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VOL. 124 | NO. 249 | Monday, December 21, 2009

Joint Venture

How a strip club and a lawsuit laid bare the alleged violations of a Smith & Nephew president

By TREVOR AARONSON | Special to The Memphis News

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“I can't count with the fingers on my hands the number of times that, even while we were in the deferred prosecution agreement, I had upper management continue to pay for the dinners of physicians' wives or pick up basketball tickets. It was a continual thing that was done despite the deferred prosecution agreement. It happened to the point that you knew it shouldn't be going on but it went on anyway.”

– Charles Redden
Former Smith & Nephew sales associate

Charles Redden remembers getting the call in April.

A sales associate for Smith & Nephew, Redden worked hospitals and clinics in Dallas – among the most lucrative regions for the British medical device maker whose U.S. headquarters is in Memphis. On the other end of the phone line was Redden’s boss, Jon Hebel, a former minor league baseball player and an area sales manager for Smith & Nephew.

The pair had reason to be concerned. Andrew Holman, the U.S. president of orthopedics at Smith & Nephew, was flying in from Memphis. He would be having dinner with some of the company’s physicians and local clients, and after that, Holman would be able to spend time with Redden and other sales associates.

“Don’t put anything in e-mail about what goes on after dinner,” Hebel warned, according to Redden.

That evening in April, anticipating having some time to mingle with Smith & Nephew brass, Redden arrived at Dallas’ W Hotel with two colleagues, Brad Kessler and Christopher Brooks. The trio of independent sales agents worked under one corporate entity, Redden & Associates, and together they had won sales awards from Smith & Nephew. At the hotel, Holman was at the bar with another Smith & Nephew executive, and they were having drinks with a Dallas physician.

No one involved in that evening's events will identify the doctor, hinting only that as a practical policy, Holman made time for Smith & Nephew’s biggest clients.

The scene of Holman having drinks with an area physician immediately troubled Redden. Although a sales executive buying drinks – and much more – for a client is common in U.S. business, the orthopedic implant industry in which Smith & Nephew operates isn’t like any other.

Bearing witness

In September 2007, following the exposure of industrywide consulting contracts with doctors that the U.S. Department of Justice viewed as kickbacks, Smith & Nephew and its four primary competitors – Zimmer, Depuy Orthopaedics, Biomet and Stryker Orthopedics – entered into deferred prosecution agreements that ended the consulting contracts, golf outings and ski trips that had become common in the lucrative marketplace of selling hip and knee implants.

The agreements required Smith & Nephew and the other companies to work with federally appointed monitors, retain internal compliance officers, and adhere to a code of ethics established by AdvaMed, an industry trade group.

The agreements created strict but awkward guidelines for relationships with doctors. While industry sales executives could take physicians to dinner, for example, they could not pay for the dinner of a spouse or take a doctor out for drinks. Under the guidelines, anything that could be construed as entertainment was an inducement in violation of the deferred prosecution agreement and justification for termination – something Redden said Smith & Nephew made clear to all employees and independent sales associates.

Yet here Redden was in April, at the W Hotel in Dallas, watching as a top Smith & Nephew executive bought drinks for an area doctor – a clear violation of the new guidelines.

While the scene troubled Redden, it didn’t shock him. Holman, Redden said, had a reputation in the company as a partier – someone willing to entertain doctors in ways that could be viewed as violations of the deferred prosecution agreement.

As everyone finished the drinks, Redden remembered Holman speaking up.

“Hey, let’s go to The Lodge,” he recalled the Smith & Nephew president saying. That wasn’t an unusual idea for Holman – Redden has alleged in court filings that Holman would visit strip clubs when away from Memphis on business – and The Lodge was among the best-known clubs in Dallas. But Holman’s proposal had a disconcerting catch: The doctor would be coming along.

