Category: Related Foreign Investigations

Items Of Interest From GSK

By now you likely know that GlaxoSmithKline (“GSK”) is the subject of bribery scrutiny for its business practices in China.

This is hardly earth-shattering as the pharmaceutical industry (and more broadly the healthcare sector) has been the subject of much scrutiny in the past few years including for business practices in China.

What is unique about GSK’s scrutiny, as I explained to National Public Radio, is the Chinese government is investigating the alleged conduct at issue.

What is also interesting is the chronology of the story.

As noted in this prior post, last month the Wall Street Journal reported that GSK was “investigating allegations from an anonymous tipster that it sales staff in China was involved in widespread bribery of doctors to prescribe drugs, in some cases for unauthorized uses, between 2004 and 2010.”  As reported in the WSJ article, a Glaxo spokesman confirmed that the company was investigating the allegations, but that after thoroughly investigating “each and every claim” from the anonymous source, the company “has found no evidence of corruption or bribery in or China business.”

Earlier this week, GSK issued this release stating:

“Certain senior executives of GSK China who know our systems well, appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behaviour of this nature.”

In short, that is quite a sequence of events and raises two questions.  How thorough was GSK’s earlier investigation and why didn’t the earlier investigation uncover the conduct disclosed earlier this week?

Yesterday, in an earnings conference call, GSK CEO Andrew Witty seemed to offer an explanation.  In actionable statements to the market, Witty suggested, not once, but several times, that the GSK-China employees defrauded the company.  The below cites are from a transcript of the earnings call posted by the website Seeking Alpha.

“Certain senior managers in the Chinese business have acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system. To see these allegations made about people working for GSK is as we have said shameful and for me personally they are deeply disappointing. The alleged activities are not what we expect of our people and are totally contrary to our values.”

“In terms of sales force practices, basically what we have been told, what we understand from the Chinese investigators is that, what happened here was a number of managers who seem to be operating outside of our processes and systems in controls to allegedly generate this fraud …”.

“We haven’t been able yet to get into a full investigation mode ourselves. But working with the Chinese authorities, it appear that this is a consequence of the individuals working outside of the controls and processes of the company to defraud the company as well as, so then go on and do things which are potentially illegal.”

“We are going to continue to work with the authorities on this, our understanding at this point in time from the authorities is that this is around individuals, and the co-people and the senior management of the company in China, who are alleged to have worked around our systems and controls to both defraud us and then to potentially do things in appropriate in the marketplace.”

Was GSK the victim of rogue employee conduct?

The U.S. Attorneys’ Manual recognizes that “no compliance program can ever prevent all criminal activity by a corporation’s employees.”  In addition, high-ranking DOJ officials have recognized that “there will always be employees who decide to take matters into their own hands – they are a fact of life,” and that “even the best compliance program may not stop fraud or corruption from occurring.”  The former Assistant Chief of the DOJ’s FCPA Unit candidly stated “most government attorneys realize that a company can take every reasonable step to prevent wrongdoing but ultimately is powerless if somebody really wants to break the law.”

If GSK was the victim of rogue employee conduct will it even matter?

Here it is interesting to note that difference between the U.K. Bribery Act and FCPA enforcement.

As reported elsewhere, the U.K. Serious Fraud Office is also investigating GSK – hardly surprising given that GSK is a U.K. based company.  If any of the conduct under investigation occurred after the Bribery Act went live on July 1, 2011, the Bribery Act would apply including Section 7 which states that a “commercial organization will have a full defense if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing.”  The U.K. Ministry of Justice has recognized  that “no policies or procedures are capable of detecting and preventing all bribery” and that “no bribery prevention regime will be capable of preventing bribery at all times.”

Adequate procedures or good faith compliance efforts of course are not relevant as a matter of law when it comes to FCPA enforcement (they should be – see my article Revisiting an FCPA Compliance Defense), but the enforcement agencies have stated that this is a factor considered in determining whether and how to proceed in a case.

The involvement of Chinese law enforcement, U.K. law enforcement, and U.S. law enforcement sets up a potential and very interesting competition issue.  China and the U.K. would seem to have a greater and more direct interest in the conduct at issue compared to the U.S.

China vs. U.K. competition could get very interesting given the U.K.’s unique double jeopardy provisions.  These provisions were highlighted in connection with the 2010 BAE enforcement action in the U.S. and U.K.  Even though the offense BAE pleaded guilty to in the U.S. was not an FCPA offense, the U.K. was limited in the charges it could bring against BAE under its double jeopardy principles because of the U.S. first-filed action.  Then Serious Fraud Office Director Richard Alderman, responded to my question as follows:

“Q: Are you suggesting that simply because facts are alleged in a U.S. prosecution to support a non-corruption charge, that the U.K. is thereby prohibited from bringing a corruption charge as to those facts?

