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Issues To Consider From The Cardinal Health Enforcement Action

Issues

This recent post highlighted the SEC’s $8.8 million Foreign Corrupt Practices Act enforcement action against Cardinal Health.

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

Timeline

According to the SEC order, “In December 2016, Cardinal voluntarily disclosed the results of its investigation to the Commission staff and subsequently cooperated with its investigation.”

Thus, from start to finish, Cardinal’s FCPA scrutiny lasted approximately 3.25 years.

No Public Disclosure

Different companies have different disclosure practices.

Just because most issuers disclose FCPA scrutiny does not mean that all issuers disclose FCPA scrutiny.

Based on a review of Cardinal’s SEC filings, it does not appear that Cardinal disclosed its FCPA scrutiny.

Glowing Words

The conduct at issue in the enforcement action resulted from Cardinal’s 2010 acquisition of Zuellig Pharma China (not specifically mentioned in the enforcement action, but clearly the entity discussed in paragraph 2 of the SEC’s order see here). Here is what Cardinal Health had to say about Zuellig Pharma China – known locally as Yong Yu – in 2010.

“This is an exciting day for Cardinal Health,” said George Barrett, chairman and chief executive officer of Cardinal Health. “The acquisition of Yong Yu follows an extensive evaluation of opportunities to drive growth in targeted geographies outside of North America where we believe our core capabilities would add value. China is an extraordinary market of enormous potential. We are proud to be able to participate in the ongoing evolution of the country’s health care system and we are confident that Yong Yu will provide the ideal platform from which to grow our portfolio in China.”

Established in 1993 and with annual sales of more than $1 billion, Yong Yu’s geographic footprint covers 31 of the 34 provincial-level administrative units in China through its direct-to-customer distribution center network and its comprehensive network of wholesalers. Yong Yu’s offerings span the full distribution value chain from importation to national supply chain management to local direct distribution to approximately 49,000 hospitals and clinics, and more than 123,000 pharmacies. The company also has a growing business distributing medical-surgical products.

Barrett added, “Yong Yu is a superb asset for Cardinal Health and has been operating in China for 17 years. Yong Yu serves virtually all major multinational pharmaceutical companies doing business in China, along with many local Chinese manufacturers. It has a nationwide distribution network with excellent infrastructure and customer service capabilities, strong customer and manufacturer relationships, and a superior management team.”

As highlighted here, in 2018 Cardinal divested its Cardinal Health China business to Shanghai Pharmaceuticals Holding Co., Ltd.

Not The First Time

Last week’s enforcement action is not the first time Cardinal has been involved (directly or indirectly) in an FCPA enforcement involving an acquisition.

In 2002, Cardinal announced that it was acquiring Syncor International. During pre-merger due diligence, it was discovered that certain foreign subsidiaries of Syncor were engaged in improper conduct. In late 2002, the DOJ and SEC brought FCPA enforcement actions against Syncor. (See here and here).

Although not specifically mentioned, Cardinal and Syncor are generally believed to be the Requestor and Company A in DOJ FCPA Opinion Procedure Release 2003-01.

Based on various facts, circumstances and representations by Cardinal, in the release the DOJ stated that it did not intend to take any enforcement action against Cardinal “for the pre-acquisition conduct” of Syncor.

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