Cohen a Vocal Critic of Deferred Prosecution

Since the U.S. Department of Justice announced deferred prosecution agreements with the orthopedic implant industry in September 2007, politics has played a controversial role.
At the center has been Christopher J. Christie, who as U.S. Attorney of New Jersey subpoenaed the initial records from Smith & Nephew, Zimmer, Depuy Orthopaedics, Biomet and Stryker Orthopedics.
Following the deferred prosecution agreements, Christie, now the Republican governor-elect of New Jersey, doled out lucrative compliance-monitoring contracts, including one to his ex-boss, former U.S. Attorney General John Ashcroft, whose contract was worth up to $52 million.
Among those most critical of Christie’s apparent cronyism and use of deferred prosecution was Democratic U.S. Rep. Steve Cohen of Memphis. As a member of the House Committee on the Judiciary and chairman of the Subcommittee on Commercial and Administrative Law, Cohen called hearings to question the deferred prosecution agreements.
But Cohen was in a precarious position to criticize. During a June 25 hearing, Cohen’s close relationship with Smith & Nephew gave his congressional colleagues reason to question publicly his motives.
Smith & Nephew’s political action committee contributed $2,500, the legal limit, to Cohen’s 2008 re-election campaign, and another $1,000 to his campaign in his initial run in 2006.
Since then, Cohen has been equally generous, sponsoring in September 2008 an $800,000 earmark for Smith & Nephew’s partnership with the University of Memphis and the Campbell Clinic.
That earmark became fodder for Republican Rep. Steve King of Iowa during the congressional hearing.
“Is there anyone on the panel that’s aware of any earmarks that have been provided to these companies that are the subject of our testimony today? None at all?” King asked the committee. “Well, then into the record, I’d suggest that I’m reading what we understand to be a press release that lays out a case that there’s an $800,000 earmark for Smith & Nephew for developing a new trauma hemostat surgical tool.”
Later, the earmark sparked a testy exchange between Republican Rep. J. Randy Forbes of Virginia and Cohen.
“Mr. Chairman, I request unanimous consent to have entered in the record a press release from your office dated Oct. 17, 2008, indicating that you obtained an earmark in the amount of $800,000 for one of the five companies involved in these deferred prosecution matters,” Forbes said during the hearing.
“There won’t be unanimous consent because Mr. (Committee of the Judiciary) Chairman (John) Conyers thought that the committee members should be more civil to each other and –”
“Then Mr. Chairman –” Forbes interrupted.
“And didn’t want to set a precedent,” Cohen continued over his colleague. “I don’t feel comfortable ruling on it because Mr. Conyers took a different position than me. I’m proud of the earmark, but Mr. Conyers thought for the committee’s sake that it shouldn’t be entered. Therefore, there will not be unanimous consent.”
Forbes continued to badger the Memphis congressman: “Mr. Chairman, then, I move to have entered into the record a press release from the chairman of the subcommittee holding this hearing today indicating that he obtained an $800,000 earmark for one of the firms involved in the deferred prosecution –”
“You’re out of order,” Cohen responded, adding a few minutes later: “You know, I’m going to – I’m the chairman of this subcommittee. I’m proud of my earmark. I hope you’ll enter all of the earmarks I get for my district.
"This is so extraneous and illogical that it makes no difference, and I’m happy to have it entered into the record, and I hope you’ll enter all the other earmarks that I’ve received for my district. Thank you, sir.”
– Trevor Aaronson

Throughout Smith & Nephew and on Cafepharma, an online forum frequented by pharmaceutical and medical device sales professionals, rumors have circulated about what happened that night at The Lodge: bottles of Dom Pérignon, lap dances, a $3,000 bill.

In truth, said Redden, for a group of businessmen at a strip club, the evening was tame – a 45-minute visit that ended in a $187 bar tab for which Holman plunked down a credit card.

But a couple of months later, Smith & Nephew would end Holman's employment and that of the three sales agents after investigating those 45 minutes inside The Lodge. As a result, Redden and his two colleagues, Kessler and Brooks, have filed a lawsuit in Texas against Smith & Nephew that alleges, among other things, breach of contract and defamation.

