Intensifying Scrutiny: Increased Enforcement and New Laws in - - PDF document

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Intensifying Scrutiny: Increased Enforcement and New Laws in Pharmaceutical and Medical Device Industries

Thomas W. McNamara San Diego | 619.487.0799 | mcnamarat@ballardspahr.com Henry E. Hockeimer, Jr. Philadelphia | 215.864.8204 | hockeimer@ballardspahr.com Samuel W. Cantrell Denver | 303.299.7353 | cantrells@ballardspahr.com Jonathan S. Satinsky Philadelphia | 215.864.8725 | satinskyj@ballardspahr.com

Webinar | December 8, 2011

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Intensifying Scrutiny: Increased FCPA Enforcement

• Federal anti-bribery statute enforced by Department of Justice (DOJ)

and the Securities and Exchange Commission (SEC)

• Anti-bribery → DOJ
• Paying or offering anything of value
• To a foreign official (or conduit)
• Corruptly
• For purpose of influencing the official in order to obtain or retain

business

• Distinguish facilitation payments
• Books and Records/Internal Controls – SEC
• No need to prove underlying anti-bribery violation; merely failure to

describe what actually occurred is violation

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FCPA Prosecutions Have Exploded

7 5 7 8 1820 20 13 26 14 48 26 10 20 30 40 50 2005 2006 2007 2008 2009 2010

FCPA Prosecution by Year: 2005-2010 DOJ SEC

• Number of FCPA cases has exploded as have fines,

settlements and prosecution of individuals.

Top 10 FCPA-Related Monetary Settlements* $579 $400 $365 $338 $185 $137.4 $81.9 $70 $58.3 $800

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 Siemens (2008) KBR/Halliburton (2009) BAE Systems (2010) ENI/Snamprogetti (2010) Technip (2010) Daimier (2010) Alcatel-Lucent (2010) Panalpina (2010) Johnson & Johnson (2011) ABB (2010) *Settlement amounts are in millions of dollars

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More Aggressive FCPA Enforcement

• DOJ and SEC have signaled an even more muscular

approach:

• “I’m proud to say that our FCPA enforcement is stronger than

it’s ever been – and getting stronger. To give you just one metric, in the past year, we’ve imposed the most criminal penalties in FCPA-related cases in any single 12-month period –

• ever. Well over $1 billion.”
• Lanny A. Breuer, Assistant Attorney General, Crim. Div., 11/16/2010
• “The SEC has created an FCPA unit to crack down on cross-

border bribery, and in the first nine months of 2010 alone, we

• btained more than $400 million in disgorgement and penalties.”
• Robert Khuzami, Director, SEC Division of Enforcement, 10/20/2010

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FCPA Focus on Life Science Industry

• DOJ has made it clear that spotlight is trained on the area:
• “Our focus and resolve in the FCPA area will not abate, and we

will be intensely focused on rooting out foreign bribery in [the pharmaceutical] industry. That will mean investigation and, if warranted, prosecution of corporations to be sure, but also investigation and prosecution of senior executives.”

• Lanny Breuer, Assistant Attorney General, Crim. Div.

11/12/2009

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Why Focus on Life Sciences?

• Globalization of healthcare
• Almost everyone can be “foreign official” in the

healthcare industry.

• As DOJ understands: “nearly every aspect of the approval,

manufacture, import, export, pricing, sale and marketing

• f a drug product may involve a ‘foreign official’ within

the meaning of the FCPA.”

• Lanny Breuer, Assistant Attorney General, Crim. Div.

11/12/2009

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Focus on the Healthcare Industry

• AstraZeneca
• Bio-Rad Laboratories Inc.
• Biomet Inc.
• Bristol-Meyers Squibb
• Eli Lilly
• GlaxoSmithKline plc
• Medtronic Inc.
• Merck
• Orthofix International N.V.
• Pfizer Inc.
• Sciclone Pharmaceuticals Inc.
• Smith & Nephew plc
• Stryker Corporation
• Talecris Biotherapeutics Holdings

Corp.

