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Next Up – Eli Lilly

Thursday, December 27th, 2012

First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011). Then it was Smith & Nephew (see here - $22 million in combined fines and penalties in February 2012). Then it was Biomet (see here – $22.8 million in combined fines and penalties in March 2012). Then it was Pfizer / Wyeth (see here – $60 million in combined fines and penalties in August 2012).

Next up is Eli Lilly in a Foreign Corrupt Practices Act enforcement action announced last week by the SEC. This post goes long and deep as to the SEC’s allegations which resulted in a $29 million settlement.

In summary, the SEC alleges in a civil complaint (here) as follows.

“Eli Lilly and Company violated the Foreign Corrupt Practices Act in connection with the activities of its subsidiaries in China, Brazil, Poland, and Russia. Between 2006 and 2009, employees of Lilly’s China subsidiary falsified expense reports in order to provide improper gifts and cash payments to government-employed physicians. In 2007, a pharmaceutical distributor hired by Lilly in Brazil paid bribes to government health officials in a Brazilian state in order to assure sales of a Lilly product to state government institutions. In Poland, between 2000 and 2003, Lilly’s subsidiary made eight payments totaling approximately $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities at the same time that the subsidiary was seeking the official’s support for placing Lilly drugs on the government reimbursement list. Finally, Lilly’s subsidiary in Russia paid millions of dollars to off-shore entities for alleged “services” beginning as early as 1994 and continuing through 2005 in order for pharmaceutical distributors and government entities to purchase Lilly’s drugs. In some instances, the off-shore entities appear to have been used to funnel money to government officials or others with influence in the government in order to obtain business for the subsidiary. These off-shore entities rarely provided the contracted-for services. Moreover, between 2005 and 2008, contemporaneous with requests to government officials to support the government’s purchase or reimbursement of Lilly’s products, the subsidiary in Russia made proposals to government officials about how the company could donate to, or otherwise support, various initiatives that were affiliated with, or important to, the government officials. As a result of this conduct, Lilly violated [the FCPA's internal controls provisions] by failing to have an adequate internal controls system in place to detect and prevent illicit payments. Lilly violated [the FCPA's books and records provisions] by improperly recording each of those payments in its accounting books and records. Lilly also violated the [FCPA's anti-bribery provisions] in connection with certain activities of its subsidiary in Russia.”

As indicated by the above paragraph, conduct in Poland, China, and Brazil gave rise to FCPA books and records and internal controls violations only.

Poland

The SEC’s allegations relating to Poland are substantively identical to allegations made against Schering-Plough in this 2004 FCPA enforcement action.

In pertinent part, the SEC alleges in its complaint against Eli Lilly as follows.

“During 2000 through 2003, Lilly’s wholly-owned subsidiary in Poland (“Lilly- Poland”) made eight payments totaling approximately $39,000 to the Chudow Castle Foundation (“Chudow Foundation”), a small charitable foundation in Poland that was founded and administered by the Director of the Silesian Health Fund (“Director”). The Director established the Chudow Foundation in 1995 to restore the Chudow Castle in the town of Chudow and other historic sites in the Silesian region of Poland.

The Silesian Health Fund (“Health Fund”) was one of sixteen regional government health authorities in Poland during the period. Among other things, the Health Fund reimbursed hospitals and healthcare providers for the purchase of certain approved products. The Health Fund, through the allocation of public money, exercised considerable influence over which pharmaceutical products local hospitals and other healthcare providers in the region purchased.

Beginning in early 2000 and into 2002, Lilly-Poland was in negotiations with the Health Fund over, among other things, the Heath Fund’s financing of the purchase of Gemzar, one of Lilly’s cancer drugs, by public hospitals and other healthcare providers. Those negotiations occurred primarily between a team manager at Lilly-Poland (“Lilly Manager”) and the Director. Continuing at intervals throughout these negotiations, the Director asked that Lilly Poland contribute to the Chudow Foundation. The initial request came directly from the Director and the subsequent requests came from the Chudow Foundation.

The Lilly-Poland Manager knew that the Director had established the Chudow Foundation and that it was a project to which he was devoted and lent much effort. The Manager requested the approval of payments to the Chudow Foundation. The Manager falsely described the first payment as being for the purchase of computers for the Chudow Foundation. The second Lilly-Poland payment request falsely characterized the proposed payment as “[t]o support foundation in its goal to develop activities in [Chudow Castle].” That request documentation also noted that the “value of the request” was “[i]ndirect support of educational efforts of foundation settled by Silesia [Health Fund].” Similarly, the remaining payments were mischaracterized as monies paid by Lilly-Poland to secure the use of the Chudow Castle for conferences after its renovation. No such conferences took place.

Lilly-Poland eventually made a total of eight payments to the Chudow Foundation, starting in June 2000 and ending in January 2003. [...] The Manager requested the approval of the payments to the Chudow Foundation with the intent of inducing the Health-Fund Director to allocate public monies to hospitals and other health care providers in the Health Fund for the purpose of purchasing Gemzar.

