Top Menu

Novartis Joins The Repeat Offender Club – This Time Paying Approximately $347 Million To Resolve An FCPA Enforcement Action


What happens when the Greek, Swiss, and South Korean subsidiaries of a Swiss company engage in improper conduct in Greece, Vietnam and South Korea? Why of course, approximately $345 million flows into the U.S. treasury.

Yesterday, Novartis joined the long and growing list of FCPA repeat offenders as the DOJ and SEC announced (see here and here) a combined approximate $347 million enforcement action. (As highlighted in this prior post, in 2016 Swiss pharmaceutical company Novartis coughed up $25 million to resolve a SEC FCPA enforcement action focused on the conduct of its indirect Chinese subsidiaries).

Yesterday’s enforcement action included a DOJ component (in which the company agreed to pay approximately $234 million) and a SEC component (in which the company agreed to pay approximately $113 million).

Continue Reading

Next Up – Stryker

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). Then it was Pfizer / Wyeth (see here  – $60 million in combined fines and penalties in August 2012).  Then it was Eli Lilly (see here – $29 million in combined fines and penalties in December 2012).

Next up, in the recent sweep of pharmaceutical / healthcare and medical device companies is Stryker Corporation.

Yesterday, the SEC announced that Stryker agreed to pay $13.2 million to resolve an SEC Foreign Corrupt Practices Act enforcement action via an administrative cease and desist order in which the company neither admitted or denied the SEC’s allegations.

The conduct at issue focused on various Stryker subsidiaries.  There is no allegation in the SEC’s order concerning Stryker Corp. itself other than the following.

“The financial results of all of the Stryker subsidiaries discussed herein were consolidated into Stryker’s financial statements.  Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within a given country. During the relevant period, each of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anti-corruption, but these policies were inadequate and insufficiently implemented on the regional and country level. Accordingly, Stryker failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that the company maintained accountability for its assets and that transactions were executed in accordance with management’s authorization.”

In summary fashion, the SEC order states:

“From approximately August 2003 to February 2008 (the “relevant period”), Stryker made approximately $2.2 million in unlawful payments to various government employees including public health care professionals (collectively, the “foreign officials”) in Mexico, Poland, Romania, Argentina, and Greece. Stryker incorrectly described these expenses in the company’s books and records as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made by Stryker to obtain or retain business. Stryker earned approximately $7.5 million in illicit profits as a result of these payments.  During the relevant period, Stryker incorrectly described unlawful payments to foreign officials in its accounting books and records in violation of [the FCPA’s books and records provisions] and failed to devise and maintain an adequate system of internal accounting controls in violation [of the FCPA’s internal controls provisions.]”

Under the heading “Unlawful Payments In Mexico,” the order states:

Between March 2004 and January 2007, Stryker’s wholly-owned subsidiary in Mexico (“Stryker Mexico) made three payments totaling more than $76,000 to foreign officials employed by a Mexican governmental agency (the “Mexican Agency”) responsible for providing social security for government employees. Stryker made these payments to win bids to sell its medical products to certain public hospitals in Mexico. Stryker Mexico earned more than $2.1 million in profits as a result of these illicit payments.  These payments were made at the direction of Stryker Mexico employees, including country level management, and paid to the foreign officials through third party agents. For example, in January 2006, Stryker Mexico learned that the Mexican Agency was threatening to revoke a contract that Stryker Mexico had won to provide knee and hip products to certain public hospitals unless Stryker Mexico paid an employee of the Mexican Agency.  As a result of the demand by the employee of the Mexican Agency, Stryker Mexico directed its outside counsel in Mexico (the “Mexican Law Firm”) to make payment to the employee, on Stryker Mexico’s behalf, in order for Stryker to keep the winning bid.  At Stryker Mexico’s direction, the Mexican Law Firm paid the foreign official approximately $46,000 on behalf of Stryker Mexico and, as a result of this payment, the Mexican Agency did not revoke Stryker Mexico’s status as the winning bidder. The Mexican Law Firm then invoiced Stryker Mexico for $46,000 for purported legal services rendered, even though no such services were provided. Stryker Mexico recorded these improper payments as legitimate legal expenses in its books and records.  Stryker Mexico earned over $1.1 million in illicit profits on this contract alone. Stryker Mexico made two additional payments through intermediaries during the relevant period in much the same fashion, with the purpose of retaining or obtaining business from public hospitals. The additional payments were in excess of $34,000 and earned Stryker illicit profits of nearly $1 million.”

