Greece « FCPA Professor

Archive for the ‘Greece’ Category

Edmonds Pleads Guilty As Trial Nears

Monday, June 18th, 2012

The Department of Justice would like for all to believe that its plea agreements represent acknowledgment of the legitimacy of its enforcement theories including as to “foreign official.” A prior guest post (here) referred to this dynamic as prosecutorial common law. As to “foreign official,” in the Carson briefing (see here at pg. 46) the DOJ stated the following - because DOJ has secured approximately 35 guilty pleas from individuals who admitted to bribing officials at SOEs ”it is thus ‘plain as a pikestaff’ that the FCPA prohibits paying bribes to officials who work at SOEs.” You can subscribe to that position if you choose or realize that testing one’s innocence comes at a high cost in our system. (See here for the prior post).

The conclusion is yours to draw, the facts are as follows.

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In April 2009, David Edmonds was criminally charged, along with other defendants who were also former employees of Control Components Inc. (CCI), in a criminal indictment (here) for engaging in “a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.”

As to Edmonds (the Vice-President of Worldwide Customer Service at CCI), the indictment alleged as follows. “From in or around 2003 through in or around 2007, defendant Edmonds caused [CCI's] employees and agents to make corrupt payments totaling approximately $430,000 to officers and employees of state-owned companies, and corrupt payments totaling approximately $220,000 to officers and employees of private companies.” “[CCI's] state-owned customers included, but were not limited to, Jiangsu Nuclear Power Corporation (“JNPC”) (China), Guohua Electric Power (China), China Petroleum Materials and Equipment Corporation (“CPMEC”), PetroChina, Dongfang Electric Corporation (China), China National Offshore Oil Corporation (“CNOOC”), Korea Hydro and Nuclear Power (“KHNP”), Petronas (Malaysia), and National Petroleum Construction Company (“NPCC”) (United Arab Emirates). Each of these state-owned entities was a department, agency, and instrumentality of a foreign government, within the meaning of the FCPA. The officers and employees of these entities, including the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were “foreign officials” within the meaning of the FCPA.”

As noted in the DOJ release (here), Edmonds was charged with one count of conspiracy to violate the FCPA and the Travel Act, three counts of violating the FCPA and two counts of violating the Travel Act.

Shortly thereafter, CCI resolved an FCPA enforcement action based on the same core set of conduct alleged in the above indictment. (See here for the prior post). I noted then, as I had since launching this website in July 2009, that the DOJ’s position that employees of state-owned companies, regardless of position, are “foreign officials” under the FCPA is an unchallenged and untested legal theory – and one I believe is ripe for challenge.

In February 2011 (as noted in this prior post), for the first time in FCPA history, a federal court judge, with the benefit of a detailed and complete overview of the FCPA’s extensive legislative history on the “foreign official” element, was asked to rule on the DOJ’s interpretation that employees of alleged state-owned or state-controlled enterprises are “foreign officials” under the FCPA. My declaration on the FCPA’s legislative history relevant to “foreign official” (here) was used in the “foreign official” motion to dismiss.

In May 2011 (as noted in this prior post), Judge James Selna denied the “foreign official” motion to dismiss and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” The “foreign official” issue thus moved to the jury instructions (as noted in this prior post).

In February 2012 (as noted in this prior post), Judge Selna issued certain jury instructions. Not surprisingly, Judge Selna carried forward his previous “instrumentality” analysis into the “instrumentality” jury instruction. Yet, in a significant development in terms of the future of the case, Judge Selna issued an instruction titled “knowledge of status of foreign official.” In pertinent part, the instruction stated as follows.

[.....]

“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;

(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.”

In his order, Judge Selna stated as follows.

“The Government proposes to add the following paragraph to element 5:”

The government need not prove that the defendant knew the legal definition of “foreign official” under the FCPA or knew that the intended recipient of the payment or gift fell within the legal definition. The defendant need not know in what specific official capacity the intended recipient was acting, but the defendant must have known or believed that the intended recipient had authority to act in a certain manner as specified in element 6.”

The Court does not believe that this language is necessary, and it is potentially confusing.”

As noted in this prior post, in April 2012 – a few months prior to trial, Stuart and Hong Carson pleaded guilty to conduct not found in the original indictment. Pursuant to a plea agreement, Stuart Carson, 73, faces up to 10 months in prison and Rose Carson, 48, faces a sentence of three years probation, which may include up to six months of home confinement.

As noted in this prior post, in late May 2012 – a few weeks prior to trial, Paul Cosgrove (a 65 year old individual who recently underwent emergency heart quadruple bypass surgery) pleaded guilty to conduct not found in the original indictment. Pursuant to a plea agreement, Cosgrove faces up to 15 months in prison.

Last week - a few weeks prior to his trial, the DOJ announced (here) that Edmonds pleaded guilty to a one-count superseding information charging him with making a corrupt payment to a foreign government official in violation of the FCPA.

Unlike the original indictment, the four page superseding information as to Edmonds (here) focuses solely on Public Power Corporation of Greece (“Public Power”) and states as follows. “Public Power was a department, agency, and instrumentality of a foreign government with the meaning of the FCPA” and “officers and employees of Public Power were ‘foreign officials’ within the meaning of the FCPA.” The superseding information then states that “on or about May 15, 2000″ Edmonds “corruptly caused an e-mail to be sent authorizing the payment of approximately $45,000 to officials of Public Power for the purpose of securing Public Power’s business.

For more on Public Power during the general time period alleged in the superceding information, see this Annual Report.

As noted in the DOJ’s release (here), “Edmonds, 59, faces up to 15 months in prison. Sentencing is scheduled for Nov. 19, 2012.”

The Edmonds plea agreement (here) incorporates the substance of Judge Selna’s jury instruction set forth above. In addition, the plea agreement states as follows. “Defendant Edmonds understands that at any trial, the government would prove sufficient facts to demonstrate that Public Power was a government instrumentality within the meaning of the FCPA [...] and its employees ‘foreign officials’ within the meaning of the FCPA.”

The plea agreement further states as follows. “Although defendant Edmonds did not actually know that the approximately $45,000 was to be offered, given, or promised to an employee of Public Power for the purpose of securing Public Power’s business, he was aware of a high probability of this circumstances and failed to make additional inquiries concerning the nature of the commission and the suspected recipient in order to determine whether the proposed commission payment might be made to an employee at Public Power for the purpose of securing Public Power’s business.” The plea agreement further states as follows. “Although defendant Edmonds did not know about the prohibitions of the FCPA, defendant Edmonds was aware that the law would forbid making an undisclosed payment to an employee of a customer for the purpose of securing the customer’s business.”

