Smith & Nephew Reaches $22 Million Settlement

U.K.-based medical device maker Smith & Nephew plc agreed to pay $22.2 million to settle Foreign Corrupt Practices Act offenses committed by its U.S. and German subsidiaries.

The company admitted bribing government-employed doctors in Greece for more than a decade to win business.

The U.S. subsidiary Smith & Nephew Inc. paid a $16.8 million criminal fine to the DOJ and entered into a deferred prosecution agreement. The parent company Smith & Nephew plc settled the SEC’s charges by paying $5.4 million in disgorgement and prejudgment interest. The company is required to retain an independent compliance monitor for eighteen months to review its FCPA compliance program.

Smith & Nephew Inc. is a Delaware corporation headquartered in Memphis. It is a wholly-owned subsidiary of Smith & Nephew plc, which is traded on the New York Stock Exchange (symbol: SSN).

The DOJ and SEC began their investigation of the orthopedic implant industry in 2007. Smith & Nephew, Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Wright Medical, and Medtronic Inc. disclosed FCPA investigations after they settled U.S. domestic bribery charges. The SEC and DOJ wanted to know whether the companies bribed doctors employed by government-owned hospitals overseas to use their products.

Doctors at overseas government owned or operated hospitals are considered 'foreign officials' under the FCPA.

In April last year, Johnson & Johnson paid $70 million to the DOJ and SEC to resolve bribery charges related to payments in Greece, Poland, and Romania. In the U.K., Johnson & Johnson's subsidiary DePuy International Limited paid £4.8 million in a civil recovery action.

The DOJ said then that Johnson & Johnson "cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry." Both the DOJ and SEC said Johnson & Johnson received a substantial discount in the settlement due to its cooperation.

A DePuy sales executive was sentenced to a year in prison in the U.K. last year. Roberty John Dougall pleaded guilty to making £4.5 million in corrupt payments to Greek medical professionals within the state-controlled healthcare system.

Beginning in 1997, Smith & Nephew’s subsidiaries made payments to three shell entities in the United Kingdom controlled by a distributor. About $9.4 million was used by the distributor to bribe Greek doctors to buy Smith & Nephew products.

Smith & Nephew failed to act on numerous red flags of bribery, the SEC said, after employees learned about the payments. The SEC said,

In one e-mail exchange between employees at the U.S. subsidiary and the distributor concerning whether to reduce the distributor’s commissions, the distributor stated, “… In case it is not clear to you, please understand that I am paying cash incentives right after each surgery…”

U.S. subsidiary Smith & Nephew Inc. and German subsidiary Smith & Nephew Orthopaedics GmbH sold orthopedic products in Greece since the 1970s through the Greek distributor. 

The government's investigation into the medical device industry is continuing, the DOJ and SEC said.

View the DOJ's February 6, 2012 release here.

View SEC Litigation Release 22252 and Accounting and Auditing Enforcement Release No. 3363 (both dated February 6, 2012) in Securities and Exchange Commission v. Smith & Nephew PLC, Civil Action No. 1: 12-CV-00187 (D.D.C.)(GK) (February, 6, 2012) here.

Download the SEC's civil complaint here.

The 2011 Watch List

The Justice Department said this year it has about 150 ongoing  FCPA investigations and prosecutions. It doesn't name those under the microscope and, while issuers probably should disclose investigations, not all of them do. Non-issuers, on the other hand, usually aren't required to say a word, so most don't.

Of the files in the DOJ's hopper, we think the list below includes more than half of them, counting individuals being investigated at some of the companies mentioned. (Tom Fox picked his favorite investigations in a great post on Monday.)

Most of the cases we've included represent something unusual -- they involve brand names, multiple defendants, high-profile news stories, unique disclosures, etc. There will also be plenty of surprises in 2011 -- the SEC is hearing from a new FCPA whistleblower every day.

In the coming year, of course, we'll cover all FCPA-related enforcement actions, as we've done in the past.

Some pending corporate investigations on our watch list include:

Alcoa -- criminal investigations of the company, its agent and some executives, growing out of allegations in a civil fraud and RICO suit filed by Bahrain's Alba.

