Feds Might 'Banish' More Execs for Misconduct, Attorney Says

--Regulators' use of extrajudicial disbarment powers could be a game-changer for Pharma, other sectors, says LeClairRyan attorney

NEWARK, N.J., July 5, 2011 /PRNewswire/ -- Regulators are brandishing a new weapon in their campaign to punish corporate officers they suspect of wrongdoing—in effect, using an extrajudicial procedure to banish them from their jobs. It is unclear whether they intend to routinely take advantage of these disbarment powers—informally dubbed the "death penalty" by some—but at a recent conference on healthcare fraud, officials expressed frustration with persistent wrongdoing in the pharmaceutical industry and strongly reiterated their intent to punish individual executives considered "bad actors," said LeClairRyan shareholder Carlos F. Ortiz, a former federal prosecutor who focuses his practice on white collar defense, the Foreign Corrupt Practices Act and criminal tax issues.

"CEOs have good reason to be worried," said Ortiz, who is based in the national law firm's Newark, N.J., office. "Banning healthcare executives from doing business with the government—by far their most critical customer—effectively pushes them out of their jobs. This might be a weapon of last resort, but regulators clearly feel that nothing else has worked."

As widely reported in the national media, the Department of Health and Human Services (HHS) recently warned New York City-based Forest Laboratories that it could lose all business with the federal government unless its 83-year-old CEO, Howard Solomon, stepped down. The pharmaceutical company had previously reached a $313 million settlement involving various allegations, including that it had distributed an unapproved drug, illegally marketed an antidepressant and misled inspectors from the Food & Drug Administration. In an attempt to force Solomon's ouster in the wake of the settlement, HHS cited a rarely used provision of the Social Security Act that enables it to bar individual corporate officers from government business.

For the pharmaceutical and other regulated industries, widespread use of such tactics would amount to nothing less than a game-changer, Ortiz noted. "But officials at HHS and the Department of Justice are increasingly vocal about the need to punish individual executives, even if extraordinary means are required," he said, "so that might well be what they have in mind." Indeed, the attorney noted, at the 21st Annual Institute on Health Care Fraud, a major symposium held in Miami Beach in mid-May, regulators were unambiguous about their intent to step up enforcement actions against individuals.

"In its initial crackdown on the likes of off-label marketing or violations of the Foreign Corrupt Practices Act, the government dramatically increased fines and penalties, such that damages totaling hundreds of millions or even billions of dollars are not uncommon today," said Washington, D.C.-based LeClairRyan shareholder Michael F. Ruggio. "When misconduct persisted despite these massive penalties, regulators sharpened their focus on indictments of individual corporate executives. However, proving such cases beyond a reasonable doubt can be difficult, and successful prosecutions are relatively rare. Thus, it is entirely possible that extrajudicial tactics could become more commonplace."

The government might use the disbarment provision to go after individual executives it suspects of turning a blind eye toward regulatory violations, maintaining lax internal controls and otherwise "setting the wrong tone at the top," Ortiz said. No forewarning would be required.

Once a clear pattern emerges regarding the intended use of the disbarment provision, regulated companies will need to work with their outside counsel to adjust their legal strategies as required, he advised. Before reaching a settlement agreement in a criminal case, for example, companies might secure written assurances that regulators will not try to use the disbarment provision later on.

Likewise, the threat of these extrajudicial powers underscores the efficacy of taking all possible measures to avoid even minor regulatory violations, Ruggio said. "Companies working within complex regulatory frameworks might well choose to seek preapproval of their compliance plans from regulators as a way to reduce the risk of inadvertent violations," he commented. "Amid these uncertainties, one thing is clear enough: the government's use of the disbarment provision is a development that must be closely tracked."

About LeClairRyan

Founded in 1988, LeClairRyan provides business counsel and client representation in corporate law and high-stakes litigation. With offices in California, Connecticut, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., the firm has approximately 335 attorneys representing a wide variety of clients throughout the nation. For more information about LeClairRyan, visit www.leclairryan.com.

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Carlos Ortiz

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