More On The Monitors

Ah, Spring. And the corporate compliance monitors are back in the news. Here's what's happening:

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.”
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Unfinished Business

We don't know how many of the 50 or so disclosed and pending Foreign Corrupt Practices Act investigations will be resolved this year. But here are some we're watching:

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.
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Readers' Choice

Based on total page views, here are the top five posts from the FCPA Blog so far in 2008:

1. Feeling the Heat Overseas, June 9, 2008

Foreign companies can't be blamed for wondering if they're being singled out under the Foreign Corrupt Practices Act. The names in the FCPA-related headlines alone are enough to cause high anxiety. ABB, Siemens, BAE, DaimlerChrysler, AstraZeneca and many more. But are U.S. prosecutors really focusing too much attention on U.K., European and other foreign companies instead of American firms? Probably not, at least according to the numbers. Here's the situation. . . .

2. Why We Keep Plugging, July 17, 2008

It's a familiar and unwelcome moment. Those on the other side of the table spot the FCPA compliance language for the first time:

The joint venture and all its personnel shall comply in all respects with the requirements of the United States Foreign Corrupt Practices Act.

Faces darken. The mood in the room goes sour. . . .

3. Grynberg v. BP et al, April 15, 2008

Last week we reported here about the civil suit filed in the U.S. District Court in D.C. by Colorado-based oilman Jack Grynberg, 76, against BP, Statoil and British Gas, along with some of their current or former top executives. The core allegation is that the defendants, without Grynberg's knowledge and using some of his money, bribed officials in Kazakhstan in order to win oil rights for joint ventures in which Grynberg had an interest. . . .

4. The FCPA Is No Private Matter, March 3, 2008

Last week we heard that Alba -- not the movie star Jessica but the smelter Aluminum Bahrain BSC -- had sued Alcoa for bribing Bahraini officials in exchange for supply contracts. The allegations sounded exactly like an offense under the Foreign Corrupt Practices Act. Alba's federal lawsuit, however, is based not on the FCPA but on common law fraud and RICO -- the Racketeer Influenced & Corrupt Organizations Act found at 18 U.S.C. §§1961-68. So what happened to the FCPA? . . .

5. Scandal Hits The Compliance Monitors, January 19, 2008

. . . No matter how you spin it -- and Messrs. Christie and Ashcroft have been doing plenty of that -- the appointments have the appearance of impropriety. Peel away the PR and the best you can say is that there was some obvious cronyism going on. The worst you can say is that the DOJ created a scheme by which U.S. Attorneys can extract millions of dollars from wrongdoers and funnel the money to former bosses, friends and political allies. We don't buy the sinister version for a second, but lots of people will take it as gospel. . . .

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Heading For The Hammock

It's the weekend again. Good thing. We need (and deserve) some rest. What serious mind, after all, wouldn't be exhausted pondering how Tampa Bay can be one and a half games clear of the Red Sox? Strangely, our spouse seems to hold no opinion on the subject. So in our household the burden of the American League East falls entirely on our shoulders.

Still, we managed to cover some new ground this week. Iraq's civil suit against those implicated in the oil-for-food scandal caught our eye. And we noted the appeal to the House of Lords by Britain's Serious Fraud Office. We're not sure if the bigger scandal there involves BAE and Prince Bandar or the SFO itself.

What else? Oh yes -- we were wowed by the D&O Diary's trend-spotting. Looks like FCPA-inspired civil litigation is the next big hazard in the lives of our already-pummeled corporate leaders.

Meanwhile, we're waiting for the DOJ to deal with Panalpina. The global logistics firm may have stretched "facilitating payments" well beyond the current legal definition -- and in the process caused compliance headaches for practically everyone in the oil-and-gas services sector.

Siemens' hopes for a quick resolution in the U.S. of its massive corruption problems have now evaporated. Our first post about that company was back in September 2007, an eon ago in the life of a blog.

Speaking of eons . . .

Aon Corporation -- the giant insurance broker -- disclosed back in November 2007 an internal investigation into possible violations of the FCPA. When it self-reported to the DOJ it also agreed to toll the statute of limitations. So we guess no one's in a big hurry to wrap up that one.

The orthopedic device makers are waiting to learn their fate with the FCPA. We first wrote about the investigation by the DOJ and SEC into the group's overseas sales practices in October 2007. That post was also our first mention of John Ashcroft's appointment as a compliance monitor in a domestic bribery case for Zimmer Holdings.

The revelation that Mr. Ashcroft might take home $52 million from the appointment prompted our favorite blog editor emeritus, Prof Peter Henning, to note in his '07 Thanksgiving Day message: That's not a bad payday, and Zimmer -- like every other company that enters into a deferred or non-prosecution agreement -- can hardly object to the fees lest it look uncooperative and bring down the wrath of the U.S. Attorney's Office. So much to give thanks for this Thanksgiving.

