Bribery

The Second Trump Administration is Open for Business

Much of the concern about a possible second Trump term has focused on what seem to be his increasingly authoritarian impulses. Yet we should also worry about old-fashioned corruption.

A glaring sign of what may coming has just appeared in the revelation that a businessman with a shady record put up the $175 million bond Trump had to pay while he appeals a civil fraud judgement in New York State. This was after Trump claimed he could not find any company willing to provide the original bond amount of $454 million and successfully begged a state appeals court to reduce the amount.

That businessman is Don Hankey, whose holdings include Knight Specialty Insurance, which provided the bond for what Hankey told the Washington Post was a “modest fee.” He claimed that the bond deal was not meant as a political statement, yet Hankey supported Trump’s claim that the case brought against him by New York Attorney General Letitia James was unwarranted.

Hankey has accumulated most of his fortune, which Forbes estimates at over $7 billion, from making subprime automobile loans via companies such as Westlake Financial, Westlake Services and Wilshire Consumer Credit. These businesses have run afoul of regulators.

In 2015 the Consumer Financial Protection Bureau hit Westlake Services and Wilshire Consumer Credit with a $48 million penalty, including a fine of $4.25 million and $44.1 million in cash relief and balance reductions for customers the agency said had been subjected to illegal debt collection practices. According to the CFPB, the companies:

Pretended to call from repo companies by altering caller ID information. The companies’ debt collectors would then make explicit or implicit threats that the borrowers’ vehicles were in imminent danger of being repossessed.
Altered caller ID information so that it looked like they were calling from unrelated businesses or family members.
Explicitly and implicitly threatened to file criminal charges against consumers even when they had not decided to refer the borrowers to criminal authorities. These tactics likely misled consumers into believing they needed to make a payment urgently to avoid an investigation.
Tricked borrowers whose vehicles had been repossessed by making it appear their calls were coming from a party associated with the word Storage. During some of these calls, the companies’ debt collectors implied that the vehicles would be released if the borrowers made a partial payment on the account; however, the companies would actually only release a repossessed vehicle after a borrower paid the full amount due.
Called consumers’ employers, friends, and family members without permission and told them that consumers were delinquent on loans or facing repossession, investigation, or criminal charges.
Paid a repo company to make collections calls to consumers, even when the companies had not decided to repossess the consumers’ vehicles or the companies had no reason to believe repossession was imminent. This tactic likely misled consumers into believing that they needed to make a payment urgently to avoid repossession.

The CFPB also accused Westlake and Wilshire of violating federal consumer financial laws in their advertising, customer relations, and account servicing practices. These were said to include changing the due dates on accounts or extended loan terms without consulting consumers and giving consumers incomplete information about the true cost of their loans.

In 2016 the Massachusetts Attorney General’s Office announced that Westlake Services would provide $5.7 million in relief to consumers to resolve allegations that the company charged excessive interest rates on subprime auto loans.

In 2017 Westlake Services and Wilshire Consumer Credit had to pay $760,000 to resolve a case brought by the U.S. Justice Department alleging they violated the Servicemembers Civil Relief Act by repossessing vehicles from members of the military without the required court orders.

Are we expected to believe that the owner of a business such as this is helping Trump solely out of the goodness of his heart? It seems a lot more likely that Hankey is currying favor with Trump in the hope of receiving future assistance from the White House in dealing with pesky regulators.

It is not difficult to imagine that Trump would use a new stint in the Oval Office for such purposes. After all, this kind of corruption was a constant theme during his first term, when special interest groups seeking presidential help could simply book an event or a block of rooms at Trump’s hotel on Pennsylvania Avenue.

What is amazing is that this kind of mischief seems to be happening again even before Trump has won the election or taken office.

Tax Credits and Fraud

The relentless corporate pursuit of special tax breaks is bad for the fiscal health of cities and states, but it is usually completely legal. An exception to this rule is taking place in New Jersey, where a well-connected company has been the target of a criminal investigation.

Holtec International, the company in question, is involved in various energy-related businesses, including the decommissioning of defunct nuclear power plants. In 2014 it was the recipient of a $260 million tax-related subsidy from the Grow New Jersey Assistance Program to create jobs at a facility in the struggling city of Camden. As the advocacy group New Jersey Policy Perspective pointed out, the deal had weak provisions relating to local hiring, training programs and even the number of jobs the company would actually have to create to get the tax benefits.