In the plea agreement, Edmonds waived any statute of limitations defenses.

Next Up – Smith & Nephew

Wednesday, February 8th, 2012

[A new job has been posted to the Jobs Board - see here. Both job seekers and organizations seeking to hire individuals with FCPA or related experience will benefit from a wide selection of job listings, so please spread the word and send the job link to your HR department and professional contacts]

When Johnson & Johnson resolved its $70 million FCPA enforcement action in April 2011 (see here for the prior post) focused on foreign health care providers as “foreign officials”, I said (here) stay tuned for more as several more health care providers as “foreign official” enforcement actions were likely in the pipeline.

On the heels of the DOJ’s likely worst week ever enforcing the FCPA in individual enforcement actions, the DOJ and SEC announced parallel enforcement actions against medical devices maker Smith & Nephew Inc. (“S&N”) and Smith & Nephew plc. (“PLC”). PLC is a U.K. company with ADR shares traded on the New York Stock Exchange and S&N is a wholly-owned subsidiary of PLC headquartered in Memphis, TN.

Total fines and penalties were approximately $22.2 million ($16.8 million against S&N via a DOJ deferred prosecution agreement, and $$5.4 million against PLC via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information (here) against S&N resolved through a deferred prosecution agreement (here).

Criminal Information

The information begins as follows. “Greece has a national healthcare system wherein most Greek hospitals are publily owned and operated. Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their officials capacities. Therefore, such HCPs in Greece are “foreign officials” as that term in defined in the FCPA …”.

The conduct at issue focuses on S&N’s and Smith & Nephew Orthopaedics GmbH’s (“GmbH”) (a German company “reporting to S&N) relationship with the entities of the Greek Distributor (an “agent and distributor for S&N and GmbH in Greece”). According to the information, S&N and GmbH sold products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-selll to Greek HCPs and government hospitals at a profit.” The information also alleges that S&N and GmbH “would cover marketing expenses for [the] Greek Distributor, up to ten percent of sales.”

The information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions and alleges that “the purpose of the conspiracy was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employeed Greek HCPs.” According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay the amount of the distributor discount – between 25 and 40 percent of the sales made by [the] Greek Distributor – to an off-shore shell company controlled by [the] Greek Distributor, in order to provide off-the-books funds for [the] Greek Distributor to pay cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of S&N products, while concealing the payments.” According to the information, S&N “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N and GmbH.”

According to the information, “[i]n total, from 1998 to 2008, S&N, and its affiliates and employees, authorized the payment, directly or indirectly, of approximately $9.4 million to [the] Greek Distributor’s shell companies, some or all of which was used to pay cash incentives to publicly-employeed Greek HCPs to induce the purchase of S&N products.”

According to the information, in 1999 “the S&N Chief Financial Officer raised with S&N Legal questions from internal auditors about the payments to the Greek Distributor’s shell companies.” The information states that the Greece Sales Manager (a U.S. citizen based in Memphis who oversaw S&N sales in Greece) met with Legal Advisor (a U.S. citizen based in Memphis who was Senior Corporate Counsel for S&N) “to discuss issues with GmbH’s relationship with [the] Greek Distributor, during which the fact that surgeons in Greece were being paid to use medical devices products was discussed …”. The information states that thereafter, the Legal Advisor “briefed a more senior S&N lawyer on the issue …”.

Based on the allegations in the information and the SEC complaint discussed below, the Greek Distributor seems to be the same distributor/agent at issue in the previous Johnson & Johnson enforcement action.

The S&N information alleges that the “Greek Distributor traveled to Memphis, Tennessee and met with VP International (a U.S. citizen based in Memphis who served as Vice President for International Sales for S&N) and others regarding reductions in Greek government reimbursement rates for S&N products sold by [the] Greek Distributor” and that “during the meeting, [the] Greek Distributor proposed that the discount to [the] Greek Distributor be increased to account for the reimbursement reduction, without any reduction in the ‘marketing’ payments to the Shell Company.” According to the information, the Greek Distributor communicated with VP International and the Greece Sales Manager that his commission could not be reduced because he was “paying cash incentives right after each surgery.” According to the information, “S&N terminated all relationships with [the] Greek Distributor and related entities in June 2008.”

Based on the same core set of conduct, the information also charges one count of FCPA anti-bribery violations and one count of FCPA books and records violations.

DPA

The DOJ’s charges against S&N were resolved via a deferred prosecution agreement. Pursuant to the DPA, S&N admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agent, and wholly-owned subsidiaries.”

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: (a) S&N investigated and disclosed to the DOJ and SEC the misconduct at issue; (b) S&N reported its findings to the DOJ and SEC; (c) S&N cooperated fully with the DOJ’s and SEC’s investigation; (d) S&N undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures; (e)-(f) S&N agreed to continue to cooperate with the DOJ, and with foreign authorities, in any investigation of its directors, officers, employees, agents, consultants, subsidiaries, contractors and subcontractors relating to violations of the FCPA or other corrupt payments; (g) S&N “has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s investigations of other companies and individuals in connection with business practices overseas in various markets;” and (h) “were the DOJ to initiate a prosecution of S&N and obtain a conviction, instead of entering into this Agreement to defer prosecution, S&N would potentially be subject to exclusion from participation in federal health care programs pursuant to 42 USC 1320a-7(a).”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $21 – $42 million. The DPA states as follows. “S&N agrees to pay a monetary penalty in the amount of $16.8 million, a 20 percent reduction off the bottom of the fine range. S&N and the DOJ agree that this fine is appropriate given S&N’s internal investigation, the nature and extent of S&N’s cooperation in this matter, and S&N’s extensive remediation.”

Pursuant to the DPA, S&N agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures set forth by the monitor as described in an attachment to the DPA. As is customary in FCPA DPA’s, S&N agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release. The DOJ release states as follows. “The matter is part of an investigation into bribery by medical device companies of physicians employed by government institutions.”

