On August 7, 2012, the US Department of Justice (DOJ) announced an enforcement action against Pfizer H.C.P. Corporation (Pfizer HCP), a wholly-owned subsidiary of Pfizer Inc. (Pfizer), while the Securities and Exchange Commission (SEC) announced related enforcement actions against Pfizer and Wyeth LLC, another wholly-owned Pfizer subsidiary. These settlements resolve one of the longest-running FCPA investigations and settlement processes pending before the two agencies (eight years from the time of Pfizer's voluntary disclosure, and almost two years in the resolution phase), and appear to represent the enforcement agencies' continued use of significant enforcement actions to address public calls for additional clarification as to their FCPA enforcement polices and priorities.
The Pfizer and Wyeth settlements address a number of issues, the most important of which appears to be the significant - and potentially extraordinary - lengths to which both agencies seem to have been willing to go to reward Pfizer for its due diligence and compliance efforts by not imposing successor liability in connection with its acquisition of Wyeth LLC, which occurred while Pfizer's own FCPA investigation was pending. In contrast, Pfizer was held responsible as a successor for the pre-acquisition conduct of another acquired entity, as well as for its own post-acquisition conduct. While it is an open question what the DOJ's and SEC's next pronouncement on the successor liability of an acquirer for target company FCPA violations revealed in the mergers and acquisitions (M&A) context will look like - possibly in the much-anticipated guidance due to be released later this year - it is evident, that both agencies have sought to use the Pfizer settlements to advance a significant policy pronouncement on FCPA liability in M&A transactions. As described below, that pronouncement appears to have reinforced positions both agencies have taken in other contexts, and arguably raised the bar on the level of pre- and post-closing due diligence and compliance activities an acquiring company must undertake in order to avoid successor and direct liability for the pre-acquisition conduct of targets.
The Pfizer and Wyeth Settlements
Pfizer and its subsidiaries agreed to a three-part settlement with the DOJ and SEC which is unusual for its bifurcated approach to liability.
DOJ Settlement. Pfizer HCP, a wholly-owned indirect subsidiary of Pfizer, entered into a two-year deferred prosecution agreement (DPA) with the DOJ, pursuant which it agreed to pay a $15 million criminal penalty and abide by an extensive list of compliance and remediation conditions for the entire DPA period. At the same time, the DOJ filed a criminal information against Pfizer HCP alleging one count of conspiracy to violate the FCPA's anti-bribery and books and records and internal controls provisions, and one count alleging substantive violations of the anti-bribery provisions.
Both counts relate to alleged improper payments made, from 1997-2006, to officials in Bulgaria, Croatia, Kazakhstan, and Russia. The DOJ charged that inappropriate conduct in Bulgaria and Russia involved the provision of travel and other perquisites to doctors and other state-employed healthcare professionals to entice them to prescribe increased amounts of Pfizer products. The charged conduct in Russia also included cash payments to doctors and other healthcare professionals using funds generated through collusion with outside vendors and shell companies controlled by hospital administrators. The Russian and Kazakh conduct involved the use of third parties to make payments to Russian and Kazakh officials to ensure the approval of Pfizer products, and in Russia alone to include Pfizer products in government-approved treatment protocols and secure their eligibility for reimbursement to patients in the Russian state health care system.
The DOJ also included in its charges conduct relating to payments made to Croatian government officials, doctors and hospital administrators from 1997-2004. Significantly, these payments were made from 1997-2003 by the Croatian representative office of a foreign subsidiary of Pharmacia & Upjohn (Pharmacia), a major multinational which Pfizer acquired in April 2003. The post-acquisition payments from May 2003 through 2004 were made by Pfizer HCP through its representative office in Croatia.
SEC Settlement. For its part, the SEC filed two separate settled complaints, one each against Pfizer Inc. and Wyeth LLC, the parent corporation of another major multinational Pfizer acquired in 2009, while Pfizer's FCPA investigation was pending. The Pfizer complaint alleged violations of the FCPA's books and records and internal controls provisions (i.e., no anti-bribery charge) in connection with improper payments from 2001-2007 to officials in Bulgaria, China, Croatia, the Czech Republic, Italy, Kazakhstan, Russia, and Serbia. Like the DOJ, the SEC alleged that the payments were made to influence government regulators to include Pfizer products in the lists of approved products, the lists of nationally-approved courses of treatment, and to doctors and other healthcare professionals to induce them to prescribe Pfizer products. In connection with the settlement, Pfizer Inc. agreed to pay over $26 million in disgorgement and prejudgment interest, and agreed to a permanent injunction against future FCPA violations.
Similarly, the SEC's complaint against Wyeth alleged violations of the FCPA's books and records and internal controls provisions, this time relating to allegedly improper payments by Wyeth subsidiaries to government officials and health care providers in Indonesia, Pakistan, China, and Saudi Arabia. Although this conduct occurred in different countries, the conduct charged was similar to some of the Pfizer settlement payments - cash payments and the provision of travel and other items to government-employed healthcare professionals to induce them to recommend Wyeth products to their patients. However, the conduct at issue occurred before, during, and after Wyeth's acquisition by Pfizer, and covered a different time period altogether (2005-2010). Wyeth agreed to pay approximately $18.9 million in disgorgement and prejudgment interest to settle the matter, and agreed to a permanent injunction against further misconduct.
