In 2012, New England Compounding Center ("NECC") shipped contaminated anti-pain medication to hospitals and clinics around the country, with devastating consequences. Patients around the country developed fungal meningitis and spinal and paraspinal infections. At least 63 died, and nearly 700 more suffered debilitating injuries. In opinions issued on July 9, 2020, the First Circuit addressed—and, for the most part, rejected—efforts by NECC's owner and chief pharmacist to vacate their convictions and set aside the lengthy prison sentences they were ordered to serve for their roles in shipping the contaminated drugs. See United States v. Cadden, 2020 U.S. App. LEXIS 21317 (July 9, 2020); United States v. Chin, 2020 U.S. App. LEXIS 21318 (2020).
For business owners, particularly those in highly regulated industries, and their lawyers, two important themes emerge from the First Circuit's opinion:
- Violating regulatory requirements, even ones that themselves carry no criminal penalties, can lead to serious criminal charges (here, federal racketeering charges) and long prison sentences—especially when those violations produce serious harm to others.
NECC operated a compounding pharmacy, combining drugs with other substances to produce specialized medications for use by patients, including methylprednisolone acetate, a steroid whose production and distribution led to the criminal case the First Circuit addressed. The US Attorney's Office in Boston built its criminal case against NECC's owner, Barry Cadden, and its chief pharmacist, Glen Chin, around NECC's violation of two seemingly technical regulatory requirements.
First, one of NECC's pharmacy technicians did not have the license required by the Massachusetts Pharmacy Board regulations. See 247 Mass. Code Regs 802(1). Second, and of greater consequence, NECC failed to follow the protocols contained in an industry standard called USP-797, which lays out procedures for how compounding pharmacies that produce high risk, sterile medications, like the product at issue in this case, are supposed to operate. Massachusetts regulations require compounding pharmacies like NECC to follow USP-797. See 247 Mass. Code Regs. 901(3).
Neither the Massachusetts Pharmacy Board's licensing regulations or USP-797 carry criminal penalties—and certainly no federal criminal penalties. So how did Cadden and Chin end up in federal court, charged with racketeering? Here's the logic: the government charged (and proved at trial) that NECC represented to its customers that its technicians were certified, and that its manufacturing process complied with industry standard USP-797. And since NECC shipped its drugs in interstate commerce, those misrepresentations led to federal mail fraud charges. Mail fraud charges, in turn, are defined by the federal racketeering statute, RICO, as "racketeering activity"—what prosecutors call "predicate acts." See 18 U.S.C. § 1961 (1)(B). Under RICO, two related instances of mail fraud committed in a ten-year period amount to a "pattern of racketeering activity." U.S.C. §1961(5).
So, in a short legal skip and jump, what appeared to be a technical regulatory violation—employing an unlicensed pharmacy technician or failing to follow an industry protocol—turned every shipment of contaminated product into a separate mail fraud charge. Then the legal magic of the RICO statute took over, converting two or more related instances of mail fraud—and here, the government charged 53 separate counts of mail fraud—into a "pattern of racketeering activity."
And so by 2017, when the criminal indictment against Cadden finally came to trial, Cadden stood accused of 53 counts of mail fraud, one count of racketeering, one count of racketeering conspiracy, one count of conspiracy to defraud the United States, and 41 counts of federal Food, Drug and Cosmetic Act ("FDCA") violations. The indictment identified 78 separate acts of racketeering—53 instances of mail fraud and 23 instances of second-degree murder, also a racketeering act under RICO. The jury found that the government had not proved the murders the government identified as predicate acts, but concluded that Cadden was guilty of racketeering, racketeering conspiracy, most of the mail fraud charges, and a number of the FDCA charges. In a separate trial, Chin was found guilty of a slightly different set of charges but, like Cadden, found guilty of racketeering and racketeering conspiracy. US District Judge Richard A. Stearns sentenced Cadden was sentenced to nine years in federal prison. Chin was sentenced to eight years.
On appeal to the First Circuit, Cadden and Chin each argued that the evidence did not support their convictions as racketeers, but the First Circuit made short work of their challenges. The Court fully embraced the government's theory. Misleading customers about the lab technician's credentials and falsely claiming compliance with an industry protocol constitute mail fraud. Because there were two or mail acts of mail fraud, and they were related, the government had established a pattern of racketeering activity, subjecting Cadden and Chin to lengthy prison sentences—even though the jury did not believe that their conduct amounted to second-degree murder. The First Circuit did order the trial judge to conduct a new sentencing hearing. But the only question is whether the Court should impose more, not less, prison time.
The first key takeaway of the First Circuit's decisions, for any business owner, executive, or lawyer representing them, is this: There is really no such thing as a purely technical violation of a legal rule that applies to your business. If serious harm results—even from what appears to be a technical regulation that carries no criminal penalties—federal criminal law sweeps broadly enough to make a decision to cut corners, or to fail to follow procedures, a potential life changing event—and not in a good way. Adopting an effective compliance program and making sure that program is implemented—making sure it has real teeth—is the best safeguard against what events like those at NECC.
- Prison time isn't all executives need to worry about; the government can forfeit the money earned from the violations they prove.
The RICO statute permits the US Attorney's office to ask the sentencing judge to impose an order of forfeiture, requiring the defendant to forfeit "any property constituting, or derived from, any proceeds which the person obtained, directly or indirectly, from racketeering activity." 18 U.S.C. §1963 (a)(3). The judge imposed an order of forfeiture on Cadden of $7,545,501, representing the amount Cadden earned from NECC's criminal activities. The First Circuit's discussion of forfeiture made clear just how onerous a forfeiture order can be. First, the Court held that Cadden was not entitled to an offset to the forfeiture order based on the taxes he had paid. The Court, in effect, saw no issue in Cadden being required to pay the government twice, once in taxes, and a second time as a result of a forfeiture order.
Second, Barry Cadden's wife, Lisa (also a part-owner of NECC), received distributions from the company and deposited them in a joint bank account which she owned with Cadden. The District Court held that the government could not forfeit money attributable to Cadden's wife's ownership stake, since she was neither charged nor convicted of racketeering. The First Circuit disagreed, holding that that Cadden "'obtained' the NECC earnings that Lisa Cadden deposited in their joint back account . . ."
Thus, in circumstances (like RICO) where a forfeiture order is appropriate, the government will not hesitate to seek it, and will likely urge the Court to take the most expansive possibly reading of what should be forfeited, with no offset for taxes paid.
Cadden and Chin are not yet in federal prison. But the First Circuit's decision makes it clear that they are both almost certainly headed there for a long time, with their pockets—to the extent there is anything left in them at all—significantly lighter than before their indictments and conviction.
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