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Teva Pharmaceutical Pays $519 Million To Settle Charges That It Violated The Foreign Corrupt Practices Act

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  • Posted on: Jan 3 2017

On December 22, 2016, the Department of Justice (“DOJ”) announced that Teva Pharmaceutical Industries Ltd. (“Teva”), the world’s largest manufacturer of generic pharmaceutical products, and its wholly-owned Russian subsidiary, Teva LLC (“Teva Russia”), agreed to resolve criminal charges and to pay a criminal penalty of more than $283 million for violating the Foreign Corrupt Practices Act (“FCPA”). The charges relate to various schemes involving the bribery of government officials in Russia, Ukraine and Mexico.

The Securities and Exchange Commission (“SEC” or “Commission”) also announced on that date, the filing of a cease and desist order against Teva, whereby the company agreed to pay approximately $236 million in disgorgement to the SEC, including prejudgment interest.  In total, Teva agreed to pay nearly $520 million in criminal and regulatory penalties.

The announcements came one day after the DOJ and SEC, together with Brazilian and Swiss authorities, reached a settlement of $3.6 billion with Odebrecht SA, the engineering conglomerate, and its affiliate Braskem SA, in connection with violations of the FCPA related to the Petrobras corruption scandal.

The Russian Connection:

According to the DOJ, Teva and Teva Russia admitted that its executives and employees paid bribes to a high-ranking Russian government official for the purpose of increasing sales of Teva’s multiple sclerosis drug, Copaxone, in annual drug purchase auctions held by the Russian Ministry of Health. Between 2010 and at least 2012, pursuant to an agreement with a repackaging and distribution company owned by the Russian government official, Teva earned more than $200 million in profits on Copaxone sales to the Russian government.  Moreover, the Russian official earned approximately $65 million in corrupt profits through inflated profit margins granted to the official’s company. The relationship ultimately ended in 2013, several months after the official resigned his position.

The Ukrainian Connection:

Teva admitted to paying bribes to a senior government official within the Ukrainian Ministry of Health to influence the Ukrainian government’s approval of Teva drug registrations, which were necessary for the company to market and sell its products in the country.  Between 2001 and 2011, Teva engaged the official as the company’s “registration consultant,” paid him a monthly fee and provided him with travel and other things of value totaling approximately $200,000.  In exchange, the official used his official position and influence within the Ukrainian government to influence the registration in Ukraine of Teva pharmaceutical products, including Copaxone and insulins.

The Mexican Connection:

Teva admitted that it failed to implement an adequate system of internal accounting controls and failed to enforce the controls it had in place at its Mexican subsidiary, which allowed bribes to be paid by the subsidiary to doctors employed by the Mexican government.  Teva admitted that its Mexican subsidiary had been bribing these doctors to prescribe Copaxone since at least 2005.  In total, Teva Mexico illegally paid approximately $16.8 million to doctors employed at government hospitals.

Teva executives in Israel responsible for the development of the company’s anti-corruption compliance program in 2009 had been aware of the bribes paid to government doctors in Mexico.  In November 2011, a Teva employee with responsibility for financial controls over Teva Mexico even identified deficiencies in internal accounting controls in Teva’s Latin American operations, writing a memorandum that said the company could not guarantee that it was not “executing payments that would violate FCPA anti-bribery provisions” or “properly accounting for any such payments under the books and records provision of the FCPA.”

Despite their knowledge of inadequate controls, Teva executives approved policies and procedures that they knew were not sufficient to meet the risks posed by Teva’s business and were not adequate to prevent or detect payments to foreign officials.  Teva also admitted that its executives put in place managers to oversee the compliance function who were unable or unwilling to enforce the anti-corruption policies that had been put in place.

The DOJ and SEC Settlements:

Teva entered into a deferred prosecution agreement (“DPA”) in connection with a criminal information, charging the company with one count of conspiracy to violate the anti-bribery provisions of the FCPA and one count of failing to implement adequate internal controls.  Pursuant to the DPA, Teva will pay a criminal penalty of $283,177,348.  Teva also agreed to continue to cooperate with the DOJ’s investigation, enhance its compliance program, implement rigorous internal controls and retain an independent corporate compliance monitor for a term of three years.

