Cardinal Health's 2003 Acquisition of Syncor Established Important FCPA Precedents Concerning Pre-Merger Due Diligence and Successor Liability
Monty Fu, the founder of Syncor International Corp., agreed with the Securities and Exchange Commission on September 27, 2007 to resolve U.S. Foreign Corrupt Practices Act charges by consenting to a permanent injunction against FCPA books-and-records violations and agreeing to pay a $75,000 civil penalty. Fu was Syncor's CEO from 1985 to 1989 and board chairman from 1985 to November 6, 2002, when he went on paid leave until he resigned in December 2002.
Over a 17-year period ending in 2002, Syncor's Taiwan subsidiary made corrupt payments to doctors at government-owned and managed hospitals. In January 2003, Cardinal Health Inc. acquired Syncor, whose common stock before the acquisition had been registered with the SEC and listed on NASDAQ's National Market.
In December 2002, the SEC settled civil and administrative proceedings against Syncor, which paid a $500,000 civil penalty and agreed to a cease-and-desist order. See SEC v. Syncor International Corp., C.A. No. 1:02CV02421 (EGS) (D.D.C.) (filed Dec. 10, 2002), Litigation Release No. 17887 (Dec. 10, 2002). The DOJ at the same time settled criminal FCPA charges against Syncor Taiwan, which paid a $2 million fine. See U.S. v. Syncor Taiwan, Inc., No. 02-CR-1244-ALL (C.D. Cal.) (filed Dec. 4, 2002). The SEC did not explain why Fu's case took so long to resolve.
The 2002 cases and the circumstances of Cardinal Health's subsequent acquisition of Syncor were legally significant. They established or helped clarify the application of successor liability for FCPA violations and an acquirers' duty to discover, disclose and remedy potential FCPA violations of its target.
Cardinal Health (NYSE: CAH) is commonly believed to be the "Requestor" in DOJ Opinion Procedure Release 2003-01 (January 15, 2003) . The Release noted that:
"The Requestor is a U.S. issuer. Requestor intends to purchase the stock of Company A, another U.S. company which has both U.S. and foreign subsidiaries, and thereafter operate it as a subsidiary. During its due diligence efforts, Requestor learned that officers of a foreign subsidiary, including officers located within the United States, authorized and made payments to individuals employed by foreign state-owned entities to obtain or retain business. Requestor notified Company A of its findings, and both companies commenced parallel investigations of Company A's operations throughout the world. The companies then disclosed the results of their investigations to the Department of Justice and the staff of the U.S. Securities and Exchange Commission (the "SEC")."
The Release then said that "[w]ith Requestor's encouragement and approval, Company A [Syncor] has taken certain remedial actions, including making appropriate disclosures to the investing public, issuing instructions to each of its foreign subsidiaries to cease all payments to foreign officials, and suspending the most senior officers and employees implicated in the payments pending the conclusion of its investigation."
"Both Requestor and Company A wish to proceed with the acquisition," the Release continued. "Requestor, however, is concerned that by acquiring Company A it is also acquiring potential criminal and civil liability under the FCPA for the past acts of Company A's employees." In light of the Requestor's concerns, it "undertakes to do the following once the transaction closes and it becomes the owner of Company A:
1. Requestor will continue to cooperate with the Department and the SEC in their respective investigations of the past payments and will similarly cooperate with foreign law enforcement authorities;
2. Requestor will ensure that any employees or officers of Company A found to have made or authorized unlawful payments to foreign officials are appropriately disciplined;
3. Requestor will disclose to the Department any additional pre-acquisition payments to foreign officials made by Company A or its subsidiaries that it discovers after the acquisition;
4. Requestor will extend to Company A its existing compliance program. Such compliance program will, if necessary, be modified to insure that it is reasonably designed to detect and deter, through training and reporting, violations of the FCPA and foreign bribery laws; and
5. Requestor will ensure that Company A implements a system of internal controls and makes and keeps accurate books and records."
The DOJ concluded by saying it would not hold the Requestor responsible for the pre-acquisition conduct "of companies that will be wholly-owned subsidiaries following the acquisition. This statement of intent does not, of course, apply to any payments made after the date of acquisition, nor does it apply to individuals involved in making or authorizing the payments." The Release was understood to mean that acquirers who do less than the Requestor / Cardinal Health did or promised to do may face successor civil and criminal liability for FCPA violations committed by target companies before the acquisition.
The principles established and discussed in the Cardinal Health - Syncor Release were echoed in Opinion Procedure Release 04-02 (July 12, 2004), requested by JPMorgan Partners Global Fund and others trying to acquire upstream oil, gas and petrochemical businesses from ABB Ltd.
View the SEC's September 28, 2007 Litigation Release No. 20310 Here.
View the SEC's Complaint Against Monty Fu Here.
View Opinion Procedure Release 2003-01 Here.
View Opinion Procedure Release 2004-02 Here.