SEC

The SEC’s settled civil complaint (here) against PLC is based on the same core conduct as described above and “concerns violations of the [FCPA] by PLC through its subsidiaries to obtain sales for their medical device business.” In summary fashion, the SEC complaint alleges as follows. “From 1997 to June 2008, two of PLC’s subsidiaries engaged in a scheme with a distributor who made illicit payments to public doctors employed by government hospitals or agencies in Greece.” The complaint further alleges that PLC failed to “have an adequate internal control system in place to detect and prevent the illicit payments” and that PLC “improperly recorded these payments in its accounting books and records.” The complaint specifically alleges that PLC “failed to act on numerous red flags of bribery.” The complaint states as follows. “Among other things, even though PLC was aware that S&N and GmbH were conducting business in Greece and was aware of the heightened risks of the Greek market, PLC did not require proof of services rendered by Company A and B [entities associated with the Greek Distributor]. PLC failed to question the reasons for paying the Greek Distributor for Greek sales to accounts in the names of entities located outside of Greece. PLC failed to conduct due diligence on Company A and Company B. PLC also failed to conduct any audits of the transactions.”

Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations.

As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, PLC consented to entry of a court order permanently enjoining it from future FCPA violations and ordering it to pay $4,028,000 in disgorgement and $1,398,799 in prejudgment interest.

The SEC’s release states as follows. “The SEC’s investigation into the medical device industry is continuing.” In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows. “Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition. The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”

In this release, Smith & Nephew stated as follows. “Smith & Nephew and other medical device companies were asked by the SEC and DOJ in late 2007 to look into possible improper payments to government-employed doctors and voluntarily report any issues. Smith & Nephew found and reported evidence of improper payments by a distributor in Greece that had been appointed by Smith & Nephew subsidiaries and was terminated in 2008. The individuals implicated are no longer associated with the Group. In the release, Olivier Bohuon (CEO of Smith & Nephew) states as follows. “We have what I believe to be a world-class compliance programme, having enhanced it significantly since this investigation began in 2007. These legacy issues do not reflect Smith & Nephew today. But they underscore that we must remain vigilant every place we do business and let nothing compromise our
commitment to integrity.”

Paul Gerlach (here - Sidley & Austin, the former Associate Director of the SEC’s Enforcement Division) and Angela Burgess (here - Davis Polk & Wardwell) represented Smith & Nephew.

"Foreign Official" Limbo – The Bar Has Been Lowered

Friday, April 15th, 2011

It’s Friday, so let’s get this started with some music.

The previous “limbo low” for an otherwise commercial enterprise to be deemed an “instrumentality” of a foreign government, and thus employees of the enterprise to be deemed “foreign officials” by the DOJ and SEC was 43%. See this prior post regarding the Alcatel-Lucent enforcement action and Telekom Malaysia Berhad – a commercial enterprise with a shareholder base of approximately 35,000 institutional and private/retail shareholders.

The limbo bar apparently has been lowered.

The recent Comverse enforcement (here) focused on “individuals connected to” “Hellenic Telecommunications Organization S.A. ["OTE"] – a telecommunications provider controlled and partially owned by the Greek Government” including “employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies.”

According to the NPA, “the Greek Government was OTE’s largest single shareholder and maintained an interest in over one-third of OTE’s issued share capital.”

Although the NPA only referenced knowing violations of the FCPA’s books and records provisions (i.e. a “charge” that does not have a “foreign official” element) you can be sure that this enforcement action, notwithstanding the manner of resolution, was still very much about the “foreign officials” allegedly at issue. See, e.g., Miller & Chevalier FCPA Review Spring 2011 (here) (“Neither the SEC nor the DOJ identifies OTE as a government instrumentality, although the language used (identifying the Greek government as the largest single shareholder but not majority owner) suggests that they would have brought anti-bribery charges if there was evidence that CTI had knowledge of the payments or that Comverse Limited engaged in improper activity in the United States.”).

The conduct at issue in the Comverse enforcement took place between 2003-2006.

Just what type of entity was OTE during this time period?

OTE’s 2003 Annual Report (here) notes that the “Greek State” stake of total share capital was approximately 33.7%. The report notes that OTE’s shares have traded on the New York Stock Exchange since 1998. The report states as follows. “The Greek State may no longer control OTE in a way different from that of any other Societe Anonyme company or telecom services provider. The Greek State may – only as a shareholder – monitor the operation and administration of the corporate affairs. The Greek State is represented by the Minister of Finance who is entitled to intervene according to the Articles of Association and the legal procedures as any other shareholder can do.

OTE’s 2004 Annual Report (here) contains information similar to that noted above and states as follows. “The Greek State may no longer control OTE in a way different from that of any other Societe Anonyme and telecom services provider company. The Greek State may – only as a shareholder – monitor the operation and administration of the corporate affairs. The Greek State is represented by the Minister of Finance who is exercising its control through the established bodies as any other shareholder can do.”

OTE’s 2005 Annual Report (here) describes a shareholder structure as follows. International institutional shareholders 40%; Hellenic Republic 38.7%; Greek institutional shareholders 12.1%; Rest shareholders 9.2%.

OTE’s 2006 Annual Report (here)describes a shareholder structure as follows. International institutional shareholders 45%; Hellenic Republic 38.7%; Greek institutional shareholders 9.5%; Rest shareholders 6.8%.

According to OTE’s current website (here), it shares trade on the Athens Stock Exchange, the London Stock Exchange and OTE’s ADRs trade on the OTC (over the counter) market in the U.S. and OTE continues to report to the SEC.

According to OTE’s current website (here), its current shareholder base is as follows. Hellenic Republic: 20.0%; Deutsche Telekom: 30.0%; Greek Institutional Shareholders: 30.2%; International Institutional Shareholders: 9.7%; and Rest Shareholders: 10.1%.

Step aside 43%, the new limbo low is between 33% – 38%.

How long can it go?

*****

A good weekend to all.

Comverse Technology … Is It Really That Simple?

Tuesday, April 12th, 2011

Question: “If you did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year.

Answer by Mark Mendelsohn, former FCPA chief DOJ: “If the Department only had the option of bringing a criminal charge or declining to bring a case, you would certainly bring fewer cases.”

Mark Mendelsohn on the Rise of FCPA Enforcement, 24 Corporate Crime Reporter 35, September 10, 2010.

“… [T]he S.E.C.’s practice of permitting defendants to neither admit nor deny the charges against them remains pervasive, presumably for no better reason than that it makes the settling of cases easier.”

U.S. District Court Judge Jed Rakoff (S.D.N.Y.) in SEC v. Vitesse Semiconducter Corp., March 21, 2010.

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A U.S. company has a subsidiary A.

Subsidiary A has a subsidiary – subsidiary B.

