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The author is a partner with Fox Rothschild LLP, Lawrenceville, NJ.
To: First Assistant U.S. Attorney; Chief, Securities and Health Care Fraud Unit
From: Alain Leibman, AUSA
Re: Prosecution Memorandum (GyneTech and Michael Bass)
As requested, I’ve preliminarily reviewed the Food and Drug Administration (FDA) Office of Inspector General’s case report in the above matter, met with the lead agent Special Agent (SA) Smith, and mapped out a plan of investigation. My analysis and plan are set forth below.
About two weeks ago, an FDA investigator in the oncology trial drugs division, Sally Jones, received an email from a person named Diana Gray, identified as a clinical trial manager at GyneTech. The firm, under the auspices of the state cancer hospital, holds FDA approval for human clinical testing of a cancer drug intended to treat late-stage breast cancer. According to FDA investigator Jones, the drug had performed well in the animal-testing phase and had shown promise for human application.
The Gray email and its attachments alleged that GyneTech (i) had developed evidence of metastatic bone tumors developing in some of its drug-trial patients; and (ii) not only had failed to report those adverse results to the FDA but also had actively concealed the negative test results. Gray implicated GyneTech’s CEO, Michael Bass, in the cover-up, but her email did not provide specifics as to what Bass actually did.
Within days, a series of events enveloped GyneTech; the whistleblower, Gray; and CEO Bass. First, when SA Smith went to Gray’s residence to interview her about her email of the previous week, Smith learned that Gray had died in a car accident the very night she sent the email. Then, one day after GyneTech’s stock hit a $216 high, the Wall Street Journal (WSJ) ran a front-page story exposing problems with the breast-cancer-drug trials and causing an immediate nearly 140-point drop in the stock’s value to $78. Two days later, class actions were filed against GyneTech and Bass, and the stock dropped to $24.
Remarkably, GyneTech has yet to formally advise the FDA of the adverse outcomes in the drug trials or to formally suspend the trials. Nevertheless, the FDA has issued an involuntary suspension order and has directed that notification be provided to all test participants.
Allegations have been made that Gray’s death was not accidental. Her partner, Tracy Vitello, gave a newspaper interview days after the car accident; she said that she had retained an attorney to sue GyneTech, and she suggested that the company was somehow complicit in Gray’s death. We should ascertain whether any local law-enforcement agencies are investigating allegations of a possible murder plot, and we should ensure that the FDA and the FBI have the lead role and that the locals take a back seat for now.
It may be a stretch to suggest that someone at GyneTech murdered Gray. What is more, murder would not implicate any federal crime, unless charged as obstruction of justice for preventing a witness from providing information. Because there was no ongoing grand jury investigation at the time of Gray’s death, even that charge might be difficult to prove. There are, however, a number of other possible violations.
(a) Securities fraud. GyneTech just filed a Form 10-Q for the last quarter, but it makes no mention of any difficulties with the drug trial, which would have been material information. We may well have evidence of securities fraud, under Title 15 and Rule 10b-5 and under Title 18 for false certification of the 10-Q. We will want to obtain the stock-trading records of any officer or director who might have been knowledgeable to see whether we also can make out an insider-trading case.
(b) False statements and fraud in the FDA-approved testing and reporting of results, mail/wire fraud, conspiracy, etc., under Title 18. We can expect that falsified reports have been or will be filed with the FDA. We should look for other false documents surrounding the testing protocol, false statements submitted to the government, and material omissions in reports to the government.
(c) Obstruction of justice under Title 18. Once we get our first subpoena out the door, we open up potential obstruction-of-justice charges. We should be particularly mindful of intra-company emails dealing with the handling of information and records. We also should look at actions that transpired before the opening of the grand-jury investigation; we may be able to apply obstruction-of-federal-audit charges to those actions.
(d) Health-care fraud under Title 18. We may well have evidence of fraud involving a health-care-benefit program, depending on the extent of government grants or other funding used to underwrite the drug trials.
(e) False claims under Title 18. I’m having SA Smith check for any FDA grants or other government money that may have supported the early testing. If there is any government seed money involved, then we will likely have false claims filed by GyneTech, because any applications for grants/funding, or the continuation of the same, would have omitted reference to the failed results.
Although not directly supporting separate charges, the serious illnesses suffered by drug-trial participants, and the number of victims, will constitute aggravating factors in any sentencing-guidelines calculation for convicted persons or entities. That will increase the applicable level in several ways, including (a) in the multiple-victim adjustments within the calculation of the adjusted offense level, (b) in the enhancement within the adjusted offense-level calculation for a conscious or reckless risk of death or serious bodily injury, (c) in the “vulnerable victim” upward adjustment, (d) in a Booker upward variance, or (e) in an upward-departure analysis.
