.”]
Next Up – Pfizer
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). Then it was Biomet (see here – $22.8 million in combined fines and penalties in March 2012). The latest Foreign Corrupt Practices Act enforcement based on the enforcement theory that various foreign health care providers are “foreign officials” is Pfizer / Wyeth (an entity acquired by Pfizer in 2009).
Total fines and penalties in the Pfizer / Wyeth enforcement action are approximately $60 million ($15 million via a DOJ deferred prosecution agreement, and $45 million via separate settled SEC civil complaints against Pfizer and Wyeth). This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 100 pages in total).
DOJ
The DOJ enforcement action involved a criminal information (here) against Pfizer H.C.P. Corp. (an indirectly wholly owned subsidiary of Pfizer Inc.) resolved through a deferred prosecution agreement (here).
Criminal Information
The criminal information begins with a description of Pfizer HCP and notes that during the relevant time period it “operated in several international markets through representative officers, including offices in Bulgaria, Croatia, and Kazakhstan, as well as through contracts with Russian distributors and employees of a representative officer of Pfizer HCP’s parent company in Moscow (‘Pfizer Russia’).” According to the information, “books and records of Pfizer HCP … were consolidated into the books and records of Pfizer for purposes of preparing Pfizer’s year-end financial statements” filed with the SEC.
The information alleges, in summary fashion, as follows.
“The manufacture, registration, distribution, sale, and prescription of pharmaceuticals were highly-regulated activities throughout the world. While there were multinational regulatory schemes, it was typical that each country established its own regulatory structure at a local, regional, and/or national level. These regulatory structures generally required the registration of pharmaceuticals and regulated labeling and advertising. Additionally, in certain countries, the government established lists of pharmaceuticals. that were approved for government reimbursement or otherwise determined those pharmaceuticals that might be purchased by government institutions. Moreover, countries often regulated the interactions between pharmaceutical companies and hospitals, pharmacies, and healthcare professionals. In those countries with national healthcare system, hospitals, clinics, and pharmacies were generally agencies or instrumentalities of foreign governments, and, thus, many of the healthcare professionals employed by these agencies and instrumentalities were foreign officials within the meaning of the FCPA. During the relevant period, for the purpose of improperly influencing foreign officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance, employees of Pfizer HCP and Pfizer Russia made and authorized the making of payments of cash and the provision of other things of value both directly and through third parties. Funds for these payments were often generated by employees of Pfizer HCP and Pfizer Russia through the use of collusive vendors to create fraudulent invoices.”
The information charges two counts: (i) conspiracy to violate the FCPA’s anti-bribery and books and records provisions and (ii) substantive FCPA anti-bribery violations. The conduct at issue took place between 1997 and 2006 and focuses on payments to alleged “foreign officials” as listed below “in exchange for improper business advantages for Pfizer HCP, including the approval of pharmaceutical products and increased sales of pharmaceutical products.”
Croatian Official (a citizen of the Republic of Croatia who held official positions on government committees in Croatia and had influence over decisions concerning the registration and reimbursement of Pfizer products marketed and sold in the country).
Russian Official 1 (a citizen of the Russian Federation who was a medical doctor employed by a public hospital who had influence over the Russian government’s purchase and prescription of Pfizer products marketed and sold in the country).
Russian Official 2 (a citizen of the Russian Federation who was a high-ranking government official who held official positions on government committees in Russia and had influence over decisions concerning the reimbursement of Pfizer products marketed and sold in the country).
Russian Official 3 (a citizen of the Russian Federation who had influence over decisions concerning the treatment algorithms involving Pfizer products marketed and sold in the country).
In addition to the above alleged “foreign officials” the information describes “other foreign officials in various countries, including Bulgaria, Croatia, Kazakhstan and Russia.”
Under the heading “Manners and Means of the Conspiracy” the information alleges as follows.
“Pfizer HCP through its employees and agents agreed to make improper payments and provide benefits (including kickbacks, cash payments, gifts, entertainment and support for domestic and international travel) to numerous government officials, including physicians, pharmacologists and senior government officials, who were employed by foreign governments or instrumentalities of foreign governments, including in Bulgaria, Croatia, Kazakhstan, and Russia. During the relevant time period, Pfizer HCP, through its employees and agents, corruptly authorized the payment, directly or indirectly, of at least $2,000,000 to intermediary companies, government officials, and others, to corruptly induce the prescription and purchase of Pfizer products and to obtain regulatory approvals for Pfizer products. Pfizer HCP through its employees falsely recorded the improper transactions by booking them in a variety of ways, including as educational or charitable support, “Travel and Entertainment,” “Convention and Trade Meetings and Conferences,” “Distribution Freight,” “Clinical Grants/Clinical Trials,” “Gifts,” and “Professional Services —Non Consultant,” in order to conceal the improper nature of the transactions in the books and records of Pfizer HCP.”