Despite benefitting from that largesse, Holtec got itself in trouble when it allegedly tried to cheat a different tax incentive program, the Angel Investor Tax Credit. The company qualified for a credit based on a $12 million investment it made in the battery company Eos Storage. That credit is capped at $500,000.

According to the New Jersey Attorney General Matthew Platkin, Holtec sought to circumvent that limit by trying to make it appear that it and a related company called Singh Real Estate Enterprises had each separately invested $6 million in Eos and thus could each claim the $500,000 credit. Holtec allegedly did so by submitting misleading documents to the state’s Economic Development Authority (EDA).

In announcing the resolution of the case against Holtec, the AG recently said: “We are sending a clear message: no matter how big and powerful you are, if you lie to the State for financial gain, we will hold you accountable — period.”

Yet Holtec is getting off easy. The AG allowed the company to enter into a deferred prosecution agreement instead of facing criminal charges. Under that agreement, Holtec must pay $5 million in penalties, forgo the angel investor credit and retain an independent monitor to oversee future dealings with the state.

Instead of showing appreciation for the leniency agreement, Holtec issued a sharply worded statement alleging that the entire investigation was retaliation after the state failed in a previous legal action against the company relating to that $260 million subsidy deal. The EDA had sought to rescind the award because the agency said it belatedly discovered that the company’s original application had not disclosed a disciplinary action brought against it by the Tennessee Valley Authority. That action, a temporary debarment, stemmed from a case in which Holtec was linked to improper payments made to a TVA manager to help secure a contract.

Holtec’s claim that its failure to mention the TVA debarment was inadvertent was accepted by the New Jersey courts and the tax credit was upheld.

This entire episode should serve as a reminder of the drawbacks of a system in which companies come to believe they have an absolute entitlement to tax breaks—and states don’t do enough to monitor the eligibility of applicants and the compliance of recipients. It also raises the question of whether there is more fraud in the economic development subsidy system than we have assumed.

Corporate Crime Groundhog Day

ABB Ltd, an industrial equipment giant based in Switzerland, seems to have a problem doing business honestly. The company has a tendency to get caught paying bribes to government officials around the world to obtain contracts to supply its goods and services.

The latest example of this came last week, when the U.S. Justice Department announced that ABB would pay a criminal penalty of $315 million to resolve allegations relating to the bribery of a high-ranking official at South Africa’s state-owned energy company. DOJ brought its action under a U.S. law, the Foreign Corrupt Practices Act, but in coordination with prosecutors in Switzerland and South Africa.

At first glance, one might think DOJ is throwing the book at ABB. Yet a closer reading of the announcement reveals that the company is the recipient of a kind of leniency agreement known as a deferred prosecution agreement. Under this arrangement, ABB Ltd pays a penalty but avoids having a criminal conviction.

DOJ did compel two of ABB’s foreign subsidiaries to enter guilty pleas, but freeing the parent of that consequence was a significant concession that allows the company to continue doing business as usual.

In its press release, DOJ congratulates itself on the handling of the case, stating: “This resolution demonstrates the Criminal Division’s thoughtful approach to appropriately balancing ABB’s extensive remediation, timely and full cooperation, and demonstrated intent to bring the misconduct to the department’s attention promptly upon discovering it, while also accounting for ABB’s historical misconduct.”

The last phrase is alluding to the fact that this is not the first time ABB has been charged with bribery by DOJ. In 2010 the company and two subsidiaries were charged in connection with bribes paid to a Mexican state-owned utility company and to officials in Iraq. The outcome was amazingly similar to this year’s case. The parent was offered a deferred prosecution agreement, while two subsidiaries pled guilty. The parties paid criminal penalties totaling $19 million.

There was also a Groundhog Day quality to the announcement last week by the SEC, which handled the parallel civil case against ABB and fined the company $75 million. After mentioning that it relieved ABB of having to pay an additional $72 million in disgorgement because of reimbursements it made to the South African government, the SEC casually noted that “ABB was the subject of two prior FCPA cases by the SEC in 2004 and 2010.” The 2010 case was related to the DOJ action cited above, while the 2004 SEC matter concerned illicit payments in Nigeria, Angola and Kazakhstan.

