Mistrial Declared in Foreign Corrupt Practices Act Case After Jury Could Not Reach Verdict

On Thursday, July 7, 2011, U.S. District Judge Richard Leon of the District of Columbia declared a mistrial in a criminal foreign bribery case under the Foreign Corrupt Practices Act (“FCPA”) involvingallegations of a corrupt deal to sell $15 million in supplies to Gabon’s Ministry of National Defense.  Prosecutors from the Department of Justice alleged that defendants John Wier III, Pankesh Patel, Lee Allen Tolleson and Andrew Bigelow tried to bribe Gabonese officials to win contracts. 

The government built its case through an undercover operation where undercover FBI agents met with the defendants and purportedly agreed to participate in the illegal deal. The case is significant because the four individuals are the first to go to trialoutof 22 military and law enforcement equipment industry executives arrested in July 2010 as part of an FBI sting. This case marked the first large-scale use of undercover techniques, commonly seen in drug or fraud cases, in an FCPA bribery investigation and it is the largest prosecution of individuals since the government began enforcing the FCPA over 30 years ago. 

The purpose of the Foreign Corrupt Practices Act is to make it unlawful for certain classes of U.S. persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any willful or corrupt offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that such money or thing of value will be offered to a foreign official to influence the foreign official in his or her official capacity to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business.

Throughout the trial, the defense focused on and impeached the credibility of the prosecution’s top informant, to show the jury that he was unreliable and unsavory.  Richard Bistrong, the informant who helped carry out the FBI’s sting operation, had his own history of past bribery crimes, among other assorted wrongdoing. 

The jury began deliberations on June 28, and on July 7, indicated that it was “hopelessly deadlocked.”  As a result, the judge declared a mistrial, meaning no verdict; however, the prosecution intends to retry the case against all four defendants in front of a different jury. This case is an example of the energized enforcement of the FCPA, in support of which the government is willing to employ undercover operatives to engage in sting operations to sniff out violations of the FCPA. So far, although it engaged in these new investigative tactics, and despite having taken the case to trial, the government was not able to obtain convictions.

Organic Labeling of Cosmetics under Scrutiny in California

The Center for Environmental Health (CEH), a public advocacy group in California, filed suit in the Superior Court of the State of California on June 16, 2011, against 26 cosmetic companies alleging companies sold their products with the aid of misleading organic product labels. CEH, seeking injunctive relief, wants to encourage cosmetic companies to use organic ingredients and ensure that consumers can trust organic labels.

Cosmetics labeled and advertised as organic are subject to several different regulations. The U.S. Food and Drug Administration (FDA) regulates cosmetics under the Federal Food, Drug, and Cosmetic Act and the Fair Packaging and Labeling Act. However, neither of these laws gives the FDA authority to enforce organic claims. The U.S. Department of Agriculture (USDA) regulates the term “organic” as it applies to agricultural products through the National Organic Program (NOP). If a cosmetic is manufactured from agricultural ingredients and is labeled as “organic,” it must meet the NOP standards for certified organic labeling. The Federal Trade Commission (FTC), pursuant to section 5 of the FTC Act, prohibits unfair or deceptive advertisement claims for cosmetics, including deceptive organic claims. Cosmetics sold in California are subject to additional requirements set forth under the California Organic Products Act of 2003 (COPA).  

According to the Complaint, CEH claims it found dozens of products made by the 26 defendant companies that are labeled organic, yet contain few or, in some cases, no organic ingredients. Pursuant to COPA, cosmetic products labeled with the term “organic” on the front of the package must contain at least 70 percent organic ingredients. Those products with less than 70 percent may only use the term "organic" on the ingredient list. COPA gives any person standing to file an action to enjoin a party from violating COPA. Additionally, a plaintiff is not required to show injury or damages under COPA in an action for injunctive relief.

Advocates are concerned with the lack of federal cosmetic regulation. Currently, the FDA has a Voluntary Cosmetic Registration Program which allows firms to voluntarily register their facilities and list their products and ingredients. There is no regulation requiring that a cosmetic label be approved prior to use. Advocates were hopeful for the passage of the Safe Cosmetics Act of 2010, which would have increased the FDA’s regulation of cosmetics. However, they were disappointed when the act never made it past the House committee for vote. See our previous report here for more information on the 2010 Safe Cosmetics Act. See our report here on the 2011 Safe Cosmetics Act, which currently in the House committee. With the FDA’s resources focused on food safety and medical device reform, state legislation and lawsuits like that filed by CEH in California state court may be the most immediate and effective means of regulating the manufacture and sale of “organic” cosmetics.

