U.S. Court of Appeals for the Second Circuit Overturns Gen Re and AIG Convictions

On Monday, August 1, 2011, the U.S. Court of Appeals for the Second Circuit overturned the 2008 convictions of four former executives of General Reinsurance Corporation (Gen Re) and one from American International Group (AIG). The Courts opinion can be found here.

In overturning the convictions, the Court declared that the trial judge erred in allowing prosecutors to offer evidence that was prejudicial to the executives and in improperly instructing the jury on causation. The Court ordered new trials for Ronald Ferguson, Gen Res former chief executive; Elizabeth Monrad, Gen Res former chief financial officer; Christopher Garand, Gen Res former senior vice president; Robert Graham, Gen Res former assistant general counsel; and Christian Milton, AIGs former vice president.

The five executives were accused of defrauding AIG investors early in the last decade by almost $600 million by masking losses to AIG. AIG later became known to the general public as a big beneficiary of the federal bailout, receiving $182.3 billion. The criminal case against the defendants arose out of investigations in 2005 by the Securities and Exchange Commission and the New York State Attorney Generals office into AIGs accounting. Prosecutors claimed the alleged fraud on the AIG investors centered on a “sham transaction to inflate AIGs loss reserves by $500 million, which preceded by several years the financial crisis of AIG.” The defendants were convicted of conspiracy, mail fraud, securities fraud and making false statements to the Securities and Exchange Commission and sentenced to terms ranging from one to four years.

However, the three-judge federal appeals court panel said that the trial judge erroneously let prosecutors display three charts with misleading AIG stock-price data. In its 77-page opinion, the panel said that the charts suggested that the “sham transaction” caused AIGs shares to plummet 12 percent during the relevant time period, and that suggestion was without foundation. The charts cast the defendants as causing an economic downturn affecting every family in America.

The Court ordered new trials for the defendants, causing a significant setback to the Department of Justice. The initial convictions in 2008 were seen as a milestone in the governments efforts to prosecute white-collar crime. However, recently, the government has declined to pursue or has failed to win convictions in a number of high-profile cases, particularly those stemming from the financial crisis.

For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

Court finds Florida’s Drug Abuse Prevention and Control Law Unconstitutional

On July 27, 2011, Judge Mary Scriven of the United States District Court for the Middle District of Florida declared Floridas Drug Abuse Prevention and Control law, § 893.13, Fla. Stat. as amended by § 893.101, Fla. Stat., unconstitutional. The Court found that the law violated due process because it eliminated mens rea as an element of felony delivery of a controlled substance thus making the law a strict liability offense. A copy of the opinion can be read here.

Mens rea, a Latin phrase meaning “guilty mind,” is best described as the intent one has to commit a crime. As described by Judge Scriven, the concept of requiring not only an actus reus, i.e. a criminal act, as well as a mens rea, i.e. a criminal intent, to obtain a conviction is a fundamental part of American and common law criminal jurisprudence. These two requirements are reflected in the principle stated by Sir Edward Coke that the “act does make a person guilty unless the mind be also guilty.”

However, over time, the federal and state governments have developed numerous criminal statutes that require no proof of criminal intent. In order to be found guilty of violating such laws, the government is only required to prove that a person did the prohibited act, even if the actions occurred by accident or mistake. Laws that do not require a mens rea element are known as strict liability or in some cases, general intent offenses. A majority of strict liability offenses are regulatory or public welfare offenses which are crimes that punish actions a reasonable person should know would seriously threaten a communitys health or safety. Examples of regulatory offenses include the misbranding and adulteration provisions of the FDCA. See 21 U.S.C. § 331. Recently, the rise of the proliferation of strict liability crimes was the subject of an article in the Wall Street Journal. A copy of that article can be read here.

Although legislatures can create strict liability offenses, they are generally disfavored by the courts. Courts will uphold such offenses as constitutional only if: 1) the penalty imposed in slight; 2) a conviction does not result in a substantial stigma to the offender; and 3) the statute regulates inherently dangerous or deleterious conduct. See Staples v. United States, 511 U.S. 600 (1994).