A: Yes. Our double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offence. Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction. As a result I could not continue to consider whether to prosecute BAE for an offence relating to Central and Eastern Europe once BAE had pleaded guilty in the US.”

Even though the U.S would seem to have the least direct interest in the conduct at issue, should there be an FCPA enforcement action against GSK (it shares do trade on U.S. exchanges), the U.S. would likely extract the largest settlement amount.  Of course as a foreign issuer, GSK could only be subject to the FCPA’s anti-bribery provisions to the extent a “means or instrumentality of interstate commerce” were used in connection with any improper payment scheme.  Not so of course with the FCPA’s generic books and records and internal control provisions.

The evolution of GSK’s bribery scrutiny, the conduct of potential rogue employees, and the competition between various law enforcement agencies that is likely to ensue, these are the items of interest from GSK’s scrutiny.

Friday Roundup

Simply inexcusable, tell us who, an interesting case study, and for the reading stack.  It’s all here in the Friday roundup.

Simply Inexcusable

The government holds those subject to the FCPA to high standards.  If the proverbial “right hand” in a company doesn’t know what the “left hand” is doing, the government is likely to call that an internal control failure.

In this post earlier this week regarding Ralph Lauren Corp.’s (RLC) FCPA enforcement action, it was noted that the RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny.  Thus, the first instance of public scrutiny appears to have been announcement of the enforcement action on Monday morning.  RLC’s stock dipped approximately 2% on the news and closed at $165.93.  The “FCPA dip” lasted only a day, as Tuesday the stock rebounded and then some and closed yesterday at $175.38.

Reading Stack

A good weekend to all.

“Carbon Copy” Prosecutions: A Growing Anticorruption Phenomenon In A Shrinking World

Andrew Boutros and Markus Funk recently released (here) their article “Carbon Copy” Prosecutions:  A Growing Anticorruption Phenomenon in a Shrinking World” published in The University of Chicago Legal Forum.  Boutros is an Assistant U.S. Attorney in the N.D. of Illinois and Lecturer in Law at the University of Chicago Law School (who co-wrote the article in his personal capacity) and Funk is a partner at Perkins Coie.  Boutros and Funk are Co-Chair’s of the ABA’s Global Anti-Corruption Task Force.

In summary, the authors, using recent enforcement actions, note as follows.

“[I]f a corporation reaches a negotiated resolution with US authorities on international bribery-related charges—whether through a non-prosecution agreement, a deferred prosecution agreement, or a guilty plea—there is a bona fide risk that other countries will initiate prosecutions based on the same facts as, and admissions arising out of, the US investigation and resolution.  [I]f an individual corporate officer is even tangentially involved or implicated in a US-negotiated resolution, that corporate officer—even if not named at all in the resolution—faces potential criminal charges overseas. The officer, therefore, has a strong incentive to ensure that the resolution either does not name him or her or describes the officer’s conduct in the most positive light (or at least neutrally).  [The] Article examines this growing—but still largely under-recognized—international phenomenon of “carbon copy” prosecutions.”

What is a carbon copy prosecution?  The authors define the term to mean “successive, duplicative prosecutions by multiple sovereigns for conduct transgressing the laws of several nations, but arising out of the same common nucleus of operative facts.”

The article then “details the myriad cost-benefit considerations that companies might weigh when deciding whether to make voluntary front-end disclosures to foreign authorities concurrently with their disclosures of potential FCPA violations to U.S. officials.”  Among the considerations the authors identify is 5th Amendment double jeopardy issues and the collateral estoppel effect of U.S. resolutions on international enforcement actions and vice versa.

In addition, the authors note as follows.  “The net effect of [DOJ and SEC FCPA settlement policies] is that when a company enters into a negotiated resolution with the DOJ – particularly in those cases with parallel SEC enforcement actions – it is essentially powerless to defend against, much less deny, the factual basis on which the resolution is based.  This all but ensures that a company that settles with the DOJ – or both the DOJ and SEC in parallel proceedings – will have little or no choice but to settle with foreign authorities, should such authorities choose to exercise jurisdiction and enforce their corollary anticorruption laws.”

Although the notion of carbon copy prosecutions have been known for some time, Boutros and Funk’s article is an important contribution to Foreign Corrupt Practices Act literature and provides an analytical scrutiny to this observable trend.  For this reason, the article should find a place on your reading stack.

Johnson & Johnson Enforcement Action Focuses on Health Care Providers As “Foreign Officials”

That was quite the 72-hour period for FCPA enforcement last week. On Wednesday, it was JGC Corporation of Japan ($218.8 million in criminal fines). On Thursday, it was Comverse Technologies ($2.8 million in combined DOJ and SEC fines, penalties, and disgorgement). On Friday, it was Johnson & Johnson ($70 million in combined DOJ and SEC fines, penalties and disgorgement – plus approximately $7.9 million in a related U.K. Serious Fraud Office civil recovery).