China

As to China, the SEC alleges, in full, as follows.

“Lilly’s wholly-owned subsidiary through which it does business in China (“Lilly- China”) employs more than one-thousand sales representatives whose main focus is on marketing Lilly products to government-employed health-care providers. During the relevant period, the sales representatives worked from regional offices and traveled throughout the country, interacting with the health-care providers in order to convince them to prescribe Lilly products. The sales representatives were directly supervised by District Sales Managers who, in tum, were supervised by Regional Managers. Sales representatives paid out-of-pocket for their travel expenses and submitted receipts and other documentation to the company for reimbursement.

Between 2006 and 2009, various sales representatives and their supervisors abused the system by submitting, or instructing subordinates to submit, false expense reports. In some instances, Lilly-China personnel used reimbursements from those false reports to purchase gifts and entertainment for government-employed physicians in order to encourage the physicians to look favorably upon Lilly and prescribe Lilly products.

In one sales area, in 2006 and 2007, a District Sales Manager for Lilly’s diabetes products instructed subordinates to submit false expenses reports and provide the reimbursement money to her. She then used the reimbursements to purchase gifts, such as wine, specialty foods and a jade bracelet, for government-employed physicians. At least five sales representatives in the oncology sales group submitted false expense reports and then used those reimbursements to provide meals, visits to bath houses, and card games to government-employed physicians.

Similarly, in three other provinces, three sales representatives submitted false expense reports and then used the reimbursements to provide government-employed physicians with visits to bath houses and karaoke bars. In another city, five sales representatives submitted false reimbursements and then their Regional Manager used the money to provide door prizes and publication fees to government-employed physicians. In another city, seven sales representatives and the District Sales Manager for the diabetes sales team used reimbursements to buy meals and cosmetics for government-employed physicians.

Between 2008 and 2009, members of Lilly-China’s “Access Group,” which was responsible for expanding access to Lilly products in China by, among other things, convincing government officials to list Lilly products on government reimbursement lists, engaged in similar misconduct. At least six members of the sixteen-member Access Group, including two associate access directors, falsified expense reports and used the proceeds to provide gifts and entertainment to government officials in China. The gifts included: spa treatments, meals, and cigarettes.

Although the dollar amount of each gift was generally small, the improper payments were wide-spread throughout the subsidiary. Lilly has terminated, or otherwise disciplined, the various employees who submitted false expense reports and/or used the proceeds to provide gifts and services to government officials.”

Brazil

As to Brazil, the SEC alleges, in full, as follows.

“Between 2007 and 2009, Lilly-Brazil distributed drugs in Brazil through third party distributors who then resold those products to both private and government entities. As a general rule, Lilly-Brazil sold the drugs to the distributors at a discount; the distributors then resold the drugs to the end users at a higher price and took the discount as their compensation. Lilly-Brazil negotiated the amount of the discount with the distributor based on the distributor’s anticipated sale. The discount to the distributors generally ranged between 6.5% and 15%, with the majority of distributors in Brazil receiving a 10% discount.

In early 2007, at the request of one of Lilly-Brazil’s sales and marketing managers at the time, Lilly-Brazil granted a nationwide pharmaceutical distributor, unusually large discounts of 17% and 19% for two of the distributor’s purchases of a Lilly drug, which the distributor then sold to the government of one of the Brazilian states. Lilly-Brazil’s pricing committee approved the discounts without further inquiry. The policies and procedures in place to flag unusual distributor discounts were deficient. They relied on the representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions. In May 2007, Lilly sold 3,200 milligrams of the drug to the distributor for resale to the Brazilian state; in August 2007, Lilly-Brazil sold 13,500 milligrams of the drug to the distributor for resale to the Brazilian state. Together the sales were valued at approximately $1.2 million.

The distributor used approximately 6% of the purchase price (approximately $70,000) to bribe government officials from the Brazilian state so that the state would purchase the Lilly product. The Lilly-Brazil sales and marketing manager who requested the discount knew about this arrangement.”

Russia

As to Russia, in pertinent part, the SEC complaint alleges as follows.

“From 1994 through 2005, Lilly-Vostok, a wholly-owned subsidiary of Lilly, sold pharmaceutical products either directly to government entities in the former Soviet Union or through various distributors, often selected by the government, who would then resell the products to the government entities. Along with the underlying purchase contract with the government entity or distributor, Lilly-Vostok sometimes entered into another agreement with a third-party selected by a government official or by the government-chosen pharmaceutical distributor. Generally, these third-parties, which had addresses and bank accounts located outside of Russia, were paid a flat fee or a percentage of the sale. These agreements were referred to as “marketing” or “service” agreements. In total, Lilly-Vostok entered into over 96 such agreements with over 42 third-party entities between 1994 and 2004.

