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Diving Into A Merger Agreement

Tuesday, October 9th, 2012

It’s an occupational hazard. Reading the news with FCPA goggles on that is.

Thus my FCPA sensors went off upon recently reading that Medtronic entered into a merger agreement with China Kanghui Holdings whereby Medtronic will acquire Kanghui. (See here for the company’s release). The release notes that China is one of the fastest growing medical device markets, that Medtronic desires to establish a more direct local presence in China, and that Kanghui has a vast China distribution network.

That’s enough FCPA risk to keep most practitioners up at night.

I couldn’t help myself so I dived into Medtronic’s SEC filings to see how, from a contractual standpoint, the company is seeking to manage this risk.

This post sets forth the relevant portions of the Medtronic - Kanghui Holders merger agreement.

Some posts on FCPA Professor are spicier than others and this post is admittedly bland, but it sheds a light on an important topic and demonstrates how the Foreign Corrupt Practices Act impacts many areas of law including transactional work.

Section 4.24 of the merger agreement is titled Compliance with Anti-Corruption and Certain Other Applicable Laws and states, in relevent part, as follows.

“(a) Neither the Company [Kanghui] nor any of its Subsidiaries is subject to any pending or, to the knowledge of the Company, threatened, investigation by the SFDA [State Food and Drug Administration in the PRC] or any other Governmental Authorities in the PRC or elsewhere pursuant to anti-corruption laws with respect to corrupt practices in the procurement by government entities, hospitals and other healthcare providers of pharmaceutical products and services, including acceptance of kickbacks or other illegal gains and benefits or other applicable anti-corruption laws.

(b) Within the preceding five calendar years, neither the Company, any of its Subsidiaries or any of their respective officers or directors, nor, to the knowledge of the Company, any of their respective employees, agents or other representatives or to the actual knowledge of the Company (without any obligation of inquiry or investigation) any of their respective distributors, in each case in connection with the activities and affairs relating to the Company or any of its Subsidiaries and in each case in violation of Applicable Law, either directly or indirectly: (i) has used or is using any funds for any illegal contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) has used or is using any funds for any direct or indirect unlawful payment to any foreign or domestic Government Official [defined in the merger agreement to mean "any officer, employee or other individual acting in an official capacity for a Governmental Authority or agency or instrumentality thereof (including any state-owned or controlled enterprise or a state-owned or controlled public hospital] or political party or official thereof or any candidate for any political office; (iii) has violated or is violating any provision of, or any rule or regulation issued under, any Applicable Law with the effect of prohibiting corruption or bribery, including, to the extent applicable, (a) the US Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78dd-1, et seq. (the “FCPA”), (b) the US Travel Act, 18 U.S.C. § 1952, (c) any Applicable Law enacted in any applicable jurisdiction in connection with, or arising under, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or (d) any other law, rule, regulation, or other legally binding measure of any foreign or domestic jurisdiction of similar effect or that relates to bribery or corruption (collectively, “Anti-Bribery Laws”); (iv) has failed to maintain in all material respects complete and accurate books and records as required by applicable Anti-Bribery Laws; (v) has established or maintained, or is maintaining, any unlawful fund of corporate monies or other properties; (vi) has made, offered to make, promised to make, ratified or authorized the payment or giving, directly or indirectly, of any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment, gift or anything of value to a foreign or domestic Government Official or political party or official thereof or any candidate for any political office to secure or attempt to secure any improper business advantage (within the meaning of such term under any applicable Anti-Bribery Law) or to obtain or retain business; or (vii) has otherwise taken any action that has caused, or would reasonably be expected to cause the Company or any of its Subsidiaries to be in violation in any material respect of any applicable Anti-Bribery Law. The Company and its Subsidiaries have conducted their businesses in compliance with the FCPA and other applicable Anti-Bribery Laws in all material respects and have instituted and maintain policies and effective disclosure controls and procedures and an internal accounting system designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith and that violations of the FCPA and PRC and other applicable Anti-Bribery Laws will be prevented, detected and deterred.

(c) Neither the Company nor any of its Subsidiaries nor any of their respective officers or directors, nor, to the knowledge of the Company, any of their respective employees, agents or other representatives has, in connection with the activities and affairs of the Company or any of its Subsidiaries within the preceding five calendar years, violated any applicable Anti-Bribery Law, or otherwise caused the Company or any of its Subsidiaries to be in violation of any applicable Anti-Bribery Law.

