The New Whistleblower Threat: Other Companies

Ever since the Securities and Exchange Commission began offering hefty rewards in exchange for tips about corporate misconduct, compliance officers have had to worry that the first indication of wrongdoing could come from a knock on the door by the agency's enforcement lawyers.

Now they may have a whole new concern on their hands: companies blowing the whistle on other companies.

Over the last year, a trend has emerged in which more companies ensnared in Foreign Corrupt Practices Act investigations have begun to provide evidence to the Justice Department against other companies in an effort to reduce their own liability.

“You never know who is out there reporting on you,” says Tom Gorman, a former SEC senior counsel in the enforcement division and now a partner with law firm Dorsey & Whitney. “So it really should heighten the concerns of corporate officials as to how they're dealing in the international marketplace and intensify their scrutiny as to what they're doing there.”

The Justice Department has long established as part of its anti-trust program that a company could avoid liability or face a reduced fine if it is the first to voluntarily step forward with information about corporate misconduct and it remediates any of its own compliance lapses. Increasingly, it appears that leniency can also be earned by providing details on other companies that could be involved. “This is really the first time I've seen prosecutors using it in a different kind of a context,” Gorman says.

Compliance executives say the idea of companies blowing the whistle on other companies presents several concerns for both corporate compliance and legal departments. “First, are the allegations based on perceptions and assumptions, rather than hard proof? Second, what is the motivation?” asks Stacey Babson-Smith, chief ethics and compliance officer for Terex Corp. “Are corporate whistleblowers raising their concerns in good faith or is it just a way to tarnish another company's reputation or derail their focus on competing fairly in the marketplace?”

David Frishkorn, chief compliance officer for Comverse, is similarly uneasy about the corporate whistleblowing trend. “I think we are all better served if we focus on transparency and fairness,” he says. “I don't want to turn in another company for alleged wrongdoing until they have had an opportunity to learn about the problem, investigate, and address it, and hopefully, disclose it to the appropriate authorities as may be necessary. I would want the same respect in return.”

“I believe that anyone that is actively looking to use negative information about another entity to their own advantage is contributing to a deteriorating business environment and undermining the integrity of both parties,” adds Frishkorn. “Who wants to do business with someone they can't trust?”

Compliance officer concerns aside, the Justice Department and SEC are now leveraging leads they receive in one investigation and using corporate whistleblower tips to scrutinize other companies in the same industry. Due to the lack of details provided in many settlement agreements, exactly who is under investigation is never particularly made clear, but it would appear the government is now investigating business partners, suppliers, and even competitors, says Gorman.

For example, when Pfizer H.C.P. Corp., an indirect wholly-owned subsidiary of Pfizer, agreed last month to a deferred prosecution agreement and a $15 million penalty for FCPA violations in connection with improper payments made to government officials in Bulgaria, Croatia, Kazakhstan, and Russia, it was clear that providing information on other companies was part of the deal. Principal Deputy Assistant Attorney General Mythili Raman publically credited the Pfizer subsidiary with “assisting U.S. authorities in our ongoing FCPA investigation of other companies and individuals.”

Just five months earlier, medical-device company Biomet also entered into a DPA and a $17 million penalty with the Justice Department stemming from Biomet's admission that it paid bribes to publicly-employed healthcare providers in Argentina, Brazil, and China to secure lucrative business with hospitals from 2000 to 2008. As in the Pfizer case, the Justice Department said Biomet's reduced penalty was, in part, “as a result of its cooperation in the ongoing investigation of other companies and individuals.”

“I believe that anyone that is actively looking to use negative information about another entity to their own advantage is contributing to a deteriorating business environment and undermining the integrity of both parties.”

—David Frishkorn,

Chief Compliance Officer,

Comverse

Johnson & Johnson reached a DPA and a $21 million criminal penalty in April 2011 over allegations that its subsidiaries, employees, and agents made various improper payments to publicly-employed healthcare providers in Greece, Poland, and Romania in violation of the FCPA in order to induce the purchase of medical devices and pharmaceuticals manufactured by J&J subsidiaries. 

“Johnson & Johnson, however, has also cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry,” said Raman.

Pharmaceutical and medical device companies aren't the only corporate whistleblowers. Electronic and electrical engineering giant Siemens appears to be one of the earliest corporate whistleblowers.

In 2008, Siemens agreed to pay $1.6 billion in disgorgement and fines pertaining to the widespread and systematic practice of paying bribes to foreign government officials to obtain business in violation of the FCPA. Despite the hefty fine, the Justice Department made clear that the outcome could have been a lot worse.

The settlement appears to offer “the most extensive discussion,” Gorman says, as to why the government gave Siemens as much reprieve as it did as it pertained to the furnishing of information of other individuals and entities.

PFIZER RESOLVES FCPA PROBE

Below is an excerpt from the Justice Department press release regarding Pfizer's FCPA settlement with the SEC:

Pfizer H.C.P. Corporation, an indirect wholly owned subsidiary of Pfizer Inc., has agreed to pay a $15 million penalty to resolve an investigation of Foreign Corrupt Practices Act (FCPA) violations, Principal Deputy Assistant Attorney General Mythili Raman of the Justice Department's Criminal Division and Assistant Director James W. McJunkin in charge of the FBI's Washington Field Office announced today. In a related matter, Pfizer Inc. and Wyeth LLC reached settlements today with the Securities and Exchange Commission (SEC) under which Pfizer Inc. agreed to pay more than $26.3 million in disgorgement of profits, including pre-judgment interest, to resolve concerns involving the conduct of its subsidiaries. Wyeth, which had been acquired by Pfizer Inc. in 2009, agreed to pay $18.8 million in disgorgement of profits, including pre-judgment interest, to resolve concerns involving the conduct of Wyeth subsidiaries.