In this case, Mackel Shelton was convicted of delivery of cocaine, a controlled substance, in violation of Floridas Drug Abuse Prevention and Control law found at § 893.13, Fla. Stat. Under the statute, a person is guilty of a drug offense if: 1) he delivers any substance, and 2) the substance is a controlled substance under the act. Additionally, Floridas Drug Abuse Prevention and Control law expressly states that “knowledge of the illicit nature of a controlled substance is not an element of any offense under this chapter.” See § 893.101, Fla. Stat. As a result, a defendant could be convicted of deliver of cocaine “without regard to whether he does so purposefully, knowingly, recklessly or negligently.” Such was the basis of Mr. Sheltons conviction.

In finding that § 893.13 violates due process under the United States Constitution, Judge Scriven found that the statute failed all three prongs of the Staples analysis. First, the Court found that because the penalty associated with delivery of cocaine was a maximum of 15 years imprisonment, the penalty was too harsh to be enforced without the State being required to prove that Mr. Shelton acted with criminal intent. The Court noted that “no strict liability statute carrying penalties of the magnitude of Fla. Stat. § 893.13 has ever been upheld under federal law.” Second, the Court found that because a conviction under the statute was a second degree felony with a 15 year sentence, the statute “gravely besmirches an individuals reputation.” As a result, the Court ruled that the statute violated principles of due process because a conviction would result in a substantial stigma to the offender. Finally, the Court found that the statute violated due process as an unconstitutional strict liability offense because it criminalized inherently innocent conduct, namely the delivery of any substance. The Court explained that “where laws proscribe conduct that is neither inherently dangerous nor likely to be regulated, the Supreme Court has consistently either invalidated them or construed them to require a proof of mens rea in order to avoid criminalizing Ëœa broad range of apparently innocent conduct.”

The Courts Order provides a detailed analysis which can serve as a roadmap to criminal defendants and their attorneys seeking to challenge strict liability convictions. The white collar criminal defense lawyers at Fuerst Ittleman are experienced in handling even the most complex cases where clients are facing allegations of criminal actions. The attorneys of Fuerst Ittleman have defended clients in cases involving numerous general intent and strict liability offenses including, money laundering violations found at 18 U.S.C. § 1957, the operation of unlicensed money transmitting businesses found at 18 U.S.C. § 1960, and violations of the FDCA under 21 U.S.C. §§ 331 and 333 as well as prosecutions of corporate officials for FDCA violations under the Park Doctrine. For more information regarding Fuerst Ittlemans white collar criminal defense practice, contact an attorney today at contact@fidjlaw.com.

Office Of Financial Regulation Report Finds That Money Services Businesses Help Facilitate Ongoing Workers’ Compensation Premium Fraud

On August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation issued a report to the Governor and his Cabinet regarding workers compensation fraud in the State of Florida. The report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers compensation insurance market. Money Services Businesses are regulated by the Office of Financial Regulation pursuant to Chapter 560, Florida Statutes. A copy of the Office of Financial Regulations report can be read here.

According to the report, the scheme is designed to allow uninsured subcontractors to procure contracting jobs while avoiding paying workers compensation insurance premiums and payroll taxes on the money earned. (Florida law requires that subcontractors possess a valid workers compensation policy in order to obtain contracts from a general contractor).

The scheme works as follows: First, individuals, known as “facilitators” incorporate “shell” companies, i.e. companies with no business operations, labor force, or physical location other than a P.O. Box, designed to appear as subcontractors on paper. Often times, the facilitators identity is completely unknown as fictitious owners are listed as the owners and officers of the corporation. Next, the shell company obtains a minimal workers compensation insurance policy. Once the shell company has obtained insurance, it proceeds to “rent” its certificate of insurance to uninsured subcontractors. The facilitators allow the uninsured subcontractor to use the shell companys name and workers compensation policy in return for a fee. Uninsured subcontractors who have “rented” the shell company will then have paperwork that appears to be compliant with state law, thus allowing them to enter into construction contracts with General Contractors.

