Recidivism Under the FCPA: Zimmer Biomet

by Thomas Fox
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Last week Zimmer Biomet Holdings, Inc. paid a high price for its and its predecessor's failure to comply with the terms and conditions of 2012 Deferred Prosecution Agreement (the “2012 DPA”). Biomet, having originally paid $23 million to resolve violations of the Foreign Corrupt Practices Act (FCPA), was subsequently acquired by Zimmer, which  is now hit with an additional $30 million and new DPA. Under the new DPA, Zimmer will pay a criminal fine of $17.46 million and retain an independent compliance monitor for three years. The company also agreed to pay the Securities and Exchange Commission (SEC) $13 million, consisting of $6.5 million in disgorgement and interest and a $6.5 million penalty and resolved the SEC matter with an Administrative Order (Order). Finally, as part of the Department of Justice (DOJ) action JERDS Luxembourg Holding S.ár.l. (Jerds), a Zimmer Biomet subsidiary, agreed to plead guilty to a Criminal Information for causing Biomet to violate the books and records provisions of the FCPA.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division said in the DOJ Press Release, “Zimmer Biomet had the opportunity to avoid criminal charges but its misconduct allowed the bribes to continue,” said Assistant Attorney General Caldwell. “Zimmer Biomet is now paying the price for disregarding its obligations under the earlier deferred prosecution agreement. In appropriate circumstances the department will resolve serious criminal conduct through alternative means, but there will be consequences for those companies that refuse to take these agreements seriously.”

The matter paints a very negative picture of a company which not only claimed it had eliminated FCPA violations in the original DPA but allowed more illegal conduct to continue during the pendency of its first monitorship. The original monitorship was schedule to last 18 months but was later extended to three years. According to the new DPA, even with that extension, “At the end of the additional year, the independent compliance monitor again could not certify that Biomet’s compliance program met the standards set forth in the 2012 DPA, and the Fraud Section concurred in that assessment”.

The new DPA noted two areas of recidivism, “During the DPA, Biomet continued to engage in criminal conduct, specifically Biomet informed the Fraud Section of: (1) internal controls failures related to Mexico between 2010 and 2013, which resulted in Biomet’s earning approximately $2,652,100 in profits; and (2) the continued use, between 2009 and 2013, by Biomet of a Brazilian distributor who had been engaged in the underlying criminal conduct that led to the 2012 DPA, which resulted in Biomet’s earning approximately $3,168,000 in profits; Biomet executives were aware of the continued use of the prohibited distributor and red flags related to corruption in Mexico that Biomet did not address; Biomet executives ignored recommendations by Biomet’s internal auditors and a company-wide requirement to cease all business with the Brazilian distributor”.

It is difficult to say in which country the violative conduct was more recalcitrant. In Brazil the company had discovered back in 2008 one of its distributors paid bribes on behalf of Biomet and was terminated. Somehow the Biomet Brazil “continued to use Brazilian Distributor A and one of his affiliated companies, Brazilian Distributor Company B, and knowingly and willfully failed to implement additional controls to ensure” the distributor did not continue his relationship with Biomet. Rather amazingly this distributor relationship continued until 2013.

In Mexico, Biomet continued its bribery scheme unabated after the 2012 DPA through its subsidiary JERDS. According to the Criminal Information, JERDS knew it could not import certain products into Mexico through its standard importation channel of flying products into Mexico City and clearing customs at that location. Instead JERDS retained a corrupt Texas shipping company which paid bribes to Mexican customs officials on the Texas-Mexico border to get the products through customs. The Information should be studied by every Chief Compliance Officer (CCO) and compliance professional to view a prime example of how business unit personal may hide illegal payments and the schemes that exporters can use to export products illegally into a foreign country using bribery and corruption.

According to the calculations in the new DPA, the fine range was between $11,640,200 and $23,280,400. Zimmer was assessed a criminal fine by the DOJ of $17,460,300. Zimmer did not receive any credit under the FCPA Pilot Program because as a recidivist they “breached its obligations under the 2012 DPA”, though they were clearly the beneficiary of some amount of credit by the DOJ. Zimmer did not receive any credit for self-disclosure, the new DPA stated, “although Biomet disclosed the conduct described in the Statement of Facts to the Fraud Section during the term of the 2012 DPA, Zimmer Biomet did not receive voluntary disclosure credit because the 2012 DPA obligated Biomet to disclose the conduct described in the Statement of Facts, and some of the conduct described in the Statement of Facts predated the 2012 DPA”. Zimmer did receive full credit for its cooperation.

Finally, the company did engage in significant remedial measures, including:

  • terminating or causing the resignation of five employees who participated in the misconduct described in the Statement of Facts;
  • terminating one employee who failed to identify issues with the use of a prohibited distributor in Brazil and failed to take appropriate steps to mitigate risks;
  • disciplining two employees who failed to detect the misconduct, failed to supervise effectively those who were engaged in the misconduct, and failed to take appropriate steps to mitigate corruption and compliance risks, including by placing an official letter of reprimand in their employment files, reducing their bonuses, and requiring them to take additional anticorruption training;
  • conducting individualized training for certain remaining employees;
  • adopting heightened controls related to their third-party intermediary policies;
  • increasing their resources devoted to compliance, particularly in Latin America; and
  • requiring improved FCPA training.

The Zimmer FCPA enforcement action serves as a cautionary tale for any company subject to a DPA. If you violate it, the second round of penalties will be more severe than the initial sanctions. Yet the DOJ did not bring down the full weight of its possible sanctions against the company, demonstrating that once again the DOJ will reward certain types of behavior.

The matter is also a cautionary tale for any company which may wish to acquire a company going through a FCPA investigation, enforcement action or under the auspices of a DPA. As JERDS Information stated, “In June 2015, Zimmer Holdings, Inc. (“Zimmer”) acquired LVB Acquisition, Inc., which owned all of Biomet, Inc. (“Biomet”). The combined entities and their subsidiaries became ZIMMER BIOMET, headquartered in Warsaw, Indiana and incorporated in Delaware. Thus, ZIMMER BIOMET knowingly assumed all the rights and obligations of Biomet under the 2012 DPA, including under the compliance monitorship that was part of the 2012 DPA.”

In the mergers and acquisition (M&A) context, failing to perform adequate pre-acquisition due diligence can be a very costly lesson. You should learn from Zimmer and its travails over the Biomet acquisition rather than learning it for yourself.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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