Category: SEC Enforcement Action

“Golf In The Morning And Beer-Drinking In the Evening” – SciClone Pharmaceuticals Resolves $12.8 Million FCPA Enforcement Action For Subsidiary’s Marketing And Promotional Activities

Yesterday, the SEC released this administrative action finding that SciClone Pharmaceuticals (a California pharmaceutical company with a China-focused business) violated the FCPA’s anti-bribery, books and records and internal controls provisions.

The conduct at issue related to the marketing and promotional activities of SciClone Pharmaceuticals International Ltd., a wholly-owned subsidiary of SciClone incorporated in the Cayman Islands with an affiliate in Hong Kong.

Among other things of value provided to healthcare professionals employed by state-owned hospitals in China were weekend trips, foreign language classes, “golf in the morning and beer drinking in the evening,” and travel to the Grand Canyon and Disneyland.

In summary fashion, the SEC’s order states:

“From at least 2007 to 2012, employees of SciClone subsidiaries, who acted as agents of SciClone in conducting business in China, gave money, gifts and other things of value to foreign officials, including healthcare professionals (“HCPs”) who were employed by state-owned hospitals in China, in order to obtain sales of SciClone pharmaceutical products. Various means were employed, and these schemes were known to and condoned by various managers within SciClone’s China-based corporate structure. The related transactions were falsely recorded in SciClone’s books and records as legitimate business expenses, such as sponsorships, travel and entertainment, conferences, honoraria, and promotion expenses. During this period, SciClone also failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program.”

The conduct at issue largely focused on SciClone Pharmaceuticals International Ltd. (“SPIL”) which is described as a wholly-owned subsidiary of SciClone that is incorporated in the Cayman Islands with an affiliate in Hong Kong. According to the order:

“SciClone operates internationally primarily through subsidiaries, including SPIL and SPIL’s wholly-owned subsidiaries that sell and promote SciClone’s products in China. SciClone directs the relevant operations of SPIL and its subsidiaries and oversees SPIL’s operations through various means including through the appointment of directors and officers of SPIL, review and approval of its annual budget, business and financial goals, and oversight of its legal, audit, and compliance functions. SciClone also reviews and approves annual marketing and promotion budgets of SPIL and its subsidiaries. During relevant periods, some SciClone officers also served as officers and/or directors of SPIL, traveled frequently to China to participate in the management of SPIL, and were responsible for negotiating its contracts with its Chinese distributors. SPIL’s books and records are consolidated by SciClone and reported in its financial statements.”

Under the heading “Facts,” the order states:

“Although SciClone has local distributor relationships in China, its sales and marketing activities there are conducted through SPIL. Sales representatives in China regularly reported to senior management of SPIL on their efforts to increase sales. In these reports, sales representatives openly referred to instances in which they provided weekend trips, vacations, gifts, expensive meals, foreign language classes, and entertainment to HCPs in order to obtain an increase in prescriptions from those HCPs. As described by one sales manager, this was “luring them with the promise of profit.”

Some sales representatives referred to those HCPs with the greatest impact on their sales volume as VIP clients, and provided details on their volume of prescriptions when reporting to SPIL. This practice was known and encouraged by certain former SPIL managers at the time SPIL and SciClone had overlapping officers and/or directors. These reports included such things as:

• In August 2005, numerous surgical VIP clients including several hospital presidents attended the annual Qingdao Beer Festival consisting of golf in the morning and beer-drinking in the evening. In later years, SPIL continued to sponsor VIPs to the annual festival.
• In February 2007, VIP clients were provided with vacations to Anji, China.
• In November 2007, a sales representative recounted the experience of recruiting a VIP client by paying for family vacations and regular family dinners through an employee expense account. The sales representative attributed a nearly four-fold sales increase to that VIP as a result.

In 2007, SciClone submitted a license application to the State Food and Drug Administration for a new medical device product and had a renewal pending for its largest product. SciClone hired a well-connected regulatory affairs specialist (“Specialist”) to facilitate that licensing.