Aon -- A U.K. subsidiary of the U.S. parent was fined £5.25 million in 2009 for failing to recognize and control the risks of overseas payments being used as bribes. U.S. investigations were first disclosed in 2007.

Avon -- The beauty-products giant in 2008 disclosed promotional payments in China that may violate the FCPA. This year, it reportedly suspended three executives in China and another in New York and expanded its internal to "a dozen or more countries."

CB Richard Ellis -- In February this year, the company self-disclosed to the DOJ and SEC potentially improper payments by employees for entertainment and gifts to Chinese government officials.

China Northeast Petroleum Corporation -- An American director who chaired the board's audit committee made a loud exit this year after the board refused to investigate alleged improper practices in China.

Drug companies -- All of them, apparently, are under scrutiny for overseas sales practices, according to unusual public warnings emanating from the DOJ during 2010.

Hewlett Packard -- It disclosed compliance problems in Russia, former CIS countries, and Serbia, potentially involving employees in Russia, Germany, Austria, Serbia, the Netherlands and perhaps other countries.

JGC -- The Japanese company is the last of the four TSKJ partners still not charged in connection with bribes in Nigeria.

Medical Device Makers -- Biomet Inc., DePuy, Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc, Medtronic Inc., and Wright Medical disclosed FCPA investigations that started in 2007 and 2008.

Morgan Stanley -- In 2009, it reported potential illegal payments in China and fired some employees allegedly involved.

PBSJ Corporation -- In December 2009, the Florida-based non-public "issuer" self-disclosed an internal investigation into potential FCPA violations, possibly in connection with road-building projects.

Schlumberger -- There were frequent press press reports during 2010 about payments in Yemen that might have violated the FCPA.

Smith & Wesson -- The biggest company involved in the shot-show case disclosed in 2010 a DOJ / SEC investigation.

Sojitz -- The Japanese trading company allegedly paid bribes to Bahraini officials, according to a civil suit filed by Alba. Like Alcoa, the U.S. intervened in Alba's suit to protect its criminal investigation into potential FCPA violations.

Team Inc. -- The oil rig operator in 2009 disclosed payments in Trinidad that might violate the FCPA.

Weatherford -- The giant oil-field services company disclosed an overseas bribery investigation in 2007 that has since expanded to include allegations of violating the Iraq oil-for-food program and possible illegal trade with Cuba, Iran, Sudan, and Syria.

FCPA-related cases in the post-indictment phase with trials pending include:

The CFE defendants (all charged in connection with alleged bribes to employees at Mexico's state-owned utility, the Comisión Federal de Electricidad):

Enrique Faustino Aguilar Noriega

Angela Maria Gomez Aguilar

Dr. Keith E. Lindsey

Steve K. Lee

Lindsey Manufacturing

The CCI defendants:

Stuart Carson

Hong (Rose) Carson

Paul Cosgrove

David Edmonds

Han Yong Kim

Flavio Ricotti

The Shot-show defendants (grouped for trial as proposed by the DOJ):

The first group: Daniel Alvirez, Lee Allen Tolleson, Andrew Bigelow, Pankesh Patel, John Benson Weir III

The second group: David Painter, Lee Wares, Jonathan Spiller, Michael Sacks, Israel Weisler

The third group: Patrick Caldwell, Stephen Giordanella, John Mushriqui, Jeana Mushriqui, John Godsey, Mark Morales

And the fourth group: Helmie Ashiblie, Yochanan Cohen, Haim Geri, Amaro Goncalves, Saul Mishkin, Ofer Paz

There are three appeals pending in FCPA-related cases that we'll be watching in 2011:

Frederick Bourke

William Jefferson

Gerald and Patricia Green

Bourke and Jefferson are free on bail pending their appeals. The Greens are serving their six-month prison terms.

Readers are welcome to let us know about other companies and people they're watching.

DePuy Exec Jailed

The U.K.'s Serious Fraud Office said this week that a former DePuy executive pleaded guilty to making £4.5 million in corrupt payments to Greek medical professionals within the state-controlled healthcare system. He was sentenced to 12 months in prison.