For more information on regulation of the cosmetic industry, please contact us at contact@fidjlaw.com.

General Reinsurance Corp. Settles With OFAC Over Alleged Violations of Iranian Transactions Regulations

On June 29, 2011, the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury announced that it had reached a settlement with General Reinsurance Corporation (“General”) over alleged violations of the Iranian Transaction Regulations (“ITR”). The alleged violations of the IRT highlight the broad reach and complexity of the sanctions on trade with Iran. General information regarding economic sanctions against Iran can be found at OFACs website here.

The ITR, which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC. 31 C.F.R. § 560.206 prohibits U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran. Additionally, 31 C.F.R. § 560.208 prohibits U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person.

Similar to our previous reports of IRT settlement agreements, although General did not directly engage in business with Iran, due to the nature of its business relationships with other entities who were engaged in business in Iran, General was found to be in violation of the IRT. OFAC alleged that the violations consisted of two reinsurance claim payments to the Steamship Mutual Underwriting Association Limited for losses arising from vessel operations of the National Iranian Tanker Company which Steamship Mutual insured. According to OFAC, General made these excess of loss claim payments pursuant to its facultative reinsurance obligation to Steamship Mutual for the coverage period of June 16, 1998 to February 20, 2002. (Reinsurance is an insurance policy taken out by an insurance company on an insurance policy. Reinsurance is usually purchased by the original insurer to mitigate its own risks associated with payment of policies. The reinsurance is used to cover and pay the original policy. In a facultative reinsurance agreement the reinsurer assumes all or part of the risks associated with a particular policy.) Consequently, due to the broad reach of the IRT, and even though General had no direct business relationships with any Iranian business, Generals reinsurance activities were deemed by OFAC to be a violation.

OFAC announced that General has paid $59,130 in penalties for its violations. According to OFAC enforcement guidelines, the base penalty associated with such a violation is $131,424. However, this penalty was lowered because: 1) General voluntarily disclosed its violations and substantially cooperated with OFAC; 2) General is the largest reinsurer in the United States; 3) the violations were the result of personnel violating Generals policies and procedures; and 4) General has not previously been subject to OFAC penalties. Additionally, General has installed enhanced sanctions compliance software and implemented new training programs regarding sanctioned transactions. A copy of OFACs announcement can be read here.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com

Sherley v. Sebelius: Briefs Argue Whether Federal Funds Incentivize Embryo Destruction

On June 24, 2011, supplemental briefs were filed by both sides in Sherley v. Seleblius, the landmark lawsuit challenging the legality of government funding for research of human embryonic stem cells (hESC). The supplemental briefs, filed with Chief Judge Royce Lamberth of the U.S. District Court for the District of Columbia, may be the parties final arguments.

The plaintiffs in this case, Dr. Sherley and Dr. Deisher, brought suit to enjoin the National Institute of Health (NIH) from funding research using hESCs pursuant to the NIHs 2009 Guidelines (the “Guidelines”). They assert that the Guidelines violated the 1996 Dickey-Wicker Amendment by funding hESC research projects. The Dickey-Wicker Amendment bans funding for research “in which a human embryo or embryos are destroyed.”

On August 23, 2010, the District Court granted the plaintiffs motion for a preliminary injunction which stopped the NIH from funding embryonic stem cell research. However, two weeks later, the Government won a temporary stay of the preliminary injunction from the Court of Appeals for the District of Columbia. See our previous report for more information on this decision.

The Court of Appeals overturned the preliminary injunction in April holding the plaintiffs were unlikely to prevail because the Dickey-Wicker Amendment is ambiguous, see our previous report here. The Court of Appeals remanded the case back to the District Court to be decided on the merits by Chief Judge Lamberth.

