Beantown Shakedown
By Harvey A. Silverglate
The Wall Street Journal, June 23, 2005; Page A13
BOSTON -- It may yet recover its cultural glory and economic robustness, but for now Boston has seen better days. Gillette, home-bred landmark and world-class brand, has been scooped up by Cincinnati's Procter & Gamble. The fabled First National Bank of Boston is subsumed in San Francisco's Bank of America. Across the river, Harvard has been laid low by the forces of political correctness; its president, former Treasury Secretary Lawrence Summers, may not state an academic proposition that runs afoul of campus orthodoxies.
According to the Census Bureau, Massachusetts was the only state last year to suffer a population decline. And the "Big Dig," under construction for more than a decade and touted as the nation's largest ($14.6 billion and climbing) public works project, is riddled with tunnel leaks (more than 700 and rising).
Despite these setbacks, the City on a Hill still lays claim to one distinction: Thanks to the nationally renowned Health Care Fraud Unit of the Massachusetts U.S. Attorney's office, Boston has become the epicenter of the Department of Justice's war against pharmaceutical and medical-device companies who allegedly rip off taxpayers.
The semi-autonomous Health Care Fraud Unit was started in 1985. Since then its aggressive pursuit of perceived corporate and individual malefactors has only increased. Between May 1996 and May 2001, the Boston Globe reported: The unit's prosecutors had "recovered $1.54 billion for federal taxpayers, more than 30% of all health care fraud settlements by the nation's 94 U.S. Attorney's offices."
The figures continue to escalate, given the unit's in terrorem misuse of some of the nation's broadest -- and vaguest -- criminal statutes and regulations.
The federal "whistle-blower" statute has played a role in attracting cases to Boston. Under the so-called qui tam law, a person who has knowledge of a government rip-off may seek to get the U.S. Attorney's office interested in pursuing the company, with the whistle-blower entitled to a substantial percentage of whatever the government collects. Such governmental interest in a civil lawsuit usually triggers a parallel criminal investigation by the Health Care Fraud Unit. In these cases, the whistle-blower becomes a government witness with a strong financial incentive to see the corporation held liable.
Corporations rarely fight such charges, even when they could prove their innocence -- or at least that their interpretation of arcane regulations was reasonable, not criminal. A deal is usually cheaper than the enormous legal fees a trial entails. And the government holds a trump card -- it may follow a criminal conviction with a so-called "debarment proceeding" that disqualifies a company from doing business with any government-funded program or agency -- a death-knell for any company in the health-care field.
Sometimes the exception proves the rule. Last July, the U.S. Attorneys lost a prosecution in Boston when 10 employees of TAP Pharmaceuticals refused to plead guilty and instead went to trial contesting the Unit's claim that their discounted sales and promotional practices -- common in the industry -- constituted illegal kick-backs and bribes.
The employees' case initially seemed doomed: The company itself had pled guilty and agreed to pay a then-record $885 million. TAP agreed to cooperate with prosecutors, waived its attorney-client privilege, and provided prosecutors with statements made by employees to company lawyers during an internal investigation.
Topping that, both the government's star witnesses, a former TAP employee and a physician in a managed-care practice that bought TAP drugs, had received "whistle-blower" bonanzas of $77 million and $17 million (the latter split with the HMO), respectively. The former TAP employee banked $47.5 million more for whistle-blowing in a related federal prosecution of drug maker AstraZeneca.
The government may have bought its testimony, but the jury didn't buy the story and acquitted the defendants. The prosecution was deemed so lacking that the judge acquitted one defendant before her case even went to the jury. Her Boston lawyer, Tracy A. Miner, noted that the TAP case and others like it "could be brought anywhere in the country, but are brought here because of the aggressive U.S. Attorney's Health Fraud Unit." It's a growth industry for Boston law firms, she admits, but Boston also might get a reputation as a place where companies should try to avoid doing business.
TAP is not alone in having paid tribute to Boston's prosecutorial zeal. In May 2004, Pfizer pled guilty and agreed to pay $430 million to settle charges concerning the off-label marketing of its anti-epilepsy drug Neurontin. The whistle-blower, David Franklin, received $25 million. In April 2003, Bayer paid $262 million after pleading guilty to overcharging for its antibiotic Cipro. Whistle-blower George Couto, a former Bayer marketing manager who helped carry out the pricing scheme, died before the settlement, but his family received $34 million.
Several more cases are pending, including charges against four former employees of Serono SA of Geneva, fueling rumors that the corporation is considering settling rather than fighting. (A recent $725 million reserve, disclosed in the company's third-quarter filing in April, added to such speculation.)
However, the TAP acquittals in Boston -- combined with growing suspicions nationally that the Justice Department has gone overboard with its use of arcane statutes and regulations to harass corporations and individuals -- could slow the Boston Unit.
The Unit's zealous prosecutions took another blow on May 31, when a unanimous Supreme Court reversed the conviction of the Arthur Andersen accounting firm. The Court ruled that the trial judge and jury had misunderstood the less-than-clear statute that the Justice Department sought to apply to the firm's destruction of documents.
In our free society, the justices reminded us, we convict people and companies only when they have knowingly violated a clear legal duty. If the court is serious and henceforth imposes such a requirement consistently, Boston may yet lose another growth industry.
Mr. Silverglate, a Boston lawyer, is working on a book about federal prosecutors' assaults on all sectors of civil society.