As to “Corrupt Payments in Bulgaria” the information alleges as follows.
“On or about January 24, 2003, a District Manager in Pfizer HCP’s representative office in Bulgaria (“Pfizer HCP Bulgaria”) sent an email to his subordinates that discussed marketing programs and “various possibilities to stimulate the prescribers” and instructed them to give individual doctors employed in Bulgarian public hospitals “a specific target as to how many packs (or new patients) per month he should achieve” and then provide support for international travel on the basis of the promises to prescribe made by the doctors. On or about October 14, 2003, a Pfizer HCP Bulgaria sales department manager sent an electronic message to multiple sales representatives containing instructions for submitting sponsorship requests. The manager wrote, “[e]ach representative wanting to sponsor someone …must very precisely state the grounds for recommending the sponsorship, and also what the doctor in question is expected to do or has already done (which is the better option).”
As to “Corrupt Payments in Croatia” the information alleges as follows.
“On or about July 9, 2003, employees of Pfizer HCP’s representative office in Croatia (“Pfizer HCP Croatia”) caused a wire transfer of $1,200 to be made from a bank account in Belgium to an account in Austria controlled by Croatian Official, which wire transfer was part of more than $85,000 paid to Croatian Official between 1997 and 2003, and which was for a purpose described by the country manager as follows: “as [Croatian Official] is a member of the Registration Committee regarding pharmaceuticals, I do expect that all products which are to be registered, will pass the regular procedure by his assistance. On or about February 18, 2004, a Pfizer HCP Croatia sales representative drafted a memorandum reporting on her discussions with doctors at Croatian public hospitals regarding bonus agreements for purchases of a Pfizer product, which reflected an agreement with the chief doctor who promised purchases of the product in exchange for Pfizer HCP providing various things of value, including travel benefits and bonuses based on a percentage of sales.”
As to “Corrupt Payments in Kazakhstan” the information alleges as follows.
“On or about May 5, 2000, Pfizer HCP entered into an exclusive distribution contract for a Pfizer product with Kazakh Company [a Kazakh company that contracted with Pfizer HCP to provide distribution services and related services in the Republic of Kazakhstan] that was valued at a minimum of $500,000 believing that all or part of the value of the contract would be provided to a high-level Kazakh government official. On or about September 23, 2003, a regional supervisor responsible for Pfizer HCP’s representative office in Kazakhstan sent a memorandum to his supervisor memorializing a conversation held in Kazakhstan, in which he indicated that the controller of Kazakh Company was “very close to government officials,” and that Kazakh Company was likely responsible for Pfizer HCP’s past problems with the registration of a Pfizer product in Kazakhstan.”
As to “Corrupt Payments in Russia” the information alleges as follows.
“On or about September 8, -2003, a Pfizer Russia. employee emailed colleagues that a Russian government doctor, Russian Official 1, requested funds to attend a conference and, in return, “has pledged to prescribe at least 20 packs of [a Pfizer product] per month, and 20 [] packs [of another Pfizer product]. On or about November 19, 2003 in an invoice cover letter, a Pfizer Russia employee requested “payment for the (motivational) trip of [Russian Official 2] for the inclusion of [a Pfizer product] into the list … of medications refundable by the state” in order to influence Russian Official 2 to add the product to the regional formulary list. On or about April 7, 2004, a Pfizer Russia employee requested that a payment be made to a Russian government official “who took an active part in getting [a Pfizer product] into the bidding.” On or about July 26, 2004, a Pfizer Russia employee sent an email to his supervisors stating that Russia Company 1 [a Russian company that bid on tenders issued by Russian healthcare institutions and worked with Pfizer HCP and Pfizer Russia to fill tenders using Pfizer products] had won a tender for the use of a Pfizer product, and that Russian Company 1’s costs included “10% – Motivation of Officials.” On or about December 2, 2004, a Pfizer Russia employee requested sponsorship for a local department of health employee who was assisting the chief pharmacologist of a regional pediatric hospital, Russian Official 3, who was compiling algarithms for antibiotic therapy and wanted “to be financially compensated” for this work. The Pfizer Russia employee noted that, “in return for this,” the pharmacologist “will include our product’s in the treatment algorithms” to be used in government hospitals. On or about June 9, 2005, a Pfizer Russia employee sent an email to her supervisor stating that a cash payment had been made to an individual government doctor, which represented 5% of the value of the purchases of a Pfizer product made by a certain government hospital during the month of March 2005. On or about June 27, 2005, a Pfizer Russia employee emailed that a government doctor “should be assigned the task of stretching the amount of the purchases … to US $100 thousand” as an “obligation” in exchange for a trip to a conference in the Netherlands or Germany. On or about September 14, 2005, a Pfizer Russia employee emailed that an”agreement on cooperation” had been reached with a government doctor, and that Pfizer Russia’s requirements were the “purchase quantities,” and the government doctor’s requirement was “a trip to a conference.” In or around October 2005 through on or about December 8, 2005, Pfizer Russia caused payments totaling at least $69,000 to be made to Russian Company 2 [a Russian company that provided certain services to Pfizer HCP and Pfizer Russia, including making improper payments to Russian government officials and other companies on Pfizer HCP’s behalf, in order to conceal the payments] with the understanding that the payments would be provided to individual Russian doctors employed in public hospitals, and that the payments represented 5% of the value of the purchases of Pfizer products in the doctors’ respective government hospitals. In or around October 2005, Pfizer Russia employees discussed how a regional distributor would provide Pfizer Russia with companies that have “neutral names,” to which Pfizer Russia could make improper payments that would be booked as conferences to provide benefits to government doctors.”