The MSBs involvement in the fraud scheme occurs upon completion of the contract between the subcontractor and the general contractor.  Once the work is completed by the uninsured subcontractor, payment is made to him by the general contractor via check made payable to the “rented” shell company. It is at this stage where an MSB, often a check casher, enters into the scheme because, unlike banks, which normally require that checks made payable to a business or third party be deposited directly into the payees account, a check casher will pay out business-to-business checks, if cashed by persons authorized by the payee. According to the report, “these Ëœauthorized persons are usually the facilitator, and others designated by the facilitator, introduced to and known by the owner/operator of the MSB.”

Upon cashing the check in the name of the shell corporation, two fees are taken out. First, the check casher takes 1.5 to 2% for itself as the fee for cashing the check. Next, a 6-8% fee for the facilitator is taken out as the “rent” paid by the uninsured subcontractor for using the shell companys name and insurance policy. The remaining goes to the uninsured subcontractor as payment for his services. In some cases, the check casher is unaware that its actions are part of a larger fraudulent scheme. Often times in such situations, the check casher becomes an unknowing part of the scheme because of a lack of due diligence in its AML compliance programs.

However, the report also indicated that in some cases the facilitators are actually the MSB owners themselves who act in concert with contractors to find uninsured subcontractors for construction contracts. Additionally, the report noted that in some cases complicit MSBs would falsify Currency Transaction Reports in order to protect the identity of the facilitator by naming the fictitious owners in the CTR. In accordance with the Bank Secrecy Act and its implementing regulations, an MSB is required to file a CTR for every transaction in currency in excess of $10,000. The failure to file a CTR or the falsifying of a CTR violates both state and federal law. More information on BSA requirements for MSBs can be found on FinCENs website here.

As a result of this scheme, “rent” paid to the shell company is not reported to the shells insurance carrier and is not subject to payroll taxes because the payments appear on paper as legitimate contractor-to-insured-subcontractor payments. Additionally, because uninsured subcontractors save money by avoiding workers compensation insurance premiums, they are able to charge a significantly cheaper rate for their services to their co-conspiring general contractors. These general contractors are then able to lower their bid prices and win construction contract jobs away from legitimate businesses. The report estimates that contractors who participate in the “renting” scheme are able to charge up to 20% less then competition for the same work. The practical effects are far reaching. First, legitimate contractors have difficulty winning bids on construction jobs because they cannot quote prices as low as the conspiring contracting companies. Second, none of the ill-gotten gains are assessed workers compensation insurance premiums or payroll taxes, resulting in a loss of revenue for the state.

Additionally, this scheme makes clear the importance of MSBs having robust AML compliance programs in place so that the MSB does not become an unknowing facilitator of fraud. MSBs must ensure that they maintain detailed and up to date records as required by law. MSBs must also ensure that their employees are properly trained in AML compliance in order to spot suspicious transactions and activities.

If you have questions pertaining to the Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fidjlaw.com.

More Than Half-Dozen Strains of E. Coli are Deadly, One is Illegal

A growing number of lawmakers, food-safety and consumer advocates are demanding that all lethal strains of Escherichia coli (E. coli) be declared adulterants when present in meat. There are seven known lethal strains of Shiga toxin-producing E. coli. Shiga toxin enters cells and stops the cells from producing proteins needed to function causing the cell to die. Symptoms include abdominal pain, bloody diarrhea, kidney failure and death.

Currently, E. coli O157:H7 (O157) is the only strain of Shiga toxin-producing E. coli to be singled out by the U.S. Department of Agriculture (USDA) as an adulterant when present in meat. Pursuant to the Federal Meat Inspection Act (FMIA), any raw ground meat that tests positive for O157 is declared adulterated and cannot be sold for human consumption. This regulation came in response to the 1993 Jack in the Box E. coli outbreak that sickened over 700 people in the U.S.