Lilly-Vostok had little information about these third-party entities, beyond their addresses and bank accounts. Rarely did Lilly-Vostok know who owned them or whether the entities were actual businesses that could provide legitimate services. Senior management employees in Lilly-Vostok’s Moscow branch assisted in the negotiation of these agreements. The contracts themselves were derived from a Lilly-Vostok-created template and enumerated various broadly-defined services, such as ensuring “immediate customs clearance” or “immediate delivery” of the products; or assisting Lilly-Vostok in “obtaining payment for the sales transaction,” “the promotion of the products,” and “marketing research.”

Contrary to what was recorded in the company’s books and records, there is little evidence that any services were actually provided under any of these third-party agreements. Indeed, in many instances, the “services” identified in the contract were already being provided by the distributor, a third-party handler (such as an international shipping handler) or Lilly itself. To the extent services such as expedited customs clearance or other services requiring interaction with government officials were provided, Lilly-Vostok did not know or inquire how the third party intended to perform their services.

Contemporaneous documents reflect that Lilly-Vostok employees viewed the payments as necessary to obtain the business from the distributor or government entity, and not as payment for legitimate services.

The SEC also alleges that in 1997 and in 1999 Lilly conducted a business review of Lilly-Vostok. According to the SEC, the reports raised concerns about Lilly-Vostok’s business practices and the reports “recommended that Lilly-Vostok modify its internal controls to ensure that [certain third-party] services were documented” and to “assure itself that [certain third-party] agreements accurately and fairly reflect the services to be provided.”

However, the SEC alleged as follows.

“Lilly did not curtail the use of marketing agreements by its subsidiary or make any meaningful efforts to ensure that the marketing agreements were not being used as a method to funnel money to government officials, despite recognition that the marketing agreements were being used to “create sales potential” or “to ‘support’ activities leading to agreement-signing” with government entities. In fact, during the 2000-2004 period — after the above-described reports, but prior to the company ending use of the agreements– Lilly-Vostok entered into the three most expensive of these arrangements.”

The three arrangements are as follows.

First, the SEC alleged that in response to a 2002 Russian Ministry of Health tender, the ministry selected a “large Russian pharmaceutical distributor” for which to purchase the products and the distributor in turn negotiated with Lilly-Vostok for the purchase of diabetes products. According to the SEC, the distributor required Lilly-Vostok, “as a condition of their agreement” to enter into various agreements with an entity incorporated in Cyprus.

According to the SEC.

“Lilly’s due diligence regarding the entity in Cyprus was limited to ordering a Dun and Bradstreet report and conducting a search using an internet service to scan publicly available information. Neither the Dun and Bradstreet report nor the internet search revealed the Cyprus entity’s beneficial owner or anything about its business. Nonetheless, pursuant to the terms of its arrangement with the distributor, Lilly-Vostok paid the entity in Cyprus over $3.8 million in early 2003.

The Cyprus entity was, in fact, owned by the Russian businessman who was the owner of the distributor. There is no evidence of services provided to Lilly-Vostok by the Cyprus entity in consideration for Lilly-Vostok’s $3.8 million in payments. Lilly’s books and records improperly reflected these payments as payments for services.”

Second, the SEC alleges “at least two instances” involving foreign government officials and alleges as follows.

“Between 2000 and 2005, Lilly-Vostok sold significant amounts of pharmaceutical products to a major Russian pharmaceutical distributor for resale to the Russian Ministry of Health. The pharmaceutical distributor was owned and controlled by an individual who, at the beginning of the distributor’s relationship with Lilly-Vostok, was a close adviser to a member of Russia’s Parliament. In 2003, this official became a member of the upper house of Russia’s Parliament. Throughout the period, this official exercised considerable influence over government decisions relating to the pharmaceutical industry in Russia.

As part of most of the sales arrangements with the distributor, the official demanded that Lilly-Vostok enter into separate “marketing” agreements with entities with addresses and bank accounts in Cyprus. Under the arrangement, Lilly-Vostok paid the Cypriot entities up to thirty percent of the sales price of the underlying sales contracts in return for the Cypriot entities entering into an agreement “to offer all assistance necessary” in various areas like storage, importation and payment.

In conjunction with outside counsel, Lilly-Vostok conducted limited due diligence on these third-parties. However, the due diligence did not identify the beneficial owners of these third-parties or determine whether the third-parties were able to provide the contracted-for assistance. Nonetheless, Lilly-Vostok concluded that it could proceed with the transactions and paid the Cypriot entities over $5.2 million. In fact, the Cypriot entities were owned by an individual associated with the distributor controlled by the member of the upper house of Russia Parliament. The Cypriot entity transferred the payments from Lilly-Vostok to other off-shore entities.”

Third, the SEC alleges “in connection another series of contracts, from 2000 through 2004, Lilly-Vostok sold products to a distributor, headquartered in Moscow, which was wholly-owned by a Russian government entity.

