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In The Herbalife Enforcement Action, The Government Failed To Present The “Complete Picture” Regarding The Company’s Internal Audit Function

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When the government charges individuals with Foreign Corrupt Practices Act violations and then subsequently charges a business organization with FCPA violations based on the same core allegations one might expect the allegations to be consistent.

However, as highlighted below in connection with the DOJ/SEC’s individual enforcement action against former Herbalife China executives (see here for the prior post) and its subsequent enforcement against Herbalife (see here and here for prior posts), in the later enforcement action the government failed to present the “complete picture” regarding the company’s internal audit function (a key portion of the internal controls allegations against the company).

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Employee Reimbursements Gone Wild

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Numerous Foreign Corrupt Practices Act enforcement actions (Bristol Myers, Eli Lilly, PTC, FLIR Sytems, Sanofi, Novartis, and Avon to name a few) have involved abuse of employee reimbursements.

The most recent example involved the Herbalife enforcement action (see here and here for prior posts) which largely focused on former Herbalife China executives Yanliang Li (a citizen of China and former Managing Director of a Chinese division of Herbalife) and Hongwei Yang (a citizen of China and former head the External Affairs Department of a Chinese division of Herbalife).

As discussed below, the abuse of employee reimbursements in the Herbalife matter is in a league of its own and represents employee reimbursements gone wild as the culpable employees allegedly entertained thousands of Chinese officials including expensive meals, alcohol, karaoke, and luxury gifts and also involved a purported purchase of hundreds of pounds of fruits and vegetables. Further, the government alleged that the culpable employees discussed using fake meal invoices or fake gift invoices to avoid internal audit oversight

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Next Up For Herbalife – The Plaintiffs’ Lawyers

Greedy Lawyers

It is as predictable as the sun rising in the east and dogs barking.

In the aftermath of a Foreign Corrupt Practices Act enforcement action (or mere instances of FCPA scrutiny), plaintiffs’ lawyers representing shareholders on a contingent fee basis announce “investigations” or file securities fraud claims against the company and/or certain officers or directors. Such FCPA-related claims are frequently dismissed, but the “investigations” continue and claims continue to be filed.

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Issues To Consider From The Herbalife Enforcement Action

Issues

This prior post went in-depth into the recent $123 million Foreign Corrupt Practices Act enforcement action against Herbalife and this post highlights additional issues to consider.

Timeline

As highlighted in this post, Herbalife disclosed its FCPA scrutiny in early 2017.  Thus, from start to finish, its scrutiny lasted more than 3.5 years. I’ve said it many times, and will continue saying it until the cows come home, if the DOJ/SEC wants their FCPA enforcement programs to be viewed as credible and effective they must resolve instances of FCPA scrutiny much quicker.

This is particularly true in the Herbalife matter given that the conduct focused on a single country as well as the following language from the enforcement agencies.

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Herbalife Resolves $123 Million Enforcement Action – Becoming The Latest Company To Resolve A Matter In Connection With Obtaining A Direct Selling Permit In China

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In 2014, Avon resolved a Foreign Corrupt Practices Act enforcement based in large part on obtaining a direct selling permit in China. (See here for the prior post).

In 2016, Nu Skin Enterprises resolved an FCPA enforcement action based in large part on obtaining a direct selling permit in China. (See here for the prior post).

In the latest enforcement action involving another company in the same general industry involving the same general conduct, the DOJ and SEC recently announced (here and here) that Herbalife agreed to pay approximately $123 million to resolve a parallel DOJ and SEC enforcement action. The corporate action follows the DOJ and SEC’s November 2019 enforcement action against former Herbalife China executives Yanliang Li (a citizen of China and former Managing Director of a Chinese division of Herbalife) and Hongwei Yang (a citizen of China and former head the External Affairs Department of a Chinese division of Herbalife).

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