Under the heading “Improper Payments in Poland,” the order states:

“Between August 2003 and November 2006, Stryker’s wholly-owned subsidiary in Poland (“Stryker Poland”) made 32 improper payments to foreign officials in Poland for the purpose of obtaining or retaining business at public hospitals. In total, Stryker Poland made approximately $460,000 in unlawful payments resulting in more than $2.4 million of illicit profits. These improper payments were recorded in Stryker’s books and records as legitimate expenses, including reimbursement for business travel, consulting and service contract payments, and charitable donations.  For example, in May 2004, Stryker Poland paid for a foreign official then employed as the director of a public hospital in Poland, and her husband, to travel to New York City and Aruba. Although the official purpose of the trip was for the foreign official to attend a single-day tour of Stryker’s manufacturing and research facility in Mahwah, New Jersey, Stryker paid for the couple’s six-night stay at a hotel in New York City, attendance at two Broadway shows, and a five-day trip to Aruba before their return flight to Poland.  According to Stryker Poland’s records, expenses for the trip, including airfare, accommodations, and entertainment, totaled approximately $7,000, all of which Stryker Poland recorded as legitimate travel expenses.  Stryker Poland’s internal documents confirm a quid pro quo arrangement between Stryker Poland and the foreign official. For example, the form containing the schedule for the foreign official’s facility tour states that the purpose of the visit was to “strengthen [the public doctor’s] conviction that Stryker products are the best solution for her hospital,” and notes that “we won a big tender for [one product] (about $350,000) and in this year they are going to buy our products for $500,000.”  Stryker Poland also made additional improper travel payments, payments under purported consulting agreements totaling approximately $47,000, and gifts and donations of nearly $400,000, each of which was made to a state-employed healthcare professional for the purpose of Stryker Poland’s obtaining or retaining the business of public hospitals.”

Under the heading “Improper Payments in Romania,” the order states:

“From at least 2003 through July 2007, Stryker’s wholly-owned subsidiary in Romania (“Stryker Romania”) made 192 improper payments to foreign officials totaling approximately $500,000 in order to obtain or retain business with affiliated public hospitals.  Stryker Romania recorded these payments as legitimate sponsorships of foreign officials’ attendance, travel and lodging at conferences, and medical events, when in reality they were illicit payments made to obtain or retain business.  As a result of these payments, Stryker Romania earned more than $1.7 million in illicit profits.  For example, in April 2004, a Stryker Romania salesperson submitted a form to sponsor a foreign official’s lodging abroad to attend a conference. The form stated that a “business benefit[]” from the sponsorship was that, in return, Stryker Romania would receive a contract for the sale of a particular medical device. In addition, Stryker Romania internally discussed that the foreign official in question was “waiting to be confirmed as chief physician” at a public hospital, “thus becoming important” for an upcoming bid for a contract. Stryker Romania recorded the payment as a legitimate business travel expense even though its own internal documents demonstrated that the payment was made with the purpose of obtaining future business.”

Under the heading “Unlawful Payments in Argentina,” the order states:

“Between 2005 and 2008, Stryker’s wholly-owned subsidiary in Argentina (“Stryker Argentina”) made 392 commission payments, or “honoraria,” to physicians employed in the public healthcare system in order to obtain or retain business with affiliated public hospitals. Unlike traditional honorarium payments that are made in exchange for the provision of a service (such as making a speech), these honoraria were commissions that were calculated as a percentage of a total sale to a particular hospital and then paid to the public doctor associated with the sale. Stryker Argentina routinely made these payments by check to doctors at rates between 20% and 25% of the related sale. In total, Stryker Argentina made more than $966,500 in improper honoraria payments during the relevant period, causing Stryker Argentina to earn more than $1.04 million in profits from the public hospitals with which the doctors were associated. Stryker Argentina booked these payments as commission expenses in an account entitled “Honorarios Medicos,” when in fact they were unlawful payments made to compensate doctors for purchasing Stryker products.”