The SEC alleged as follows.

”The purchase agreements were signed on the government-owned distributor’s behalf by its General Director. As part of the arrangement, the government-owned distributor selected a third-party entity with an address in the British Virgin Islands (“the BVI entity”) with which Lilly-Vostok entered into agreements for the broadly defined “services” enumerated in the Lilly-Vostok template (see above). Under the terms of the agreements between Lilly-Vostok and the BVI entity, Lilly-Vostok was to pay the BVI entity up to 15% of the price of the product purchased by the government-owned distributor. Accordingly, from 2000 through 2005, Lilly-Vostok made approximately 65 payments to the BVI entity totaling approximately $2 million.

There is no evidence that the BVI entity performed any of the services listed in its agreement with Lilly-Vostok. There is also no evidence that Lilly-Vostok performed any due diligence or inquiry as to whether the BVI entity was able or did perform the contracted-for services. Lastly, there is no evidence that Lilly-Vostok performed any due diligence or inquiry into the identity of the beneficial owner of the BVI entity. In fact, the beneficial owner of the BVI entity was the General Director of the government-owned distributor, and he ultimately received the payments from the BVI entity.”

As to these various arrangements, the SEC alleges as follows. “Lilly did not direct Lilly-Vostok to cease entering into these third-party agreements until 2004. However, Lilly permitted the subsidiary to continue making payments under already existing third-party contracts as late as 2005.”

As to the above Russian conduct, the complaint charges violations of the FCPA’s anti-bribery provisions. Of note, the complaints specifically pleads as follows regarding knowledge. “When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstances, unless the person actually believes that the circumstance does not exist.”

The SEC complaint also contains the following allegation.

“From 2005 through 2008, Lilly-Vostok made various proposals to government officials in Russia regarding how Lilly-Vostok could donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials. Examples included their personal participation or the participation of people from their institutions in clinical trials and international and regional conferences and the support of charities and educational events associated with the institutes. At times, these proposals to government officials were made in a communication that also included a request for assistance in getting a product reimbursed or purchased by the government. Generally, Lilly-Vostok personnel believed these proposals were proper because of their relevance to public health issues and many of the proposals were reviewed by counsel. Nonetheless, Lilly-Vostok did not have in place internal controls through which such proposals were vetted to ascertain whether Lilly-Vostok was offering something of value to a government official for a purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”

As to Lilly’s books and records, the SEC alleges as follows.

“[S]ubsidiaries of Eli Lilly made numerous payments that were incorrectly described in the company’s books and records. In China, payments were falsely described as reimbursement of expenses when, in fact, the money was used to provide gifts to government-employed physicians. In Brazil, money that was described in company records as a “discount” for a pharmaceutical distributor was, in actuality, a bribe for government officials. In Poland, payments classified as charitable donations were not intended for a genuine charitable purpose but rather to induce a government official to assent to the purchase of a Lilly product. Finally, in Russia, millions of dollars in payments, described in the company’s books and records as for various services, were actually payments to assure that Lilly was able to conduct business with certain pharmaceutical distributors.”

As to Lilly’s internal controls, the SEC alleges as follows.

“During the relevant period, Lilly and its subsidiaries failed to devise and maintain an adequate system of internal accounting sufficient to provide reasonable assurance that the company maintained accountability for its assets and transactions were executed in accordance with management’s authorization. Particularly, Lilly did not adequately verify that intermediaries with which the company was doing government-related business would not provide a benefit to a government official on Lilly’s behalf in order to obtain or retain business. Lilly and its subsidiaries primarily relied on assurances and information provided in the paperwork by these intermediaries or by Lilly personnel rather than engaging in adequate verification and analyzing the surrounding circumstances of the transaction. Lilly and its subsidiaries’ employees considered and offered benefits to government officials at the same time they were asking those government officials to assist with the reimbursement or purchase of Lilly’s products with inadequate safeguards to assure that its employees were not offering items of values to a government official with a purpose to assist Lilly in retaining or obtaining business.

Moreover, despite an understanding that certain emerging markets were most vulnerable to FCPA violations, Lilly’s audit department, based out of Indianapolis, had no procedures specifically designed to assess the FCPA or bribery risks of sales and purchases. Accordingly, transactions with off-shore entities or with government-affiliated entities did not receive specialized or closer review for possible FCPA violations. In assessing these transactions, the auditors relied upon the standard accounting controls which primarily assured the soundness of the paperwork. There was little done to assess whether, despite the existence of facially acceptable paperwork, the surrounding circumstances or terms of a transaction suggested the possibility of an FCPA violation or bribery.

As to Lilly’s remedial efforts, the SEC complaint states as follows.

“Since the time of the conduct noted in this Complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anticorruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

As noted in this SEC release, Lilly, without admitting or denying the allegations, agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8.7 million for a total payment of $29,398,734. The release also notes that “Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures.”

