Between 2011 and 2013, senior personnel at Orthofix do Brasil LTDA ("Orthofix Brazil"), Brazilian subsidiary of Orthofix International N.V. ("Orthofix"), allegedly schemed to use high discounts and make improper payments through third party commercial representatives and distributors allegedly to induce doctors employed at government-owned hospitals in Brazil to use Orthofix's products and increase sales. The alleged improper payments were improperly recorded as legitimate expenses and allegedly generated illicit profits of approximately USD 2,928,000 to Orthofix. For example, Orthofix Brazil's commercial representatives made arrangements with doctor to provide a specific amount, approximately 20-25% of the sales price, in exchange for their use of Orthofix's products. Orthofix Brazil allegedly then paid approximately 33-42% sales commission to the representatives, portion of which would be used to pay the prearranged fee to the doctors. In another instance, Orthofix Brazil allegedly provided a high discount ranging in certain instances of up to 70% to the distributors, who then used part of the profit generated by that discount to make alleged improper paymetns to certain doctors. Although the discounts were purportedly meant to allow the distributors to make sufficient profits, portion of the discount was often used to make improper payments to doctors. The executives and employees at Orthofix Brazil allegedly were aware of the improper payments.
Orthofix Brazil allegedly improperly recorded the improper payments as legitimate business expenses, including commissions, discounts, consulting fees, and administrative expenses, in its books and records. Orthofix Brazil's books and records were subsequently consolidated into Orthofix's books and records.
Orthofix allegedly had deficient internal accounting controls. Orthofix allegedly had no policies or processes in place to centralize and monitor Orthofix Brazil's third party intermediary payments. The alleged lack of centralized global accounting and payment controls allegedly allowed its subsidiary to easily evade the policies and controls by the parent company.
Orthofix described the ongoing investigation as follows in its June 30, 2010 SEC Form 10-Q:
"During a recent internal management review of Promeca S.A. DE C.V. ('Promeca'), one of its Mexican subsidiaries, the Company received allegations of improper payments, allegedly made by certain of Promeca's local employees in Mexico, to employees of a Mexican governmental health care entity. The Company has engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation focusing on compliance with the Foreign Corrupt Practices Act ('FCPA') and voluntarily contacted the U.S. Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. During 2009, Promeca accounted for approximately one percent of the Company's consolidated net sales and consolidated total assets. The internal investigation is in its early stages and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations provide for potential criminal and civil sanctions in connection with FCPA violations, including criminal fines, civil penalties, and disgorgement of past profits . . .
Allegations in the SEC complaint, filed on 10 July 2012 at the same time that the final settlement with the company was announced, explain how employees of Promeca paid bribes to hospital officials employed by the IMSS between 2003 and 2008. The employees called the bribes "chocolates" and paid up to 5% to 10% of sales in order to obtain and retain contracts with various hospitals. Approximately USD 317,000 was paid in this way. At first, the Promeca employees wrote checks to themselves for cash advances in order to pay the bribes, and then later submitted falsified receipts for imaginary expenses including meals and automobile tires. Later, the Promeca employees began accounting for the payments as promotional and training expenses.
In 2008, the IMSS changed its procurement policies, and Promeca employees instituted a new system to ensure continued business, paying front companies controlled by IMSS officials up to 5% of the tender price, and attributing the payments to training courses, meetings and conventions in the company's books. Promeca also spent over USD 80,000 on gifts for IMSS officials, providing them travel packages, televisions, laptops, appliances, and an automobile lease agreement, and falsely recording the expenses as promotional and training costs.
On or about November 16, 2010, Orthofix received a subpoena from the U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission ("SEC") seeking documents related to the Mexican allegations. Orthofix is cooperating with the SEC and DOJ in connection with the subpoena.
In April 2011, Orthofix completed its internal investigation of Promeca and commenced settlement discussions with the US authorities regarding the Mexican allegations on 24 May 2011.
On 6 February 2012, Orthofix reached an Agreement in Principle with the DOJ to settle the FCPA claims. The agreement also includes a resolution of the qui tam claim filed by Susan Hutcheson against Blackstone and Orthofix in the U.S. District Court for the District of Massachusetts."
On 10 July 2012, Orthofix entered into definitive agreements memorializing the previously disclosed agreement in principle previously reached with the DOJ and the SEC regarding the Company's self-initiated and self-reported internal investigation of its Mexican subsidiary, Promeca S.A. de C.V. (' Promeca '), into allegations of non-compliance by Promeca with the FCPA. As part of the settlement, Orthofix has consented to final judgment with the SEC and entered into a deferred prosecution agreement ("DPA") with the DOJ.