Subsidiary B engaged an agent who made improper payments partially facilitated by subsidiary’s B’s inflated commission payments to him.

There is no allegation that Subsidiary A knew about the payments.

There is no allegation that the U.S. company knew about the payments.

But subsidiary B’s books, records and accounts are incorporated into the books, records and accounts of the U.S. company for purposes of financial reporting.

These are the essential facts from last week’s FCPA enforcement action against Comverse Technology Inc. – “a world leader in multimedia telecommunications applications”.

The enforcement action involved both a DOJ and SEC component. Total settlement amount was $2.8 million ($1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).

Is it really that simple?

Some have suggested that Comverse received “lenient” treatment (see here). Yet, it is questionable whether Comverse would have faced any criminal liability should the DOJ have been required to satisfy its high burden of proof in court.

Yet, FCPA enforcement actions like Comverse seem to be becoming norm.

DOJ

The DOJ enforcement action was resolved via a non-prosecution agreement, meaning there was not, and will never, be judiciary scrutiny of the DOJ’s enforcement theory.

The NPA (here) begins as follows.

The DOJ “will not criminally prosecute Comverse Technology, Inc. (“CTI”), Comverse Inc., a wholly owned subsidiary of CTI (“Comverse Inc.”), and the subsidiaries of Comverse Inc., including Comverse Ltd. (collectively referred to as Comverse) for any crimes … related to Comverse’s knowing violation of the books and records provisions of the Foreign Corrupt Practices Act … arising from and related to Comverse’s failure accurately to record certain improper payments made by employees of Comverse Ltd. and certain subsidiaries of Comverse Ltd. and a third party agent from 2003 to 2006.”

According to the NPA, Comverse Inc. was wholly-owned subsidiary of CTI and Comverse Ltd., an Israeli company based in Tel Aviv, was a wholly owned subsidiary of Comverse Inc.

The NPA has a term of two years and Comverse admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Comverse agreed “not to make any public statement contradicting” the information below.

The conduct at issue focuses on monthly retainer fees paid by Comverse Ltd. to Agent G (an Israeli citizen engaged by Comverse Ltd. as an independent consultant with a particular focus on Greece) and commissions paid to Agent G on purchase orders. According to the NPA, “Agent G would keep 15% of the total commission, and the remaining 85% was used to make improper payments.”

According to the NPA, “between 2003 and 2006, Comverse Ltd. made approximately $536,000 in cash payments to Corporation H [a Cyprus-based company created by Agent G at the direction of Comverse Ltd. employees to facilitate the payment of cash to representatives of certain Comverse Ltd. customers in exchange for securing purchase orders] with the intent that the money woudl be passed on to individuals connected to OTE, including employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies for Comverse Ltd. products and services, resulting in approximately $1.25 million in adjusted operating income.”

OTE?

That would be the “Hellenic Telecommunications Organization S.A. – a telecommunications provider controlled and partially owned by the Greek Government.” According to the NPA, “the Greek Government was OTE’s largest single shareholder and maintained an interest in over one-third of OTE’s issued share capital.”

The DOJ agreed to resolve the enforcement action via a NPA “based, in part, on the following factors: (a) Comverse’s timely, voluntary, and complete disclosure of the facts” [described above]; (b) Comverse’s full cooperation with the Department and the [SEC]; and (c) the remedial efforts already undertaken and to be undertaken by Comverse.”

The DOJ release (here) states as follows. “The [NPA] recognizes the company’s thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation with the department. CTI has also undertaken extensive remedial efforts and overhauled its overall compliance culture, including through the implementation of mandatory training programs focused on anti-corruption and the use of third-party agents and intermediaries, as well as more rigorous accounting controls for the approval of third-party payments. As a result of these mitigating factors, the department has agreed not to prosecute CTI or its subsidiaries for failing to maintain accurate books and records, provided that CTI satisfies its obligations under the agreement for a period of two years. Those obligations include ongoing cooperation, payment of the $1.2 million penalty, and the continued implementation of rigorous internal controls.”

SEC

The SEC’s civil complaint (here) is based on the same core conduct described above.

The complaint alleges, in summary fashion, as follows.

“Between 2003 and 2006, Comverse Technology, Inc. (“Comverse”) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (the “FCPA”) when its Israeli operating subsidiary, Comverse Limited (“Comverse Limited”), engaged in a scheme to make improper payments to obtain or retain business.”

“In order to facilitate and conceal the payments, Comverse Limited employed a third-party agent (the “Agent”) to establish an offshore entity in Cyprus which, in turn, funneled the improper payments to Comverse Limited’s customers. Employees of Comverse Limited made payments to the Cyprus entity and, after taking 15% off the top of these payments, the Agent paid or facilitated the payment of the remaining 85% to Comverse Limited’s customers in the form of cash bribes.”

“Comverse Limited did not accurately record these improper payments in its books and records, which, in turn, caused them to be improperly classified in Comverse’s consolidated financial statements. Comverse failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions at all levels of the organization were recorded properly.”

Specifically, the SEC alleged as follows.

“Between 2003 and 2006, Comverse Limited made improper payments to employees connected to OTE in order to obtain or retain business with OTE. The scheme originated in Comverse Limited’s EMEA (Europe, Middle East, and Africa) sales division and the improper payments were inaccurately recorded on Comverse Limited’s books and records, which, in turn, were consolidated with Comverse’s financial results.”

“Between 2003 and 2006, Comverse Limited, using [Corporation H], made improper payments totaling approximately $536,000 to individuals connected to OTE, including employees of OTE’s subsidiaries Cosmote, Cosmofon, and Cosmorom to obtain or retain OTE’s business. The improper payments resulted in $1.2 million of improper benefit to Comverse Limited, which flowed through to Comverse.”

As to internal controls, the SEC alleged as follows. “During the relevant time period, neither Comverse nor Comverse Limited had a process, formal or otherwise, for conducting due diligence of third-party agents or for the independent review of third-party agent contracts outside of the sales departments.” The SEC further alleged as follows. “At the time of the conduct, while Comverse did have an omnibus anti-corruption policy that prohibited improper payments to government-affiliated third parties and others, Comverse did not widely circulate this policy and provided no training on it to any employees.”

As to books and records, the SEC alleged as follows. “Comverse Limited falsified its books and records by characterizing and recording the bribes as legitimate sales commissions, thereby failing accurately to reflect the payments and their purpose. These improper expenses, in turn, were consolidated into Comverse’s financial records.”

