Harsh sentences coming for strict liability FDA misdemeanor offense

The FDA has recently expressed that it intends to bring more criminal prosecutions for strict liability offenses under the Food, Drug & Cosmetic Act (FDCA) under the “Park” Doctrine. As we previously discussed, the FDCA makes it a criminal misdemeanor to violate the FDCA even if a person had no knowledge of a violation, did not commit fraud, and did not intend to violate the law. This is known as a “strict liability” misdemeanor, as opposed to criminal offenses that require a defendant to knowingly commit an offense.

On January 19, 2011, the United States Sentencing Commission (The Commission) issued a Federal Register Notice regarding amendments to the Federal Sentencing Guidelines which would require many persons convicted and sentenced under the misdemeanor, strict liability provisions of the FDCA to be sentenced under more serious guidelines for fraud rather than for regulatory offenses. The impact of these proposed changes is that strict liability, or “Park” misdemeanor offenses could receive the same guideline score as a felony offense requiring intent to defraud, and consequently a similar sentence, i.e. prison terms. The Commission proposal would amend the Guidelines with regard to “persons convicted of Federal health care offenses involving Government health care programs.” As currently noticed, the proposal would not contain a limitation with regard to the health care offenses and government health care programs to which increased sentences would apply. Therefore, they would apply to strict liability misdemeanors under the FDCA that involve health care offense and government health care programs.

What is left open to debate is how directly connected to a government health care program a FDCA offense must be to trigger the proposed guidelines. As seen from recent “off-label” use cases, the Department of Justice believes that such uses implicate government health care programs. As such, a wide swath of proscribed conduct under the FDCA regarding manufacturing, adulteration and misbranding may come under the purview of the new proposed Guidelines. Under the current proposals, there may be considerable litigation regarding the applicability of the enhanced Guidelines to strict liability misdemeanors if there is not further clarification or amendment by the Commission after the comment period.

Lawyers at Fuerst Ittleman concentrate their practices on defending individuals and corporations accused of FDCA offenses in administrative, civil and criminal cases. If you are in need of legal advice regarding the FDCA, criminal investigations or prosecutions regarding the FDA or require guidance on complying with the FDCA, Fuerst Ittleman can assist you.

US Government Audit Reveals Government Waste in Catfish Regulation

In 2008, the U.S. catfish industry convinced Congress to require tougher federal inspections on just one species of fish”catfish”by transferring regulation of domestic and imported catfish from the Food & Drug Administration (FDA) to the Department of Agriculture (USDA). The U.S. catfish industry supported these tougher inspections by the USDA not because it supported tougher regulation on catfish, but because it believed they would be a roadblock to imports from Vietnam and other countries.

Now, a recent government audit has cited the catfish program and its $30 million price tag as a prime example of government waste and duplication. It turns out that when the regulation of catfish, one of the most popular fish in the U.S., was transferred to USDA, the legislation did not clarify that FDA was relieved of any duties regarding the inspection of catfish. As such, there are now two federal agencies responsible for inspecting the same type of fish. The big difference, however, is that while the FDA usually inspects only about 2 percent of the fish imported into the U.S. through spot checks and sampling, the USDA also requires inspection on-site of production facilities. This would require the foreign producers of catfish to create and implement an equivalent inspection system and that could take years.

In the meantime, a Final Rule on implementation of the provision has yet to be issued by USDA. As such, the inspection regime by USDA has not been implemented despite millions already having been spent to implement the legislation.

Given what was stated to be government waste and duplication by the recent audit, Sen. John McCain has taken up the cause of repealing the provision, which was buried in the 2008 Farm Bill. McCain has stated that the provision is “nothing more than a protectionist tactic funded at taxpayers expense” to help special interests, here the U.S. catfish industry. McCain introduced legislation to repeal the provision, stating that “if implemented, the proposed USDA regulations will lead to a duplicative, costly and complex overseas inspection programs that serves no real purpose but to protect American catfish growers from competition while forcing American consumers to pay more for fish.”

Catfish have been a subject of much political debate in Washington. In 2002, legislation backed by the U.S. catfish industry was passed mandating changes in labeling so that Vietnamese catfish could not be imported into the U.S. under the name “catfish”; instead it was mandated that Vietnamese catfish be labeled “pangasius”. Vietnam has considered such restrictions to be trade barriers and has hinted at trade retaliation. In any event, Vietnamese exports of “pangasius” to the U.S. boomed.