In their supplemental brief, the plaintiffs argued that “[t]he federally sponsored hESC research that the Guidelines support inevitably creates a substantial risk”indeed, a virtual certainty”that more human embryos will be destroyed in order to derive more hESCs for research purposes.”

The government, in anticipation of the plaintiffs theory, argued the Guidelines interpreted the Dickey-Wicker Amendment to permit the funding of hESC research but to forbid funding for the derivation of hESCs. The government further argued “that the Guidelines Ëœincentivize the donation of future embryos casts no doubt on whether NIH had reasonably interpreted the [Dickey-Wicker Amendment], both because future donors would not be engaging in Ëœresearch in which an embryo is subject to a risk of injury, and because it is not plausible to claim that NIH funded researchers Ëœknowingly create the incentive for future donation.”

Fuerst Ittleman will continue to closely monitor the progress of issues regarding funding for stem cell research. If you have any questions pertaining to new NIH guidelines, or the application process for receiving NIH grants, contact Fuerst Ittleman PL at contact@fidjlaw.com.

Supreme Court Holds Failure to Warn Suits Against Generic Drug Manufacturers Are Preempted By Federal Law

On June 23, 2011, the Supreme Court ruled in Pliva, Inc. v. Mensing that federal law preempts state tort law suits against generic drug manufacturers for failure to provide adequate warning labels. The decision comes two years after Wyeth v. Levine in which the Court held that federal drug laws did not preempt such suits against brand-name manufacturers. As a result of its decision in Pliva, generic drug manufacturers have greater protection against state tort suits than their brand-name manufacturing counterparts. Also, as a result of this decision, consumers are left with fewer remedies for injuries caused by taking generic drugs than their brand-name counterparts.

In Pliva, Mrs. Mensing and Mrs. Demahy brought state-law tort claims against generic manufacturers claiming that the labels warning of the dangers associated with the long term use of their drugs were inadequate. As a result of the long term use of the generic drugs, Mrs. Mensing and Mrs. Demahy alleged that they developed a severe neurological disorder whose risk of development was known by the generic manufacturer to be greater than that indicated on the label.

Responding to the plaintiffs’ claims, the generic manufacturers argued that because federal law requires a generic drug to bear the same label as its brand-name counterpart, it was impossible to also comply with a state law duty to revise its labels. Thus, the Court addressed “whether federal drug regulations applicable to generic drug manufacturers directly conflict with, and thus preempt, these state-law claims.”

In determining conflict preemption applied and that Mrs. Mensing’s and Mrs. Demahy’s state tort law claims were barred, the Court focused its analysis on “whether the private party could independently do under federal law what state law requires of it.” The Court found that under federal law brand-name and generic drug manufacturers have different labeling duties. While a brand-name manufacturer is responsible for the accuracy and adequacy of its label, a generic manufacturer’s duty is to ensure that its warning label is the same as the brand-name drug’s.

Consequently, the Court rejected the victims’ argument that, like the brand-name manufacturers in Wyeth, generic drug manufacturers could provide additional warning labels before receiving agency approval through the FDA’s “change being effected” (“CBE”) regulations. In reaching this conclusion, the Court relied heavily upon the FDA’s interpretation of its CBE regulations. The FDA asserted, and the Court agreed, that the CBE regulations only permit generic drug manufacturers to change its label: 1) to match an updated brand-name label, or 2) to follow the FDA’s instructions.

Furthermore, though all manufacturers bear responsibility for the content of their labels at all times to ensure adequate and accurate labeling, the “requirement of sameness” in generic labeling prohibits the unilateral change of a generic label. Instead, the Court adopted the FDA’s position that “generic drug manufacturers that become aware of safety problems must ask the [FDA] to work toward strengthening the label that applies to both the generic and brand-name equivalent drug,” rather than unilaterally changing a label.

However, the Court also rejected the argument that in order for state tort claims against manufacturers of generic drugs to be preempted by federal law, the generic drug manufacturer must first ask the FDA for help in strengthening the brand-name label and thus its own. In rejecting this argument, the Court found that even if a generic drug manufacturer complied with its obligation under federal law to communicate with the FDA about the possibility of a safer label, such actions would not satisfy its state law duty to provide adequate labeling. The Court stated: “state law demanded a safer label; it did not instruct the Manufacturers to communicate with the FDA about the possibility of a safer label.” The Court went on to hold that “when a party cannot satisfy its state duties without the Federal Government’s special permission and assistance, which is dependent on the exercise of judgment by a federal agency, that party cannot independently satisfy those state duties for preemption purposes.”

