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Friday Roundup

Roundup

As we say not as we do, scrutiny alerts and updates, and further RIP to the “Arthur Andersen effect.” It’s all here in 200th edition of the Friday roundup.

As We Say, Not As We Do

This previous post highlighted the April Fools’ Day 2015 SEC enforcement action against KBR for its non-existent, theoretical muzzling of individuals in certain employment agreements. According to the SEC, this violated SEC Rule 21F-17, which provides in relevant part: (a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

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Days After Resolving A $25 Million FCPA Enforcement Action, Novartis Again The Subject Of FCPA Scrutiny

repeat

Last week Novartis agreed to pay $25 million to resolve an SEC Foreign Corrupt Practices Act enforcement action concerning alleged conduct in China. (See here and here for prior posts).

According to this Reuters report:

“An anonymous whistleblower has accused Swiss drugmaker Novartis of paying bribes in Turkey through a consulting firm to secure business advantages worth an estimated $85 million, according to a Feb. 17 email seen by Reuters.

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Issues To Consider From The Novartis Enforcement Action

Issues

This prior post went in-depth into the recent $25 million Foreign Corrupt Practices Act enforcement action against Novartis.

This post continues the analysis by highlighting various issues to consider.

Origin and Timeline

Below is how Novartis has described the origin of its FCPA scrutiny in public filings.

“After reports of Chinese government investigations of competitors for alleged improper use of certain China-based travel agencies to reward healthcare providers, Novartis commenced an internal investigation in 2013 concerning its local affiliates’ relationships with China-based travel agencies (and other vendors). Novartis is communicating with the US Securities and Exchange Commission (SEC) about this internal investigation.”

Chinese Travel Companies

As highlighted in this recent guest post, several FCPA enforcement actions have been based on alleged improper travel involving alleged Chinese officials. Often times, this travel is facilitated through Chinese travel agencies – a well-known corruption risk.

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Novartis Coughs Up $25 Million To Resolve FCPA Enforcement Action Based On Conduct Of Indirect Chinese Subsidiaries

Novartis

What happens when a Swiss corporation, with over 120,000 employees, has two indirect Chinese subsidiaries and a few employees of those subsidiaries, who concealed their conduct from the parent corporation, allegedly provided various things of value (such as an excursion to Niagara falls, spa and sauna sessions, and cover charges to a strip club) to various Chinese healthcare professionals?

Why of course, $25 million to the U.S. treasury because the Swiss corporation has shares traded on the New York Stock Exchange.

Yesterday, the SEC announced this Foreign Corrupt Practices Act enforcement action against Novartis.

By my count, it is the 22nd FCPA enforcement against a healthcare related company (i.e. pharma, medical device, etc.) premised on the enforcement theory (regardless of whether the action was resolved “merely” through books and records and internal controls issues) that employees of certain foreign health care systems are “foreign officials” under the FCPA and thus occupy a status similar to Presidents and Prime Ministers and other bona fide government officials.

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Potpourri

Potpourri

Disgraceful, scrutiny alerts, resource alert, for the reading stack, and for your consideration.  It’s all here in a potpourri edition of FCPA Professor.

Disgraceful

It’s a disgraceful practice.

A for-profit business invites a high-ranking DOJ official to its private event in which people have to pay to hear the public official speak.

It’s a disgraceful practice.

The for-profit company treats the DOJ official’s comments as if they own his words and then put the words behind a paywall.

Andrew Weissmann, the DOJ’s fraud section chief, recently spoke at GIR Live, an event hosted by a private for-profit company. According to this teaser post Weissmann spoke about issues of public concern including “how the department will factor in compliance, how it intends to reward those that self-report, and how it aims to increase transparency around resolutions and declinations.”

I requested a transcript of Mr. Weissmann’s remarks from the DOJ press office and was told: “[Mr. Weissmann] did not prepare formal remarks but spoke from notes, so I don’t have anything to provide. You’re welcome to check with the event organizers to see if they have a recording of it.”