Seafood labeling fraud on the other hand, is a serious problem. A February, 2009 General Accounting Office report to Congress found the most common types of Seafood fraud are: Transshipping through a third country to avoid duty; adding water or ice to seafood to increase its weight; substituting one species for another one listed on the label; and less seafood in the package than shown on the label. The Department of Justice takes this kind of fraud seriously; criminal prosecutions have resulted in recent months, as can be seen here. With the passage of the new Food Safety Modernization Act, which became law in January, regulation of seafood will inevitably skyrocket, with the FDA receiving new inspection and recall powers, and Customs implementing restrictions at the border.

U.S. Supreme Court Rules That Drug Companies Must Report Adverse Events To Shareholders, Rejects “Statistically Significant” Risk Argument

On March 22, 2011, the Supreme Court ruled in a unanimous decision that publicly traded drug companies are required to disclose adverse drug events to shareholders in order to comply with their reporting requirements under 10(b)(6) of the Securities Exchange Act. In so ruling, the High Court rejected Matrixx Initiatives, Inc.s (“Matrixx”) argument that publicly traded drug companies need only report adverse events to their shareholders when there is a “sufficient number of reports to establish a statistically significant risk that the product is in fact causing the event.” A copy of the full opinion of Matrixx Initiatives, Inc. v. Siracusano can be read on the Supreme Courts website here.

This case stems from reported adverse effects of Zicam, a cold remedy which Matrixx manufactured until 2009. The suit alleged that for a five year period between 1999 and 2004, Matrixx received numerous reports from medical professionals and researchers describing more than ten patients who lost their sense of smell, a condition known as anosmia, after using Zicam nasal spray and gel. However, Matrixx failed to disclose these reports to its shareholders and instead made claims that the company was poised for growth. In 2004, ABC reported the link between Zicam and the loss of sense of smell. As a result of the report, Matrixxs stock price plummeted. Ultimately, in 2009, the FDA issued a warning to Matrixx that Zicam posed a threat to consumers and Matrixx recalled the product.

The plaintiffs in this case filed suit for securities fraud for failing to disclose material facts and information about the company. Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful for any person to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations” as prescribed by the Commissioner of the SEC. Under 17 CFR §240.10b“5(b), publicly traded companies may not omit or fail to disclose “material facts” and information which would influence the purchase or sale of securities. Matrixx argued that the materiality requirement for reporting adverse drug incidents can only be satisfied when a sufficient number of reports establish that there is a “statistically significant risk” from the use of a drug product.

In rejecting this argument, the Supreme Court found that the materiality standard announced by the Court in Basic Inc. v. Levinson, 485 U. S. 224 (1988) controlled. In Basic, the Court held that the materiality requirement is satisfied when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” Id., at 231“232. Justice Sotomayor, writing for the Court, found that determining materiality of an adverse event report is a “fact specific inquiry” and that, while “the mere existence of reported events” will not in and of itself be sufficient to satisfy the materiality requirement, “the source, content, and context of the reports” must be analyzed determine whether any particular adverse report is sufficiently material as to require disclosure. The Court further stated that “[a] lack of statistically significant data does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse events. As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation.” Here, given that the plaintiffs alleged that Matrixx received reports from medical professionals regarding at least 10 patients suffering from adverse effects, the Court found that plaintiffs had sufficiently alleged that “Matrix received information that plausibly indicated a reliable causal link between Zicam and anosmia.”

As a result of the Courts decision, the class action suit brought against Matrixx Initiatives, Inc. will proceed. For more information on the effect of this decision on your business, please contact us at contact@fidjlaw.com.

11th Circuit Affirms Conviction in Tax Fraud Case Under 18 U.S.C. section 286

On August 17, 2010, the 11th Circuit affirmed the conviction of the Defendant in the case of the United States of America v. Maritiza Valiente, docket # 09-14493.

The facts of the case were somewhat unique, and described by the Court as follows:

Valiente and her codefendants falsely claimed that certain individuals were entitled to income tax refunds based upon their employment at Valiente’s business in 1999. However, in reality, Valiente’s business never had any employees. Using falsified W-2 forms provided by Valientes company, one codefendant prepared and filed false IRS1040 Forms. During early 2000, the two other codefendants assisted in preparing and filing false 1040 Forms. All three codefendants then distributed the illegal proceeds of the federal income tax refunds.

