By Brad Brooks
SAO PAULO, August 21 (Reuters) - Healthcare giant Philips was warned of suspicious sales of its medical equipment to the Brazilian government, and failed to halt them, nearly a decade before an alleged bribery racket was exposed in the company's Brazil operations last year, Reuters has learnt.
Claims of malfeasance reached the highest levels of the Dutch conglomerate as early as 2010, according to court records filed by federal prosecutors, internal company documents and Reuters interviews with a former manager at a Philips subsidiary in Brazil who says he told superiors of the suspected scheme and was later sacked.
That ex-employee, Jose Israel Masiero Filho, a former supply-chain executive with Dixtal Biomedica Industria e Comercio Ltda., spoke extensively with Reuters in his first interview with foreign media. He said in January 2010 he spotted irregularities in three deals to sell Philips and Dixtal equipment to an obscure Brazilian middleman who had landed big contracts with Brazil's Ministry of Health. Masiero said he suspected payoffs had been used to secure that government business, allegations now at the heart of a burgeoning graft probe in Brazil, court records show.
Masiero emailed an internal Philips hotline immediately to report his suspicions, met soon after with the company's top compliance officer, and alerted at least three other senior executives during 2010. Among them was Steve Rusckowski, former chief executive of Philips Healthcare, the company's largest division. Masiero's warnings were detailed in emails, internal company memos and court records viewed by Reuters.
"Philips should consider that by approving and accepting these sales, it will be involved in illegal activities if discovered," Masiero wrote to Rusckowski in an email dated October 14, 2010.
Still, Koninklijke Philips, as the company is formally known, continued to sell to the Brazilian intermediary to fulfill the Health Ministry contracts, invoices show.
Rusckowski, who served as Philips Healthcare's chief executive until April 2012, did not respond to requests for comment. He is now CEO of New Jersey-based Quest Diagnostics.
In an emailed statement to Reuters, Philips said it is cooperating with Brazilian authorities investigating the nation's medical device industry. The company said it launched an internal investigation in 2010 in response to an "anonymous complaint" but "did not identify direct evidence of wrongdoing." The company said it did, however, tighten up its internal control processes in Brazil.
Philips would not discuss ex-employee Masiero or the circumstances surrounding his dismissal.
Brazil's Health Ministry did not respond to requests for comment.
HEALTHCARE IN THE CROSSHAIRS
Philips is now among the targets in a widening investigation into medical contracting graft in Brazil that authorities say is still in its early stages, and which has sparked additional probes by U.S. law enforcement.
Masiero is cooperating with Brazilian prosecutors. They allege Philips and other multinationals conspired with intermediaries to pay bribes for public contracts, charging Brazil's state healthcare system inflated prices to recoup the cost of the kickbacks. Twenty four people were charged last year in connection with the alleged scheme. All are currently on trial in Rio de Janeiro.
Germany's Siemens AG (DE:SIEGn) and the American firms Johnson & Johnson (NYSE:JNJ), General Electric (NYSE:GE) Co and Stryker Corp (NYSE:SYK), all major manufacturers of medical devices, have been swept up in the probe.
Johnson & Johnson, Siemens and GE declined to comment. They previously denied wrongdoing and said they were cooperating with the investigation. Stryker said it was committed to working in an ethical manner and that it was unable to comment further.
In the United States, the FBI, Department of Justice and the Securities and Exchange Commission have launched their own investigations into suspected corruption in sales of medical equipment in Brazil as well as China, according to people with knowledge of the matter.
The whistleblower Masiero said he is cooperating with all those agencies, an assertion confirmed in emails viewed by Reuters. The Justice Department, SEC and FBI all declined to comment.
Philips told Reuters it is "reviewing" inquiries from the Justice Department and SEC in connection with the Brazil probe.
MYSTERIOUS MIDDLEMAN
Now 52, Masiero was hired in 2006 to be Dixtal's exports manager, rising to become the top logistics and supply chain executive for the Sao Paulo-based medical device firm in early 2009. Philips purchased Dixtal in 2008.
In early 2010, Masiero noticed what he considered irregularities with three large contracts awarded by Brazil's Health Ministry. The deals, one for 750 Philips heart defibrillators, the others for a total of 3,972 Dixtal vital-signs monitors, were worth a combined 68.9 million reis (about $40 million at the time), government records show.
Masiero said he found it odd that Philips did not compete directly for such a major piece of business. Neither Philips or Dixtal submitted bids, according to government records of tender competitors viewed by Reuters.