The Specialist arranged trips for two foreign officials to attend an academic conference in Greece at SciClone’s expense. The conference was solely related to the new medical device. One of the foreign officials had oversight over new product approvals, and the other foreign official had oversight over renewals for existing licensed products. At the time the trip was arranged, both SciClone’s renewal application and its application for a new license were pending.

As the foreign officials were unable to obtain travel visas in time to attend the conference in Greece, the Specialist instead provided them at least $8,600 in lavish gifts. The Specialist submitted two expense reimbursements for the gifts, the first of which was approved by the senior vice president of SPIL.

After learning of the gifts, SciClone terminated the Specialist and conducted an internal investigation related to the Specialist’s conduct and practices in China. The review did not look more broadly at sales and marketing practices in China. No further action or remedial measures were taken by SciClone or SPIL after the conclusion of the internal investigation in 2008.

Local Chinese travel companies were routinely hired to provide services (such as arranging transportation, accommodations, and meals for HCPs) in connection with what were ostensibly legitimate conferences, seminars, and other events. In addition to a lack of due diligence for these third party vendors, prior to 2012, there was a lack of controls over the events to ensure they had an appropriate business purpose and that the events actually occurred. Many events did not include a legitimate educational purpose or the educational activities were minimal in comparison to the sightseeing or recreational activities. For example:

• Between at least 2008 and 2010, SciClone sponsored dozens of Chinese HCPs to attend liver and oncology conferences in the United States. While a portion of the travel was devoted to educational purposes, it also consisted of significant sightseeing that involved, for example, travel to Las Vegas and Los Angeles with tours of the Grand Canyon or Disneyland.
• In April 2010, SPIL sponsored Chinese HCPs to attend a seminar in Japan regarding Zadaxin, its principle product. While a portion of the meeting appeared to involve half a day of educational activities, the remaining six days involved sightseeing and tourist locations such as Mt. Fuji.
• In March 2010, SPIL held its annual sales meeting in China on the island of Hainan, a resort destination. The sales meeting was attended by the sales representatives and senior management from SPIL. The weekend before the sales meeting, SPIL hosted VIP clients to a weekend stay on Hainan. There was no educational component to the VIP clients’ stay.

As part of its remedial efforts, SciClone conducted a detailed, comprehensive internal review of promotion expenses of employees from 2011 to early 2013. This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings. A portion of the funds generated through the reimbursements were used as part of the sales practices described above that continued through at least 2012.”

Based on the above, the SEC found as follows:

“SciClone through SPIL violated [the anti-bribery provisions] by providing things of value to foreign officials, including healthcare professionals (“HCPs”) who were employed by state-owned hospitals in China, in order to obtain sales of SciClone pharmaceutical products. SciClone violated [the books and records provisions] by improperly recording the payments to health care providers as sales, marketing, and promotion expenses. The false entries were initially recorded by SPIL which were then consolidated and reported by SciClone in its consolidated financial statements. SciClone violated [the internal controls provisions] by failing to devise and maintain a sufficient system of internal accounting controls to detect and prevent the making of improper payments to foreign officials.”

Without admitting or denying the SEC’s findings, SciClone is required to cease and desist from committing future FCPA violations and agreed to pay approximately $12.8 million ($9,426,000 in disgorgement and prejudgment interest of $900,000 as well as a $2.5 million civil penalty).

In resolving the action, SciClone agreed to “report to the Commission staff periodically, at no less than nine-month intervals during a three-year term, the status of its remediation and implementation of compliance measures.” Specifically, SciClone is required to “submit to the Commission staff a written report within 180 calendar days of the entry of this Order setting forth a complete description of its Foreign Corrupt Practices Act (“FCPA”) and anti-corruption related remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Respondent for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews.” In addition, SciClone is required to “undertake at least three follow-up reviews, incorporating any comments provided by the Commission staff on the previous report, to further monitor and assess whether the policies and procedures of Respondent are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws.”

Under the heading “Remedial Efforts,” the order states:

“SciClone has taken steps to improve its internal accounting controls and to create a dedicated compliance function. These include the following: (1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anticorruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone’s policies; and (8) creating an internal audit department and compliance department.”

