On Tuesday, the Southern District of New York and the Drug Enforcement Administration announced a series of indictments against one of the ten largest drug distributors in the US, Rochester Drug Co-Operative, and two former executives, the CEO and the chief compliance officer, and the latter has pled guilty and agreed to cooperate with prosecutors. The company has agreed to pay fines and has entered into a deferred prosecution agreement which includes a $20 million penalty. So the fish remaining to be fried is 74 year old former CEO Laurence Doud III, who could spend the rest of his life in prison.
As we’ll explain, it’s a welcome development to see the Department of Justice embrace the idea that executives should be held accountable, which can and should include criminal prosecution. However, the jury is out as to whether this action against Rochester Drug and Doud is a training-wheels case for the DoJ to get practice and refine its arguments before going after bigger targets, or whether this prosecution came about due to particularly bad conduct at a relatively small player. We’ve embedded the Doud indictment at the end of this post; you can find links to the other major filings at the end of the press release. As it states:
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and Ray Donovan, the Special Agent in Charge of the New York Division of the U.S. Drug Enforcement Administration (“DEA”), announced today criminal charges against Rochester Drug Co-Operative, Inc. (“RDC”), one of the 10 largest pharmaceutical distributors in the United States; Laurence F. Doud III, the company’s former chief executive officer; and William Pietruszewski, the company’s former chief compliance officer, for unlawfully distributing oxycodone and fentanyl, and conspiring to defraud the DEA. Mr. Berman’s Office also filed a lawsuit against RDC for its knowing failure to comply with its legal obligation to report thousands of suspicious orders of controlled substances to the DEA.
Rochester Drug Co-Operative is privately held, with most shares in the hands of its customers. Even though it is a regional player with only about $1 billion in sales, RDC is one of the ten largest drug distributors in the US. Even though RDC and its executives are charged with particularly egregious behavior, the indictments have rattled industry executives.
In short form, the DEA has a strict compliance regime for Schedule II drugs like oxycodone and the implementation at RDC was a joke. The suit alleges RDC should have reported over 2000 suspicious cases to the DEA and actually sent in only four. The Doud filing describes, for instance, how “Pharmacy-1” showed implausibly rapid growth in oxycodone scrips and also became one of the biggest customers in the US for a fentanyl nasal spray. Pharmacy-1 was also ordering only controlled substances, another red flag.
Another example:
By mid-2014, the manufacturers who supplied RDC began warning the Company that if it continued to distribute to Pharmacy-1, they would “sanction” or even terminate sales to RDC. Internally at RDC, the Company’s compliance and sales personnel discussed “slowing down” on fentanyl sales to Pharmacy-1 in order to appease the manufacturers that supplied RDC. DOUD was aware of the manufacturers’ complaints, but he nonetheless insisted that RDC continue to ship orders to Pharmacy-1. Indeed, even when Pharmacy-1 started refusing to provide reports of its sales to RDC in 2014, DOUD refused to curtail sales to Pharmacy-1. Instead, RDC continued — and in fact grew — its sales to Pharmacy-1 throughout DOUD’s tenure as CEO.
Other alleged abuses include the failure to do required due diligence on new customers and continuing to supply pharmacies that were filling scrips to doctors under DEA investigation.
The result of this “see no evil” attitude toward opioid orders was a four-fold increase in sales from 2012 to 2016, which generated “millions of dollars” of CEO pay.
But why were RDC and its executives singled out for criminal charges when the three largest distributors, AmerisourceBergen, Cardinal Health, and McKesson, simply paid fines? A big difference was that RDC was a recidivist. It had been fined before and had to pay for a compliance monitor, yet flouted the requirement that it comply with the monitor’s recommendations. Doud complained about the agreement and refused to staff up the compliance department as outside counsel requested. RDC also kept selling drugs to pharmacies that other distributors had blacklisted.
Mind you, it’s not as if the large distributors weren’t caught out for being lax. As Law360 points out:
But that’s not to say other drug distributors have always been diligent about ferreting out shady pharmacies. In 2017, when McKesson paid $150 million to resolve allegations it failed to report suspicious opioid orders, the DOJ said the distributor had processed 1.6 million orders for controlled substances in Colorado over several years and reported only 16 of them — 0.001% — as suspicious.
Also in 2017, AmerisourceBergen and Cardinal Health paid $16 million and $20 million, respectively, to resolve allegations of improper opioid distribution in West Virginia.
