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From Securities Regulation Daily, July 28, 2015

Mead Johnson settles SEC’s findings of violations of the FCPA

By Jacquelyn Lumb

Mead Johnson Nutrition Company has agreed to settle SEC charges that it violated the Foreign Corrupt Practices Act in connection with its Chinese subsidiary’s improper payments to health care professionals who in turn recommended the company’s baby formula to new and expectant mothers. Kara Brockmeyer, the chief of the SEC’s FCPA unit in the Division of Enforcement, said the company’s lax internal controls provided the opportunity for its subsidiary to make the improper payments. The payments were not accurately reported in the company’s books and records over a five-year period in which over $2 million in improper payments were made.

Improper payments. According to the SEC’s cease-and-desist order, certain of the subsidiary’s employees made improper payments to health care professionals at state-owned hospitals in China to help the subsidiary develop its business. The Chinese subsidiary received approximately $7.77 million in benefits as a result of the improper payments.

Inaccurate books and records. The Chinese subsidiary’s books and records were consolidated into Mead Johnson’s, which rendered them inaccurate. The SEC said that Mead Johnson did not have an adequate system of internal accounting controls over the subsidiary’s operations to prevent and detect the improper payments that occurred over a period of years.

Failure to self-report. Mead Johnson received an allegation of possible FCPA violations in 2011 but an internal investigation did not find evidence that its distributor allowance funds were being used to make improper payments. By 2013, the subsidiary discontinued the distributor allowance funding and discontinued all practices with respect to compensating health care professionals. Mead Johnson did not report the 2011 allegation to the SEC and did not promptly disclose the allegation once the SEC began an inquiry into the matter.

Subsequent cooperation. Following a second internal investigation, Mead Johnson undertook significant remedial measures including the termination of senior staff at the Chinese subsidiary; updating and enhancing its financial accounting controls; revising its compliance program and enhancing its compliance division; and establishing a unit in China to monitor compliance and controls on an ongoing basis.

Sanctions. Although Mead Johnson did not self-report the 2011 allegations, the SEC said the company subsequently provided extensive and thorough cooperation. The company was ordered to pay disgorgement of $7.77 million, prejudgment interest of $1.26 million, and a civil monetary penalty of $3 million. Mead Johnson settled the proceeding without admitting or denying the SEC’s findings.

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