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From Securities Regulation Daily, March 3, 2015

Ceresney highlights pharma issues in FCPA enforcement, accounting and disclosure

By Anne Sherry, J.D.

Addressing a pharmaceutical compliance conference today in Washington, D.C., SEC Enforcement Director Andrew Ceresney discussed the division’s efforts in enforcing the Foreign Corrupt Practices Act across the pharmaceutical industry before tackling auditing and disclosure requirements. Although the scope of his remarks was wide, he noted that compliance can be mutually reinforcing; for example, internal controls designed to prevent and detect FCPA violations can end up preventing accounting and disclosure violations, and vice versa.

FCPA in pharma cases. Ceresney identified the three types of FCPA violation that the division sees most often in its pharmaceutical cases: “pay-to-prescribe,” bribes to get drugs on the approved list or formulary, and bribes described as charitable contributions. On the third category, he noted that the division takes an expansive view of the prohibition on giving “anything of value” to a foreign official to obtain or retain business. The phrase captures more than cash bribes; the SEC took action against Eli Lilly over payments to a foundation started by the head of a regional governmental health authority, while an action against Stryker involved a purported donation to a public university to fund the pet project of a doctor with a public hospital.

Compliance and cooperation. The director emphasized the role of a robust FCPA compliance program in avoiding these violations. A strong compliance program, as described in the SEC and DOJ’s joint resource guide on the FCPA, includes compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance.

The compliance programs place companies in the best position to detect misconduct and allow self-reporting and cooperation which, Ceresney stated, is always in the company’s best interest. He said that he still holds the opinion, formed when he was a defense lawyer, that the only two things a company can do to improve its plight when it becomes aware of misconduct are to remediate the misconduct and cooperate in the investigation. Penalties are reduced for cooperation; conversely, the consequences for companies are worse when the SEC finds the violations on its own rather than through self-reporting. The expansion of the SEC’s whistleblower program means that companies take a “huge gamble” by choosing not to self-report, he concluded.

Disclosure and accounting. Finally, Ceresney turned to disclosure and accounting issues, describing this as going right to the heart of investor protection. Sound internal controls are key building blocks to ensure reliable financial reporting, he said, and enforcement cases may be brought for internal controls violations even without accompanying charges of fraud. The theme of these cases are controls that were not carefully designed to match the business or not updated to evolve along with the business, or cases where senior leadership “was not asking the tough questions – and sometimes not even asking the easy questions.” Senior leadership must place strong emphasis on the importance of designing and implementing internal controls for the employees to properly focus on the controls, he said.

Ceresney also focused on disclosure issues, in particular with respect to dealings with the FDA. He described two recent enforcement actions in connection with disclosures related to FDA filings and the regulatory status of a drug. In another case, the company had received three denials of clearance for a medical scanner, the third of which called some sample images “useless.” On an investor conference call, however, the CEO downplayed the FDA’s concerns, calling them “administrative” and “not substantive.” While sharing every item of FDA correspondence with investors is not practical, he said, sharing critical correspondence eliminates many of these disclosure issues because investors get a chance to judge the back-and-forth for themselves.

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