Therefore, because state tort law requires all drug manufacturers to  adequately and safely label their products, but federal drug regulations prevent generic manufacturers from unilaterally changing their generic drug products’ safety labels, “it was impossible for the Manufacturers to comply with both their state-law duty to change the label and their federal law duty to keep the label the same.” As such, the Court found that state law was preempted by the federal drug regulatory regime.

Given that the Court previously found in Wyeth that “Congress did not intend FDA oversight to be the exclusive means of ensuring drug safety and effectiveness,” this case raises the interesting question of whether the Court’s decision leaves a gap in consumer protection. The practical result of the Court’s opinion is that the ability of an individual to bring a state tort suit for failure to warn of dangers regarding drug products now hinges on whether that drug product is brand-name or generic. However, the Court’s last line of Pliva is telling: “as always, Congress and the FDA retain the authority to change the law and regulations if they so desire.” Fuerst Ittleman will continue to monitor the progress of these issues. For more information, contact us at contact@fidjlaw.com.

Former Jenkens & Gilchrist Attorneys, Former BDO Seidman CEO, and Deutsche Bank Broker Found Guilty of Multi-Billion Dollar Tax Fraud Scheme

Four tax and banking professionals were convicted on May 24, 2011 in Manhattan federal court for their roles in a tax shelter scheme, sending a clear message that dishonest tax professionals will be held accountable for their crimes. The verdict found former Jenkens & Gilchrist attorneys Paul M. Daugerdas and Donna M. Guerin, former BDO Seidman CEO Denis M. Field, and Deutsche Bank broker David Parse guilty of designing, marketing, and implementing fraudulent tax shelters used by the wealthy to avoid paying taxes to the IRS. According to the Justice Department, Daugerdas, Guerin, and Field collectively made $130 million in profits from the 10-year scheme.

According to the evidence, the defendants”who are all certified public accountants”undertook to prevent the IRS from detecting their clients use of the tax shelters. The defendants also created and assisted in creating transactional documents that fraudulently described their clients motivations for entering into the tax shelters. The entire scheme lasted from 1994 through 2004 and made the defendants millions of dollars in fees, commissions, and bonuses. Daugerdas, Field, and Parse also utilized the tax shelters for themselves to evade tax liabilities for their illicit income. For example, Daugerdas used the shelters to cut his tax liability on his $95 million income from over $32 million to less than $8,000.

Chief of IRS-Criminal Investigation Victor S.O. Song stated,

Promoting and marketing tax shelter transactions intended to conceal the true facts from the IRS isnt tax planning; its criminal activity. People trust their attorneys and Certified Public Accountants to hold the highest standards when dealing in financial transactions. Todays conviction reinforces or commitment to every American taxpayer to identify and to prosecute those who devise illegal tax shelters.

The Justice Department reported that Daugerdas, Guerin, and Field were all convicted of “conspiring to defraud the IRS to evade taxes, and of corruptly endeavoring to obstruct and impede the internal revenue laws,” in addition to mail fraud and multiple counts of tax evasion. Parse was convicted of mail fraud and obstructing internal revenue laws. The defendants face prison time and, for all counts except mail fraud, fines of the greater of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS. Sentencing is scheduled for October 14, 2011.

Several other defendants implicated in the case have already pleaded guilty. At least four additional defendants are former BDO partners or executives. In December 2010, Deutsche Bank agreed to pay $553,633,153 to the United States in connection with the transactions engineered by the defendants.

The attorneys at Fuerst Ittleman, PL are committed to providing ethically and legally sound tax advisory and litigation services. For a private consultation regarding your companys tax planning or tax issues, email us at contact@fidjlaw.com.

Federal Judge Permanently Enjoins HedgeLender From Promoting Its Stock-Loan Arrangement Which Allegedly Assisted Customers Evade Nearly 30 Million in Income Taxes

On June 14, 2011, a Virginia federal judge granted a permanent injunction barring HedgeLender, LLC (“HedgeLender”) from promoting a stock-loan tax scheme that allowed owners of appreciated stock to obtain cash without paying capital gains tax through the use of purported income.