DPA
The DOJ’s charges against Pfizer HCP were resolved via a deferred prosecution agreement. Pursuant to the DPA, Pfizer HCP admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agents” as set forth in the information. As is customary in DOJ FCPA corporate enforcement actions, Pfizer HCP agreed not to make any public statement contradicting the acceptance of responsibility for the conduct set forth in the resolution documents.
The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) the extraordinary cooperation of Pfizer HCP’s parent company, Pfizer Inc., (“Pfizer”}, with the Department and the U.S. Securities and Exchange Commission (“SEC”), including thorough and responsive reporting of potential violations, including the conduct of other companies and individuals; (b) Pfizer’s initial voluntary disclosure of potential improper payments and the timely and complete disclosure of the facts [described in the DPA] as well as facts relating to potential improper payments in various countries that had been identified by its compliance program, internal audit function and global internal investigations concealing bribery and related misconduct; (c) the early and extensive remedial efforts undertaken by Pfizer, including the substantial and continuing improvements Pfizer has made to its global anticorruption compliance procedures; (d) Pfizer’s agreement to maintain an anti-corruption compliance program for all of its subsidiaries worldwide, including Pfizer HCP, to continue in its efforts to implement enhanced compliance measures [as required by the DPA] and to provide to the Department written reports on its progress and experience in maintaining and enhancing its compliance policies and procedures [as described in the DPA].”
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $22.8 – $45.6 million. The DPA specifically states that a downward departure “is warranted for substantial assistance in the investigation or prosecution of others.” The DPA then states as follows. “The Government and Pfizer HCP agree that $15 million is the appropriate monetary penalty, which is a 34% reduction off the bottom of the recommended Guidelines fine range. Pfizer HCP and the Department agree that this fine is appropriate given the nature and extent of Pfizer’s voluntary, prompt and thorough disclosure of the misconduct at issue, the nature and extent of Pfizer’s extensive cooperation in this matter, Pfizer’s cooperation … in the Department’s investigation into other misconduct in the industry, and Pfizer’s extraordinary and ongoing remediation.”
Pursuant to the DPA, Pfizer’s HCP’s parent company, Pfizer, agreed that it will report to the DOJ during the term of the DPA regarding remediation and implementation of certain compliance measures required under the agreement.
The DPA contains a section titled “Origin of the Investigation and Cooperation with the authorities” and states as follows.
“In May 2004, Pfizer’s Corporate Compliance Division learned of potentially improper payments by the Croatian representative office of Pfizer HCP (“Pfizer HCP Croatia”). After conducting a preliminary investigation using external counsel, Pfizer made a voluntary disclosure to the Department and to the Commission. At the time, neither agency was aware of the allegations of improper payments or had any open investigation involving the overseas operations of Pfizer or any of its subsidiaries. From 2004 to the present, Pfizer, using external counsel and forensic accountants, internal Legal, Compliance, and Corporate Audit personnel, conducted an extensive, global review of its operations regarding allegations of improper payments to government officials and government doctors, including in Pfizer HCP markets and those of other Pfizer subsidiaries. This included a review of allegations that were identified by Pfizer’s own internal investigations and compliance controls, including its system of proactive FCPA reviews and enhanced audits. Pfizer reported to the Department and the Commission on the results of these investigations on a regular basis. At the request of the Department and the Commission, Pfizer agreed to periodically toll the statute of limitations on its own behalf and on behalf of its subsidiaries. In addition, starting immediately in 2004, Pfizer launched extensive remedial actions including: undertaking a comprehensive review of its compliance program, implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis, developing global systems to support employee compliance with the enhanced procedures, adding FCPA-specific reviews to its internal audits, performing proactive anti-corruption compliance reviews in approximately ten markets annually, and conducting comprehensive anti-corruption training throughout the organization. Pfizer regularly reported to the Department and the Commission on these activities and sought their input concerning the scope and focus of these remedial activities.”