• Wright Medical Group Inc.
• Zimmer Holdings

Scores of healthcare companies have been subject to FCPA

• investigations. Many are presently under investigation:

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Future Trends in FCPA Prosecutions

• More individuals prosecuted
• Control Person Liability
• Nature’s Sunshine
• More judicial interpretation
• Companies don’t go to trial – but people do
• Judicial gloss on statute: “foreign official” “instrumentality”
• Recent black eye for DOJ – Lindsey Manufacturing
• DOJ 0-2 in corporate criminal prosecutions
• Business Backlash
• Chamber of Commerce
• DOJ “detailed guidance” forthcoming

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• Historically, self-reporting has been primary source
• Competitors
• Dodd Frank Whistleblowers
• UK Bribery Act of 2010

Where Are New Anti-Bribery Investigations Coming From?

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Competitors

• Johnson and Johnson
• Payments to Greek doctors, Romanian doctors and pharmacists, and Polish doctors and

hospital administrators to use products

• Internal investigation and self-reported
• DPA $70 million total in fines and penalties: $21.4 to DOJ; $48.6 to SEC
• “J&J has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s

investigations of other companies and individuals in connection with business practices overseas in various markets.”

• “J&J’s cooperation during this investigation and its substantial assistance in investigations of
• thers has been extraordinary.”
• Benefit to J&J – a reduction from minimum fine in recognition
• f, among other things, cooperation. Range $28.5 - $57
• million. No monitor imposed.
• Pfizer – $60 million settlement before end of year
• Press reports four companies have received inquiries from DOJ

as a result of the cooperation

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Whistleblowers

The Dodd-Frank Act SEC Regulation 21F

• A “whistleblower” is an individual who voluntarily

provides original information to the SEC that relates to a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur. (§ 240.21F-2)

• The SEC shall award the whistleblower between 10%

and 30% of all collected monetary sanctions imposed in the action or in a related action

• Monetary sanctions must total more than $1 million to

qualify.

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Whistleblower Provisions: Concern for Companies

• Challenges facing companies:
• Corrupt culture in emerging markets
• High bar for FCPA compliance
• Renegade employees and corrupt agents
• Whistleblower provisions may undermine reporting lines
• May be increasingly difficult to self-monitor
• A robust compliance program is not a defense to FCPA

violations

• A mitigating factor, but not insulation from liability
• UK anti-bribery law provides an affirmative defense

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Whistleblowers

• Whistleblower’s interaction with entity’s internal

compliance system can impact award amount (§ 240.21F-6)

• In increasing award amount, SEC will consider:
• Whether whistleblower reported possible violations through

internal whistleblower, legal, or compliance procedures before reporting to SEC

• Whether whistleblower assisted any internal investigation or

inquiry concerning the reported securities violations

• In decreasing award amount, SEC will consider:
• Whether, in cases where whistleblower interacted with internal

compliance system, he undermined the integrity of such system

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Whistleblowers

• No employer may discharge, demote, suspend, threaten,

harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower:

• In providing information to the SEC
• Must possess a reasonable belief that information relates to a

possible securities law violation

• In initiating, testifying in, or assisting in any investigation or

enforcement action

• Anti-retaliation provisions apply regardless of whether

whistleblower meets conditions to qualify for award

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Whistleblowers

• A whistleblower may sue his employer in federal court
• Statute of limitations, generally speaking, is six years
• Relief includes:
• Reinstatement
• Twice the amount of back pay owed, with interest
• Litigation costs, expert witness fees, and reasonable attorneys’ fees
• These whistleblower rights and remedies cannot be waived

by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement

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Whistleblowers – SEC’s FY 2011 Whistleblower Report

• Only 7 weeks of data (Aug. 12, 2011 – Sept. 30, 2011)
• 334 whistleblower tips received
• 13 FCPA tips (3.9%) received
• 32 tips from foreign sources
• 10 from China
• No data reported for tips received prior to effective date of

Regulation 21F

• No awards paid to date

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U.K. Bribery Act 2010

• Received royal assent in April 2010, and came into force

in July 2011

• Described by many as most draconian anti-bribery

legislation in the world

• Demonstrates international commitment to corruption

prevention

• Think Orwell’s 1984: wherever you go, you (and your agents)

are being watched

• Cooperation of foreign governments means enhanced resources

to enforce FCPA

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U.K. Bribery Act 2010 – Jurisdiction

• Broad extraterritorial reach
• Corporations are subject to Bribery Act’s jurisdiction if they:

i. Are incorporated or formed in UK; or ii. Carry on business or part of business in UK

