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FCPA And Then Some As Alere Resolves SEC Enforcement Action


One instance of Foreign Corrupt Practices Act scrutiny that has attracted significant investor interest over the past few years (because it occurred in the context of an M&A transaction) involved Alere Inc.

As highlighted in this previous post, the company disclosed in August 2015 that it received an SEC subpoena inquiring about its foreign business practices. Thereafter, Alere announced that it would be acquired by Abbott in a $5.8 billion transaction.

Thereafter, in March 2016 Alere also announced that it would be unable to timely file its annual report because it was “continuing to conduct an analysis of certain aspects of the timing of revenue recognition, more specifically, revenue cutoff, in Africa and China.” The company also disclosed at that time that “on March 11, 2016, the Company received a grand jury subpoena from the United States Department of Justice requiring the production of documents relating to, among other things sales, sales practices and dealings with third-parties (including distributors and foreign governmental officials) in Africa, Asia and Latin America and other matters related to the U.S. Foreign Corrupt Practices Act.”

In April 2017, as reported here, “Abbott agreed to consummate its troubled acquisition of Alere in a deal that values the medical test maker’s equity at $5.3 billion, shaving $500 million from the original price and ending months of legal maneuvering that appeared headed for a Delaware court.”

Against this backdrop, earlier today the SEC released this administrative order in which Alere, without admitting or denying the SEC’s findings, agreed to pay approximately $13 million to resolve a variety of legal violations including FCPA books and records and internal controls violations.

In summary fashion, the Order states:

“Alere is a Massachusetts-based public company, traded on the New York Stock Exchange, which manufactures and sells diagnostic tests for infectious disease, cardiometabolic disease and toxicology. Alere maintains operations and sells its products around the world. Between 2011 and 2016, Alere engaged in the improper premature recognition of revenue in its financial statements filed with the Commission. And, between 2011 and 2013, Alere’s subsidiary in Colombia improperly characterized payments to a Colombian government official in Alere’s books and records. Alere’s subsidiary in India also failed to properly record certain payments made by a distributor in its books and records. Alere further failed to devise and maintain a sufficient system of internal accounting controls. As a result, Alere violated Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Section 17(a) of the Securities Act.

Since May 2015, Alere has at three different times revised or restated its financial statements that had appeared in the company’s periodic filings with the Commission. In May 2015, Alere restated its 2014 Form 10-K due to incorrect tax accounting. In August 2016, Alere filed its 2015 Form 10-K, which revised the revenue and associated entries in its financial statements for prior periods due to incorrect reporting of revenue. In June 2017, Alere filed its 2016 Form 10-K, which restated its revenue and associated entries for prior periods due to newly discovered improper reporting of revenue. In total, Alere has restated its financial statements for fiscal years 2013, 2014, and 2015 and for the following fiscal quarters: Q3 2014, Q1-Q3 2015, and Q1-Q3 2016.

Revenue Recognition Problems: From 2011 to 2016, Alere misstated its revenue in its financial statements filed with the Commission. These revenue misstatements resulted from (a) intentional early reporting of revenue by Alere’s South Korean subsidiary, Standard Diagnostics, and (b) improper revenue recognition practices by Alere at subsidiaries located, among other locations, in South Korea, Israel, South Africa, Ireland, and China. The improper revenue recognition practices primarily related to the timing of when Alere could have recognized the revenue. As a result, Alere’s revision and restatement of its revenue over the five-year period, shifted to a later reporting period in total over $260 million in revenue from the quarter in which it was originally recognized. The revenue involved in “early sales” and other practices described below was eventually recognizable and collected, just not in the quarter in which it was recorded.

Recording of Offers and Payments to Foreign Officials: Between 2011 and 2013, Alere’s foreign subsidiaries located in Colombia and India indirectly made improper offers and payments to foreign government officials for the purpose of making sales of its products. Profits from the sales associated with the improper offers and payments totaled approximately $3.3 million.”

In resolving the matter, Alere agreed to pay a civil money penalty of $9,200,000, disgorgement of $3,328,689, and prejudgment interest of $495,196.”

Based upon the above SEC finding, the FCPA component of the Alere enforcement action appears to be approximately $3.8 million ($3.3 million in disgorgement and $.5 million in prejudgment interest) and will be recorded as such in FCPA enforcement statistics.

The remainder of this post highlights of the FCPA specific portions of the SEC’s order.

Under the heading “Alere Recorded Improper Payments from BioSystems to a Government Official in Colombia,” the order states:

“During 2007 and 2008, Alere purchased a private Colombian distributer of Alere products called BioSystems, S.A. ultimately renaming it Alere Colombia in 2016. In conjunction with the acquisition, Alere installed Biosystems’ former primary shareholder and owner as Biosystems’ General Manager (the “Colombia GM”).

Biosystems’ customers included a set of entities known as an Entidad Promotora de Salud, or EPS, which provided health insurance services for their members. These entities were created by Colombian law as part of the Colombian government’s efforts to provide universal health benefits to its citizens. Under this system, EPSs were responsible for organizing and guaranteeing the provision of health services for their enrolled participants and managing their participants’ health risks. Among other things, EPSs contracted for health services on behalf of their participants through a network of public, private, and their own health service providers. EPSs were both private and government controlled.