(d) None of the Company nor any of its Subsidiaries (nor any of their respective directors, officers, executives, employees, agents or other representatives), is party to or otherwise subject to the terms of any corporate integrity agreement, non-prosecution agreement, deferred prosecution agreement or any other arrangement similar to any of the foregoing arising from or otherwise relating to any such Proceeding.

(e) Since August 10, 2010, all imports, exports, re-exports, sales or transfers of products, services or Intellectual Property or related technical information of the Company and its Subsidiaries have been effected in all material respects in accordance with all applicable anti-corruption, export control, trade sanctions, anti-terrorism and anti-boycott Applicable Laws. All products shipped by the Company and its Subsidiaries have been accurately marked, labeled and transported in all material respects in accordance with such Applicable Laws.

[.....]

(g) No Governmental Authority has, to the Company’s knowledge, initiated, threatened to initiate, conducted, or concluded a material investigation or other proceeding against the Company or any of its Subsidiaries, or any of their respective Affiliates, directors, officers, employees, agents or other representatives, of alleged violations by the Company or any of its Subsidiaries, or any of their respective Affiliates, of any Applicable Laws referenced in Section 4.24.”

*****

As to its own FCPA scrutiny, Medtronic stated as follows in its most recent quarterly filing.

“On September 25, 2007 and November 16, 2007, the Company received letters from the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ), respectively, requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in several non-U.S. countries. A number of competitors have publicly disclosed receiving similar letters. Subsequently, the SEC and DOJ have made additional requests for information from the Company. The Company is fully cooperating with these requests.”

Of Note From the Tyco Enforcement Action

Thursday, September 27th, 2012

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

The Tyco Enforcement Action Should Be An FCPA Practitioners New Best Friend

During the negotiation phase of resolving an FCPA enforcement action with the DOJ and/or the SEC, a topic that often comes up, and an analysis that an FCPA practitioner frequently performs, is comparing the conduct at issue in the current case to prior enforcement actions. The enforcement agencies typically dismiss such comparative efforts by practitioners by saying that every enforcement action (and negotiation) is unique and that what the agencies did in one enforcement action is not binding in another. On the flip side, and a position I think is imminently reasonable, is that the enforcement agencies ought to be bound by some consistency in enforcement approaches.

If so, the Tyco enforcement action should be the FCPA practitioners new best friend.

For starters, this enforcement action involved a company that settled a wide-ranging fraud action in 2006 – one that involved a material FCPA component (see here for the prior SEC action). In that 2006 action, Tyco was permanently enjoined from, among other things, future FCPA violations. (For more on so-called “obey the law injunctions – see this recent guest post and this prior post).

The government bluntly stated in this week’s enforcement action that certain of the misconduct occurred even after the 2006 injunction. In addition, and per the government, the alleged misconduct in this week’s enforcement action was carried out by several different methods, the conduct occurred over a lengthy time period and involved conduct in approximately 25 countries.

Even so, against this backdrop of an injunction being violated and widespread misconduct in approximately 25 countries, Tyco was offered a non-prosecution agreement by the DOJ and the government did not require an imposition of a corporate monitor.

Should an FCPA practitioner in the future be faced with anything other than a DOJ NPA or should a monitor be insisted upon by the government, the Tyco enforcement action should be your new best friend.

Assessing Tyco’s Culpability

Yes, as noted above, Tyco is now an FCPA ”recidivist.” By my count, it has now joined ABB, Baker Hughes, and General Electric in that category.

Yet in reading the Tyco enforcement action, I am hardly surprised nor shocked. The company is a diversified global company operating in more than 60 countries with more than 100,000 employees worldwide. The vast majority of the conduct at issue in the enforcement actions allegedly occurred between 2000 and 2006.

Furthermore, there is no allegation or suggestion that Tyco (the parent company entity) knew of or participated in the improper conduct. For instance, the closest Tyco connection alleged is in the SEC’s complaint concerning conduct in Turkey. However, even there, the SEC only alleges a dual officer structure between the relevant subsidiary and executive officers while at the same time alleging that there was “no indication that any of these individuals [the dual officers] knew of the illegal conduct.” In other respects, the resolution documents allege or suggest that various indirect subsidiaries took steps to conceal the conduct at issue or circumvent Tyco’s internal controls.

I’ve said before and I will say again (based on nearly a decade of FCPA practice experience conducting FCPA internal investigations around the world) that if every large multi-national company with diverse global business units, with tens of thousands of employees scattered across the world, would hire FCPA counsel to do a complete and thorough world-wide review of the company’s operations, given the current enforcement theories, including the standardless books and records and internal controls theories of enforcement, 95% of companies would find problematic conduct (the other 5% of companies either hired counsel not well versed on the current enforcement theories and/or counsel did not look hard enough).

