Gregory A. Brower, Featured Expert Contributor, White Collar Crime & Corporate Compliance

Brower_GregGregory A. Brower is a Shareholder with Brownstein Hyatt Farber Schreck, LLP in Las Vegas, NV and Washington, DC, and a member of Washington Legal Foundation’s Legal Policy Advisory Board.

Federal prosecutors in the Southern District of New York unveiled the unprecedented criminal charges against a major drug distributor and two senior company executives. For the first time, prosecutors deployed federal criminal laws typically used to charge street dealers and major traffickers against an otherwise legal pharmaceutical company and its executives. The alleged illegal criminal conduct spans almost a decade during which time the company, Rochester Drug Co-Operative (“RDC”), saw its sale of oxycodone increase almost tenfold to 42 million doses in 2016. The indictment alleges that top company officials “made the deliberate decision” to not investigate and alert federal regulators to what they knew were pharmacy sales of their products to people who wanted them for nonmedical uses.

Three separate defendants have been charged, with very different potential outcomes for each. The company itself entered into a deferred prosecution agreement (“DPA”) with the government to include the filing of an information containing three counts: (1) conspiracy to distribute controlled substances in violation of 21 U.S.C. § 846; (2) conspiracy to defraud the United States in violation of 18 U.S.C. § 371; and (3) knowingly failing to furnish suspicious order reports to the DEA in violation of 21 U.S.C. §§ 842(a)(5) and (c)(2), and 18 U.S.C. § 2.

The Department of Justice (DOJ) agreed to defer the prosecution of the criminal information against the company for a period of five years, at the end of which the charges will be dismissed, providing the company lives up to its end of the deal. The company agreed to pay a fine of $20 million, cooperate in any related investigations, and comply with certain other terms concerning corporate governance, compliance and monitoring requirements. The company’s former compliance officer similarly settled with the government, pleading guilty to the same three counts listed above.  He also agreed to cooperate with any related cases, including the big one arising from last Tuesday’s announcement: the criminal indictment of the company’s longtime CEO.

This first-of-its-kind indictment against a corporate officer charges conspiracy to violate the Controlled Substances Act and conspiracy to defraud the United States, and alleges that for several years, the company distributed dangerous, highly addictive opioids to pharmacy customers that its senior management, including the now former CEO, knew were being sold and used illegally. Specifically, it is alleged that the former CEO personally directed that the company supply tens of millions of doses of oxycodone, fentanyl and other opioids to pharmacy customers that the company’s own compliance personnel determined, and reported to the former CEO, were dispensing those drugs to individuals who had no legitimate medical need for them, and did so in order to maximize the company’s revenue and his own compensation.

The company is also the target of a related civil suit filed by DOJ in the Southern District of New York, which, like the criminal charging documents, lays out a pattern of alleged compliance failures ranging from the lack of an adequate system for required reporting to the DEA to a “culture of noncompliance.” It is this alleged compliance culture that apparently caught DOJ’s attention and led to these charges, effectively making an example of these defendants. Interestingly, RDC is much smaller than the biggest companies in this space, some of which have faced civil enforcement actions related to opioids.

What is different here, at least according to the government’s allegations, is that the violations were not the isolated acts of a few rogue employees, but were fundamental to the company’s business model, a corporate reality that is always likely to catch DOJ’s attention. The lesson of this novel prosecution is that good compliance is not only good business, it is essential to avoiding significant, expensive, and, potentially even criminal penalties.