Thankfully, Carlos Ayres was at the event and publicly posted a summary of Mr. Weisssmann’s remarks on the FCPAmericas website. According to his post:

“Weissmann said that the DOJ will publish in the next weeks a list of questions that companies can expect to be asked when being assessed by the DOJ’s new compliance consultant.”

“Weissmann said that the DOJ will shed more light on declination decisions in the short term, publishing related data with aggregate information.”

“Weissmann stated that DOJ will make an effort to complete cases for companies that self-report within one year.”

Thank you Mr. Ayres for your public service in sharing the comments of a high-ranking DOJ official on matters of public concern.

Scrutiny Alerts

HSBC Holdings

The company recently disclosed:

“Hiring practices investigation

The US Securities and Exchange Commission (the ‘SEC’) is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in AsiaPacific. HSBC has received various requests for information and is cooperating with the SEC’s investigation. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.”

Novartis

The Swiss company, which qualifies as an issuer under the FCPA, was recently the focus of news reports. According to this article:

“South Korean authorities raided Novartis offices in search of evidence the company provided bribes to local doctors, according to media reports. The Seoul Western District Prosecutors’ Office confiscated various documents, including account books, in order to determine whether rebates the drug maker offered physicians may have actually been bribes.”

Mondelēz International, Inc.

Approximately five years ago (see here for the prior post), Kraft Foods disclosed FCPA scrutiny resulting from its acquisition of Cadbury in connection with a manufacturing facility in India.  Kraft, now known as Mondelēz International, Inc., recently disclosed:

“As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters, including through ongoing meetings with the U.S. government to discuss potential conclusion of the U.S. government investigation. On February 11, 2016, we received a “Wells” notice from the SEC indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against us for violations of the books and records and internal controls provisions of the Exchange Act in connection with the investigation. We intend to make a submission to the staff of the SEC in response to the notice.”

So-called Wells Notices are rare in the FCPA context for the simple reason that few issuers actually publicly push back against the SEC.  See here for an example of a company that prevailed against the SEC after receiving a Wells Notice.

Key Energy Services

The company has been under FCPA scrutiny since Spring 2014 and continues to bleed cash in connection with its scrutiny. In this recent filing, the company disclosed $2.7 million “related to” its FCPA scrutiny.

Sweet Group

The U.K. Serious Fraud Office recently announced:

“Construction and professional services company Sweett Group PLC was … sentenced and ordered to pay £2.25 million as a result of a conviction arising from a Serious Fraud Office investigation into its activities in the United Arab Emirates. The company pleaded guilty in December 2015 to a charge of failing to prevent an act of bribery intended to secure and retain a contract with Al Ain Ahlia Insurance Company (AAAI), contrary to Section 7(1)(b) of the Bribery Act 2010. The relevant conduct occurred between 1 December 2012 and 1 December 2015.”

In the release, David Green (Director of the SFO) stated:

“Acts of bribery by UK companies significantly damage this country’s commercial reputation. This conviction and punishment, the SFO’s first under section 7 of the Bribery Act, sends a strong message that UK companies must take full responsibility for the actions of their employees and in their commercial activities act in accordance with the law.”

As further noted in the release:

“His Honour Judge Beddoe described the offence as a system failure and said that the offending was patently committed over a period of time. Referring to Section 7 of the Bribery Act 2010 and to Sweett’s ignorance of its subsidiary’s actions , HHJ Bedoe said:

The whole point of section 7 is to impose a duty on those running such companies throughout the world properly to supervise them. Rogue elements can only operate in this way – and operate for so long – because of a failure properly to supervise what they are doing and the way they are doing it.

The SFO’s investigation into Sweett Group PLC, which commenced on 14 July 2014, uncovered that its subsidiary company, Cyril Sweett International Limited had made corrupt payments to Khaled Al Badie, the Vice Chairman of the Board and Chairman of the Real Estate and Investment Committee of AAAI to secure the award of a contract with AAAI for the building of the Rotana Hotel in Abu Dhabi. The amount is broken down as £1.4m in fine, £851,152.23 in confiscation. Additionally, £95,031.97 in costs were awarded to the SFO.”