However, there are six other non-O157 Shiga toxin-producing strains of E. coli, known as the Big 6, which are not declared adulterants when present in meat. As a result, meat contaminated with the Big 6 can be sold for human consumption. The Big 6 usually require an illness to trigger a recall because the strains are often not tested for. The USDA decided to single out E. coli O157:H7 because it was especially virulent and caused illness when present even in very small amounts of cooked ground meat.

Following the recent E. Coli outbreak in Europe, U.S. Senator Kristen Gillibrand introduced the meat safety bill (S.1157) on June 8, 2011 that would require ground beef manufacturers to test meat for the Big 6 and other high-risk pathogens before and after the meat is ground. The meat safety bill calls for habitual violators to be listed on a public website. The bill is currently in the Senate Committee on Agriculture, Nutrition, and Forestry.

Critics of the meat safety bill argue that bacteria are constantly evolving and therefore requiring additional testing would not solve E. coli food safety issues. For example, the European E. coli variant that sickened more than 4,075 in Europe and killed 50 people was not known before this spring and is not part of the Big 6. Critics also note that contamination can be cooked out of fresh meat and additional testing would increase the price of ground beef for consumers.

Fuerst Ittleman will continue to monitor the progress of the meat safety bill and requirements for E. coli testing. For more information, please contact us at contact@fidjlaw.com

FDA Requests Public Comment on Notification of a Health Claim or Nutrient Content Claim

Companies seeking to use health claims or nutrient content claims on food labeling must submit notification to the FDA prior to marketing. Pursuant to the Federal Food, Drug, and Cosmetic Act (FD&C Act), such claims must be based on current, published, authoritative statements from certain federal scientific bodies. On August 3, 2011, the U.S. Food and Drug Administration (FDA) announced in the Federal Register that the Agency is seeking public comment concerning the collection of information associated with the submission of notifications of health claims or nutrient content claims.

In 1998, the FDA released guidance regarding the submission of health claims and nutrient content claims. At the time, the Agency stated that the notification must contain the exact wording of the claim, description of the basis relied upon, a copy of the statement referred to, a balanced representation of literature in a bibliography, and information on analytical methodology. The Agency estimates that review of the information collection will take 250-450 hours per notification depending upon the nature of the claim. Currently, the notification must be submitted to the FDA via regular mail.

The FDA invites public comment until October 3, 2011, regarding:

  • Whether the proposed collection of information is necessary for the proper performance of FDAs functions, including whether the information will have practical utility
  • The accuracy of FDAs estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used
  • Ways to enhance the quality, utility, and clarity of the information to be collected
  • Ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques

Fuerst Ittleman will continue to monitor the FDA for changes to submission requirements for notifications of health claims or nutrient content claims. For more information regarding submission of notifications, contact us at contact@fidjlaw.com.

FDA Announces Updates to Premarket Review Standards

On August 2, 2011, the U.S. Food and Drug Administration (FDA) published a notice for comment in the Federal Register regarding updated, withdrawn and modified standards for reviewing premarket applications for medical devices. The notice, entitled Modifications to the List of Recognized Standards, Recognition List Number: 027, is intended to “assist manufacturers who elect to declare conformity with consensus standards to meet certain requirements for medical devices.”

This notice describes 1) the withdrawal of standards and their replacement by others; 2) the correction of errors made by the FDA in listing previously recognized standards; and 3) the changes to the supplementary information sheets of recognized standards that describe revisions to the applicability of these standards. The FDA will incorporate these modifications into the list of FDA Recognized Consensus Standards.

Fuerst Ittleman is well-equipped to assist members of FDA-regulated industry navigate the laws and regulations applicable to medical device applications in the United States. For more information about the current regulatory framework surrounding medical devices, please contact us at contact@fidjlaw.com.