It Takes A While … Just To Negotiate

As noted in this previous post regarding Pfizer, the gray cloud that is FCPA scrutiny can hang over a company for a long time. On this issue, it is interesting to note that Tyco’s most recently quarterly filing stated that the company began its negotiations with the DOJ and SEC in February 2010.

The FCPA As An M&A Issue

The $26 million in combined fines and penalties will not be borne entirely by Tyco and its shareholders. The FCPA frequently finds its way into corporate divestitures and other transactions.

On this note, Tyco’s most recent quarterly filing stated as follows concerning previously spun off business units and now separate companies. “Covidien and TE Connectivity agreed, in connection with the 2007 Separation, to cooperate with the Company in its responses regarding these matters. Any judgment required to be paid or settlement or other cost incurred by the Company in connection with the FCPA investigation matters would be subject to the liability sharing provisions of the Separation and Distribution Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of the Company to Covidien and TE Connectivity, respectively, and provides that the Company will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among the Company, Covidien and TE Connectivity.”

In addition, as noted in the NPA, one of Tyco’s business units is poised to be spun-off to Pentair Inc. later this week. The NPA states as follows. “Tyco agrees that if this separation and merger occur during the term of this Agreement, Tyco shall, for any business entities, operations, or units involved in the conduct [at issue] and included in the spin-off and merger, including provisions in any separation agreement binding the relevant and culpable entities to the [compliance] obligations [set forth in the NPA]. Tyco shall no longer be responsible for ensuring compliance by any separated entities, operations or units with the obligations described in the [NPA].”

More Foreign Healthcare Providers as “Foreign Official”

This recent post traced the origins and prominence of the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA. Add the Tyco enforcement action to the list as the enforcement action included conduct involving Chinese health care providers, Saudi Arabian health care providers, and Polish health care providers.

With the Tyco action on the list, 5 of the 9 (55%) core corporate enforcement actions this year have been based, in whole or in part, on this theory.

More Chinese Design Institutes

The number of FCPA enforcement actions involving Chinese design institutes (an entity category that has given many an FCPA practitioner a headache trying to figure them out) has grown with the Tyco enforcement action. As noted in this previous post concerning Watts Water Technologies, other enforcement actions that have involved, in whole or in part, Chinese design institutes include the following: Rockwell Automation (here), ITT (here), and Avery Dennison (here).

Scrutiny Alerts

Tuesday, September 25th, 2012

This post provides updates on three company’s FCPA scrutiny: Kraft, Brookfield Asset Management, and H-P.

Kraft

In February 2010, Kraft acquired Cadbury, and with that, Cadbury’s Baddi, India facility which churns out various chocolates. Producing chocolates for the mouths of the masses is, all things considered, a low FCPA risk activity. But alas, company employees had to interact with India’s legendary bureaucracy in regards to licenses, permits, and excise tax issues. Therein was the FCPA risk as detailed in this recent Forbes India article.

In its most recent quarterly filing (here) the company stated as follows.

“A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010 we began reviewing and adjusting, as needed, Cadbury’s operations in light of U.S. and international standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities. As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a Cadbury facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are cooperating with the U.S. and Indian governments in their investigations of these matters.”

Brookfield Asset Management

The Wall Street Journal reported last week (here - “Brookfield Faces Brazil Accusations”) that “Brazilian authorities are investigating allegations that an executive at Brookfield bribed Sao Paulo officials to secure permits required for renovating three shopping malls in that city.” According to the article, the allegations were made by the former CFO of a Brookfield subsidiary in Brazil who was fired in 2010, and who the company has sued in Brazil for embezzling funds. The article further suggests that the former CFO has contacted the SEC about the matter.

Brookfield (here) is “global alternative asset manager with over $150 billion in assets under management … with a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity.” The company’s common shares trade on three stock exchanges, including the New York Stock Exchange.

H-P

As noted in this previous post, H-P has been under FCPA scrutiny since April 2010. Last week, the Wall Street Journal reported here (“German Prosecutors Name H-P in Bribery Indictment of Employees”) that German prosecutors named H-P in a criminal bribery case against one current and two former employees. According to the article, the “German prosecutors asked the court to attach H-P to the case, a motion that could lead to fines and other penalties if the court finds that the company benefited from the crime.” In the article, a H-P spokeswoman said current and former employees had been indicted on charges of “alleged conduct that occurred nearly 10 years ago by a former H-P company” and that H-P had been “only named as a side participant in the proceedings,” not indicted, and was fully cooperating with authorities.