Based on the above conduct, the SEC charged Comverse with FCPA books and records and internal control violations.

As noted in the SEC release (here) without admitting or denying the SEC’s allegations, Comverse consented “to a conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business.” In addition, Comverse consented to pay $1,249,614 in disgorgement and $358,887 in prejudgment interest.

Daniel Horwitz (Lankler and Carragher – see here) represented Comverse.

The company’s 8-K filing on April 7th stated as follows. ” As originally disclosed by the Company on March 16, 2009, the Audit Committee of the Board of Directors of the Company conducted its own internal investigation into such payments. The Audit Committee found that the conduct at issue did not involve the Company’s executive officers.”

The company’s 10-K filing on January 25, 2011 suggests that the company’s internal investigation was prompted by a whistleblower complaint and the filing details the company’s remedial actions in connection with the investigation. According to the filing “the Company recorded charges of $2.9 million associated with [the FCPA matter] during the fiscal year ended January 31, 2009.” The company has not yet disclosed what its fees and expenses were during the fiscal year ended January 31, 2010.

*****

Another interesting item from Comverse’s SEC filings. “For the fiscal year ended January 31, 2010, approximately one quarter of Verint’s [Comverse's majority-owned publicly traded subsidiary] business was generated from contracts with various governments around the world, including federal, state, and local government agencies.”

Johnson & Johnson Enforcement Action Focuses on Health Care Providers As "Foreign Officials"

Monday, April 11th, 2011

That was quite the 72-hour period for FCPA enforcement last week. On Wednesday, it was JGC Corporation of Japan ($218.8 million in criminal fines). On Thursday, it was Comverse Technologies ($2.8 million in combined DOJ and SEC fines, penalties, and disgorgement). On Friday, it was Johnson & Johnson ($70 million in combined DOJ and SEC fines, penalties and disgorgement – plus approximately $7.9 million in a related U.K. Serious Fraud Office civil recovery).

This post analyzes the Johnson & Johnson enforcement action. Separate posts regarding the Comverse and JGC Corp. enforcement actions will follow later this week.

*****

Johnson & Johnson (“J&J), a global pharmaceutical, consumer product, and medical device company, resolved enforcement actions focused on business conduct in Greece, Poland, Romania. The enforcement actions also resolved an investigation of Johnson & Johnson subsidiary companies in the United Nations Oil for Food Program in Iraq.

The J&J enforcement action involved both a DOJ and SEC component. Total settlement amount was $70 million ($21.4 million criminal fine via a DOJ deferred prosecution agreement; $48.6 million in disgorgement and prejudgment interest via a SEC settled complaint).

This post summarizes the DOJ, SEC and SFO enforcement actions.

DOJ

The DOJ enforcement action involved a criminal information (here) against DePuy Inc. (a wholly-owned subsidiary of J&J and a global manufacturer and supplier of orthopedic medical devices) resolved through a deferred prosecution agreement (here).

Criminal Information

The background section of the information begins as follows. “Greece has a national healthcare system wherein most Greek hospitals are publicly owned and operated. Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their official capacities. Therefore, such HCPs in Greece are “foreign officials” as that term is defined in the FCPA.”

The conduct at issue focuses on Depuy International. In 1998, J&J acquired DePuy, including its subsidiary Deputy International (a U.K. company).

According to the information, between 1998 through 2006, DePuy and others conspired to “secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employed Greek HCPs.”

The information alleges that “DePuy, its executives, employees, and subsidiaries agreed to sell products to Company X [an agent and distributor for DePuy and its subsidiaries in Greece until 2001 when it was acquired by DePuy and named DePuy Medec and later renamed DePuy Hellas] at a 35% discount, then paid 35% of sales by Company X to an off-shore account of Company Y [based in the Isle of Man and a consultant for DePuy International in Greece until 1999] in order to provide off-the-books funds to Agent A [a Greek national who was the beneficial owners of both Company X and Y] for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”

The information further alleges that “DePuy, its executives, employees, and subsidiaries agreed to pay Agent A and Agent B [a Greek national who acted as a consultant to DePuy International and DePuy Hellas] a percentage of the value of sales of DePuy products in Greece in order to provide funds to Agent A and Agent B for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”

The information further alleges that between 2002 and 2006 “approximately £500,000 was withdrawn by DePuy Hellas MD [a Greek National who was an employee of Company X until it was acquired by J&J when she became the Managing Director of DePuy Hellas] and others and used to cover payments owed to HCPs by the agents but not yet paid.”

The information charges as follows. “In total, from 1998 to 2006, defendant DePuy, DePuy International, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of approximately $16.4 million in cash incentives to publicly-employed Greek HCPs to induce the purchase of DePuy products. In order to conceal the payments, DePuy Hellas and DePuy International falsely recorded the payments in their books and records as “commissions.””

As to a U.S. nexus, the information describes the following: certain phone calls made to Executive B (a U.S. citizen and officer and senior executive of DePuy) in Indiana to discuss the Company X acquisition and due diligence on Greek Agent A; e-mails sent to Executive B in Indiana regarding Agent A or Greek business in general; e-mails Executive A (a British citizen who was an officer and senior executive in charge of DePuy at the time it was purchased by J&J and who retained that position until 1999 when he became a senior executive at J&J retaining control of DePuy and its related operating companies) sent or received in New Jersey regarding Agent A.

Based on the above allegations, the information charges: (i) a conspiracy to violate the FCPA’s anti-bribery and books and records provisions; and (ii) a substantive FCPA anti-bribery violation.

DPA

The DOJ’s charges against DePuy were resolved via a deferred prosecution agreement (dated January 14, 2011) between the DOJ and J&J, its subsidiaries, and its operating companies “relating to illegal conduct committed by certain J&J operating companies and subsidiaries.” In addition to DePuy Inc., other operating companies named are Cilag AG International and Janssen Pharmaceutica N.V.

Pursuant to the DPA, J&J admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, and agents, and wholly-owned subsidiaries and operating companies” as set forth in a Statement of Facts attached to the DPA.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors.