Under the heading “Unlawful Payments in Greece,” the order states:

“In 2007, Stryker’s wholly-owned subsidiary in Greece (“Stryker Greece”) made a sizeable and atypical donation of $197,055 to a public university (the “Greek University”) to fund a laboratory that was then being established by a foreign official who served as a prominent professor at the Greek University, and was the director of medical clinics at two public hospitals affiliated with the Greek University.  As a result of this donation, Stryker Greece earned a total of $183,000 in illicit profits.  The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business from the public hospitals with which the foreign official was affiliated, in exchange for making the donation to the foreign official’s pet project. In an email from the country manager of Stryker Greece to the regional manager, the country manager emphasized that she believed the donation to the Greek University was necessary to secure future sales for Stryker Greece. The country manager wrote: “I think that anything below 30K will leave [the foreign official] disappointed. He did promise that he would direct his young assistants into using our trauma and sports medicine products. [The foreign official] is . . . difficult to get as a ‘friend’ and really tough to have as a disappointed customer.”  The regional manager asked,  “What do we get for the sponsorship – or is it just a gift?” The country manager confirmed the quid pro quo, stating, “For the sponsorship we get the Spine business and a promise for more products in his Department. . .”  At a later date, another country manager stated, “I am willing to support what [the foreign official] is asking for in order to secure the sales he is bringing in.” The regional manager then approved the request. Soon thereafter, the country manager said of his meeting with the foreign official: “Things went well (how couldn’t they—I offered him the amount he is asking for . . .). . . . My impression is that we will sta rt business again.”  Stryker Greece made the donation to the Greek University in three installments, each of which was improperly booked as a legitimate marketing expense in an account entitled “Donations and Grants.”

Based on the above allegations, the SEC found that Stryker violated the FCPA’s books and records and internal controls provisions.

In the SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated:

“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed.  Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”

As noted in the SEC’s release, the administrative order “requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million.  Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of the FCPA’s books and records and internal controls provisions.

The Stryker action is yet another example of the SEC obtaining a disgorgement remedy without finding or charging violations of the FCPA’s anti-bribery provisions.  (See here for a prior post on no-charged bribery disgorgement).

The SEC order also contains a separate section titled “Stryker’s Remedial Efforts” and states:

“In response to the Commission’s investigation, Stryker retained outside counsel to assist Stryker in conducting an internal investigation into Stryker’s compliance with the FCPA in the jurisdictions that were the subject of the staff’s inquiry, as well as in jurisdictions where issues arose through Stryker’s audit and hotline processes. Stryker voluntarily produced reports and other materials to the Commission staff summarizing the findings of its internal investigation. In total, Stryker produced over 800,000 pages of documents at Stryker’s expense, including courtesy translations of numerous key documents.  Since the time of the conduct detailed above, Stryker implemented a company wide anti-corruption compliance program, which includes: (a) enhanced corporate policies and standard operating procedures setting forth specific due diligence and documentation requirements for relationships with foreign officials, health care professionals, consultants, and distributors; (b) compliance monitoring and corporate auditing specifically tailored to anticorruption, including the hiring of a chief compliance officer and a sizeable full-time dedicated staff in both its internal audit and compliance functions to ensure FCPA compliance and the implementation of periodic self-assessments; (c) enhanced financial controls and governance; (d) expanded anti-corruption training to all Stryker employees; and (e) the maintenance of an Ethics Hotline which serves as a mechanism for employees to report any actual or suspected illegal or unethical behavior.  In addition to its internal anti-corruption enhancements, from 2007 through the present, Stryker engaged a third-party consultant to perform FCPA compliance assessments and compile written reports for Stryker’s operations in dozens of foreign jurisdictions across the world at least annually. Stryker voluntarily produced documents that permitted the Commission staff to assess how Stryker’s internal audit and compliance functions used the results of each of the assessments to implement additional enhancements to its infrastructure, to target jurisdictions for future assessments, and to create management action plans in collaboration with local management.  Based on the improvements described above, Stryker has demonstrated a commitment to designing and funding a meaningful compliance program in order to prevent and detect violations of the FCPA and other applicable anti-bribery laws.”

In this Wall Street Journal Risk and Compliance post, a Stryker spokesperson stated that the company “was advised that the Justice Department closed its investigation.”

Matthew Kipp (Skadden) represented Stryker.

Stryker’s November 2007 quarterly filing stated:

“In October 2007, the Company disclosed that the United States Securities and Exchange Commission has made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries.”

Thus, the time period from first instance of public disclosure of FCPA scrutiny to actual settlement was 6 years.

Yesterday Stryker’s stock was up approximately .07%.


A few upcoming events that may be of interest to East Coast readers.