In Lilly’s release (below) the retention period of the consultant is identified as 60 days and in the SEC’s proposed final judgement, the consultant is identified as FTI Consulting which has been assisting Lilly in connection with a previous Corporate Integrity Agreement.

The case has been assigned to Judge Beryl A. Howell (U.S. District Court, District of Columbia).

William Baker III (Latham & Watkins) represented Lilly.

In the SEC’s release, Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit) stated as follows. “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.” In the same release, Antonia Chion (Associate Director in the SEC Enforcement Division) stated as follows. “When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated. We strongly caution company officials from averting their eyes from what they do not wish to see.”

This Lilly release quotes Anne Nobles (Lilly’s Chief Ethics and Compliance Officer and Senior VP of Enterprise Risk Management) as follows. “Lilly requires our employees to act with integrity with all external parties and in accordance with all applicable laws and regulations. Since ours is a business based on trust, we strive to conduct ourselves in an ethical way that is beyond reproach. We have cooperated with the U.S. government throughout this investigation and have strengthened our internal controls and compliance program globally, including significant investment in our global anti-corruption program.” The Lilly release further states as follows. “The SEC noted that since the time of the conduct alleged in its complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anti-corruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.” The release further notes that “Lilly was first notified of the investigation in August 2003″ and describes the independent compliance consultant as conducting a ”60-day review of the company’s internal controls and compliance program related to the FCPA.”

Friday Roundup

Friday, November 9th, 2012

Thanks, the “foreign officials” of Medicine Bow, are you sure the company is FCPA-compliant in China, quotable, checking in on Brazil, and an interesting read.

Thanks

Many thanks for making FCPA Professor a part of your day. October readership was an all-time record in the history of FCPA Professor (this site launched in July 2009) and two posts earlier this week “Stop Drinking the Kool-Aid” and “It Ought to Stop” were among the most read posts in FCPA Professor history. As to these posts, I received many positive and supportive comments.

Should you have ideas for how FCPA Professor can be improved, please let me know at fcpaprofessor@gmail.com.

The “Foreign Officials” of Medicine Bow

Given the enforcement agencies’ untethered and boundless views on who is a “foreign official” under the FCPA, one never knows where a “foreign official” will pop up.

Such as Medicine Bow, Wyoming – population 300.

As noted in this recent Wall Street Journal article, “an arm of [China] state-controlled Sinopec Group, also known as China Petrochemical Corp., is planning to build an advanced facility [in Medicine Bow] that will convert coal into gasoline.” According to the article, the project will create approximately 400 full-time jobs when the facility goes into operation.

In this 2010 article, I noted that with foreign government owned sovereign wealth funds making investments around the world (including in U.S. companies) and with SOEs listing public shares on various exchanges and otherwise doing business around the world, there has never been a more critical time for the enforcement agencies to make clear their legal and policy reasoning on “foreign official.”

Far from adding clarity on this issue, the recent “foreign official” trial court decisions (see here and here), as well as the DOJ’s recent “foreign official” reversal (see here), has only muddied the waters.

Are You Sure the Company Is Compliant?

Subject to a few observable exceptions, investors seem to care very little about FCPA scrutiny and enforcement actions. All the more reason the below exchange from the recent Novartis AG earnings conference call caught my eye.

ANDREW BAUM (Citigroup Analyst): One trend would notice with some of you peers is where there is a sudden acceleration in the growth in China, it is often closely followed by scrutiny under the Foreign Corrupt Practices Act. Could you just give us an update on what you’re doing to ensure compliance in Novartis in China, is held in check, so that doesn’t become a risk?

DAVID EPSTEIN (Novartis, Head of Pharmaceuticals): “You asked about compliance. And just — I would just say rest assured our Company does everything that is in the power to be done, on a worldwide basis, to teach our people to be compliant. Both in terms of training and coming from the top and everything else. So I’m quite pleased with where our Chinese business is going. And leave it at that.”

Quotable

The U.K. Independent recently ran (here) a profile of David Green (who became Director of the U.K. Serious Fraud Office this past spring).

Below are some notable Green quotes.

“I would like the SFO to have a hard-edged, tough reputation. It should be something which is feared. You don’t want to be investigated by the SFO.”
On the issue of guidance. “I am sceptical of guidance notes. I suspect the motives of those that want absolutely precise guidance, because I suspect they want to wait round the corner and hit you over the head with it, and say, you are acting contrary to your guidance. The criminal law covers an endless multitude of possibilities and possible sets of facts. It is very hard to be specific. On corporate hospitality, it rather depends on the motive and the context and the timing and the value. You can’t just say, Wimbledon tickets are OK. They’ll say that you said, ‘Wimbledon tickets are all right.’”
On the issue of criminal law enforcement as a funding source. “It is a good source of income, and as a matter of principle I see nothing wrong with prosecutors being in part funded by money taken from criminals. I am all for that.”