There is something almost comical about this history. ABB keeps getting caught breaking the rules and keeps promising to mend its ways. DOJ and the SEC keep giving special consideration to a company whose business model seems to depend on the use of improper payments.

Leniency deals such as deferred prosecution agreements are supposed to act as a deterrent against future misconduct, but the arrangement loses all meaning if the company continues to offend and is then offered another agreement. The financial penalties rise, but they are still insignificant for a company with annual revenues of about $30 billion and assets of about $40 billion.

Finding the most effective way to handle corporate crime is no easy task, yet DOJ should at least deny leniency deals to repeat offenders.

A Legacy of Corruption

According to conventional economic thinking, commodity prices are governed by impersonal market forces. That’s how oil companies, for instance, are able to claim they are not to blame for soaring petroleum prices even as they rake in record profits.

What these corporations conveniently leave out of their narrative is the fact that markets can be manipulated. This reality is made abundantly clear in a multinational criminal case involving the Swiss commodity trading and mining company Glencore.

Law enforcement officials in the United States, the United Kingdom and Brazil have just announced that Glencore will plead guilty and pay more than $1 billion in penalties for a case that involves, among other things, manipulation of fuel oil prices in the United States over a period of eight years. According to the U.S. Justice Department, Glencore created phony transactions in order to effect changes in benchmark rates that benefitted the company’s trading positions. As punishment for this behavior, Glencore will pay a criminal fine of $341 million and criminal forfeiture of $144 million.

The charges against Glencore also include allegations of widespread bribery. The DOJ stated that over a decade the company violated the Foreign Corrupt Practices Act by making more than $100 million in improper payments to government officials in Nigeria, Cameroon, Ivory Coast, Equatorial Guinea, Brazil, Venezuela, and the Democratic Republic of the Congo (DRC).

After using these bribes to gain improper business advantages, Glencore was said to have concealed the payments by entering into sham consulting agreements and paying inflated invoices. In other words, it falsified its own records in an effort to cover up its corruption. For these offenses, Glencore was hit with a criminal fine of $428 million and disgorgement in the amount of $272 million.

It is unclear to what extent Glencore’s market manipulation behavior affected overall fuel oil prices in the United States and what harm its bribes may have caused in those African and South American countries.

What is undeniable is that Glencore has now joined the list of large corporations whose ethics policies have turned out to be a sham. As of this writing, the company’s website still touts its code of conduct, which is spelled out in a 59-page document. It includes statements such as: “We act honestly and with integrity and are accountable for everything we do.” And: “We do not engage in corruption and we never pay bribes regardless of who we’re dealing with or what the local custom or practice is.”

It actually should come as no surprise that Glencore would fail to live up to those high-minded ideals. After all, the company was originally created by the notorious Marc Rich, who in 1983 was indicted in the United States on dozens of criminal counts relating to racketeering, income tax evasion, wire fraud, and violation of economic sanctions against Iran.

Facing the possibility of many years in prison, Rich fled the country and spent years eluding a team of U.S. marshals tasked with bringing him back to face trial. While he was a fugitive, his companies paid millions in civil penalties. Not only did Rich avoid being extradited but he received a highly controversial pardon from Bill Clinton on his last day in office.

Glencore’s dubious behavior could even be seen in its press release announcing the resolution of the criminal cases. In it, the company stated that Glencore cooperated with the investigations, whereas the DOJ release emphasized “the company’s failure to voluntarily and timely disclose the conduct to the department.” In other words, Glencore is trying to take credit for having cooperated only after it was caught. It is appropriate that the resolution of the case includes a requirement that the company retain an independent compliance monitor for three years.

The Glencore case comes on the heels of DOJ’s multi-billion-dollar resolution of a case involving the financial services company Allianz, which was accused of engaging in a massive scheme to lure pension funds into complex investments that ended up generating massive losses.

These two resolutions have not attracted a lot of attention in the U.S., where neither Allianz nor Glencore is a household name. Yet the cases are indications that the Biden DOJ may very well be making good on its promise to get tougher on corporate crime after the lax enforcement during the Trump years. I look forward to seeing the book thrown at some large domestic companies as well.