In a release (here) DOJ representatives stated as follows. “Pfizer took short cuts to boost its business in several Eurasian countries, bribing government officials in Bulgaria, Croatia, Kazakhstan and Russia to the tune of millions of dollars.” “Corrupt pay-offs to foreign officials in order to secure lucrative contracts creates an inherently uneven marketplace and puts honest companies at a disadvantage. Those that attempt to make these illegal backroom deals to influence contract procurement can expect to be investigated by the FBI and appropriately held responsible for their actions.”
SEC
The SEC enforcement action includes separate settled civil complaints against Pfizer and Wyeth.
Pfizer Complaint
The settled civil complaint (here) against Pfizer alleges, in summary, as follows.
“This action arises from violations of the books and records and internal controls provisions of the [FCPA by Pfizer] relating to improper payments made to foreign officials in numerous countries by the employees and agents of Pfizer’s subsidiaries in order to assist Pfizer in obtaining or retaining business. At various times from at least 2001 through 2007, employees and agents of subsidiaries of Pfizer, conducting business in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia, engaged in transactions for the purpose of improperly influencing foreign officials, including doctors and other healthcare professionals employed by foreign governments. These improper payments were variously made to influence regulatory and formulary approvals, purchase decisions, prescription decisions, and to clear customs. Employees in each of the involved subsidiaries attempted to conceal the true nature of the transactions by improperly recording the transactions on the books and records of the respective subsidiaries. Examples included falsely recording the payments as legitimate expenses for promotional activities, marketing, training, travel and entertainment, clinical trials, freight, conferences and advertising. These improper payments were made without the knowledge or approval of officers or employees of Pfizer, but the inaccurate books and records of Pfizer’s subsidiaries were consolidated in the financial reports of Pfizer, and Pfizer failed to devise and maintain an appropriate system of internal accounting controls.”
The SEC’s allegations concerning conduct in Bulgaria, Croatia, Kazakhstan and Russia are substantively similar to the DOJ’s allegations described above.
As to Russia, the SEC complaint contains the following additional allegations concerning customs related payments. “During the relevant period, Russian Federation customs officials would not clear pharmaceutical products for importation unless the importer provided an official certification indicating that the products conformed to the specific terms of the product registration and packaging requirements filed by the manufacturer with the Ministry of Health. The Russian government licensed a private certification company (the “Certification Center”) to perform this governmental function, which performed inspections and furnished the necessary certificates. In the spring of 2005, Pfizer Russia began to experience increasing difficulty in obtaining the necessary certificates because the Pfizer products did not conform to the precise terms of the product registration and packaging requirements filed with the Ministry of Health. On or about September or October 2005, a Certification Center employee proposed that the Certification Center would overlook the non-compliance of Pfizer Russia’s products in exchange for monthly payments of approximately $3,000. With the approval of the then-Pfizer Russia Country Manager, between October and December 2005 Pfizer Russia made payments of over $13,000 through an intermediary company, which then forwarded the payments to a company Pfizer Russia employees believed to be controlled by the Certification Center’s employees. The customs clearing problems ceased after Pfizer Russia started making payments, but they resumed when Pfizer Russia stopped the payments in 2006 after Pfizer began a Corporate Compliance review in Russia.”
As to conduct in China, the SEC alleges as follows as to Pfizer subsidiary Pfizer Investment Co. Ltd. (Pfizer China). “From at least 2003 through 2007, Pfizer China, through its employees and agents, provided cash payments, hospitality, gifts, and support for international travel to doctors employed by Chinese government healthcare institutions. The payments of cash and other things of value were intended to influence these government officials to prescribe Pfizer products, provide hospital formulary listing, and otherwise use their influence to grant Pfizer China an unfair advantage.” The SEC further alleged as follows. “Pfizer China employees took steps to conceal the true nature of the cash payments, gifts, and travel support made to Chinese government doctors by failing to accurately record the transactions.”
