GSK Faces a Bad Day at Black Rock

One of my favorite movies is Bad Day at Black Rock. It is one of the few movies to combine elements of film noir into something approaching a traditional Western. It also attacks directly the prejudice and hate against Japanese-Americans in the immediate aftermath of Pearl Harbor. I thought about that eponymous title when I read a recent article in the Financial Times (FT), entitled “GSK salesmen want ‘bribes’ reimbursed”, by reporters Patti Waldmeir and Andrew Ward.

You know it is going to be a bad day when your employees line up to testify against your company in an ongoing investigation for bribery and corruption. But those rainy day sighs can go up to the Bad Day at Black Rock level when these same employees publicly announce that the company they work for owes them for the creation of fraudulent invoices used by a business unit to fund bribery and corruption which violates not only the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act but also domestic Chinese anti-corruption laws. This happened to the UK pharmaceutical giant GlaxoSmithKline PLC (GSK) last month when it was announced that certain current employees in its China operation were petitioning the company to reimburse them for bribes they were ordered to pay by their superiors.

In their article, Waldmeir and Ward wrote “the UK pharmaceutical company at the centre of a Chinese corruption scandal, is facing protests from junior employees who say the company is refusing to reimburse them for bribes they were ordered to pay by their superiors.” While my initial thought was that these Chinese employees had quite a bit of ‘cheek’ in raising this claim, the more I read into the story, the more I think it may portend serious problems for GSK in any attempt to defend the company going forward. Waldmeir and Ward reported “some Chinese sales staff are complaining that GSK has denied bonuses, threatened dismissal or refused to reimburse them for bribes they say were sanctioned by their superiors to boost the company’s drug sales. In some cases, managers instructed them to purchase fake receipts that were used to cover up bribes paid in cash or gifts to doctors and hospitals, according to salesmen interviewed by the Financial Times.”

The article went on to highlight just how some of these fake invoices, used to gain funds from the corporate headquarters to facilitate bribery and corruption, were generated. “In some instances, managers disguised their involvement by using their personal email address to instruct staff to pay bribes and by ordering junior staff to claim on their personal expense accounts – even if the bribe was actually paid out by the manager – according to these people.” Last March, a group of current GSK employees sent a letter to the company that said, in part, ““All the expenses were approved by the company,” the group wrote in a letter to management. “The expenses were paid with our own money, and although the receipts were not compliant, it was our managers who told us to buy the fake receipts,” said one former GSK salesman.”

The article quoted that GSK said, “We have zero tolerance for unethical or illegal behaviour and anyone who conducts such behaviour has no place in our company. We believe the vast majority of our employees uphold our values and we welcome employees speaking up if they have concerns.” Talk about a ‘Speak Up’ culture at your company. Probably not exactly what the company had in mind when it invited employees to raise their concerns.

However, as damning as this is, and it would certainly appear to be quite damning, was the following revelation, which was also reported by Waldmeir and Ward, regarding witness prep during GSK’s internal investigation. They wrote, “Some staff were warned not to implicate their supervisors, according to a former salesman: “Our manager approached each person before they were questioned and asked them not to mention his name. He even prepared a story for them to tell the investigator.””

Dissecting all of the above, it would appear that GSK has several real problems on several fronts from this article. The first is that there appears to have been clear China business unit management participation in the bribery and corruption scheme. While it is still not clear whether the corporate home office was involved in the scheme, simply knew of it or choose to bury its collective head in the sand as to what was going on in China, if your in-country business unit management is involved, it is not too many steps to the corporate home office. Conversely, the question might be that if this fraud against the corporate home office was so open and obvious, why did the corporate office not detect it going forward?

Yet the real issue for the corporate office may be the information about employees being coached to hide evidence during the investigation. If such activity was limited to the ‘managers’ in the Chinese business units only, what does it say about a corporate office, which allows such witness intimidation? Think that is an investigation best practice? However, if the corporate office was involved in any way in such witness intimidation, it will bode extremely poorly in the eyes of the Chinese regulators, the UK Serious Fraud Office (SFO), which has opened an investigation into the GSK matter and probably the US Department of Justice (DOJ) as well, since GSK is still subject to the Corporate Integrity Agreement (CIA) it signed back in July of 2012; when it pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data in what the DOJ called the “largest health care fraud settlement in U.S. history” according to its press release. Think witness tampering or hiding of evidence might garner the attention of the DOJ for a company already under the equivalent of a Deferred Prosecution Agreement (DPA)?

In addition to all of the above conduct, it will be interesting to see the effect of this ongoing investigation on the stock value of GSK. In a Wall Street Journal (WSJ) article, entitled “FCPA Hits Companies Harder if they Committed Fraud”, Sam Rubenfeld reported “A study of U.S. Foreign Corrupt Practices Act enforcement issued by the Searle Civil Justice Institute, a research division of The Law & Economics Center at George Mason University School of Law found that public companies lost an average of 2.9% of market capitalization as a result of an investigation. But, the study found, the number masks an important distinction: Companies charged with bribery only suffered an initial 1.5% loss, while those charged with bribery and financial fraud saw a initial drop of 16.3% in market cap.” It will be interesting to see the effect the apparent fraudulent activities of GSK’s China employees will have on not only the overall penalty assessed against GSK but if there is any attendant drop in shareholder value.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

 

© Thomas R. Fox, 2014

Why the Compliance Function is Different Than the Legal Function

I have long been proud of my profession. I would often tell students that they ware about to join a profession which extended as far back as Demosthenes, who practiced his closing orations against crashing sea waves so that the full Greek demos might hear him when he closed a trial. Further, while thoughts of Atticus Finch are never far from a Southern lawyer’s mind, if not aspirations to emulate him, today we celebrate a real life lawyer who did the profession proud. It was on this day, 60 years ago in 1954 that Joseph Welch, then Special Counsel to the US Army, unmasked Senator Joseph McCarthy for what he and his hearings into communism were. In response to McCarthy’s charge, that Frederick G. Fisher a young associate in Welch’s law firm had been a long-time member of an organization that was a “legal arm of the Communist Party,” Welch responded, “Until this moment, Senator, I think I never really gauged your cruelty or your recklessness.” Welch then uttered these immortal lines, “Have you no sense of decency, sir, at long last?” The audience applauded Welch’s stinging comeback. The hearings closed one week later. The US Senate officially condemned McCarthy for contempt against his colleagues later that year.