On Wednesday, October 30th, Brooklyn Law School will host a panel discussion of practitioners, in-house counsel, and professors titled “New Developments in FCPA Enforcement” (see here for more information).

On Saturday, Nov. 10th, I will be participating in a panel titled “Anti-Corruption Initiatives in the Arab World” as part of Harvard’s Arab Weekend.  (To learn more about the event and the other panelists, see here).

An Obscure Enforcement Action

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

In 1993, the DOJ brought a Foreign Corrupt Practices Act enforcement action against American Totalisator Company (“ATC”), a company engaged in the manufacture and sale of totalisator systems.  A totalisator system is machine for computing and showing totals, especially a pari-mutuel machine showing the total number and amounts of bets at a racetrack.  The conduct at issue focused on ATC’s business “with the Horse Races Administration of Greece (“ODIE”), an instrumentality of the Greek government … in connection with the sale of a totalisator system and spare parts for the Phaleron racetrack in Athens, Greece.”

Oddly enough, the ATC enforcement was not the first “old” FCPA enforcement action concerning bribery at the racetrack.  See here for the prior post regarding a 1981 FCPA enforcement action against Sam Wallace Company and various individuals concerning alleged payments made to the chairman of the Trinidad and Tobago Racing authority concerning a racetrack project in Trinidad.

In a civil Complaint for Permanent Injunction, the DOJ alleged:

“Beginning in or about 1985 and continuing through the present, ATC … corruptly used means and instrumentalities of interstate commerce, in furtherance of the offer, payment, promise to pay, and authorization of the payment of money, to a person, to wit, its Greek agent, while knowing that all or a portion of such money would be offered, given, or promised, directly or indirectly, to a foreign official, for purposes of: influencing the acts and decisions of such foreign official in his official capacity or; inducing such foreign official to do or omit to do any act in violation of the lawful duty of such foreign official or; inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence an act or decision of such government or instrumentality, in order to assist ATC in obtaining or retaining business in connection with its contract for the sale of a totalisator system and spare parts to ODIE …”.

The DOJ requested a Final Judgment of Permanent Injunction restraining and enjoining ATC from violating the FCPA.  The Consent and Undertaking indicates that the DOJ “declined criminal prosecution.”  The DOJ letter setting forth the declination states that “illicit payments were made to officials of the Greek government and judiciary by ATC’s agent, O. Nicholas Katsanis.”  The letter does not provide a specific reason for the declination other than that the Fraud Section “determined that a criminal prosecution of ATC or [its parent company General American Totalisator Company] was not warranted, but that the [Fraud] Section deemed it appropriate for ATC to consent” to the Order of Permanent Injunction.

See here for original source documents in connection with the enforcement action.

The ATC enforcement action is an obscure enforcement action.  My searches revealed no real-time media reporting of the action and the action is not found on the DOJ’s FCPA website.

The ATC enforcement action is also a reminder of an obscure FCPA provision – the ability of the DOJ to bring civil injunctive actions. 15 USC 78dd-2(d)(1) states:

“When it appears to the Attorney General that any domestic concern to which this section applies, or officer, director, employee, agent, or stockholder thereof, is engaged, or about to engage, in any act or practice constituting a violation of subsection (a) or (i) of this section, the Attorney General may, in his discretion, bring a civil action in an appropriate district court of the United States to enjoin such act or practice, and upon a proper showing, a permanent injunction or a temporary restraining order shall be granted without bond.”

Edmonds Pleads Guilty As Trial Nears

The Department of Justice would like for all to believe that its plea agreements represent acknowledgment of the legitimacy of its enforcement theories including as to “foreign official.”  A prior guest post (here) referred to this dynamic as prosecutorial common law.  As to “foreign official,” in the Carson briefing (see here at pg. 46) the DOJ stated the following – because DOJ has secured approximately 35 guilty pleas from individuals who admitted to bribing officials at SOEs “it is thus ‘plain as a pikestaff’ that the FCPA prohibits paying bribes to officials who work at SOEs.”  You can subscribe to that position if you choose or realize that testing one’s innocence comes at a high cost in our system.  (See here for the prior post).

The conclusion is yours to draw, the facts are as follows.


In April 2009, David Edmonds was criminally charged, along with other defendants who were also former employees of Control Components Inc. (CCI), in a criminal indictment (here) for engaging in “a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.”