GyneTech’s stock value has dropped precipitously in the last few weeks, from a high of $216 per share to its present $24 per share. If bankruptcy is not the inevitable next phase for the company, we will want to consider charging the company. Of course, under the doctrine of respondeat superior, GyneTech can be held criminally responsible for the acts of its officers and employees under certain conditions.
Nevertheless, we are obliged to consider not only the expansive legal principles of corporate liability but also the limiting conditions that the DOJ places on our exercise of discretion in that regard as well. I will not here belabor the DOJ’s corporate-prosecution principles, because they are well understood, but several points pertinent to the next steps in the investigation are worth mentioning. Various factors bear on the decision to prosecute a company, including swift corporate cooperation (which we should strongly encourage here), the pervasiveness of wrongdoing within the entity, the company’s timely and voluntary disclosure of wrongdoing, and the company’s remedial actions or proposals.
Presumably, outside counsel for GyneTech will seek either to avoid prosecution of the company altogether or to mitigate any prosecution by, for example, proposing a deferred-prosecution agreement with or without corporate monitoring. Under either scenario, counsel presumably will be anxious to persuade this office that the drug-trial misconduct was limited in scope, occurred at lower levels, ran afoul of internal compliance programs, etc. If supported by evidence they bring to our attention, then these are appropriate mitigating considerations.
GyneTech’s cooperation generally is also a mitigating consideration. We can assume that an internal investigation is underway at the company, and we should expect GyneTech to turn over the facts learned in the course of that investigation. Although we cannot insist that the company waive attorney-client or work-product privileges in doing so, the company should be given incentives to give the government everything at the earliest possible time, when the company’s disclosures will have the greatest possible value. We can, and should, also insist on other measures from the company, including making witnesses available to the agents and this office; immediately providing any non-privileged materials, even while the company assesses its position about waiver of privilege concerning other materials; and assisting the agents in interpreting drug-trial records.
Normally, we would strongly consider obtaining, and simultaneously executing, search warrants for the multiple GyneTech locations where the drug trial took place, as well as for the company’s central data-collection point and its office of governmental programs. But there are practical impediments to that course of action: (i) With Gray’s passing, we have no insider who is cooperating and therefore no one immediately identifiable who could provide the probable cause necessary to secure the warrants; and (ii) given the publication of the WSJ story and the filing of the shareholder and drug-trial participant suits, it is likely that the necessary test records already have been gathered, moved, and perhaps even taken into custody by either in-house counsel or outside counsel. And it is possible that personal computers have been scrubbed and their data collected by counsel.
Assuming we could establish the necessary probable cause for a search warrant, there may be some value in the images of federal agents, dressed in their raid jackets, removing boxes of material from the above locations (even if those boxes are empty or contain only the agent’s supplies). That decision, however, will have to be made at a higher level.
Ordinarily, we would move quickly to interview potential witnesses without much concern for corporate counsel’s typical argument that their “client” group encompasses those witnesses and makes them off-limits. As you know, DOJ policy is to ignore state ethical-code prohibitions on contact with “represented parties,” rendering pointless the arcane determination of who is, and is not, within the “client” group represented by counsel. Other than the late Ms. Gray, however, we do not have the names of individual GyneTech employees who may have pertinent knowledge. For that reason, I will have SA Smith interview Vitello, Gray’s partner, to see whether Gray may have left behind a diary or notes, or whether she perhaps even brought home GyneTech drug-testing records. The “silver platter” doctrine allows us to secure and use such records, even if improperly taken by the employee, as long as there was no
government involvement in their initial seizure.
Subject to what the Vitello interview generates, and in light of these limitations, I would recommend a simultaneously executed two-pronged approach: (a) incentivize GyneTech’s outside counsel to provide the government with information and documents about the wrongdoing within the company; and (b) employ the grand jury to secure documents and to advance the message to GyneTech that its cooperation should be tendered without reservation—that is, before we have to subpoena every member of its board of directors.
As discussed above, there are many reasons why GyneTech will perceive its self-interest to be advanced by early cooperation with this office. We should capitalize on this perception by demanding prompt turnover of information and documents so that this office can fully consider all factors relevant to the corporate-prosecution principles.