The company’s most recent quarterly filing stated as follows.

“The German Public Prosecutor’s Office (“German PPO”) has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor’s Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an information technology network. The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation. In addition to information about the Russia GPO deal, the U.S. enforcement authorities have requested (i) information related to certain other transactions, including transactions in Russia, Serbia and in the Commonwealth of Independent States (CIS) subregion dating back to 2000, and (ii) information related to two former HP executives seconded to Russia and to whether HP personnel in Russia, Germany, Austria, Serbia, the Netherlands or CIS were involved in kickbacks or other improper payments to channel partners or state-owned or private entities. HP is cooperating with these investigating agencies.”

Friday Roundup

Friday, September 7th, 2012

A focus on entertainment and calling out FCPA / Bribery Act Inc. and a recent disclosure from a company that is part of FCPA history. It’s all here in the (slimmer than normal) Friday roundup.

Recent Comments From The Director of the U.K. SFO

The briberyact.com previously mentioned here recent comments made by David Green (Director of the U.K. Serious Fraud Office) in a Daily Mail article (here) that “mainstream corporate entertaining” is of little concern to the SFO. Green states in the article as follows. “We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the ‘serious champagne office.’”

The same can not always be said of the DOJ or SEC. Although such seemingly minor corporate entertainment expenditures have never been the sole focus of an enforcement action, several enforcement actions have included such allegations. For instance, the UTStarcom enforcement action (see here for the prior post) contained allegations about a $600 bottle of wine. The Data Systems and Solutions enforcement action (see here for the prior post) contained allegations regarding a Cartier watch. The IBM enforcement action (see here for the prior post) contained allegations about a camera. The RAE Systems enforcement actions (see here for the prior post) contained allegations about kitchen appliances, business suits, and high-priced liquor. Numerous other examples abound. One must assume that the enforcement agencies included such allegations in the resolution documents for a reason, not just to fill up paper.

Alexandra Wrage (President of Trace International) noted the U.K. / U.S. irony in this recent piece for Corporate Counsel. ”[W]hereas the U.S. law permits these expenditures [facilitation payments and reasonable entertainment expenses], within reason, and then enforces when companies overstep, the U.K. prohibits them, but assures the public that they won’t be prosecuted.”

Green’s comments to the Daily Mail were also notable for his calling out of FCPA (or as the case may be Bribery Act) Inc. The Daily Mail article notes as follows. “[Green] criticised American law firms that had taken advantage of the uncertainty. ‘It is in their interest to focus attention on the Bribery Act. They put up talking heads and arrange conferences. It is a huge industry.’” Green’s comments are similar to those noted in this prior post by Kenneth Clark (the U.K.’s anti-corruption champion) who stated, in the House of Commons, leading up to the Bribery Act as follows. “I hope to put out very clear guidance [regarding the Bribery Act] to save [businesses] from the fears that are sometimes aroused by the compliance industry, the consultants and lawyers who will, of course, try to persuade companies that millions of pounds must be spent on new systems that, in my opinion, no honest firm will require to comply with the Act.”

Harris Corp.

As previously noted in this Wall Street Journal Corruption Currents post, Harris Corporation disclosed as follows in its recent annual report.

“[I]n April 4, 2011, we completed the acquisition of Carefx and thereby also acquired its subsidiaries, including in China (“Carefx China”). The consolidated revenue of the Carefx China operations for fiscal 2012 was approximately $1.4 million, or less than 0.1% of our consolidated revenue. In connection with our integration activities and the subsequent audit of the financials of the Carefx China operations, we became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly. In response, with the concurrence of our Audit Committee, we initiated an internal investigation, with the assistance of outside legal counsel, to determine whether violations of the FCPA potentially occurred. In the course of our investigation, we learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers and potential customers. Although our investigation is not complete, we have already taken remedial actions related to the Carefx China operations, including changes to internal control procedures, termination of the gift-giving practice, additional compliance training and termination of the employment of certain individuals. The preliminary results of the investigation have been disclosed to our Audit Committee, Board of Directors and auditors, and we have also contacted the U.S. Department of Justice and the SEC to voluntarily disclose that we are conducting the investigation and to advise that it is our intent to fully cooperate with any investigation that they may conduct with respect to this matter. We cannot predict at this time any regulatory action that may be taken with respect to this matter or any other potential consequences that may result. However, based on the information available to date, we do not believe that this matter will have a material adverse effect on our financial condition, results of operations or cash flows.”

