Johnson & Johnson will pay a $21.4 million penalty to resolve criminal FCPA charges with the DOJ and $48.6 million in disgorgement and prejudgment interest to settle the SEC’s civil charges.
Entries in Wright Medical (8)
Of the 150 files in the DOJ's hopper, our watch list includes more than half of them.
For the second time in recent months, U.K. judges have warned the Serious Fraud Office not to make plea deals in overseas bribery cases, throwing into doubt the agency's whistleblower program and its partnership with the U.S. Justice Department in resolving global corruption cases.
This week a U.K. appeals court affirmed the suspended sentence agreed between the SFO and a former sales executive who helped bribe Greek doctors and then turned whistleblower. But at the same time, the court said the SFO's U.S.-style approach was unconstitutional.
Robert John Dougall, 45, formerly marketing director of DePuy, pleaded guilty in April to making £4.5 million in corrupt payments to Greek medical professionals within the state-controlled healthcare system. DePuy, acquired by Johnson & Johnson in 1999, makes and sells orthopedic devices.
The SFO said Dougall was the first "co-operating defendant" in a major SFO corruption investigation. It had recommended leniency in exchange for his guilty plea and help in the case, as typically happens in U.S. white-collar prosecutions. The SFO asked for a suspended sentence; the trial court instead sent Dougall to prison for a year.
The appeals court reversed the sentence but hammered the SFO. It said "agreements between the prosecution and the defense about the sentences to be imposed in fraud and corruption cases were constitutionally forbidden" and solely under the purview of judges, according to reports.
In March, Britain's second-ranking criminal judge said the $12.7 million fine the SFO agreed with a U.K. division of Innospec Inc. went beyond the SFO's authority. Delaware-based Innospec had reached what it believed was a $40 million global settlement with U.S. prosecutors and the SFO.
At Innospec's hearing, Lord Justice Thomas, the deputy head of criminal justice in the U.K. courts, said: “I have concluded that the director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again.” Although he confirmed the U.K. part of the fine agreed by the SFO, he called the amount "wholly inadequate." See our post here.
The SFO first charged Dougall in November 2009 after a "referral" from the U.S. Justice Department. Two months earlier, DePuy and four other orthopedic device makers -- Biomet, Zimmer, Smith & Nephew and Stryker -- had 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.
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.
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.
It's an annual event. Democrats in Congress have re-introduced a bill from last year to regulate the way monitors are selected, paid and held accountable. The Project on Government Oversight has a nice report here. The retitled "Accountability in Deferred Prosecution Act of 2009" can be downloaded here.
Two of the bill's sponsors are from New Jersey, where the big flap about monitors first started. In late 2007, New Jersey's U.S. Attorney Chris Christie used deferred prosecution agreements to settle domestic bribery charges against orthopedic device makers. To monitor their compliance, he selected former U.S. Attorney General John Ashcroft, former U.S. Attorney for the Central District of California Debra Yang, former New Jersey Attorney General David Samson, former U.S. Attorney for the Southern District of New York in Manhattan David N. Kelly, and former counsel to the Federal Trade Commission during the Reagan Administration John Carley.
Sticker shock. The monitors were seen as being close to Christie. On top of that, his ex-boss John Ashcroft's monitorship had a price tag of $28 million to $52 million for 18 months of work. Democratic lawmakers (and plenty of Republicans) were unhappy to learn that federal prosecutors, acting alone, could tap party big shots and friends for such lucrative (part-time) posts. In early 2008, Congress launched investigations into all aspects of the monitors -- their appointment, pay, oversight and reporting responsibilities -- and even whether deferred prosecution agreements make sense in the first place. The hearings ended without any action by the Congress.
Where are they now? The orthopedic device makers completed their deferred prosecution agreements a couple of weeks ago. In their September 2007 settlements, they together paid $310 million to resolve charges that they bribed U.S. doctors to buy their products. After that, the Justice Department and the Securities and Exchange Commission began investigating whether the companies also gave kick-backs to overseas doctors employed by government-owned hospitals. Such payments could violate the Foreign Corrupt Practices Act. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed FCPA investigations during 2007 and Wright Medical reported a similar investigation in June 2008.