Under the terms of the SEC Consent, Orthofix will settle civil claims related to this matter by voluntarily disgorging profits in an amount of USD 5,225,701, inclusive of pre-judgment interest. Orthofix has also agreed to pay a fine of USD 2,220,000 pursuant to the terms of the DPA. Orthofix previously recorded charges of USD 3.0 million during the first quarter of 2011 and USD 4.5 million during the fourth quarter of 2011 to establish an accrual in anticipation of a future final resolution of these matters with both the DOJ and the SEC. The company expects to make these settlement payments in the third fiscal quarter of 2012. In addition, Orthofix will periodically report the status of such remediation and implementation of compliance measures to the SEC during a two-year term.
As part of the DPA, which has a term of 3 years, the DOJ has agreed not to pursue any criminal charges against Orthofix in connection with this matter if the company complies with the terms of the DPA. The DPA takes note of the Orthofix's self-reporting of this matter to the DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by the company. The DPA provides that the Company shall continue to cooperate fully with the DOJ in any future matters related to corrupt payments, false books and records or inadequate internal controls. In that regard, Orthofix has represented that it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws. The Company will periodically report to the DOJ during the term of the DPA regarding such remediation and implementation of compliance measures.
Neither the SEC Consent nor the DPA provides for the appointment of an independent external monitor by the DOJ or the SEC.
In August 2013, internal legal department of Orthofix was notified of certain allegations involving potential improper payments with respect to its Brazilian subsidiary, Orthofix Brazil. Orthofix has engaged outside counsel to assist in reviewing these allegations with focus on compliance with applicable anti-bribery laws, including the FCPA. In accordance with Orthofix's agreement with the authorities, Orthofix contacted both the DOJ & SEC in August 2013 to make voluntary self-disclosures.
On 15 June 2015, Orthofix and the DOJ agreed to extend the terms of the DPA for two months (to end on 17 September 2015) to permit the DOJ additional time to evaluate Orthofix's compliance with the internal controls and compliance undertakings in the DPA and to further investigation the allegations in Brazil.
On 17 September 2015, the DOJ extended the terms of the DPA for an additional ten months (to end on 17 July 2016), stating that Orthofix's efforts to be in compliance with the internal controls and compliance undertakings in the DPA were insufficient. On 17 July 2016, the DPA expired. The DPA required the DOJ to notify the court and file a dismisal of the case within 30 days of DPA expiration and it was filed on 28 July 2016.
In August 2013, internal legal department of Orthofix was notified of certain allegations involving potential improper payments with respect to its Brazilian subsidiary, Orthofix do Brasil Ltda. Orthofix has engaged outside counsel to assist in reviewing these allegations with focus on compliance with applicable anti-bribery laws, including the FCPA. In accordance with Orthofix's agreement with the authorities, Orthofix contacted both the DOJ and the SEC in August 2013 to make voluntary self-disclosures.
According to its Form 10-Q filed with the SEC on 1 August 2016, Orthofix and the SEC are in discussions regarding a resolution of the Brazil-related allegations. In the same filing, Orthofix disclosed that it has recorded a charge of USD 4.6 million in the second quarter of 2016 which Orthofix believes represents the minimum range of less in connection with a potential resolution to this matter with the SEC. Orthofix further estimated that additional loss of up to USD 1.5 million could result.
On 18 January 2017, Orthofix settled the SEC's charges that Orthofix and its Brazilian subsidiary, Orthofix Brazil, violated the books and records and internal controls provisions of the FCPA. The SEC found that Orthofix do Brasil schemed to use high discounts and make improper payment through third-party commercial intermediaries to induce doctors at government-owned hospitals in Brazil to use Orthofix's products, leading to increase in sales. Orthofix also failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances to detect and prevent such improper payments by its subsidiary despite the fact that Orthofix had, in 2012, been charged by the SEC with the violation of the same FCPA provisions in connection with improper payments paid by its Mexican subsidiary to Mexican officials. Pursuant to the cease-and-desist order settling the FCPA violations, Orthofix admitted wrongdoing and agreed to pay disgorgement of USD 2,928,000, prejudgment interest of USD 263,375, and a civil penalty in the amount of USD 2,928,000. Orthofix also agreed to retain an independent compliance consultant for one year to review and test its FCPA compliance program.
On the same day, 18 January 2017, the SEC also announced that Orthofix also agreed to pay a civil penalty in the amount of USD 8,250,000 to settle the accounting violations, including improper revenue recognition and inadequate internal accounting controls. In the cease-to-desist order settling the accounting violations, the SEC noted its consideration of Orthofix's cooperation with the SEC's investigation and remedial actions, including enhancement of internal controls, and the restructuring and strengthening of its accounting and finance group.
The SEC Complaint notes that upon discovery of the bribe payments through a Promeca executive, Orthofix immediately self-reported the matter to the Commission staff, and conducted an internal investigation.
On 24 March 2014, the medical device company disclosed possible violations of the FCPA for conduct in Brazil, saying the allegations were first known in August 2013. According to the Wall Street Journal, alleged kickbacks by Orthofix were paid directly and through a distributor to win business. A tipster gave the information to the US authorities and alleged that Orthofix paid kickbacks to surgeons in Brazil, even as the company was already looking into possible foreign bribery involving a subsidiary there.