To promote that cooperation, we should immediately engage GyneTech’s outside counsel; if they do not contact our office first, then having an agent with a subpoena appear on the executive floor should generate that call. We will make very clear, very quickly, that if the company wants to cooperate, we want internal investigative reports, witness statements—in short, everything. To the extent that we still are unsure of GyneTech’s internal workings and reporting channels, or the means by which the drug trial results were monitored or reported internally, we can and should lean on company counsel to assist in developing the investigation of internal company processes. But at this early stage, we will not commit to any position on the company’s ultimate status.
Of course, we cannot condition a decision not to prosecute on GyneTech’s waiver of the attorney-client privilege. But counsel for the company may well see it to be advantageous to waive the privilege; in fact, corporate counsel usually see it that way. We will want consent to allow our FBI computer-analysis response teams to image all pertinent hard drives and to copy all internal emails from company servers. Presumably, the company’s IT people have properly bannered the individual employees’ computers so that the employees know that there is no expectation of privacy in the computers; for that reason, there should be no Fourth Amendment concerns, questions about whether the company has authority to consent to searches of the individuals’ computers, and the like.
We do not have enough information at the moment to confidently identify the good guys and the bad guys at GyneTech. So we should proceed cautiously before offering immunity in exchange for any witness’s testimony. We might be immunizing the wrong person, only to regret that later. In fact, I have had cases where I immunized a lower-level employee on the assumption that the fraud was directed at a higher level, only to find that the problem was limited to rogue employees at lower levels, one of whom I had just immunized.
I therefore recommend that we proceed as follows:
(1) We should immediately serve a subpoena duces tecum on GyneTech for the kitchen sink—everything relating to the testing at every location, including actual results and internal communications.
(2) We should simultaneously serve, through in-house counsel or otherwise, testimonial subpoenas on every member of the board of directors, on every member of any relevant special committee of the board, and on all officers who can be identified as remotely related to the testing or who signed the 10-Q. Of course, they all will lawyer up, and some may assert their Fifth Amendment privilege. But others may not, and we may get at least some useful attorney proffers of information that will help us build a corporate tree, determine who knew what, and fill in some blanks.
We also may expect to get our first live cooperators after the subpoenas are served. Someone served with a subpoena, or someone who learns that agents are swarming with subpoenas, may come forward, looking for a 5K1.1 motion at sentencing. The most useful information we get in the first stage of the investigation may well come from attorney proffers and potential cooperator proffers.
(3) We should address the situation of Michael Bass, former GyneTech CEO, who now works for MedaStar. Based on Gray’s last email, we should assume that Bass has some responsibility for the false testing, making him the presumptive target of the investigation. For that reason, we should not subpoena his testimony, although he certainly would assert the Fifth Amendment if he were subpoenaed.
We also should be mindful that Bass now works for a GyneTech competitor; therefore, the GyneTech attorneys may be highly motivated to slant the evidence against Bass and away from the current company officers and directors. I’m sure that we will hear that very line from Bass’s attorneys when they ask for their meeting with us. And if Bass is indicted, that also will be an argument they make to the jury. Therefore, we should try to build the case against Bass based on his own words (in emails or conversation) and his own directions (if any) to the test-program participants, and we should look for evidence of motive in his compensation, including bonuses and stock trades (e.g., check the timing of any trades in relation to real-world test-protocol events).
(4) We should coordinate with the Securities and Exchange Commission (SEC). We will get an access request out to the SEC Enforcement Division immediately. Coordination with the SEC has become more complicated in the last couple of years, now that the Enforcement Division is authorized to offer non-
prosecution agreements, as well as deferred-prosecution agreements, to individual witnesses. The former, in particular, are problematic because attorneys for SEC witnesses tend to seek reassurance from the DOJ that non-suit by the SEC also means non-prosecution by the DOJ.
We also should be mindful that the new Dodd-Frank whistleblower regulations are now in effect. The SEC may well have received submissions from GyneTech employees or officers that include information about the drug-trial fraud. We should request copies of any such submissions.
(5) We should exploit discovery in the class-action litigations. There are now at least two class actions pending against GyneTech, its board, and Bass—one brought by shareholders and the other by drug-trial participants. My guess is that at least the shareholder class will be certified; I am uncertain whether the class of drug-trial participants is sufficiently numerous to achieve certification. Regardless, as either class action or both class actions move into merits discovery, we should serve subpoenas on plaintiffs’ counsel for all discovery, especially deposition transcripts. Although some or all of the discovery may be taken pursuant to protective orders, it is well established that a grand-jury subpoena at least presumptively, if not as a per se matter, trumps any protective order.
I look forward to hearing your thoughts on my recommendations and receiving your further instructions.