Barr Opts for Prisoner Executions over Corporate Prosecutions

The priorities of the Barr Justice Department came to light with the revelation that it is rushing to schedule a series of federal prisoner executions before the Trump Administration comes to an end in January. DOJ is exhibiting a lot less urgency about meting out penalties for corporate defendants.

Four years ago at this time, the Obama Justice Department used its final weeks to negotiate an extraordinary wave of settlements with big business, collecting more than $30 billion in fines and settlements. During a period of ten days there were four ten-figure settlements: Deutsche Bank’s $7.2 billion toxic securities case; Credit Suisse’s $5.3 billion case in the same category; Volkswagen’s $4.3 billion case relating to emissions fraud; and Takata’s $1 billion case relating to defective airbag inflators.

The rush to settle was based at least in part on concern that the incoming Trump Administration would downplay the prosecution of corporate offenses as part of the assault on government regulation. That concern turned out to be valid, though not to the extent many observers expected. Prosecutions and regulatory enforcement have declined in some areas but have not disappeared.

Since this year’s election results became clear, there have been no billion-dollar resolutions announced by DOJ. During this time the only significant announcement was one involving a $135 million settlement of a foreign bribery case against Vitol, the secretive European commodity trading company.

While Barr is not yet using the lame duck period to resolve cases, DOJ was showing some prosecutorial vigor in a few areas even before the election. One of these is the enforcement of the Foreign Corrupt Practices Act. Even though Trump himself has reportedly sought to strike down the law, claiming it is unfair to U.S. companies, the Justice Department has gone on bringing cases.

The Vitol action is one of five FCPA settlements DOJ has announced during the past few months. These follow about 20 others since Trump took office. There are a few things to note about these cases. First, the corporate defendant, while paying a penalty, was almost always offered a way to avoid a guilty plea, usually through a deferred prosecution or non-prosecution agreement.

The second significant feature of Trump’s FCPA cases is that most of them were brought against corporations headquartered outside the United States. Trump’s criticism of the law may have prompted DOJ to focus more on foreign culprits, perhaps using FCPA as a surreptitious trade weapon. When DOJ pursued a case against the very American company Walmart, the department was accused of going easy on the giant retailer in the settlement negotiations.

Occasionally, even Barr’s DOJ has had to get tough with a U.S. company in an FCPA case. That happened in October, when Goldman Sachs had to pay more than $2 billion to resolve its culpability in the notorious 1Malaysia Development Bhd. (1MDB) case, which also involved prosecutors from other countries such as the United Kingdom and Singapore.

Assuming he does not get fired for refusing to go along with Trump’s election fraud delusion, Barr still has some time to end his tenure in a blaze of corporate settlements. It would be a better legacy than a brazen misuse of the death penalty by a lame duck attorney general.

Bribery and Airbus

Given all the talk about the globalization of supply chains and other business activities, it is encouraging to see that international coordination can also occur when it comes to the investigation of corporate misconduct.

That is part of the story in the recent announcement that law enforcement agencies in the United States, Britain and France worked together to bring about a $4 billion settlement with Airbus to resolve allegations of bribery and export-control violations in its dealings with countries such as China, Malaysia and Ghana.

Unfortunately, cross-border cooperation can also result in the spread of undesirable practices. The Airbus deal included a deferred prosecution agreement offered by the UK’s Serious Fraud Office. Britain imported such arrangements from the United States, whose Justice Department also offered one to Airbus.

At least Britain has used DPAs sparingly – the Serious Fraud Office website lists half a dozen prior to Airbus, while the U.S. DOJ has handed out more than 200 of them, along with a roughly equal number of related non-prosecution agreements.

Part of the justification for these deals is that they will discourage corporations from repeating their offenses by holding out the possibility of an actual criminal prosecution should that occur. But Airbus is a company that already had a history of bribery.

A 2003 article in The Economist described this track record involving customers in countries such as Kuwait and India. In 2018 Airbus had to pay more than 80 million euros to resolve a bribery investigation conducted by the Munich Public Prosecutor relating to the sale of fighter aircraft to Austria. The new settlement with Airbus was the culmination of an investigation that lasted for years.

