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Frederick Lacey remembers the day well: July 26, 2006. Lacey, a retired federal district court judge, was serving as a corporate monitor for Bristol-Myers Squibb Co. He had spent the last 37 months helping the drug giant reform its compliance practices after it violated securities laws. As a favor to some of Bristol-Myers' senior executives, he joined them on a trip to Boston to meet with U.S. Attorney Michael Sullivan. The company was trying to settle a probe by Sullivan's office on another disturbing matter: whether it had inflated drug prices on bills to insurers and government agencies. At the July meeting, Lacey recalls, he praised Bristol-Myers and assured Sullivan that the company had cleaned up its act. Under Lacey's watch, it had changed its top financial executives, added a new compliance officer, and adopted a healthy new attitude toward being a good corporate citizen.

Even as he was speaking those words, Lacey would learn later, Bristol-Myers was in legal trouble in yet another area. While Lacey sat in Boston, Federal Bureau of Investigation agents raided Bristol-Myers' corporate headquarters in New York. The FBI, sent by the U.S. Department of Justice's antitrust division, was searching for evidence that executives at the pharmaceutical company had -- just a few months earlier -- cut a clandestine noncompete deal with a generic drug rival. The company, which declined to comment for this story, would later admit making false statements to federal regulators about the secret contract.

Clearly, July 26 was a black day for Bristol-Myers. And it wasn't exactly a shining moment for the Justice Department's corporate monitor program, either. Blindsided by the secret deal, Lacey, 87, became Justice's first monitor to have a company get caught committing a crime under his watch.

For his part, Lacey discusses the antitrust raid, and the guilty plea that followed, in a tone more hurt than angry. He says simply that he felt "deeply disappointed at the turn of events that was in such contrast to what I had found in four years with this company."

But the truth is that for more than a decade, before Lacey became its overseer, Bristol-Myers had been skating on the edge of one legal disaster after another. Allegations of securities fraud, anti-competitive acts, and unethical practices plagued the drug giant. Its corporate culture reeked of bad men doing bad things. As monitor, Lacey helped reform the company and guide it to safer ground -- in May, Bristol-Myers settled the antitrust charges; in June it fulfilled a deferred prosecution agreement with the Justice Department over accounting charges. The company has also reached a tentative settlement with Sullivan's office. But Bristol-Myers certainly hit some nasty bumps along the way. So how did it and its monitor get into this mess?

The company's problems began in the early 1990s, when it began a "decade-long pattern" of stifling generic drug competition to protect its multibillion-dollar annual revenue stream, according to the Federal Trade Commission and Justice's antitrust division. An FTC complaint alleged that Bristol-Myers delayed and blocked generic drugs from entering the market by, among other things, misleading the Food and Drug Administration, filing "objectively baseless" lawsuits, and "wrongfully submitting unenforceable patents."

Worse, in 1994 Bristol-Myers cut an apparently illegal noncompete deal with a competitor, Schein Pharmaceutical Inc., based in Florham Park, N.J. Justice exposed the deal in 2003 and accused Bristol-Myers of paying $72.5 million to settle a lawsuit challenging its patent for the popular anxiety drug BuSpar. As part of the deal, Schein agreed to keep its generic version off the market until BuSpar's patent expired six years later. (Schein has since been acquired by Corona, Calif.-based Watson Pharmaceuticals Inc.) Bristol-Myers knew that delaying the generic "would be highly profitable for [it], but very costly for consumers," Justice's complaint said.

Around the same time, Bristol-Myers faced another, unrelated legal issue with the Securities and Exchange Commission. In the late 1990s, according to the SEC, company executives promised investors that they would double profits within five years. But drug sales didn't meet those expectations.

So in 2000 and 2001 Bristol-Myers tried to inflate its sales figures by shipping more drugs to distributors and paying them to "store" the extra pharmaceuticals, the SEC says. The scheme is called "channel stuffing," a type of securities fraud.

Awash in scandal, with both the FTC and SEC investigating it, Bristol-Myers promoted Peter Dolan to CEO in mid-2001. Dolan, a 13-year company veteran, was previously its president, so he knew the problems he was inheriting. With one hand Dolan was dealing with the SEC over the channel stuffing. With the other, he was trying in vain to fend off the FTC.

In March 2003 Bristol-Myers agreed to the filing of a 10-year FTC consent order against it. The civil order barred the pharmaceutical leader from using its previous tactics to block generic drugs. The company didn't admit or deny the FTC's charges. But the consent order included a provision that Bristol-Myers would allow the FTC to review and approve any future deals with generic competitors. Three years later, that provision would haunt Bristol-Myers and its corporate monitor, and lead to the FBI's raid on the company's headquarters.