As to conduct in the Czech Republic, the SEC alleges as follows as to Pfizer subsidiary Pfizer spol. s.r.o. (Pfizer Czech). “From at least 2003 and through 2004, Pfizer Czech, through its employees and agents, provided support for international travel and recreational opportunities to doctors employed by the Czech government with the intent to influence these government officials to prescribe Pfizer products.” The SEC further alleged as follows. “Pfizer Czech employees took steps to conceal the true nature of these transactions, and failed to accurately record these transactions by falsely booking them as “Conventions and Trade Meeting,” among other false and misleading descriptions.”
As to conduct in Italy, the SEC alleges as follows as to Pfizer subsidiary Pfizer Italia S.r.l (Pfizer Italy). “From at least 2001 and continuing through early 2004, Pfizer Italy provided, directly or through vendors, cash payments, gifts, support for domestic and international travel, and other benefits to doctors employed by Italian government healthcare institutions. The payments of cash and other things of value were intended to influence these government officials to prescribe Pfizer products.” The SEC further alleged as follows. “Pfizer Italy employees took steps to conceal the true nature of these transactions and failed to accurately record these transactions by falsely booking them as “Marketing Expenses,” “Professional Training,” and “Advertising in Scientific Journals,” among other false and misleading descriptions.”
As to conduct in Serbia, the SEC alleges as follows as to a representative office of Pfizer HCP (Pfizer HCP Serbia). “Pfizer HCP Serbia, through one of its sales representatives, paid for a government employed doctor to attend a conference in Chile in exchange for the doctor’s agreement to increase his department’s purchases of Pfizer products. Although Pfizer HCP Serbia management discovered the improper agreement and terminated the responsible sales representative, it still provided the support after the doctor threatened to spread negative information about Pfizer’s reputation as a company.”
Under the heading “accounting and internal controls” the SEC alleged as follows. “[F]our Pfizer subsidiaries engaged in transactions in eight countries which were intended to improperly influence foreign government officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance. Through the four subsidiaries, Pfizer earned aggregate profits of $16,032,676 as a result of these improper transactions. [D]uring the relevant period the Pfizer subsidiaries recorded transactions associated with the improper payments in a manner that did not accurately reflect their true nature and purpose. The false entries in the subsidiaries’ books and records were consolidated into the books and records of Pfizer, which reported the results of its subsidiaries’ operations in its consolidated financial statements. [D]uring the relevant period Pfizer failed to devise and maintain an effective system of internal controls sufficient to prevent or detect the above-described conduct.”
Based on the above conduct, the SEC charged Pfizer with violating the FCPA’s books and records and internal control provisions.
The SEC complaint further notes as follows. “Pfizer made an initial voluntary disclosure of certain of these issues to the Commission and Department of Justice in October 2004, and thereafter diligently and thoroughly undertook a global internal investigation of its operations in no less than 19 countries, which identified additional potential violations, and regularly reported on the results of these investigations and fully cooperated with the staff of the Commission. Pfizer also undertook a comprehensive compliance review of its operations, enhanced its internal controls and compliance functions, engaged in significant disciplinary measures, and developed and implemented global FCPA compliance procedures, including the development and implementation of innovative proactive procedures, and sophisticated supporting systems.”
In addition, the SEC complaint contains a separate section titled “remedial efforts” that states as follows.
“Pfizer has taken extensive remedial actions including: undertaking a comprehensive worldwide review of its compliance program; implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis; developing global systems to support employee compliance with the enhanced procedures; adding FCPA-specific reviews to its internal audits; performing innovative and proactive anti-corruption compliance reviews in approximately 10 markets annually; and conducting comprehensive anti-corruption training throughout the organization.”
Wyeth Complaint
The SEC also brought a settled civil complaint (here) against Wyeth LLC. According to the complaint, Wyeth was an issuer but in connection with its acquisition by Pfizer in October 2009, Wyeth delisted and became a wholly-owned subsidary of Pfizer.
The complaint alleges, in summary fashion, as follows. “This action arises from violations of the books and records and internal controls provisions of the [by Wyeth], while an issuer, relating to improper payments made to foreign officials in numerous countries by the employees and agents of Wyeth’s subsidiaries in order to assist Wyeth in obtaining or retaining business. During the time relevant to this Complaint, Wyeth was a pharmaceutical company engaged in business throughout the world, and an issuer as that term is used under the FCPA. At various times from at least 2005 through 2010, subsidiaries of Defendant Wyeth conducting business in several countries, including Indonesia, Pakistan, China, and Saudi Arabia, engaged in transactions for the purpose of improperly influencing foreign officials, including doctors and other healthcare professionals employed by foreign governments. Employees in each of the involved subsidiaries attempted to conceal the true nature of the transactions by improperly recording the transactions on the books and records of the respective subsidiaries. Examples include falsely recording the payments as legitimate expenses for promotional activities, marketing, training, travel and entertainment, conferences and advertising. These improper payments were made without the knowledge or approval of officers or employees of Wyeth, but the inaccurate books and records of Wyeth’s subsidiaries were consolidated in the financial reports of Wyeth, and Wyeth failed to devise and maintain an appropriate system of internal accounting controls. Certain of these payments were made following the acquisition of Wyeth by Pfizer Inc. (“Pfizer”) without the knowledge or approval of officers or employees of Pfizer, and the inaccurate books and records of Wyeth’s subsidiaries regarding those payments were consolidated in the financial reports of Pfizer.”
