In a story in the D&O
Diary, entitled "More
Woes for Companies with Chinese Connections", Kevin LaCroix discussed
the settlement reached by the entity SciClone Pharmaceuticals, and its
individual defendant directors and officers, in litigation involving three
consolidated derivative lawsuits that were filed following the company's
announcement that it was the target of Securities and Exchange Commission (SEC)
and Department of Justice (DOJ) investigations for possible violations of the
Foreign Corrupt Practices Act (FCPA). As reported by the FCPA Professor and
others, within the first two weeks after the company's announcement of the
investigation there was a literal whirlwind of announcements by law firms of
investigations of SciClone and the lawsuits which were consolidated into the
settled action.
Although the FCPA does not provide for a private right of
action, the announcement of a FCPA investigation can often bring civil lawsuits
against the company, as nominal defendant, and certain of the company's
directors and officers. In the SciClone lawsuits, it was alleged that "the
Individual Defendants, by reason of their failure to implement and maintain
internal controls and systems at the Company to assure compliance with the
FCPA, breached their fiduciary duties and may be held liable for damages." As
reported by LaCroix, the parties have agreed, subject to court approval, to
resolve the consolidated actions based on the company's agreement to adopt
certain specified corporate governance reforms and their agreement to pay $2.5
million in plaintiffs' attorneys' fees. The payment of the plaintiffs'
attorneys' fees is to be made by "SciClone's insurers under its director and
officer insurance policy."
SciClone has a large amount of its business in China and
on its website announces, "SciClone's goal is to grow sales of our significant
marketed portfolio in China". As noted by LaCroix, "The existence of the FCPA
investigation underscores the challenges facing companies attempting to do
business in China." This "China-centric" business focus may have led to some of
the issues involved in the FCPA investigation.
The Settlement has several features that are well worth
noting by the compliance practitioner.
Clawbacks
In addition to agreeing to seek to retrieve any
incentive-based compensation from company officers in the event of an
earnings restatement, SciClone is required to "take legal action to recoup" all
incentive-based compensation "paid to the director, officer, employee, or
independent contractor" that was earned if an "Established Violation" is found.
An Established Violation is defined to be "a guilty plea or other admission of
guilt under penalty of perjury, or a criminal or civil judgment or sanction."
This requirement on a company is something not generally or previously seen.
The requirement against third party "independent contractors" is also a new
wrinkle. Is this language broad enough to include agents, resellers,
distributors or any other monikered foreign business partner?
Compliance Coordinator
The Settlement goes into substantial detail about the
creation of a new position within SciClone named "Compliance Coordinator".
While never calling this position the Chief Compliance Officer, the Compliance
Coordinator has many roles usually associated with that position. In addition
to the duties of the Compliance Coordinator, which will be enumerated below,
the position requires fluency in both English and Mandarin. Other requirements
of the Compliance Coordinator include:
- A
senior profession with FCPA compliance experience, who would be a part of
the executive management team.
- Knowledge
of and experience with the types of compliance issues faced by SciClone.
- The
Compliance Coordinator shall report directly to the Audit Committee of the
Board of Directors on all compliance efforts going forward through no less
than quarterly and annual reports.
- Provide
an annual assessment of the Company's compliance program and perform
unannounced site visits to China to ensure compliance with the program.
- Liaise
with a designated compliance "point person" at all locations other than
the home office of the Compliance Coordinator.
- The
Compliance Coordinator shall have the right to be present at any
regularly-noticed meeting of the Board of Directors.
Compliance Program and Code of Conduct
The Settlement adopts the 13 point best practices compliance
program as set for in all Deferred Prosecution Agreements (DPAs) since at least
the Panalpina DPA of November, 2010. The Settlement also goes into some detail
about the Code of Conduct specifically adding a component for "Health Care
Professionals" as that is the type of business in which SciClone is involved.
Internal Controls, Use of Agents and Employee
Training
In three separate sections of the Settlement, there are
further requirements regarding "Internal Controls and the Compliance Function";
"Use of Foreign Agents and Distributors" and "Employee Compliance Training". In
the Internal Controls section the company's Internal Auditor "shall report
directly to the Audit Committee at least quarterly" and "shall provide a
balanced assessment of significant legal compliance risks and effectiveness of
the system of internal controls in managing these risks." Regarding the use of
foreign business partners, compensation should be "commercially reasonable" and
the company should contractually limit compensation to "specific, identified
tasks and should avoid large percentage-based commissions and success fees." In
the training section it is specifically noted that the training should be both
in English and Mandarin.
The SciClone Settlement has several unique and
interesting factors. The first is that is has great specificity for a civil
settlement. One can only speculate but it would certainly appear that these
compliance roles, policies and procedures were not in place and that the lack
of them has led to at least one or more potential violations. Certainly not
referenced anywhere in any of these proceedings is the role of the DOJ or SEC
and how these compliance roles, policies and procedures may have been influenced
by DOJ or SEC input, or how these might factor into any settlement with
the DOJ or SEC. This civil Settlement Agreement adds greater specificity to the
13 points of a minimum best practices compliance program that was set
forth in the Panalpina settlement.
For a copy of the parties' stipulation of settlement
click here.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
This publication contains general information
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© Thomas R. Fox, 2011
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