Christie, meanwhile, resigned as New Jersey's U.S. Attorney in November 2008 and is running for governor as a Republican. In recent days he's had to defend his anti-corruption image against charges concerning the monitor appointments. The AP's report is here. "At issue," the AP says, "is Christie's acceptance of campaign cash from Herbert Stern, a former monitor for the state's medical and dental school, and his choice of two other monitors with whom he had prior ties: John Ashcroft, the former U.S. attorney general and Christie's old Justice Department boss, and David Kelley, a former U.S. attorney in Manhattan who investigated a stock fraud case involving Christie's younger brother, Todd, but declined to prosecute him." Christie, 46, says he's done nothing wrong.
Don't need 'em, don't want 'em. The always-resourceful Corporate Crime Reporter has a neat story dated April 3, 2009 titled, Guess Which U.S. Attorney Doesn’t Do Corporate Deferred Prosecution Agreements? It's Philadelphia. Linda Dale Hoffa, the office's Criminal Division chief since 1984, said this:
We haven’t done [deferred prosecution agreements] because we think it’s better to make a clear bright line decision that we are prosecuting or not prosecuting. There is either sufficient evidence to prosecute or not to prosecute. A deferred prosecution agreement can be more of a gray area. If the crime is serious enough, and it is warranted, then we will bring a prosecution. It’s not a written policy. But it has been the practice in our office.She also said it's the same with non-prosecution agreements. Either the office makes a decision to prosecute or to decline to prosecute, in which case "we close our file.”
Alcoa. In February 2008, government-owned Aluminum Bahrain BSC (Alba) accused its long-time U.S. supplier of overcharging for raw materials during a 15-year period, and using some of the money to bribe Alba's executives for more contracts. Alcoa's conspiracy, Alba said in a federal civil complaint filed in Pittsburgh, "succeeded in exacting hundreds of millions of dollars in over payments, which continue to accumulate to this day. Among other things, Plaintiff seeks damages in excess of $1 billion, including punitive damages, for this massive, outrageous fraud."
The Justice Department quickly intervened, asking the court to stay all discovery. It said the facts of Alba's allegations, if true, might violate the FCPA and mail and wire fraud statutes. Therefore, the DOJ said, it wanted to conduct a criminal investigation into Alcoa and its executives. That investigation is pending and the civil suit is still on hold.
Aon. The giant Chicago-based insurance broker disclosed in November 2007 an internal investigation into possible violations of the FCPA and non-U.S. anti-corruption laws. It said it had self-reported the investigation to the Justice Department, the Securities and Exchange Commission and others, and that it had already agreed with U.S. prosecutors to toll any applicable statute of limitations. Meanwhile, in January this year, the U.K.'s Financial Services Authority (FSA) fined Aon's U.K. subsidiary £5.25 million for failing to recognize and control the risks of overseas payments being used as bribes. The fine was the largest the FSA had ever levied for financial crimes.
Avon. It said in October 2008 that it had launched an internal investigation into possible FCPA violations in China. The global beauty-products retailer didn't release details. The investigation may be linked to the payment to regulators of improper promotional expenses. China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. Two years ago, the company convinced China's regulators to allow its traditional door-to-door sales model. Avon's FCPA disclosure referred to "certain travel, entertainment and other expenses."
BAE. The case is about alleged secret payments of £1 billion to the former Saudi ambassador to the United States, Prince Bandar bin-Sultan. The payments were allegedly made when U.K.-based BAE was trying to sell jet fighters to the Saudi government. Britain's Serious Fraud Office opened, then closed, an examination into the allegations. But the DOJ is conducting its own investigation of possible violations of the FCPA and anti-money laundering laws. In May 2008, BAE's chief executive Mike Turner and director Nigel Rudd were detained at U.S. airports. Authorities apparently copied information from their laptop computers, cell phones, and papers before letting them leave.
The DOJ has also reportedly served subpoenas on other BAE employees in the U.S. And in November 2007, according to the U.K.'s Guardian, the DOJ obtained Swiss banking records and evidence from a U.K. businessman who was part of the deal. The paper reported that Peter Gardiner had boxes of invoices allegedly detailing payments made by BAE to members of the Saudi royal family. Gardiner was flown by FBI agents to Washington in August 2007 to give testimony there, the paper said.