This case is unusual in that the government charged the tax fraud under 18 U.S.C. section 286 (conspiracy to defraud the government in respect to claims); the entire section can be found here. Typically, the government charges individuals with tax evasion under 26 U.S.C. section 7201, found here, or as “Klein conspiracies” under 18 U.S.C. section 371, found here.

Ultimately, the Court found that there was sufficient evidence to support a conviction, and the judgment and sentence were both affirmed. The Eleventh Circuits entire opinion can be found here.

The attorneys at Fuerst Ittleman have extensive experience litigating tax and other white collar criminal matters at trial and the appellate levels. You can contact an attorney at Fuerst Ittleman by emailing contact@fidjlaw.com.

Andrew Ittleman of Fuerst Ittleman to Instruct at 2011 US Money Transmitter Seminar in Los Angeles

On April 14 and 15, 2011, Andrew Ittleman, Esq. CAMS of Fuerst Ittleman will participate as an instructor at the US Money Transmitter Seminar at the Hotel Intercontinental in Los Angeles, California. The Seminar, which will be held as part of the 2011 International Money Transmitter Conference (IMTC), will be the first of its kind in California and will feature intensive discussions on a variety of issues affecting the money transmitting industry. The Seminar is intended to give an in-depth overview of the most important US money transfer regulations as well as the interpretations and expectations of US authorities regarding such regulations. Using examples drawn from real life, participants will receive practical advice on how to implement proper actions to prevent costly mistakes and avoid litigation risks. Among other issues, the Seminar will address the following questions:

  • What is a money transmitting business? Are you sure you are one? Are you sure you are not?
  • If you have a bank account in a state in the US, is your business required to become licensed there?
  • If you have corporate headquarters in a state, is your business required to become licensed there?
  • If you have a license to transmit money in one state, what types of activities can you conduct in other states where you are not licensed?
  • Can a foreign money transmitting business maintain bank accounts in the United States if the business is unregistered or unlicensed in the United States? Does it have to register with FINCEN?
  • Why are criminal investigations and prosecutions uniquely devastating for money services businesses?

For more information about the conference, please visit IMTC’s website. Additionally, Fuerst Ittleman clients and colleagues are entitled to a $100 discount off the cost of registration. For more information, please see the following announcement from IMTCs Director, Mr. Hugo Cuevas-Mohr:

Hugo Cuevas Letter [PDF]

Court of Appeals Overturns Ruling Allowing FDA to Conduct Records Inspections of Compounding Pharmacies

On February 25, 2011, the United States Court of Appeals for the Fifth Circuit vacated a ruling of the United States District Court for the  Western District of Texas which held that the FDA could conduct limited inspections of pharmacy records to determine if pharmacy-compounded drugs comply with the conditions set forth in the Food, Drug  & Cosmetic Act (“FDCA”). The Fifth Circuits opinion may be read here.

This case arose from a 2005 lawsuit filed by a group of pharmacies against the FDA challenging the authority of the FDA to regulate compounded drugs under the FDCA. The District Court ruled in  favor of the pharmacies, declaring that compounded drugs were exempt from new drug definitions and from the new drug approval processes.  Also, it ruled that under the FDCA, if a pharmacy is compliant with local laws, dispenses drugs pursuant to a prescription, and compounds in the regular course of its own business, the pharmacy is exempt from FDA records inspections.

The FDA appealed the District Courts ruling that compounds were exempt from the definition of new drugs under the FDCA, but not the ruling that compliant pharmacies were exempt from FDA records inspections. The Court of Appeals reversed the District Courts ruling on the new drug issue, holding instead that compounded drugs were “new” drugs under the FDCA, but were exempt from the FDCAs substantive provisions if they comply with the conditions of Sections 353a and 360b(a). On remand, the District Court entered a new judgment that declared that the FDA had the statutory authority to conduct limited inspections of pharmacy records to determine whether drugs compounded by pharmacies are exempt from the provisions of the FDCA.

The pharmacies then appealed this new District Court ruling, arguing that by failing to appeal the District Courts first inspection declaration, FDA forfeited the inspection issue. On appeal, the Court of Appeals ruled in favor of the pharmacies, finding that since the FDA did not appeal the District Courts original ruling that compounding pharmacies were exempt from FDA records inspection, the FDA forfeited the issue, and therefore, the District Court violated the “waiver doctrine” by reconsidering the inspection issue. The District Courts ruling that FDA could conduct limited records inspections of compounding pharmacies was thus vacated.

The applicability of many provisions of the FDCA to compounding pharmacies is complicated. With a primary focus of the FDCA being federal regulation of drug manufacturers, the application of these regulations to compounding pharmacies may be inappropriate.

