The Foreign Corrupt Practices Act (“FCPA”) makes it unlawful to bribe a foreign government official for the purpose of obtaining or retaining business.  It defines “foreign official” as including the officers and employees of any “instrumentality” of a foreign government.  The Department of Justice and the Securities Exchange Commission, the two primary government enforcers of the FCPA, have always interpreted this broadly, taking the position that a state-owned or state-controlled enterprise (“SOE”) can be an “instrumentality” under the FCPA.  The government has so contended even in situations where the foreign government is a minority investor in the enterprise and the enterprise has publicly traded stock, does business outside of its own borders, employs non-nationals, and has other attributes of a commercial business.  Recently, district courts faced with this theory have agreed, subject to a factual analysis of the particular state-owned enterprise at issue.  With approximately half of recent FCPA enforcement actions based, in whole or in part, on this enforcement theory, and more than $2 billion in penalties applied under the FCPA in 2010 and 2011, these decisions are yet another reason why FCPA training and compliance programs must be a point of focus for business entities with an international presence. 

In 2011, at least two district courts engaged the government’s broad definition of “instrumentality,” and both concluded that a SOE can qualify, in appropriate factual circumstances, as an instrumentality for the purposes of the FCPA.  In United States v. Carson, No. 09-77, 2011 WL 5101701 (C.D. Cal. May 18, 2011), the Central District of California tackled the issue and concluded that several factors bear on whether an SOE qualifies as an instrumentality:  the foreign state’s characterization of the entity and its employees; the foreign state’s degree of control over the entity; the purpose of the entity’s activities; the entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; the circumstances surrounding the entity’s creation; and the foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).  Where the weight of the factors permit the conclusion that the SOE is an instrumentality, the court concluded that the employees of a SOE would qualify as “foreign officials” under the FCPA.

In United States v. Aguilar, 783 F. Supp. 2d 1108, 1109 (C.D. Cal. 2011), the court again was faced with this issue.  There, the defendants were alleged to have bribed a set of high-ranking employees of an electric utility company.  It was undisputed that, under the Mexican Constitution, the supply of electricity is a government function; that the utility-employer is “a decentralized public entity;” and that it is “a company created and owned by the Mexican government.”  The defendant moved to dimiss the FCPA case on the ground that the electric utility company was not a government instrumentality.  The court denied the defendant’s motion , holding that the utility could qualify as an instrumentality, and its employees as government officials, for the purpose of the FCPA.  This court, too, considered a non-exclusive list of factors in reaching that decision:

• The entity provides a service to the citizens—indeed, in many cases to all the inhabitants—of the jurisdiction.

• The key officers and directors of the entity are, or are appointed by, government officials.

• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.

• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.

• The entity is widely perceived and understood to be performing official ( i.e., governmental) functions.

Finally, the Sixth Circuit held that the federal prosecutor committed misconduct when it implied a falsehood on an excluded issue.  The Sixth Circuit, acting through Judges Ray Kethledge, Jane Branstetter Stranch, and District Judge James Gwin, ordered that Mr. Parkes’ conviction be vacated, and that an acquittal be entered.

Mr. Parkes’ business made car floor mats, and borrowed money from a local bank.  The business suffered enormous losses when a new manufacturing process failed, resulting in the mats melting in summer sunshine.  The business eventually began importing its mats from China, and essentially acting as a distributor.  This kept the business going, but it still owed more than $2 million to the bank.  The bank also honored bounced checks of the business, essentially converting those amounts to new loans.  Soon the loan size exceeded lending limits.  To avoid FDIC scrutiny, the bank president falsified entries on the books to make it appear that the amount loaned had gone to several different shell entities.  The Government charged Mr. Parkes with participating in the scheme based on a vague fax from the business to the bank.  However, there was no evidence that Mr. Parkes was the author of the fax, which was subject to a few plausible explanations.  In addition, although the bank president had plead guilty pursuant to a plea agreement requiring cooperation, the Government never introduced his testimony to establish that Mr. Parkes intended that fraudulent bank entries be made.

What the jury did not hear was that the bank president had been embezzling for years from the bank, and one reason why he might make false entries on his own would be to avoid triggering FDIC scrutiny if the large loans had been discovered.  In addition, the jury did not hear how the bank president had concealed – on his own – loans exceeding limits from other businesses.  Critically, of course, this would have explained to the jury why the bank president might do this for Mr. Parkes’ business without Mr. Parkes’ intent that it be done, when it would not seemingly benefit the president otherwise.  The Court excluded this as Rule 404(b) evidence because telling the jury that he was an embezzler tended to discredit any testimony that the bank president might give, but the Sixth Circuit held it was relevant for a legitimate purpose for Mr. Parkes’ defense – his motive or lack thereof.  It also held that the relevance of an item has to be judged in relation to the issues in the case.

Finally, the Sixth Circuit criticized the prosecutor for suggesting that Mr. Parkes would receive a windfall if not convicted, when the Government had successfully argued to keep out evidence that Mr. Parkes had paid back most of the loans pursuant to his personal guarantees.

