U.S. v. Costanzo, s. 92-2665
| Citation | 4 F.3d 658 |
| Decision Date | 08 October 1993 |
| Docket Number | 92-2720 and 92-2841,Nos. 92-2665,s. 92-2665 |
| Parties | 39 Fed. R. Evid. Serv. 756 UNITED STATES of America, Appellee, v. Donald V. COSTANZO, Appellant. UNITED STATES of America, Appellee, v. Scott A. CLAWSON, Appellant. UNITED STATES of America, Appellee, v. Anthony Thomas CIVELLA, Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Frank A. White, Kansas City, MO, argued for Castanzo; Robert Beaird, Kansas City, MO, argued for Clawson; Oscar Goodman, Las Vegas, NV, argued for Civella. (Robert G. Duncan, and Ronald Partee, on the briefs).
Bruce E. Clark, Kansas City, MO, argued, for appellee (Jean Paul Bradshaw II and Sheryle L. Jeans, on the brief).
Before JOHN R. GIBSON, Circuit Judge, BRIGHT, Senior Circuit Judge, and BOWMAN, Circuit Judge.
Donald Costanzo, Scott Clawson, and Anthony Civella appeal from their convictions in the District Court 1 on an array of mail fraud, wire fraud, and transportation of stolen goods charges. See 18 U.S.C. Secs. 1341, 1343, 2314 (1988). Civella also appeals from his sentence. For the reasons set forth below, we affirm.
The charges in this case arise out of a scheme to "divert" pharmaceuticals. Costanzo, Clawson, and Civella controlled a number of institutional pharmacies (that is, pharmacies that provided medication to patients in institutional settings such as nursing homes) in the Kansas City area. The scheme for which they were prosecuted involved the purchase of pharmaceuticals by these pharmacies and the subsequent resale of the drugs to a pharmaceutical wholesaler. It resulted from a particular opportunity available to institutional pharmacies: namely, drug manufacturers sell pharmaceuticals to institutional pharmacies at prices that may be as low as twenty-five percent of the prices at which the companies sell drugs to other customers. Defendants were able to garner large profits merely by reselling to a wholesaler drugs purchased from manufacturers at institutional prices.
One reason that drug manufacturers offer institutional pharmacies low prices is that manufacturers recognize that the amount that insurance companies and the government, which pay for many of the patients in institutions, will reimburse for pharmaceuticals is relatively low. In addition, drug manufacturers want doctors in institutions to be able to prescribe the manufacturer's drugs, since this increases the chances that the doctors will prescribe the same drugs to patients the doctor sees in other contexts. Finally, manufacturers hope that patients who are treated with a certain drug in an institutional setting will continue to use that particular medication after they are released from the institution.
In order to ensure that the sale of deeply discounted drugs to institutional pharmacies does not undermine their ability to sell to other purchasers at normal wholesale prices, manufacturers include what are known as "own-use clauses" in the contracts under which they sell drugs to institutional pharmacies. These clauses provide that drugs purchased at institutional prices may be dispensed only to patients in institutional settings. The clause used by Ciba-Geigy Corporation, the drug manufacturer involved in most of the instances of diversion for which defendants were charged, is fairly typical and provides that:
Products purchased from CIBA-GEIGY at other than standard prices or terms are to be used exclusively for long term care facility inpatients for whom we are the pharmacy provider. Any other use of these products will be cause for immediate termination of this account as well as any pricing Agreements then in force with CIBA-GEIGY.
Ciba-Geigy Corp., Long Term Care Facilities Provider Account Application (Exhibit 721).
Defendants' actions in purchasing drugs at institutional prices and reselling them to pharmaceutical wholesalers are referred to as a "diversion" because drugs were diverted from the nursing home inpatients contemplated in institutional buying contracts to other persons. Apparently, no federal law expressly proscribes drug diversion per se. Thus, the government prosecuted defendants for mail fraud, wire fraud, and transportation of stolen goods in violation of 18 U.S.C. Secs. 1341, 1343, 2314. Central to the charges was the claim that defendants defrauded drug manufacturers by obtaining pharmaceuticals at highly discounted prices by falsely representing that the pharmaceuticals would be used solely by nursing home patients, although defendants intended all the while to divert the drugs to wholesalers in violation of the own-use restrictions.
