SciClone Raises Standards, and Eyebrows, With FCPA Deal

Find a company that has established a robust compliance program in recent years, and it's a fair bet that federal prosecutors provided the, ahem, motivation to do so. But once in a great while, a company adopts such programs to appease shareholders.

Such were the circumstances faced by SciClone Pharmaceuticals, which has agreed to adopt certain corporate governance reforms and pay $2.5 million in plaintiffs' legal fees through its director-and-officer insurance policy, all as part of a deal to settle a consolidated shareholder lawsuit stemming from alleged violations of the Foreign Corrupt Practices Act.

Typically, the intent of a shareholder derivative lawsuit—where shareholders sue the board over allegations of bad management—is to get the company's officers and directors to enter into a settlement of monetary damages, explains Lucinda Low, a partner with the law firm Steptoe & Johnson. “I'm not aware of any other case, certainly in the FCPA area, where this sort of result has occurred,” where shareholders didn't want any damages.

Requests for comment from plaintiffs' and defense attorneys in the case were not returned. SciClone itself, which does $115 million in sales annually, also did not return calls for comment regarding the settlement. As stated in the agreement, however, some factors that played a role were the expense, length, and uncertain outcome of the litigation.

“Plaintiff and their counsel also are mindful of the inherent problems of proof of, and possible defenses to, the violations asserted in the action,” the agreement stated. For these reasons, the settlement “provides an excellent recovery based on the alleged conduct of the defendants” and is in the “best interests of SciClone and its shareholders.”

SciClone denies any wrongdoing, and further denies that its shareholders suffered damage from the alleged conduct. The company said in the agreement that it “entered into the stipulation solely to avoid the continuing additional expense, inconvenience, and distraction of this litigation and to avoid the risks inherent in any lawsuit.” 

Case Background

In August 2010, the Securities and Exchange Commission and the Justice Department opened an investigation into certain officers and directors of SciClone, relating to a range of matters including interactions with regulators and government-owned entities in China. SciClone's board of directors appointed a special committee of independent directors to oversee the company's response to the government inquiries.

The federal investigations, which remain ongoing, subsequently led the Construction Industry and Laborers Joint Pension Trust to file a shareholder derivative lawsuit in September 2010, alleging that certain officers and directors of SciClone breached their fiduciary duty by failing to implement internal controls and systems to assure compliance with the FCPA. That lawsuit later was consolidated with three other shareholder derivative cases filed on behalf of SciClone.

In a report to the SEC and Justice Department, the board's special committee concluded in May that SciClone:

Lacked appropriate internal controls with respect to sales and marketing practices, including payments for, or reimbursement of, third-party gifts, travel and entertainment expenses, and sponsorships of certain conferences and events;

Failed to adequately implement existing controls and policies; and

Lacked transparency between the company's United States and China operations, such that U.S. management did not have adequate and appropriate information about the company's activities in China.

The current settlement, which still must be approved by a federal judge, would remedy those compliance gaps. It also means all pending private lawsuits against SciClone will be dismissed. Notably, the settlement comes at a time when SciClone is expanding its sales in the Chinese market.

“I'm not aware of any other case, certainly in the FCPA area, where this sort of result has occurred.”

—Lucinda Low,

Partner,

Steptoe & Johnson

Under the agreement, SciClone for a three-year period must undertake what some legal experts say are compliance reforms that go well beyond even the strictest of deferred-prosecution agreements reached with federal regulators. Perhaps most notably SciClone must retain a “compliance coordinator” fluent in Mandarin and English, whose duties mirror those of both a chief compliance officer and an external monitor, says Low.

The compliance coordinator must provide a written or oral report on at least a quarterly basis to the board, SciClone legal counsel, the chief executive officer, the chief financial officer, internal auditors, and the company's external auditors, concerning compliance with the code of business conduct and ethics and the global anti-bribery and anti-corruption policy—which must be communicated in both English and Mandarin.

To report to so many parties—and external auditors in particular—is not only “unusual,” says Low, but suggests that the compliance coordinator is “more than your typical chief compliance officer and really has some features of an external monitor.”

Additionally, the compliance coordinator, serving as a member of the company's executive team, must report directly to the audit committee, whose chair must further report to the board at least quarterly on SciClone's implementation of remedial measures and compliance with the FCPA. These reports will be in addition to annual reviews the board and compliance coordinator must make.