(a) J&J voluntarily and timely disclosed the majority of the misconduct described in the Information and Statement of Facts [Note - the Iraq Oil for Food conduct was not voluntarily disclosed];

(b) J&J conducted a thorough internal investigation of that misconduct;

(d) J&J cooperated fully with the Department’s investigation of this matter;

(e) J&J has undertaken substantial remedial measures as contemplated by [the DPA];

(f) J&J has agreed to continue to cooperate with the Department in any investigation of the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA and related statutes;

(g) J&J has cooperated and agreed to continue to cooperate with the SEC and, at the direction of the Department, foreign authorities investigating the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to corrupt payments;

(h) J&J has cooperated and agreed to continue to cooperate with the
Department in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets;

“(i) J&J has also agreed to resolve related cases being investigated by the SEC and the United Kingdom Serious Fraud Office (the “SFO”); and

(j) Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participation in federal health care programs pursuant to 42 U.S.C. § 1320a-7(a).

With respect to the corporate compliance reporting obligations imposed on J&J by the DPA, the agreement states as follows.

(i) J&J has already engaged in significant remediation of the misconduct described in the Statement of Facts and reviewed and improved its compliance program and implementation thereof;

(ii) J&J conducted an extensive, global review of all of its operations to determine if there were problems elsewhere and has reported on any areas of concerns to the Department and the SEC;

(iii) J&J has and will undertake enhanced compliance obligations
described in [the DPA];

(iv) J&J’s cooperation during this investigation and its substantial assistance in investigations of others has been extraordinary; and

(v) J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”

As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $28.5 million to $57 million. Pursuant to the DPA, J&J agreed to pay a monetary penalty of $21.4 million (25% below the minimum amount suggested by the guidelines). The DPA states as follows. “J&J and the Department agree that this fine is appropriate given J&J’s voluntary and thorough disclosure of the misconduct at issue, the nature and extent of J&J’s cooperation in this matter, penalties related to the same conduct in the United Kingdom and Greece, J&J’s cooperation in the Department’s investigation of other companies, and J&J’s extraordinary remediation.”

Pursuant to the DPA, J&J agreed to self-report to the DOJ “periodically, at no less than six-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance measures” described in the DPA.

As is standard in FCPA DPAs, J&J agreed not to make any public statement “contradicting the acceptance of responsibility” by J&J as set forth in the DPA.

The Statement of Facts attached to the DPA include, in addition to the Greece conduct described above, conduct relating to Poland, Romania and in connection with the U.N. Oil for Food Program in Iraq.

Poland

As to Poland, the DPA states, in summary fashion as follows.

“Poland has a national healthcare system. Most Polish hospitals are owned and operated by the government and most Polish HCPs [health care providers] are government employees providing health care services in their official capacities. Therefore, most HCPs in Poland are “foreign officials” as defined by the FCPA.”

“Polish hospitals purchase their medical products through a tender process, whereby suppliers of medical products compete for business by submitting bids to tender committees. Each tender committee may be associated with one or more hospitals.”

“In general, the tender committees evaluate the competitive bids and select the winning supplier for each purchase. Because most Polish hospitals are government owned, the tender committees effectively determine, on behalf of the government, from whom the government will purchase medical products.”

“J&J Poland [a wholly owned subsidiary of J&J] made payments and provided things of value to publicly-employed Polish HCPs, in the form of “civil contracts,” travel sponsorships, and donations of cash and equipment, to corruptly influence the decisions of HCPs on tender committees to purchase medical products from J&J Poland.”

As to civil contracts, the DPA states as follows.

“J&J Poland engaged in professional services contracts with publicly-employed Polish HCPs, known as “civil contracts.” The contracts were purportedly for professional services including lecturing, leading workshops, and conducting clinical trials.”

“J&J Poland did not require that its sales representatives provide proof that the work, for which payment had been made, was actually ever performed.”

“From January 2000 until June 2006, J&J Poland awarded civil contracts to publicly-employed Polish HCPs to corruptly influence them, in their official capacities as members of tender committees, in order to induce those HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”

As to travel, the DPA states as follows.

“J&J Poland sponsored some publicly-employed Polish HCPs to attend conferences in order to corruptly influence them, in their official capacities as members of tender committees, in order to induce the HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”

As to “Total Improper Payments in Poland,” the DPA states as follows.

“In total, from in or around 2000 to in or around 2007, J&J Poland and its employees authorized the payment, directly or indirectly, of approximately $775,000 in improper payments, including direct payments and travel, to publicly-employed Polish HCPs to induce the purchase of J&J products.”

Romania

As to Romania, the DPA states as follows.

“The national healthcare system in Romania is almost entirely state-run. The healthcare system is funded by the National Health Care Insurance Fund (“CNAS”), to which employers and employees make mandatory contributions. Most Romanian hospitals are owned and operated by the government and most HCPs in Romania are government employees. Therefore, most HCPs in Romania are “foreign officials” as defined by the FCPA.”

“From in or around 2005 through in or around 2008, J&J Romania [a wholly owned subsidary] employees made arrangements with J&J Romania distributors for the distributors, on behalf of J&J Romania, to provide cash payments and gifts to publicly-employed Romanian HCPs in exchange for prescribing certain pharmaceuticals manufactured by J&J subsidiaries and operating companies.”

As to “Total Improper Payments in Romania,” the DPA states as follows.

“In total, from in or around July 2005 to in or around mid-2008, J&J Romania and its employees authorized the payment, directly or indirectly, of approximately $140,000 in incentives to publicly-employed Romanian HCPs to induce the purchase of pharmaceuticals manufactured by J&J subsidiaries and operating companies.”

Oil for Food Program

As to the U.N. Oil for Food Program, the DPA states as follows.

“Between in or around December 2000 and in or around March 2003, Janssen [a wholly-owned subsidiary of J&J headquarted in Belgium] and Cilag [a wholly-owned subsidiary of J&J headquartered in Switzerland] were awarded 18 contracts for the sale of pharmaceuticals to the Iraqi Ministry of Health State Company for Marketing Drugs and Medical Appliances (“Kimadia”) under the [Oil for Food Program], with a total contract value of approximately $9.9 million, which generated approximately $6.1 million in profits. Janssen and Cilag secured these contracts through the payment of approximately $857,387 in kickbacks to the government of Iraq.”

“The kickbacks were paid to the government of Iraq through JC-Lebanon Agent [a Lebanese citizen who was an agent for both Janssen and Cilag in Iraq]. The kickbacks were concealed from the United Nations by inflating Janssen and Cilag’s contract prices by 10%.”

The DPA concludes with a section titled “Books and Records” that states as follows.

“In order to conceal the payments to the Greek, Polish, and Romanian HCPs on the books and records of J&J and its subsidiaries, the payments were misrepresented as, among other things, “commissions,” “civil contracts,” “travel,” “donations,” and “discounts.””

