March 25, 2022

Court denies whistleblowers’ claims in FCPA action

On March 25, 2022, the US Court of Appeals for the District of Columbia Circuit denied petitions by two whistleblower claimants who argued that they should have received whistleblower awards in connection with a Foreign Corrupt Practices Act settlement by Novartis AG, a Swiss pharmaceutical company.  The claimants had provided information to the US Securities and Exchange Commission about improper conduct by Novartis competitors, which the claimants argued ultimately led to the Novartis settlement. 

Specifically, the covered action was an SEC FCPA investigation that was settled in March 2016 and that involved conduct in China by Novartis subsidiaries (Novartis later settled another unrelated FCPA investigation in June 2020 that also involved conduct in China, as well as South Korea, Vietnam, and Greece).  The SEC’s investigation began in January 2012, and it ultimately found that Novartis subsidiaries had provided gifts, entertainment, travel and “favors” to Chinese healthcare professionals and their relatives in order to increase sales.  According to the SEC’s order, the subsidiaries attempted to disguise the transactions using complicit third parties such as travel agents and event planners that papered the transactions as if they were legitimate medical conferences or research projects.  The Novartis subsidiaries then booked the expenses as legitimate business expenses.  The SEC charged Novartis under the books and records and internal controls provisions of the FCPA.  The SEC investigation was settled in March 2016 with Novartis agreeing to pay a penalty, disgorgement, and prejudgment interest totaling to about $25 million. 

The two individuals who filed whistleblower claims in connection with this settlement worked for competitors of Novartis during the relevant period.  Both had informed the SEC and later US media about illegal behavior by their own employers in China.  The claimants theorized that their disclosures caused the media to report on the illegal conduct, and this caused Novartis to review its practices, identify improper conduct, and eventually settle with the SEC.  The argument was based on a statement in the SEC order, which said, “Novartis instituted an expansive review of its relationships in China with travel and event planning vendors” and then took remedial measures “[i]n connection with the SEC Staff’s investigation and in response to media reports concerning a competitor.”  (emphasis added). 

The SEC Claims Review Staff (CRS) determined that the claimants did not satisfy any of the three grounds for eligibility for a whistleblower award described in Exchange Act Rule 21F-4(c)the claimants’ information did not lead to the opening or reopening of an SEC investigation (Rule 21F-4(c)(1)); did not relate to conduct already under investigation and did not “significantly contribute” to the success of the SEC’s action (Rule 21F-4(c)(2)); and was provided to Novartis’s competitors while the Rule required that the information be given to Novartis (Rule 21F-4(c)(3)). 

The claimants did not challenge the CRS’s findings that they did not meet any of the above three factors, but instead argued that the SEC should have considered fact patterns not described by Rule 21F-4.  The SEC rejected claimants arguments, finding that Rule 21F-4 provided the exclusive criteria by which a whistleblower award could be granted.  Claimants then appealed to the DC Circuit Court, which has jurisdiction to hear such appeals under 15 U.S.C. § 78u-6(f) and implementing regulations.  The Court concluded that the SEC’s interpretation of Rule 21F-4(c) was entitled to deference under Supreme Court precedent, and found the SEC’s reading of the rule was “within the bounds of reasonable interpretation.”  The Court therefore denied the claimants’ appeal.