In this release, SciClone’s Chief Executive Officer (Friedhelm Blobel) commented: “We are very pleased to have reached a final settlement with the SEC and DOJ that is in line with our previous expectations and brings this matter to conclusion. We believe that we have established an industry-leading compliance program, including a commitment to constant improvement, which is a key business asset. We look forward to continuing to focus on providing high quality medicines to patients, growing our business and creating value for our shareholders.”

John Dwyer and Jessica Valenzuela Santamaria (Cooley) represented SciClone.

2016 FCPA Enforcement Begins With SEC Action Against SAP

When Vicente Garcia (a former head of Latin American sales for SAP) resolved a parallel DOJ / SEC FCPA enforcement action in August 2015 (see here for the prior post), the question remained: would there also be a Foreign Corrupt Practices Act enforcement action against SAP?

Yesterday, the SEC answered that question in the affirmative by announcing an enforcement action against SAP (a German company with American Depository Shares registered with the SEC).

The SAP action is the first FCPA enforcement action of 2016.

Based on the same core conduct alleged in the prior Garcia action, SAP, without admitting or denying the SEC’s finding’s in an administrative order, agreed to pay approximately $3.9 million.

In summary fashion, the order states:

“This matter concerns violations of the books and records and internal controls provisions of the FCPA by SAP SE (“SAP”), a European Union corporation headquartered in Waldorf, Germany. The violations occurred due to deficient internal controls, which allowed SAP’s former Vice-President of Global and Strategic Accounts, Vicente E. Garcia, to discount the software price to a former SAP local partner at a level sufficient to permit Garcia and the local partner to pay $145,000 in bribes to one senior Panamanian government official, and offer bribes to two others. Through these bribes, Garcia secured government sales contracts of approximately $3.7 million for SAP, and also self-profited through kickbacks. By excessively discounting the SAP software, Garcia created a slush fund that the partner used to pay the bribes and kickbacks. Garcia concealed his scheme from others at SAP, circumvented SAP’s internal controls, and justified the excessive discounts by falsifying SAP’s internal approval forms.”

“The deep discounts that Garcia used to create the slush fund were falsely recorded as legitimate discounts on the books of SAP’s Mexican subsidiary, which were subsequently consolidated into SAP’s financial statements. In addition, SAP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurances that these improper payments to government officials did not occur.”

According to the order:

“Garcia, as a senior vice-president of SAP responsible for sales in Latin America, used his knowledge of the availability of discounts to push through large discounts in order to create a slush fund from which the local partner was able to pay the bribes. SAP routinely provides large discounts to local partners for legitimate reasons that Garcia used to justify the illegitimate discounts. Once Garcia obtained approval of the discounts based on his falsified justification forms, the bribes were then paid from the local partner.”

[…]

As a result of Garcia’s conduct in the bribery scheme, SAP, with its local partner, was able to sell software to the Panamanian government through four contracts from 2010 to 2013. These contracts generated revenues of approximately $3.7 million to SAP.

The deep discounts that Garcia used to create the slush fund were falsely recorded as legitimate discounts on the books of SAP Mexico, which were subsequently consolidated into SAP’s financial statements.”

Under the heading “SAP’s Insufficient Internal Controls,” the order states:

“SAP lacked adequate internal controls to ensure that discounts to local partners were not improperly used. SAP’s system required employees to electronically submit requests within SAP to obtain approval of discounts to local partners. SAP employees, however, had wide latitude in seeking and approving discounts to local partners, and employees’ explanations for the discounts were accepted without verification. There were also no requirements for heightened anti-corruption scrutiny for large discounts. Garcia was therefore able to evade the basic approval procedures by taking advantage of his position and his knowledge of how discounts were approved. Furthermore, the nature of Garcia’s reporting structure made it easy for him to implement the bribery scheme. Although Garcia was located in Miami and employed by SAPI, he variously reported to supervisors employed by other regional subsidiaries and used employees from other subsidiaries such as SAP Mexico to execute the sales to the Panamanian government. This indirect reporting structure at SAP created gaps in supervising Garcia that provided him the opportunity to use the large discounts for creating a slush fund for bribes. Because of the deficient controls, Garcia was able to provide the partner with deep enough discounts to enable him to implement the bribery scheme, which continued unabated for over four years.”

