Device Company Smith & Nephew Resolves Overseas Payments Case With DOJ

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Medical device maker Smith & Nephew Inc. entered into a deferred prosecution agreement with the Department of Justice to resolve allegations of improper payments by the company and certain affiliates in violation of the Foreign Corrupt Practices Act, DOJ said Feb. 6 (United States v. Smith & Nephew Inc., D.D.C., docket number unavailable, settlement announced 2/6/12).

According to DOJ, Smith & Nephew acknowledged responsibility for the actions of its affiliates, subsidiaries, employees, and agents who made various improper payments to publicly employed health care providers in Greece from 1998 until 2008 to “secure lucrative business.”

As part of the agreement, Smith & Nephew will pay a $16.8 million penalty and is required to:

  •  implement what DOJ called “rigorous internal controls,”
  •  cooperate fully with the department, and
  •  retain a compliance monitor for 18 months.

In a separate statement, Smith & Nephew said it has committed to:

  •  pay $22.2 million in total fines and profit disgorgement,
  •  maintain an enhanced compliance program,
  •  and appoint an independent monitor for at least 18 months to review and report on its compliance program.

Smith & Nephew said that it and “other medical device companies were asked by the [Securities and Exchange Commission] and DOJ in late 2007 to look into possible improper payments to government-employed doctors and voluntarily report any issues. Smith & Nephew found and reported evidence of improper payments by a distributor in Greece that had been appointed by Smith & Nephew subsidiaries and was terminated in 2008. The individuals implicated are no longer associated with the Group.”

DOJ's Interest in Health Care, FCPA

In its Feb. 6 statement, DOJ noted that this case is “part of an investigation into bribery by medical device companies of physicians employed by government institutions.”

The FCPA, enacted in 1977, prohibits U.S. companies, or foreign companies with stocks listed in the United States, from providing benefits—which can include such items as cash, gifts, meals, grants, honoraria, and consulting arrangements—for the purpose of obtaining or retaining business. The anti-bribery provision of the FCPA clearly precludes companies from paying foreign government officials to use or promote their products; such officials can be doctors employed in a government-run health care system.

In a 2009 speech, Lanny A. Breuer, head of DOJ's Criminal Division, told a conference that the department is targeting its criminal enforcement in the pharmaceutical industry on FCPA violations. And in early 2010, attorneys warned that multinational drug and device companies struggling to comply with FCPA provisions have a new trend to watch out for: cooperation between the DOJ and foreign officials in investigating and prosecuting violations (4 MELR 144, 2/24/10).

Smith & Nephew, a Delaware corporation, is headquartered in Memphis, Tenn., and is a wholly-owned subsidiary of Smith & Nephew PLC, an English company traded on the New York Stock Exchange, which makes it subject to FCPA.

DOJ said that, according to the criminal information filed Feb. 6 in U.S. District Court for the District of Columbia in connection with the agreement, Smith & Nephew, through certain executives, employees and affiliates, agreed to sell products at full list price to a Greek distributor based in Athens and then pay the amount of the distributor discount to an offshore shell company controlled by the distributor.

The government said that these “off-the-books funds were then used by the distributor to pay cash incentives and other things of value to publicly-employed Greek health care providers to induce the purchase of Smith & Nephew products.” DOJ said that, in total, from 1998 to 2008, Smith & Nephew and its affiliates and employees “authorized the payment of approximately $9.4 million to the distributor's shell companies, some or all of which was passed on to physicians to corruptly induce them to purchase medical devices manufactured by Smith & Nephew.”

The agreement “recognizes Smith & Nephew's cooperation with the department's investigation, thorough self-investigation of the underlying conduct, and the remedial efforts and compliance improvements undertaken by the company,” DOJ said.

SEC Aspect

DOJ and the SEC share enforcement authority under FCPA.

DOJ also said that, in a related matter, Smith & Nephew reached a settlement Feb. 6 with the SEC, under which Smith & Nephew agreed to pay $5.4 million in disgorgement of profits, including pre-judgment interest.

The DOJ case was prosecuted by trial attorney Kathleen M. Hamann of the Criminal Division's Fraud Section with assistance from the FBI Washington Field Office's dedicated FCPA squad.

DOJ said it acknowledged and “expresses its appreciation for the assistance provided by the authorities of the 8th Ordinary Interrogation Department of the Athens Court of First Instance and the Athens Economic Crime Squad in Greece, as well as the significant coordination with and assistance by the Securities and Exchange Commission's Division of Enforcement.”

The SEC's investigation was conducted by Tracy L. Price of the Enforcement Division's FCPA Unit, along with Brent S. Mitchell and Reid A. Muoio.

According to court documents, Smith & Nephew is represented by Paul Gerlach of Sidley Austin LLP in Washington and by Angela T. Burgess of Davis Polk & Wardwell LLP in New York.

For More Information

Key documents are at http://op.bna.com/hl.nsf/r?Open=bbrk-8r8lyv (the agreement) and http://op.bna.com/hl.nsf/r?Open=bbrk-8r8m2e (the information filed in the court). The SEC complaint is at http://www.sec.gov/litigation/complaints/2012/comp22252.pdf.