Under the FDCA and its enforcing regulations, drug manufacturers must comply with an extensive regulatory scheme, including the new drug approval process, misbranding provisions, and registration with the FDA.  Additionally, the FDA has the express authority to conduct field inspections of drug manufacturing facilities under the Act.  While it is unclear whether this provision applies to compounding pharmacies, Section 704 of the FDCA allows the FDA “to enter, at reasonable times, any factory, warehouse, or establishment in which food, drugs, devices, or cosmetics are manufactured, processed, packed, or held, for introduction into interstate commerce. . . .”  Based on this language, these provisions may only apply to compounding pharmacies if they are properly considered manufacturers of drugs that may be introduced into interstate commerce.  However, because of the FDAs failure to properly preserve the inspection issue, the Court of Appeals did not determine whether this provision applied and the District Courts original ruling that compounding pharmacies are exempt survives.

The issue of applying the FDCA and its enforcing regulations to compounding pharmacies and doctors is hotly-contested.  Typically applicable to manufacturers, Congress enacted the FDCA in an effort to oversee establishments that manufacture products affecting interstate commerce. However, the FDA has made repeated attempts to apply these restrictions to pharmacists and doctors, which have traditionally been seen as beyond FDAs jurisdiction.  Because Congress did not intend for the Act to regulate practitioners, who are generally regulated by the states, the FDAs regulation of the practice of pharmacy and the practice of medicine may be viewed as exceeding the scope of its authority.

U.S. Department of Justice charges former UBS banker Christos Bagios with conspiracy to defraud the United States

The United States Attorney’s Office for the Southern District of Florida together with the Department of Justice – Tax Division, charged via information Christos Bagios, now a senior banker at Credit Suisse, of conspiring to defraud the United States of income taxes from U.S. citizens and residents pursuant to 18 U.S.C. section 371, commonly referred to as a Klein Conspiracy. Section 371 is available in full here.

According to the criminal complaint, Bagios, while he worked at UBS from 1999 through 2005, helped U.S. taxpayers hide assets from the U.S. government. U.S. taxpayers have an obligation under the Bank Secrecy Act to report foreign bank accounts to the U.S. Treasury. The Bank Secrecy Act is enforced by the Department of the Treasury – Financial Crimes Enforcement Network; see https://www.fincen.gov/statutes_regs/bsa/

According to the information, Bagios aided as many 150 U.S. clients in a bid to conceal between $400 million and $500 million from the Internal Revenue Service. The IRS has been delegated the authority to administer the Foreign Bank Account Report (“FBAR”) forms (Form TD 90.22-1) available here.

As we have previously blogged, four other Swiss bankers were charged last week with helping Americans evade U.S. taxes.

The full text of the criminal complaint can be found here

As we noted before, it appears that in the wake of the UBS deferred prosecution and the indictment, trial and conviction of Maurico Cohen Assor and his son, the Department of Justice is stepping up and continuing enforcement of tax related crimes. The attorneys at Fuerst Ittleman have extensive experience in criminal and civil tax litigation and regularly represent those being investigated for criminal tax offenses. If you have questions regarding income tax and reporting obligations, contact Fuerst Ittleman at contact@fidjlaw.com.

U.S. Supreme Court to Decide if Internal Revenue Code Section 7206 Offenses are a Basis for Deportation

In November of 2010, the taxpayer at issue in Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010) (available here), petitioned the Supreme Court for a Writ of Certiorari. The question presented to the Court in that petition was whether Code section 7206, available here, provides a basis for deportation. The Ninth Circuit has reached a different conclusion than the Third Circuit in Ki Se Lee v. Ashcroft, 368 F.3d 218, 224 (3d Cir. 2004) (available here) creating a split among the Circuits.

The law at issue, 8 U.S.C. §1101(a)(43)(M), available here, defines an aggravated felony as

(M) an offense that”

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.

The split between the Circuits is whether an IRC section 7206 violation can be an aggravated felony when IRC section 7201 is exclusively referenced as an aggravated felony within the criminal provisions contained in Title 26 (the Internal Revenue Code). The significance of this issue is that if the Ninth Circuit’s decision is adopted by the Supreme Court, any crime contained in the Internal Revenue Code could in theory be used as a basis for deportation. As a result, any criminal tax offense must be studied for both criminal and immigration consequences.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating criminal tax matters and have experience litigating ineffective assistance of counsel claims after a plea or conviction.

