Corporate Management and Fraud Against the Government

Handling Whistleblower Cases Nationwide from Newport News, Virginia

When major corporations are fined for defrauding the government, CEO’s aren’t the ones writing the checks.

Take, for example, three companies in the healthcare industry who have recently agreed to settlements in fraud cases:

  • Amgen, Inc. has set aside $780 million to settle a lawsuit involving illegal marketing practices, while Chairman and CEO Kevin Sharer is expected to receive $49 million upon his retirement at year end.
  • GlaxoSmithKline CEO Andrew Witty reached a contract agreement this year that will raise his salary to roughly $16.5 million. Meanwhile, the company officially announced in July that it will pay a record-setting $3 billion to settle allegations of illegal marketing practices of various prescription drugs.
  • Former Johnson & Johnson Chairman and CEO William Weldon received a pay raise, as well as a 55 percent increase in his performance bonus, while the company faces litigation involving marketing of a prescription drug for unapproved uses. Weldon’s total annual compensation exceeds $18 million, while Johnson & Johnson will pay a settlement of approximately $1.8 billion. Even further, newly-incumbent CEO Alex Gorsky was an active participant in such fraudulent practice and “has firsthand knowledge of the fraud,” according to federal allegations.

Apparently the lesson to be learned is that for top executives, fraud pays. This clearly challenges the most basic premise of the False Claims Act: companies should pay for defrauding the government, literally and figuratively.

How do those who facilitate wrongful business practice often emerge unscathed? According to Erika Kelton, “proving requisite intent of individuals at the top of large corporate offenders has at times been challenging for prosecutors.”  It is often too difficult and costly to reveal evidence that clearly links the actions of an individual to corporate wrongdoing. Dennis M. Kelleher, president of Better Markets, says “if you are an executive, you know that the chances of getting caught are infinitely small, and the chances of getting caught and prosecuted are even smaller.” If an executive resigns in the midst of pending litigation, for example, he or she cannot be held criminally liable. Critics believe that the practice of settling fraud cases without charging executives may prompt CEO’s to seek profit without regard for the law.

Evidently, monetary settlements alone “do not always suffice to remedy False Claims Act settlements.” Corporate integrity agreements have become a common tool used to combat fraud, but are not always effective. For example, Pfizer, Inc. has agreed to multiple conditions of corporate integrity over the past decade, only to show a lack of integrity in its business practice. Its recent history of fraud settlements with the government includes payments of $430 million in 2004, $152 million in 2008, $49 million later in 2008, $2.3 billion in 2009, and $14.5 million in 2011.

The Department of Justice has encouraged corporate executives to accept personal responsibility, but this seems unlikely without legal or contractual obligation to do so.  For example, JPMorgan Chase CEO Jamie Dimon has declined to voluntarily return any of his $23 million in annual compensation amid an investigation involving fraudulent financial trading that has caused the company losses of almost $7 billion. The three traders directly involved in the scandal were forced to return two years’ compensation, and former chief investment officer Ina Drew resigned and voluntarily returned two years’ pay totaling $30 million, but Dimon has refused to take personal responsibility. In certain situations, like in the GlaxoSmithKline case, a settlement agreement may stipulate that a company change certain compensation structures.

Still, a more “realistic and focused deterrent” might be necessary, says Kelton.  Critics opine that throwing an executive or two in jail would certainly send a message, and would “encourage fraudsters to think twice” before defrauding the government. Clawback provisions, in which executives are forced to “pay back” compensation, would dissuade fraudulent business practice as well.

No matter how it’s done, the message needs to be made loud and clear: fraud should not be so rewarding.