On April 23, 2019, the US Department of Justice (DOJ) announced it has entered into a deferred prosecution agreement with Rochester Drug Co-Operative, Inc. (RDC), one of the 10 largest wholesale distributors of pharmaceutical products in the US, and filed felony criminal charges against two of RDC’s former senior executives for unlawful distribution of controlled substances (oxycodone and fentanyl) and conspiring to defraud the US Drug Enforcement Agency (DEA). During the relevant time period (2012-2016), RDC’s sales of oxycodone increased by approximately 800 percent (from 4.7 million to 42.2 million tablets) and fentanyl increased by approximately 2,000 percent (from 63,000 to over 1.3 million dosages). The two charged executives are RDC’s former chief executive officer, Laurence F. Doud III, and the company’s former chief compliance officer, William Pietruszewski.

Geoffrey S. Berman, the US Attorney for the Southern District of New York, noted in a press release that the prosecution is “the first of its kind,” with RDC and its former chief executive officer and former chief compliance officer charged with “drug trafficking, trafficking the same drugs that are fueling the opioid epidemic that is ravaging this country.” Keeping the focus on the C-suite, Mr. Berman emphasized that his office “will do everything in its power to combat this epidemic, from street-level dealers to the executives who illegally distribute drugs from their boardrooms.”

Ray Donovan, the DEA Special Agent in Charge of the investigation, underscored this sentiment:

Today’s charges should send shock waves throughout the pharmaceutical industry reminding them of their role as gatekeepers of prescription medication.  The distribution of life-saving medication is paramount to public health; similarly, so is identifying rogue members of the pharmaceutical and medical fields whose diversion contributes to the record-breaking drug overdoses in America . . . . This historic investigation unveiled a criminal element of denial in RDC’s compliance practices, and holds them accountable for their egregious non-compliance according to the law.”

A consistent theme across the three cases is the alleged deficiency in RDC’s compliance program—as well as the role that the former CEO and compliance chief allegedly played in directing RDC to ignore its obligations to maintain “effective control[s] against diversion of particular controlled substances into other than legitimate medical, scientific, and industrial channels” under 21 USC § 823(b)(1) and reporting suspicious orders under 21 CFR § 1301.74(b). The criminal pleadings include allegations that:

• For five years (2012-2017), RDC allegedly “took steps to conceal its illicit distribution of controlled substances from the DEA and other law enforcement authorities.”

• RDC allegedly did not “investigate, monitor, or report to the DEA pharmacy customers that it knew were diverting controlled substances for illegitimate use.”

• Allegedly because RDC “knew” that reporting its pharmacy customers to the DEA would likely result in an investigation and shutdown of the customers, “RDC’s senior management . . . directed the company’s compliance department . . . not to report them, and instead to continue supplying those customers with dangerous controlled substances that the company knew were being dispensed and used for illicit purposes.”

• At the direction of the former CEO, RDC allegedly opened new customer accounts “without conducting due diligence, and supplied those customers – some of whom had been terminated by other distributors – with dangerous controlled substances.”

The indictment against Mr. Doud, RDC’s former CEO, alleges that he directed the company to supply opioids to pharmacy customers despite the fact “that its own compliance personnel determined, and reported to Doud, [that the customers] were dispensing those drugs to individuals who had not legitimate medical need for them.” The indictment also alleges that “Doud and other members of RDC’s senior management made the deliberate decision not to investigate, monitor, or report to the DEA pharmacy customers that they knew were diverting controlled substances for illegitimate use.” The indictment goes on to allege that Mr. Doud directed RDC’s compliance department not to report these issues to the DEA because it would likely result in the shutdown of the pharmacies in question. Further, the indictment alleges that Mr. Doud directed RDC’s compliance department to report “red flags” with customers directly to him and “dismissed the concerns and rarely authorized the termination of business with the customers.”

The criminal information against RDC’s former chief compliance officer, Mr. Pietruszewski, alleges that RDC (1) received approximately 8,000 “orders of interest” (including orders for fentanyl and oxycodone) that the company’s compliance department had “flagged as suspicious,” but only reported four such orders to the DEA; (2) opened new accounts for pharmacy customers without conducting due diligence as the company represented to the DEA had been done; and (3) knowingly supplied to customers controlled substances that “were being distributed outside the scope of professional practice and not for a legitimate medical purpose, and failed to report those customers to the DEA.”

Under the five-year deferred prosecution agreement and consent decree with RDC, the company (1) stipulated to a lengthy statement of facts; (2) agreed to pay a $20 million penalty; (3) committed to reform its Controlled Substances Act compliance program; and (4) submitted to supervision by an independent monitor. DOJ also announced the settlement of parallel civil lawsuit against RDC on allegations that it knowingly failed to comply with its “legal obligation to report thousands of suspicious orders of controlled substances to the DEA.” The civil complaint outlines various causes of action predicated on the allegation that RDC “was well aware that many of its largest pharmacy customers exhibited ‘red flags’ associated with the diversion of controlled substances, but failed to report these customers or their orders to the DEA as required.”

It is noteworthy that the government focused acutely on RDC’s compliance program—as well as the direction provided by two senior executives—and alleged failures to meet the company’s legal obligations to conduct due diligence and report internal findings to the DEA.  As we have reported consistently over the past few years on the FCA Update blog and in the Health Care Enforcement Quarterly Roundup, the federal government has expanded its role in combating the opioid crisis and will continue to do so for the foreseeable future. These latest cases further reflect the vulnerabilities that companies should consider as they evaluate compliance programs and evaluate risk and exposure.