Off the Hook: Why Drug Prosecutions Are Targeting Middle Managers and Letting Bosses Slide

That U.S. Supreme Court ruling which overturned the conviction of Enron's Jeffrey Skilling appears to have a parallel in the pharmaceutical business. The prosecution of former Bristol-Myers Squibb (BMY) executives Frederick S. Schiff and Richard Lane on "channel-stuffing" charges has ended in a cents-on-the-dollar settlement. They previously faced 15 years in prison.

The Skilling ruling made it harder to prosecute a boss by narrowing the definition of "honest services fraud" to kickbacks and bribery. In Schiff and Lane's case, a federal appeals court recently narrowed the grounds on which executives can be prosecuted for saying one thing in technically compliant SEC filings while lying by omission in analyst conference calls.

While the Skilling case does not directly affect the BMS case, it is part of an emerging pattern in the prosecution of white-collar criminals in the drug industry: middle managers and other underlings -- the ones actually carrying out illegal schemes -- are becoming more vulnerable to litigation, as their names appear frequently in the paper trails. CEOs and other top executives -- the ones who order such schemes be carried out -- are becoming more insulated from litigation, as they tend not to be the writers of incriminating emails and PowerPoint presentations.

The end of the BMS case is, from the point of view of BMS's rank-and-file employees and stockholders, a disgrace. Its legal technicalities are complicated (which is why it's being settled rather than tried), but its facts are not: The pair hatched a scheme in which they recorded as revenue advance shipments of drugs to wholesalers even though prescriptions had not been written for those sales. Excess inventory at wholesalers grew to $1.95 billion in 2001; a mountain of unsold drugs. A Wall Street analyst asked Schiff in a conference call about BMS's wholesale policy, according to the indictment. He replied:

There are no unusual items that we see in the inventory levels.

In 2002, it was revealed that BMS had been "channel stuffing." BMS stock lost 40 percent of its value as the scheme unraveled. Schiff and Lane lost their jobs and were indicted for securities fraud. BMS paid $150 million to settle the case. The settlement fees will be an easy reach for Schiff and Lane. (Lane's final paypacket with BMS was worth $3.7 million.)

Contrast their fate with those of some less lucky, and less senior, drug executives:

The DOJ extracted a $2.3 billion settlement over Pfizer (PFE)'s off-label promotion of the painkiller Bextra and the antipsychotic Geodon, and blamed management for creating a corporate culture in which illegal sales were encouraged. However, the only people criminally prosecuted by the DOJ were two regional sales managers.
Blue Cross Blue Shield didn't name any C-suite managers at Pfizer as defendants in its lawsuit over the Bextra/Geodon case. Instead, it fingered an svp, a vp, an executive director of sales and a district sales manager.
Johnson & Johnson (JNJ) is currently the subject of an international investigation into whether it paid bribes in foreign countries to advance sales of its medical devices. If J&J's global device sales were dependent on kickback schemes it seems implausible that this could have gone unnoticed by top brass. Yet the only person convicted so far has been the director of marketing for Greece.
Cephalon (CEPH) paid $425 million to the Department of Justice in a settlement for illegal promotion of Actiq, a plastic lollipop filled with highly addictive fentanyl. Fifty-six patients died of overdoses at just one clinic supplied by Cephalon. Yet the only individuals prosecuted by the DOJ were the doctors who ran the pill mill that dispensed the drug.
Device maker Stryker (SYK) was investigated by the SEC, FDA and Department of Justice for corrupt practices and the manufacturing quality of their products. The only people prosecuted were two regional sales managers.

While it is wrong to sympathize with lower-rung individuals who participate in corrupt schemes at the direction of their bosses, there's a rank unfairness in the way that executives with less overall responsibility are targeted and their bosses are not simply because the bosses are looking the other way and not involved in the day to day execution of the goals and strategies they set.

DOJ prosecutors complained recently that drug companies have not cleaned up their act in response to dozens of civil and criminal cases bought against them. The agency should have changed tactics to target senior management long ago, if that is the case. Now, a compliant judiciary has removed one more weapon from their arsenal. Don't expect the trend of going after the little guy to end anytime soon.

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