Well, with the FCPA backlog still growing, we could keep at this for a long time. But our thoughts must now return to more weighty matters. That's right -- the mystery of the American League East.

Enjoy the weekend.

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Industry-Wide Investigation Snares Wright Medical

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.

Faro Pays $2.95 Million For FCPA Settlement

Faro Technologies Inc. confirmed that it has resolved Foreign Corrupt Practices Act offenses with the Department of Justice and the Securities and Exchange Commission. The DOJ settlement requires payment of a $1.1 million criminal penalty and entry into a two-year non-prosecution agreement with appointment of a compliance monitor. In settling with the SEC, Faro will pay about $1.85 million in disgorgement and prejudgment interest.

Florida-based Faro -- which designs, develops, and markets software and portable, computerized measurement devices -- self-disclosed potential FCPA violations in China to U.S. authorities in March 2006. It announced an anticipated settlement with prosecutors in its October 30, 2007 earnings release (see our post here).

Faro began selling its products directly to customers in China in 2003 through a Shanghai-based subsidiary, Faro China. In 2004 and 2005, a Faro employee authorized corrupt payments in the form of “referral fees” directly to employees of state-owned or controlled entities to secure business. It made illicit payments of $444,492 to obtain contracts worth about $4.9 million, and its net profit from the contracts was $1,411,306.

Faro employees routed the corrupt payments through a shell company to “avoid exposure,” according to internal e-mails. The employees also caused Faro China to enter into a bogus service contract with an intermediary, using it to pay the bribes. The intermediary aggregated the payments and invoiced Faro for reimbursement under the service contract. In its books and records, Faro falsely recorded the bribes as referral fees. The DOJ and SEC said the company failed to devise and maintain a system of internal controls for foreign sales sufficient to ensure compliance with the FCPA.

Faro's own documents, the DOJ said, revealed the extent of the bribery. "Profit lists" reflected the price of contracts and the costs of manufacture, along with line items for "referral fees" of 10%-15% of the contract price that were kickbacks to employees of state-owned customers. The DOJ gave the following examples:

A 2005 profit list for Purchase Order CH2005-VW34 for a purchase by Shanghai Turbine Generator Co., Ltd., a Chinese government entity, shows a contract value of $148,700 and an anticipated referral fee of $14,800, or approximately 10% of the contract value.

A 2005 profit list for Purchase Order Ch-2005-VW50(SW) for a purchase by Jiangxi Changhe Auto Co., Ltd. Hefel Plant, a Chinese government entity, shows a contract value of $53,086 and a referral fee of $8,000, or approximately 15% of the contract value.

Faro's non-prosecution agreement has a two-year term instead of the usual three years, presumably reflecting the company's prompt and detailed self-disclosure and effective corrective action. Faro said its estimated costs associated with the monitoring and stepped-up compliance obligations will be "in the range of $1 million to $2 million."

Neither Faro nor the DOJ explained why it took more than nine months to formally approve the previously announced settlement. We've speculated (here) that the Justice Department was delaying settlements involving compliance monitors, including Faro's, pending some accommodation with lawmakers on safeguards for the appointments. Controversy erupted last year after New Jersey U.S. Attorney Chris Christie appointed his former boss, ex-U.S. Attorney General John Ashcroft, as a monitor in a domestic bribery case for orthopedic device maker Zimmer Holdings Inc. The news that Mr. Ashcroft's firm could make as much as $52 million from the appointment sent shock waves around Capitol Hill and triggered Congressional hearings.

It appears from FCPA settlements announced in the past month involving Willbros, AGA Medical, and now Faro that monitor appointments are back on track. The solution appears to have been relatively simple. As with Willbros and AGA Medical, Faro will nominate its candidate to act as compliance monitor (after consulting with the DOJ), and the DOJ will have final approval over its choice. Provided the DOJ doesn't interfere directly and allows Faro and the other companies to pick their own qualified candidates, the selection is taken out of the hands of the DOJ. That should prevent the appearance of political abuse or cronyism in the appointments.

Faro Technologies, Inc. trades on NASDAQ under the symbol FARO.

View the DOJ's June 5, 2008 news release here.

View the SEC's Securities Exchange Act of 1934 Release No. 57933 / June 5, 2008, Accounting and Auditing Enforcement Release No. 2836 / June 5, 2008, and Administrative Proceeding File No. 3-13059 here.

View Faro's June 5, 2008 press release here.
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The FCPA Takes A Holiday?

It's been a quiet time here at the FCPA Blog. Not much to report -- which isn't a bad thing. We've had a chance to clean our desk, get our shoes shined, and pick on Wikipedia. On that score, we even had time to submit some edits for Wiki's FCPA article. Now we're biting our nails, waiting for the editorial lords to make a ruling on our hoped-for alterations.