Based on the above findings, the order finds that SAP violated the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, SAP agreed to pay disgorgement of $3.7 million “representing ill-gotten gains received in connection with the bribery scheme” and prejudgment interest of $188,896.

Under the heading “SAP’s Cooperation and Remediation,” the order states:

“When SAP learned of the conduct as a result of the SEC’s inquiry, SAP conducted a thorough internal investigation and extensively cooperated with the SEC’s investigation by, among other things: (i) conducting an internal investigation; (ii) voluntarily producing approximately 500,000 pages of documents and other information quickly, identifying significant documents and translating documents from Spanish; (iii) conducting witness interviews, sharing Power-Point presentations and timelines; (iv) facilitating an interview of Garcia at work at SAPI offices in Miami without alerting him to the investigation into his conduct; and (v) initiating a third party audit of the local partner.

After being alerted to Garcia’s misconduct, SAP terminated Garcia and undertook remediation efforts to uncover any other possible misconduct and to improve its FCPA compliance. Specifically, SAP audited all recent public sector Latin American transactions, regardless of Garcia’s involvement, to analyze partner profit margin data especially in comparison to discounts so that any trends could be spotted and high profit margin transactions could be identified for further investigation and audit. SAP also implemented new policies and procedures to detect and prevent similar issues from recurring in the future. For example, SAP elevated the status of its Chief Compliance Officer (“CCO”) by having that person now report directly to the CFO, who is a member of the Executive Board, and gave the CCO authority to independently terminate employees and partner contracts. SAP conducted, and continues to conduct, regular anti-corruption training, as well as anti-corruption audits through its internal audit function.

In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff.”

In this release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated: “SAP’s internal controls failed to flag Garcia’s misconduct as he easily falsified internal approval forms and disguised his bribes as discounts.”

According to reports, SAP was represented by Patrick Robbins (Shearman & Sterling).

A Focus On SEC Individual Actions

This previous post highlighted various facts and figures from 2015 SEC FCPA enforcement (both corporate and individual).

As highlighted in the prior post, of the 9 corporate SEC FCPA enforcement actions from 2015, 2 (22%) (PBSJ and FLIR Systems) have involved, at present, related SEC charges against company employees.

As further highlighted in the prior post, the SEC brought two individual enforcement actions in 2015 (Vicente Garcia – associated with SAP and Walid Hatoum – associated with PBSJ).

This post focuses on SEC FCPA individual actions historically.

The SEC Gets Creative In Also Bringing An Enforcement Action Against Standard Bank

Previous posts here, here, and here have highlighted and analyzed the U.K. enforcement action against Standard Bank (SB) based on allegations that a former “sister company” inserted a local partner into a private placement bond offering on behalf of the Government of Tanzania that was used to facilitate improper payments to government officials.

The end result of this was that SB’s fee in the $600 million offering was not 1.4% but 2.4% (with the additional 1% being paid to the local partner).

The Judge in the U.K. matter concluded that there was insufficient evidence to suggest that any SB employees committed a bribery offense and that were was no evidence “that anyone within Standard Bank knew that two senior executives [at the former sister company] intended the payment to constitute a bribe, or so intended it themselves.”

Elsewhere the Judge repeated: “the evidence does not reveal that executives or employees of Standard Bank intended or knew of an intention to bribe.”

Nevertheless, SB was charged with a Sec. 7 violation of the Bribery Act for failing to prevent bribery (a first in the U.K. in connection with foreign bribery) and agreed to pay approximately $33 million to resolve the matter via a deferred prosecution agreement (also a first in the U.K.).

The SEC also got in on the action by announcing a $4.2 million enforcement action (via an administrative action) against Standard Bank for violating Section 17(a)(2) of the Securities Act of 1933 (’33 Act) based on the same core conduct alleged in the U.K. action.

The SEC’s release states:  “The SEC did not have jurisdiction to bring charges under the FCPA because Standard was not an “issuer” as defined by that Act.”