As noted in this previous post, Harris Corp. is part of FCPA history. It is believed to be the first, and to this day only, publicly traded company to have put the DOJ to its burden of proof at trial. As noted in the post, Harris Corp. prevailed in the enforcement action (1990-1991). I noted in the previous post as follows. If non-prosecution and deferred prosecution agreements existed in 1990, would Harris have resolved the enforcement action via such a resolution vehicle? Likely yes. Yet Harris and the individual defendants all prevailed at trial.

If the conduct Harris recently disclosed gives rise to an enforcement action, will Harris likewise this time around put the DOJ to its burden of proof? Even if it has valid legal and factual defenses, not a chance. NPAs and DPAs exist today and resolving FCPA inquiries is often more about cost-beneft / risk-reward, than law and facts.

*****

A good weekend to all.

Friday Roundup

Friday, August 24th, 2012

The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality. It’s all here in the Friday roundup.

Stung By The Sting

The manufactured Africa Sting case may be over, but it effects are still being felt.

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case. The company stated in its recent quarterly filing (here) as follows.

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.

Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson. The company disclosed in its most recent quarterly filing (here) as follows.

“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”

Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.

Orthofix

This previous post discussed the July enforcement action against Orthofix International. As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal. The information (here) was recently unsealed. In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.” “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”

IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.

Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)

Mexican Official 2 – the purchasing director of Magdelena de las Salinas

Mexican Official 3 – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)

Mexican Official 4 – a sub-director of IMSS

According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”

Under the heading “Internal Controls” the information alleges, among other things, as follows. “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca. Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca. Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A. Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”

The information charges one count of violating the FCPA’s internal control provisions.

Checking In On Wal-Mart

During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows. ”Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.” Later in the call, the following was said. “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”

In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.” According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”

Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post). As indicated in this recent press release and this recent letter the lawmakers are growing impatient. In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.

“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.

During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.

In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”

Pipeline Report

Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.

NCR

Global technology company NCR Corp. recently disclosed here as follows.

“NCR has received anonymous allegations from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa, including allegations which, if true, might constitute violations of the Foreign Corrupt Practices Act. NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue. NCR takes all allegations of this sort seriously and promptly retained experienced outside counsel and began an internal investigation that is ongoing. NCR does not comment on ongoing internal investigations. Certain of the allegations relate to NCR’s business in Syria. NCR has ceased operations in Syria, which were commercially insignificant, notified the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) of potential apparent violations and is taking other measures consistent with OFAC guidelines.”

Based on the disclosure, an analyst downgraded NCR stock (see here) causing shares to drop approximately 10%.

Expro

As reported in this Wall Street Journal Corruption Currents post, Expro International (an oil field management company owned by a Goldman Sachs-backed private equity consortium) “is re-investigating claims that its employees paid bribes in Kazakhstan.” The report states as follows. “Expro International and the consortium, Umbrellastream, received allegations from an anonymous tipster in May that two of Expro’s former operations coordinators in Western Kazakhstan oversaw and approved bribes to customs officials there from 2006 until summer 2009, according to an email reviewed by Corruption Currents. The alleged bribes were paid to clear Expro’s equipment through customs to avoid costly delays, the tipster said. The allegations have sparked an internal investigation by Expro’s lawyers at Gibson, Dunn & Crutcher LLP into the claims, according to another email. But it appears the investigation is not the first time Expro has scrutinized its operations in Kazakhstan.”

Add a few, but take one off.

As noted in this recent Friday roundup, Academi, Inc., formerly known as Xe Services, formerly known as Blackwater recently resolved a non-FCPA case and the DPA specifically stated that the agreement “does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.” As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq and as noted in this previous post, its FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).

However, as on-line news agency Main Justice reports here, reference to the FCPA investigation in the recent DPA appears to have been a drafting error. Citing a July 19th letter to the company, Main Justice reports that the DOJ has closed its “foreign bribery inquiry” of the company. Main Justice cites the following portion of the declination letter. “[The DOJ has closed its inquiry] based on a number of factors, including but not limited to, the investigation undertaken by Academi and the steps taken by the company to enhance its anti-corruption compliance program.”

A Safe Assumption

This previous post regarding the recent Pfizer enforcement action raised the following question(s).

Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set? Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort? Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?

The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety. One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).

The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative. The article states as follows.

“[The conduct at issue in the enforcement action] puts the safety of consumers at risk. If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide. The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”

Alternative Reality

Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed. Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.

“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce. All citizens and companies become subject to the Justice Department’s essentially unfettered power. Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game. It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”

*****

A good weekend to all.