|
|
SEC Opens Five New FCPA Investigations of Pharmaceuticals and Medical Device Makers
November 1, 2007
In the past few weeks, at least five medical device manufacturers have announced that the Securities and Exchange Commission (SEC) is investigating them for potential violations of the Foreign Corrupt Practices Act (FCPA). The probes are looking into the relationships of the manufacturers — and those of their overseas subsidiaries — with foreign government officials. The companies under investigation include Medtronic Inc., Zimmer Holdings Inc., Stryker Corp., Biomet Inc., and Smith & Nephew PLC. These announcements followed the announcement on September 27, 2007 that the SEC settled a civil action against Immucor, Inc. and its Chief Executive Officer Gioacchino De Chirico. De Chirico agreed to pay a $30,000 penalty after being charged with making a payment to the director of a public hospital in Milan, Italy for preferential treatment in selecting contracts for supplies and equipment, and of falsely accounting for the payment by describing it as a consulting fee. The Trend These probes by the SEC are not the first in the medical device and pharmaceutical industries; they follow a growing trend over the past few years:
- Syncor: In 2002, Syncor Taiwan, Inc. pleaded guilty to making improper payments to physicians employed by various state-owned hospitals in connection with the sale of radiopharmaceutical products and for referrals of patients to medical imaging centers operated by Syncor. The court imposed a criminal fine of $2 million on Syncor Taiwan, Inc., and the U.S. parent company, Syncor International Corp., paid a $500,000 penalty to the SEC. Just last month, Monty Fu, the founder of Syncor International Corp., agreed to resolve the FCPA charges brought against him personally, consenting to a permanent injunction against aiding and abetting FCPA books-and-records and internal controls violations and agreeing to pay a $75,000 civil penalty.
- Schering-Plough: In 2004, Schering-Plough Corporation (SPC) settled an enforcement action brought against it by the SEC after SPC's Polish subsidiary made a series of payments to a local Polish charitable foundation to induce the foundation's president, who was also a Polish government official, to influence the purchase of Schering-Plough's pharmaceutical products. The case was noteworthy since the payments were made to a bona fide charity and not directly to the foreign official. However, according to the SEC, the payments were not recorded accurately in the subsidiaries' books and records.
- DPC: In 2005, DPC (Tianjin) Co. Ltd. agreed to pay a criminal penalty of $2 million in 2005, after pleading guilty to making $1.6 million in bribes in the form of illegal "commissions" to physicians and laboratory personnel employed by government-owned hospitals in China. The SEC also required DPC Tianjin's parent company, Diagnostics Products Corporation, to disgorge $2.8 million — its gains from the Chinese market.
- Micrus: Also in 2005, Micrus Corporation, a manufacturer of medical devices used in the treatment of neurovascular diseases, voluntarily notified the DOJ of potential FCPA violations. The ensuing investigation revealed that Micrus had paid more than $105,000 disguised in Micrus's books and records as stock options, honorariums and commissions to doctors employed at publicly owned and operated hospitals throughout Europe in return for the hospitals' purchase of Micrus' products. Micrus agreed to resolve its criminal liability associated with potential violations of the FCPA by paying $450,000 in penalties, retaining an independent compliance expert for a period of three years, and cooperating fully with the investigation.
What to Expect There are good reasons to believe that federal investigations in the medical device and pharmaceutical industries will expand:
- Government's Propensity to Focus on Industry Segments and Specific Practices. Recent enforcement patterns suggest that high-profile FCPA investigations in a particular geographic region or market segment are likely to lead to broad industry or sector inquiries by the government. For example, shortly after the announcement of high-profile and very large settlements in the Baker Hughes and Vetco Gray matters, a number of companies operating in the same region and business sector announced that they had initiated internal investigations or made voluntary disclosures to the DOJ and SEC about FCPA-related matters. The Vetco Gray investigation showed that Panalpina World Transport Holdings Ltd. served as a conduit for payments to Nigerian customs agents. Panalpina then started an internal inquiry after federal investigators requested documents from it in connection with those payments. At least eleven oil and gas companies came under investigation by federal authorities for payments to Panalpina as a result of the probe. Given this pattern, it is not far-fetched to think that there will be additional regulatory scrutiny and voluntary self-reporting in the medical device and pharmaceutical industries.
- Greater Focus on Improper Payments to Secure Regulatory Approval. The DOJ and SEC have historically focused FCPA investigations on improper payments made to obtain government contracts or sales. In recent years, however, the DOJ and SEC have aggressively focused on pursuing FCPA cases based on improper payments made to obtain favorable regulatory treatment (such as the award of a license or permit). Earlier this year, for example, the Dow Chemical Company (Dow) agreed to pay a $325,000 civil penalty following an FCPA investigation involving numerous alleged improper payments made to Indian government officials by a subsidiary of Dow in order to register several agro-chemical products slated for marketing in time for India's growing season. For medical device and pharmaceutical companies whose products require approval from international regulatory authorities, this trend has particular relevance.
- Increased International Law Enforcement Activity. US enforcement efforts in this area may be magnified by the increase of anti-bribery law enforcement in the medical products industry internationally. Throughout Europe, law enforcement and regulatory agencies are increasingly investigating the relationships between manufacturers and healthcare professionals. After the United States, investigations and enforcement activities involving healthcare sales and marketing activities appear to be most common in Europe. Prosecutors in Italy and Germany are now vigorously pursuing criminal investigations into manufacturer relationships with healthcare professionals, often using electronic wiretaps, search warrants, and other criminal enforcement techniques.
China also recently made it clear that it will crack down on bribery in the medical device and pharmaceutical industries. In July, for example, the head of China's State Food and Drug Administration, Zheng Xiaoyu, was executed after a court found him guilty of accepting bribes in exchange for approving medical products for sale in China. At least one media account has indicated that before his execution Xiaoyu named at least eight Western companies from whom he claimed to have received improper payments.
What to Know
The recent trend of federal FCPA investigations illustrates the broad reach of the FCPA. Many of the settlements so far affecting the medical device and pharmaceutical industries have resulted in criminal dispositions along with a parallel SEC settlement. The cases highlight that in addition to criminal bribery charges public companies also face potential books and records violations where payments to doctors are misrecorded. Moreover, where the evidence is not sufficient for a criminal violation, such as in Schering-Plough and the Fu settlements, the SEC is still able to charge them for civil violations of the books and records provisions of the FCPA. FCPA investigations are increasingly focused on the manner in which U.S. issuers and their foreign subsidiaries record payments under the theory that the FCPA's "books and records" and "internal controls" provisions allow the government to bring actions against public companies for the actions of their subsidiaries, even if the parent has no knowledge of the subsidiary's actions and bribery itself cannot be proven. According to the SEC, a parent corporation is liable under those provisions if they fail to install adequate internal controls to scrutinize links and transactions between their overseas subsidiaries and government officials (including members of international regulatory bodies in a position to approve a medical device or pharmaceutical manufacturer's products and physicians employed by state-owned hospitals). Proper risk assessment combined with an effective compliance program that is pushed down to all relevant subsidiaries, rigorous due diligence on agents hired by overseas subsidiaries, along with careful scrutiny of charitable contributions, and payments in connection with requests for regulatory approval is expected in order for the parent company to be compliant with the FCPA. This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Richard Grime, an O'Melveny partner licensed to practice law in the District of Columbia, Jeremy Maltby, an O'Melveny partner licensed to practice law in California, New York and the District of Columbia, David Deaton, an O'Melveny counsel licensed to practice law in California, and Anton Jongeneel, an O'Melveny associate whose California admission is pending, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
Related Offices
|
|