Not to suggest that an FCPA enforcement action against SB was warranted, but truth be told the SEC has previously brought Foreign Corrupt Practices Act enforcement actions against non-issuers.

For instance, in 2010 the SEC brought a $11.3 million FCPA enforcement action against Panalpina Inc. even though the SEC acknowledged in its complaint that the company was not “an issuer for purposes of the FCPA.” Rather, the enforcement action was premised on allegations that Panalpina “while acting as an agent of its issuer customers” violated the FCPA and that Panalpina “also aided and abetted its issuer customers’ violations.” Similarly, in a $125 million FCPA enforcement action in 2010 in connection with Bribery Island, Nigeria conduct the SEC included as a defendant Snamprogetti Netherlands B.V.

Back to the SEC’s enforcement action against SB.

Unlike the FCPA which is part of the Securities Exchange Act of 1934, as indicated above, Section 17(a)(2) is the part of the ’33 Act, a statutory scheme that broadly governs the offering of securities.

Specifically, Section 17(a)(2) states, under the heading “Fraudulent Interstate Transactions,” as follows.

“It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement … by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”

Key elements of a Section 17(a)(2) violation are thus materiality and use of U.S. interstate commerce or mail. (For an informative article about Section 17(a)(2) see here).

As mentioned above, the SEC’s administrative order was based on the same core conduct alleged in the U.K. action. In summary fashion, the order states:

“This case involves Standard Bank Plc’s (“Standard”) failure to disclose payments made by Standard’s affiliate, Stanbic Bank Tanzania, Limited (“Stanbic”), in connection with $600 million of sovereign debt securities issued by the Government of Tanzania (“GoT”) in 2013. Standard (an international investment bank located in London) was aware that its affiliate, Stanbic, paid $6 million of the proceeds of the offering to an entity called Enterprise Growth Markets Advisors Limited (“EGMA”). Standard failed to disclose the existence of EGMA and the fees it was to receive. At all relevant times, EGMA’s chairman and one of its three shareholders and directors was a representative of the GoT. Several red flags indicated the risk that the portion of the offering proceeds paid to EGMA by Stanbic was intended to induce the GoT to grant the mandate for the transaction to Standard and Stanbic. Standard acted as joint Lead Manager in the offering of Tanzanian sovereign debt securities without disclosing that EGMA was involved in the transaction and would receive a substantial fee in connection with the transaction.”

Under the heading “Standard’s Failure to Disclose,” the order states:

“Standard was negligent in not taking any steps to understand what role EGMA would be playing in the transaction in return for its $6 million fee and there are no records of contemporaneous communications among Standard and Stanbic personnel concerning the ownership of EGMA, its relationship to the GoT, or why it was being made part of the transaction.

[…]

The investor representation letter failed to include material facts about the transactions namely any mention of EGMA, its shareholders’ ties to the GoT, its lack of a substantive role in the transaction, and that it was to receive a $6 million fee.

[…]

Standard did not disclose the involvement of EGMA and the fee EGMA was to receive.”

As to the jurisdictional nexus in Section 17(a)(2), the order states:

“On February 27, 2013, the GoT issued its floating-rate amortizing, unrated, unlisted, sovereign bonds through a Regulation S private placement. As set forth in the transaction documents, the gross proceeds of $600 million were transferred by the facility agent to the GoT’s account in New York, on March 8, the GoT then transferred the total 2.4% fee of $14.4 million to Stanbic in Tanzania. Stanbic deposited EGMA’s 1% fee, or $6 million, into an account EGMA had previously opened at Stanbic. After EGMA made payments of the legal costs related to the transaction, approximately $5.2 million of its $6 million was withdrawn in cash between March 18 and 27, 2013. Standard did not become aware of those cash withdrawals until after they were made, and does not have knowledge as to the ultimate disposition of those withdrawn funds.”

In conclusion, the SEC order states:

“By offering the Tanzanian sovereign bonds, Standard had a duty to disclose to investors material facts that it knew or should have known concerning the transaction.

As a result of the conduct in failing to disclose the material facts described above, Respondent committed violations of Sections 17(a)(2) of the Securities Act.”

