Zimmer Biomet warns of ‘additional liabilities’ for DPA breaches, accrues money for penalties

Zimmer Biomet Holdings Inc. said in a securities filing Monday “it is probable that Biomet will incur additional liabilities related to” DOJ and SEC investigations of FCPA violations that occurred after Biomet’s FCPA settlement in 2012 and during its deferred prosecution agreement.

Zimmer bought Indiana-based Biomet last year for about $14 billion. The orthopedic device maker is now known as Zimmer Biomet Holdings Inc. The combined company is liable for FCPA penalties Biomet may incur.

On Monday, Zimmer Biomet said: “The DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA.”

The company said it has accrued money for possible FCPA liabilities. It didn’t specify the amount accrued.

The account holding the accrued funds is called “Other Current Liabilities.” That account contained $1.163 billion as of June 30.

Of that amount, Zimmer Biomet said $50 million was for Durom Cup-related claims and $89 million was for foreign currency and cash hedging. That could leave all or some part of $1.02 billion for FCPA-related liabilities.

In June, the DOJ said in a court filing that Biomet breached the 2012 deferred prosecution agreement “based on conduct in Brazil and Mexico.”

A status report filed in federal court in Washington, D.C. on June 6 also cited Biomet’s failure to maintain an effective FCPA compliance program.

Biomet entered into a three-year deferred prosecution agreement in March 2012. The DOJ extended the DPA twice during a federal investigation.

In the March 2012 enforcement action, Biomet paid $22.7 million to settle FCPA-related offenses. That included a criminal fine of $17.3 million to the DOJ and the three-year DPA with a compliance monitor. It also disgorged $5.5 million to the SEC to resolve civil FCPA allegations.

In July 2014, the SEC subpoenaed Biomet for documents relating to “certain alleged improprieties” in the company’s Brazilian and Mexican operations. Biomet had disclosed the allegations to the DOJ and the SEC three months earlier.

In March 2015, the DOJ extended the DPA and the compliance monitor’s appointment for an additional year.

In March this year, Zimmer Biomet said it agreed to extend the DPA again.

In the June court filing, the DOJ said its discussions with Biomet to resolve the DPA breaches without a trial are ongoing. The company confirmed the discussions Monday but said it couldn’t predict the outcome.

In the 2012 enforcement action, prosecutors said Biomet bribed doctors at government hospitals in Argentina, Brazil, and China from 2000 to 2008. It paid more than $1.5 million and disguised the payments as commissions, royalties, consulting fees, and scientific incentives.

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Here’s the full FCPA disclosure from Zimmer Biomet Holdings’ Form 10-Q filed with the SEC on August 8, 2016:

Biomet is involved in ongoing governmental investigations, the results of which may adversely impact our business and results of operations. Further, if Biomet fails to comply with the terms of the DPA that it entered into in March 2012, it may be subject to criminal prosecution and/or exclusion from federal healthcare programs.

On March 26, 2012, Biomet entered into a DPA with the DOJ and a Consent with the SEC related to an investigation by the DOJ and the SEC into possible violations of the FCPA in the marketing and sale of medical devices in certain foreign countries. Pursuant to the DPA, the DOJ agreed to defer prosecution of Biomet in connection with those matters, provided that Biomet satisfies its obligations under the DPA over the term of the DPA. The DPA had a three-year term and provided that it could be extended in the sole discretion of the DOJ for an additional year.

Pursuant to the Consent, Biomet consented to the entry of a Final Judgment which, among other things, permanently enjoined Biomet from violating the provisions of the FCPA. In addition, pursuant to the terms of the DPA, an independent external compliance monitor was appointed to review Biomet’s compliance with the DPA, particularly in relation to Biomet’s international sales practices. The Consent that Biomet entered into with the SEC mirrors the DPA’s provisions with respect to the compliance monitor.

In October 2013, Biomet became aware of certain alleged improprieties regarding its operations in Brazil and Mexico, including alleged improprieties that predated the entry of the DPA. Biomet retained counsel and other experts to investigate both matters. Based on the results of the ongoing investigations, Biomet has terminated, suspended or otherwise disciplined certain of the employees and executives involved in these matters, and has taken certain other remedial measures. Additionally, pursuant to the terms of the DPA, in April 2014 and thereafter, Biomet disclosed these matters to and discussed these matters with the independent compliance monitor and the DOJ and SEC. On July 2, 2014 and July 13, 2015, the SEC issued subpoenas to Biomet requiring that Biomet produce certain documents relating to such matters. These matters remain under investigation by the DOJ.

On March 13, 2015, the DOJ informed Biomet that the DPA and the independent compliance monitor’s appointment had been extended for an additional year. On April 2, 2015, at the request of the staff of the SEC, Biomet consented to an amendment to the Final Judgment to extend the term of the compliance monitor’s appointment for one year from the date of entry of the Amended Final Judgment.

The DPA as originally extended was set to expire on March 26, 2016. However, the DOJ and the SEC continue to evaluate the alleged misconduct in Brazil and Mexico, as well as any issues relating to Biomet’s compliance program. The DOJ, the SEC and Biomet have agreed to continue to evaluate and discuss these matters and, therefore, the matter is ongoing as of the date of the filing of this Form 10-Q. Pursuant to the DPA, the DOJ has sole discretion to determine whether conduct by Biomet constitutes a violation or breach of the DPA, and the DOJ has notified Biomet that it believes a breach occurred. The DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA. The DOJ could, among other things, revoke the DPA or prosecute Biomet and/or the involved employees and executives. Biomet continues to cooperate with the SEC and the DOJ, and expects that discussions with the SEC and the DOJ will continue. There is no assurance that Biomet will enter into a consensual resolution of this matter with the SEC or the DOJ, and the terms and conditions of any such potential resolution are uncertain. We believe it is probable that Biomet will incur additional liabilities related to these investigations, which we have accrued in “Other current liabilities” as of the Closing Date. It is reasonably possible our estimates may change in the near future once the DOJ and SEC complete their investigations and we conclude our discussions regarding potential resolution.

As a result of the merger, all obligations and liabilities of Biomet related to the above matters have been assumed by us as the combined company. From time to time, we are, and may continue to be, the subject of additional investigations. If, as a result of the investigations described above or any additional investigations, we are found to have violated one or more applicable laws, our business, financial condition, results of operations and cash flows could be materially adversely affected. If some of our existing business practices are challenged as unlawful, we may have to modify those practices, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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Richard L. Cassin is the publisher and editor of the FCPA Blog. He’ll be the keynote speaker at the FCPA Blog NYC Conference 2016.