According to the Justice Department, the kickbacks were used to influence post-market studies, which are typically used to assess the clinical performance of a medical device after its approval. Medtronic offered each participating physician between $1,000 and $2,000 per patient implanted with one of its devices. The Justice Department contended that these kickbacks were offered to physicians in order to persuade them to continue using Medtronic products, or to convince them to stop using a competitor’s products.

The settlement resolves allegations contained in two separate qui tam whistleblower lawsuits. As a result of the settlement, the whistleblowers will receive payments of roughly $4 million, to be deducted from the federal government’s share of the settlement. This settlement represents yet another False Claims Act recovery for the federal government, which has recovered nearly $6.5 billion since January 2009 in cases involving federal health care fraud.

Negron and her co-defendants had masterminded a scheme that defrauded Medicare for more than eight years.  The scheme operated by paying bribes and kickbacks to the owners and operators of assisted elderly care facilities across Florida in exchange for delivering Medicare-ineligible patients to Negron’s company.  The fraudulent clinic paid millions of dollars in kickbacks, and defrauded Medicare for more than $205 million of unnecessary or illegitimate services.  After a six-day trial in August of 2011, Negron was found guilty of 24 felony counts, including several health care fraud offenses and money laundering offenses.

The two other owners of Negron’s company, Laurence Duran and Marianella Valera, were sentenced earlier this year.  Duran received a 50 year sentence for his role in the Medicare fraud scheme.  Valera received a 35 year sentence for her role. According to the Department of Justice, these sentences are the three longest prison sentences ever imposed in a Medicare Fraud Strike Force case.

For more information, please see here.

The charges alleged that one of KV’s defunct subsidiaries, Ethex Corporation, failed to advise the Centers for Medicare and Medicaid Services that two of its unapproved products did not qualify for coverage.  Ethex submitted the false quarterly reports to the government about two of its drugs, Nitroglycerin ER and Hyocyamine ER, neither of which had ever received full regulatory approval for safety and effectiveness.  The Department of Justice contended that, by misrepresenting the regulatory status of these drugs, Ethex knowingly caused false claims to be submitted to government health care programs, and that it received reimbursement for unapproved drugs.

Since January 2009, the Department of Justice has used the False Claims Act to recover nearly $6.5 billion in cases involving fraud against federal health care programs.  For more information, see here.

As part of its agreement with the EPA, Lafarge will pay a $740,000 civil penalty.  Additionally, Lafarge will implement a nationwide evaluation and compliance program at 189 of its similar facilities to ensure all facilities meet Clean Water Act requirements.   Lafarge must review the permits at all facilities, inventory all discharges to U.S. waters, and ensure that best management practices are in place.  The company has also been ordered to identify an environmental vice president who is responsible for overseeing compliance with stormwater requirements.  It is estimated that Lafarge will spend approximately $8 million over five years to develop and maintain this robust compliance program.

For more information about this settlement, see the EPA press release.

In September, two other defendants, Guillermo “Willy” Cabeza, former president of Arrow Air, and Luis Juan Soto, former president of South Winds Cargo, pleaded guilty.  They are both currently awaiting sentencing.  At sentencing, all three defendants face a maximum $1 million fine and up to 10 years in prison. 

A total of 22 airlines and 21 executives have been charged in the Justice Department’s ongoing investigation into price fixing in the air transportation industry.  More than $1.8 billion in criminal fines have been imposed and four executives have been sentenced to serve prison time.

To read more about Gonzalez’s guilty plea, please see the DOJ Press release and The Miami Herald article covering this plea hearing.

Merck faced multiple criminal and civil charges regarding its promotion of Vioxx, which was withdrawn from the market in 2004 after studies linked the drug to increased risk of heart attack and stroke.  As a result of the criminal settlement, Merck will plead guilty to a misdemeanor for promoting the use of Vioxx as a rheumatoid arthritis treatment.  Merck illegally promoted the drug as a rheumatoid arthritis treatment for three years before the FDA approved it in 2002.

The civil settlement covers a broader range of alleged misconduct. The settlement will resolve allegations that Merck’s representatives made inaccurate or misleading statements about Vioxx’s safety in order to increase sales of the drug. State and federal agencies then relied on those false claims in making payment decisions relating to Vioxx. The civil settlement also recovers damages for Merck’s off-label promotion of Vioxx as a rheumatoid arthritis therapy.

For more information, see here.

 This is another in a recent string of Medicare fraud cases brought by the Medicare Fraud Strike Force. As we have previously reported, the Strike Force is operating in nine districts, including the Eastern District of Michigan.  Since 2007 the Strike Force’s efforts have lead to indictments against more than 1,140 individuals for crimes involving Medicare fraud.  Those 1,140 individuals, collectively, had billed Medicare more the $2.4 billion for services that were either never rendered or were medically unnecessary.

 For more information see the DOJ Press Release announcing the guilty plea.