Robert John Dougall, 45, was DePuy's marketing director. The company, acquired by Johnson & Johnson in 1999, makes and sells orthodpedic devices. The SFO said from 2002 to 2005, Dougall arranged the payment of commissions to surgeons as an inducement to use DePuy's products. The payments were made through agents and offshore accounts.

The SFO said its investigation began "following a referral by the U.S. Department of Justice in October 2007."  Dougall, it said, is the first "co-operating defendant" in a major SFO corruption investigation, which is ongoing.

Dougall was first charged by the SFO in November 2009. In September 2007, DePuy and four other orthopedic device makers -- Biomet, Zimmer, Smith & Nephew and Stryker -- agreed to pay $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products. Since the U.S. settlement, the four companies, along with Medtronic Inc. and Wright Medical Group, have disclosed DOJ and SEC Foreign Corrupt Practices Act investigations. See our post here.

A copy of the SFO's April 14, 2010 release can be viewed here.

Ex-Johnson & Johnson Exec Charged In U.K.

Britain's Serious Fraud Office charged a former executive of a Johnson & Johnson subsidiary with overseas corruption. Robert John Dougall, 44, an ex-vice president of DePuy International Limited of Leeds, appeared Tuesday in the City of Westminster Magistrates' Court. He's accused of making corrupt payments to medical professionals in the Greek public healthcare system in order to sell orthopaedic products. The conduct allegedly occurred between February 2002 and December 2005.

The summons charged Dougall with conspiracy to corrupt in violation of the Criminal Law Act 1977. He was released on unconditional bail. A copy of the SFO's December 1 announcement is here.

The SFO said it began working on the case in March 2008. In February 2007, Johnson & Johnson said it had "voluntarily disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission that subsidiaries outside the United States are believed to have made improper payments in connection with the sale of medical devices in two small-market countries. " The company said then that Michael J. Dormer, the officer responsible for the overseas medical device business, had accepted responsibility and retired.

In September 2007, DePuy and four other orthopedic device makers -- Biomet, Zimmer, Smith & Nephew and Stryker -- agreed to pay $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products. Since the U.S. settlement, the four companies, along with Medtronic Inc. and Wright Medical Group, have disclosed DOJ and SEC Foreign Corrupt Practices Act investigations. 

The Serious Fraud Office -- which has a new-look website and says it now has 88 ongoing cases -- didn't say if DePuy or others will also face charges.

An Abundance Of Caution

The Justice Department last week issued its first Foreign Corrupt Practices Act Opinion Procedure Release of the year. The Requestor in Release No. 09-01 is a medical device maker that wants to introduce its product to a foreign government. Unlike its few global competitors, it isn't well known in the target country. To introduce itself, it plans to donate samples to government health centers -- ten devices for ten different centers -- worth $19,000 each or $1.9 million for all 100 units.

The medical centers will select the 100 ultimate recipients of the devices. All candidates will have to be financially needy and generally can't be family members of government officials.

The DOJ said the Requestor's plan won't trigger any FCPA enforcement action. Why not? Because the donated devices won't go to government officials but to needy patients. Bottom line: No foreign official, no FCPA offense.

Sound familiar? It should. The same question came up in FCPA Opinion Procedure Releases No. 97-02 (November 5, 1997) and No. 06-01 (October 16, 2006). We talked about them here. So if the question's been asked and answered twice already, why did this Requestor ask again? Probably because medical device makers have been feeling the heat of the FCPA.

The DOJ and SEC are investigating their overseas sales practices. In 2007, Depuy and four other device makers paid $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products. The same year, Johnson & Johnson (which owns Depuy) self-disclosed that "subsidiaries outside the United States are believed to have made improper payments in connection with the sale of medical devices in two small-market countries." So the SEC and DOJ want to know whether the companies bribed overseas doctors at government-owned hospitals to use their products.

Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed FCPA investigations during 2007; Wright Medical reported a similar investigation in June 2008.

View a copy of Opinion Procedure Release No. 09-01 (August 3, 2009) here.
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