Scheme
Caused Losses Estimated at More Than Half-a-Billion Dollars to Medicaid and is
Believed to be the Largest Single Prescription Drug Diversion Scheme Ever
Charged at One Time
Preet Bharara, the United States
Attorney for the Southern District of New York; Janice K. Fedarcyk, the
Assistant Director in Charge of the New York Field Office of the Federal Bureau
of Investigation (FBI); Raymond W. Kelly, the Police Commissioner of the City
of New York (NYPD); and Robert Doar, the Commissioner of the New York City
Human Resources Administration (HRA), announced today the unsealing of charges
against 48 defendants for their participation in a massive fraud scheme
involving the unlawful diversion and trafficking of hundreds of millions of
dollars’ worth of prescription drugs that had previously been dispensed to
Medicaid recipients in the New York City area (“second-hand” drugs), in a
national underground market. As a result of the fraud, Medicaid lost more than
an estimated $500 million in reimbursements for pills that were diverted into
this second-hand black market. Forty-two of the defendants were charged in a
superseding indictment, and six more were charged in a complaint.
Thirty-four of the defendants were
arrested this morning in connection with today’s charges. Fifteen defendants
were taken into custody in New York and New Jersey, and an additional defendant
from the area will surrender today. These 16 defendants will be presented and
arraigned in Manhattan federal court before U.S. Magistrate Judge Frank Maas
later this afternoon. Nineteen other defendants were arrested in Pennsylvania,
Massachusetts, Florida, and Texas and are expected to appear today and tomorrow
in federal courts in those states. The remaining defendants charged are at large.
Manhattan U.S. Attorney Preet Bharara
said, “As alleged, these defendants ran a black market in prescription pills
involving a double-dip fraud of gigantic proportions. It worked a fraud on
Medicaid—in some cases, two times over—a fraud on pharmaceutical companies, a
fraud on legitimate pharmacies, a fraud on patients who unwittingly bought
second-hand drugs, and ultimately, a fraud on the entire health care system.
With the dozens of arrests we made today, we have taken a significant step
toward exposing and shutting down the black market for second-hand drugs, and
our investigation is very much ongoing.”
FBI Assistant Director in Charge Janice
K. Fedarcyk said, “The scheme to collect, aggregate, and resell costly
prescription drugs was bad medicine in three ways: profiting so obscenely by
breaking the law is the very definition of unjust enrichment. The scheme was
theft, plain and simple, from a program funded by taxpayers. And the scheme
posed serious health risks at both the collection and distribution ends. People
with real ailments were induced to sell their medications on the cheap rather
than take them as prescribed, while end-users of the diverted drugs were
getting second-hand medicine that may have been mishandled, adulterated,
improperly stored, repackaged, and expired.”
NYPD Commissioner Raymond W. Kelly said,
“It’s one thing when people sell their blood for money; it’s another when they
sell their drugs, especially when the diversion compromises the pharmaceutical
supply with tainted and outdated drugs.”
HRA Commissioner Robert Doar said, “This
case is an egregious example of individuals preying on our most vulnerable
population. The diversion, repackaging, and reselling of HIV/AIDS medications,
in some cases expired, is a danger to our public health. The integrity of the
Medicaid Program has been threatened by these criminals who have used taxpayer
dollars for the opposite reasons for which they are intended. But make no
mistake, together with our law enforcement partners, we will continue to pursue
these types of criminals and prosecute them to the fullest extent of the law.”
The following allegations are based on
the superseding indictment, the complaint, and other documents unsealed today
in Manhattan federal court:
The prescription drugs involved in this
scheme were drugs designed to treat various illnesses, including HIV,
schizophrenia, and asthma, and were non-controlled substances that did not lend
themselves to abuse. These second-hand drugs were originally dispensed to
Medicaid recipients in the New York City area who then sold them into
collection and distribution channels that ultimately ended at pharmacies for
resale to unsuspecting consumers. The defendants and their co-conspirators
profited by exploiting the difference between the cost to the patient of
obtaining the prescription drugs through Medicaid, which was usually nothing,
and the hundreds of dollars per bottle that pharmacies paid to purchase those
drugs to sell to their customers. In order to maximize their profits, the
defendants and their co-conspirators targeted the most expensive drugs, which
often cost more than $1,000 per bottle.
The
Fraudulent Distribution and Trafficking Scheme
The lowest level participants in the
scheme (the “Medicaid beneficiaries”) were typically AIDS patients or
individuals who suffered from other illnesses that required expensive drug
therapies. Using their Medicaid benefits to cover the costs, the Medicaid
beneficiaries filled prescriptions for month-long supplies of drugs at
pharmacies throughout the New York City area and then sold them to “collectors”
for cash instead of using them for treatment. These transactions occurred at
street corners and bodegas in and around New York City, including in the
Washington Heights neighborhood of Manhattan and in the Bronx. Collectors then
sold the second-hand bottles to higher level participants in the scheme
(“aggregators”), who typically bought large quantities of second-hand drugs
from multiple collectors. These transactions repeated themselves at
increasingly higher levels of aggregators who purchased the drugs from
multiple, lower level aggregators. The pills were ultimately sold to wholesale
prescription drug distribution companies (“corrupt distribution companies”),
which then sold them to pharmacies and to other wholesale prescription
distribution drug companies across the United States. Ultimately, these
pharmacies then dispensed the second-hand drugs to unsuspecting customers, some
of whom likely were Medicaid beneficiaries. Therefore, in some cases, Medicaid
would have reimbursed patients for the same drugs twice—the second time for
drugs that were misbranded, adulterated, and possibly expired—and would thereby
have been defrauded twice.
