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The Origins And Prominence Of A Theory

It is one of the more aggressive and dubious FCPA enforcement theories there is.  It has never been subjected to judicial scrutiny.  It is a relatively new enforcement theory when one considers that the Foreign Corrupt Practices Act was enacted in 1977.    It is an enforcement theory that dominates this new era of enforcement and will likely continue to do so in the near future.

It is the enforcement theory that employees (such as physicians, nurses, mid-wives, lab personnel, etc.) of certain foreign health care systems are “foreign officials” under the FCPA.

This post traces the origins and prominence of this theory,  contains comments from the former DOJ FCPA enforcement attorney who came up with this theory, and highlights a datapoint relevant to the legitimacy and validity of this theory.

Below is a list of DOJ and/or SEC enforcement actions based on the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA.  (In addition to the below enforcement actions, a minor component of the record-setting 2008 Siemens enforcement action also involved this enforcement theory).  Each enforcement action listed below indicates the company involved, the year of the enforcement action, whether it was a DOJ or SEC enforcement action and the “foreign officials” involved as alleged by the DOJ and/or SEC.

Syncor (2002 – DOJ and SEC Enforcement Action)

Physicians employed by hospitals owned by the legal authorities in Taiwan.

Four doctors at government-owned hospitals in Mexico and doctors employed by hospitals owned by foreign government in Belgium, Luxembourg, and France.

Schering-Plough (2002 – SEC Enforcement Action)

Director of the Silesian Health Fund, one of sixteen regional government health authorities in Poland.

Diagnostic Products Corp. (2005 – DOJ Enforcement Action)

Laboratory personnel and doctors employed by hospitals owned by the Chinese government.

Micrus Corp. (2005 – DOJ Enforcement Action)

Physicians at state-owned hospitals in France, Germany, Turkey and Spain.

Immucor (2007 – SEC Enforcement Action)

Director of a public hospital in Italy

AGA Medical (2008 – DOJ Enforcement Action)

Hospitals owned and operated by the Chinese government.

Johnson & Johnson (2011 – DOJ and SEC Enforcement Action)

Health care providers who worked at publicly-owned hospitals in Greece, Poland, and Romania.

Smith & Nephew (2012 – DOJ and SEC Enforcement Action)

Health care providers who worked at publicly-owned hospitals in Greece.

Biomet (2012 – DOJ and SEC Enforcement Action)

Health care providers who worked at publicly-owned hospitals in Argentina, Brazil, and China.

Orthofix (2012 – DOJ and SEC Enforcement Action)

Individuals associated with Instituto Mexicano del Seguro Social, the Mexican government-owned healthcare and social services institution.

Pfizer (2012 – DOJ and SEC Enforcement Action)

Physicians, pharmacologists and senior government officials, who were employed by foreign governments or instrumentalities of foreign governments, including in Bulgaria, Croatia, Kazakhstan, and Russia.  Doctors employed by Chinese government healthcare institutions, the Czech government, Italian government healthcare institutions, the government of Serbia, the Indonesian government, and healthcare institutions owned or controlled by the Pakistani government.

As the above list demonstrates, this enforcement theory has been the principal basis for 11 core corporate enforcement actions since it was invented in 2002.  This number may not seem large at first blush, but it takes on added meaning when one considers, as noted in this prior post, that approximately 35% of core corporate enforcement actions since 2007 are the direct result of just three events – Iraq Oil for Food, Bonny Island Bribery, and Panalpina related investigations.

As demonstrated by the above list, this enforcement theory dominates FCPA enforcement thus far in 2012 (50% of the 8 core corporate enforcement actions this year have been based on this theory).

As indicated above, the first use of this enforcement theory occurred in the 2002 Syncor enforcement action.  Then, Peter Clark headed the DOJ’s FCPA Unit.  I asked him via e-mail the origins of this theory, whether it was internally debated, etc.

His e-mail response, published with his permission, was as follows.  “There was no debate or dissent – the line prosecutors and I all agreed on the charge. While it may have been the first time a government-employed doctor was described as a government official in charging language, there was nothing novel [in the sense that we were striking out in a direction no one had ever thought of previously] or particularly aggressive about it.”