As to Edmonds (the Vice-President of Worldwide Customer Service at CCI), the indictment alleged as follows.  “From in or around 2003 through in or around 2007, defendant Edmonds caused [CCI’s] employees and agents to make corrupt payments totaling approximately $430,000 to officers and employees of state-owned companies, and corrupt payments totaling approximately $220,000 to officers and employees of private companies.”  “[CCI’s] state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (“JNPC”)  (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation (“CPMEC”), PetroChina, Dongfang  Electric Corporation (China), China National Offshore Oil Corporation (“CNOOC”), Korea Hydro and Nuclear Power (“KHNP”),  Petronas (Malaysia), and National Petroleum Construction Company (“NPCC”) (United Arab Emirates).  Each of these state-owned entities was a department, agency, and instrumentality of a  foreign government, within the meaning of the FCPA. The officers  and employees of these entities, including the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA.”

As noted in the DOJ release (here), Edmonds was charged with one count of conspiracy to violate the FCPA and the Travel Act, three counts of violating the FCPA and two counts of violating the Travel Act.

Shortly thereafter, CCI resolved an FCPA enforcement action based on the same core set of conduct alleged in the above indictment.  (See here for the prior post).  I noted then, as I had since launching this website in July 2009, that the DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.

In February 2011 (as noted in this prior post), for the first time in FCPA history, a federal court judge, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element, was asked to rule on the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA.  My declaration on the FCPA’s legislative history relevant to “foreign official” (here) was used in the “foreign official” motion to dismiss.

In May 2011 (as noted in this prior post), Judge James Selna denied the “foreign official” motion to dismiss and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”  The “foreign official” issue thus moved to the jury instructions (as noted in this prior post).

In February 2012 (as noted in this prior post), Judge Selna issued certain jury instructions.  Not surprisingly, Judge Selna carried forward his previous “instrumentality” analysis into the “instrumentality” jury instruction.  Yet, in a significant development in terms of the future of the case, Judge Selna issued an instruction titled “knowledge of status of foreign official.”  In pertinent part, the instruction stated as follows.


“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;

(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.”

In his order, Judge Selna stated as follows.

“The Government proposes to add the following paragraph to element 5:”

The government need not prove that the defendant knew the legal definition of “foreign official” under the FCPA or knew that the intended recipient of the payment or gift fell within the legal definition. The defendant need not know in what specific official capacity the intended recipient was acting, but the defendant must have known or believed that the intended recipient had authority to act in a certain manner as specified in element 6.”

The Court does not believe that this language is necessary, and it is potentially confusing.”

As noted in this prior post, in April 2012 – a few months prior to trial, Stuart and Hong Carson pleaded guilty to conduct not found in the original indictment.  Pursuant to a plea agreement, Stuart Carson, 73, faces up to 10 months in prison and Rose Carson, 48, faces a sentence of three years probation, which may include up to six months of home confinement.

As noted in this prior post, in late May 2012 – a few weeks prior to trial, Paul Cosgrove (a 65 year old individual who recently underwent emergency heart quadruple bypass surgery) pleaded guilty to conduct not found in the original indictment.  Pursuant to a plea agreement, Cosgrove faces up to 15 months in prison.

Last week – a few weeks prior to his trial, the DOJ announced (here) that Edmonds pleaded guilty to a one-count superseding information charging him with making a corrupt payment to a foreign government official in violation of the FCPA.

Unlike the original indictment, the four page superseding information as to Edmonds (here) focuses solely on Public Power Corporation of Greece (“Public Power”) and states as follows.  “Public Power was a department, agency, and instrumentality of a foreign government with the meaning of the FCPA” and “officers and employees of Public Power were ‘foreign officials’ within the meaning of the FCPA.”  The superseding information then states that “on or about May 15, 2000” Edmonds “corruptly caused an e-mail to be sent authorizing the payment of approximately $45,000 to officials of Public Power for the purpose of securing Public Power’s business.

For more on Public Power during the general time period alleged in the superceding information, see this Annual Report.

As noted in the DOJ’s release (here), “Edmonds, 59, faces up to 15 months in prison.  Sentencing is scheduled for Nov. 19, 2012.”

The Edmonds plea agreement (here) incorporates the substance of Judge Selna’s jury instruction set forth above.  In addition, the plea agreement states as follows.  “Defendant Edmonds understands that at any trial, the government would prove sufficient facts to demonstrate that Public Power was a government instrumentality within the meaning of the FCPA […] and its employees ‘foreign officials’ within the meaning of the FCPA.”

