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From Securities Regulation Daily, October 24, 2013

SEC: Stryker settles FCPA charges for $13.3 million

By Anne Sherry, J.D.

The SEC today announced settled charges against Stryker Corporation, a Michigan-based medical technology company. The SEC’s investigation found that Stryker violated the Foreign Corrupt Practices Act by making $2.2 million in unlawful payments to foreign government officials while describing the payments as legitimate expenses in the company’s books and records. A practitioner versed in FCPA issues observes that the case raises questions regarding the propriety of charitable donations and gifts, as well as potential liability when a company’s internal controls do not reach overseas operations (Release No. 34-70751, October 24, 2013).

Bribery and books-and-records allegations. The order instituting proceedings alleges that Stryker’s subsidiaries in in Mexico, Poland, Romania, Argentina, and Greece made illicit payments and gifts to government officials in order to obtain or retain business at the countries’ public hospitals. In the company’s books and records, the payments and gifts were described as charitable donations, consulting and services contracts, travel expenses, and commissions. The order instituting proceedings describes another example in which Stryker’s Mexican subsidiary funneled a bribe through a law firm and booked it as a legal expense. Stryker made approximately $7.5 million in profits as a result of the illicit payments, according to the order and press release.

Internal controls allegations. Also according to the order, Stryker failed to devise and maintain an adequate system of internal accounting controls. Stryker’s overseas operations were decentralized, with each foreign subsidiary operating under individual policies and directives implemented by country or regional management. While Stryker had corporate anti-corruption policies, these policies were inadequate and insufficiently implemented on the regional and country level, the SEC alleged.

Remedial efforts and remedies. The order describes remedial efforts undertaken by Stryker, including retaining outside counsel to assist in an internal investigation, cooperating with Commission staff, turning over and translating key documents, and implementing a meaningful company-wide compliance program. In addition to a $3.5 million civil penalty and disgorgement plus prejudgment interest totaling nearly $9.8 million, the SEC imposed a cease-and-desist order against further violations.

Practitioner commentary. Iris E. Bennett, a partner with Jenner & Block LLP and author of the Aspen treatise Practicing Under the U.S. Anti-Corruption Laws, provided insight into the implications of the case:

“The Stryker case is notable on several grounds. One is that much of the conduct involved gifts and hospitality, including not only paying for officials’ vacations but even the fact that the company paid for lodging for a foreign official to attend a conference abroad. Gifts and hospitality have figured heavily in many SEC cases brought under the FCPA, and the Stryker case reinforces the enforcement risk that can arise based on gifts, hospitality, and sponsorships — areas in which a company’s personnel can make the wrong judgment calls if a company lacks adequate compliance policies, procedures and training.

“Also of note is the SEC’s allegation that a charitable donation to fund a public university research lab was corrupt, because the lab was the ‘pet project’ of a research physician viewed as key to obtaining business from the university. This allegation may cause companies to wonder about the bounds of permissible charitable donations, and the case reinforces the importance of careful risk assessment where a donation is requested by someone important to a company’s business, or related to an entity with which you do business.

“Finally, the case highlights the importance of adequate, risk-based implementation of corporate compliance policies and procedures at foreign subsidiaries: public companies are required under the FCPA to have adequate internal controls, including at their majority-owned subsidiaries, and Stryker was sanctioned in part because according to the SEC the company’s corporate anti-corruption policies and controls were not sufficiently implemented at the company’s foreign subsidiaries.”

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