Once assumes the DoJ hasn’t yet caught any of them walking on the wild side again. The criminal charges against RDC and its executives may go a long way towards preventing that. But one nevertheless has to note that the SDNY is taking on a comparatively small actor. On the one hand, it makes sense to start out with a comparatively easy case in making a new type of prosecution. Even when a Federal agency appears to have a rock solid case, it’s difficult to prevail against a major corporation because they can afford to throw large amounts of legal ammo at the government. So it remains to be seen whether this prosecution is a one off, or whether the government prosecutes more opioid industry perps, including much more powerful targets.
Nevertheless, these indictments are a step in the right direction, even if a small one.
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Good. Sacklers next.
If only. The family is circling the wagons around a revolving door:
Purdue’s Sackler family wants global opioids settlement: Sackler lawyer Mary Jo White [Reuters]
Sacklers sold out long ago, they will not be charged with anything. Only 2 family members have something to do with the company today. I do not believe in charging anyone, I believe in decriminalizing it all. If you are stupid enough to use it well you pay the price if you become addicted.
Deferred Prosecution Agreement. Pfffft.
Yes, the idea that a company can put aside money for the use of lawsuits is a ridiculous concept. The real “cost of doing business” should always include time in jail because the crime itself makes more profit than any fine so what is being learned? Nothing, except it can be done again and again without severe penalty.
That’s for companies because a criminal prosecution of a company will pretty much always put it out of business. The minute an indictment is filed and unsealed, many customers are legally obligated to stop doing business with it (this is very much the case in the financial services industry). Do you seriously think secretaries and low level workers should lose their jobs for actions taken by the top brass that they had nothing to do with and didn’t profit from? Or actions in a part of the operation completely remote from them?
There’s even a literature among legal scholars about the problem with the fact that civil prosecutions of companies often seem inadequate, particularly since the costs are imposed on shareholders, yet the jump in terms of severity of sanction by going to criminal charges is so great as to make it unworkable.
Having said that, the DoJ and other regulators are slowly getting more bloody-minded about enforcing these DPAs and similar agreements. When Standard Chartered violated an enforcement action that wasn’t a DPA but merely required a lot of compliance changes, they charged a new fine that was double the original fine and forced out the CEO. Admittedly it this change in attitude is like turning a supertanker, but the elites are getting the message that they need to start enforcing standards.
But the better remedy for serious misconduct would be clawing back executive comp and wiping out any deferred pay. The prospect of making formerly rich executives broke would focus a lot o fminds.
I am sure you don’t not wish to sound like NPR (or even more horribly, Lanny Breuer, a financial criminals’ best friend) Yves, because I know you ARE in favor of jailing the executives themselves when they have committed crimes. Bill Black has discussed the benefit here at NC many times.
Full agreement about claw-backs.
Kai Ryssdal at NPR recently interviewed some regulator types who also brought up the “secretaries” defense to explain why no bankers where charged following the Bankers Wilding 2004-2009 crime spree in and he failed to challenge them and point out that all the payment systems, (and secretaries) could have been preserved while jailing the worst banker -criminals.
Boy, I never appreciated how much the financial elites worried about all the lowly working stiffs they could harm with their illicit activities. Sort of like their worries that raising the minimum wage might hurt unskilled job seekers. Such good people.
So never jail the bosses because of what it does to the workers…?
Well, that is what the Elite criminals would like you to believe. But the solution is simply to prosecute the actual humans who committed the crimes, rather than the Company itself.
However, when the Company is an ongoing Criminal Enterprise, like Citigroup, deutschbank,
HSBC etc etc. then shut the company down and pay displaced low-level employees with some of those clawed-back ill-gotten gains from the C-suite miscreants.
Cardinal pharmaceuticals would put a load of opiods every day on an unmarked freight truck, take it to fedex in Huntsville. Fedex would put it on prop planes and fly it to Memphis hub and then ship it on to small towns in Iowa, Kentucky, Georgia, etc. Fedex used to have a jet fly the pharmaceuticals from Huntsville to Memphis, but too much oversight on jet planes. FAA doesn’t look much at prop planes. Plus, the amounts of cargo are smaller, so a prop plane with 300lbs of opiods doesn’t look as a bad as a 727 with 1,500lbs of opiods if there is a crash.