As to Indonesia, the complaint alleges as follows. “From at least 2005 until 2010, Wyeth Indonesia [an Indonesian company that was an indirect majority-owned subsidiary of Wyeth], through its employees and agents, provided cash payments and nutritional products to employees of Indonesian government-owned hospitals, including doctors employed by the Indonesian government. The cash payments and products were intended to influence the doctors’ recommendation of Wyeth nutritional products to their patients, to ensure that Wyeth products were made available to new mothers at the hospitals, and to obtain information about new births that could be used for marketing purposes.” The SEC further alleged as follows. “Wyeth Indonesia employees also took steps to conceal the true nature of the transactions by inaccurately recording them as “Miscellaneous Expenses – Joint Promotions,” “Medical Education – Promo,” “Trade Allowances,” and “Miscellaneous Selling Expenses,” among other false and misleading descriptions.”
As to Pakistan, the complaint alleges as follows. “Starting at least in 2005 and continuing into 2009, Wyeth Pakistan [a Pakistani company that was an indirect majority-owned subsidiary of Wyeth] employees provided improper benefits to doctors who were employed by healthcare institutions owned or controlled by the Pakistani government. These improper benefits included cash payments, travel, office equipment and renovations, and were intended to influence the doctors to recommend Wyeth products to new mothers.” The SEC further alleged as follows. “Wyeth Pakistan employees and local management took steps to conceal the true nature of the transactions by inaccurately recording them as “Advertising and Sales Promotion,” “Film Show,” “Entertainment,” “Product Meetings,” and “Give Aways and Gifts,” among other false and misleading descriptions.”
As to China, the complaint alleges as follows. “From at least 2005 through 2010 and until the conduct was stopped by Pfizer, Wyeth China [a Chinese company that was an indirect majority-owned subsidiary of Wyeth], through its employees and agents, provided cash payments to Chinese state-owned hospitals and healthcare providers (including doctors, nurses, and midwives) employed by the Chinese government that were intended to influence the healthcare providers’ recommendation of Wyeth nutritional products to their patients, to ensure that Wyeth products were made available to new mothers at the hospitals, and to obtain information about new births that could be used for marketing purposes.” The SEC further alleged as follows. “Wyeth China employees took steps to conceal the true nature of the payments by falsifying expense reimbursement requests and, in concert with local travel agencies, by submitting false or inflated invoices and other supporting documentation for large-scale consumer education events, resulting in those transactions being falsely recorded in Wyeth China’s books and records.
As to Saudi Arabia, the complaint alleges as follows. “In June 2007, the local distributor, at the direction of Wyeth Saudi Arabia [a Delaware corporation that operated a representative office in Saudi Arabia], made a cash payment to a Saudi Arabian customs official to secure the release of a shipment of promotional items that were to be used in connection with the marketing and sale of Wyeth’s nutritional products. These promotional items were held in port because Wyeth Saudi Arabia had failed to secure a required Saudi Arabian Standards Organization Certificate of Conformity. In July 2007, Wyeth Saudi Arabia reimbursed the distributor for this cash payment and improperly recorded it as a “facilitation expense” in its books and records.”
Under the heading “accounting and internal controls,” the SEC alleged as follows. “Wyeth Indonesia, Wyeth Pakistan, and Wyeth China engaged in transactions which were intended to improperly influence foreign government officials. Through these three subsidiaries Wyeth earned aggregate profits of approximately $17,217,831 as a result of these improper transactions. […] During the relevant period, the Wyeth subsidiaries recorded transactions associated with the improper payments in a manner that did not accurately reflect their true nature and purpose. False entries in the subsidiaries’ books and records were consolidated into the books and records of Wyeth, which reported the results of its subsidiaries’ operations in its consolidated financial statements. […] During the relevant period, Wyeth failed to devise and maintain an effective system of internal controls sufficient to prevent or detect the above-described conduct.