BAE apparently stonewalled the U.S. investigation at first but has since begun cooperating.
Medical Device Makers. Their overseas sales practices probably came under scrutiny in early 2007. That's when Johnson & Johnson (which owns device-maker Depuy) said it voluntarily disclosed to the DOJ and SEC 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. " In September 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. Now the SEC and DOJ want to know whether the companies bribed overseas doctors employed by 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 and Wright Medical reported a similar investigation in June 2008.
Panalpina. In February 2007, the Justice Department said in connection with the resolution of Vetco's FCPA case that bribes in Nigeria "were paid through a major international freight forwarding and customs clearance company to employees of the Nigerian Customs Service . . .” Since then about a dozen leading oil and gas-related companies received letters from the DOJ and SEC asking them to "detail their relationship with Panalpina . . ." Among those involved are Schlumberger, Shell, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., ENSCO, Cameron, Noble Corp., Pride International, Global Industries and Parker Drilling.
Swiss-based Panalpina said in its 2008 half-yearly report that it would divest its domestic operations in Nigeria to a local investment group and retain no ownership or operating interest. It completed the transaction in November. It also said it was cooperating with an investigation by the DOJ and SEC and that its U.S. subsidiary in Houston had been instructed to produce documents and other information about services to certain customers in Nigeria, Kazakhstan and Saudi Arabia.
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And a long-standing prosecution that isn't mentioned much these days but should be watched is US v. Giffen. It's in the U.S. District Court for the Southern District of New York (Foley Square). American businessman James H. Giffen was arrested in New York in March 2003 for allegedly paying or offering $78 million in bribes to an advisor of Kazakhstan's president and its former oil and gas minister. He was charged with violating the FCPA, mail and wire fraud, false statements and money laundering.
When arrested, Giffen was carrying a Kazakhstan diplomatic passport. His lawyers have said he was acting in Kazakhstan with the full knowledge and approval of the U.S. government. Most of the court record is sealed, apparently because it contains classified documents. After nearly six years of little activity (raising speedy-trial issues, no doubt), there's more going on in the case now. A pre-trial conference was held this month and the next one is scheduled for June. Giffen is free on $10,000,000 bail.
This week, Wright Medical Group became the latest orthopedic device maker to disclose a government investigation into its overseas sales practices. The company's Form 8-K said its principal operating subsidiary, Wright Medical Technology, Inc., received notice from the Securities and Exchange Commission of an informal investigation regarding potential violations of the Foreign Corrupt Practices Act. Wright said, "We understand that several other medical device companies have received similar letters. We intend to fully cooperate with this informal investigation."
Tennessee-based Wright designs, manufactures and distributes orthopaedic implants and instrumentation worldwide. Its products include large joint implants for the hip and knee; extremity implants for the shoulder, elbow, hand, wrist and foot; and biologic products, including bone graft substitutes.
In their investigation of the orthopedic implant industry, the SEC and Justice Department want to know whether the companies bribed doctors employed by government-owned hospitals overseas to use their products. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed similar FCPA investigations during 2007, after they settled U.S. domestic bribery cases. They've denied violating any foreign laws.
We've wondered if one or more of the device makers may be providing industry-wide information to the authorities. In its disclosure last October, Medtronic said its letter from the SEC about the investigation "notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors."
Industry-wide investigations are a new development for the FCPA. There hadn't been any until 2007, when it emerged that the DOJ and SEC were examining customs clearance and permitting practices across the oil and gas services sector, and the overseas sales practices of the leading orthopedic device makers. Simultaneous investigations create their own dynamics, and we've asked before whether companies that become potential targets might bargain for leniency by implicating their peers. We don't know if that's happened yet. But there are well-known rewards for companies that are the first to talk about their co-conspirators in price-fixing cases, for example, so it's certainly possible that we'll see similar behavior in FCPA investigations.
Wright Medical Group, Inc. trades on NASDAQ under the symbol WMGI.
View Wright's June 10, 2008 Form 8-K here.
View prior posts about medical device makers here.