This post analyzes the Johnson & Johnson enforcement action. Separate posts regarding the Comverse and JGC Corp. enforcement actions will follow later this week.

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Johnson & Johnson (“J&J), a global pharmaceutical, consumer product, and medical device company, resolved enforcement actions focused on business conduct in Greece, Poland, Romania. The enforcement actions also resolved an investigation of Johnson & Johnson subsidiary companies in the United Nations Oil for Food Program in Iraq.

The J&J enforcement action involved both a DOJ and SEC component. Total settlement amount was $70 million ($21.4 million criminal fine via a DOJ deferred prosecution agreement; $48.6 million in disgorgement and prejudgment interest via a SEC settled complaint).

This post summarizes the DOJ, SEC and SFO enforcement actions.

DOJ

The DOJ enforcement action involved a criminal information (here) against DePuy Inc. (a wholly-owned subsidiary of J&J and a global manufacturer and supplier of orthopedic medical devices) resolved through a deferred prosecution agreement (here).

Criminal Information

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

The conduct at issue focuses on Depuy International. In 1998, J&J acquired DePuy, including its subsidiary Deputy International (a U.K. company).

According to the information, between 1998 through 2006, DePuy and others conspired 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-employed Greek HCPs.”

The information alleges that “DePuy, its executives, employees, and subsidiaries agreed to sell products to Company X [an agent and distributor for DePuy and its subsidiaries in Greece until 2001 when it was acquired by DePuy and named DePuy Medec and later renamed DePuy Hellas] at a 35% discount, then paid 35% of sales by Company X to an off-shore account of Company Y [based in the Isle of Man and a consultant for DePuy International in Greece until 1999] in order to provide off-the-books funds to Agent A [a Greek national who was the beneficial owners of both Company X and Y] for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”

The information further alleges that “DePuy, its executives, employees, and subsidiaries agreed to pay Agent A and Agent B [a Greek national who acted as a consultant to DePuy International and DePuy Hellas] a percentage of the value of sales of DePuy products in Greece in order to provide funds to Agent A and Agent B for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”

The information further alleges that between 2002 and 2006 “approximately £500,000 was withdrawn by DePuy Hellas MD [a Greek National who was an employee of Company X until it was acquired by J&J when she became the Managing Director of DePuy Hellas] and others and used to cover payments owed to HCPs by the agents but not yet paid.”

The information charges as follows. “In total, from 1998 to 2006, defendant DePuy, DePuy International, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of approximately $16.4 million in cash incentives to publicly-employed Greek HCPs to induce the purchase of DePuy products. In order to conceal the payments, DePuy Hellas and DePuy International falsely recorded the payments in their books and records as “commissions.””

As to a U.S. nexus, the information describes the following: certain phone calls made to Executive B (a U.S. citizen and officer and senior executive of DePuy) in Indiana to discuss the Company X acquisition and due diligence on Greek Agent A; e-mails sent to Executive B in Indiana regarding Agent A or Greek business in general; e-mails Executive A (a British citizen who was an officer and senior executive in charge of DePuy at the time it was purchased by J&J and who retained that position until 1999 when he became a senior executive at J&J retaining control of DePuy and its related operating companies) sent or received in New Jersey regarding Agent A.

Based on the above allegations, the information charges: (i) a conspiracy to violate the FCPA’s anti-bribery and books and records provisions; and (ii) a substantive FCPA anti-bribery violation.

DPA

The DOJ’s charges against DePuy were resolved via a deferred prosecution agreement (dated January 14, 2011) between the DOJ and J&J, its subsidiaries, and its operating companies “relating to illegal conduct committed by certain J&J operating companies and subsidiaries.” In addition to DePuy Inc., other operating companies named are Cilag AG International and Janssen Pharmaceutica N.V.

Pursuant to the DPA, J&J admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, and agents, and wholly-owned subsidiaries and operating companies” as set forth in a Statement of Facts attached to the DPA.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors.

(a) J&J voluntarily and timely disclosed the majority of the misconduct described in the Information and Statement of Facts [Note – the Iraq Oil for Food conduct was not voluntarily disclosed];

(b) J&J conducted a thorough internal investigation of that misconduct;

(c) J&J reported all of its findings to the Department;

(d) J&J cooperated fully with the Department’s investigation of this matter;

(e) J&J has undertaken substantial remedial measures as contemplated by [the DPA];

(f) J&J has agreed to continue to cooperate with the Department in any investigation of the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA and related statutes;

(g) J&J has cooperated and agreed to continue to cooperate with the SEC and, at the direction of the Department, foreign authorities investigating the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to corrupt payments;

(h) J&J has cooperated and agreed to continue to cooperate with the
Department in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets;

“(i) J&J has also agreed to resolve related cases being investigated by the SEC and the United Kingdom Serious Fraud Office (the “SFO”); and

(j) Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participation in federal health care programs pursuant to 42 U.S.C. § 1320a-7(a).

