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.
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.00 u.s._v._laurence_doud_indictment_0