Based on the above conduct, the SEC charged Wyeth with violations of the FCPA’s books and records and internal control provisions.
The SEC complaint notes as follows. “Following Pfizer’s acquisition of Wyeth, which was finalized on or about October 15, 2009, Pfizer undertook a risk-based FCPA due diligence review of Wyeth’s global operations and reported the results of that diligence review to the Commission staff within 180 days of the closing. Pfizer’s post-acquisition review identified potential improper payments, and it diligently and thoroughly undertook a global internal investigation of Wyeth’s operations and voluntarily disclosed the results to the Commission staff, which included identifying improper payments made by Wyeth’s Nutritional Products Division in Indonesia, Pakistan, China, and Saudi Arabia, as well as additional improper payments made by other Wyeth subsidiaries. Following the acquisition, Pfizer diligently and promptly integrated Wyeth’s legacy operations into its compliance program and cooperated fully with the Commission staff.”
In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states as follows. “Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers. These charges illustrate the pitfalls that exist for companies that fail to appropriately monitor potential risks in their global operations.”
As noted in the SEC release, in settling the charges Pfizer and Wyeth neither admitted nor denied the allegations. The release states as follows. “Pfizer consented to the entry of a final judgment ordering it to pay disgorgement of $16,032,676 in net profits and prejudgment interest of $10,307,268 for a total of $26,339,944. [Pfizer] also is required to report to the SEC on the status of its remediation and implementation of compliance measures over a two-year period, and is permanently enjoined from further violations” of the FCPA’s books and records and internal control provisions. “Wyeth consented to the entry of a final judgment ordering it to pay disgorgement of $17,217,831 in net profits and prejudgment interest of $1,658,793, for a total of $18,876,624. As a Pfizer subsidiary, the status of Wyeth’s remediation and implementation of compliance measures will be subsumed in Pfizer’s two-year self-reporting period. Wyeth also is permanently enjoined from further violations” of the FCPA’s books and records and internal control provisions.
Brett Campbell and Peter Clark (Cadwalader, Wickersham & Taft – here and here) represented Pfizer. Clark is a former head of the DOJ’s FCPA enforcement program.
See here for Pfizer’s press release.
Friday Roundup
I didn’t think so, China SOE developments, additional material for the reading pile, and the best part of the Olympics starting. It’s all here in the Friday roundup.
I Didn’t Think So
Will tinkering with advisory guidelines that are only implicated when a business organization pleads guilty to or is convicted of a crime best incentivize FCPA compliance, best advance the FCPA’s objective or reducing bribery, increase public confidence in FCPA enforcement actions and allow the DOJ to better allocate its limited prosecutorial resources to cases involving corrupt business organizations and the individuals who actually engaged in the improper conduct?
I didn’t think so, but see here for a recent post on Corruption, Crime and Compliance by Michael Volkov.
What will better achieve each of the above desirable objectives? See here for my scholarship “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”
China SOE Developments
Probably one of the most unhelpful statements ever made by an enforcement official concerning the “foreign official” / “instrumentality” issue was when SEC Chairman Mary Schapiro stated (see here for the prior post) that “given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.” Two developments this week concerning China SOEs reminded me of Schapiro’s statement.
First, as numerous financial publication headlines indicated, China’s state-owned Cnooc Ltd. announced a $15.1 billion takeover offer for Canada-based Nexen Inc. Should the transaction close, the acquisition would give Cnooc “operational control of a significant Canadian oil-sands field operator” and “catapult it into the driver’s seat in some of the Western world’s richest frontiers, from the U.S. Gulf of Mexico to the North Sea.” (See here for the WSJ article).
Second, earlier this week China Investment Corporation released its annual report (here). Notably, the annual report begins as follows. “In 2011, China Investment Corporation continued to invest on a commercial basis to seek long-term returns and prudently manage our fully deployed portfolio.” (emphasis added). The annual report highlights direct investments in Canada, the U.K., France, Russia, Trinidad & Tobago, Brazil, South Africa, Vietnam and Australia.
For the Reading Pile
If this recent Summer Reading Spectacular post wasn’t enough to quench your thirst for FCPA information, there is more.
This recent FCPA Update from Debevoise & Plimpton contains a timely article in the aftermath of the dramatic collapse of the Africa Sting cases and the Lindsey Manufacturing prosecutions titled “The Difficulty of Recovering Damages From the Government When an FCPA Prosecution Misfires: Sovereign and Official Immunity and Their Impact on FCPA Compliance.” The conclusion states as follows. “Although success in an FCPA litigation is obviously a relief for corporate and individual defendants, FCPA defendants face enormous obstacles when it comes to recovering the significant costs associated with defending themselves against government enforcement actions.”