In 1999, Daniel Stafford started an unincorporated entity named the “SAS” group in Reston, Virginia. He incorporated the entity in 2001 in Delaware as HedgeLender Corporation and maintained its principal place of business in Reston, VA. In August 2001, HedgeLender entered into a joint venture agreement to design, produce, sell, and deliver no-margin call, no-contingent-liability stock loan products. HedgeLender coordinated all marketing efforts and advertised the transactions to customers outside the insurance industry.

Specifically, HedgeLender advertised HedgeLoans as a means for consumers to transfer their securities to certain lenders as collateral for a loan against the value of those securities. Specifically, they advertised the loans as “non-recourse, non-callable loans for up to 90% of the value of a customer’s securities.” The customers then transferred the securities to a specific as collateral for the loan. HedgeLender promotions also stated that capital gains from the HedgeLoans were not income, but tax free loan proceeds. Other marketing tactics included:

  • A term of two to seven years;
  • An above-market interest rate;
  • Any dividends issued on the securities during the loan were credited against the accrued interest;
  • Prepayment of the principal and interest was prohibited during the term of the loan; and
  • The customer can receive the full value of his securities at maturity if he repaid the balance of the loan, regardless of how much the securities had appreciated.

Once a customer entered into a HedgeLoan transaction, HedgeLender gave the customer a Master Loan Agreement (“MLA”). The customer would then be told to transfer his securities to a lender, which essentially also transferred the securities legal title. HedgeLender, however, told customers that they still had “beneficial ownership” of the securities for the term of the transaction. HedgeLender also told customers that once the securities were transferred, the lender would enter into “hedges” with the customers’ securities. According to the MLA, the lender had no responsibility to transfer the loan proceeds to a customer until it hedged the securities.

As discussed by the Court,

The defendant [was] aware that the “hedge” [was] actually a sale of the customers’ securities in the open market. Because the lender [sold] the securities, they are not collateral for a loan. Regardless, the lender in the joint venture with the defendant sends statements to the customers that describe the value of the customer’s collateral securities, the amount of accrued, and any dividends received on the securities. But, because the securities are sold, no dividends are issued on them and no interest is accrued. The lender also does not issue IRS form 1099 to customers or to the IRS when it sells the securities.

United States v. HedgeLender LLC, No. 10-cv-01054-TSE-IDD, (E. Dist. Va. 2011).

In 2007, several customers whose loans matured chose to repay the loans; the lender, however, did not have enough funds to buy back the securities or return the cash equivalent to the customers. The lender, thus, defaulted on its obligations under the MLA. Consequently by 2008, more than $268 million in securities and more than 350 customers had transacted in the scheme.

After conducting audits of some HedgeLoans customers, the IRS has determined that the HedgeLoan schemes have helped customers to evade taxes and hindered the Agency’s efforts to administer federal tax laws. Furthermore, between 2001 and 2008, Defendant’s promotion of HedgeLoans caused more than $268 million in taxable sales of securities for more than 350 customers. The IRS has determined that the average amount of under-reported income for HedgeLender customers has resulted in an average deficiency of $85,641 in income tax owed per customer. As a result, the Agency estimates a total loss in income tax in the amount of as much as $30 million.

Id. As discussed above, the Court deemed HedgeLoans a tax shelter within the meaning of IRC §6700. As further discussed by the Court:

Since the Defendant promoted the HedgeLoans transactions as “loans,” which has tax implications for customers, then the transactions have some connection to taxes and are a “plan or arrangement” within the meaning of IRC §6700.

When considering whether injunctive relief was appropriate under IRC §§7402(a) and 7408, the Court considered the following:

  1. The gravity of harm caused by the offense;
  2. The extend of the defendants participation and his degree of scientor;
  3. The isolated or recurrent nature of the infraction and the likelihood that the defendants customary business activities might again involve him in such transactions;
  4. The defendants recognition of his own culpability; and
  5. The sincerity of his assurances against future violations.

With regard to HedgeLender, the Court found that permanent injunctive relief was appropriate after weighing the above factors.