“In my opinion, while they should limit payments for these consulting arrangements, they shouldn't consider everything an inducement. Buying the dinner of a doctor's wife? I know of no doctor who could be induced by a simple dinner.”

– Dick Tarr
Executive director, InMotion Orthopaedic Research Center

The lawsuit describes, for the first time, the circumstances surrounding the quiet departure of one of Smith & Nephew’s top executives and raises questions about how faithfully the medical device maker has complied with the deferred prosecution agreement and the industry guidelines.

“I can’t count with the fingers on my hands the number of times that, even while we were in the deferred prosecution agreement, I had upper management continue to pay for the dinners of physicians’ wives or pick up basketball tickets,” Redden said. “It was a continual thing that was done despite the deferred prosecution agreement. It happened to the point that you knew it shouldn’t be going on, but it went on anyway.”

Smith & Nephew declined to comment about Redden, Holman or any employees or independent contractors mentioned in the Texas lawsuit.

“We don’t comment on pending litigation or any matters related to specific employees,” said Andrew Burns, a spokesman for Smith & Nephew.

The company also declined an invitation to provide information that might raise doubts about Redden’s version of the events or the version of the events put forward in the lawsuit.

The only comments Burns could offer were general in nature.

“A compliance officer and senior executives manage our compliance programs,” he said. “In keeping with that, we have terminated employees and sales agents for violating the code of ethics and conduct in business principles. The treatment is equitable between independent sales agents and employees. The code of ethics is applied the same no matter what position the person holds in the company.”

Rules of the road

Founded by Englishman Thomas James Smith in 1856, Smith & Nephew takes its name from the original partnership between Smith and his nephew, Horatio Nelson Smith, when the business was first known as T.J. Smith and Nephew.

From meager beginnings in Yorkshire, England, more than 150 years ago, Smith & Nephew has grown into a global enterprise with operations in 32 countries and a world leader in medical device design and manufacturing. The company has 9,850 employees worldwide, with more than 1,800 in Memphis.

Its revenue has grown from $2.78 billion in 2006 to $3.8 billion in 2008. What’s more, the company’s profit margins outshine even its lustrous revenue growth.

In 2008, the company turned a gross profit of $2.72 billion – a margin of more than 70 percent.

The company is divided into three units: orthopedics, endoscopy and wound management. The orthopedics division, which is based in Smith & Nephew’s U.S. headquarters on Brooks Road in Memphis, is the company’s fastest growing and most profitable.

The global orthopedic reconstruction industry is a $10 billion market today – 68 percent of which comes from the United States – and that market is expected only to grow as Baby Boomers age and demand for hip and knee implants increases.

While orthopedics may be the fastest-growing division for Smith & Nephew, it is also the most controversial and tightly regulated. That’s largely because of the unique relationship doctors have with companies in the orthopedics industry.

In the pharmaceutical industry, for example, companies develop drugs in private laboratories with doctors and scientists on payroll and then bring in independent doctors at the end for clinical trials.

In orthopedic reconstruction, independent doctors are closely involved in the design, development and refinement of implants that are used to repair, among other things, hips and knees. For that reason, consulting contracts with these independent doctors are an industry standard.

“Companies get a lot of information from doctors that goes into the development of products,” said Dick Tarr, executive director of InMotion Orthopaedic Research Center in Memphis. “You have to have a doctor somewhere on your team to design a device for a patient.”

“There's a saying that if you're going to go after the king, you better be able to kill the king. They are truly contronted with a Gordian knot. ... ‘Do I tell the truth? If I tell the truth, Holman is going to fire me.’ ... They were stuck. There is no right answer.”

– Steven Shaver
Texas lawyer representing Redden and his two colleagues

But the consulting contracts that secured input from doctors also led to conflicts of interest throughout the industry. In March 2005, as part of an investigation into whether these contracts with doctors were kickbacks for the physicians purchasing a particular company’s products, then-U.S. Attorney of New Jersey Christopher J. Christie subpoenaed records from Smith & Nephew, Zimmer, Depuy Orthopaedics, Biomet and Stryker Orthopedics – the five companies that together represented 95 percent of the hip and knee implant market in the United States.