In June 2003 Bristol-Myers first retained Lacey to advise the company in its dealings with regulators and to help shore up its tarnished image. Lacey, a special counsel with the Newark office of LeBoeuf, Lamb, Greene & MacRae, has a national reputation for integrity and toughness.

As a former U.S. Attorney in New Jersey, Lacey had convicted corrupt politicians and battled organized crime. He was also an experienced monitor. As the court-appointed independent administrator for the International Brotherhood of Teamsters from 1989 to 1991, he helped clean up the union by ousting some 200 powerful leaders with mob connections. He says he had to drag the Teamsters into court constantly to enforce his orders.

Lacey says he was prepared to be just as tough with Bristol-Myers. "I said I was not going to be window dressing. I have a sterling reputation, and if I find something wrong, the rock gets turned over," Lacey says he told Dolan and others. (Dolan and former Bristol-Myers general counsel Richard Willard declined to comment for this story.)

Lacey saw nothing "onerous" at Bristol-Myers, as he had with the Teamsters, so he settled on an approach he calls "benign aggressiveness." Dolan, Lacey adds, gave him complete access to anyone, any meeting, any document: "Dolan supported me 100 percent. He set the tone at the top for a complete dedication to compliance and integrity."

By August 2004, Lacey and his team had studied Bristol-Myers' approach to securities laws and shored up its compliance program. The company ousted the chief financial officer and controller, while adding a chief compliance officer, an assistant controller for financial compliance, and an experienced securities and disclosure lawyer. It also formed a senior management group to assess business risk and disclosure; the group included Lacey and his counsel. (The company had also hired Gary Apfel, head of the corporate governance practice at LeBoeuf and managing partner of its Los Angeles office, as counsel to the monitor.)

The SEC accepted Lacey's work and ended its probe of the channel stuffing with a settlement in mid-2004. Under its terms, Bristol-Myers paid $150 million. Again, the company didn't admit or deny the charges.

But the deal called for the drug giant to name "an independent adviser to review Bristol-Myers' accounting practices and internal control systems" and report back to the SEC. With the SEC's blessing, Dolan asked Lacey to stay on in that role.

Lacey says he found the work exhilarating. He hadn't wielded this much power in years. He attended executive committee meetings, talked with any individual he chose, and sent a team of LeBoeuf lawyers to attend dozens of other meetings and report back to him. (Lacey declined to comment on what LeBoeuf earned from his work for the pharmaceutical company.) He was having what he calls "just an outstanding phase in my career -- dealing with people of such integrity, skill and brilliance. I developed a tremendous amount of respect for them."

A year later, in June 2005, U.S. Attorney Christopher Christie of New Jersey filed criminal charges over the same channel stuffing/securities fraud incident involved in the SEC complaint. Bristol-Myers hired Mary Jo White, former U.S. Attorney in Manhattan and now a partner at Debevoise & Plimpton in New York, to negotiate a two-year deferred prosecution agreement with Christie to avoid going to trial. This time the company admitted the securities fraud.

Under the terms of the agreement, Bristol-Myers promised not to commit any new criminal violation. And it had to hire a corporate monitor acceptable to Christie. In interviews, the prosecutor had praised Lacey as a role model for his own work as U.S. Attorney. (Christie declined to comment for this story.) So the company asked Lacey to continue his oversight, this time as the monitor reporting to Christie as well as to the SEC.

The deferred prosecution agreement spelled out Lacey's new role: He would see that the company continued its current reforms while implementing six pages' worth of new demands. They included detailed new processes for handling the annual budget, sales and earnings forecasts, and "nonstandard" transactions. Lacey would "have the authority to require [Bristol-Myers] to take any steps he believes are necessary to comply," the agreement stated. And the company agreed to "adopt all recommendations contained in each report submitted" by Lacey to Christie.

The agreement also spelled out several ways that information was to be shared and disclosed.

For example, senior management was required to regularly brief the board of directors on company issues. In addition, Dolan, general counsel Willard, and the chairman of the board were to meet with Lacey quarterly and share information. And Lacey was to report to Christie quarterly, as well as continue reporting to the SEC.

Then the secret deal raised its ugly head that summer day in 2006 while Lacey was in Boston. Justice's antitrust division accused Bristol-Myers of negotiating another noncompete contract, this time with Apotex Inc., a Canadian generic drug firm. The American business had apparently violated its 2003 FTC order.

According to court documents, Dr. Andrew Bodnar negotiated the secret deal on May 26, 2006, after FTC regulators had already rejected the idea. Bodnar was Bristol-Myers' senior vice president for strategy, medical, and external affairs at the time, and was a top adviser to Dolan, who had promoted him. (Bodnar is no longer with the company and did not respond to a request for an interview.)