Bribery, in fact, has long been a pervasive problem in the aerospace industry, including U.S. players. Among the revelations that occurred during the Watergate investigation was the fact that companies such as Lockheed and Northrop frequently paid questionable payments to gain foreign contracts. The uproar over these payments, which also involved companies in other industries, helped bring about the Foreign Corrupt Practices Act—the key law used by U.S. prosecutors in their portion of the case against Airbus.

The FCPA has also been used against other foreign aerospace companies. These cases include an $800 million settlement with aircraft engine manufacturer Rolls-Royce that also involved prosecutors in the UK and Brazil; a $107 million settlement with Brazilian aircraft manufacturer Embraer; and a $400 million settlement with Britain’s BAE Systems.

Bribery has been such a significant issue for Airbus that the company had planned to include a chapter on its scandals in a book it had commissioned to celebrate its fiftieth anniversary. Airbus executives apparently thought that publishing that unflattering content would highlight the company’s purported commitment to transparency and thus help it negotiate a more favorable deal in its negotiations with prosecutors. Airbus subsequently decided that the move might actually have the opposite effect, and it cancelled the publication of the book.

That may have been the wiser course of action. Airbus got the deferred prosecution agreements it was seeking and thereby protected its ability to bid on government contracts. The public, however, is left to wonder whether the company and its competitors will ever cease their corrupt practices.

U.S. Prosecutors and Foreign Corporations

Federal prosecutors recently announced that telecommunications giant Ericsson will pay more than $1 billion to resolve allegations that it conspired to make illegal payments to win contracts in five countries. The settlement included a $520 million criminal penalty imposed by the Justice Department and a $540 million civil payment to the Securities and Exchange Commission.

This was the latest in a long series of cases brought under the Foreign Corrupt Practices Act, the 1977 law that emerged out of the Watergate-era revelations about improper overseas payments by U.S. corporations. But what the case against Sweden’s Ericsson highlights is the extent to which the law is being applied to foreign corporations as well as domestic ones.

In fact, companies based outside the United States increasingly appear to be the primary targets of prosecutors. In the period since the Trump Administration took office, foreign corporations have paid about $4 billion in FCPA penalties to DOJ and the SEC—more than seven times the sum paid by domestic firms. Apart from the Ericsson settlement, the largest combined penalties have been paid by a Russian company ($831 million by Mobile TeleSystems PJSC) and another Swedish one ($731 million by Telia).

By contrast, U.S.-based firms have gotten off with much lighter financial punishment. The only domestic company paying more than $100 million was Walmart, though its long-delayed $281 million penalty was well below what had been expected.

The tougher treatment of foreign companies can also be seen in the prosecution of price-fixing. Violation Tracker shows that during the Trump Administration foreign companies have paid more than $723 million to DOJ in criminal penalties, whereas domestic firms have been penalized only $44 million. There were seven fines of $50 million or more among the foreign companies; none among those based in the United States.

This tendency toward imposing heavier penalties on foreign companies is not unique to the Trump years. During the Obama Administration, seven of the ten largest FCPA settlements involved foreign corporations, as did nine of the ten largest price-fixing cases.

There is no evidence to suggest that foreign companies are more prone to law-breaking and thus account for more of the penalties. When it comes to offenses that are more purely domestic in nature – such as environmental, consumer protection and employment violations – U.S.-based companies more than hold their own.

The question is whether the federal government is using those portions of its enforcement powers that impact more heavily on international trade to put an added burden on the foreign competitors of U.S. companies. Perhaps this is an indirect form of protectionism.

Personally, I have no problem with the prosecution of foreign corporations that are engaged in misconduct, as long as domestic companies doing the same thing are not being let off the hook.

The 2019 Corporate Rap Sheet

While the news has lately focused on political high crimes and misdemeanors, 2019 has also seen plenty of corporate crimes and violations. Continuing the pattern of the past few years, diligent prosecutors and career agency officials have pursued their mission to combat business misconduct even as the Trump Administration tries to erode the regulatory system. The following is a selection of significant cases resolved during the year.

Online Privacy Violations: Facebook agreed to pay $5 billion and to modify its corporate governance to resolve a Federal Trade Commission case alleging that the company violated a 2012 FTC order by deceiving users about their ability to control the privacy of their personal information.

Opioid Marketing Abuses: The British company Reckitt Benckiser agreed to pay more than $1.3 billion to resolve criminal and civil allegations that it engaged in an illicit scheme to increase prescriptions for an opioid addiction treatment called Suboxone.