As indicated above, the most recent use of this enforcement theory was in the Pfizer enforcement action.  In a bit of irony, and as noted in this prior post, Clark (currently at Cadwalader – here) served as Pfizer’s defense counsel.

A useful datapoint in examining the legitimacy and validity of this enforcement theory may be found in analyzing the number of criminal charges filed against individuals based on this theory.

Despite extracting nine corporate settlements based on the theory, the DOJ has never charged an individual in connection with this enforcement theory.  This is meaningful because individuals, as opposed to business organizations, are more likely to contest DOJ charges and put the DOJ to its burden of proof.

In short, despite Clark’s belief to the contrary, the enforcement theory that various employees of certain foreign health care systems are “foreign officials” is one of the more aggressive and dubious enforcement theories there is.  It has never been subjected to judicial scrutiny.  It is a relatively new enforcement theory and it is an enforcement theory that dominates this new era of enforcement.  It is likely that this enforcement theory will continue to dominate in the future as the pharmaceutical / medical devices industry sweeps are still in its infant stages (in terms of actual enforcement actions).

[As noted in this previous post, in the United States approximately 20% of hospitals are owned by state or local governments (see here). In addition, approximately 150 more medical centers are run by the Veterans Health Administration (see here).  Are we calling 20+% of U.S. health-care providers U.S. officials? If not, why not and why the difference?  Something to keep in mind when considering the origins and prominence of this theory of enforcement].

 

Rate This – Nielsen Company Accused Of FCPA Violations In Civil Suit, Plus Olympus Under Scrutiny

Approximately 100 companies are publicly known to be the subject of FCPA scrutiny.  This figure is likely a conservative estimate given that little is often known of private company FCPA scrutiny until an enforcement action is announced.  For instance, other than those involved, who knew that NORDAM Group or Data Systems & Solutions (two companies that recently resolved enforcement actions – see here and here) were the subject of FCPA scrutiny?

Add two more companies to the list:  Nielsen Company and Olympus Corp.

Nielsen

It is not the traditional way companies become the subject of the FCPA scrutiny, but then again it is not unheard of for FCPA scrutiny to begin with a civil complaint.

Last week in a lengthy civil complaint (here) filed by New Delhi Television Limited (“NDTV”) in New York State Court, NDTV (which describes itself as India’s first and most respected private broadcaster of news, current affairs and lifestyle television and a pioneer in India’s news television) accused Nielsen and a host of related entities and individuals of “negligence, gross negligence, false representations, prima facie tort and negligence per se (based on violations of the Foreign Corrupt Practices Act and the Dutch Corporate Governance Code).”

The 37th cause of action against Nielsen is for negligence per se arising from violations of the FCPA and the complaint states in full as follows.