FDA Seeks Comment on Food Safety Fees for Facility Reinspections

On August 1, 2011, the U.S. Food and Drug Administration (FDA) posted a notice for public comment regarding food safety fees associated with facility reinspections. The passage of the Food Safety Modernization Act (FSMA) earlier this year granted the FDA authority to impose and collect fees from food producers when the Agency has to reinspect the facility for compliance with FDA regulations. The Federal Register notice seeks to “obtain information that will be used to formulate a proposed set of guidelines in consideration of the burden of fee amounts on small business.” The FDA will accept comments until October 17, 2011.

The FSMA was signed into law to enable the FDA to better protect public health by helping to ensure the safety and security of the food supply. The law provides the FDA with enforcement power intended to boost the rate of compliance with prevention- and risk-based food safety standards. The new section (32 U.S.C. 379j-31) of the Food, Drug, and Cosmetics Act (FDCA), “mandates that FDA assess and collect fees for costs associated with certain domestic and foreign facility reinspections, failure to comply with a recall orderand certain importer reinspections.”

In this Federal Register notice, the FDA is particularly interested in understanding how these costs may impact small business. In order to prepare for and develop guidelines in consideration of the burden of fee amounts on small businesses, the FDA will accept comments on the following questions:

  • Is a fee reduction or other consideration for small business appropriate?
  • How should small business be defined or recognized for the purpose of the proposed guidelines?
  • If FDA considers reduced fee amounts in the proposed set of guidelines, what factors should FDA consider in establishing the amount by which fees could be reduced?

The fees associated with FDA reinspections will be based on an estimation of 100 percent of the costs of the FDAs expenses, such as the inspectors time at the facility, travel expenses, related administrative tasks, and laboratory analysis. The FDA plans to accept public comment on the cost of fees after the fees are established and published in the Federal Register later this year.

Fuerst Ittleman will continue to monitor the developments in the FDAs regulation of food facilities. For more information, please contact us at contact@fidjlaw.com.

FDA to Launch Online Pet Food Tracking System

Earlier this week, the U.S. Food and Drug Administration (FDA) announced the launch of Pet Event Tracking Network (PETNet), “a secure, web-based information exchange system that will allow FDA and Federal and State Agencies to share initial information about pet-food related incidents, such as illness associated with the consumption of pet food or pet food products.” The new system is intended to improve communication about the safety of pet food products across and within various levels of federal and state government.

This new online system was developed in response to the 2007 melamine pet food recall. (Robert Becerra of Fuerst Ittleman successfully represented the importer of the tainted pet food in the criminal prosecution filed by the U.S. Attorneys Office in Kansas City, Missouri.) At the time, the FDA struggled to effectively communicate information between the Agency and States about the dangers and contamination of certain pet food products. The following year, the FDA created the Partnership for Food Protection, a coalition to “bring federal, state, local, territorial and tribal representatives with expertise in food, feed, epidemiology, laboratory, animal health, environment and public health together to develop an Integrated Food Safety System.”

Together, the FDA and Partnership for Food Protection, launched PETNet. PETNet will function as a voluntary information exchange, surveillance, and alert system. It was designed to make real-time updates about emerging pet food related illnesses available to and accessible by members, government officials responsible for the regulation of pet food products. Members of PETNet can post “events” into the system identifying suspicions or trends in animal food products in their area. The web-based system can quickly and easily transmit information to other regulatory agencies and channels that would benefit from this information. PETNet will enable members able to track individual “events” to determine whether regulatory action needs to be taken in their jurisdiction. PETNet is currently comprised of over 200 representatives from four federal agencies, all 50 states, the District of Columbia and Puerto Rico.

Fuerst Ittleman will continue to track changes in the reporting and regulation of pet food products. For more information, please contact us at contact@fidjlaw.com.

FDA Responds to Requests to Finalize Rule for Gluten-Free Labeling

On July 21, 2011, United States Senators Ron Wyden (D-OR) and Patrick Leahy (D-VT) urged U.S. Food and Drug Administration (FDA) Commissioner Margaret Hamburg to take prompt action and finalize the proposed rule for gluten-free labeling. As we previously reported, the FDA has not defined “gluten-free” in over four years following the release of the proposed definition.