Specifically, Defendant has promoted and marketed HedgeLoans, and as a result, hundreds of customers have engaged in transactions. Through audits of some HedgeLoans customers, the IRS has determined that these customers have failed to report income, which on average, results in $85,641 in income tax deficiency per customer. In total, the IRS estimates that it has lost income in the approximate amount of $30 million in unpaid taxes involving all HedgeLoans customers. In addition, the Agency will have to utilize significant resources to continue audits of HedgeLoans customers. This is a significant harm to society because it promotes noncompliance with federal tax laws and is a great cost to the public.

Id. (emphasis added).

The attorneys at Fuerst Ittleman, PL have extensive experience with the complex regulatory provisions governing the reporting of transactions including the tax treatment of loans as well as the sale of securities. You can contact an attorney by emailing us at contact@fidjlaw.com.

U.S. Cracks Down on UBS Clients in California

Our continuing coverage of the U.S. governments attack on hidden offshore assets brings us the two latest cases against UBS clients, both surfacing in California district courts. Robert Greeley of San Francisco and Sean and Nadia Roberts of Tehachapi were charged with filing false 2008 income tax returns that failed to disclose their foreign accounts. Since 2007, the government has accused more than two dozen former UBS clients of tax crimes.

On June 14, Greeley was charged with filing a 2008 tax return that failed to report two UBS accounts and the interest income earned on the accounts. Greeley allegedly held both accounts in the name of Cayman Islands entities that he controlled”one from 2002 through at least 2008, and the other from 2004 through at least 2008.

On June 20, the Justice Department announced that Sean and Nadia Roberts pleaded guilty to filing a false tax return that failed to disclose, among other foreign accounts, a secret UBS bank account. The charges culminate a string of transactions by the Robertses which effected a sham aircraft loan and filtered cash from their domestic business through various foreign accounts and entities. The Robertses admitted to the following:

  • Filing returns for tax years 2004 through 2008 that concealed their interest in the foreign accounts
  • Failing to report income on the accounts,
  • Falsely deducting transfers from their business to the accounts, and
  • Failing to file Reports of Foreign Bank and Financial Accounts (“FBARs”) disclosing their interests in same.

    • The couple agreed to pay $709,675 of restitution to the IRS, and a 50 percent penalty for the one year with the highest offshore balance to resolve their failure to file FBARs.

    The IRS implemented an Offshore Voluntary Disclosure Initiative in 2009”and again this year”whereby taxpayers avoid prosecution by disclosing their offshore accounts. Read our coverage of the Second Offshore Voluntary Disclosure Initiative here.

    The attorneys at Fuerst Ittleman, PL are adept in the complex regulatory requirements of the Bank Secrecy Act, foreign bank accounts, and the Internal Revenue Code. You can contact an attorney by emailing us at contact@fidjlaw.com.

    Third Circuit to consider Constitutionality of IRS Summons Issued in U.S. Virgin Islands Economic Development Credit Case

    On June 13, 2011, Joseph A. DiRuzzo, III, a Senior Tax Associate at Fuerst Ittleman, PL filed his Initial Brief in the Third Circuit Court of Appeals in Gangi v. United States of America, 3d. Cir. case # 11-1612. The appeal stems from a decision of the United States District Court for the District of New Jersey in which the District Court granted in part and denied in part Mr. Gangis petition to quash two separate IRS summons, one issued to CitiBank and the other to Sovereign Bank.

    Mr. Gangi petitioned the District Court contending that the IRS summons used to audit USVI taxpayer that claimed EDC credits violated United States v. Powell, was unconstitutional, and that there was institutional bad faith on part of the IRS. The District Court ruled, in part, against Mr. Gangi finding that the IRS summonses in question were properly issued.

    The 3rd Circuit opening brief argued that the District Court erred in concluding that the enforcement of the IRS summonses would not result in an abuse of its process; that the “Virgin Islands project” (the IRS audit project regarding USVI residency) was predicated on an unconstitutional construction of the Internal Revenue Code and violated the Equal Protection Clause; and that the IRS Taxpayer Advocates 2009 report to Congress demonstrated institutional bad faith on the part of the IRS.

    A full copy of the opening brief is available here.

