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February 23, 2008

Stephanie Salter: What’s John Ashcroft doing in Indiana? Making millions

By Stephanie Salter

TERRE HAUTE — Until the past year, an august northern Indiana company, Zimmer Holdings, was pretty much going about business as usual: manufacturing a broad array of medical devices, such as hip and knee replacement implants, expanding operations in the United States and 25 nations, and racking up annual sales of nearly $4 billion.

Then Zimmer, with headquarters in Warsaw, got into some hot water with the federal government.

After a two-year investigation of the orthopedic implant industry, a criminal complaint was filed in U.S. District Court in New Jersey, where Zimmer does business. The complaint charged Zimmer and four other companies (two more from Warsaw) with “conspiracy to commit violations of the federal anti-kickback statute.”

Specifically, the feds said the companies provided what a U.S. attorney called “exorbitant” fees to doctors and other health-care consultants to exclusively choose, use or endorse their products for their patients.

Believe it or not, such practices are illegal in corporate America. Illegal, but not uncommon.

Four of the five companies, including Zimmer, were smacked with fines totaling about $311 million. All five agreed to an increasingly popular method of avoiding trial-and-punishment in federal court. The legal remedy is known as “deferred prosecution” and relies on an outside, independent “monitor” who oversees the compliance portion of the corporation’s effort to straighten up its act.

If the company pays its fine and fulfills the Justice Department’s demands for a year and a half, the charges are dismissed and the company need never admit wrongdoing.

None of this information would have oozed out of the rarefied world of federal court law, stock analysis or annual shareholder reports were it not for a disclosure that Zimmer did not have to make — but did — on its filings with the Securities and Exchange Commission.

The name of the monitor assigned to supervise Zimmer’s corporate integrity agreement for 18 months caught many an eye: Former U.S. Attorney General John Ashcroft.

Yes, the fellow who served as the nation’s top lawyer during the Bush administration’s first term has done quite well for himself since resigning in February 2005. He now heads the Ashcroft Group, one of the most lucrative and popular Washington, D.C., consulting and lobbying firms in history.

Among his clients has been the Oracle Corp., which got a green light from the Justice Department for a huge acquisition only a few weeks after — what a coincidence — hiring Ashcroft in his very first year of business.

Depending on the workload, Ashcroft will charge Zimmer between $28 million and $52 million for monitoring services.

A spokesperson for Ashcroft’s firm told the New York Times that the monitorship involves some 30 people, has “taken a large personal commitment” from the former A.G., and already has required several trips to Indiana.

But even a potential $52-million haul for Ashcroft is not what brought deferred prosecutions to public — and Congressional — attention. Rather, it is the fact that Ashcroft got the no-bid, no-public-notice contract from someone who used to call him “boss.”

Christopher J. Christie has been a U.S. attorney in New Jersey since January 2002 when he left private practice and Republican fund raising for Ashcroft’s Justice Department. Two other monitors that Christie appointed for the other companies’ kick-back settlements were former Justice colleagues under Ashcroft who are now in private practice.

Since this information began to surface last autumn, all sorts of people have been educating themselves about deferred prosecution. What they have discovered is an increase in its use to save large corporations or individual executives from traditional trial and punishment, and a dearth of rules and regulations for awarding contracts to monitors.

A review of such settlements, conducted by lawyers in Texas, showed that the number of deferred or no-prosecution federal settlements has increased to 35 last year from five in 2003. Two-thirds of the cases involved corporate violations of either federal health-care laws or the Foreign Corruption Practices Act, the Texas study found.

Proponents of the Justice Department settlements argue that they are a way to punish and reform a company without killing it and costing thousands of employees their jobs.

“We will not use the power and authority of our office to destroy companies,” Christie told the Associated Press last September at a news conference announcing the settlements.

Looking at what Zimmer Holdings agreed to pay to avoid active prosecution provides an idea of just how much it would take to destroy a company of its size. Zimmer’s share of the four-company fine is $169.5 million. Ashcroft’s $28 million to $52 million is on top of that.

So far, the Zimmer case has resulted in several actions:

Pending legislation in New Jersey to set strict guidelines for deferred prosecution monitor appointments; an internal investigation by the Department of Justice; and Congressional investigations and hearings before the House and Senate Judiciary Committees.

The current U.S. Attorney General, Michael Mukasey, was among those asked about the subject during testimony before the Senate committee late last month. Although deferred prosecutions got lost in a media hub-bub over Mukasey’s comments about the legality of waterboarding, the Bush Administration’s third attorney general said of the practice and its monitor contracts:

“Yes, we are looking at the phenomenon. Yes, we are going to see if there should be standards.”

Perhaps when John Ashcroft is finished monitoring the scene up in Warsaw, he would be happy to help his former Justice colleagues hammer out some standards. For a fee.

Stephanie Salter can be reached at (812) 231-4229 or stephanie.salter@tribstar.com.

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