Other than mentioning the conclusory legal term “material” three times, the SEC’s order contains no specifics regarding this required legal element. The standard definition of material is whether there is a substantial likelihood that the information would be viewed by the reasonable investor as having significantly altered the total mix of information made available concerning the security.

It is a highly dubious proposition that the 116 sophisticated, institutional investors that participated in the $600 million private placement offering would have viewed the participation of EGMA and its 1% fee as being material.

As noted in the SEC’s release:

“The SEC’s order requires Standard to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act of 1933 that prohibits obtaining money by any materially untrue statement or omission, and to pay a $4.2 million civil penalty.  The order also requires Standard to pay disgorgement of $8.4 million, which the Commission has deemed satisfied by a payment of equal amount in the U.K. matter.”

In the SEC release, Gerald Hodgkins (Associate Director of the SEC’s Division of Enforcement) states:

“Standard failed to disclose EGMA’s involvement in the bond offering to investors despite red flags suggesting some of the proceeds of the offering were going to EGMA for the purpose of influencing the Tanzanian Government’s selection of bankers for the transaction. This action against Standard demonstrates that when suspicious payments made anywhere in the world result in tainted securities offerings in the United States, the SEC is fully committed to taking action against the responsible parties.”

Next Up – Bristol-Myers

First it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).

Then it was Smith & Nephew (see here – $22 million enforcement action in February 2012).

Then it was Biomet (see here – $22.8 million enforcement action in March 2012).

Then it was Pfizer / Wyeth (see here  – $60 million enforcement action in August 2012).

Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).

Then it was Stryker (see here – $13.2 million enforcement action in October 2013).

Then it was Mead Johnson (see here – $12 million enforcement action in July 2015).

The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Bristol-Myers Squibb Co. (“BMS”).

Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”

Yesterday, the SEC announced this administrative cease and desist order in which BMS agreed, without admitting or denying the SEC’s findings, to pay approximately $14.7 million.

The order states in summary fashion as follows.

“These proceedings arise out of violations of the internal controls and recordkeeping provisions of the FCPA by BMS and its majority-owned joint venture in China. Between 2009 and 2014, BMS failed to design and maintain effective internal controls relating to interactions with health care providers (“HCPs”) at state-owned and state-controlled hospitals in China. Through various mechanisms during this period, certain sales representatives of the joint venture improperly generated funds that were used to provide corrupt inducements to HCPs in the form of cash payments, gifts, meals, travel, entertainment, and sponsorships for conferences and meetings in order to secure new sales and increase existing sales. BMS falsely recorded the relevant transactions as legitimate business expenses in its books and records.”

The findings focus on Bristol-Myers Squibb (China) Investment Co. Limited (“BMS China), a company through which BMS conducts business in China, and how BMS China, in turn, primarily operates in China through Sino-American Shanghai Squibb Pharmaceuticals Limited (“SASS”), a majority-owned joint venture.

According to the Order:

“BMS holds a 60% equity interest in SASS and has held operational control over this entity since 2009 when it obtained the right to name the President of SASS and a majority of the members of SASS’s Board of Directors.

BMS began operating in China in 1982 when it formed SASS, the first SinoAmerican pharmaceutical joint venture. Following a successful product launch in 2005, BMS China’s business grew quickly. By 2009, BMS China had 1490 full-time employees and net sales of more than $200 million. This upward trend continued through 2014 when the number of full-time employees expanded to 2464 and net sales reached nearly $500 million.

Certain BMS China employees achieved their sales, in part, by providing HCPs and other government officials with cash and other inducements in exchange for prescriptions and drug listings.”

Under the heading “Failure to Respond to Red Flags,” the Order states:

“BMS China failed to respond effectively to red flags indicating that sales personnel provided improper payments and other benefits in order to generate sales from HCPs. In 2009, BMS China initiated a review of travel and entertainment expenses submitted for reimbursement by its sales personnel and found non-compliant claims, fake and altered invoices and receipts, and consecutively numbered receipts. Shortly thereafter, BMS China retained a local accounting firm to conduct monthly post-payment reviews of all claims for travel, entertainment, and meeting expenses to identify false, improperly documented, and unsubstantiated claims. BMS China brought this function in-house in early 2011 and the results of both the external and internal reviews were provided to management of BMS China as well as regional compliance and corporate business managers who reported directly to senior management of BMS.