SCICLONE'S COMPLIANCE PROGRAM

The following excerpt from the notice of SciClone's proposed settlement explains what SciClone's compliance program and code will entail:

SciClone's Global Anti-Bribery & Anti-Corruption Policy shall be designed to prevent and detect violations of the FCPA and other applicable laws throughout SciClone's global operations. The policy shall include the following:

1.Strong, explicit and visible support and commitment from Section 16 officers, senior management and the board to the company's internal controls, ethics, and compliance programs. This commitment shall be communicated to all employees and contractors in writing, in both English and Mandarin, as soon as reasonably practicable and periodically thereafter.

2.An overall statement expressing clear corporate policy prohibiting the provision of any financial benefit or benefit-in-kind to any non-U.S. government official or health care professional (HCP) in exchange for prescribing, recommending, purchasing, supplying, or administering SciClone products or for a commitment to continue to do so, or that may have an inappropriate influence on a government official or HCP, or HCP's prescribing practices, or that would create the appearance of doing so.

3. A requirement that all interactions with government officials and HCPs must comply with the policy and with all applicable laws, rules, and regulations.

4. Guidelines applicable to all directors, officers, employees, independent contractors, and/or agents concerning:

A. Gifts;

B. Hospitality, entertainment and expenses;

C. Honoraria;

D. Charitable donations and sponsorships;

E. Facilitation payments;

F. Travel;

G. Solicitation and extortion.

5. Directions to report any potential violation of the policy to any SciClone manager, the compliance coordinator, or the chair of the audit committee, and information regarding how to submit an anonymous report.

6. A requirement that all agents, business partners, distributors, consultants, and joint venture partners must also comply with the policy, and that the Company must perform a reasonable due diligence investigation before signing any contract with a third-party (other than for a one-time speaking or meeting engagement).

7. If the board has received information or facts suggesting that activity has been undertaken by the company, its officers, directors, employees, independent contractors, or agents that may violate the FCPA, the board must promptly consider whether to report such information to the DoJ and the SEC (or any other governmental or regulatory authority). In evaluating whether to report a potential violation, the board shall consult with outside legal counsel with substantial experience in such matters.

8. The quarterly report from the compliance coordinator shall include a summary of the nature and types of expenditures incurred or paid for by the company relating to travel of non-SciClone officers, directors, employees or independent contractors, including but not limited to a summary of travel expenses of HCP to seminars and events conducted or sponsored (in whole or in part) by SciClone.

Source: SciClone Notice of Proposed Settlement.

The level of detail required in these reports under the agreement is also “striking,” Low says. The report must include a summary of the nature and types of travel expenditures incurred by non-SciClone officers, directors, employees, or independent contractors, including those of healthcare professionals to seminars and events conducted or sponsored by SciClone.

The proposed settlement also goes further than many DPAs in that it requires training of all directors, officers, employees, and independent contractors. A typical DPA requires training of personnel and appropriate third parties, Low explains. “That's a huge undertaking for the company to train all independent contractors,” she says.

The settlement also devotes considerable attention to SciClone's whistleblower program. The company must keep a written log of whistleblower complaints for at least five years. What's more, the compliance coordinator must notify the whistleblower when the investigation is complete and to report the results of any investigation when practicable.

In the event of an FCPA violation or other criminal conduct, SciClone must decide whether to take legal action to recoup all incentive-based compensation paid to the director, officer, employee, or independent contractor that would not have been earned but for the violation. Such a clawback requirement on a company is “something not generally or previously seen,” Thomas Fox, an independent consultant, noted in his FCPA Compliance and Ethics Blog.

Similar Settlements

The SciClone settlement appears to be the third time in the last few years that a drug maker agreed to create a new executive role to appease shareholders. In March 2010, pharmaceutical giant Eli Lilly & Co. agreed to create four new senior-level ethics and compliance positions as part of a deal to settle various shareholder lawsuits stemming from the illegal marketing and promotion of a handful of its drugs.

In December 2009, Merck appointed Michael Rosenblatt, dean of Tufts University School of Medicine, as executive vice president and chief medical officer on the heels of a settlement to end shareholders litigation over Merck's painkiller Vioxx. Merck took Vioxx off the market in 2004 after a study showed it doubled the risk of heart attacks and strokes. (Just last week, Merck also agreed to pay $950 million in penalties to end various criminal and civil investigations related to its Vioxx marketing.)

Similar to that of SciClone and Lilly, Merck also agreed to create a new committee. A new product-safety committee would draft and implement procedures to monitor the safety of any Merck drug; another committee is charged with promptly identifying and addressing risks that could affect the company, its products, or customers.

A final hearing on the SciClone settlement is scheduled for Dec. 13.