From the skyscrapers of Wall Street to the factories of northern Indiana, cheers rang out for one of the biggest mergers of the year. For $13.35 billion, Goldman Sachs and a group of giant private equity firms agreed in April to sell one Indiana medical device maker to another.
But possible acts of bribery abroad may have complicated that deal — and raised larger questions about the way prosecutors mete out justice for big corporations, according to confidential documents reviewed by The New York Times and interviews with lawyers briefed on the matter.
Biomet, the medical devices company being sold to its rival Zimmer Holdings, is suspected of helping to bribe government officials in Mexico and Brazil, according to the confidential documents, which have not been previously reported. An email from an anonymous whistle-blower laid bare the problems in Brazil, reporting that distributors Biomet had hired to sell its orthopedic devices were “paying kickbacks” to government doctors.
The fate of Biomet’s merger now hinges partly on the outcome of bribery investigations by the Justice Department and the Securities and Exchange Commission, painful reminders of a separate 2012 federal case that accused Biomet of foreign bribery. Although Biomet disclosed the thrust of its problems to Zimmer before striking the deal — and neither company has shown signs of abandoning it — an unexpectedly steep penalty for Biomet could alter the price of the deal.
Behind the scenes in Washington, Biomet’s lawyers have opened talks to settle the investigation, according to the lawyers briefed on the matter, who were not authorized to discuss the case. And to safeguard the deal, which is set to close in the first quarter of 2015, Biomet asked the government to resolve the investigation promptly.
The effort may not be in vain. Federal guidelines require prosecutors to weigh the collateral consequences of criminally charging a company, including “disproportionate harm” to innocent shareholders. In a guidebook about foreign bribery cases, the Justice Department and the S.E.C. also noted that in the context of mergers, the government often “declined to take action” against companies that cooperated fully.
For now, even as the Justice Department investigates Biomet employees, a steep fallout for the company seems unlikely. According to the lawyers briefed on the matter, the Justice Department has discussed the possibility of reaching a so-called deferred prosecution agreement with Biomet that would withhold criminal charges in exchange for certain concessions. Under that plan, prosecutors would impose criminal charges only on Biomet’s Brazilian and Mexican subsidiaries.
A settlement like that — one without charges for Biomet in the United States — could provide ammunition to critics who claim that the government enables a pattern of corporate recidivism. It was not even three years ago that Biomet reached a deferred prosecution agreement for similar acts of bribery.
“There are good reasons for prosecutors to give new owners a chance to clean up a company,” said Brandon L. Garrett, aUniversity of Virginia law school professor and author of the book “Too Big to Jail: How Prosecutors Compromise With Corporations.” “But if prosecutors want companies to take foreign bribery laws seriously, then they can’t keep letting companies violate the law over and over again.”
It is unclear how Biomet’s merger will factor into the government’s case, if at all. Biomet, Zimmer, the S.E.C. and the Justice Department declined to comment.
Typically, prosecutors proceed, and mergers survive. Yet some deals, when entangled in federal investigations, do come apart.
A decade ago, Lockheed Martin abandoned its $2.2 billion acquisition of Titan amid uncertainty about a federal bribery investigation into Titan, which ultimately pleaded guilty. And the drug wholesaler Cardinal Health trimmed $90 million from the price of a $1.1 billion takeover when its target, Syncor, settled a bribery investigation.
Foreign bribery investigations have bedeviled many a Fortune 500 company. On Monday, the Justice Department announced the largest ever foreign bribery case, extracting $772 million from the French power company Alstom.
Regardless of how the Biomet investigation concludes, Zimmer’s hands may be largely tied. Biomet disclosed the investigation to Zimmer upfront. Unless those representations were well off base, the deal will remain on track.
Still, the repeat nature of Biomet’s crime could expose it to stiffer-than-expected federal penalties, which may prompt Zimmer to seek a price cut. For example, if prosecutors suddenly demand that Biomet and its subsidiaries plead guilty to criminal charges, they might set off a temporary ban on Biomet’s participation in federal health care programs, a blow that could sour Zimmer on the deal.