The plea agreement further states as follows.  “Although defendant Edmonds did not actually know that the approximately $45,000 was to be offered, given, or promised to an employee of Public Power for the purpose of securing Public Power’s business, he was aware of a high probability of this circumstances and failed to make additional inquiries concerning the nature of the commission and the suspected recipient in order to determine whether the proposed commission payment might be made to an employee at Public Power for the purpose of securing Public Power’s business.”  The plea agreement further states as follows.  “Although defendant Edmonds did not know about the prohibitions of the FCPA, defendant Edmonds was aware that the law would forbid making an undisclosed payment to an employee of a customer for the purpose of securing the customer’s business.”

In the plea agreement, Edmonds waived any statute of limitations defenses.

Next Up – Smith & Nephew

[A new job has been posted to the Jobs Board – see here.  Both job seekers and organizations seeking to hire individuals with FCPA or related experience will benefit from a wide selection of job listings, so please spread the word and send the job link to your HR department and professional contacts]

When Johnson & Johnson resolved its $70 million FCPA enforcement action in April 2011 (see here for the prior post) focused on foreign health care providers as “foreign officials”, I said (here) stay tuned for more as several more health care providers as “foreign official” enforcement actions were likely in the pipeline.

On the heels of the DOJ’s likely worst week ever enforcing the FCPA in individual enforcement actions, the DOJ and SEC announced parallel enforcement actions against medical devices maker Smith & Nephew Inc. (“S&N”) and Smith & Nephew plc. (“PLC”).  PLC is a U.K. company with ADR shares traded on the New York Stock Exchange and S&N is a wholly-owned subsidiary of PLC headquartered in Memphis, TN.

Total fines and penalties were approximately $22.2 million ($16.8 million against S&N via a DOJ deferred prosecution agreement, and $$5.4 million against PLC via a settled SEC civil complaint).


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

Criminal Information

The information begins as follows.  “Greece has a national healthcare system wherein most Greek hospitals are publily owned and operated.  Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their officials capacities.  Therefore, such HCPs in Greece are “foreign officials” as that term in defined in the FCPA …”.

The conduct at issue focuses on S&N’s and Smith & Nephew Orthopaedics GmbH’s (“GmbH”) (a German company “reporting to S&N) relationship with the entities of the Greek Distributor (an “agent and distributor for S&N and GmbH in Greece”).  According to the information, S&N and GmbH sold products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-selll to Greek HCPs and government hospitals at a profit.”  The information also alleges that S&N and GmbH “would cover marketing expenses for [the] Greek Distributor, up to ten percent of sales.”

The information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions and alleges that “the purpose of the conspiracy was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employeed Greek HCPs.”  According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay the amount of the distributor discount – between 25 and 40 percent of the sales made by [the] Greek Distributor – to an off-shore shell company controlled by [the] Greek Distributor, in order to provide off-the-books funds for [the] Greek Distributor to pay cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of S&N products, while concealing the payments.”  According to the information, S&N “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N and GmbH.”

According to the information, “[i]n total, from 1998 to 2008, S&N, and its affiliates and employees, authorized the payment, directly or indirectly, of approximately $9.4 million to [the] Greek Distributor’s shell companies, some or all of which was used to pay cash incentives to publicly-employeed Greek HCPs to induce the purchase of S&N products.”

According to the information, in 1999 “the S&N Chief Financial Officer raised with S&N Legal questions from internal auditors about the payments to the Greek Distributor’s shell companies.”  The information states that the Greece Sales Manager (a U.S. citizen based in Memphis who oversaw S&N sales in Greece) met with Legal Advisor (a U.S. citizen based in Memphis who was Senior Corporate Counsel for S&N) “to discuss issues with GmbH’s relationship with [the] Greek Distributor, during which the fact that surgeons in Greece were being paid to use medical devices products was discussed …”.  The information states that thereafter, the Legal Advisor “briefed a more senior S&N lawyer on the issue …”.

Based on the allegations in the information and the SEC complaint discussed below, the Greek Distributor seems to be the same distributor/agent at issue in the previous Johnson & Johnson enforcement action.