As part of the resolution, the department today filed a two-count criminal information charging Pfizer H.C.P. with conspiracy and violations of the FCPA in connection with improper payments made to government officials, including publicly-employed regulators and health care professionals in Bulgaria, Croatia, Kazakhstan and Russia. The department and Pfizer H.C.P. agreed to resolve the investigation by entering into a deferred prosecution agreement. Both the information and the deferred prosecution agreement were filed today in the U.S. District Court in the District of Columbia ...

… According to court documents, Pfizer H.C.P. made a broad range of improper payments to numerous government officials in Bulgaria, Croatia, Kazakhstan and Russia – including hospital administrators, members of regulatory and purchasing committees and other health care professionals – and sought to improperly influence government decisions in these countries regarding the approval and registration of Pfizer Inc. products, the award of pharmaceutical tenders and the level of sales of Pfizer Inc. products. According to court documents, Pfizer H.C.P. used numerous mechanisms to improperly influence government officials, including sham consulting contracts, an exclusive distributorship and improper travel and cash payments.

Pfizer H.C.P. admitted that between 1997 and 2006, it paid more than $2 million of bribes to government officials in Bulgaria, Croatia, Kazakhstan and Russia. Pfizer H.C.P. also admitted that it made more than $7 million in profits as a result of the bribes.

The agreement recognizes the timely voluntary disclosure by Pfizer H.C.P.'s parent company, Pfizer Inc.; the thorough and wide-reaching self-investigation of the underlying and related conduct; the significant cooperation provided by the company to the department and the SEC; and the early and extensive remedial efforts and the substantial and continuing improvements Pfizer Inc. has made to its global anti-corruption compliance procedures.

Pfizer H.C.P. received a reduction in its penalty as a result of Pfizer Inc.'s cooperation in the ongoing investigation of other companies and individuals. In addition to the $15 million penalty, the agreement requires Pfizer Inc. to continue to implement rigorous internal controls and to cooperate fully with the department.

Due to Pfizer Inc.'s extensive remediation and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, Pfizer H.C.P. is not required to retain a corporate monitor, but Pfizer Inc. must periodically report to the department on implementation of its remediation and enhanced compliance efforts for the duration of the agreement.

In the 18 months following its acquisition of Wyeth, Pfizer Inc., in consultation with the department, conducted a due diligence and investigative review of the Wyeth business operations and integrated Pfizer Inc.'s internal controls system into the former Wyeth business entities. The department considered these extensive efforts and the SEC resolution in its determination not to pursue a criminal resolution for the pre-acquisition improper conduct of Wyeth subsidiaries.

Source: Justice Department.

As part of its overall cooperation efforts, for example, Siemens provided the government with corporate records, financial records, and payments made by third parties—and even provided forensic analysis of those documents—revealing evidence of corrupt payments that the government would not have otherwise obtained. “It was only through the extensive, worldwide investigative efforts of the internal investigators that these complex criminal activities were uncovered,” the Justice Department said in a statement at the time.

In November 2010, offshore drilling company Pride Intl. and Pride Forasol, a wholly-owned French subsidiary of Pride Intl., entered into a DPA and agreed to a $32 million criminal penalty stemming from allegations of foreign bribery in the oil field services industry.

Because of the companies' voluntary disclosure of wrongdoing, the Justice Department was able to bring additional charges against Pride services provider, Panalpina World Transport. “The extent of Panalpina's conduct was unknown by the Department at the time of the companies' disclosure,” according to the Justice Department. “It was only through the extensive, worldwide investigative efforts of the companies that these complex criminal activities were uncovered and reported to the department.”

Let's Make a Deal

Despite the increase in corporate whistleblowing, many companies may be unaware of this growing trend, Gorman says, because everybody is still focused on the SEC's whistleblower rules. As more companies that are under FCPA investigation do become aware, “I would expect to see this become a standard part of the cooperation package that companies will start looking at to try to mitigate their own potential liability,” he adds, “and I would expect enforcement officials to encourage it, because it just gives them an extra pair of eyes in the marketplace.”

The trend also conveniently fits with the SEC's new initiative of deferred prosecution agreements. John Nester, a spokesman for the SEC, makes clear that the whistleblower awards as they pertain to financial payments are only available for individuals, “but companies can and do receive credit for cooperating,” he says.

Nester sites the Seaboard 21(a) Report, which sets forth the various board measures for evaluating a company's cooperation. This includes such measures as self-policing, self-reporting misconduct, remediation, and cooperation with law enforcement authorities.

Babson-Smith says that just knowing another company may have its eye on you, however, should not affect the decision to self-report. “If there is a potential corporate whistleblower, then there are individual whistleblowers as well. The analysis as to whether to disclose is likely to be the same regardless of who is blowing the whistle,” she says. “The company must determine what is in its best interests, in light of all of the facts, including the severity of the misconduct and the existence of corporate and individual whistleblowers.”