Still, we're wondering why it's so quiet, why the Department of Justice hasn't announced a deferred prosecution agreement since Flowserve's on February 21? We know from various public disclosures that companies are standing in line. Faro Technologies, Inc. is one of them (see our post here). Aon Corporation could be another (see our post here), and there are more.

We're not sure why there seems to be a moratorium on FCPA settlements right now. But it could be linked to what's happening in Washington. As we mentioned yesterday, the U.S. House of Representatives' Subcommittee on Commercial and Administrative Law is holding hearings this week. The hearings have the moniker: "Deferred Prosecution: Should Corporate Settlement Agreements Be Without Guidelines?" And sparks are flying.

It's fair to say that all aspects of deferred prosecution agreements are in play. Media attention has focused on the corporate monitorships. That's due mainly to New Jersey U.S. Attorney Chris Christie's appointment of his former boss, ex-U.S. Attorney General John Ashcroft, as a monitor for orthopedic device maker Zimmer Holdings Inc. The case involves domestic bribery. Mr. Ashcroft's firm could make as much as $52 million from the appointment. Not surprisingly, that ignited the controversy that now engulfs every aspect of the monitorships and even the idea of deferred prosecution agreements.

While the storm blows on Capitol Hill, the DOJ can't be anxious to announce any new agreements and monitorships just yet. And no company would want to get caught in the political crossfire by being part of a fresh settlement, just as potential monitors wouldn't risk an appointment while the flap over Mr. Ashcroft et al is in the news.

All this is speculation, to be sure. Perhaps the DOJ will make a formal announcement about what's happening, or at least send out some smoke signals, to let everyone know if we're in for a long wait. Meanwhile, we're off to get a haircut, wash the car and catch some zzzzzzzzz. What a life!

Thanks to photo.jacko.com for the great picture.

Handicapping The FCPA

We heard a few days ago (here) that some Siemens insiders are trying to calculate the company's potential financial penalties for alleged Foreign Corrupt Practices Act offenses. Apparently the insiders think that past FCPA settlements reveal a correlation between the amount of bribes paid and the financial penalties imposed on the organizations. We don't think the correlation exists, but we're never going to be mistaken for mathematicians. So we're providing the raw data below in case any real mathematicians are paying attention.

Who knows? Maybe there is a pattern after all. Even so, we don't advise anyone to decide about FCPA compliance after a cost - benefit analysis. For individuals, there is a 100% chance that an FCPA offense can result in five years behind bars. No matter how you figured it beforehand, ending up in prison will always turn out to be an enormous tragedy. And no, we're not suggesting that organizations should compute their odds. The only bet that makes any sense is to comply.

So for purely academic purposes, here are the numbers. They're for FCPA matters that companies resolved with the SEC, DOJ or both during 2007. As a caveat, most of the companies also agreed to appoint monitors or compliance consultants. The cost of doing that is not included in the amounts shown. As we've learned from John Ashcroft's recent appointment by Zimmer Holdings in a domestic bribery case, monitors can cost millions or even tens of millions of dollars a year. Nor do the numbers reveal the damage done to the fabric of organizations by FCPA problems, and the ruined lives of men and women who lost their jobs and perhaps a lot more because of non-compliance.

El Paso Corp., Feb. 7, 2007 Amount of alleged bribes: approximately $5.5 million. Financial penalties: $7.65 million ($5.4 million in disgorgement and a $2.25 million civil penalty).

The Dow Chemical Co., Feb. 13, 2007 Amount of alleged bribes: about $200,000. Financial penalties: $325,000 civil penalty.

Baker Hughes Inc., Apr. 26, 2007 Amount of alleged bribes: $15.4 million. Financial penalties: $44 million (about $22 million in disgorgement and pre-judgment interest, a $10 million civil penalty for violating a prior cease-and-desist order, and an $11 million criminal fine).

Delta & Pine Land Co., July 26, 2007 Amount of alleged bribes: $43,000. Financial penalties: $300,000 civil penalty.

Textron Inc., Aug. 23, 2007 Amount of alleged bribes: about $650,000. Financial penalties: about $4.5 million (over $3 million in disgorgement and pre-judgment interest, an $800,000 civil penalty, and a $1.15 million fine).

Bristow Group, Inc., Sept. 26, 2007 Amount of alleged bribes: over $423,000. Financial penalties: Nil.

York International Corp., Oct. 1, 2007 Amount of alleged bribes: about $7.5 million. Financial penalties: $22 million (over $10 million in disgorgement and pre-judgment interest, a civil penalty of $2 million, and a $10 million fine).