United States Tax Court Denied Motion to Interplead the Government of the Virgin Islands Regarding Tax Credits Under the Virgin Islands Economic Development Program

In a recent opinion, Judge Jacobs of the United States Tax Court refused to allow a taxpayer to interplead the Government of the Virgin Islands as a party to Tax Court litigation under U.S. Tax Court Rule 1(b), found here, and Federal Rule of Civil Procedure 22, found here. The case is captioned Huff v. Commissioner, 135 T.C. 30 (2010) and the text of the opinion can be found here.

The Huff case stems from the IRS audit of a taxpayer that took Virgin Islands Economic Development credits under Internal Revenue Code section 934, found here. The Virgin Islands Economic Development Program is administered by the Economic Development Commission (see, https://www.usvieda.org/) and is promoted by the United States Department of the Interior, see e.g. https://www.doi.gov/oia/press/2009/11192009.html.

Judge Jacobs ruled that because the Tax Court lacks jurisdiction to redetermine the taxpayer’s Virgin Islands tax liabilities, the taxpayer will not be permitted to interplead the Virgin Islands. The Court further held that 48 U.S.C. sec. 1612(a) explicitly provides that the District Court of the Virgin Islands is the sole court that may determine the correct amount of petitioners Virgin Islands tax liabilities for 2002, 2003, and 2004. The petitioner would consequently have to appear before that court to seek refunds from the Virgin Islands.

The result of the Tax Court’s decision is that there is now a distinct possibility that those taxpayers that were not bona fide Virgin Islands residents, or that did not have Virgin Islands sourced income or income effectively connected with at Virgin Islands trade or business will have to sue the Virgin Islands government in the District Court of the Virgin Islands to recoup taxes improperly paid to the Virgin Islands Bureau of Internal Revenue, found https://www.viirb.com/.

The attorneys at Fuerst Ittleman, PL have extensive experience handling tax litigation against the IRS, the United States government, and the Virgin Islands government.

4th Circuit Rules in Favor of Taxpayers in Son of Boss Case in Home Concrete v. United States

The Fourth Circuit, in an opinion available here, has added itself to the list of Federal circuits in conflict by ruling that a basis overstatement does not qualify as an omission to income under IRC section 6501 that would increase the normal three year limitation period to six. Section 6501 can be viewed in full here. As we previously blogged (in two separate posts here and here), the Seventh Circuit and the Fifth Circuit recently decided the same issue with opposite conclusions.

The Fourth Circuit Court of Appeals held that the statutory issue was resolved by the Supreme Courts decision in Colony, rejecting the argument recently accepted by the Seventh Circuit in Beard found here. The Fourth Circuit concluded that “we join the Ninth and Federal Circuits and conclude that Colony forecloses the argument that Home Concretes overstated basis in its reporting of the short sale proceeds resulted in an omission from its reported gross income.”

Second, the Court held that the outcome was not changed by new Treasury regulations, and in any event, no deference would be given to the Treasury regulations because the Supreme Court had already conclusively construed the term “omission from gross income” in Colony and therefore there was no longer any room for the agency to resolve an ambiguity by regulation.

Judge Wilkinson, on behalf of the Fourth Circuit, further discussed the limits of Chevron deference in the wake of the Supreme Court’s decision in Mayo Foundation case, available here. According to Judge Wilkinson, Mayo “makes perfect sense” in giving “agencies considerable discretion in their areas of expertise.” However he emphasized that “it remains the case that agencies are not a law unto themselves. No less than any other organ of government, they operate in a system in which the last words in law belong to Congress and the Supreme Court.”

The IRS’s attempt to reverse Colony via Treasury regulation “pass[es] the point where the beneficial application of agency expertise gives way to a lack of accountability and a risk of arbitrariness.” He summarizes that “Chevron, Brand X, and more recently, Mayo Foundation rightly leave agencies with a large and beneficial role, but they do not leave courts with no role where the very language of the law is palpably at stake.”

The significance for taxpayers is that depending on where the taxpayer lives at the time his Petition for Redetermination is filed with the U.S. Tax Court, or which U.S. District Court he/she files a lawsuit against the U.S. Government, will govern the outcome of the case. Accordingly, unless and until this issue is resolved by the United States Supreme Court, two taxpayers with identical facts may have two different outcome based merely upon where they reside.

Lawyers at Fuerst Ittleman PL are experienced in handling tax litigation against both the IRS and the U.S. Department of Justice.