Pursuant to the Food Allergen Labeling and Consumer Protection Act of 2004 (FALCP), the FDA was tasked with proposing rules for gluten labeling within two years of enactment and finalizing the rules within four. The FDA issued a proposed rule in January of 2007, but has yet to promulgate a final rule. Senators Wyden and Leahy are concerned that the lack of federal standards has caused confusion for consumers. Accurately labeling gluten-free products would help those who suffer from celiac disease, a chronic inflammatory disorder of the small intestine which is triggered by certain proteins known as gluten.

Today, the FDA responded and reopened the public comment period on the proposed rule for “gluten-free” labeling for 60 days beginning August 3, 2011. The FDAs goal is to eliminate uncertainty about food labeling and assure consumers that foods labeled “gluten-free” must meet a clear standard established and enforced by the Agency. The FDA stated that the final rule will also apply to dietary supplements, whereas the proposed rule only applied to conventional food products.
In the proposed rule, a food labeled “gluten-free” does not contain any of the following:

  • Any type of wheat, rye, barley, or crossbreeds of these grains
  • An ingredient derived from these grains and that has not been processed to remove gluten
  • An ingredient derived from these grains and that has been processed to remove gluten, if it results in the food containing 20 or more parts per million (ppm) gluten
  • 20 ppm or more gluten

Until the issuance of the final rule, Quality Assurance International (QAI) and the healthcare nonprofit National Foundation for Celiac Awareness (NFCA) created a “Certified Gluten-Free” label to assure customers about accurate gluten-free labeling. The label certifies that the food contains no more than 10 ppm of gluten.

This is not the first time that specific label terms have been left vague or undefined. For example, before the U.S. Department of Agriculture (USDA) finally took action to define the term “organic,” many consumers relied on third party certifications to ensure that food labels were accurate. USDA officials finally drafted a set definition for the term “organic” after seven years in 1997. See our previous report here for more information regarding this issue.
Fuerst Ittleman will continue to monitor the FDA for changes to gluten-free labeling requirements. For more information regarding the labeling of food products, contact us at contact@fidjlaw.com.

New Head of Global Compliance Seeks Increase of FDA Authority over Drug Imports and Recalls

Last month, the U.S. Food and Drug Administration (FDA) appointed a new deputy commissioner for global regulatory operations and policy, Deborah Autor. Autor, the former director of the Center for Drug Evaluation and Research (CDER) Office of Compliance, is urging Congress to increase the FDAs authority over imported drugs and the power to mandate recalls of unsafe drug products.

The FDA has recently announced the new “Pathway to Global Product Safety and Quality” in response to mounting problems related to the importation of food and medical devices; however, it does not cover the importation of drugs. See our previous report for more information on the FDAs new global strategy. Autor is seeking more effective regulation of imported drugs to create drug security in a global pharmaceutical economy.

In an effort to ensure that drugs and clinical trials from abroad adhere to standards comparable to those in the U.S., Autor proposed that the FDA have the power to stop imported drugs at the border if the manufacturer has refused FDA inspections. The FDA states 80 percent of the active ingredients in U.S. drugs are manufactured overseas. Additionally, it is estimated that drug imports will triple by 2015, while it is likely that FDA budget will not. The FDA also estimated that it would take nine years for the agency to inspect every high priority pharmaceutical facility just once. Autor claims that having the authority to stop potentially unsafe drugs at the border will prevent risks associated with uninspected products. 

Autor has proposed FDA mandatory drug recall authority since the contaminated blood thinner, heparin, imported from China killed 81 people in 2008.  Pursuant to the Food Safety Modernization Act (FSMA), the FDA has the authority to order mandatory recalls of food but not drugs. Advocates say that the Senate Committee on Health, Education, Labor and Pensions is likely to give the FDA stronger authority over drugs as part of a broader bill to renew FDA industry fees, which will expire next year.

Fuerst Ittleman will continue to monitor the FDAs progress regulating the importation of drugs. For more information, please contact us at contact@fidjlaw.com.