Matthew Jacobs, a former DOJ prosecutor who now heads the San Francisco offices of Vinson & Elkins LLP, stated as follows in a recent Law360 article (“FCPA Enforcement Will Stay Robust Beyond Obama’s 2nd Term”): “The Department of Justice has figured out that conducting investigations of corporations is a lucrative business. This is the one area of government activity that actually brings money in rather than shoots money out. We’re talking about literally billions of dollars that the government is able to collect … as long as there’s a budget issue it’s not too cynical to say that … generating revenue is a factor in bringing these cases.”

Matt Kelly at Compliance Week recently stated (here) as follows concerning the DOJ’s promise of upcoming FCPA guidance and the role of Assistant Attorney General Lanny Breuer. “We’d be foolish to ignore the profit motive, too [in addressing the why FCPA guidance now question]: Breuer will be in the private sector again soon enough, representing companies ensnared in FCPA probes. He’ll be able to command quite a premium if he can legitimately say, ‘I know how the Justice Department will interpret its FCPA guidance, because I wrote it. I don’t believe that career advancement is why Breuer is pushing for this guidance, but the fact remains that he stands to reap more money because of it.”

Brazil Developments

If Latin America is an area of your interest and concern, you should be reading the FCPAmericas blog (here) run by Matteson Ellis. This recent post tracks developments of Brazil’s draft bribery bill.

Interesting Read

See here for a write-up of an article examining the differences between a tip and a bribe. From the article. “It is generally considered a good-natured prosocial thing to tip, but bribing is considered to be antisocial and negative. [...] Tips and bribes can possess striking similarities that may lead to their positive association. In a sense, both are gifts intended to strengthen social bonds and each is offered in conjunction with advantageous service. One could even argue that the main difference between the two acts is merely the timing of the gift: Tips follow the rendering of a service, whereas bribes precede it.”

*****

A good weekend to all.

Friday Roundup

Friday, August 3rd, 2012

Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack. It’s all here in the Friday roundup.

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA. The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA. The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements. Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here). That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.” In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows. “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit. Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s. This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows. “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.” During the Q2 earnings call, company CEO Sheri McCoy stated as follows. “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation. The company has held discussions with law firm Allen & Overy LLP for that role.” Arnold & Porter has been leading Avon’s investigation. According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry. But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe. Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million. Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain. In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit has likely already occured - its pre-enforcement action professional fees and expenses. For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action. Information in a recent company press release suggests that this is unlikely to occur. In this recent release, Total stated as follows. “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990′s. Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation. In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million] in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts. For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats? According to a recent study (see here) by the Society for Corporate Compliance and Ethics “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out. After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post. See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata ”win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post. Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.” See here for the most recent edition.

As to “foreign official,” the report states as follows. ”[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. ”We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way. As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.” This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh. For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud. It has not happened. See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal). As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings. Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.” Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

*****

A good weekend to all.

Rate This – Nielsen Company Accused Of FCPA Violations In Civil Suit, Plus Olympus Under Scrutiny

Thursday, August 2nd, 2012

Approximately 100 companies are publicly known to be the subject of FCPA scrutiny. This figure is likely a conservative estimate given that little is often known of private company FCPA scrutiny until an enforcement action is announced. For instance, other than those involved, who knew that NORDAM Group or Data Systems & Solutions (two companies that recently resolved enforcement actions – see here and here) were the subject of FCPA scrutiny?

Add two more companies to the list: Nielsen Company and Olympus Corp.

Nielsen

It is not the traditional way companies become the subject of the FCPA scrutiny, but then again it is not unheard of for FCPA scrutiny to begin with a civil complaint.

Last week in a lengthy civil complaint (here) filed by New Delhi Television Limited (“NDTV”) in New York State Court, NDTV (which describes itself as India’s first and most respected private broadcaster of news, current affairs and lifestyle television and a pioneer in India’s news television) accused Nielsen and a host of related entities and individuals of “negligence, gross negligence, false representations, prima facie tort and negligence per se (based on violations of the Foreign Corrupt Practices Act and the Dutch Corporate Governance Code).”

The 37th cause of action against Nielsen is for negligence per se arising from violations of the FCPA and the complaint states in full as follows.