During the period between mid-2009 and late 2013, BMS China identified numerous irregularities in travel and entertainment and event documentation, including fake and altered purchase orders, invoices, agendas, and attendance sheets for meetings with HCPs that likely had not occurred. BMS China inaccurately recorded the reimbursement of these false claims as legitimate business expenses in its books and records, which were then consolidated into the books and records of BMS.

Certain BMS China employees admitted that they had submitted false reimbursement claims and used the funds for the benefit of HCPs in support of sales by BMS China. They also alleged that the use of false reimbursement claims to fund payments to and for the benefit of HCPs in order to secure prescription sales was a widespread practice at BMS China. In emails to the BMS China President in November 2010 and January 2011, certain terminated employees wrote that they used the funds to pay rebates, provide entertainment, and fund gift cards for HCPs, as there was no other way to meet their sales targets. Citing the “open secret” that HCPs in China rely upon the “gray income” to maintain their livelihood, they said that they tried to meet the demands of the HCPs for the benefit of BMS China. Despite the widespread exceptions and serious allegations of potentially widespread bribery practices, BMS China did not investigate these claims.”

Under the heading “Compliance and Controls Environment,” the Order states:

“Despite its longstanding presence in China, BMS did not implement a formal FCPA compliance program until April 2006 when it adopted its first standalone anti-bribery policy and corresponding corporative directive. At approximately the same time, BMS began conducting compliance assessments and audits of BMS China that included a review of internal controls relating to anti-bribery risks. These internal reviews revealed weaknesses in the monitoring of payments made to HCPs, the lack of formal processes around the selection and compensation of HCPs as speakers, deficiencies in obtaining and documenting the approval of donations, sponsorships, and consulting arrangements with HCPs, and the failure to conduct post-event verification of meetings and conferences sponsored by sales representatives. Reports of these findings were provided to senior management of BMS China as well as members of BMS’s global compliance department.

These identified controls deficiencies were not timely remediated and compliance resources were minimal. The corporate compliance officer responsible for the Asia-Pacific region through 2012 was based in the U.S. and rarely traveled to China. There was no dedicated compliance officer for BMS China until 2008, and no permanent compliance position in China until 2010. In addition, the BMS sales force in China received limited training and much of it was inaccessible to a large number of sales representatives who worked in remote locations. For example, when BMS rolled out mandatory anti-bribery training in late 2009, 67% of employees in China failed to complete the training by the due date.

Annual internal audits of BMS China repeatedly identified substantial gaps in internal controls, and the results were reported to the Audit Committee and senior management of BMS. In connection with each audit, the audit team cited a lack of effective controls and documentation relating to interactions with HCPs and the monitoring of potential inappropriate payments to HCPs. Among Internal Audit’s conclusions were that BMS China’s controls around the review and approval of travel and entertainment expenses and gifts to HCPs were not effective and that it failed to track payments to HCPs, including high-risk payments, in its quarterly review of potential inappropriate payments, and to enforce controls relating to the documentation, approval, and payment of distributor rebates. Internal Audit also cited the lack of due diligence assessments of distributor compliance, including anti-bribery compliance, the failure to properly document and approve agreements with HCPs who served as speakers, and the lack of a mechanism to ensure that services were received in exchange for sponsorships. As a result, Internal Audit issued a series of qualified opinions in connection with its annual audits of BMS China between 2009 and 2013.”