“In order to conceal the kickback payments made to the Iraqi government through JC-Lebanon Agent for contracts under the OFFP on the books and records of Janssen and Cilag, the payments were misrepresented as “commissions.””

“At the end of J&J’s fiscal year from in or around 1998 to in or around 2007, the books and records of DePuy International, DePuy Hellas, J&J Poland, J&J Romania, Janssen, and Cilag, including those containing false characterizations of kickback and bribe payments given to the Iraqi government and Greek, Polish, and Romanian officials, were incorporated into the books and records of J&J for purposes of preparing J&J’s year-end financial statements, which were filed with the Securities and Exchange Commission.”

The DOJ’s release (here) states as follows.

“Johnson & Johnson has admitted that its subsidiaries, employees and agents paid bribes to publicly-employed health care providers in Greece, Poland and Romania, and that kickbacks were paid on behalf of Johnson & Johnson subsidiary companies to the former government of Iraq under the United Nations Oil for Food program. Johnson & Johnson, however, has also cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry. As [the DPA] reflects, we are committed to holding corporations accountable for bribing foreign officials while, at the same time, giving meaningful credit to companies that self-report and cooperate with our investigations.” “The agreement recognizes J&J’s timely voluntary disclosure, and thorough and wide-reaching self-investigation of the underlying conduct; the extraordinary cooperation provided by the company to the department, the SEC and multiple foreign enforcement authorities, including significant assistance in the industry-wide investigation; and the extensive remedial efforts and compliance improvements undertaken by the company. In addition, J&J received a reduction in its criminal fine as a result of its cooperation in the ongoing investigation of other companies and individuals, as outlined in the U.S. Sentencing Guidelines. J&J’s fine was also reduced in light of its anticipated resolution in the United Kingdom. Due to J&J’s pre-existing compliance and ethics programs, extensive remediation, and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, J&J was not required to retain a corporate monitor, but it must report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement.”

SEC

The SEC’s civil complaint (here) is based on the same core set of facts contained in the above DPA and alleges, in summary, as follows.

“This matter concerns violations of the Foreign Conupt Practices Act by J&J as a result of the acts of its subsidiaries to obtain business for J&J’s medical device and pharmaceutical segments.”

“Since at least 1998 and continuing to early 2006, J&J’s subsidiaries, employees and agents paid bribes to public doctors in Greece who selected J&J surgical implants for their patients. Further, J&J’s subsidiaries and agents paid bribes to doctors
and public hospital administrators in Poland who awarded tenders to J&J from 2000 to 2006. J&J’s subsidiaries and agents also paid bribes to public doctors in Romania to prescribe J&J pharmaceutical products from 2002 to 2007. Finally, J&J’s subsidiaries and agent paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program (“Program”) from 2000 to 2003.”

As to Greece, the SEC complaint alleges as follows.

“One of J&J’s product lines is surgical implants such as artificial knees, hips and other products that surgeons implant into patients. Surgical implants are a lucrative, but competitive business. In many countries, orthopedic surgeons control which implants they use.”

“In 1998, J&J acquired another medical device company, DePuy Inc., a NYSE company. A top DePuy executive then went on to become a top J&J executive in the United States in J&J’s medical device and diagnostics business (“Executive A”). At the time of the acquisition, DePuy was engaged in a widespread bribery scheme in Greece to sell its implants. Executive A and DPI executives knowingly continued that scheme. From 1998 to 2006, J&J earned $24,258,072 in profits on sales obtained through bribery.”

The SEC complaint alleges that “J&J’s internal audit group discovered the payments to Greek doctors in early 2006 after receiving a whistleblower complaint.” According to the complaint, “the issue of payments to surgeons had been previously raised in an anonymous 2003 letter to a different internal audit team concerning a related J&J subsidiary in Greece … however, that team concentrated their investigation on allegations about a possible conflict ofinterest by local management and J&J did not fully investigate the alleged payments to doctors.”

As to Poland, the SEC complaint alleges as follows.

“Employees of … a J&J subsidiary, bribed publicly-employed doctors and hospital administrators to obtain business. [Subsidiary] executives running three business lines oversaw the creation of sham contracts and travel documents and also the creation of slush funds as a means to funnel bribe payments to doctors and
administrators. From 2000 to 2006, J&J earned $4,348,000 in profit from its sales through the bribery.”

“The bribery appears to have stopped when Polish prosecutors began to investigate payments to doctors.”

As to travel issues, the SEC complaint alleges as follows.

“[Subsidiary] also paid for public doctors and hospital administrators to travel to medical conventions in Poland and abroad in order to influence tender committee decisions in their favor. Sponsored doctors were taken on trips in exchange for influencing the doctors’ decisions to purchase J&J’s medical products or to award hospital tenders to J&J. Some of the trips were to the United States for conferences. Some of the trips were to tourists areas in Europe, and some included spouses and family members to what amounted to vacations.”

As to Romania, the SEC complaint alleges as follows.

“Employees of … a J&J subsidiary, bribed publicly-employed doctors and pharmacists to prescribe J&J products that the company was actively promoting. The employees worked with [the subsidiary's] local distributors to deliver cash to publicly-employed doctors who ordered J&J drugs for their patients. [The subsidiary] also provided travel to certain doctors who agreed to prescribe J&J products. From 2000 to 2007, J&J earned $3,515,500 in profit from its sales through the bribery.”

As to Iraq Oil for Food conduct, the SEC complaint alleges as follows.

“J&J participated in the Program through two of its subsidiaries, Cilag AG International and Janssen Pharmaceutica N.V. (collectively “Janssen-Cilag”). During the program, Janssen-Cilag sold pharmaceuticals to an arm of the Iraqi Ministry of Health known as Kimadia. Janssen-Cilag conducted business with Kimadia in Iraq through a Lebanese agent (the “Agent”). The Agent’s primary contact with the J&J companies was an area director at Janssen-Cilag’s office in Lebanon.”

“In total, secret kickback payments of approximately $857,387 were made in connection with nineteen Oil for Food contracts. The payments were made through the Agent to Iraqi controlled accounts in order to avoid detection by the U.N. The fee was effectively a bribe paid to the Iraqi regime, which were disguised on J&J’s books and records by mischaracterizing the bribes as legitimate commissions.”

“In order to generate funds to pay the bribes and to conceal those payments, Janssen-Cilag and its agent inflated the price of the contracts by at least ten percent before submitting them to the U.N. for approval. J&J’s total profits on the contracts were $6,106,255.”

