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Bribes Brought ‘Obscene Profits,’ Mexico Says

SHERMAN, Texas (CN) - Medical device-maker Orthofix made $4.9 million in "obscene profits" after bribing Mexican government officials for hospital contracts, Mexico's social security agency claims in court.

The Instituto Mexicano del Seguro Social (IMSS) sued Lewisville-based Orthofix International on Oct. 3 in Federal Court.

IMSS says in the lawsuit that Orthofix agreed to pay $5.2 million in 2012 to settle SEC charges that its Mexican subsidiary, Promeca, bribed hospital and IMSS officials for contracts. Promeca paid more than $317,000 in bribes from 2003 to March 2010, the SEC said.

"Promeca personnel colloquially referred to the illicit payments as 'chocolates,' a term commonly understood within Orthofix to describe a supplier's improper payments to purchasers of medical supplies and devices in exchange for an agreement to buy the supplier's goods; in other words, bribes," according to the IMSS complaint.

"In addition, between 2003 and 2010, Promeca expended approximately $80,050 on gifts and travel packages, some of which were intended to corruptly influence IMSS employees in order to retain their business. The various gifts included vacation packages, televisions, laptops, appliances, and in one case, the lease of a Volkswagen Jetta."

Orthofix made $8.7 million in gross revenue from the contracts, IMSS claims.

"Of this amount, a whopping $4.9 million was Orthofix's 129 percent profit," the complaint states

The IMSS claims that under the original bribery scheme, Promeca won contracts to sell products at two of its hospitals. It allegedly paid officials a percentage of collected sales revenue at the hospitals.

"From around 2003 until around 2007, Promeca delivered to a Mexican hospital official at Lomas Verdes cash payments equal to as much as 5 percent of Promeca's collected sales to that hospital," the complaint states. "Beginning in or around July 2007, Promeca stopped making cash payments to the official and instead leased a vehicle for the official to drive. The official drove that leased car until around September 2010."

Hospital officials at Magdalena de las Salinas received cash payments of as much as 10 percent of Promeca's sales from 2003 to 2006, the IMSS claims. From 2006 to 2007, another official at the same hospital allegedly received payments of up to 6 percent of sales.

Promeca established "a new bribery system" in 2008 when IMSS introduced a new national tender system, according to the complaint. A special IMSS committee, rather than individual hospitals, began selecting winning bidders to supply the system nationwide.

"To achieve this, Promeca made payments to three front companies, which were controlled by certain IMSS officials," the complaint states. "These payments were bribes. Promeca won the national tenders for 2008 and 2009 as a result of the bribes. As promised to the corrupt officials, Promeca paid the front companies 5 percent and 3 percent, respectively, of the collected sales from these tenders."

The IMSS claims that parent company Orthofix was involved, in that it "ultimately formally accepted its responsibility" in the SEC action by entering into the deferred prosecution agreement.

Orthofix "expressly admits, accepts, and acknowledges that it is responsible for the acts of its officers, directors, employees, agents, and those of Orthofix's subsidiaries as charged" in the criminal information, the complaint states.

Orthofix officials did not respond to a request for comment Saturday.

At the time of the settlement with the SEC, the agency said Orthofix self-reported the matter and implemented "significant remedial measures," including firing the Promeca executives who orchestrated the scheme.

The IMSS seeks damages for racketeering, fraud, conspiracy to commit fraud, breach of contract and violations of the Mexican Civil Code.

It is represented by Mark Maney with Maney & Gonzalez-Felix in Houston.

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