First it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).
Then it was Smith & Nephew (see here - $22 million enforcement action in February 2012).
Then it was Biomet (see here – $22.8 million enforcement action in March 2012).
Then it was Pfizer / Wyeth (see here – $60 million enforcement action in August 2012).
Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).
Then it was Stryker (see here – $13.2 million enforcement action in October 2013).
The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Mead Johnson Nutrition Company. Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”
Yesterday, the SEC announced that Mead Johnson (a leading pediatric nutrition products) agreed to pay approximately $12 million pursuant to an administrative cease and desist order in which the company neither admitted or denied the SEC’s findings.
The substance of the order is approximately four pages and states in summary fashion as follows.
“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Mead Johnson. The violations, which occurred in connection with the operations of Mead Johnson’s subsidiary in China, took place up through 2013.
The conduct at issue relates primarily to the misuse of marketing and sales funds in China. Despite prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson’s majority-owned subsidiary in China, Mead Johnson Nutrition (China) Co., Ltd. (“Mead Johnson China”), made improper payments to certain health care professionals (“HCPs”) at state-owned hospitals in China to recommend Mead Johnson’s nutrition products to, and provide information about, expectant and new mothers. These payments were made to assist Mead Johnson China in developing its business. For the period from 2008 through 2013, Mead Johnson China paid approximately $2,070,000 to HCPs in improper payments and derived profits therefrom of approximately $7,770,000.
Mead Johnson China failed to accurately reflect the improper payments in its books and records. Mead Johnson China’s books and records were consolidated into Mead Johnson’s books and records, thereby causing Mead Johnson’s consolidated books and records to be inaccurate. Mead Johnson failed to devise and maintain an adequate system of internal accounting controls over Mead Johnson China’s operations sufficient to prevent and detect the improper payments that occurred over a period of years.”
Under the heading “Mead Johnson China’s Improper Payments to HCPs,” the order states in full as follows.
“A portion of Mead Johnson China’s marketing efforts during the 2008 to 2013 period was through the medical sector, which included marketing through healthcare facilities and HCPs. Despite the prohibitions in the FCPA and Mead Johnson’s internal policies, certain employees of Mead Johnson China improperly compensated HCPs, who were foreign officials under the FCPA, to recommend Mead Johnson’s infant formula to, and to improperly provide contact information for, expectant and new mothers.
Funding for those payments came from funds generated by discounts provided to Mead Johnson China’s network of distributors.
Mead Johnson China uses third-party distributors to market, sell and distribute product in China. Some of Mead Johnson China’s funding of its marketing and sales practices were effected through discounts provided to the distributors. Pursuant to contracts between Mead Johnson China and its distributors, Mead Johnson China provided the distributors a discount for Mead Johnson’s products that was allocated for, among other purposes, funding certain marketing and sales efforts of Mead Johnson China. This form of funding was referred to as “Distributor Allowance.”
Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent, and certain Mead Johnson China employees provided specific guidance to distributors concerning the use of the funds. Mead Johnson China staff also maintained certain records related to Distributor Allowance expenditure by distributors. In addition, Mead Johnson China used some of the funds to reimburse Mead Johnson China’s sales personnel for a portion of their marketing and other expenditures on behalf of Mead Johnson China.
Mead Johnson China’s sales personnel marketed product through medical channels, including healthcare facilities. These sales personnel encouraged HCPs at the healthcare facilities to recommend Mead Johnson products to mothers and to collect contact information of the mothers for Mead Johnson China’s marketing purposes. To incentivize HCPs to recommend Mead Johnson product and collect information from the mothers, these sales personnel improperly paid HCPs, providing cash and other incentives, contrary to Mead Johnson’s internal policies. The Distributor Allowance was the funding source for the cash and other incentives paid to HCPs.”
Under the heading “Mead Johnson Failed to Make and Keep Accurate Books and Records and Devise and Maintain an Adequate Internal Control System,” the order states in full as follows.
“The Distributor Allowance funds contractually belonged to the distributors, but were in large part under Mead Johnson China’s control. Mead Johnson China’s employees maintained certain records related to the Distributor Allowance, including records reflecting payments to HCPs. However, those records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies.
Mead Johnson failed to devise and maintain an adequate system of internal controls over the operations of Mead Johnson China to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through its distributors was not used for unauthorized purposes, such as the improper compensation of HCPs. The use of the Distributor Allowance to improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies. Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.”
Notwithstanding the above, the order otherwise specifically states:
“Mead Johnson has established internal policies to comport with the FCPA and local laws, and to prevent related illegal and unethical conduct. Mead Johnson’s internal policies include prohibitions against providing improper payments and gifts to HCPs that would influence their recommendation of Mead Johnson’s products.”
Under the heading “Internal Investigation and Remedial Efforts,” the order states in full:
“In 2011, Mead Johnson received an allegation of possible violations of the FCPA in connection with the Distributor Allowance in China. In response, Mead Johnson conducted an internal investigation, but failed to find evidence that Distributor Allowance funds were being used to make improper payments to HCPs. Thereafter, Mead Johnson China discontinued Distributor Allowance funding to reduce the likelihood of improper payments to HCPs, and discontinued all practices related to compensating HCPs by 2013. Mead Johnson did not initially self-report the 2011 allegation of potential FCPA violations and did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.
As a result of its second internal investigation commenced in 2013, Mead Johnson undertook significant remedial measures including: termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, adding positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-going basis; and providing employees with a method to have immediate access the company’s policies and requirements.
Despite not self-reporting the 2011 allegation of potential FCPA violations or promptly disclosing the existence of this allegation in response to the Commission’s inquiry into this matter, Mead Johnson subsequently provided extensive and thorough cooperation. Mead Johnson voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents. These actions assisted the Commission staff in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”
Based on the above findings, the order finds:
“Up through 2013, certain Mead Johnson China employees made payments to HCPs using funds maintained by third parties. These funds and payments from the funds were not accurately reflected on Mead Johnson China’s books and records. The books and records of Mead Johnson China were consolidated into Mead Johnson’s books and records. As a result of the misconduct of Mead Johnson China, Mead Johnson failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions as required by [the FCPA's books and records provisions].
Up through 2013, Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through third-party distributors was not used for unauthorized purposes, such as improperly compensating Chinese HCPs to recommend Mead Johnson’s products. As a result of such failure, the improper payments to HCPs occurred contrary to management’s authorizations, in violation of [the FCPA's internal controls provisions].”
In the SEC’s release Kara Brockmeyer (Chief of the SEC Enforcement Divisions’s FCPA Unit) stated:
“Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other health care professionals in China to recommend its baby formula and give the company marketing access to mothers.”
As noted in the release:
“The company consented to the order without admitting or denying the findings and agreed to pay $7.77 million in disgorgement, $1.26 million in prejudgment interest, and a $3 million penalty.”
In this press release, Mead Johnson’s CEO Kasper Jakobsen stated:
“We are pleased to have reached this final resolution with the SEC. Integrity and compliance with laws and regulations are central to the success of our operations around the world. We will continue to reinforce these operating principles in all our interactions with customers and business partners. Our China business is one of Mead Johnson’s most important operations, and we remain confident in its continued long-term growth.”
Yesterday Mead Johnson’s stock closed up .64%.
According to reports, Mead Johnson was represented by F. Joseph Warin, Michael S. Diamant and Christopher W.H. Sullivan of Gibson Dunn.