Bodnar allegedly offered the deal in an effort to settle Apotex's patent challenge to Bristol-Myers' best-selling drug, Plavix, a blood thinner. If Apotex would settle the suit, Bodnar allegedly promised, his company wouldn't compete with it on the generic front, according to the court documents.

When the FTC asked about the patent settlement, Bristol-Myers denied making any noncompete promises, according to federal prosecutors in Washington, D.C. But Apotex later revealed the deal in court.

These antitrust allegations stunned Lacey, who demanded that heads roll. He still won't pass judgment on whether the secret deal was illegal. But, Lacey adds, "this agreement should not have been signed without at least passing it before the board of directors and other senior management," including the new chief compliance officer.

For that reason alone, Lacey says, he recommended to the board on Sept. 12, 2006, that it fire the general counsel and the CEO with whom he had worked so closely for three years. The board could have appealed to Christie, but the U.S. Attorney attended the board meeting with Lacey and made clear his support. So the board took Lacey's advice, and the next day Dolan and Willard were gone.

Last February the company promoted Sandra Leung to general counsel. Leung, who declined an interview, previously had served as chief ethics officer, corporate secretary, and litigation attorney. In April, Bristol-Myers named James Cornelius to the CEO post. He was a former member of the board of directors and had been serving as interim CEO since Dolan left.

Still, the company clung to a perilous perch. Under its deferred prosecution agreement with Christie, committing any other crime while the agreement was in effect meant that the U.S. Attorney could indict it for the original securities fraud. Under the Sarbanes-Oxley Act, a securities indictment would jeopardize Bristol-Myers contracts with government agencies and could doom the company to an Arthur Andersen type of death.

So Christie became the only U.S. Attorney faced with deciding what to do when a major company violates a deferred prosecution agreement. Lacey says Christie asked him to stay out of all legal negotiations at this point, and he did, leaving them up to Debevoise's White. She declined to comment, but Lacey spelled out what happened next in an "executive summary" filed as the deferred prosecution ended in June.

The summary alludes to a three-way deal cut by Bristol-Myers, Christie, and the antitrust prosecutors on May 10. Under the pact, Bristol-Myers and the antitrust prosecutors agreed that the company would plead guilty to two counts of making false statements to the FTC and pay a mere $1 million penalty.

As part of the agreement, Justice retained the right to personally charge Dolan, Willard, and Bodnar; and Bristol-Myers had to cooperate with that ongoing investigation. (As of press time no charges had been filed.)

In the third leg of the deal, Christie agreed not to prosecute the company for breaching its deferred prosecution agreement by committing another crime.

The three-way pact meant that Bristol-Myers had dodged another legal bullet. Some critics, like Russell Mokhiber of the Corporate Crime Reporter newsletter, have accused Christie of backing down for not prosecuting the company. But Peter Henning, a corporate law professor at Wayne State University in Detroit, says prosecuting Bristol-Myers for securities fraud would have been "the nuclear option, because the company already admitted what it did and would have no defense at trial." Henning explains that any company convicted of a fraud felony is automatically barred from the federal health care system for five years. "And that could well force the breakup of the company," he adds.

Paul McNulty, U.S. deputy attorney general at the time, declined to discuss the Bristol-Myers case. But in general McNulty, also citing harm to shareholders and innocent employees, says that no U.S. company should be indicted if it ousts the wrongdoers and makes strong efforts to clean up its corporate culture. The only exception would be a company "where the corruption was so systemic" that remedial efforts could not change it, McNulty adds.

Lacey, whose monitorship officially ended in April, says that Bristol-Myers does not fit McNulty's "systemic corruption" exception. He calls the secret deal over Plavix "an isolated incident" that occurred mainly because of lack of communication.

Was his monitorship a success, as Lacey says, or did it fail because a crime was committed on his watch? Henning, the law professor, doesn't blame Lacey. "It's like trying to stop your teenager if he's intent on sneaking out," Henning says. "There's no way to stop someone intent on committing a white-collar crime."

Today Bristol-Myers seems to have put its legal problems behind it. Lacey's job is over. On June 11 the company pled guilty to the FTC charges over the Plavix deal, although it issued a statement afterward saying that it "continues to believe that there was no side agreement with Apotex." And Christie's deferred prosecution agreement expired June 15, with the court dismissing the securities fraud charges for good.

As for Lacey, he spent the summer relaxing at his home on the Jersey shore, satisfied that Bristol-Myers is a better company today than when he joined it in 2003. Considering all the problems, would he be a monitor again, if asked? It depends on the case, he allows: "If it were something like the Teamsters, that would take a lot of thought. But if something like Bristol-Myers came along again, yes, I would. In a heartbeat."

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