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.
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.
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?
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.
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© Thomas R. Fox, 2011