• Individuals are subject to Bribery Act’s jurisdiction if:

i. Offense committed in UK; or ii. Person committing offense has “close connection” with UK (even if offense committed outside UK)

• Purpose is to level playing field
• Non-UK company that conducts any business in UK could be

liable, even if all misconduct occurs outside UK

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U.K. Bribery Act 2010 – Corporate Offense

• Strict liability for companies that fail to prevent bribery…

UNLESS adequate procedures in place

• “Adequate procedures” amount to complete defense
• Proportionality
• Top-level commitment
• Risk assessments
• Due diligence
• Training programs/communication
• Monitoring and review
• Companies on the hook for failure to prevent bribery by person

“associated” with organization

• “Associated person” = employee, agent, distributor, contractor,

intermediary, joint venture, or subsidiary

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U.K. Bribery Act 2010 – “Adequate Procedures”

1) Proportionality: action taken should be proportionate to risks faced and size of business 2) Top-Level Commitment: “tone at the top”; zero-tolerance policy; enforcement/discipline for breaches 3) Risk assessments: consider industry and region 4) Due diligence: screening, background checks, etc. of business partners 5) Training programs/communication: live, in-person training at regular intervals; hotline 6) Monitoring and Review: review and update to keep pace with changes in law and additional risks that come with entering new markets

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U.K. Bribery Act 2010 – “Facilitation Payments”

• NO “facilitation payments” allowed
• This differs from FCPA
• Behooves you to tailor policy to U.K. Bribery Act (i.e., prohibit

“facilitation payments” – NO exceptions)

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U.K. Bribery Act 2010 – “Hospitality Payments”

• “Hospitality payments” must be proportionate in size and

scope

• Consider:

i. Level of hospitality offered; ii. Way in which hospitality provided; and

• iii. Recipient’s level of influence on business decision in question
• Potentially affects tickets to games, client dinners, travel

expenses, etc.

• Not necessarily prohibited, just need to analyze carefully

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U.K. Bribery Act 2010 – The Threat is Real

• Recent developments
• First sentence handed down in November
• New whistleblower hotline added in November
• Alcoa probe
• Penalties
• Individuals: unlimited fines and/or imprisonment up to 10 years
• Companies: unlimited fines
• Potential implications re: EU debarment
• ***Note of caution: potential data privacy issues in dealing with EU

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Elements of an Effective Compliance Program

• All the standard components:
• Culture of compliance – Tone at the Top
• High level compliance officer/committee that reports to the board
• f directors or audit committee
• Training employees and third parties
• Internal procedures regarding gifts, travel, hospitality, charitable

and political contributions, and facilitating payments

• Internal audits
• Internal accounting and control systems
• Discipline for misconduct

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FCPA Considerations: Enhanced Compliance Program

• Meaningful due diligence on foreign agents and

partners  Most important

• Add affirmative obligation to report suspected misconduct
• Particularly for managers
• Non-retaliation and whistleblowing protection policies
• Training on this requirement
• Counter-narrative
• Analyze the corruption risks particular to the business
• Take into account country of operation

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FCPA Considerations: Enhanced Compliance Program

• Look for red flags
• Incorporate FCPA warranties in all contracts
• Change in business = change in risk assessment
• Probe, audit, test and review
• New operations and relationships require more attention
• How do resolve problems identified – government will be

interested in how you respond – counter-narrative

• Get internal message across – compliance culture is valued by

company

• Employees who believe company is sincere in compliance and listens to

concerns are less likely to be whistleblowers

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Intensifying Scrutiny: Increased Enforcement and New Laws in Pharmaceutical and Medical Device Industries

Thomas W. McNamara Partner, White Collar/Investigations Group, San Diego 619.487.0799 | mcnamarat@ballardspahr.com Henry E. Hockeimer, Jr. Partner, White Collar/Investigations Group, Philadelphia 215.864.8204 | hockeimer@ballardspahr.com Samuel W. Cantrell Associate, White Collar/Investigations Group, Denver 303.299.7353 | cantrells@ballardspahr.com Jonathan S. Satinsky Associate, White Collar/Investigations Group, Philadelphia 215.864.8725 | satinskyj@ballardspahr.com