DePuy Inc. allegedly earned more than $24 million in profits over eight years by bribing Greek orthopedic surgeons to buy its implants, according to a federal investigation that resulted in Johnson & Johnson (NYSE:JNJ) agreeing to pay $70 million in fines in a deferred prosecution agreement in the U.S. and more than $8 million in the U.K.
The U.S. settlement, which also covers bribery charges over its pharmaceutical products and an alleged kickbacks scheme to win contracts under the United Nations Oil-for-Food program in Iraq, is only the latest black eye for the New Brunswick, N.J.-based conglomerate. Johnson & Johnson did not admit to or deny any of the allegations, according to a press release from the federal Securities & Exchange Commission.
The alleged infractions took place between 1998 and 2006 when the Warsaw, Ind.-based company, through its DePuy International Ltd. unit, began funneling funds to a Greek distributor which would in turn pay doctors working in the Greek public health system to purchase orthopedic implants made by DePuy.
While the scheme originated prior to JNJ’s 1998 buyout of DePuy, investigators say that J&J officials knew of the arrangement and allowed it to continue, even allowing DePuy to purchase the Greek distributor in 2001 and renaming it Depuy Helles despite several red flags being raised internally.
“The problem with these contracts for offshore payments has been and continues to be the ‘smell test’ or the issue of substance plus our knowledge of what really happens,” an unnamed executive wrote in an email obtained by investigators. “In the case of [the Greek distributor], we (or them) would face serious problems to come up with a substantiated services rendered for anything close to the amount paid (including mark- up), simply because only a small fraction (if any) is used for services and the bulk goes into the black hole. The last item is my major concern for the latest option i.e. buying [the Greek Distributor] since, even with a thorough audit, we cannot know whether we will face future tax (and other) audits linking [the Greek distributor], the owners and the Isle of Man payments.”
Investigators pointed to another volley of emails that revealed knowledge of impropriety, including one memo sent by the Greek distributor’s accountant that said they needed more money in order to “pay cash incentives for sales up to the end of January 2001.”
That memo prompted a harsh response from an unnamed DePuy vice president.
“I [am] very disappointed to read in your proposal that it contains references to [the Greek agent’s] activities which cannot be mentioned in written correspondence with DePuy International,” he wrote. “I have made this point many times and each time it happens you put us in a very difficult position.”
The scheme allegedly ended in 2006, when an internal auditor at J&J discovered the payments after receiving a whistleblower complaint. The company then reported its findings to the U.S. Dept. of Justice and the U.S. Securities & Exchange Commission.
Across the pond, Great Britain’s Serious Fraud Office won its case against Leeds-based DePuy International Ltd., meaning the division will pony up $7.9 million plus legal fees for "unlawful conduct relating to the sale of orthopedic products in Greece between 1998 and 2006."
The SFO launched its probe in October 2007 on a tip from its counterparts at the U.S. Justice Dept.
For its part, Johnson & Johnson is understandable eager to put the scandal in its rear-view mirror.
"More than four years ago, we went to the government to report improper payments and have taken full responsibility for these actions," chairman and CEO William Weldon said in prepared remarks. "We are deeply disappointed by the unacceptable conduct that led to these violations. We have undertaken significant changes since then to improve our compliance efforts, and we are committed to doing everything we can to ensure this does not occur again.
"I know that these actions are not representative of Johnson & Johnson employees around the world who do what is honest and right every day, in the conduct of our business and in service to patients and customers worldwide. We will continue to demonstrate that Johnson & Johnson is a company that embraces responsible corporate behavior."