The S&N information alleges that the “Greek Distributor traveled to Memphis, Tennessee and met with VP International (a U.S. citizen based in Memphis who served as Vice President for International Sales for S&N) and others regarding reductions in Greek government reimbursement rates for S&N products sold by [the] Greek Distributor” and that “during the meeting, [the] Greek Distributor proposed that the discount to [the] Greek Distributor be increased to account for the reimbursement reduction, without any reduction in the ‘marketing’ payments to the Shell Company.”  According to the information, the Greek Distributor communicated with VP International and the Greece Sales Manager that his commission could not be reduced because he was “paying cash incentives right after each surgery.”  According to the information, “S&N terminated all relationships with [the] Greek Distributor and related entities in June 2008.”

Based on the same core set of conduct, the information also charges one count of FCPA anti-bribery violations and one count of FCPA books and records violations.


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

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: (a) S&N investigated and disclosed to the DOJ and SEC the misconduct at issue; (b) S&N reported its findings to the DOJ and SEC; (c) S&N cooperated fully with the DOJ’s and SEC’s investigation; (d) S&N undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures; (e)-(f) S&N agreed to continue to cooperate with the DOJ, and with foreign authorities, in any investigation of its directors, officers, employees, agents, consultants, subsidiaries, contractors and subcontractors relating to violations of the FCPA or other corrupt payments; (g) S&N “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 (h) “were the DOJ to initiate a prosecution of S&N and obtain a conviction, instead of entering into this Agreement to defer prosecution, S&N 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 – $42 million.  The DPA states as follows.  “S&N agrees to pay a monetary penalty in the amount of $16.8 million, a 20 percent reduction off the bottom of the fine range.  S&N and the DOJ agree that this fine is appropriate given S&N’s internal investigation, the nature and extent of S&N’s cooperation in this matter, and S&N’s extensive remediation.”

Pursuant to the DPA, S&N 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 set forth by the monitor as described in an attachment to the DPA.  As is customary in FCPA DPA’s, S&N agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release. The DOJ release states as follows.  “The matter is part of an investigation into bribery by medical device companies of physicians employed by government institutions.”


The SEC’s settled civil complaint (here) against PLC is based on the same core conduct as described above and “concerns violations of the [FCPA] by PLC through its subsidiaries to obtain sales for their medical device business.”  In summary fashion, the SEC complaint alleges as follows.  “From 1997 to June 2008, two of PLC’s subsidiaries engaged in a scheme with a distributor who made illicit payments to public doctors employed by government hospitals or agencies in Greece.”  The complaint further alleges that PLC failed to “have an adequate internal control system in place to detect and prevent the illicit payments” and that PLC “improperly recorded these payments in its accounting books and records.”  The complaint specifically alleges that PLC “failed to act on numerous red flags of bribery.”  The complaint states as follows.  “Among other things, even though PLC was aware that S&N and GmbH were conducting business in Greece and was aware of the heightened risks of the Greek market, PLC did not require proof of services rendered by Company A and B [entities associated with the Greek Distributor].  PLC failed to question the reasons for paying the Greek Distributor for Greek sales to accounts in the names of entities located outside of Greece.  PLC failed to conduct due diligence on Company A and Company B.  PLC also failed to conduct any audits of the transactions.”

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

As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, PLC consented to entry of a court order permanently enjoining it from future FCPA violations and ordering it to pay $4,028,000 in disgorgement and $1,398,799 in prejudgment interest.

The SEC’s release states as follows.  “The SEC’s investigation into the medical device industry is continuing.”  In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition.  The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”

In this release, Smith & Nephew stated as follows.  “Smith & Nephew and other medical device companies were asked by the SEC and DOJ in late 2007 to look into possible improper payments to government-employed doctors and voluntarily report any issues. Smith & Nephew found and reported evidence of improper payments by a distributor in  Greece that had been appointed by Smith & Nephew subsidiaries and was terminated in 2008. The individuals implicated are no longer associated with the Group.  In the release, Olivier Bohuon (CEO of Smith & Nephew) states as follows.  “We have what I believe to be a world-class compliance programme, having enhanced it significantly since this investigation began in 2007.  These legacy issues do not reflect Smith & Nephew today. But they underscore that we must remain vigilant every place we do business and let nothing compromise our
commitment to integrity.”

Paul Gerlach (here – Sidley & Austin, the former Associate Director of the SEC’s Enforcement Division) and Angela Burgess (here – Davis Polk & Wardwell) represented Smith & Nephew.

Powered by WordPress. Designed by WooThemes