Maxwell Technologies

In 2011, Maxwell Technologies (a California-based manufacturer of energy storage and power delivery products) resolved parallel DOJ and SEC FCPA enforcement actions concerning alleged business conduct in China by agreeing to pay approximately $14 million. The company recently disclosed:

“In January 2011, we reached settlements with the SEC and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other securities laws violations. We paid the monetary penalties under these settlements in installments such that all monetary penalties were paid in full by January 2013. With respect to the DOJ charges, a judgment of dismissal was issued in the U.S. District Court for the Southern District of California on March 28, 2014.

On October 15, 2013, we received an informal notice from the DOJ that an indictment against the former Senior Vice President and General Manager of our Swiss subsidiary had been filed in the United States District Court for the Southern District of California. The indictment is against the individual, a former officer, and not against the Company and we do not foresee that further penalties or fines could be assessed against us as a corporate entity for this matter. However, we may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendant and to incur other financial obligations. While we maintain directors’ and officers’ insurance policies which are intended to cover legal expenses related to our indemnification obligations in situations such as these, we cannot determine if and to what extent the insurance policy will cover the legal fees for this matter. Accordingly, the legal fees that may be incurred by us in defending this former officer could have a material impact on our financial condition and results of operation.

Swiss Bribery Matter

In August 2013, our Swiss subsidiary was served with a search warrant from the Swiss federal prosecutor’s office. At the end of the search, the Swiss federal prosecutor presented us with a listing of the materials gathered by the representatives and then removed the materials from our premises for keeping at the prosecutor’s office. Based upon the our exposure to the case, we believe this action to be related to the same or similar facts and circumstances as the FCPA action previously settled with the SEC and the DOJ. During initial discussions, the Swiss prosecutor has acknowledged both the existence of our deferred prosecution agreement (“DPA”) with the DOJ and our cooperation efforts thereunder, both of which should have a positive impact on discussions going forward. Additionally, other than the activities previously reviewed in conjunction with the SEC and DOJ matters under the FCPA, we have no reason to believe that additional facts or circumstances are under review by the Swiss authorities. In late March 2015, we were informed that the Swiss prosecutor intended to inform the parties in April 2015 as to whether the prosecutor’s office would bring charges or abandon the proceedings. However, to date, the Swiss prosecutor has not issued its formal decision. At this stage in the investigation, we are currently unable to determine the extent to which we will be subject to fines in accordance with Swiss bribery laws and what additional expenses will be incurred in order to defend this matter. As such, we cannot determine whether there is a reasonable possibility that a loss will be incurred nor can we estimate the range of any such potential loss. Accordingly, we have not accrued an amount for any potential loss associated with this action, but an adverse result could have a material adverse impact on our financial condition and results of operation.”

As noted here by Wall Street Journal – Risk & Compliance Journal, in the same disclosure Maxwell disclosed approximately $2.4 million in FCPA professional fees and expenses in 2015.

Resource Alert

As highlighted here, Stanford Law School and Sullivan & Cromwell recently announced the launch of an FCPA clearinghouse –  “a public database that aggregates and curates source documents and provides analytic tools related to enforcement of the Foreign Corrupt Practices Act (FCPA).”

For the Reading Stack

An informative read here in Bloomberg Law from John Cunningham and Geoff Martin (both of Baker & McKenzie) titled “Casting a Wider Net: Conspiracy Charges in FCPA Cases.”

Another informative read here in the New York Times regarding the DOJ’s Kleptocracy Asset Recovery Initiative.

For Your Consideration

Did U.S. involvement in Afghanistan result in more corruption? Did the U.S. fail to conduct adequate due diligence on intermediaries (a frequent FCPA enforcement theory against companies)? NPR explores the issue here.

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