“The anti-bribery provisions of the Foreign Corrupt Practices Act … prohibit U.S. companies from giving anything of value, either directly or indirectly, to, inter alia, a foreign politician so as to induce such foreign politician to do or omit to do any act in violation of the lawful duty of such foreign politician; or to secure any improper advantage, or to continue the company’s business. Accordingly, since the formation of TAM [Television Audience Management, an Indian company which is a joint venture between a Nielson entity and others], Nielsen had a duty to comply with the provisions of the FCPA, so as to prevent the rampant corruption that has existed and currently exists within TAM. Nielsen has known or should have known, that politicians directly and indirectly own approximately one-third of the news channels in India; that approximately sixty-percent (60%) of Indian cable operations are owned, directly or indirectly, by politicians or their proxies; and that, at all relevant times, there were high levels of corruption in the Indian television ratings industry and in TAM’s operations. Nonetheless, since the inception of TAM, Nielsen has allowed TAM, using the Nielsen Process and/or Nielsen’s proprietary property and/or Nielsen’s name and logo, to publish corrupt data, which was known to be corrupt, which benefited politicians. Indeed, Nielsen knew or should have known and/or consciously disregarded the fact that the leakage of panel home identities yielded hundreds of millions of dollars for the benefit of several politicians. This has enabled TAM, Nielsen and Kantar [another entity in the joint venture] to maintain its monopoly power in India and/or steady revenues. The failure to stop publication of corrupt data continues to benefit politicians, TAM, Nielsen and Kantar. Since the formation of TAM, Nielsen has had intimate actual knowledge of such violations of the FCPA; knew of several red flags giving rise to an inference of actual knowledge of such violations of the FCPA; was willfully blind to such violations of the FCPA; and consciously avoided such violations of the FCPA. Indeed, Robert Messemer, Chief Global Security Officer for The Nielsen Company, and Paul Donato, Executive Vice President and Chief Research Officer for Nielsen, during the course of their several visits to India commencing January 2012, meetings there as described above, and in the course of investigations during and subsequent to such visits and meetings, had actual knowledge of, and/or consciously disregarded FCPA violations, including, but not limited to, representations made in person to them by the whistleblower whom they personally interviewed on February 28, 2012 …, that, at the very least, one of the parties engaged in obtaining and using highly sensitive identities of panel homes was a television network owned by a well known Indian politician. As a result of Nielsen’s willful disregard of such undeniable corrupt practices, such foreign politicians derived benefits by, inter alia, manipulation and skewing of TAM data in favor of broadcast channels and cable operations owned and/or operated by such local politicians or their proxies, from manipulation of rates based on knowledge of corrupt data and identity of panel homes, and various other means. Nielsen’s complete and utter failure and/or refusal to stop publication of manipulated TAM data has allowed such politicians to continue to benefit from the publication of such data. Thus, benefits were provided to those politicians, and TAM and/or Nielsen continued to enjoy the benefits of, inter alia, continued operations as a monopoly in the Indian market, and steady revenues. Such acts and omissions by Nielsen constitute violations of the FCPA by Nielsen, and, as a result, negligence per se.”

For additional coverage of the complaint, see here from Courthouse News Service, here from the Hollywood Reporter and here from International Business Times.

Olympus

Yesterday, Bloomberg reported (here) that Olympus Corp., the world’s largest maker of endoscopes, uncovered irregularities at a doctor-training program in Brazil that may have violated U.S. law and reported them to the Department of Justice.” According to the article, “at issue in Brazil may be the way the company handled doctors’ expenses for travel, meals or entertainment.” The article quotes company Chairman Yasuyuki Kimoto as saying “we might agree to some sort of violation of the Foreign Corrupt Practices Act in Brazil. We understand DOJ is trying to gather lots of information on us.”

How can Tokyo based Olympus become subject to the FCPA? For starters, the company has Level 1 ADRs traded on the so-called “Pink Sheets.” Also, as noted in the Bloomberg article, the company has a U.S. based subsidiary and if it was involved in the conduct at issue, the DOJ may take the position that the subsidiary was acting as an agent of the parent company. Also, as I suggest in the Bloomberg article, under the dd-3 prong of the FCPA added by the 1998 amendments, any company can be subject to the FCPA’s anti-bribery provisions to the extent “while in the territory of the U.S.” conduct occurs in furtherance of the scheme. As noted in this prior post, the DOJ has asserted expansive theories under dd-3. Notwithstanding the DOJ’s dd-3 setback in the Africa Sting case (also noted in the prior post) it is likely to continue to assert such expansive theories until challenged.

Olympus’s FCPA scrutiny would appear to be based on the untested (and in the minds of many – see here - dubious) enforcement theory that anyone employed by a state-run health care system is a “foreign official” under the FCPA. Several prior enforcement actions, including against medical device companies, (see here for instance) have been based on this theory.

Friday Roundup

Friday, March 30th, 2012

This week’s disclosure, Jefferson’s non-FCPA appeal, statistics of note, and an update on Brazil’s “FCPA”. It’s all here in the Friday roundup.

MTS Systems Corp. Disclosure

Minnesota-based MTS Systems Corp. (here), a global supplier of test systems and industrial position sensors, disclosed earlier this week (here) as follows.

