Minnesota company at center of alleged $400 million fraud

Updated: 10:45 a.m. May 12 | Posted: 4:03 p.m. May 11

Minnesota regulators are alerting pharmacies around the state to be on the lookout for medications purchased from a Minnesota company that's been indicted for participating in what federal prosecutors call a massive drug diversion and fraud scheme.

The Minnesota Board of Pharmacy said late Monday drug wholesaler Minnesota Independent Cooperative (MIC) was allegedly involved in purchasing medication from illegal sources and selling potentially adulterated and misbranded drugs to pharmacies and other drug wholesalers.

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The board encourages pharmacies and wholesalers that have purchased drugs from MIC to take the allegations into consideration and consider notifying customers who received drugs obtained from MIC.

Also Monday, the board suspended the Minnesota license of an allegedly related Puerto Rico-based wholesaler whose owner has pleaded guilty to a felony charge of conspiring to distribute prescription drugs without a license.

The board's actions follows two separate indictments issued last Thursday.

A federal grand jury in Ohio indicted MIC and three California men.

According to those charges, from 2007 through April 2014, David Miller and his company, MIC, bought prescription drugs from a network of illegal and unlicensed sources in New York, Florida and California.

The 12-count indictment accuses Miller and MIC of illegally selling $393 million worth of prescription drugs to wholesalers and retail pharmacies in nearly 40 states. Requests for comment sent to Miller and an attorney representing him in a recent civil case went unanswered.

The indictment alleges Miller was majority owner of MIC, which had a warehouse and staff in Eagan. Prosecutors say the facility's employees were "responsible for receiving drug shipments [from illicit suppliers], inspecting the drugs for damage and signs of diversion, sorting and organizing the drugs, and using the drugs to fill and ship orders to MIC's customers."

In addition to the Ohio charges, a second indictment in California made public Thursday charged 33 people, including Miller, of participating in a sprawling criminal enterprise engaged in money laundering in addition to fraud and prescription drug diversion.

"American consumers should be able to rely on the prescription drug supply chain," Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department's Civil Division said in a news release. "Prescription drug diversion schemes like the one charged in this indictment undermine that supply chain and increase the risk that counterfeit, adulterated, misbranded, sub-potent or expired drugs will be sold to patients and consumers."

But the case raises questions about whether there are enough tripwires in place to provide timely alerts about criminal enterprises illegally selling prescription drugs at the wholesale level — even though a new federal law is designed to help identify such schemes.

MIC had brushes with pharmacy regulators in Minnesota and California several years ago, but those encounters did not lead to disciplinary or other actions for the criminal enterprise prosecutors now allege was underway.

The California Board of Pharmacy in February 2010 listed Minnesota Independent Cooperative of Mendota Heights as a party in a complaint against a southern California pharmacist.

That complaint, formally referred to as an "accusation," said the pharmacist was purchasing medications from "David Miller of the E-Tail Network, an unlicensed [in California] pharmaceutical broker." According to the Ohio indictment out last week, Miller "owned and controlled" E-tail Network.

California eventually disciplined the pharmacist in 2013.

The Minnesota Board of Pharmacy has no indication that the California regulators notified their Minnesota counterparts about any disciplinary cases involving MIC, according to the board's executive director Cody Wiberg. Because MIC was, in fact, licensed in Minnesota at the time, Wiberg said he wouldn't necessarily expect California officials to do so.

In 2012, with the California case still pending, the Minnesota board disciplined MIC because of a problem with a supplier.

MIC admitted that it purchased drugs from B&Y Wholesale Distributors, Inc., a company located in Puerto Rico that was not licensed by the Minnesota pharmacy board as a nonresidential wholesaler at the time that the purchases were made. Consequently, the board adopted a stipulation and consent order at its April 4, 2012 meeting, reprimanding MIC and imposing a $10,000 civil penalty.

Wiberg said the discipline was based on the extent of the information the board had at the time, chiefly that MIC's supplier was not yet licensed in Minnesota. Since then, "we have cooperated with the federal investigation and have provided any materials that we could supply them," Wiberg said. "We have been aware of that investigation all along."

There were also chances for pharmaceutical businesses to tip law enforcement to questionable activity.

"On numerous occasions, MIC's customers returned drugs to MIC, stating that the bottles contained the wrong drug, the wrong dosage, or had other signs of drug diversion," the Ohio indictment said.

As early as 2008 one of MIC's customers went so far as to sue the company alleging negligence and fraud. MIC had delivered some inhalers that federal authorities later confiscated because they had been identified as stolen in transit. MIC denied the allegations and demanded payment of $1.2 million. The parties eventually settled out of court.

Earlier this year, the feds sent a shot across Miller's bow. According to court documents, federal authorities seized more than $2 million from MIC accounts at two Minnesota banks, and nearly $452,000 from another wholesaler. The two companies sued, seeking to reclaim the money. They also denied any unlawful conduct.

Then last week, the massive federal investigations run out of northern California and southern Ohio went public. It had been about a year and a half since the Drug Quality and Security Act became law. Among other things, that law gave regulators new tools to trace prescription drugs through the supply chain. But "major gaps" remain in the nation's system for regulating wholesale distribution of prescription drugs, said Cody Wiberg, executive director of the Minnesota Board of Pharmacy.

There are some "very reliable, very ethical, law-abiding" large wholesalers Wiberg said. But "there is this plethora of secondary and tertiary operations that are vexing."

Some may be legitimate, he said, but the fear is many are not, even if their transgressions are not on the scale alleged in the MIC case.

The board's staff is planning to propose state legislation next year that would "completely rewrite" Minnesota's regulatory system for wholesale drug distribution, Wiberg said.

The new provisions for licensing wholesalers would be "more stringent" than current state policy, Wiberg said, in the hope of dissuading potential fly-by-night operators from even trying to start up.

He said the board has been "planning this in earnest" since Congress passed the Drug Quality and Security Act in 2013, and it is not in response to the MIC situation. Wiberg said an FDA investigator told him Friday that the suspects arrested last week include the person who ran MIC's warehouse in Eagan.

But as of Friday, Miller remained at large according to the FBI, the only one of the 33 people charged who has so far escaped arrest.