White Collar: ATT Charged in Civil RICO Complaint

A customer of AT&T (ATT) has filed a class action suit in federal district court in San Francisco alleging a bank, wire and mail fraud based racketeering claim. The suit names AT&T and three of its subsidiaries as defendants. The complaint alleges that the defendants engaged in a practice known as "cramming," which is the unlawful practice of charging customers for third party products that the customers had neither requested nor authorized.

The complaint accuses the defendants of falsely representing in their bills that the amounts charged were authorized and owed by customers. The plaintiffs alleged two specific bills and the invoice dates to meet the requirement of a pattern of racketeering activity.

The complaint alleges that the racketeering enterprise consisted of AT&T, the three subsidiaries, billing aggregators, and third party providers billing through AT&T. The plaintiffs successfully argued that the entities forming the RICO enterprise all had a common purpose, thus meeting the burden necessary to establish an enterprise rather than an ad hoc group or conspiracy. The common purpose was the exploiting of AT&T's unlawful third party billing and collecting system.

The case has made it through the first hurdle of a motion to dismiss. Discovery will now begin before the next major obstacle for the plaintiffs, which is the certification of the class under Federal Rule of Civil Procedure 23.

Health Care: Pfizer Found Liable in Civil RICO Case

Yesterday was quite newsworthy the U.S. District Court in Boston. (See blog entry below about the identity theft sentencing.) In a case before the court a jury found Pfizer, Inc., liable for the violation of federal racketeering law by improperly marketing its epilepsy drug Neurontin for off-label uses. The jury awarded the plaintiffs, Kaiser Foundation Hospitals and the Kaiser Foundation Health Plan, $47 million. Civil RICO (Racketeer Influenced and Corrupt Organizations) provides for the awarding of triple damages. Thus, the jury's award is increased to a judgment of $141 million.

Off-label uses of a drug are its prescription for medical purposes not approved by the Food and Drug Administration. Pfizer marketed Neurontin not only for the treatment of epilepsy, the FDA approved use, but the company also marketed Neurontin for the treatment of migraine headaches, pain, and bipolar disorders. While physicians are free to prescribe drugs for off-label uses, drug companies may only market their products for the uses approved by the FDA.

To succeed on a claimed RICO violation the plaintiffs must prove the existence of an enterprise, which engaged in racketeering activity two or more times in a ten year period, thus establishing a pattern of racketeering activity. In this case Pfizer itself, or at least its division marketing Neurontin, would be the enterprise. The racketeering activity would be the fraudulent marketing of the drug for off-label uses, in essence a mail fraud or wire fraud. Finally, the pattern of racketeering activity would be the repeated marketing of the drug for off-label uses.

Pfizer has stated its intention to appeal the verdict. Previously, in 2004 Pfizer had pleaded guilty to a criminal charge for its promotion of off-label uses for Neurontin and paid a fine of $430 million to the federal and state governments. Pfizer believes that the court erred in allowing evidence of the criminal conviction to come before the jury and has stated its intention to base the appeal on this alleged error.

For more about the Pfizer case please see Forexyard, "US Jury's Neurontin Ruling to Cost Pfizer $141 Mln," March 26, 2010, http://www.forexyard.com/en/news/jurys-Neurontin-ruling-to-cost-Pfizer-141-mln-2010-03-25T220425Z-US.

White Collar and Healthcare: Big Tobacco Seeks Supreme Court Review of RICO Finding

Three of the nations largest companies are seeking Supreme Court review of the determination that they had engaged in racketeering acts in violation of the federal RICO statute. The appeal is of the decision of a three judge panel of the United States Court of Appeals for the District of Columbia. That court upheld the decision of the United States District Court finding the companies liable for racketeering violations based on fraud.

Philip Morris, Lorillard, and R.J. Reynolds Tobacco are asking the Supreme Court to review the circuit court's decision to uphold the trial court. The U.S Department of Justice brought a civil action against the tobacco companies in 1999, alleging that the companies violated RICO by making deceptive claims as part of their advertising. Among the deceptions were claims of low tar and "light" cigarettes. At trial the district court judge found that the companies had conspired to hide the dangers of cigarette smoking through these fraudulent claims.

To succeed in the RICO allegatiion the government had to prove that the companies constituted racketeering enterprises and that they engaged in a pattern of racketeering activity. The government satisfied the trial court that the companies met the definition of an enterprise and that they had conspired to engage in the pattern of racketeering activity, which was the pattern of false claims designed to increase sales and profits.

The companies appear to be asking the Supreme Court to hear the case on the basis of a First Amendment challenge. The companies contend that the government's use of RICO in the context of the suit against big tobacco is a violation of protected speech and will chill public debate on scientific matters.

