FedEx Indicted for Shipping Drugs for Online Pharmacies

FedEx Corp. was indicted for delivering prescription pain pills, sedatives, anti-anxiety drugs and other controlled substances for illegal Internet pharmacies.

The operator of the world’s largest cargo airline was charged by the U.S. with 15 counts of conspiracy to distribute controlled substances and misbranded drugs and drug trafficking that carry a potential fine of twice the gains from the conduct, alleged to be at least $820 million for it and co-conspirators. The company, while denying the allegations, said today in a regulatory filing that conviction could be “material.”

Yesterday’s indictment in San Francisco federal court comes more than a year after United Parcel Service Inc. agreed to forfeit $40 million in payments it received from illicit online pharmacies under a non-prosecution agreement with the U.S. Justice Department.

The criminal case is an unprecedented escalation of a federal crackdown on organizations and individuals to combat prescription drug abuse, said Larry Cote, an attorney and ex-associate chief counsel at the U.S. Drug Enforcement Administration.

“Targeting a company that’s two, three steps removed from the actual doctor-patient, pharmacy-patient relationship is unprecedented,” said Cote, who advises companies in the drug supply chain on compliance matters.

Walgreen, CVS

Walgreen Co. agreed to pay an $80 million civil fine last year to resolve allegations that a distribution center and pharmacies in Florida failed to report suspicious drug orders of oxycodone and knew, or should have known, that prescriptions filled weren’t for legitimate medical use, according to the DEA.

CVS Caremark Corp. in 2010 agreed to pay a $78 million civil fine to settle claims that some stores in California and Nevada allowed criminals to buy cold medications that were used to make methamphetamine.

The filing of criminal charges against FedEx could have a chilling effect on mail-order pharmacies that rely on express delivery to get medicines to patients, said Cote. The government’s case will turn on what federal drug enforcers specifically told FedEx about the pharmacies and what the company knew about the entities, he said.

“The DEA does believe that everyone in the supply chain is responsible and has an obligation to understand where their products are ending up,” said Cote, calling that “a stretch.”

Drug Deliveries

FedEx delivered drugs to Internet pharmacies that supplied pills to customers who filled out online questionnaires, and were never examined by doctors -- knowing these practices violated federal and state drug laws, the government alleged.

The company vowed to fight the charges, saying it can’t be responsible for the contents of the 10 million packages it transports daily and that policing customers would violate their privacy.

“FedEx is innocent,” Patrick Fitzgerald, a spokesman for the Memphis, Tennessee-based company, said yesterday in an e-mailed statement. “We will plead not guilty. We will defend against this attack on the integrity and good name of FedEx and its employees.”

FedEx rose 90 cents to $152.82 at 2:57 p.m. in New York trading after earlier falling as much as 67 cents.

Basic Tenet

FedEx said last year that an indictment or prosecution in the case would threaten a basic tenet of its shipping business - - not opening packages. Revenue from online pharmaceutical shipments is a small percentage of total sales, the company previously said. FedEx reported $44.3 billion in revenue for fiscal 2013.

If convicted, the company could face fines, penalties, forfeiture and compliance conditions, it said today in the regulatory filing.

“Given the early stage of this proceeding, we cannot estimate the amount or range of loss, if any; however, it is reasonably possible that it could be material if we are convicted,” according to the filing with the U.S. Securities and Exchange Commission.

FedEx said yesterday it repeatedly asked the government for a list of illegal pharmacies so it would know which ones not to do business with. The U.S. never gave it such a list, it said.

Vacant Homes

The company knew it was delivering drugs to dealers and addicts, with couriers in Kentucky, Tennessee and Virginia expressing concerns circulated to senior managers that FedEx trucks were stopped on the road by online pharmacy customers demanding packages of pills, according to the indictment. Some delivery addresses were parking lots or vacant homes, prosecutors said.

“This indictment highlights the importance of holding corporations that knowingly enable illegal activity responsible for their role in aiding criminal behavior,” U.S. Attorney Melinda Haag in San Francisco said in a statement.

The illegal deliveries began in 2000, Haag said, and FedEx continued to do business with one Internet pharmacy whose manager had been arrested for violating drug laws. She said the company also served a fulfillment pharmacy that supplied Internet pharmacies that were shut by law enforcement, with their owners and doctors convicted of illegally distributing drugs.

UPS, in its March 2013 agreement, acknowledged doing business with online pharmacies even after it learned they were illegally distributing controlled substances without requiring valid prescriptions.

Compliance Program

UPS, based in Atlanta, also agreed to establish a compliance program designed to ensure such customers won’t be able to use its services to illegally distribute drugs.

Under the U.S. Controlled Substances Act, a shipping or freight company is allowed to possess and transport drugs “in the lawful and usual course of its business” without registering with drug enforcement authorities. The law regulates the manufacture and distribution of narcotics and certain other drugs and chemicals used in the illegal production of controlled substances.

Consumers are turning to online pharmacies because of the convenience and privacy of purchasing medicines there, and as insurance companies encourage home delivery for long-term medications, according to the U.S. Food and Drug Administration website.

The case is U.S. v. FedEx Corp., 14-cr-00380, U.S. District Court, Northern District of California (San Francisco).

Before it's here, it's on the Bloomberg Terminal.