With respect to the corporate compliance reporting obligations imposed on J&J by the DPA, the agreement states as follows.

(i) J&J has already engaged in significant remediation of the misconduct described in the Statement of Facts and reviewed and improved its compliance program and implementation thereof;

(ii) J&J conducted an extensive, global review of all of its operations to determine if there were problems elsewhere and has reported on any areas of concerns to the Department and the SEC;

(iii) J&J has and will undertake enhanced compliance obligations
described in [the DPA];

(iv) J&J’s cooperation during this investigation and its substantial assistance in investigations of others has been extraordinary; and

(v) J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”

As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $28.5 million to $57 million. Pursuant to the DPA, J&J agreed to pay a monetary penalty of $21.4 million (25% below the minimum amount suggested by the guidelines). The DPA states as follows. “J&J and the Department agree that this fine is appropriate given J&J’s voluntary and thorough disclosure of the misconduct at issue, the nature and extent of J&J’s cooperation in this matter, penalties related to the same conduct in the United Kingdom and Greece, J&J’s cooperation in the Department’s investigation of other companies, and J&J’s extraordinary remediation.”

Pursuant to the DPA, J&J agreed to self-report to the DOJ “periodically, at no less than six-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance measures” described in the DPA.

As is standard in FCPA DPAs, J&J agreed not to make any public statement “contradicting the acceptance of responsibility” by J&J as set forth in the DPA.

The Statement of Facts attached to the DPA include, in addition to the Greece conduct described above, conduct relating to Poland, Romania and in connection with the U.N. Oil for Food Program in Iraq.

Poland

As to Poland, the DPA states, in summary fashion as follows.

“Poland has a national healthcare system. Most Polish hospitals are owned and operated by the government and most Polish HCPs [health care providers] are government employees providing health care services in their official capacities. Therefore, most HCPs in Poland are “foreign officials” as defined by the FCPA.”

“Polish hospitals purchase their medical products through a tender process, whereby suppliers of medical products compete for business by submitting bids to tender committees. Each tender committee may be associated with one or more hospitals.”

“In general, the tender committees evaluate the competitive bids and select the winning supplier for each purchase. Because most Polish hospitals are government owned, the tender committees effectively determine, on behalf of the government, from whom the government will purchase medical products.”

“J&J Poland [a wholly owned subsidiary of J&J] made payments and provided things of value to publicly-employed Polish HCPs, in the form of “civil contracts,” travel sponsorships, and donations of cash and equipment, to corruptly influence the decisions of HCPs on tender committees to purchase medical products from J&J Poland.”

As to civil contracts, the DPA states as follows.

“J&J Poland engaged in professional services contracts with publicly-employed Polish HCPs, known as “civil contracts.” The contracts were purportedly for professional services including lecturing, leading workshops, and conducting clinical trials.”

“J&J Poland did not require that its sales representatives provide proof that the work, for which payment had been made, was actually ever performed.”

“From January 2000 until June 2006, J&J Poland awarded civil contracts to publicly-employed Polish HCPs to corruptly influence them, in their official capacities as members of tender committees, in order to induce those HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”

As to travel, the DPA states as follows.

“J&J Poland sponsored some publicly-employed Polish HCPs to attend conferences in order to corruptly influence them, in their official capacities as members of tender committees, in order to induce the HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”

As to “Total Improper Payments in Poland,” the DPA states as follows.

“In total, from in or around 2000 to in or around 2007, J&J Poland and its employees authorized the payment, directly or indirectly, of approximately $775,000 in improper payments, including direct payments and travel, to publicly-employed Polish HCPs to induce the purchase of J&J products.”

Romania

As to Romania, the DPA states as follows.

“The national healthcare system in Romania is almost entirely state-run. The healthcare system is funded by the National Health Care Insurance Fund (“CNAS”), to which employers and employees make mandatory contributions. Most Romanian hospitals are owned and operated by the government and most HCPs in Romania are government employees. Therefore, most HCPs in Romania are “foreign officials” as defined by the FCPA.”

“From in or around 2005 through in or around 2008, J&J Romania [a wholly owned subsidary] employees made arrangements with J&J Romania distributors for the distributors, on behalf of J&J Romania, to provide cash payments and gifts to publicly-employed Romanian HCPs in exchange for prescribing certain pharmaceuticals manufactured by J&J subsidiaries and operating companies.”

As to “Total Improper Payments in Romania,” the DPA states as follows.