From at least 2006, Biosystems sold products to an EPS that operated as a private entity (the “Customer EPS”). Biosystems’ contact at the Customer EPS was a management level employee (“the “Customer EPS Manager”) responsible for, among other things, recommending and approving products – including Biosystems’ products – for the Customer EPS to purchase and provide to its enrolled participants. The Colombia GM oversaw the Customer EPS account and dealt directly with the Customer EPS Manager.

During 2011 through 2013, due to allegations of mismanagement at the Customer EPS, the Government of Colombia, acting through the Ministry of Health, took control and direction of the Customer EPS. During this time, the Customer EPS was an instrumentality of the Government of Colombia and its employees were officials of the Government of Colombia. In 2013, the Ministry of Health began dissolving the Customer EPS and transferring its members to another EPS.

From 2007 through at least 2012, Biosystems, at the direction of the Colombia GM, made improper payments totaling approximately $275,000 to the Customer EPS Manager in order to obtain and retain business from the Customer EPS. The payments began at least six months before Alere acquired Biosystems. Biosystems disguised these improper payments as payments for purported consulting services from the Customer EPS Manager’s husband, sisterin-law, and friend. In fact, none of the recipients of these improper payments performed legitimate consulting services for Biosystems sufficient to justify the amount of payments received.

From 2011 through 2013, Biosystems sold approximately $7.6 million of products to the Customer EPS. During this time, the Customer EPS Manager continued in her position at the Customer EPS and remained responsible for recommending Biosystems’ products to the Customer EPS. From 2011 through 2013, Biosystems earned approximately $3.18 million in profits from the approximate $7.6 million in sales to the Customer EPS. In 2013, the Colombia GM hired the Customer EPS Manager to work at Biosystems.

In 2015, Alere’s corporate management began an internal investigation into consulting payments at Biosystems and discovered the improper payments. Shortly thereafter, the Customer EPS Manager resigned from Biosystems. The Colombia GM had previously resigned from Biosystems in January 2015.

The improper payments to the Customer EPS Manager were recorded as legitimate consulting expenses in Biosystems’ books and records. Biosystems’ books and records were consolidated into Alere’s books and records thereby causing Alere’s books and records to be inaccurate. Alere also failed to devise and maintain an adequate system of accounting controls sufficient to prevent and detect the improper payments that occurred over several years.

Through the conduct described above, Alere violated [the FCPA’s books and records and internal controls provisions] through the inaccurate recording of the payments to the Customer EPS’s relations on its books and records, and its failure to devise or maintain internal accounting controls sufficient to provide reasonable assurances that its funds would not be used to make improper payments in contravention of Alere’s policies.”

Under the heading “Alere India Failed to Maintain Internal Controls Against Improper Payments to Government Officials,” the Order states:

“In 2011, an India-based subsidiary of Alere, Alere Medical Pvt. Ltd. (“Alere India”), acting through an India-based distributor (“India Distributor”), won a contract to provide malaria testing kits to a local governmental entity for a national disease control program.

In early 2012, the India Distributor wrote a letter to Alere India’s then-Vice President of Marketing and Sales about the tender. The India Distributor noted that it had met with officials of the local governmental entity who had informed them that if the local governmental officials were paid a four percent commission, they would increase the orders under the tender from 200,000 to 1,000,000 testing kits. Alere India’s Vice President of Marketing and Sales approved the four percent commission and the India Distributor proceeded to incorporate the increased commission amount into the prices for the test kits. Alere India failed to record the additional commission in its books and records.

In August 2012, the India Distributor requested from Alere India a credit memo for the commission it had paid the local government officials in connection with the initial 200,000 test kits it had provided to the local governmental entity. Around the same time, the India Distributor paid Alere India the amounts owed for the 200,000 test kits, but deducted the commission paid to the local government officials from the total payment amount. The India Distributor noted the reasons for the deduction on an invoice accompanying the payment.

In December 2012, the new management at Alere India discovered the unpaid credit memo associated with the 200,000 test kits. Alere’s corporate management initiated an internal investigation, and it directed Alere India to refuse to issue the requested credit memo. Alere India requested and received reimbursement from the India Distributor for increased commission the India Distributor had withheld on that order. Alere, however, retained the approximate $150,000 in profits that it obtained from the increased contract.

Through the conduct described above, Alere violated [the FCPA’s books and records and internal controls provisions] through the inaccurate recording of the commissions paid by Alere India on its books and records, and its failure to devise or maintain internal accounting controls sufficient to provide reasonable assurances that its funds would not be used to make improper payments in contravention of Alere’s policies.”

In this release, Alere stated: “We have cooperated with the SEC and we are pleased to fully resolve this matter.”

Also yesterday, as stated in this separate release, Alere announced:

“[We have] reached an agreement in principle to settle with the U.S. Department of Justice (the “DOJ”) to resolve various potential civil claims, including claims under the False Claims Act, relating to Alere Triage® cardiac and Toxicology products sold between January 2006 and March 31, 2012. The settlement relates to matters arising out of the previously disclosed 2012 FDA inspection of Alere San Diego and the Office of Inspector General subpoena. “We have cooperated with the DOJ investigation, and we are pleased to reach this agreement in principle that would fully resolve this matter with DOJ.” If the ongoing discussions with the DOJ are successfully concluded, we believe the total combined payment to the Department of Justice and the participating states will be within the $35 million loss contingency reserve previously taken by the Company.”

Yesterday, Alere’s stock price closed up 3.8%.

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