Biotech company avoids DOJ charges after self-reporting payment of bribes

Lifecore Biomedical, Inc.’s efforts in self-reporting FCPA violations lead to declination decision from DOJ.

Lifecore Biomedical, Inc., formerly known as Landec Corporation, has received a declination with disgorgement from the US Department of Justice (DOJ) for Foreign Corrupt Practices Act (FCPA) violations in Mexico. The company is a biotech firm with its principal offices in California but is incorporated in Delaware.

The DOJ’s declination letter stated that its decision not to bring charges against the business were in keeping with its Corporate Enforcement and Voluntary Self-Disclosure Policy, and that it reached this conclusion despite the bribery committed by employees and agents of Lifecore and its former US subsidiary, Yucatan Foods L.P.

Bribery in Mexico

DOJ said in its declination letter that its investigation found evidence that, between May 2018 and August 2019, some of Yucatan’s officers, employees, and agents, including employees of Procesadora Tanok S. de R.L. de C.V. (Tanok) – a manufacturing facility owned and operated by Yucatan in the Mexican state of Guanajuato – paid bribes to one or more Mexican government officials prior to and after Lifecore’s December 2018 acquisition of Yucatan and Tanok.

Specifically, these individuals engaged in a scheme to pay approximately $14,000 in bribes to a government official through a third-party intermediary to secure a wastewater discharge permit, the DOJ said.

Tanok employees and agents also paid a third-party service provider approximately $310,000 to prepare fraudulent manifests purporting to show the provider had delivered wastewater to a municipal water company for disposal while knowing that a portion of the fee was used to pay bribes to one or more local Mexican government officials to sign the manifests to help make them appear legitimate.

Attempt to conceal misconduct

During Lifecore’s pre-acquisition due diligence of Yucatan and Tanok, at least one Yucatan officer involved in the misconduct took steps to conceal the misconduct from Lifecore and its auditor. After Lifecore learned of the misconduct during post-acquisition integration, it initiated an internal investigation that led to its voluntary self-disclosure to the the DOJ’s criminal division.

In its 10-Q filed on January 2, 2020, Lifecore (then called Landec) disclosed that it had started an investigation into potential environmental and FCPA compliance matters associated with regulatory permissions at the Tanok facility in Mexico.

As part of the company’s internal investigation, Landec retained the law firm Latham & Watkins, LLP and shortly after that voluntarily disclosed the investigation to the SEC, DOJ, and the Mexican Attorney General’s Office.

The agencies subsequently opened their own investigations into the matter, and Landec said it was cooperating with the government. The company further clarified that the conduct at issue began prior to the Yucatan Foods acquisition.

Voluntary disclosure

The DOJ outlines what the business did to showcase its voluntary reporting and its cooperation with the government’s own investigation into the matter and why it was so sufficient as to be worthy of a full declination from prosecution.

In the declination letter, the letter says that it credited:

  1. Lifecore’s timely and voluntary self-disclosure of the misconduct, which it reported to the Fraud Section’s FCPA Unit within three months of first discovering the possibility of misconduct and hours after an internal investigation confirmed that misconduct had occurred;
  2. Lifecore’s full and proactive cooperation in this matter (including its provision of all known relevant facts about the misconduct), and its agreement to continue to cooperate with any ongoing government investigations and any prosecutions that might result in the future, including following Lifecore’s divestiture of Tanok and the legacy Yucatan business;
  3. the nature and seriousness of the offense;
  4. Lifecore’s timely and appropriate remediation, including the termination of employment of the Yucatan Officer engaged in the bribe scheme, withholding that officer’s bonus and other compensation, and substantially improving its compliance program and internal controls; and
  5. the fact that Lifecore agreed to disgorge the costs it avoided having to pay as a result of the bribery scheme.

The DOJ notes that Lifecore has agreed to continue to fully cooperate in the Fraud Department’s ongoing investigation and that the government has made continued cooperation with its ongoing investigation a material condition of any transfer of control to Lifecore’s successor-in-interest following its divestiture of the legacy Yucatan and Tanok business.

Continued cooperation

It says that Lifecore also agreed that if it enters into a merger agreement or is acquired, it will require that its successor-in-interest agree to the obligations set forth in this letter agreement, including continued cooperation with the DOJ’s investigation.

Lifecore agreed that the financial benefit attributable to the bribery conduct (the costs Lifecore avoided paying that were associated with the on-site wastewater treatment as well as duties that otherwise would have been due to Mexican regulatory authorities) was a little over $1.2m.