Two and a half years after the initial subpoenas, in September 2007, all five companies settled with the Department of Justice, agreeing to pay $310 million in total penalties and work with federal monitors during a probationary period.

Following the settlements, doctors’ names were not revealed, and to this day, any physicians who received kickbacks through sham consulting agreements are unknown to the public.

Of the $310 million penalty for the five companies, Smith & Nephew paid $28.9 million. Zimmer, the market leader, paid the most at $169.5 million.

“We are satisfied that the industrywide compliance program made uniform by this settlement will ensure continued, appropriate use of consultants,” David Illingworth, Smith & Nephew’s chief executive, said in a statement at the time.

While the end of the consulting contracts made headlines, those were not the only changes required as part of the deferred prosecution agreements.

For medical device makers, the entire relationship with doctors changed fundamentally. The federal government required the companies to follow the lead of AdvaMed, the trade group whose ethical code considers anything more than a simple dinner a potential inducement to buy products.

“They’ve put in place these rules and regulations that are little too far-fetched, like the rules for the NCAA,” Tarr said. “I think they need some commonsense rules.

“In my opinion,” he continued, “while they should limit payments for these consulting arrangements, they shouldn’t consider everything an inducement. Buying the dinner of a doctor’s wife? I know of no doctor who could be induced by a simple dinner.”

Nevertheless, Smith & Nephew and its competitors were forced to implement and enforce these strict guidelines.

Redden, the Smith & Nephew sales associate in Dallas, remembers receiving the first e-mails from the Memphis office following the deferred prosecution agreement. Smith & Nephew provided links to a Web site laying out what employees and sales associates could and could not do.

“Basically, they tried to instill certain guidelines for us to follow,” Redden said.

All Smith & Nephew sales associates are independent contractors. Sales managers, who are Smith & Nephew employees, supervise these contractors. Whether the person is a contractor or employee, he or she is required to follow the AdvaMed guidelines as well as a similar code of conduct Smith & Nephew created.

“We follow our code of conduct in business principles and the AdvaMed code of ethics,” said Andrew Burns, the Smith & Nephew spokesman. “Termination is a potential outcome for any employee or independent sales agent who violates that. As far as awareness of AdvaMed's code of ethics is concerned, we train our independent sales agents and company employees extensively.

“Everybody, regardless of their role, has to take the basic courses and pass the same tests. Each person is then individually accountable for their behavior.”

Following the deferred prosecution agreement, the companies involved and the Department of Justice established anonymous tip lines where anyone could report violations of the company-doctor relationship guidelines. Each company’s compliance office was then tasked with investigating tips and taking action against suspected offenders.

The Texas lawsuit against Smith & Nephew is revealing because it opens to the public what has been a closed process inside the competitive orthopedic implant industry. Files of compliance investigations from the five orthopedics companies and their federally appointed monitors are not available for public review.

For that reason, it’s impossible to determine how Smith & Nephew’s compliance with the deferred prosecution agreement compared to its competitors. The discovery phase in the Texas lawsuit could force open those files.

Gotcha game

At some point, someone called Smith & Nephew’s anonymous tip line about Andrew Holman’s April visit to a Dallas strip club with a doctor. More than six weeks after that evening with Holman, Redden received a call from a compliance officer in Memphis.

The officer asked him if he knew anything about Holman’s escorting a doctor to a strip club. Panicked, Redden responded: “No.” The compliance officer then received the same answer from Brad Kessler and Christopher Brooks, the two other Smith & Nephew sales associates who worked with Redden and went to The Lodge with Holman.

After holding senior executive positions at Boston Scientific and Johnson & Johnson, Holman joined Smith & Nephew as a vice president in October 2005. He was appointed president of the company’s Americas division in April 2008.