Under the heading “Internal Documents Reveal Improper Benefits Provided to HCPs,” the Order states:

“Emails and other BMS China documents detail, among other things, proposed “activity plans,” “action plans,” and plans for “investments” in HCPs to increase prescription sales. These contemporaneous documents were prepared at the direction of, and sometimes transmitted to, district and regional sales managers of BMS China, and show that sales representatives used funds derived from travel and expense claims to make cash payments to HCPs and to provide gifts, meals, entertainment, and travel to HCPs in order to induce them to prescribe products sold and marketed by BMS China. The sales representatives provided a variety of benefits to HCPs, ranging from small food and personal care items to shopping cards, jewelry, sightseeing, and cash payments, in exchange for prescription sales. This kind of conduct was captured in a July 2013 email from a sales representative to a regional manager. The sales representative explained that a former sales representative had offered cash for sales to HCPs at a local hospital and “the attitude of the director of the infectious diseases department was extremely clear when I took over: ‘No money, no prescription.’” Similarly, the work plans prepared by other sales representatives also identified correlations between the value of the benefits provided to specific HCPs and the volume of prescription sales expected.

Certain documents within BMS China were replete with references to “investments” made in order to obtain sales, such as offering speaking engagements and sponsorships for domestic and international conferences and meetings in exchange for prescriptions. Some sales representatives also sought to increase prescription sales and maintain drug listings at pharmacies by hosting cash promotions and events for pharmacy employees. Based on the volume of prescriptions, certain BMS China sales representatives gave cash, shopping cards, and foodstuffs as promotional prizes to pharmacy employees; at least one sales representative characterized the expenses as a “departmental development fee” in contemporaneous documents.”

Based on the above, the Order finds:

“As described herein, BMS, through the actions of certain BMS China employees, violated [the FCPA’s books and records provisions] by falsely recording, as advertising and promotional expenses, cash payments and expenses for gifts, meals, travel, entertainment, speaker fees, and sponsorships for conferences and meetings provided to foreign officials, such as HCPs at state-owned and state-controlled hospitals as well as employees of state-owned pharmacies in China, to secure prescription sales. BMS also violated [the FCPA’s internal controls provisions] by failing to devise and maintain a system of internal accounting controls relating to payments and benefits provided by sales representatives at BMS China to these foreign officials. As identified in various internal reviews, audits, and investigations conducted since at least 2009, BMS lacked effective internal controls sufficient to provide reasonable assurances that funds advanced and reimbursed to employees of BMS China were used for appropriate and authorized purposes.”

Under the heading “Remedial Efforts,” the Order states:

“BMS has implemented significant measures to enhance its anti-bribery and general compliance training and policies and to strengthen its accounting and monitoring controls relating to interactions with HCPs, including travel and entertainment expenses, meetings, sponsorships, grants, and donations funded by BMS China. BMS took numerous steps to improve the internal controls and compliance program at BMS China. Examples include a 100% pre-reimbursement review of all expense claims; the implementation of an accounting system designed to track each expense claim, including the request, approval, and payment of each claim; and the retention of a third-party vendor to conduct surprise checks at events sponsored by sales representatives. Additionally, BMS terminated over ninety employees, and disciplined an additional ninety employees, including sales representatives and managers of BMS China, who failed to comply with or sufficiently supervise compliance with relevant policies. In addition, BMS replaced certain BMS China officers as part of an overall effort to enhance “tone at the top” and a culture of compliance. Further, BMS revised the compensation structure for BMS China employees by reducing the portion of incentive-based compensation for sales and distribution, eliminated gifts to HCPs, implemented enhanced due diligence procedures for third-party agents, implemented monitoring systems for speaker fees and third-party events, and incorporated risk assessments based on data analytics into its compliance program.”

As stated in the Order:

“Without admitting or denying the findings, Bristol-Myers Squibb consented to the order and agreed to return $11.4 million of profits plus prejudgment interest of $500,000 and pay a civil penalty of $2.75 million.  Bristol-Myers Squibb also agreed to report to the SEC for a two-year period on the status of its remediation and implementation of FCPA and anti-corruption compliance measures.”

In the SEC’s release Kara Krockmeyer (Chief of the SEC’s FCPA Unit stated):

“Bristol-Myers Squibb’s failure to institute an effective internal controls system and to respond promptly to indications of significant compliance gaps at its Chinese joint venture enabled a widespread practice of providing corrupt inducements in exchange for prescription sales to continue for years.”

Yesterday Bristol-Myers’s stock closed down .47%.

According to reports, Bristol-Myers was represented by F. Joseph Warin of Gibson Dunn.