Unfortunately the legal profession took one in the eye last week when General Motors (GM) released its internal investigation into the company’s failure to recall millions of defective small cars, and found no evidence of a cover-up. As reported by Bill Vlasic in a New York Times (NYT) article, entitled “G.M. Lawyers Hid Fatal Flaw, From Critics and One Another”, stated the GM law department did not come out of this matter looking too well. Vlasic said that “interviews with victims, their lawyers and current and former G.M. employees, as well as evidence in the report itself, paint a more complete picture: The automaker’s legal department took actions that obscured the deadly flaw, both inside and outside the company.”

While GM’s General Counsel (GC), Michael Millikin, survived dismissal in the aftermath of the internal investigation, he certainly did not come out as a GC who was particularly engaged with what was going on in his own department. Vlasic reported, “At least three senior lawyers are among the employees who lost their jobs as a result of the investigation conducted by the former United States attorney Anton R. Valukas… One of the lawyers dismissed this week was William Kemp, who had been orchestrating G.M.’s legal strategy and in-house investigations of the defective ignition switch for more than two years before the recall. Yet it was not until early February, days after a high-level committee finally ordered the switch recall, that Mr. Kemp informed Mr. Millikin of the deadly consequences of the flawed part. G.M. has linked 13 deaths and 54 crashes to the defect.” Two other lawyers reported to have been dismissed, as a result of the internal investigation, were Lawrence Buonomo, head of product litigation, and Jennifer Sevigny.

Equally damning were the internal investigations report that during safety meetings relating to the ignition switch failure, “Mr. Valukas said employees he interviewed told him they had refrained from taking notes in safety meetings “because they believed G.M. lawyers did not want notes taken.”” Beyond this ban on note taking, Vlasic said “The secrecy factor extended to how some employees kept or discarded old emails. According to two former G.M. officials, company lawyers conducted annual audits of some employees’ emails that could be used as evidence in lawsuits against the company.” While GM euphemistically called this email deleting program “information life-cycle management,” when the purpose is to remove evidence that could be used against the company in lawsuits, it once again shines a very bad light on my legal profession brethren.

This sordid tale of the complicity of the GM legal department is all part of what GM Chief Executive Officer (CEO) Mary Barra “denounced as a “pattern of incompetence and neglect” at the company that allowed a defective part to exist in its vehicles for more than 10 years.” But more than simply causing the corpse of Atticus Finch to spin over in his fictional grave, the GM legal department’s role in the company’s debacle points to something that Donna Boehme and Mike Volkov have been articulating and writing about for some time. It is not simply that the Chief Compliance Officer (CCO) needs to be out from under the roof of the GC’s office; it is that the compliance function is different than the legal function.

When I initially went in-house, it was made clear to me that the role of the in-house department in the company I worked for was to protect the company. When I became a GC, I took that role to heart and felt like I was the company’s lawyer (even if the CEO felt like I was his lawyer). But as Boehme points out in her article in the June 2014 issue of the SCCE Magazine, entitled “Toldya. (Reason #119 why Compliance is not a subset of Legal),” there are distinct differences in approaches to doing compliance from practicing law. She said, “one thing is clear – the two functions have very different mindsets, mandates and priorities.” She notes that the legal department mandate is to “advise and protect the company.” However, Boehme believes that the compliance mandate is much broader. She writes, “Compliance, on the other hand, is tasked with detecting and preventing misconduct.” The compliance mandate includes constant vigilance on the integrity of the compliance program, protecting internal whistleblowers (in part to demonstrate to others that it is safe to come forward), and supporting a culture of accountability, especially at levels of management.

I might say that a corporate legal department’s role has traditionally been seen to protect the company from problems, while the role of the compliance function is to remedy problems. Here you can think of McNulty’s Maxim No. 3 – What did you do to fix it when you found out about it? But Boehme takes it a step further by noting, “A well-run compliance program requires hundreds of judgments, big and small, to be made on a weekly basis. The company with the political will to elevate their chief compliance officer to a “separate but equal” status in the C-suite will benefit from those judgments being made with an independent compliance mindset, and not “Always Legal but Occasionally Compliance” prism.”

I often repeat the legal truism that bad facts make bad law. Make no mistake about it; the GM ignition switch imbroglio is very bad. But the GM legal department’s role in the company’s ongoing scandal, clearly points out the difference between the roles of legal and compliance. I am sure that the GM lawyers involved, and those who were terminated, thought their job was to defend the company at all costs. But I have never met a CCO who felt that way. They believe that their job is to prevent, detect and remedy any compliance issues that arise. You cannot do that if you are instructing others not to take notes in relevant meetings, deleting potentially incriminating emails and hiding from your boss that there is a real problem out that that must be dealt with.

For the rest of you out there who are lawyers and reading this, remember Joseph Welch today as a far better example of our historical brethren.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014