Orthofix settles charges over alleged Mexican bribery scheme

Michael P. Tremoglie Jul. 11, 2012, 10:16am

SHERMAN, Texas (Legal Newsline) - The Securities and Exchange Commission filed a complaint Tuesday against Orthofix International, a Texas-based medical device company that settled the charges for $5.2 million.

The company was charged with violating the Foreign Corrupt Practices Act. It is alleged the company's subsidiary paid routine bribes to Mexican officials in order to obtain lucrative contracts with government run hospitals.

The SEC alleges that Orthofix's Mexican subsidiary Promeca S.A. de C.V. bribed officials - referring to them as "chocolates" - at Mexico's government-owned health care and social services institution Instituto Mexicano del Seguro Social. The alleged bribes came in the form of cash, laptop computers, televisions and appliances that were provided directly to Mexican government officials or indirectly through front companies that the officials owned.

The alleged bribes lasted for several years and yielded nearly $5 million in illegal profits for the Orthofix subsidiary. According to the complaint, from 2003-2010, Orthofix's wholly owned Mexican subsidiary Promeca S.A. de C.V. repeatedly paid bribes totaling approximately $317,000 to Mexican officials in order to do business with Instituto Mexicano del Seguro Social, the Mexican government-owned healthcare and social services institution.

The SEC says the company later submitted falsified receipts for imaginary expenses which were accounted for in Promeca's books and records. Eventually, the bribes became too large and the Promeca began falsely accounting for the payments as promotional and training expenses, the SEC says.

Because of the bribery scheme, Promeca's training and promotional expenses were significantly over budget, the SEC says. Orthofix launched an inquiry into these expenses, but did nothing to control them, the SEC says.

The SEC alleges that "prior to the discovery of the bribery schemes, Orthofix did not have an effective FCPA compliance policy or FCPA-related training." The government acknowledges that Orthofix disseminated some code of ethics and anti-bribery training to Promeca, but "the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English."

There was nothing in the court documents to indicate that the SEC surveyed the employees to learn if they understood the training materials or not.

But, according to the SEC complaint, when Orthofix did learn of the bribery scheme, it:

-Immediately self-reported the bribe payments to the SEC when the company learned about them through a Promeca executive;

-Conducted an internal investigation;

-Implemented significant remedial measures;

-Terminated the Promeca executives that orchestrated the alleged bribery scheme;

-Wound up Promeca's operations;

-Enhanced its overall FCPA compliance program with mandatory annual FCPA training for all employees and third-party agents; and

-Expanded internal audit functions, and implemented other internal control measures.

The government claimed that Orthofix's violations are that it failed to implement adequate internal controls to prevent the bribery or to ensure that transaction were properly recorded. It also allegedly failed to implement an adequate FCPA compliance and training program.

Orthofix agreed to pay $5.2 million to settle the SEC's charges. It consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest. The final judgment would permanently enjoin the company from violating the books and records and internal controls provisions of the FCPA. Orthofix also agreed to certain undertakings, including monitoring its FCPA compliance program and reporting back to the SEC for a two-year period.

"Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business," said Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division's Foreign Corrupt Practices Act Unit. "Orthofix's lax oversight allowed its subsidiary to illicitly spend more than $300,000 to sweeten the deals with Mexican officials."

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