Wildfire Complicity: Pacific Gas & Electric reached a $1 billion settlement with a group of localities in California to resolve a lawsuit concerning the company’s responsibility for damage caused by major wildfires in 2015, 2017 and 2018. PG&E later agreed to a related $1.7 billion settlement with state regulators.

International Economic Sanctions: Britain’s Standard Chartered Bank agreed to pay a total of more than $900 million in settlements with the U.S. Justice Department, the Treasury Department, the Federal Reserve, the New York Department of Financial Services and the Manhattan District Attorney’s Office concerning alleged violations of economic sanctions in its dealing with Iranian entities.

Emissions Cheating: Fiat Chrysler agreed to pay a civil penalty of $305 million and spend around $200 million more on recalls and repairs to resolve allegations that it installed software on more than 100,000 vehicles to facilitate cheating on emissions control testing.

Foreign Bribery: Walmart agreed to pay $137 million to the Justice Department and $144 million to the Securities and Exchange Commission to resolve alleged violations of the Foreign Corrupt Practices Act in Brazil, China, India and Mexico.

False Claims Act Violations: Walgreens agreed to pay the federal government and the states $269 million to resolve allegations that it improperly billed Medicare, Medicaid, and other federal healthcare programs for hundreds of thousands of insulin pens it knowingly dispensed to program beneficiaries who did not need them.

Price-fixing: StarKist Co. was sentenced to pay a criminal fine of $100 million, the statutory maximum, for its role in a conspiracy to fix prices for canned tuna sold in the United States. StarKist was also sentenced to a 13-month term of probation.

Employment Discrimination: Google’s parent company Alphabet agreed to pay $11 million to settle a class action lawsuit alleging that it engaged in age discrimination in its hiring process.

Investor Protection Violation: State Street Bank and Trust Company agreed to pay over $88 million to the SEC to settle allegations of overcharging mutual funds and other registered investment company clients for expenses related to the firm’s custody of client assets.

Illegal Kickbacks: Mallinckrodt agreed to pay $15 million to resolve claims that Questcor Pharmaceuticals, which it acquired, paid illegal kickbacks to doctors, in the form of lavish dinners and entertainment, to induce them to write prescriptions for the company’s drug H.P. Acthar Gel.

Worker Misclassification: Uber Technologies agreed to pay $20 million to settle a lawsuit alleging that it misclassified drivers as independent contractors to avoid complying with labor protection standards.

Accounting Fraud: KPMG agreed to pay $50 million to the SEC to settle allegations of altering past audit work after receiving stolen information about inspections of the firm that would be conducted by the Public Company Accounting Oversight Board. The SEC also found that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results.

Trade Violations: A subsidiary of Univar Inc. agreed to pay the United States $62 million to settle allegations that it violated customs regulations when it imported saccharin that was manufactured in China and transshipped through Taiwan to evade a 329 percent antidumping duty.

Consumer Protection Violation: As part of the settlement of allegations that it engaged in unfair and deceptive practices in connection with a 2017 data breach, Equifax agreed to provide $425 million in consumer relief and pay a $100 million civil penalty to the Consumer Financial Protection Bureau. It also paid $175 million to the states.

Ocean Dumping: Princess Cruise Lines and its parent Carnival Cruises were ordered to pay a $20 million criminal penalty after admitting to violating the terms of their probation in connection with a previous case relating to illegal ocean dumping of oil-contaminated waste.

Additional details on these cases can be found in Violation Tracker, which now contains 397,000 civil and criminal cases with total penalties of $604 billion.

Note: I have just completed a thorough update of the Dirt Diggers Digest Guide to Strategic Corporate Research. I’ve added dozens of new sources (and fixed many outdated links) in all four of the guide’s parts: Key Sources of Company Information; Exploring A Company’s Essential Relationships; Analyzing A Company’s Accountability Record; and Industry-Specific Sources.

Another Type of Quid Pro Quo

As the political news is dominated by discussion of quid pro quo and bribery, there has been another ongoing series of allegations about improper payments for things of value. The other quid pro quo relates to the pharmaceutical industry, which has been the subject of a seemingly never-ending scandals about financial inducements given to healthcare professionals.