“MTS Systems Corporation (the “Company”) is investigating certain gift, travel, entertainment and other expenses that may have been improperly incurred in connection with some of the Company’s operations in the Asia Pacific region. The investigation has focused on possible violations of Company policy, corresponding internal control issues and any possible violations of applicable law, including the Foreign Corrupt Practices Act. Though the investigation is not complete, the Company has taken remedial actions, including changes to internal control procedures and removing certain persons formerly employed in its Korea office. The Company believes, however, that the amount of the expenses in question is not material to its reported consolidated financial statements. The Company has voluntarily disclosed this matter to the U.S. Department of Justice and the U.S. Securities and Exchange Commission. Additionally, the Company has disclosed this matter to the U.S. Air Force pursuant to its Administrative Agreement. The Company cannot predict the outcome of this matter at this time or whether it will have a materially adverse impact on its business prospects, financial condition, operating results or cash flows.”

MTS’s FCPA disclosure marks the fourth time in the last five weeks that a company has newly disclosed FCPA scrutiny. See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.”

Jefferson’s Non-FCPA Appeal

I respectfully disagree with others who have recently stated that the 4th Circuit upheld former Congressman William Jefferson’s FCPA conspiracy conviction. Yes, the 4th Circuit did affirm Jefferson’s conviction of Count 1, as well as other charges. Count 1 was a conspiracy charge to solicit bribes, commit honest services wire fraud, and violate the FCPA in violation of 18 USC 371; however, as even the 4th Circuit noted in its opinion – here, this count charged a conspiracy with multiple objects and the jury was instructed that it only had to find that Jefferson conspired to commit one of the substantive offenses identified. In announcing the jury verdict the court did not specify which object of the conspiracy the jury agreed on and in fact the jury found Jefferson not guilty of a substantive FCPA charge, a charge principally based on allegations that Jefferson attempted to bribe Nigerian officials (including the former Nigerian Vice President) to assist himself and others obtain or retain business for a Nigerian telecommunications joint venture.

As stated in the 4th Circuit’s opinion, Jefferson appealed his convictions on the following grounds: “(1) that an erroneous instruction was given to the jury with respect to the bribery statute’s definition of an ‘official act’; (2) that another erroneous instruction was given with respect to the ‘quid pro quo’ element of the bribery-related offenses; (3) that Jefferson’s schemes to deprive citizens of honest services do not constitute federal crimes; and (4) that venue was improper on one of his wire fraud offenses.” [Reference to the "bribery statute" is to 18 USC 201 - the domestic bribery statute, not the FCPA]. In short, Jefferson’s 4th Circuit appeal had nothing to do with the FCPA.

Statistics of Note

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (see here), I argue that a compliance defense will better incentivize corporate compliance, reduce improper conduct, and thereby advance the FCPA’s objective of preventing bribery of foreign officials. Sure, business organizations at present have at least two incentives (the DOJ’s Principles of Prosecution of Business Organizations and the U.S. Sentencing Guidelines) to implement FCPA compliance policies and procedures. I argue that these incentives are not well known by a meaningful segment of the business community and, even if they were, despite these incentives (incentives which merely lessen the impact of legal exposure vs. reduce legal exposure), few business organizations operating in a world of finite resources are sufficiently implementing comprehensive FCPA policies and procedures. Various survey data is cited in support.

Add Deloitte’s recent third-party business relationships poll (see here) to the list. Despite the fact that a significant majority of corporate FCPA enforcement actions are based on the conduct of foreign third parties (such as agents, representatives, distributors, joint venture partners) the poll found the following.

On what percentage of your organization’s third-party business partners do you estimate it performs due diligence and risk assessments?
Votes Received: 1,339

None	5%
Up to 25%	23.4%
26–50%	14.5%
51–75%	12.4%
76-100%	13.4%
NA/Don’t know	31.3%

An FCPA compliance defense surely will not cause 100% of business organizations to perform due diligence and risk assessment of all foreign third parties, but it is reasonable to conclude that an FCPA compliance defense will better incentivize more robust FCPA compliance policies and procedures, including as to third-parties.

Another statistic of note. A recent Global Anti-Corruption Survey by AlixPartners found that 95% of survey participants believe their industry is exposed to business practices that may constitute corruption. Southeast Asia and Africa presented the most significant risk according to survey participants. Survey participants were in-house legal counsel or compliance officers at North American multinational companies with annual revenues of $250 million or greater (with 90% of respondents working for companies with annual revenues exceeding $1 billion).

Brazil Update

In this prior post, Matteson Ellis (founder and Principal of Matteson Ellis Law, PLLC, who also writes the FCPAmericas Blog), provided an overview of a draft bill making its way through the Brazilian Congress that would strengthen its “FCPA-like” law. In this recent post on his FCPAmericas Blog, Ellis provides an update on the draft bill. Ellis reports as follows. “A Special Committee created by the Brazilian Congress to analyze [the draft bill] has recently presented a revised draft that bolsters certain key provisions and keeps other significant ones the same. The House aims to vote on the legislation before July 2012.” In his post, Ellis provides various highlights of the revised draft bill as to corporate liability, sanctions, voluntary disclosure, and compliance programs.

*****

A good weekend to all.