“In total, from in or around July 2005 to in or around mid-2008, J&J Romania and its employees authorized the payment, directly or indirectly, of approximately $140,000 in incentives to publicly-employed Romanian HCPs to induce the purchase of pharmaceuticals manufactured by J&J subsidiaries and operating companies.”

Oil for Food Program

As to the U.N. Oil for Food Program, the DPA states as follows.

“Between in or around December 2000 and in or around March 2003, Janssen [a wholly-owned subsidiary of J&J headquarted in Belgium] and Cilag [a wholly-owned subsidiary of J&J headquartered in Switzerland] were awarded 18 contracts for the sale of pharmaceuticals to the Iraqi Ministry of Health State Company for Marketing Drugs and Medical Appliances (“Kimadia”) under the [Oil for Food Program], with a total contract value of approximately $9.9 million, which generated approximately $6.1 million in profits. Janssen and Cilag secured these contracts through the payment of approximately $857,387 in kickbacks to the government of Iraq.”

“The kickbacks were paid to the government of Iraq through JC-Lebanon Agent [a Lebanese citizen who was an agent for both Janssen and Cilag in Iraq]. The kickbacks were concealed from the United Nations by inflating Janssen and Cilag’s contract prices by 10%.”

The DPA concludes with a section titled “Books and Records” that states as follows.

“In order to conceal the payments to the Greek, Polish, and Romanian HCPs on the books and records of J&J and its subsidiaries, the payments were misrepresented as, among other things, “commissions,” “civil contracts,” “travel,” “donations,” and “discounts.””

“In order to conceal the kickback payments made to the Iraqi government through JC-Lebanon Agent for contracts under the OFFP on the books and records of Janssen and Cilag, the payments were misrepresented as “commissions.””

“At the end of J&J’s fiscal year from in or around 1998 to in or around 2007, the books and records of DePuy International, DePuy Hellas, J&J Poland, J&J Romania, Janssen, and Cilag, including those containing false characterizations of kickback and bribe payments given to the Iraqi government and Greek, Polish, and Romanian officials, were incorporated into the books and records of J&J for purposes of preparing J&J’s year-end financial statements, which were filed with the Securities and Exchange Commission.”

The DOJ’s release (here) states as follows.

“Johnson & Johnson has admitted that its subsidiaries, employees and agents paid bribes to publicly-employed health care providers in Greece, Poland and Romania, and that kickbacks were paid on behalf of Johnson & Johnson subsidiary companies to the former government of Iraq under the United Nations Oil for Food program. Johnson & Johnson, however, has also cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry. As [the DPA] reflects, we are committed to holding corporations accountable for bribing foreign officials while, at the same time, giving meaningful credit to companies that self-report and cooperate with our investigations.” “The agreement recognizes J&J’s timely voluntary disclosure, and thorough and wide-reaching self-investigation of the underlying conduct; the extraordinary cooperation provided by the company to the department, the SEC and multiple foreign enforcement authorities, including significant assistance in the industry-wide investigation; and the extensive remedial efforts and compliance improvements undertaken by the company. In addition, J&J received a reduction in its criminal fine as a result of its cooperation in the ongoing investigation of other companies and individuals, as outlined in the U.S. Sentencing Guidelines. J&J’s fine was also reduced in light of its anticipated resolution in the United Kingdom. Due to J&J’s pre-existing compliance and ethics programs, extensive remediation, and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, J&J was not required to retain a corporate monitor, but it must report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement.”

SEC

The SEC’s civil complaint (here) is based on the same core set of facts contained in the above DPA and alleges, in summary, as follows.

“This matter concerns violations of the Foreign Conupt Practices Act by J&J as a result of the acts of its subsidiaries to obtain business for J&J’s medical device and pharmaceutical segments.”

“Since at least 1998 and continuing to early 2006, J&J’s subsidiaries, employees and agents paid bribes to public doctors in Greece who selected J&J surgical implants for their patients. Further, J&J’s subsidiaries and agents paid bribes to doctors
and public hospital administrators in Poland who awarded tenders to J&J from 2000 to 2006. J&J’s subsidiaries and agents also paid bribes to public doctors in Romania to prescribe J&J pharmaceutical products from 2002 to 2007. Finally, J&J’s subsidiaries and agent paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program (“Program”) from 2000 to 2003.”

As to Greece, the SEC complaint alleges as follows.

“One of J&J’s product lines is surgical implants such as artificial knees, hips and other products that surgeons implant into patients. Surgical implants are a lucrative, but competitive business. In many countries, orthopedic surgeons control which implants they use.”