Arnold & Porter recently published this “FCPA, Bribery Act & Other Global AntiCorruption Insights.” The comprehensive nearly 50 page document contains key enforcement and investigative developments, global enforcement and investigative developments, as well as a focus on FCPA reform.
Olympics
The best part of Olympics starting?
No more client alerts, marketing material, etc. warning of the Bribery Act / FCPA risks of entertaining clients or prospective clients at the Olympics.
Keep an eye out for the Rio Tinto sponsored Mongolian Olympic team (see here for the prior post).
*****
A good weekend to all.
Briefing Complete In Jackson – Ruehlen Challenge
This previous post asked whether the SEC would be put to its burden of proof in the Mark Jackson and James Ruehlen FCPA enforcement action. The answer was yes as the defendants filed a motion to dismiss the SEC’s complaint as highlighted in this previous post. The SEC filed an opposition brief that is highlighted in this previous post. Last Friday, Jackson & Ruehlen filed separate reply briefs (see here and here).
In summary, Jackson’s counsel (lead by David Krakoff, BuckleySandler – here) argues as follows (internal citations omitted).
“Plaintiff Securities and Exchange Commission’s [opposition brief] side-steps the issues presented as well as Supreme Court precedent. Rather than address the deficiencies in its Complaint … the SEC ignores them and assumes it is not required to plead actual facts. Rather than properly plead the elements of a Foreign Corrupt Practices Act (“FCPA”) violation, the SEC claims it would simply be too difficult to identify, in any way, the other necessary party in an alleged bribery scheme—the foreign official who received or was to receive alleged bribes, or what acts that specific foreign official took.
But viewed under proper pleading standards, the SEC’s Complaint remains deficient and must be dismissed. The Complaint is nothing more than a series of conclusions about what Jackson “knew” or “believed,” without the necessary foundation of facts suggesting that Jackson did “know” or “believe” what the SEC asserts. Such conclusions are not “well-pleaded” facts which must be accepted by the Court as true for the purpose of a motion to dismiss. The few well-pleaded facts do not rise to the level of a plausible entitlement to relief, and indeed are equally consistent with a legally permissible explanation of Jackson’s conduct, which requires the Complaint to be dismissed. And many of the claims are barred by the statute of limitations.
The SEC has had years to investigate this case, using the full force of its investigatory power. It is not too much to ask, now that it has filed suit, for the SEC to plead actual facts.”
In summary, Ruehlen’s counsel (lead by Joseph Warin, Gibson Dunn – here) argues as follows (internal citations omitted)
“Despite investigating this case for many years, the SEC concedes in its Opposition that the Complaint does not allege the basic facts of an FCPA claim:
• It does not identify any Nigerian official—by name or even by position—to whom bribes were paid, authorized, or intended.
• It does not identify any duty that was breached or any law that was violated by the unknown Nigerian official recipient(s).
• It does not state what the unknown Nigerian officials did in exchange for the bribes or how those actions were intended to assist Noble in obtaining or retaining business.
These structural flaws cannot be cured through discovery.
First, without alleging the identity of the officials, facts describing their duties and obligations under Nigerian law, and facts showing how Mr. Ruehlen allegedly intended to corrupt them, the SEC’s conclusory claims only raise the “sheer possibility that the defendant has acted unlawfully,” which is insufficient to state a claim.
Second, because the plain language of the FCPA permits payments to foreign officials in order to secure routine governmental actions, the Complaint only alleges conduct that is “not only compatible with, but indeed [is] more likely explained by, lawful . . . behavior.”
Third, the Complaint does not meet the standards of notice pleading under Federal Rule of Civil Procedure 8. Mr. Ruehlen is left to guess who was allegedly bribed, the scope of that person’s authority, and whether that person violated any Nigerian law. He must also guess which Noble record he allegedly falsified and which control he allegedly evaded. Accordingly, the Complaint does not provide Mr. Ruehlen the requisite “fair notice of what the . . . claim is and the grounds upon which it rests,” rendering it impossible for him to answer the Complaint, seek discovery, or prepare his defense.
The briefing is complete and the lines have been drawn.
The Jackson & Ruehlen challenge is a significant event in terms of the SEC’s FCPA enforcement program. Rarely is the SEC put to its burden of proof in FCPA enforcement actions. As noted in this prior post, the last time the SEC was put to its burden, in a similar case concerning conduct outside the context of foreign government procurement, the SEC lost. In addition, as noted in prior posts (here and here) the government (DOJ and SEC) have an overall losing record when put to its burden of proof in cases concerning conduct outside the context of foreign government procurement.