Ingersoll-Rand Co. Ltd., Oct. 31, 2007 Amount of alleged bribes: over $1.5 million. Financial penalties: $6.7 million (over $2.2 million in disgorgement and pre-judgment interest, a $1.95 million civil penalty, and a $2.5 million fine).

Chevron Corp., Nov. 14, 2007 Amount of alleged bribes: over $20 million. Financial penalties: $30 million ($25 million in disgorgement, a $3 million civil penalty and a $2 million penalty to the Office of Foreign Asset Controls of the U.S. Department of the Treasury).

Akzo Nobel NV, Dec. 20, 2007 Amount of alleged bribes: $280,000. Financial penalties: $2.9 million (over $2.2 million in disgorgement and a $750,000 civil penalty).

Lucent Technologies, Inc., Dec. 21, 2007 Amount of alleged bribes: at least $1.3 million. Financial penalties: $2.5 million ($1.5 million civil penalty and a $1 million fine).

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View more information by clicking on the subject headings to the right.

Tough Medicine For Medical Device Makers

The Securities and Exchange Commission said in October this year it is investigating possible violations of the U.S. Foreign Corrupt Practices Act by the leading manufacturers of orthopedic implants. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. all made announcements about the SEC's investigation and denied violating any laws. In September this year, four of them plus Depuy Orthopedics (part of Johnson & Johnson) paid $310 million to settle charges they paid kickbacks to induce U.S. doctors to buy their products.

Medtronic wasn't part of the domestic case. But it now confirms that the SEC and the Department of Justice are asking for information about payment practices abroad that might violate the FCPA. Medtronic -- based in Minneapolis -- does business in some 120 countries and employs more than 37,000 people worldwide. The company's latest Form 10-Q disclosed these details about the FCPA investigation:

"On September 25, 2007, the Company received a letter from the SEC requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in an unspecified number of foreign countries, including Greece, Poland and Germany. The letter 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. A number of competitors have publicly disclosed receiving similar letters. On November 16, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC. The Company intends to cooperate with both requests."

Doctors at government-owned or managed hospitals overseas are "foreign officials" for purposes of the FCPA. That means payments to them intended to obtain or retain business might violate the antibribery provisions. Application of the FCPA to overseas doctors made the headlines in 2002, when the SEC settled civil and administrative proceedings against Syncor International Corp. and the DOJ settled criminal FCPA charges against Syncor's Taiwan subsidiary. Payments to doctors have since resulted in FCPA enforcement actions against DPC (Tianjin) Co. Ltd. -- the Chinese subsidiary of Los Angeles-based Diagnostic Products Corporation -- and Micrus Corporation.

Those cases -- and the current investigation of Medtronic and its peers -- demonstrate the compliance risks involved when doing business with foreign hospitals that are owned or controlled by government authorities. The companies face a dilemma. Often the only way to promote their products is through direct contact with local physicians. Much of that contact is educational and might include, for example, sponsoring the doctors' evaluations of the companies' products and subsidizing the presentation of papers at medical seminars. The payments, however -- unless expressly permitted by the written laws or regulations of the host country -- can violate the FCPA.

The investigations of Medtronic and its peers will lead to better compliance practices by companies dealing with government-linked hospitals overseas. Another result, we suspect, will be that more countries -- with the backing of the global medical industry -- will pass laws and regulations to allow some level of financial support from foreign companies to local doctors for product evaluations and related programs.

Medtronic Inc. trades on the New York Stock Exchange under the symbol MDT.

View Medtronic's Form 10-Q (December 4, 2007) Here.

Looking Back At Johnson & Johnson's FCPA Disclosure

The SEC's just-announced investigation of several orthopedic device makers for possible violations of the U.S. Foreign Corrupt Practices Act (reported here) probably originated in February 2007. That's when 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. "

At the same time, Johnson & Johnson said Michael J. Dormer, Worldwide Chairman of its Medical Devices & Diagnostics group, had retired. The company said, "In a letter to Johnson & Johnson, Mr. Dormer cited the internal review of these matters and noted he had 'ultimate responsibility by virtue of my position' for those subsidiaries that were the subject of the disclosure." Dormer started his career with Johnson & Johnson in the 1970s. He later worked for device-maker Depuy Orthopedics for six years until Johnson & Johnson acquired it in 1998.

Johnson & Johnson's self-disclosure about potential FCPA violations would have given the SEC and DOJ a quick start in examining the overseas practices of orthopedic device makers. But before prosecutors turned their attention to the FCPA, they apparently wanted to first resolve the domestic bribery cases against Depuy and its peers -- Biomet, Zimmer, Smith & Nephew and Stryker. The DOJ announced a settlement of the domestic bribery cases on September 27, 2007, and the SEC's investigative letters about potential FCPA violations went out to the companies just two weeks later.

View Johnson & Johnson's February 12, 2007 Press Release Here.