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Business Litigation: Bio Rad Agree to Multi Million Settlment

Bio-Rad agrees to Pay $55 Million in Business Litigation Settlement

Life Sciences, Pharmaceutical and Medical Device Companies Under Increased Scrutiny by Department of Justice and the SEC

Over the last several years, multinational companies of various sizes and geographical reach in the pharmaceutical, medical device, and biotechnology industries have found themselves in the crosshairs of the U.S. Department of Justice ("DOJ") and U.S. Securities and Exchange Commission ("SEC") as both agencies continue their aggressive enforcement of the Foreign Corrupt Practices Act ("FCPA"). Many such life sciences companies have already resolved FCPA matters with the U.S. government, and numerous others have disclosed that they are subject to ongoing investigations. Last week, the government delivered yet another reminder that this enforcement trend will continue as a California-based, multinational medical diagnostics and life sciences company, Bio-Rad Laboratories ("Bio-Rad"), agreed to pay a total of $55 million to resolve parallel FCPA investigations by the DOJ and SEC involving payments made to government officials in Russia, Vietnam, and Thailand. Bio-Rad's settlement with the SEC included $40.7 million in disgorgement and prejudgment interest, which represents the tenth largest disgorgement in any FCPA-related enforcement action brought by the SEC. Bio-Rad also entered into a non-prosecution agreement with the DOJ, pursuant to which it agreed to pay a criminal fine of $14.35 million and report its compliance efforts to the government for a period of two years. The Bio-Rad Investigation The DOJ and SEC investigations of Bio-Rad primarily focused on the company's sale of clinical diagnostic products, such as HIV kits, in the Russia market, where a substantial portion of Bio-Rad's business consisted of sales to the Russian government. Those sales were made pursuant to government contracts that were awarded to Bio-Rad through a public tender offer process that required approval from various government officials. From approximately 2005 to 2010, a Bio-Rad subsidiary, headquartered in France, made excessive payments to third-party intermediary companies that were retained in order to assist the company in acquiring new business in Russia (e.g., disseminating promotional material and distributing and installing products). These intermediary companies, which were incorporated in the United Kingdom, Belize and Panama, were paid commissions between 15% and 30%, which over the course of nearly five years, amounted to approximately $4.6 million on $38.6 million of sales. However, none of the third-party intermediaries actually provided, or had the capability to provide, the contracted-for services; according to the SEC, the intermediaries had phony addresses, off-shore bank accounts in Lithuania and Latvia, and no employees. The SEC charged that one of the intermediaries "even used a phony office address in Moscow that was actually the office address for a Russian government building." Moreover, each intermediary was created by the same individual, who was known to have important contacts within the Russian government and the ability to influence the tender offer process. Bio-Rad's Russian subsidiary won 100% of its government contracts when utilizing these intermediaries, and then lost its first major Russian government contract after terminating the intermediaries in 2010. The scheme was apparently effective in obtaining and retaining business--while it lasted. The SEC charged similar wrongdoing in Southeast Asia. In Vietnam, Bio-Rad sales representatives made payments to Vietnamese officials at hospitals and laboratories in exchange for their agreement to purchase Bio-Rad products. The country manager in the Vietnam office recognized the wrongful nature of the conduct, but feared losing 80% of the business without it. In order to "insulate" Bio-Rad from liability, he then channeled $2.2 million to third-party agents and distributors in the form of "advertising" and "training" fees, which were, in turn, funneled to Vietnamese government officials. In Thailand, Bio-Rad acquired a 49% interest in Diamed Thailand, as part of its acquisition of Diamed AG (Switzerland). There was little due diligence performed in connection with the acquisition and, as it turned out, the Thai affiliate operated a bribery scheme that utilized third-party intermediaries. Specifically, Diamed Thailand paid the intermediary an inflated commission of 13%, the majority of which was provided to Thai government officials in exchange for business contracts. The above conduct resulted in Bio-Rad's agreement to pay $55 million to settle the SEC's charges, which included violations of the anti-bribery, internal controls, and books and records provisions of the FCPA, as well as the parallel investigation by the DOJ. Interestingly, however, the DOJ was focused not only on Bio-Rad's failure to implement adequate controls, but also on Bio-Rad's lack of "adequate compliance systems." The DOJ's specific mention of Bio-Rad's compliance program--both in the non-prosecution agreement and its accompanying press release--is interesting given that, to date, FCPA liability has not been predicated solely upon a failure to implement a sufficient compliance program. However, it comes on the heels of the recent Smith & Wesson settlement, where the SEC's administrative order was similarly focused on compliance program failures, thus raising the question as to whether the government is setting the table to try and impose FCPA liability for the simple failure to implement adequate compliance systems. More details are in the complete business litigation article here. Originally posted by Gary Giampetruzzi, Anthony Antonelli & Amanda Pober on Ball and Bonholtzer - Business Litigation Attorney Los Angeles

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