First Ever Felony Criminal Charges’ Against a Distributor and its Former CEO & Chief Compliance Officer for Violating Federal Narcotics Laws

On April 23, 2019, the Manhattan U.S. Attorney and N.Y. Division of the Drug Enforcement Administration announced the “first ever felony criminal charges” against Rochester Drug Co-Operative, Inc. (“RDC”; read the Criminal Information here), Laurence F. Doud III (“Doud”; read the Indictment here), the company’s former chief executive officer, and William Pietruszewski (“Pietruszewski”; read the Criminal Information here), the company’s former chief compliance officer, for the illegal distribution of controlled substances.

The government simultaneously announced in the press release that RDC entered into a Stipulation and Settlement Agreement (the “Agreement”) and consent decree under which RDC provided an extensive Statement of Facts admitting to its conduct, agreed to a $20 million penalty, reform and enhance its Controlled Substances Act compliance program, and submit to supervision by an independent monitor. RDC also entered into a Deferred Prosecution Agreement (“DPA”) in which the government agreed to defer prosecution for five years after which it would seek to dismiss the charges provided RDC comply with the Agreement. The government also brought a civil lawsuit against RDC for its knowing failure to comply with its legal obligation to report thousands of suspicious orders of controlled substances to the Drug Enforcement Agency (“DEA”).

Pietruszewski is cooperating and pled guilty to numerous charges, one of which carries a maximum sentence of life in prison and a mandatory minimum sentence of 10 years.

A criminal case will proceed against Doud, who also faces two charges, one of which also carries a maximum life sentence in prison and a mandatory minimum sentence of 10 years.

RDC

RDC is a New York-based wholesale distributor of non-controlled drugs and controlled substances, such as oxycodone and fentanyl. During the relevant time period (from January 2017 through March 2017), RDC was considered the fourth largest wholesale distributor in New York and one of the nation’s ten largest distributors, with over 1,300 pharmacy customers and over $1 billion in revenue. In 2015 the company entered into a consent decree with the DEA and paid a $360,000 civil penalty for its failure to adhere to the Controlled Substance Act (“CSA”) (read the 2015 DOJ Press Release here). Despite RDC’s high revenues and history of non-compliance, RDC failed to provide necessary resources to comply with the narcotics laws.

According to the 30-page Statement of Facts, RDC admitted, among other things, that it:

• Repeatedly represented to the DEA that it had standard operating procedures for conducting due diligence on customer accounts and reporting suspicious orders to the DEA;
• Opened new accounts for pharmacy customers without first conducting due diligence on the pharmacies;
• Released orders of controlled substances to pharmacies that RDC believed were dispensing controlled substances for other than legitimate medical purposes;
• Increased order limit thresholds so that pharmacies could increase the amounts of controlled substances they were ordering from RDC;
• Shipped orders that RDC’s compliance program deemed to be suspicious;
• Knowingly failed to report suspicious orders to the DEA.

The company admitted RDC’s senior management, including Doud (former CEO), were involved and directed the conduct described above. Where was compliance?

RDC’s compliance department had primary responsibility for RDC’s complying with the CSA. Pietruszewski supervised the department and reported directly to Doud and its chief financial officer. Its Compliance Officer, CEO, and CFO were involved in compliance decision-making and were aware of RDC’s legal obligation to maintain effective controls against diversion. However, RDC failed to properly staff or provide sufficient resources to its compliance department, which was tasked with maintaining those controls against diversion. Doud even complained to the CFO and Pietruszewski about the financial burden of compliance and stated: “there is NO return” on the RDC’s compliance program (i.e., sales generated revenue, while compliance costed the company money).

CALL OUT: “Our 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.” U.S. Attorney Geoffrey S. Berman for the Southern District of New York

Doud (former CEO)

According to the 25-page Criminal Indictment, Doud, was RDC’s CEO from 1991 through April 2017 and responsible for, among other things, supervising RDC’s compliance with federal narcotics laws. The government alleges that under Doud’s direction, RDC supplied “tens of millions of oxycodone, fentanyl, and other dangerous opioids” to pharmacy customers despite knowing that the narcotics were being sold and used illicitly.

The allegations highlight that Doud directed and controlled the company to contravene narcotics laws in order to maximize the company’s revenue and his compensation. For example, the government alleges RDC, under Doud’s direction, violated the CSA and company’s policies to conceal RDC’s illicit distribution of controlled substance from the DEA and other law enforcement authorities. He directed the compliance department not to report certain pharmacies to the DEA and even dismissed their concerns. The compliance department staff and members of RDC’s senior management warned Doud about how the company’s largest pharmacy customer was distributing controlled substances that were being diverted for illegitimate purposes. Instead, the government alleges, Doud repeatedly disregarded the warning and instructed employees to ship increasingly large orders of narcotics to the pharmacy.

The government charged Doud, 75, with: (1) one count of conspiracy to distribute controlled substances, which carries a maximum sentence of life in prison and a mandatory minimum sentence of 10 years; and (2) one count of conspiracy to defraud the United States, which carries a maximum prison term of five years.

Pietruszewski (former Chief Compliance Officer)

The three charges of the 7-page Criminal Information concern a narcotics conspiracy (Count 1), a conspiracy to defraud the U.S. (Count 2), and failure to file suspicious order reports (Count 3).

Count 1 describes how Pietruszewski conspired with others to distribute and possess with intent to distribute controlled substances (i.e., oxycodone and fentanyl) outside the scope of professional practice and not for a legitimate medical purpose.

Count 2 explains that Pietruszewski, together with co-conspirators, caused RDC to:

• Violate narcotics laws by failing to report suspicious orders of controlled substances only four suspicious orders to be reported (e.g., the company identified approximately 8,300 potentially suspicious “orders of interest,” including thousands of oxycodone orders, but the company reported only four suspicious orders to the DEA);
• Sell controlled substances to new accounts without conducting due diligence on those accounts (Pietruszewski, including other co-conspirators, represented to the DEA that the company did in fact conduct due diligence); and
• Supplied customers with controlled substances despite knowing the controlled substances were being distributed outside the scope of professional practice and not for a legitimate medical purpose.

Count 3 describes how Pietruszewski knowingly failed to keep/maintain/furnish certain records required under the CSA and failed to disclose and aided and abetted the failure to disclose suspicious orders to the DEA.

Pietruszewski, 53, pled guilty, pursuant to a cooperation agreement, to: (1) one count of conspiracy to distribute controlled substances, which carries a maximum sentence of life in prison and a mandatory minimum prison term of 10 years; (2) one count of conspiracy to defraud the United States, which carries a maximum sentence of five years in prison; and (3) one count of willfully failing to file suspicious order reports with the DEA, which carries a maximum sentence of one year in prison.

Analysis

While this case involves a distributor of controlled substances, the pharmaceutical industry cannot ignore this case. Compliance officers and their staff, as well as executives, should view this case as a wake-up call. It is the clearest example that the Department of Justice (“DOJ”) can and will hold individuals accountable for corporate misconduct. The case also signals that compliance officers are not immune from prosecution.