Under the heading “Anti-Bribery Violations” the complaint alleges as follows.

“J&J, through its subsidiaries and agents, knowingly allowed its employees and third parties to pay Greek and Polish public doctors and public hospital administrators for the purpose of obtaining or retaining business.”

“Executive A, a U.S. resident and a senior executive at J&J, approved the arrangements with the Greek Agent in Greece. Executive A and DPI executives knew that the Greek Agent was bribing Greek doctors. In addition, Polish doctors were bribed to use J&J products in return for trips. Use of the mails and interstate commerce was also used to facilitate the bribery schemes in both Greece and Poland.”

Under the hearing “Failure to Maintain Its Books and Records” the complaint alleges as follows.

“J&J’s subsidiaries made numerous illicit payments for the purpose of obtaining contracts in Iraq, Romania, Greece, and Poland. J&J’s books and records did not reflect the true nature of those payments. For example, they did not record that a portion of its payments to the Greek and Iraqi agents constituted reimbursements for bribes, and they did not record the true terms of the civil contract payments to Polish doctors. Efforts were made to obscure the purpose of trips to the United States and abroad. Certain J&J subsidiaries created false contracts, invoices, and other documents to conceal the true business arrangement it had with its consultants and distributors to pay bribes. False travel documents were created, and petty cash was used to pay bribes. United Nations contracts were also falsified.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint alleges as follows.

“J&J failed to implement internal controls to detect or prevent bribery. The conduct was widespread in various markets, Greece, Poland, Romania, and Iraq. The conduct involved employees and managers of all levels. False documents were routinely created to conceal the bribery in each country.”

“Rather than cease the bribery that was happening at DePuy prior to J&J’s acquisition, J&J through its subsidiaries, employees and agents allowed the bribery to continue. They created sham businesses and entered into contracts that were merely
conduits to allow the bribery to flourish. They failed to conduct due diligence on the Greek Distributor. The Company also paid its consultant outside of Greece to avoid detection of bribery. The Company had two different J&J corporate entities make
payments to the Greek Agent to conceal the amount of money that was being funneled to
doctors as bribes.”

“[Polish subsidiary] entered into fake civil contracts with Polish doctors and J&J also created false travel arrangements in Poland and Romania to create slush funds.”

“Cilag and Janssen paid bribes to Iraq despite the fact that trade sanctions were in place against doing business in Iraq. Cilag and Janssen falsified their contracts with the United Nations to conceal the kickbacks being paid to Iraq.”

Based on the above allegations, the SEC charged J&J with FCPA anti-bribery violations and FCPA books and records and internal control violations.

Without admitting or denying the SEC’s allegations, J&J agreed to an injunction prohibiting future FCPA violations and agreed to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest.

The SEC’s release (here) contains the following statement from Robert Kuzami (Director of the SEC’s Division of Enforcement): “The message in this and the SEC’s other FCPA cases is plain – any competitive advantage gained through corruption is a mirage. J&J chose profit margins over compliance with the law by acquiring a private company for the purpose of paying bribes, and using sham contracts, off-shore companies, and slush funds to cover its tracks.” In the release, Cheryl Scarboro (Chief of the SEC Enforcement Divisions FCPA Unit) stated as follows. “Bribes to public doctors can have a detrimental effect on the public health care systems that potentially pay more for products procured through greed and corruption.”

The SEC release states as follows.

“J&J voluntarily disclosed some of the violations by its employees and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.”

SFO

On the same day as the above U.S. enforcement actions, the U.K. SFO announced (here) a Civil Recovery Order against DePuy International Limited “in which DePuy International Limited will pay £4.829 million [approximately $7.9 million], plus prosecution costs, in recognition of unlawful conduct relating to the sale of orthopaedic products in Greece between 1998 and 2006.”

According to the SFO release, the SFO “launched an investigation into the activities of DePuy International Limited in October 2007 following a referral from the DOJ.” Richard Alderman, Director of the SFO, stated as follows. “When Johnson & Johnson reported the DePuy corruption, the DOJ informed the SFO of issues within our jurisdiction. We worked with the DOJ to find a solution that served both the interests of justice and the company’s desire to put illegal activity behind it and move on. I believe the order approved [...] will illustrate to other companies how the SFO works closely with organisations across the world in enforcing the highest ethical standards, but is willing to engage and listen to companies that come to us with problems and help them find solutions.”

The SFO release further states as follows. “On the facts of this case, criminal sanction of the Greek conduct has been achieved by the conclusion of a Deferred Prosecution Agreement with DePuy International Limited’s parent company and the DOJ. The Director of the Serious Fraud Office has concluded that a prosecution was therefore prevented in this jurisdiction by the principles of double jeopardy. The underlying purpose of the rule against double jeopardy is to stop a defendant from being prosecuted twice for the same offence in different jurisdictions. The DOJ Deferred Prosecution Agreement has the legal character of a formally concluded prosecution and punishes the same conduct in Greece that had formed the basis of the Serious Fraud Office investigation. [...] Consequently the Serious Fraud office is satisfied that the most appropriate sanction is a Civil Recovery Order, under the Proceeds of Crime Act 2002.”

As highlighted in this prior post, in April 2010, former DePuy executive Robert Dougall pleaded guilty to conspiring with others “to make corrupt payments and/or give other inducements” to “medical professionals within the Greek state health care system” contrary to Section 1 of the UK Prevention of Corruption Act of 1906.

*****

Eric Dubelier (Reed Smith – see here – a former DOJ enforcement attorney) represented J&J.

J&J’s press release (here) notes as follows. “In 2007, Johnson & Johnson voluntarily disclosed to the DOJ and the SEC that subsidiaries outside the United States were believed to have made improper payments in connection with the sale of medical devices. In the course of comprehensive compliance efforts and reports into the Company, similar issues in additional markets and businesses were identified and brought to the attention of the agencies.” William Weldon, Chairman and Chief Executive Officer of J&J stated as follows. “More than four years ago, we went to the government to report improper payments and have taken full responsibility for these actions. We are deeply disappointed by the unacceptable conduct that led to these violations. We have undertaken significant changes since then to improve our compliance efforts, and we are committed to doing everything we can to ensure this does not occur again. I know that these actions are not representative of Johnson & Johnson employees around the world who do what is honest and right every day, in the conduct of our business and in service to patients and customers worldwide. We will continue to demonstrate that Johnson & Johnson is a company that embraces responsible corporate behavior.”