“In 1998, J&J acquired another medical device company, DePuy Inc., a NYSE company. A top DePuy executive then went on to become a top J&J executive in the United States in J&J’s medical device and diagnostics business (“Executive A”). At the time of the acquisition, DePuy was engaged in a widespread bribery scheme in Greece to sell its implants. Executive A and DPI executives knowingly continued that scheme. From 1998 to 2006, J&J earned $24,258,072 in profits on sales obtained through bribery.”

The SEC complaint alleges that “J&J’s internal audit group discovered the payments to Greek doctors in early 2006 after receiving a whistleblower complaint.” According to the complaint, “the issue of payments to surgeons had been previously raised in an anonymous 2003 letter to a different internal audit team concerning a related J&J subsidiary in Greece … however, that team concentrated their investigation on allegations about a possible conflict ofinterest by local management and J&J did not fully investigate the alleged payments to doctors.”

As to Poland, the SEC complaint alleges as follows.

“Employees of … a J&J subsidiary, bribed publicly-employed doctors and hospital administrators to obtain business. [Subsidiary] executives running three business lines oversaw the creation of sham contracts and travel documents and also the creation of slush funds as a means to funnel bribe payments to doctors and
administrators. From 2000 to 2006, J&J earned $4,348,000 in profit from its sales through the bribery.”

“The bribery appears to have stopped when Polish prosecutors began to investigate payments to doctors.”

As to travel issues, the SEC complaint alleges as follows.

“[Subsidiary] also paid for public doctors and hospital administrators to travel to medical conventions in Poland and abroad in order to influence tender committee decisions in their favor. Sponsored doctors were taken on trips in exchange for influencing the doctors’ decisions to purchase J&J’s medical products or to award hospital tenders to J&J. Some of the trips were to the United States for conferences. Some of the trips were to tourists areas in Europe, and some included spouses and family members to what amounted to vacations.”

As to Romania, the SEC complaint alleges as follows.

“Employees of … a J&J subsidiary, bribed publicly-employed doctors and pharmacists to prescribe J&J products that the company was actively promoting. The employees worked with [the subsidiary’s] local distributors to deliver cash to publicly-employed doctors who ordered J&J drugs for their patients. [The subsidiary] also provided travel to certain doctors who agreed to prescribe J&J products. From 2000 to 2007, J&J earned $3,515,500 in profit from its sales through the bribery.”

As to Iraq Oil for Food conduct, the SEC complaint alleges as follows.

“J&J participated in the Program through two of its subsidiaries, Cilag AG International and Janssen Pharmaceutica N.V. (collectively “Janssen-Cilag”). During the program, Janssen-Cilag sold pharmaceuticals to an arm of the Iraqi Ministry of Health known as Kimadia. Janssen-Cilag conducted business with Kimadia in Iraq through a Lebanese agent (the “Agent”). The Agent’s primary contact with the J&J companies was an area director at Janssen-Cilag’s office in Lebanon.”

“In total, secret kickback payments of approximately $857,387 were made in connection with nineteen Oil for Food contracts. The payments were made through the Agent to Iraqi controlled accounts in order to avoid detection by the U.N. The fee was effectively a bribe paid to the Iraqi regime, which were disguised on J&J’s books and records by mischaracterizing the bribes as legitimate commissions.”

“In order to generate funds to pay the bribes and to conceal those payments, Janssen-Cilag and its agent inflated the price of the contracts by at least ten percent before submitting them to the U.N. for approval. J&J’s total profits on the contracts were $6,106,255.”

Under the heading “Anti-Bribery Violations” the complaint alleges as follows.

“J&J, through its subsidiaries and agents, knowingly allowed its employees and third parties to pay Greek and Polish public doctors and public hospital administrators for the purpose of obtaining or retaining business.”

“Executive A, a U.S. resident and a senior executive at J&J, approved the arrangements with the Greek Agent in Greece. Executive A and DPI executives knew that the Greek Agent was bribing Greek doctors. In addition, Polish doctors were bribed to use J&J products in return for trips. Use of the mails and interstate commerce was also used to facilitate the bribery schemes in both Greece and Poland.”

Under the hearing “Failure to Maintain Its Books and Records” the complaint alleges as follows.

“J&J’s subsidiaries made numerous illicit payments for the purpose of obtaining contracts in Iraq, Romania, Greece, and Poland. J&J’s books and records did not reflect the true nature of those payments. For example, they did not record that a portion of its payments to the Greek and Iraqi agents constituted reimbursements for bribes, and they did not record the true terms of the civil contract payments to Polish doctors. Efforts were made to obscure the purpose of trips to the United States and abroad. Certain J&J subsidiaries created false contracts, invoices, and other documents to conceal the true business arrangement it had with its consultants and distributors to pay bribes. False travel documents were created, and petty cash was used to pay bribes. United Nations contracts were also falsified.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint alleges as follows.