Liability for Target's FCPA Violations in M&A Transactions
As in the Petersen/Morgan Stanley case earlier this year,1 the DOJ and SEC appear to have used the differential approach in the two Pfizer settlements to strongly signal an enforcement posture on acquirers' liability for past and ongoing FCPA violations of target companies flowing from M&A transactions, and the measures acquirers should adopt to avoid such liability, particularly successor liability. Notably, none of the Pfizer DOJ or SEC settlements mention any FCPA-related due diligence, investigation, compliance or remediation efforts in connection with Pfizer's 2003 acquisition of Pharmacia. As a result, the DOJ settlement presumably holds Pfizer HCP liable for the conduct of a Pharmacia subsidiary in Croatia for pre-acquisition conduct dating from 1997 until Pharmacia's acquisition by Pfizer in 2003, as well as holding Pfizer HCP liable for the continuing conduct in Croatia after its April 2003 acquisition of Pharmacia. The DOJ's prosecution of Pfizer HCP for Pharmacia Croatia's pre-acquisition conduct stands as a clear instance where the agency has imposed criminal sanctions on an acquirer for pre-acquisition acts of an acquired company; i.e., on a true successor basis.2
The conduct cited in Wyeth's SEC settlement - and its absence from both the Pfizer SEC and DOJ settlement documents - stands in significant contrast to the DOJ's treatment of the historic Pharmacia Croatia-related conduct. Pfizer evidently determined to acquire Wyeth while Pfizer's FCPA investigation was pending and, as highlighted in the Wyeth SEC complaint, "undertook a risk-based FCPA due diligence review of Wyeth's global operations and reported the results of that due diligence review to the Commission staff within 180 days of the closing."3 While the SEC brought charges against Wyeth for conduct in four countries - China, Kazakhstan, Saudi Arabia, and Pakistan - the reported conduct does not appear in either the DOJ's settlement with Pfizer HCP or the SEC's complaint filed against Pfizer. Instead, the DOJ acknowledged that on declining to bring charges against Pfizer for Wyeth's past conduct, it had considered Pfizer's extensive review and investigation of Wyeth's operations, and efforts to integrate Wyeth into Pfizer's internal control environment.4
The three settlements appear to represent both agencies' application of DOJ's previously articulated policy, in Opinion Procedure Release 08-02, of declining to impose successor liability for pre-closing actions of a target company where the acquirer takes significant steps, before or immediately after closing, to investigate and remediate any problematic conduct discovered, within a maximum of 180 days of closing. See Steptoe's Alert of July 1, 2008. They also appear consistent with new mergers and acquisitions-related compliance conditions that have appeared in Attachment C of two DPAs in 2012, which require the companies party to the agreements to develop risk-based FCPA-focused due diligence procedures for acquisitions, implement FCPA/anti-corruption policies and procedures at the target, and conduct FCPA/anti-corruption training for key target personnel as soon as practicable post-closing.5
The Pfizer and Wyeth settlements are particularly interesting for the apparent lengths the SEC was willing to go to ensure that Pfizer was not subject to successor or direct liability for any of Wyeth's conduct, but that some charges were brought on that conduct. The Wyeth acquisition closed in October 2009, and on November 6, 2009 Wyeth deregistered as an issuer under Sections 12(g) and 15d of the Exchange Act.6 Notwithstanding these facts, and the Wyeth complaint's statements that the subject post-acquisition payments were incorporated into Pfizer's books and records, the SEC held Wyeth responsible for at least the pre- and post-closing conduct that likely was more properly attributable to Pfizer from an accounting perspective. Moreover, a significant portion of the conduct charged in China against Wyeth took place after November 6, 2009, the date on which Wyeth ceased to be an "issuer" for the purposes of the FCPA. As a result, the SEC's complaint charges conduct for which the SEC does not appear to have had a legal basis on which to do so.7
While the reasons for these aspects of the settlements are not entirely clear, it seems likely that the complexity imposed by their bifurcation accounts for the long period of time that negotiation of the settlements required. Pfizer, of course, had strong incentives to negotiate for the bifurcation so it would not be held liable for any conduct that took place before it had control of Wyeth, or for Wyeth's conduct immediately post-closing, and the DOC and SEC both may have determined to use the settlements to advance their wider policy positions in the settlement papers. The DOJ's final settlement appears to have rewarded Pfizer in other ways, in particular by affording it a 34% "discount" off the low end of the applicable fine range in the Sentencing Guidelines in return for observance of strict compliance obligations and its assistance in providing information to the DOJ which could be used to prosecute other companies.8
In light of Petersen/Morgan Stanley, and the attention that declination has received as a result of the DOJ's strong commendation of that company's compliance program, it may be that additional statements from DOJ and SEC regarding acquirer liability in M&A transactions will be forthcoming in the upcoming FCPA guidance. In the meantime, both DOJ and SEC have made a relatively strong statement that the general due diligence and remediation framework set out in OPR 08-02 likely applies, providing companies with strong due diligence, remediation and compliance plans post-closing some measure of comfort that they can avoid successor and direct liability for their acquisitions' past and ongoing FCPA violations.
Footnotes
1. See Steptoe's May 24, 2012 alert. In the Morgan Stanley/Peterson case, the former employee, Petersen, was prosecuted and labeled as a "rogue" while the company's extensive compliance measures shielded it from pursuit.
2. It should be noted that Pharmacia, as a US company, was subject to the FCPA prior to its acquisition by Pfizer, so this was not a case of conduct that was outside the jurisdictional scope of the FCPA being prosecuted as a result of an acquisition by a company subject to the FCPA.
3. See Wyeth SEC Complaint, at para. 5.
4. See DOJ Press Release, August 7, 2012.
5. See DPAs of BizJet Inc. and Data Systems LLC at Attachment C; Non-Prosecution Agreement of Nordam Group at Attachment B.
6. See Wyeth LLC Form 15-12B, November 6, 2009.
7. The SEC, of course, has equitable as well as legal authority.
8. See Pfizer DPA, at page 7.
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