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First of Its Kind: Drug Wholesaler Accepts DPA and Two Executives Face Criminal Charges in SDNY For Illegal Distribution of Opioids

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:

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Fifth Circuit Holds FCA Amendment Does Not Expand Retaliation Liability beyond Employers

The Fifth Circuit Court of Appeals recently affirmed a district court’s dismissal of a retaliation claim under the False Claims Act (FCA) as to several individual defendants.

In Howell v. Town of Ball, a Ball, Louisiana police officer, Howell, sued the town and several town officials for employment retaliation in violation of the FCA (among other claims).  The officials moved to dismiss, arguing that the FCA creates a cause of action only against a plaintiff’s employer.  The district court agreed, citing the subsection of the FCA that creates a cause of action for those “discriminated against in the terms and conditions of employment . . .”  31 U.S.C. § 3730(h) (emphasis added).

On appeal, Howell argued that a 2009 amendment to the FCA (which removed the reference to “employer” in § 3730(h)) “indicate[d] a legislative intent to broaden the class of viable defendants.” In a July 1 decision, a three-judge panel of the Fifth Circuit disagreed with Howell, holding that “the reference to an ‘employer’ was deleted to account for the broadening of the class of FCA plaintiffs to include ‘contractors’ and ‘agents,’ not to provide liability for individual, non-employer defendants.”

In sum, FCA plaintiffs can only bring retaliation actions against their actual employers, notwithstanding the role that other non-employer individuals may have had in allegedly retaliatory activity.




U.S. Attorney Manual Revised To Reflect Yates Memorandum’s Focus on Individuals

On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a memorandum outlining the Department of Justice’s increased focused on individual responsibility in investigations of corporate wrongdoing, now colloquially referred to as the “Yates Memorandum.”  (We previously reported on the Memorandum here).

Pursuant to the Yates Memorandum’s directive that the U.S. Attorneys’ Manual (USAM) be revised to reflect this increased focus on individuals, on November 16, 2015, such revisions were released.  In a speech on that date to the American Banking Association and the American Bar Association Money Laundering Enforcement Conference, Deputy AG Yates highlighted the important nature of the revisions: “We don’t revise the USAM all that often and, when we do, it’s for something important.  We change the USAM when we want to make clear that a particular policy is at the heart of what all Department of Justice attorneys do and when we want to make sure that certain principles are embedded in the culture of our institution.”

Among other things, the revisions to the USAM update the “Filip factors” concerning criminal prosecution of organizations and associated commentary.  The revisions urge an early focus on individual culpability and possible prosecution in corporate criminal investigations.  The revisions, like the Yates Memorandum itself, also make clear that to receive any credit at all for cooperation, corporations must identify culpable individuals and disclose nonprivileged information concerning their misconduct.  In her speech, Deputy AG Yates remarked that this “seems to be the policy shift that has attracted the most attention,” but also stated that this concept of corporate cooperation is nothing new.  She went on:

“What is new is the consequence of not doing it.  In the past, cooperation credit was a sliding scale of sorts and companies could still receive at least some credit for cooperation, even if they failed to fully disclose all facts about individuals.  That’s changed now.  As the policy makes clear, providing complete information about individuals’ involvement in wrongdoing is a threshold hurdle that must be crossed before we’ll consider any cooperation credit.”

In response to concerns that this policy will require broad and expensive internal investigations, Yates noted that investigations should be tailored to the wrongdoing, and not every investigation needs to be a “years-long, multimillion dollar” effort.  She further suggested that if there are doubts about what is required in terms of an investigation, the requisite extent of the investigation could be vetted with the prosecutor.

Yates observed that nothing about the policy requires waiver of the attorney-client privilege.  But at the same time, she invoked the adage that “legal advice is privileged.  Facts are not.”  As such, while a law firm’s interview memoranda prepared during the course of an internal investigation may not need to be disclosed in order for the corporation to receive credit, “the corporation does need to produce all relevant facts—including the facts learned through those interviews—unless identical information has already been provided.”

Yates further observed that the edits to the USAM make clear that [...]

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SDNY Holds that Corporate Attorney-Client Privilege Trumps Individual Advice-of-Counsel Defense

In the wake of the U.S. Department of Justice’s (DOJ) recent memorandum regarding increased focus on individual culpability for corporate wrongdoing (on which we previously posted here) comes a district court decision with significant implications for individuals who attempt to assert an advice-of-counsel defense based on consultation with company counsel.

In a September 22, 2015 decision in U.S. v. Wells Fargo Bank, N.A, the U.S. District Court for the Southern District of New York ruled that an employee could not assert the advice-of-counsel defense because his employer, Wells Fargo, refused to waive the attorney-client privilege over the relevant communications between the employee and Wells Fargo counsel.

In Wells Fargo, the United States brought civil claims against Wells Fargo and individual defendant Kurt Lofrano for violation of the False Claims Act (FCA), along with other claims. Lofrano asserted that he had sought advice from Wells Fargo attorneys concerning the legal requirements he is now alleged to have violated, and acted in conformity with such advice. All parties agreed that the advice-of-counsel defense would provide a complete defense to the government’s claims against Lofrano.

But Wells Fargo objected to disclosure of the privileged communications at issue, and sought a protective order prohibiting disclosure. The Southern District engaged in a lengthy analysis of the competing principles that, on the one hand, a person accused of wrongdoing should be able to present “every available defense” and, on the other hand, the broader public interests underlying the sanctity of the attorney-client privilege.

Relying on the Supreme Court precedent (Swidler v. Berlin, 524 U.S. 399 (1998)) concerning the survival of the attorney-client privilege on death (a situation the Southern District conceded was not directly on point), the court rejected the argument that a balancing test should be used under which Lofrano’s need for the privileged evidence would be weighed against Wells Fargo’s need to keep it confidential: “That is, the use of a balancing test to determine whether a company, through no fault of its own, must forfeit its privilege based on an employee’s later assertion of an advice-of-counsel defense would render the privilege no less uncertain that the use of such a test to determine whether the privilege applies in the first instance.”  The court held that the attorney-client privilege is not a qualified privilege and that, because Wells Fargo would not waive its privilege, the advice-of-counsel defense was not “available” to Lofrano.

The court observed that this result “is arguably harsh in this particular case, as it may well deprive Lofrano of his best defense to liability for tens of millions of dollars. It is, however, the price that must be paid for society’s commitment to the values underlying the attorney-client privilege.” The court went on to chronicle the ways in which the result might not be as harsh as it seems including, for example, the “significant number of cases” where the employer will also seek to assert the advice-of-counsel defense alongside the employee, and thus agree to waive. But this was [...]

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