Polish Sausage: How Lilly's Foreign Bribery Probe Might Play Out

Eli Lilly (LLY) said it is close to settling a foreign corruption investigation with the Department of Justice that stems from its sales in Poland, but even though key Lilly executives could go to prison (in a worst-case scenario) the company has declined to make more information about the extent of its problems available.

Generally, U.S. companies are supposed to disclose to the SEC any "material" event, including the loss of key executives. No executives at Lilly have been accused of wrongdoing. Yet foreign bribery probes sometimes seal management's fate.

For instance, Robert John Dougall, director of marketing at Johnson & Johnson (JNJ)'s DePuy unit was sentenced to 12 months in prison for violations of the Foreign Corrupt Practices Act. J&J settled that investigation for $70 million last month. The company's worldwide chairman for medical devices & diagnostics, Michael J. Dormer, also resigned over the allegations. J&J's fines -- for bribing Greek doctors, among other acts -- were larger than its sales from that country.

At Lilly, here is the sum total of what we know for sure, from the company's 10-Q:

In August 2003, we received notice that the staff of the SEC is conducting an investigation into the compliance by Polish subsidiaries of certain pharmaceutical companies, including Lilly, with the U.S. Foreign Corrupt Practices Act of 1977. The staff has issued subpoenas to us requesting production of documents related to the investigation. In connection with that matter, staffs of the SEC and the Department of Justice (DOJ) have asked us to voluntarily provide additional information related to certain activities of Lilly affiliates in a number of other countries. The SEC staff has also issued subpoenas related to activities in these countries. We are in advanced discussions with the SEC to resolve their investigation.

To help you speculate, bear in mind that in some foreign countries Lilly's corporate culture is rather relaxed about the way one hand washes the other: Lilly was caught giving excessive gifts to doctors and hospitals in South Korea in 2009, according to the Trace Compendium of Foreign Corrupt Practices Act filings. Lilly was one of seven companies that paid fines totaling about $20 million to the Korea Fair Trade Commission. Lilly's share of the fine was $1.3 million fine. The KFTC said:

Pharmaceutical companies employed diverse means, including wining and dining, product presentation, financial support for the cost of attending domestic & international seminars, materials & services, and Post Marketing Surveillance, to offer economic benefits to doctors and hospitals in a repetitive manner.

While they fiddled with accounting records to make the wining and dining expenses look like the expenditure for product presentations, they tried to ensure that such fabrication would appear to comply with an ethics code by splitting the large sum into smaller amounts or inflating the actual number of participants of the presentations.

Related:

• Internal Emails: J&J Knew of Bribery "Black Hole" for Years
• Does Your Company Pay Bribes in Foreign Countries? Now There's an App for That!
• The Price of Admission: 10 Medical Companies Suspected of Paying Bribes in Foreign Countries