With the Biomet deal unfinished, a sense of uncertainty has crept over the economy of Warsaw, Ind., known as the orthopedic capital of the world, where both Biomet and Zimmer have headquarters. In addition to the bribery investigation, the companies are addressing concerns from European antitrust regulators leery of combining two huge players.
Should the deal fall into trouble, Biomet would join other big companies taken private in the buyout boom of the mid-2000s that have yet to return to the public stock market. The private equity owners of Toys “R” Us and First Data, which were taken private between 2005 and 2007, have not sold those companies. The biggest buyout of all, the Texas utility now known as Energy Future Holdings, is mired in bankruptcy.
Biomet was taken private in 2007, when Goldman’s buyout arm, the Blackstone Group, Kohlberg Kravis Roberts and TPG Capital together paid $11.4 billion. The company has done relatively well under private ownership, though it did not turn a profit until its most recent fiscal year.
The proposed sale to Zimmer offers the company’s Wall Street owners a chance to cash out. Zimmer has agreed to pay $10.35 billion in cash and $3 billion in stock.
Weeks after the merger announcement, Biomet’s problems in Mexico and Brazil reached a turning point: The company received an S.E.C. subpoena. Biomet also publicly warned investors that the Justice Department could take its own action. Against that backdrop, Biomet in recent months sought to emphasize a willingness to cooperate with investigators.
It has fired employees viewed as culpable. It reported misconduct to the government. And in April, and then again in May, Biomet’s lawyers from Ropes & Gray delivered presentations to federal investigators, highlighting evidence in the case.
In July, Biomet outlined its approach at a meeting with lawyers representing the company’s employees, according to the lawyers briefed on the matter. During the more than two-hour meeting, one of Biomet’s lawyers explained that the company was fully cooperating with the government and that one of its “top priorities” was to do what it could to protect the deal.
There is some precedent for Biomet receiving leniency. When Biomet settled its first foreign bribery investigation in 2012, the Justice Department imposed a $17.28 million penalty, 20 percent below what federal guidelines established as a minimum punishment.
The Justice Department also declined to charge the company criminally, deciding instead on a deferred prosecution agreement. In the agreement, prosecutors attributed their leniency to concerns about Biomet’s business: “Biomet would potentially be subject to exclusion from participation in federal health care programs.”
The initial settlement focused on misconduct in countries where health care workers were government employees. In Brazil, prosecutors said at the time, Biomet authorized certain payments that were used to entice public health care workers to buy Biomet products. A company that distributed Biomet’s products orchestrated the payments, prosecutors said.
Biomet eventually tore up its contract with the distributor.
But in October 2013, the email from the anonymous whistle-blower landed in the inbox of Biomet executives, claiming that Biomet continued to hire three “offshoots” of the distributor. These offshoots, the email contended, “have been paying kickbacks since they took over,” an accusation that Ropes & Gray has not verified.
Senior lawyers at Biomet failed to halt the misconduct as it unfolded, the documents reviewed by The Times show. When internal auditors drafted a report in 2010 recommending that Biomet “ensure that the relationship” between the original and new distributors “is completely separated,” a senior Biomet lawyer “made significant edits to the entire report,” according to the documents, and deleted the recommendation altogether.
Within days of receiving the whistle-blower’s email, Biomet discovered unrelated bribery accusations in Mexico. The company’s customs broker disclosed that shipments to one of Biomet’s units in Mexico came about “in an irregular way,” a reference to paying bribes to Mexican customs officials.
An internal investigation traced the problem to early 2010, when a Biomet Mexican unit struggled to import products that lacked valid registrations, the documents show. To ship dental devices across the Mexican border, employees at one of Biomet’s Mexican units authorized more than $1 million in payments to a third-party broker, which then used some of the money to bribe customs officials.
Biomet also disclosed to prosecutors that it had improperly hired an unlicensed customs broker to import products from Texas into Mexico.
“At the Texas border, since it is a land border, it is less strict and they do not request all the documents,” an internal email said.