It may seem like quite a stretch to move from advertising light cigarettes to a defense of scientific speech. However, the thinking of the company attorneys probably is that recently the Supreme Court reversed years of precedent by treating corporate expenditures for political advertising as the equivalent of individual speech in the political context. Using the same logic, they will argue that product advertising is immune from control. After its ruling on compaign funding by corporations, it will be interesting to see if the Court is willing to go further down this activist revolutionary path. My guess is that the Court will put on the brakes and decline to hear the case.

White Collar: South Florida Attorney Charged in Massive Ponzi Scheme

The United States Attorney for the Southern District of Florida has charged Scott Rothstein, a Fort Lauderdale attorney, with operating a $1.2 billion fraud. The criminal information alleges that Rothstein and others committed racketeering violations, money laundering, and wire and mail fraud violations.

The government alleges that Rothstein used his now defunct law firm, Rothstein, Rosenfeldt and Adler as the basis of his fraud. The allegations are that Rothstein and co-conspirators sold purported settlements in sexual harrassment and whistle-blower suits to investors. According to the complaint, Rothstein sold these purported settlements at discounted rates. Allegedly, he told the investors that the plaintiffs would receive the investment money and relinquish the right to the settlement proceeds to the investors who would receive a longer term pay out. Rothstein allegedly told the investors that the plaintiffs wished to sell the settlements to avoid publicity and embarrassment. Moreover, he told the purported victims that there were no public court records because his law firm had settled the cases before filing the actions by threatening suits, explaining the that defendants could thereby avoid negative publicity.

One of the charges against Rothstein alleges a RICO conspiracy. RICO is an acronym for Racketeer Influenced and Corrupt Organizations. It is a statute that was orginally enacted to combat organized crime. However, it is frequently charged in cases of business crimes and fraud. The centerpiece of a RICO charge is the existence of an enterprise that is instrumental in the conduct of a pattern of racketeering. In the Rothstein case the government has charged the law firm as the RICO enterprise with wire fraud, mail fraud, and money laundering comprising the pattern of racketeering facilitated by the law firm.

At arraignment the government asked the court to remand Rothstein to custody pending further action, which will be either a plea to the information or a grand jury proceeding. (In the federal system, the government can only proceed based on a grand jury indictment unless the defendant voluntarily waives indictment.) It is likely that Rothstein will cooperate against his co-conspirators in attempt to reduce his ultimate sentence.

Finally, the government has also filed a count of forfeiture in the information. The count seeks, upon conviction, the forfeiture of currency and property in the amount of $1.2 billion.

For further information, please see The Miami Herald, http://www.miamiherald.com/467/story/1360988.html, The South Florida Sun-Sentinel, http://www.sun-sentinel.com/news/broward/fort-lauderdale/fl-rothstein-next-20091201,0,3597653.story, and The New York Times, http://www.nytimes.com/2009/12/02/us/02lawyer.html?scp=1&sq=rothstein&st=cse.

White Collar Crime and Securities: Federal Authorities Seek Top Russian Mobster on Fraud Charges

Federal investigators are seeking reputed Russian crime boss Semion Mogilevich on a 45 count indictment charging Mogilevich and others with racketeering (RICO), securities fraud, wire fraud, mail fraud, and money laundering.

The charges allege that Mogilevich owned a company called YBM, which purportedly manufactured magnets. YBM was a public company traded on the Ontario, Canada, exchange. Its headquarters was in suburban Philadelphia. Allegedly, the company did not produce magnets or anything else. Instead, it is alleged that the defendants moved large amounts of money through European banks including banks in Budapest, Hungary. According the the U.S., the movements of money were reported as the manufacture and sale of magnets. This made the company appear active and profitable, thus driving up its stock price. Those owning the stock, in short the defendants, were able to realize millions from the fraudulently valued stock. It is alleged that Mogilevich defraud American and Canadian investors out of $150 million.

Mogilevich is currently in Russia where authorities arrested him last year on fraud and tax charges. He is out of custody on bail in the Russian cases. American authorities have not been able to bring Mogilevich under U.S. jurisdiction because this country has neither an extradition treaty nor extradition relations with Russia. Authorities are hoping that Mogilevich travels to a jurisdiction that has either a treaty or extradition relations with the U.S.

This case is an example of organized crime elements becoming more sophisticated in their activities and becoming an international law enforcement group. Combating such crime will increasingly require international law enforcement cooperation.

For more information please see CNN.com, http://www.cnn.com/2009/CRIME/10/21/mogilevich.fbi.most.wanted/