Teva Russia agreed to plead guilty to a one-count criminal information, charging the company with conspiring to violate the anti-bribery provisions of the FCPA.  The plea agreement is subject to court approval.

The DOJ said that Teva had not self-reported the violations and so was not eligible for a more significant discount or a declination of prosecution, but that the company had received a 20 percent discount off the sentencing guidelines for cooperating with the government’s investigation and engaging in remediation. Although Teva cooperated with the investigation, it nevertheless did not receive full credit for that cooperation because of “vastly overbroad assertions of attorney-client privilege and not producing documents on a timely basis.”

In the SEC action, Teva agreed to pay more than $236 million in disgorgement and interest to the Commission.

The criminal cases are United States v. Teva Pharmaceutical Industries Ltd., case number 1:16-cr-20968, and United States v. Teva LLC (Russia), case number 1:16-cr-20967, and the civil case is Securities and Exchange Commission v. Teva Pharmaceutical Industries Ltd., case number 1:16-cv-25298, all in the U.S. District Court for the Southern District of Florida.

Takeaway:

Andrew Ceresney, the former Director of the SEC’s Enforcement Division, once suggested that FCPA violations would become an “increasingly fertile ground” for whistleblowers under the SEC Whistleblower Program. Although it appears that the Teva settlements did not result from the SEC Whistleblower Program or the False Claims Act, publicly available documents show the presence of internal whistleblowing. As noted in the SEC complaint, “On or about February 23, 2007, an anonymous letter was delivered to a Teva internal auditor stating, among other things, that Teva Mexico was authorizing illicit payments to government officials as an incentive to increase sales.” Teva even initiated an internal investigation in response to the charges made in the letter, and terminated 11 Teva Mexico employees for their role in the alleged wrongdoing. Unfortunately, Teva’s internal accounting controls were still not sufficient to meet the risks posed by Teva’s business in Mexico.

The internal whistleblowing that occurred in Teva is consistent with recent statistics showing that employees who discover misconduct first report it internally. For example, according to the SEC in its latest annual report to Congress, to date almost 65% of award recipients were company insiders, approximately 80% of whom raised concerns internally to supervisors or compliance personnel, or understood these personnel were aware of the violations, before reporting their concerns to the SEC. In 2015, only 50% of award recipients were company insiders.

These statistics indicate that the majority of employees who learn of violations of the law first report the misconduct internally – action that is encouraged by the SEC. In fact, the SEC has implemented several rules under the Whistleblower Program that are intended to encourage internal reporting of misconduct through company ethics and compliance programs and procedures.

For example,

  • a person who reports misconduct internally can receive whistleblower status under the law, so long as the person reports the same information to the SEC within 120 days. This means that the whistleblower will not lose his/her place vis-à-vis a whistleblower award if someone else reports the same information to the SEC before he/she does so.
  • a person who reports misconduct internally can receive credit for the findings made by the company in response to the whistleblower’s report. Thus, where a company conducts an investigation and discloses the results of the investigation to the SEC, the whistleblower receives credit for triggering the investigation and reporting to the Commission.
  • a person who reports (or fails to report) misconduct internally is a factor considered by the SEC in determining how much to award the whistleblower. Under the SEC Whistleblower Program, a whistleblower, whose information led to a successful enforcement action, can receive between 10% and 30% of the amount recovered by the SEC.

Notably, the courts are split on whether employees who first report misconduct internally are entitled to the law’s protections against retaliation. Not surprisingly, the SEC has advocated that those protections should extend to internal whistleblowers. Whether the courts will ultimately rule in favor of the whistleblower remains to be seen.  However, one thing is certain, the SEC Whistleblower Program is designed to encourage whistleblowers to first report misconduct internally.

To learn more about the SEC Whistleblower Program, visit the SEC Whistleblower pages of this website.

 

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