“J&J failed to implement internal controls to detect or prevent bribery. The conduct was widespread in various markets, Greece, Poland, Romania, and Iraq. The conduct involved employees and managers of all levels. False documents were routinely created to conceal the bribery in each country.”

“Rather than cease the bribery that was happening at DePuy prior to J&J’s acquisition, J&J through its subsidiaries, employees and agents allowed the bribery to continue. They created sham businesses and entered into contracts that were merely
conduits to allow the bribery to flourish. They failed to conduct due diligence on the Greek Distributor. The Company also paid its consultant outside of Greece to avoid detection of bribery. The Company had two different J&J corporate entities make
payments to the Greek Agent to conceal the amount of money that was being funneled to
doctors as bribes.”

“[Polish subsidiary] entered into fake civil contracts with Polish doctors and J&J also created false travel arrangements in Poland and Romania to create slush funds.”

“Cilag and Janssen paid bribes to Iraq despite the fact that trade sanctions were in place against doing business in Iraq. Cilag and Janssen falsified their contracts with the United Nations to conceal the kickbacks being paid to Iraq.”

Based on the above allegations, the SEC charged J&J with FCPA anti-bribery violations and FCPA books and records and internal control violations.

Without admitting or denying the SEC’s allegations, J&J agreed to an injunction prohibiting future FCPA violations and agreed to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest.

The SEC’s release (here) contains the following statement from Robert Kuzami (Director of the SEC’s Division of Enforcement): “The message in this and the SEC’s other FCPA cases is plain – any competitive advantage gained through corruption is a mirage. J&J chose profit margins over compliance with the law by acquiring a private company for the purpose of paying bribes, and using sham contracts, off-shore companies, and slush funds to cover its tracks.” In the release, Cheryl Scarboro (Chief of the SEC Enforcement Divisions FCPA Unit) stated as follows. “Bribes to public doctors can have a detrimental effect on the public health care systems that potentially pay more for products procured through greed and corruption.”

The SEC release states as follows.

“J&J voluntarily disclosed some of the violations by its employees and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.”

SFO

On the same day as the above U.S. enforcement actions, the U.K. SFO announced (here) a Civil Recovery Order against DePuy International Limited “in which DePuy International Limited will pay £4.829 million [approximately $7.9 million], plus prosecution costs, in recognition of unlawful conduct relating to the sale of orthopaedic products in Greece between 1998 and 2006.”

According to the SFO release, the SFO “launched an investigation into the activities of DePuy International Limited in October 2007 following a referral from the DOJ.” Richard Alderman, Director of the SFO, stated as follows. “When Johnson & Johnson reported the DePuy corruption, the DOJ informed the SFO of issues within our jurisdiction. We worked with the DOJ to find a solution that served both the interests of justice and the company’s desire to put illegal activity behind it and move on. I believe the order approved […] will illustrate to other companies how the SFO works closely with organisations across the world in enforcing the highest ethical standards, but is willing to engage and listen to companies that come to us with problems and help them find solutions.”

The SFO release further states as follows. “On the facts of this case, criminal sanction of the Greek conduct has been achieved by the conclusion of a Deferred Prosecution Agreement with DePuy International Limited’s parent company and the DOJ. The Director of the Serious Fraud Office has concluded that a prosecution was therefore prevented in this jurisdiction by the principles of double jeopardy. The underlying purpose of the rule against double jeopardy is to stop a defendant from being prosecuted twice for the same offence in different jurisdictions. The DOJ Deferred Prosecution Agreement has the legal character of a formally concluded prosecution and punishes the same conduct in Greece that had formed the basis of the Serious Fraud Office investigation. […] Consequently the Serious Fraud office is satisfied that the most appropriate sanction is a Civil Recovery Order, under the Proceeds of Crime Act 2002.”

As highlighted in this prior post, in April 2010, former DePuy executive Robert Dougall pleaded guilty to conspiring with others “to make corrupt payments and/or give other inducements” to “medical professionals within the Greek state health care system” contrary to Section 1 of the UK Prevention of Corruption Act of 1906.

*****

Eric Dubelier (Reed Smith – see here – a former DOJ enforcement attorney) represented J&J.

J&J’s press release (here) notes as follows. “In 2007, Johnson & Johnson voluntarily disclosed to the DOJ and the SEC that subsidiaries outside the United States were believed to have made improper payments in connection with the sale of medical devices. In the course of comprehensive compliance efforts and reports into the Company, similar issues in additional markets and businesses were identified and brought to the attention of the agencies.” William Weldon, Chairman and Chief Executive Officer of J&J stated as follows. “More than four years ago, we went to the government to report improper payments and have taken full responsibility for these actions. We are deeply disappointed by the unacceptable conduct that led to these violations. We have undertaken significant changes since then to improve our compliance efforts, and we are committed to doing everything we can to ensure this does not occur again. I know that these actions are not representative of Johnson & Johnson employees around the world who do what is honest and right every day, in the conduct of our business and in service to patients and customers worldwide. We will continue to demonstrate that Johnson & Johnson is a company that embraces responsible corporate behavior.”