Like many ladder-climbing executives, Redden said, Holman had a with-me-or-against-me attitude – someone more than willing to let the axe fall on those who stepped out of line.

“There’s a saying that if you’re going to go after the king, you better be able to kill the king,” said Steven Shaver, a Texas lawyer representing Redden and his two colleagues. “Early on, these guys don’t know what to do. They are truly confronted with a Gordian knot. They don’t know how to untie it. ‘Do I tell the truth? If I tell the truth, Holman is going to fire me.’

“The question is, whom do you pick? Do you take on the compliance people or Andrew Holman? They were stuck. There is no right answer.”

As Smith & Nephew’s compliance office was investigating the anonymous tip, Brooks ran into Holman at a sales meeting in Cabo San Lucas, Mexico. Holman instructed Brooks to “deny anything happened that night,” according to the Texas lawsuit.

Soon, Redden recalled, the rumors started – champagne, strippers, thousands of dollars expensed to the company. Messages popped up on Cafepharma. “There was some information on those boards that was only known by people inside Smith & Nephew’s compliance department at one point,” Redden said.

Redden, nervous about the compliance investigation and the security of his job, hired Shaver to represent him and his two colleagues. Shaver recommended they cooperate with the investigators. “We went back to the compliance department and said, ‘Hey, we’re willing to work with you,’” Shaver said.

But by then, it was too late. Within a few days, Holman no longer worked for Smith & Nephew. Since Smith & Nephew will not discuss personnel matters, it’s unclear whether Holman was fired or resigned during the compliance investigation.

After parting ways with Smith & Nephew, Holman became executive vice president of sales and marketing for DJO, a competing medical device maker based in California. Holman did not respond to an interview request or a list of questions e-mailed to his secretary.

On Cafepharma, he’s continued to be dogged by rumors about that night in Dallas. In one thread about his new position at DJO, one of the forum’s many anonymous users wrote sarcastically: “I heard he interviewed at a strip club for this position.”

Redden, Kessler and Brooks were equally stung in the compliance investigation. They were called into Hebel’s office in Dallas, where they met a human resources representative and were fired on the spot.

Hebel, the one who allegedly warned Redden not to put anything in an e-mail about the night with Holman, was the only Smith & Nephew employee to keep his job despite knowing about the strip club. He declined an invitation to comment for this story.

Shaver speculated the only difference between Hebel and his clients was that Hebel was willing to provide compliance investigators with information about Holman. “Here’s a guy who, like Brad (Kessler), Charles (Redden) and Chris (Brooks), knew this was a no-win situation,” Shaver said. “Yet this guy survives it and they cut a deal.”

‘Collateral damage’

In Shaver’s opinion, the disparity of treatment between Hebel and the others begins to show how flawed the compliance system is as established by Smith & Nephew and the Department of Justice. The tip line allows people to make allegations anonymously, but the compliance process inside Smith & Nephew punishes employees and contractors for not providing information.

“It violates basic principles of American due process,” Shaver said. “American due process has traditionally allowed the accused to be confronted by their accusers, and it allows the accused not to talk. This system allows you to be accused anonymously, and then you’re required to tell everything without knowing who accused or, often, what you have been accused of.”

As part of their lawsuit, Redden, Kessler and Brooks are seeking commissions they allege Smith & Nephew hasn’t paid, lost income, damages for slander, punitive damages and attorneys’ fees. A trial is scheduled for April in U.S. District Court in Dallas, though Smith & Nephew lawyers are trying to move the case to the federal court in Memphis.

To this day, Redden said he doesn’t know exactly why he was terminated. Since he and his two colleagues never paid for the doctor’s entertainment that night, they never violated AdvaMed or Smith & Nephew guidelines, he insisted.

They were guilty only, he said, of not snitching on a company president who easily could have fired them in retaliation.

“Quite frankly,” Redden said, “I feel like we were collateral damage.”

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