The events underlying this case began in 1985 when Costanzo 2 and John Sansone formed a partnership with Lou Ferro, Sr., and Lou Ferro, Jr., to start an institutional pharmacy servicing nursing homes in Kansas City. The Ferros already owned a retail pharmacy in Kansas City named Penn Park Pharmacy, and the new partnership began to serve patients in nursing homes, as well as members of the general public, out of this pharmacy. Although the pharmacy was providing drugs to patients in institutional settings, it was not purchasing drugs at institutional prices. Business grew rapidly and before long Clawson was hired as an additional pharmacist.
In 1986, Costanzo, Sansone, and both Ferros travelled to Las Vegas to investigate the possibility of opening another pharmacy to service a nursing home there. While in Las Vegas, they met Wilbur Swift and Martin Rubin, the owners of B.W. Wholesale, a pharmaceutical wholesaler that specialized in purchasing diverted pharmaceuticals. Swift suggested that Penn Park Pharmacy purchase drugs at institutional prices and resell them to B.W. Wholesale. Swift offered to pay Penn Park Pharmacy the cost of diverted pharmaceuticals plus a twenty-five percent markup and to pay all shipping costs. Swift said that diversion was legal, but that the pharmacy should not sign an own-use clause or B.W. Wholesale would not be able to purchase diverted pharmaceuticals from it.
After returning from Las Vegas, Costanzo asked Ferro, Jr., to investigate Swift's proposal. Ferro, Jr., attended a trade convention in New Orleans and spoke with representatives of pharmaceutical companies who informed him that Penn Park Pharmacy could purchase pharmaceuticals at institutional prices for its institutional patients. These representatives also told him that pharmacies could only purchase drugs at institutional prices if they signed own-use clauses and that these clauses prohibited the resale of the pharmaceuticals. Ferro, Jr., relayed this information to Costanzo and said that he did not believe that they should resell pharmaceuticals purchased at institutional prices.
In December 1986, Penn Park Pharmacy applied to join GeriMed, a buying group through which institutional pharmacies purchase drugs from manufacturers at institutional prices. To satisfy GeriMed's membership requirements, the pharmacy had to conduct its institutional business out of a location separate from its retail business. Therefore the partnership opened up a pharmacy named Penn Park Institutional Pharmacy ("Penn Park") at a new location. Shortly after this institutional pharmacy was opened, Costanzo and Sansone quarreled with the Ferros and the partnership was dissolved--the Ferros kept the retail pharmacy they originally had owned, and Costanzo and Sansone took the institutional pharmacy. Clawson also moved to the institutional pharmacy.
Following the split, Sansone executed institutional pricing contracts and credit applications on behalf of Penn Park with a number of individual drug manufacturers. Like the contract that the pharmacy executed with GeriMed, these agreements contained own-use restrictions so clearly set forth that anyone perusing the typically one-page agreements would recognize the restriction. Nevertheless, Sansone told Clawson and Robert Shuey, the other pharmacist at Penn Park, that he was planning to purchase drugs through the pharmacy and resell them to a wholesaler. Sansone also told Clawson and Shuey that this was a grey area under the law and asked them not to tell anyone about the diversion.
In the late spring of 1987, the actual drug diversion began. Sansone controlled the operation on Penn Park's end. The decision of what drugs to order for purposes of diversion, however, was based on purchase orders submitted to Penn Park by B.W. Wholesale. These purchase orders were structured to prevent drug manufacturers from detecting the diversion, principally by limiting the quantities of drugs ordered to quantities that B.W. Wholesale thought would not provoke suspicion. Although Penn Park was servicing some nursing homes, and therefore legitimately purchasing some drugs for its own use, the vast majority of the drugs Penn Park purchased once the diversion began were merely repackaged and shipped to B.W. Wholesale.
In September 1987, managers at G.D. Searle & Co. ("Searle"), a pharmaceutical manufacturer from which Penn Park was purchasing drugs, began to question the large quantities and the unusual assortment of drugs that Penn Park was purchasing. Searle requested that Penn Park provide an audit of the drugs that Penn Park had purchased from Searle. Penn Park initially failed to provide the requested information, and Searle suspended the pharmacy's institutional pricing privileges.
Clawson then conceived the idea of creating fake drug utilization reports for nonexistent institutional patients that would show that the drugs purchased from Searle had been prescribed to these patients. Under Clawson's direction, an extensive effort to create fake drug utilization reports began. Several people worked keying patient profiles into the pharmacy's computer from 10:00 p.m. to 3:00 a.m. for three or four nights in a row, and the fake drug utilization reports then were submitted to Searle. The...
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