The most significant recent case involves a company called Avanir Pharmaceuticals, which had to pay more than $115 million to resolve allegations that it paid kickbacks to physicians to get them to prescribe its drug Nuedexta for uses not approved as safe by the Food and Drug Administration.

Among those uses were the treatment of behaviors associated with dementia among residents of long-term care facilities. Nuedexta was tested and approved for patients exhibiting what is known as pseudobulbar affect (PBA) — involuntary, sudden, and frequent episodes of laughing or crying that occur secondary to a neurologic disease or brain injury.

The case against Avanir included allegations that physicians receiving its payments ended up putting large numbers of patients on Nuedexta who showed no symptoms of PBA, exposing them to unknown risks.

The Justice Department regarded Avanir’s behavior to be serious enough to warrant criminal charges, but like in so many other cases, the company was offered a deferred prosecution agreement that allowed it to buy its way out of full legal jeopardy by paying criminal penalties of nearly $13 million. The company agreed to cooperate in the prosecution of several individuals who received the kickbacks and whose liability may end up being more than financial in nature.

In addition to the criminal matter, Avanir agreed to pay $103 million to settle a related civil False Claims Act case based on the fact that federal and state healthcare programs ended up paying claims stemming from the improper prescribing of Nuedexta.

Avanir’s alleged behavior is especially troublesome because of the involvement of elderly dementia patients, but the use of kickbacks is far from unknown in the pharmaceutical industry. In Violation Tracker we document about 50 drug industry cases in which kickbacks were the primary or secondary offense.

These cases, which have resulted in more than $7 billion in fines and settlements, have implicated pretty much every large pharmaceutical producer and numerous smaller ones as well. Some companies show up on the list several times. These include Abbott Laboratories, which along with its subsidiaries has been involved in six cases between 2003 and 2017 that resulted in $630 million in penalties, and Pfizer, which together with its subsidiaries has paid $531 million in five cases between 2004 and 2018.

The extent of the recidivism in drug industry kickback cases suggests that the industry is not taking the problem very seriously and that the Justice Department’s approach has not had the necessary deterrent effect. Perhaps there is a lesson here for the political world as well.

Back Pedaling on Kickbacks?

It’s hard not to be suspicious when the Secretary of Health and Human Services promotes a supposed reform by stating that “President Trump has promised American patients a healthcare system with affordable, personalized care, a system that puts you in control, provides peace of mind, and treats you like a human being, not a number. But too often, government regulations have stood in the way of delivering that kind of care.”

Secretary Alex Azar used those dubious statements in a press release about his department’s plan to “modernize and clarify” the regulations that interpret the Physician Self-Referral Law (known as the Stark Law) and the Federal Anti-Kickback Statute.

Azar claims that the rule changes would promote new methods of delivering healthcare based on greater coordination among providers, including those with financial relationships with one another.

The changes are technical in nature, but I cannot help but worry that the scheme would serve to legitimize dubious dealings and enable providers to avoid prosecution under laws that have been in place for several decades.

I have become more familiar with these laws in the course of collecting data for Violation Tracker. The database currently contains more than 360 cases in which kickbacks and bribery are involved as the primary or secondary offense. These cases have resulted in more than $14 billion in fines and settlements involving many of the largest names in pharmaceuticals (Merck, Amgen, Bristol-Myers Squibb, Pfizer, et al.), hospitals (Tenet, HCA, among others) and pharmacies (such as CVS).

The biggest penalty is a $2.2 billion agreement signed by Johnson & Johnson in 2013 to resolve civil and criminal charges of paying kickbacks to physicians to encourage them to prescribe several of its drugs for uses not approved by the Food and Drug Administration.

One of those drugs was the anti-psychotic medication Risperdal, which was only approved for schizophrenia but which J&J was allegedly promoting for other less serious conditions among elderly patients through financial inducements to providers.

In an interesting coincidence, the announcement of the new HHS proposal came at almost exactly the same time that a jury in Philadelphia hit J&J with an $8 billion verdict over its marketing of Risperdal for use by children.

It will be interesting to see whether the new HHS rules on kickbacks, if they go through, manage to distinguish between more innocent financial dealings among providers and the corrupt practices that have been so common among the larger players. Given this administration’s track record on healthcare and so many other issues, we cannot give it the benefit of the doubt.