“The anti-bribery provisions of the Foreign Corrupt Practices Act … prohibit U.S. companies from giving anything of value, either directly or indirectly, to, inter alia, a foreign politician so as to induce such foreign politician to do or omit to do any act in violation of the lawful duty of such foreign politician; or to secure any improper advantage, or to continue the company’s business.  Accordingly, since the formation of TAM [Television Audience Management, an Indian company which is a joint venture between a Nielson entity and others], Nielsen had a duty to comply with the provisions of the FCPA, so as to prevent the rampant corruption that has existed and currently exists within TAM.  Nielsen has known or should have known, that politicians directly and indirectly own approximately one-third of the news channels in India; that approximately sixty-percent (60%) of Indian cable operations are owned, directly or indirectly, by politicians or their proxies; and that, at all relevant times, there were high levels of corruption in the Indian television ratings industry and in TAM’s operations. Nonetheless, since the inception of TAM, Nielsen has allowed TAM, using the Nielsen Process and/or Nielsen’s proprietary property and/or Nielsen’s name and logo, to publish corrupt data, which was known to be corrupt, which benefited politicians. Indeed, Nielsen knew or should have known and/or consciously disregarded the fact that the leakage of panel home identities yielded hundreds of millions of dollars for the benefit of several politicians. This has enabled TAM, Nielsen and Kantar [another entity in the joint venture] to maintain its monopoly power in India and/or steady revenues. The failure to stop publication of corrupt data continues to benefit politicians, TAM, Nielsen and Kantar.  Since the formation of TAM, Nielsen has had intimate actual knowledge of such violations of the FCPA; knew of several red flags giving rise to an inference of actual knowledge of such violations of the FCPA; was willfully blind to such violations of the FCPA; and consciously avoided such violations of the FCPA.  Indeed, Robert Messemer, Chief Global Security Officer for The Nielsen Company, and Paul Donato, Executive Vice President and Chief Research Officer for Nielsen, during the course of their several visits to India commencing January 2012, meetings there as described above, and in the course of investigations during and subsequent to such visits and meetings, had actual knowledge of, and/or consciously disregarded FCPA violations, including, but not limited to, representations made in person to them by the whistleblower whom they personally interviewed on February 28, 2012 …, that, at the very least, one of the parties engaged in obtaining and using highly sensitive identities of panel homes was a television network owned by a well known Indian politician.  As a result of Nielsen’s willful disregard of such undeniable corrupt practices, such foreign politicians derived benefits by, inter alia, manipulation and skewing of TAM data in favor of broadcast channels and cable operations owned and/or operated by such local politicians or their proxies, from manipulation of rates based on knowledge of corrupt data and identity of panel homes, and various other means. Nielsen’s complete and utter failure and/or refusal to stop publication of manipulated TAM data has allowed such politicians to continue to benefit from the publication of such data. Thus, benefits were provided to those politicians, and TAM and/or Nielsen continued to enjoy the benefits of, inter alia, continued operations as a monopoly in the Indian market, and steady revenues.  Such acts and omissions by Nielsen constitute violations of the FCPA by Nielsen, and, as a result, negligence per se.”

For additional coverage of the complaint, see here from Courthouse News Service, here from the Hollywood Reporter and here from International Business Times.

Olympus

Yesterday, Bloomberg reported (here) that Olympus Corp., the world’s largest maker of endoscopes, uncovered irregularities at a doctor-training program in Brazil that may have violated U.S. law and reported them to the Department of Justice.”   According to the article,  “at issue in Brazil may be the way the company handled doctors’ expenses for travel, meals or entertainment.”  The article quotes company Chairman Yasuyuki Kimoto as saying “we might agree to some sort of violation of the Foreign Corrupt Practices Act in Brazil.  We understand DOJ is trying to gather lots of information on us.”

How can Tokyo based Olympus become subject to the FCPA?  For starters, the company has Level 1 ADRs traded on the so-called “Pink Sheets.”  Also, as noted in the Bloomberg article, the company has a U.S. based subsidiary and if it was involved in the conduct at issue, the DOJ may take the position that the subsidiary was acting as an agent of the parent company.  Also, as I suggest in the Bloomberg article, under the dd-3 prong of the FCPA added by the 1998 amendments, any company can be subject to the FCPA’s anti-bribery provisions to the extent “while in the territory of the U.S.” conduct occurs in furtherance of the scheme.  As noted in this prior post, the DOJ has asserted expansive theories under dd-3.  Notwithstanding the DOJ’s dd-3 setback in the Africa Sting case (also noted in the prior post) it is likely to continue to assert such expansive theories until challenged.

Olympus’s FCPA scrutiny would appear to be based on the untested (and in the minds of many – see here – dubious) enforcement theory that anyone employed by a state-run health care system is a “foreign official” under the FCPA.  Several prior enforcement actions, including against medical device companies, (see here for instance) have been based on this theory.

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

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

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

DOJ

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

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

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

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

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

SEC

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

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

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

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

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

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

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

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

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

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

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

Peter Spivack (Hogan Lovells – here) represented Orthofix.

Next Up – Biomet

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

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

DOJ

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

Criminal Information

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

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

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

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

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

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

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

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

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

DPA

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

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

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

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

See here for the DOJ’s release.

SEC

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

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

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

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

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

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

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

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

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

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

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

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).

DOJ

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.

DPA

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.”

SEC

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.

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