The defendants charged in the superseding
indictment and the complaint include collectors, aggregators, and owners and
operators of the corrupt distribution companies who were carrying out this
scheme in states including New York, New Jersey, Pennsylvania, Florida, Texas,
Massachusetts, Utah, Nevada, Louisiana, and Alabama.
In addition, several defendants were
also charged with narcotics trafficking offenses for buying and reselling drugs
including Oxycodone and Oxymorphone.
The
Fraudulent Labeling Scheme
Because the prescription drugs involved
in the scheme were not drugs of abuse and were ultimately going to be resold in
the legal drug distribution chain, it was essential that they be packaged in
bottles that appeared to contain new drugs that came directly from the
manufacturer via authorized and licensed wholesale distributors. Therefore, the
defendants and their co-conspirators had to restore the previously dispensed
bottles to their original appearance, with the manufacturer’s label still
intact but without the patient labels that pharmacies affix when dispensing
drugs to a patient. After purchasing the second-hand bottles originally
dispensed to Medicaid beneficiaries, the defendants and their co-conspirators
used lighter fluid and other means to dissolve the adhesive on the patient labels
so that they could be removed. During the process, the manufacturers’ labels
sometimes became damaged, and/or the second-hand drugs were close to their
expiration dates or had already expired. When the bottles were not resaleable
because of damaged manufacturers’ labels or expiration date problems, some of
the defendants replaced the original manufacturers’ labels with counterfeit
labels and/or altered the labels to backdate their expiration dates. Some of
these counterfeit prescription drug manufacturers’ labels were obtained by two
of the defendants from the Dominican Republic. In other instances, the
defendants and their co-conspirators removed the drugs from the bottles and
trafficked in loose pills, which were then completely untraceable.
E-mails obtained by search warrant
revealed that a certain subset of the defendants bought and sold more than $62
million worth of second-hand prescription drugs during an approximately
12-month time period during the conspiracy, which they meticulously documented
in a business-like manner through purchase orders and receipts scanned onto
their computers and uploaded into e-mail accounts.
The
Second-Hand Pills
The second-hand pills that found their
way back into the legal drug distribution stream were potentially dangerous to
the unwitting consumers who purchased them for several reasons. For example,
the defendants and their co-conspirators stored the drugs in uncontrolled
conditions, such as car trunks, residences, and rented storage facilities,
which would have compromised the medical efficacy of the drugs over time.
During the investigation, the FBI seized
more than $16 million worth of second-hand prescription drugs, comprised of
more than 33,000 bottles and more than 250,000 loose pills, kept in uncontrolled
and sometimes egregious conditions by various defendants and their
co-conspirators.
*
* *
Charts identifying each defendant, the
charges, and the maximum penalties are below. The indicted case is assigned to
U.S. District Judge Denise L. Cote.
Mr. Bharara praised the efforts of the
FBI’s Health Care Fraud Task Force and thanked FBI, NYPD, and HRA for their
work on the case. The New York FBI Health Care Fraud Task Force was formed in
2007 in an effort to combat health care fraud in the greater New York City
area. The task force is comprised of agents, officers, and investigators from
the FBI, NYPD, the New York State Insurance Fraud Bureau, U.S. Department of
Labor, U.S. Office of Personnel Management Inspector General, U.S. Food and
Drug Administration, New York State Attorney General’s Office, New York State
Office of Medicaid Inspector General, New York State Health and Hospitals
Inspector General, and the National Insurance Crime Bureau.
Mr. Bharara thanked the Drug Enforcement
Administration, Immigration and Customs Enforcement’s Homeland Security
Investigations, and the New York State Office of the Medicaid Inspector General
for their assistance. He also thanked the FBI’s Boston, Houston, Miami, Newark,
Philadelphia, and Salt Lake City Field Offices, as well as the U.S. Attorney’s
offices in New Jersey, Massachusetts, Texas (Southern), Florida (Southern),
Pennsylvania (Eastern), and Utah for their assistance in the investigation.
If you think you may have purchased
second-hand prescription drugs or were otherwise victimized by this scheme, you
can call the FBI Hotline at 212-384-3555.
The case is being prosecuted by the
Office’s Organized Crime Unit. Assistant U.S. Attorneys Jason A. Masimore and
Russell Capone are in charge of the prosecution. Assistant U.S. Attorney
Alexander Wilson of the Office’s Asset Forfeiture Unit is responsible for the
forfeiture of assets.
The charges contained in the indictment
and the complaint are merely accusations, and the defendants are presumed
innocent unless and until proven guilty.
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