Instead the contracts were won by Rizzi Comercio e Representacoes Ltda., a little-known Brazilian medical supply firm. Masiero, tasked with getting the equipment to Rizzi Comercio, was surprised to find its billing address was a tiny storefront with peeling purple paint in a dilapidated Sao Paulo neighbourhood.
"It was an immediate red flag for me," Masiero told Reuters.
In addition, the Health Ministry was paying well above market prices for the equipment, Masiero said, unusual for a large customer with buying clout. On February 12, 2010, for example, Masiero allegedly received an email from a Philips' sales executive, Frederik Knudsen, directing him to deliver the first shipment of 60 defibrillators to Rizzi Comercio, which marked up those devices an additional 67%, according to correspondence included in court records.
"The value that should be on the order is what was agreed to with the Health Ministry" – $16,700 (13,724.52 pounds) per unit – "and not what we sold them to Rizzi for ($9,991)," according to the email allegedly from Knudsen, which was seen by Reuters.
Prosecutors say Philips and Rizzi Comercio conspired to disguise and recoup the cost of bribes through inflated prices, fleecing Brazilian taxpayers in the process.
Knudsen, whom Philips confirmed still works for them, is now among those on trial in Rio. So is Daurio Speranzini, who led Philips Healthcare's operations in Latin America for seven years before joining GE in 2011. He left that firm last December. Both men were charged last August with racketeering and fraud.
Knudsen's lawyers did not respond to requests for comment. In a written defence filed with the court, they said Knudsen did not set Philips' prices and that he is innocent. In a separate court filing, they also questioned the veracity of the emails their client allegedly sent to Masiero.
Speranzini's lawyers referred questions to their written defence, which contends he had no knowledge of the alleged bribery scheme or of Masiero's warnings.
Also on trial for racketeering and fraud are two brothers who own Rizzi Comercio, Wlademir and Adalberto Rizzi.
Their lawyer, who did not respond to requests for comment, said in court filings that her clients engaged in no illegal activities.
SOUNDING THE ALARM
Uneasy about the deals with Rizzi Comercio, Masiero on January 20, 2010, notified Philips' global compliance team in Amsterdam through an email hotline.
Philips sent Caroline Visser, then-chief of Philips' global compliance, to Brazil to meet with Masiero in March 2010. She promised a swift investigation, according to emails the pair exchanged.
Two months later, Masiero was transferred from Dixtal to a logistics post within Philips in Sao Paulo, a move he considered a demotion and an effort to silence him. The shipments continued, invoices show.
Frustrated, Masiero on October 14, 2010, sent an email to Rusckowski, the head of Philips' healthcare division.
Masiero expressed concern about Rizzi Comercio and its use of an unfamiliar intermediary, Moses Trading American, to purchase the U.S.-made Philips heart defibrillators on its behalf for export to Brazil. Far more typical, Masiero told Reuters, would be for Philips to sell directly to Rizzi.
Masiero's uneasiness only increased when he traced Moses Trading American's address on Philips' invoices to a private home on a golf course in suburban Phoenix.
"Moses Trading selling operation is clearly suspicious," Masiero wrote to Rusckowski.
According to emails reviewed by Reuters, Rusckowski forwarded Masiero's message to Clement Revetti, Jr., the chief legal officer for Philips Healthcare. Revetti thanked Masiero and asked him not to contact the CEO again.
Masiero defied that order. On November 9, 2010, he again emailed Rusckowski and Revetti of his concerns.
On March 4, 2011, Masiero says he discussed his suspicions once more in person in Sao Paulo with Visser, the compliance head. He was fired later that day. Masiero said he was given no reason for his dismissal. Paperwork required under Brazilian labour laws shows Philips sacked Masiero "without cause," meaning the company made no claims that it was performance-related.
Visser and Revetti did not respond to requests for comment.
As for Moses Trading American, Brazilian prosecutors say that operation is run by a Peruvian named Oscar Moses whom they are investigating in connection with a string of allegedly fraudulent medical equipment deals in Brazil. He has not been charged with a crime.
Moses did not respond to requests to comment sent to his Linkedin and Facebook (NASDAQ:FB) profiles.
TALKING TO PROSECUTORS
Discouraged after his firing, Masiero dropped the matter.
Then in 2014, Brazil was engulfed by a corruption scandal centred on contracting graft at state oil company Petrobras. That blockbuster probe, known as Car Wash, ultimately toppled leaders at the highest levels of Brazilian business and politics.
Masiero got in touch with federal prosecutors.
"His information was key to helping us break up this scheme," said Marisa Ferrari (NYSE:RACE), a lead prosecutor on the case.
Masiero, meanwhile, is unemployed. He said he has been blacklisted in Brazil.
He and his family recently left Brazil for a country Masiero does not want to name.
