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Of Note From The Pfizer Enforcement Action

Yesterday’s post (here) went long and deep as to the Pfizer / Wyeth enforcement action.  Today’s post continues the analysis by highlighting additional notable issues.

FCPA Reform Issue

For the second time in recent months, the DOJ has attempted to address an FCPA reform proposal in an enforcement action press release.  See here and here for prior posts concerning the Garth Peterson enforcement action / Morgan Stanley no enforcement action.

As noted here and here (among other posts), one FCPA reform proposal seeks to address an acquiring company inheriting the acquired company’s FCPA exposure.

The DOJ’s release (here) in the Pfizer enforcement action stated as follows.  “In the 18 months following its acquisition of Wyeth, Pfizer Inc., in consultation with the department, conducted a due diligence and investigative review of the Wyeth business operations and integrated Pfizer’s Inc.’s internal controls system into the former Wyeth business entities.  The department considered these extensive efforts and the SEC resolution in its determination not to pursue a criminal resolution for the pre-acquisition improper conduct of Wyeth subsidiaries.”

Kudos to the DOJ … in part.

As evident from a close read of the statement of facts attached to the DPA (here), a substantial portion of the improper conduct giving rise to the allegations in Pfizer HCP’s information resulted from Pfizer’s acquisition of Pharmacia Corporation in 2003.  The statement of facts state as follows.  “[In April 2003] Pfizer acquired Pharmacia Corporation in a stock-for-stock transaction.  Pharmacia’s international operations were combined with Pfizer’s, including Pharmacia’s operations in Bulgaria, Croatia, Kazakhstan and Russia which were thereafter restructured and incorporated into Pfizer HCP.”  [Conduct in these countries was the focus of the information].

No Knowledge at Corporate Headquarters

Pfizer’s press release (here – pursuant to the DPA, Pfizer had to consult with the DOJ prior to issuing) stated as follows.  “There is no allegation by either DOJ or SEC that anyone at Pfizer’s or Wyeth’s corporate headquarters knew of or approved the conduct at issue before Pfizer took appropriate action to investigate and report it.  As soon as these local activities came to the attention of Pfizer’s corporate headquarters, they were voluntarily brought to the attention of the DOJ and SEC. Today’s settlements are focused solely on these local activities.”

You do wonder whether those opposed to FCPA reform (such as here) actually read FCPA resolution documents and understand this as well as other alleged facts in the Pfizer action such as the successor liability issue discussed above and that the conduct at issue in the DOJ enforcement took place between 6 – 15 years ago.  Probably not.

Curious Charging Decisions

In criminal actions, the DOJ’s burden of proof is beyond a reasonable doubt.  In civil actions, the SEC’s burden of proof is a more lenient preponderance of the evidence.  Given these different burdens of proof, it is common for the SEC to charge FCPA anti-bribery violations even in the absence of similar DOJ charges.

The exact opposite happened in this enforcement action.

The DOJ’s information charges FCPA anti-bribery violations, however, the SEC’s complaint which tracks the DOJ’s allegations (and then some) merely charge FCPA books and records and internal control violations.

Thinking About Disgorgement

There are certain exceptions, but one FCPA-related issue that has always intrigued me is that most corporate FCPA violators are otherwise viewed as selling the best product or service for the best price.  In my 2010 opening remarks at the World Bribery and Corruption Compliance (see here) I observed as follows.  “Another issue in need of deeper analysis is the commonly held enforcement view that the contract (and thus net profits of the contract) at issue was secured solely because of the alleged improper payments made by the corporate. This ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract? Does a but for analysis have a place in bribery laws – in other words should the enforcement agency have to prove that but for the improper payment, the company would not have secured the contract at issue?”

Given my interest in this issue, I was delighted to read (as highlighted in this prior post) a piece titled “Economic Analysis of Damages under the Foreign Corrupt Practices Act,” (here) by Dr. Patrick Conroy (here) and Dr. Graeme Hunter (here) – both of Nera Economic Consulting.  The authors note that “to date there has been little consideration of the true benefit of the bribe” but “with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe.” The authors note that “while a bribe may have led to very high gains, the but-for profits could have been high (and the gain from the bribe low) if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable.”

As noted by the FCPA Blog (here), the combined SEC disgorgement (and pre-judgement interest amount) in the Pfizer / Wyeth settlements was approximately $45 million.

However, does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set?  Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort?  Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?  Numerous other examples could also be cited in connection with the enforcement action, be I trust you get the point.

Given the above referenced SEC charges, the enforcement action also again raises the issue of “no-charged bribery disgorgement” which was the focus of this prior post that highlighted an FCPA Update by Debevoise & Plimpton (the author group included Paul Berger (here) a former Associate Director of the SEC Division of Enforcement).

A Gray Cloud That Lasted 8 Years

The FCPA Blog recently highlighted here the FCPA’s long shadow and asked “how long should the DOJ and SEC keep self reporting companies on the hook?” I share the concern that FCPA scrutiny, and the gray cloud it represents as hanging over a company, simply lasts too long.  In many cases, the gray cloud lasts between 2-4 years from the point of first disclosure to the point of an enforcement action.  In certain cases the gray cloud hangs over a company for a longer period of time.  Pfizer is one such example.  As noted in the resolution documents, Pfizer voluntarily disclosed various conduct giving rise to the enforcement action in 2004.  Thus the gray cloud lasted approximately 8 years.

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