Because Lifecore has already incurred $879,555 in expenses by constructing a wastewater treatment plant and paying Mexican regulators the duties it owed, Lifecore agreed to disgorge the remaining amount of costs avoided, or $406,505.

GRIP comment

In September 2022, Deputy Attorney General Lisa Monaco announced that all DOJ units prosecuting corporate crime would publish or revise written policies on voluntary self-disclosure to meet certain minimum standards including that, “absent the presence of aggravating factors, the Department will not seek a guilty plea where a corporation has voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated the criminal conduct”.

DOJ’s Criminal Division was the first component to announce its own Corporate Enforcement and Voluntary Self-Disclosure Policy in January 2023 in response to the directive. The new Criminal Division policy significantly enhances the benefits available to companies that meet its expectations and continued that department’s trend of offering companies significantly more than the baseline benefits provided by the Monaco Memo.

Specific actions

Under the policy, the disclosure must be truly voluntary (not subject to some pre-existing obligation to disclose) and the company must disclose all “relevant, non-privileged facts.” The policy sets out specific actions that a company is required to take to qualify for full cooperation credit (the significant reduction in the presumptive penalty under the US Sentencing Guidelines) for the timely and appropriate remediation of its compliance program as it pertains to the violation at in issue in the case.

(More companies are choosing to voluntarily report instances of potential criminal misconduct after the DOJ upped the rewards for doing so, by the way.)

And under the Criminal Division’s policy, a company that meets all three prongs – the voluntary self-disclosure, cooperation, and remediation requirements together – and has no aggravating circumstances, will presumptively receive a declination with disgorgement.

The Division uses declinations to incentivize voluntary self-disclosure, knowing that offering up a prompt “look what we did here” is not easy, comes with financial and reputational costs, and constitutes a risk to the business that could possibly otherwise escape any scrutiny from a law enforcement agency.

And the policy showcases its broad commitment to avoiding guilty pleas where companies voluntarily self-disclose, fully cooperate, and timely and appropriately remediate – because it offers this, even in the presence of aggravating circumstances warranting criminal resolutions. (The only caveat is that this avoidance of a guilty plea relies on an absence of “particularly egregious or multiple aggravating circumstances” being present in the case.)

Compliance considerations

In light of the declination in this case and the Criminal Division’s cooperation credit regime, companies would be wise to equip their legal and compliance departments with the personnel, technology, and well-crafted procedures needed to enable the earliest possible detection of misconduct.

This will enable a business to reap the benefits and consequences of voluntary self-disclosure – or at least seriously consider such timely disclosure as an option.

Another compliance consideration is, of course, the issue of successor liability under the FCPA, which has been a truly challenging one for businesses undergoing a merger or acquisition (M&A). If a company discovers FCPA misconduct, the acquiring company can be held liable for the target company’s corruption issues, either from before the deal closed or for matters not addressed post deal. Both pre- and post-deal acts of foreign bribery was alleged in the Lifecore case.

The aforementioned corporate enforcement policy outlining the DOJ’s cooperation policies applies in the context of mergers and acquisitions, and the DOJ specifically added those type of cases it back in 2019 and them provided greater clarity in an M&A Safe Harbor Policy outlined in a speech by Monaco on October 4 this year.

Incentivize transparency

The Department has consistently said it is sometimes simply not possible to gain access to the information needed to uncover corruption beforehand in an M&A transaction. When companies find violations after a deal closes, “we want to reward them accordingly for stepping up, being transparent, and reporting and remediating the problems they inherited,” Deputy Assistant Attorney General Matthew Miner said in a 2018 speech.

Here, some FCPA violative conduct occurred still after the deal closed, but the DOJ still offered a declination, largely because of promptness. Bribes were paid after the December 2018 acquisition date, but they came to light “during post-acquisition integration,” sparking an internal investigation, which led to the voluntary self-disclosure, DOJ said.

Specifically, it reported its discovery to the FCPA Unit – part of the Criminal Division’s Fraud Section – within three months of first discovering the possibility of misconduct and only hours after an internal investigation confirmed that misconduct had occurred, the DOJ said.

If companies seek greater clarity on what prompt reporting of misconduct looks like in the Criminal Division-M&A declination arena, three months after discovering the possibility and hours after confirming it might be a tough act to follow, but there it is.