Saturday, August 19, 2006

Is Bristol-Myers Risking a Violation of Its Deferred Prosecution Agreement?

A Department of Justice criminal investigation into an agreement between Bristol-Myers Squibb and generic drug-maker Apotex regarding a $40 million payment to the company to keep a generic version of Plavix, one of Bristol-Myers best selling drugs, from the market has certainly caught the eye of the company's board of directors.  One would think that an FBI search of the Bristol-Myers' offices, including the CEO's, would be enough to spur the board into action, but a press release issued by the company (here) on August 17 made it a point to begin by stating that the board has been treating the investigation "with the highest degree of attention and seriousness."  The release goes on to note that in addition to hiring former U.S. Attorney Mary Jo White to conduct the internal investigation, the independent directors have hired former U.S District Court judge Kenneth Conboy (now with Latham & Watkins), and that former FBI Director Louis Freeh will monitor "internal and external legal initiatives." 

I assume one of those "external legal initiatives" is to keep Bristol-Myers out of hot water with the U.S. Attorney's Office for the District of New Jersey for violating the terms of the deferred prosecution agreement it entered into in June 2005 regarding accounting fraud arising from a channel stuffing program that inflated revenues and earnings.  The agreement (here) primarily addresses securities reporting and internal control issues, but Paragraph 34 contains a general requirement that "BMS will inform the Office of any credible evidence of criminal conduct at BMS occurring after the date of the Agreement . . . ."  The definition of "criminal conduct" includes "any crime related to BMS's business activities committed by one or more BMS executive officers or directors," which certainly appears to cover the current criminal investigation.  The effect of a future criminal violation can be rather severe, as provided in Paragraph 36:

Should the Office determine during the term of this Agreement that BMS has committed any criminal conduct as defined in paragraph 34 commenced subsequent to the date of this Agreement, or otherwise in any other respect knowingly and materially breached this Agreement, BMS shall, in the discretion of the Office, thereafter be subject to prosecution for any federal crimes of which the Office has knowledge, including crimes relating to the matters set forth in the Statement of Facts.

That means the original securities fraud case could be restarted, which gets even scarier for the company because Paragraph 37 states that "[i]n the event of a breach of this Agreement that results in a prosecution of BMS, such prosecution may be premised upon any information provided by or on behalf of BMS to the Office at any time, unless otherwise agreed when the information was provided."  All those high priced lawyers will have to keep Bristol-Myers from having to face a government onslaught not only from the current investigation but also from last year's trouble.  (ph)

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