ParfumGigi@aol.com

2 janvier, 2008 19:56

Some experts question the wisdom of recent deferred prosecution agreements in which companies were able to maintain innocence

Sue Reisinger

Corporate Counsel

January 2, 2008

How can the government reach a deferred prosecution agreement with a company that denies it did anything wrong? That's the question raised by the apparently unprecedented DPAs that a federal prosecutor recently signed with several manufacturers of orthopedic implants.

On Sept. 27 Christopher Christie, the U.S. Attorney for New Jersey, filed DPAs with four of the companies, a nonprosecution agreement (NPA) with a fifth and accompanying civil settlements with all five. The businesses control 95 percent of the market for implants used in hip and knee surgeries. According to Christie's office, from 2002 to 2006 the manufacturers funneled tens of thousands of dollars through consulting agreements to unidentified surgeons who used their products. Christie's staff says that the payments violated an anti-kickback provision in the Medicare fraud statute.

The five prosecution agreements are notable for a number of reasons. For one, they helped the U.S. Department of Justice set a record for DPAs and NPAs in 2007. For another, four of the manufacturers will each pay hefty fines of up to $170 million. Plus, all five of the companies have hired a prominent monitor (the best-known being former U.S. attorney general John Ashcroft) to make sure that they implement various corporate governance reforms.

But the most notable aspect of the deals is that none of the manufacturers admit that they did anything wrong. In fact, they deny it.

In all of the 49 deferred prosecution agreements that Corporate Counsel has been able to identify, the companies did not deny that their employees committed crimes. In return, the Justice Department agreed to hold off on pursuing the case and to dismiss the charges if the business stayed out of trouble during the term of the pact.

However, that trend changed with the DPAs that Christie's office signed with Zimmer Holdings Inc.; DePuy Orthopaedics Inc.; Biomet Inc.; and Smith & Nephew plc. Christie actually allowed the four companies to deny making illegal payments as part of the civil settlements that are attached to the DPAs.

Chad Phipps, general counsel at Zimmer, says the denial language was negotiated as part of the settlement, and he wouldn't elaborate on it. Spokespeople for the other companies also wouldn't comment. Zimmer, DePuy and Biomet are all based in Warsaw, Ind. Smith & Nephew is based in London, with a subsidiary in Memphis, Tenn.

In identical language in the four DPAs, each company "acknowledges responsibility for its behavior." But in the attached civil settlements, each "denies that it engaged in any wrongdoing and specifically denies that any of the payments, services, or remuneration were illegal, improper, or resulted in any false or fraudulent claims." And all four state in their civil deals that they settled only because they wanted to "avoid the delay, uncertainty, inconvenience, and expense of protracted litigation," and not because they believe they did anything wrong.

The fifth company targeted by Christie's probe -- Stryker Orthopedics, a division of Howmedica Osteonics Corp. based in Mahwah, N.J. -- was rewarded with a comparatively lenient nonprosecution agreement because it was the first to voluntarily cooperate with the government. Past NPAs negotiated by the Justice Department have sometimes included an admission of guilt; Stryker's does not.

The terms of the four DPAs are surprising to several experts. Lawrence Finder, a former U.S. Attorney who is now a partner at Haynes and Boone in Houston, calls the denials of guilt "curious." Finder, who co-authored a study of DPAs and NPAs in 2006, can't recall any other DPA that allowed a company to deny guilt.

Peter Henning, a veteran of both the Justice Department and the Securities and Exchange Commission who is now a law professor at Wayne State University, agrees that the companies' denials are "odd." Henning, the co-author of a popular white-collar crime blog, adds that letting businesses deny behavior "can come back to haunt [the government] down the road" and "can undermine later prosecution."

Michael Drewniak, a spokesman for Christie's office, counters that companies are "routinely allowed to deny wrongdoing in Medicare or Medicaid fraud civil settlements." But those civil settlements are usually not attached to a deferred prosecution agreement. "I'll just leave it at that," Drewniak says, declining to elaborate.

Rather than push for admissions of guilt, Christie apparently chose to use his muscle to win 20 pages' worth of corporate governance reforms. Key among them: All five companies had to hire federal monitors to supervise the reforms, and those monitors were chosen by Christie "after consultation with the company."

The list of monitors is a high-powered one. It's topped by Zimmer's monitor -- former attorney general Ashcroft, now chairman of the Ashcroft Group LLC, a management consultant group in Washington, D.C. Ashcroft also has a law firm that will help with the monitoring.

Asked about the denial language in the DPAs with the orthopedic companies, an Ashcroft spokesman said simply, "Well, the U.S. Attorney could hardly indict them all and put 95 percent of the U.S. orthopedics market out of business, could he?"

According to Ashcroft's contract, which Zimmer filed with the SEC, the company agrees to pay him an average of $1.5 million to $2.9 million per month, but notes that the figure could go higher. That fee includes a base of $750,000 a month, plus up to $895 an hour for senior consultants or lawyers hired by Ashcroft, including those from his own firm.

The monitor for Depuy is Debra Yang, a former U.S. Attorney for Los Angeles and now a partner at Gibson, Dunn & Crutcher. Smith & Nephew's monitor is David Samson, a former attorney general of New Jersey and now a partner at Wolff & Samson in West Orange, N.J. Biomet's monitor is David Kelley, a former U.S. Attorney for Manhattan and now a partner at Cahill, Gordon and Reindel. And Stryker is monitored by John Carley, former senior vice president for legal affairs at Cendant Corp.

So, will deniable DPAs be a trend for the future? Eugene Illovsky, a partner in Morrison & Foerster's Palo Alto, Calif., office and a white-collar crime specialist, says that the DPAs with the orthopedic companies are a sign that the government is trying to be more flexible at a time when corporations are pushing back against aggressive U.S. Attorneys. The use of DPAs is still evolving, he says, and future ones "will probably take different and more interesting forms as this area of the law develops."