    The Answer Brief of the United States is expected in mid July. The pace of the Virgin Islands tax litigation is quickening as this case will require the Third Circuit to again examine the USVI residency/EDC cases, and in July the Tax Court will be hearing oral argument regarding the applicability of TERFA to USVI partnerships.

    The attorneys at Fuerst Ittleman have extensive experience in litigating against the IRS and the Tax Division of the U.S. Department of Justice before the Tax Court, District Courts, and Courts of Appeal in civil and criminal matters. Additionally, the attorneys at Fuerst Ittleman have extensive experience in Virgin Islands tax cases, and Mr. DiRuzzo is admitted to practice law in the USVI. For more information, contact us at: contact@fidjlaw.com.

    Two Dietary Supplement Companies Found Guilty of Criminal Contempt for Violating Consent Decree

    A New Jersey jury found two dietary supplement companies guilty of several counts of criminal contempt for violating a consent decree, see Department of Justice announcement. A consent decree is an agreement wherein the defendant agrees to take voluntary action to remedy nonconformance and, in turn, settles a pending civil suit with the government. Criminal contempt generally refers to conduct that defies or disrespects the court and impedes the administration of justice.

    Dr. Mohamed Desoky is the owner of two dietary supplement companies, Quality Formulation Laboratories, Inc. and American Sports Nutrition, Inc. These companies manufactured and distributed food products and supplements, including protein powder mixes and other dietary supplements, under the American Sports Nutrition brand and other private labels across the United States.

    In December 2008 and January 2009, the U.S. Food and Drug Administration (FDA) launched an investigation of Desoky and his companies in Paterson, New Jersey. During the course of that investigation, the FDA observed several instances of noncompliance with good manufacturing principles (GMPs), see FDA Inspection Form here.

    Based on the results of the FDAs investigation, the Justice Department filed suit against Desoky and his companies. In the complaint, the Justice Department claimed that Desokys companies produced adulterated food because its operations failed to meet the FDAs regulations for GMPs and that its insanitary conditions may have resulted in products contaminated with filth. The complaint also alleged that Desokys companies caused misbranding of food because their product labels failed to indicate the presence of a major allergen, milk.

    The complaint alleged that upon observation of the production area, the FDAs investigator found raw ingredient bags with rodent urine stains and numerous holes where rodents had gnawed completely through the packaging. Furthermore, the investigator allegedly surveyed that at least two dead rodents”one of which was apparently cut in half”were found in production or product storage areas. The complaint went on to allege observation of multiple instances of live, active rodents and the existence of rodent excrement throughout the factory. The companys alleged “failure to have adequate control over their manufacturing process, sanitizing and cleaning operations, and employee training” may have resulted in a product containing a major allergen due to “cross-contamination” or “cross-contact” during the manufacturing process.

    In March 2010, Desoky signed and entered into a consent decree of permanent injunction that required the defendants to immediately cease all manufacturing operations, including directly or indirectly receiving, manufacturing, preparing, packing, labeling, and distributing any article of food, including dietary supplements, see FDAs announcement of consent decree here. Pursuant to this consent decree, Desoky and his companies were prohibited from reopening their operations in New Jersey or elsewhere without first correcting their violations and obtaining FDA approval.

    Soon thereafter, the FDA conducted another investigation of the Quality Formulations facility and found evidence that some manufacturing and distribution had occurred after the consent decree came into effect. Additionally, the FDA determined that Desoky transported some employees and equipment to a new facility to continue manufacturing and shipping products. As a result of this violation, the government filed criminal contempt charges against Desoky, his companies and Desokys two sons, who, even with the knowledge of the consent decrees terms, allegedly helped Desoky set up the new manufacturing facility in Congers, New York. Criminal charges were filed in the U.S. District Court for the District of New Jersey and the jury returned a guilty verdict. Sentencing has been scheduled by the court for September 7, 2011.

    The jurys guilty verdict may be a strong indication to food and dietary supplement manufacturers of the importance of compliance with food safety laws. This case raises interesting questions about the role of consent decrees in future litigation with the FDA, as well as the FDAs future regulation of dietary supplement companies and GMPs. Fuerst Ittleman will continue to monitor the progress of these issues. For more information, contact us at contact@fidjlaw.com.