Friday Roundup

Save the date, Halliburton speaks on Nigeria, and the SEC’s first non-prosecution agreement … it’s all here in the Friday roundup.

Save the Date

FCPA enforcement 2010 is coming to a close. The three most significant events from 2010? The three most interesting events from 2010? And a bold prediction?

That is my task on December 29th when I participate in Securities Docket’s annual “Year in Review” webcast slated for 1 p.m. EST. The webcast is free and you can sign up here.

Other participants who address the same questions as to their area of expertise include Compliance Week editor Matt Kelly, Francine McKenna (re: The Auditors), Francis Pileggi (Delaware corporate law guru), Kevin LaCroix (The D&O Diary), Tracy Coenen (The Fraud Files), Lyle Roberts (The 10b-5 Daily) and Securities Docket’s Bruce Carton.

Halliburton Statement on Nigeria Charges

In last week’s Friday roundup, it was noted that Nigeria dropped charges against Dick Cheney after his former employer, Halliburton, reportedly agreed to pay a $250 million fine. According to various media reports, the sum consisted of $120 million in penalties and the repatriation of $130 million.

A Halliburton spokesman was quoted as saying “we have no comment to make on this.”

Halliburton has now spoken and its statement (here) contradicts the widely reported $250 million figure. The statement reads, in full, as follows:

“Halliburton announced today the resolution of the previously disclosed investigation by the Federal Government of Nigeria (FGN) arising out of allegations of improper payments to government officials in Nigeria in connection with the construction and subsequent expansion by a joint venture known as TSKJ of a natural gas liquefaction project on Bonny Island, Nigeria, in which Halliburton’s former subsidiary KBR, Inc. had an approximate 25 percent interest. Pursuant to this agreement, all lawsuits and charges against KBR and Halliburton corporate entities and associated persons have been withdrawn, the FGN agreed not to bring any further criminal charges or civil claims against those entities or persons, and Halliburton agreed to pay US$32.5 million to the FGN and to pay an additional US$2.5 million for FGN’s attorneys’ fees and other expenses. Among other provisions, Halliburton agreed to provide reasonable assistance in the FGN’s effort to recover amounts frozen in a Swiss bank account of a former TSKJ agent and affirmed a continuing commitment with regard to corporate governance. Any charges related to this settlement will be reflected in discontinued operations.”

SEC’s First Non-Prosecution Agreement

In January 2010, the SEC announced a series of measures (see here) “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”

“New cooperation tools” not previously available to the SEC, include, among other things:

* “Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.”

* “Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.”

and

* “Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.”

The SEC release noted that “similar cooperation tools have been regularly and successfully used by the Justice Department in its criminal investigations and prosecutions.”

Earlier this week, the SEC announced (here) its first non-prosecution agreement against Carter’s Inc. related to enforcement action against its former Executive Vice President (Joseph M. Elles) for engaging in financial fraud and insider trading.

The SEC’s announcement states as follows:

“The SEC also announced that it has entered a non-prosecution agreement with Carter’s under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles’s unlawful conduct. The non-prosecution agreement reflects the relatively isolated nature of the unlawful conduct, Carter’s prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter’s extensive and substantial remedial actions. This marks the first non-prosecution agreement entered by the SEC since the announcement of the SEC’s new cooperation initiative earlier this year.”

The NPA (here) is similar to DOJ NPAs and DPAs in the FCPA context. Carter’s agreed to cooperate in the investigation of its former employee and any other related enforcement action and Carter’s is prohibited from making any public statement contrary to the factual basis of the agreement (notwithstanding that the NPA does not contain a factual basis or a statement of facts). The NPA specifically states that the agreement should not “be deemed exoneration of [Carter’s] or be construed as a finding by the Commission that no violation of the federal securities laws have occurred.”

Although the Carter NPA is not in an FCPA enforcement action, it is likely that NPAs (and DPAs) will be frequently used by the SEC (as they are by the DOJ) in the FCPA context.

As I note in the “Facade of FCPA Enforcement” (here), DOJ NPAs and DPAs have exploded in recent years and the “lions share” of these agreements are used to resolve FCPA enforcement actions. Many observers believe that NPAs and DPAs have taken the place of declinations and that companies are pressured to enter into such agreements prematurely even before each element of the relevant charge is established.

With the SEC now using such alternative resolution vehicles, the end result will be even less judicial scrutiny (not that there is much judicial scrutiny at present) as to SEC interpretations of the FCPA and whether factual evidence actually exists to support each element of an FCPA charge.