Chapter 25
Detroit, Michigan, 2015
By September 25, 2015, within weeks of Joe Rannazzisi’s removal, the DEA and the Justice Department reached a settlement with McKesson. Mimi Paredes’s arguments against a deal had been rejected by the DEA’s Chief Counsel’s Office and the Justice Department.
McKesson would not lose its registrations to distribute narcotics. Instead, the registrations would be suspended in Colorado for three years, in Ohio and Michigan for two, and in Florida for one. The company would get the reprieve it demanded and keep supplying the Veterans Administration, the Indian Health Service, and federal prisons. There would be no criminal charges. No perp walks. No $1 billion fine. Instead, McKesson would pay $150 million to settle the allegations. The fine was $50 million more than the annual compensation package of CEO John Hammergren. For a company with annual revenue of nearly $200 billion, about the same as ExxonMobil, it once again amounted to an expensive speeding ticket, David Schiller thought.
Jim Geldhof was in his office in Detroit when he heard the news. He had once thought the McKesson case would set an example to the rest of the drug industry. No other company would want to endure the pain of prison sentences, registration revocations, crippling fines, and plummeting stock prices. Instead, McKesson prevailed over the DEA and Geldhof thought his agency had become a paper tiger.
Other major DEA cases against the industry were in trouble as well. The case that Geldhof’s top investigator, James Rafalski, had built against Masters Pharmaceutical was in serious legal jeopardy. Masters had appealed the agency’s decision to file the Immediate Suspension Order and the case was pending before the U.S. Court of Appeals in Washington, D.C., the second most influential judicial panel in the nation. A loss there would make it nearly impossible for the DEA to continue its aggressive enforcement campaign against the drug industry. The stakes couldn’t be higher. The industry had lined up an impressive legal team in an all-out effort to secure a win in the Masters case. It included Gregory G. Garre, the solicitor general under President George W. Bush, who had been retained by The Alliance and the National Association of Chain Drug Stores, which filed a brief supporting Masters. Larry Cote, the former DEA lawyer who had joined Linden Barber’s private practice, also filed a brief. Cote was representing the Generic Pharmaceutical Association.
Rafalski’s other big case was also going sideways. He had been investigating Mallinckrodt for nearly four years. At every turn, Rafalski believed the giant drug maker was dragging out the production of documents that he and Leslie Wizner, the assistant U.S. attorney assigned to the case, were filing with the company. Eventually, Mallinckrodt turned over a quarter million records. As Rafalski and Wizner sifted through the emails, order forms, and client lists, they were astonished by the volume of pills they saw. The Blue Highway between Florida and points north was paved with Mallinckrodt’s oxycodone 30mg tablets. Reading the documents, Rafalski believed that people like Victor Borelli, the company’s national sales manager who wrote the “Doritos” email, should be under criminal investigation. Internally, Wizner and other federal prosecutors began to formulate the arguments they could make against Mallinckrodt before a jury one day.
“We will argue that thousands of orders from the distributors as well as tens of thousands of orders from these down-stream customers were suspicious because of the pattern of distribution to Florida,” they wrote in one internal prosecution memo. They singled out Mallinckrodt’s oxycodone shipments to Sunrise Wholesale, the Florida distributor, which then supplied Barry Schultz, the Delray Beach doctor who was later convicted of drug trafficking and sentenced to 157 years in prison. The prosecutors said they had documented a pattern of behavior that was so egregious it could result in civil conspiracy charges against Mallinckrodt.
“Mallinckrodt did knowingly, intentionally and unlawfully combine, conspire, confederate and agree with Sunrise and Barry Schultz to commit offenses against the United States,” the prosecutors wrote in a draft complaint against the company. “That is, to knowingly, intentionally and unlawfully distribute, dispense or prescribe controlled substances, including but not limited to the Schedule II drug oxycodone 30 mg.”
But the complaint was never filed.
Mallinckrodt had assembled a sophisticated legal team to fend off the allegations. It included Brien T. O’Connor, a former federal prosecutor in Boston who specialized in fraud and corruption cases. O’Connor had an important ally, Linden Barber, who was working on the case.
On July 10, 2015, Wizner sent a proposed settlement to O’Connor. She said the U.S. attorney’s office in Detroit had completed its review of the evidence and concluded that Mallinckrodt could face as much as $2.3 billion in fines. She noted that 222,107 orders of oxycodone to Florida were “excessive” and should have been reported as suspicious to the DEA. She also said the federal government could hit the company with a $1.3 billion fine because 217,022,834 of the company’s 30mg oxycodone pills had been sold for cash in Florida in 2009 and 2010.
“As you are aware, significant cash sales are an indication of diversion,” Wizner wrote in her settlement letter.
She also asserted that Mallinckrodt knew where its pills were going because of the chargeback rebate program Rafalski had uncovered while investigating Harvard Drug five years earlier.
O’Connor countered that there was nothing in the Controlled Substances Act that required Mallinckrodt to determine where its pills went after it shipped them to its distributors. Wizner understood that the debate over how much responsibility a drug maker had for its pills once they went to the retail level presented legal risks for both sides. Jurors could agree with the government, finding that the company knew what was happening to its drugs and should have done something to stop the shipments. But a jury could also return a verdict clearing Mallinckrodt, finding that the law was vague when it came to drug manufacturers. The entire case could fall apart. Wizner proposed settling in exchange for a $70 million fine.
O’Connor argued that it was impossible to monitor all of the fifty-five thousand retail outlets where its drugs had been delivered. He noted that the DEA was aware of the company’s increased sales of oxycodone and could have reduced the amount of narcotics the company was permitted to make. Rafalski thought the argument was specious. The DEA sets quotas for the quantities of controlled substances that can be manufactured. Under the law, the agency was required to increase the quota for controlled substances to meet the demand of the prescriptions being written by doctors and the amounts requested by the scientific and research communities. For years, manufacturers had been complaining to Congress that they needed the DEA to increase the quota even more or they would deprive legitimate patients from getting their prescriptions filled.
Negotiations dragged on that summer, with offers and counteroffers over money, and arguments over whether Mallinckrodt had a responsibility to tell the DEA what it knew about its pills that were going downstream and saturating the black market. Threats of setting trial dates came and went without any visible progress in the case.
By the fall, Geldhof was losing his patience. He was planning to retire on January 2, just a few months away, and he wanted to know what was happening with one of his biggest cases. He frequently patrolled the sixth floor of the DEA offices in Detroit, stopping by Rafalski’s pod and towering over his desk.
“What’s going on? What’s taking so long?” Geldhof boomed.
“I haven’t heard a thing,” Rafalski replied.
It was as if the Mallinckrodt case had fallen into a black hole.