CNN: Pfizer Too Big to Prosecute; Shadow Company Takes the Hit

A bit of ancient history: As I described in HOOKED, Australian business sociologist John Braithwaite, in the course of doing the research for his 1984 book, Corporate Crime in the Pharmaceutical Industry, was interested to discover that more than one U.S. drug firm had a position in the organizational chart informally called "vice president in charge of going to jail." The lines of authority were arranged so that, if the firm was ever caught doing illegal things, this particular VP would take the hit and thereby protect higher-ups from criminal prosecution; and that VP's compensation package included appropriate recompense for this service. This handy arrangement was later messed up by a U.S. Supreme Court ruling in a case called Park. According to Park, I gather, the court held that if a company did wrong, and somebody had to be blamed, it had to go up to the CEO. So the position of "VP in charge of going to jail" presumably went the way of the dinosaurs and the dodo.

Now fast forward to the present. According to a CNN special report:
http://www.cnn.com/2010/HEALTH/04/02/pfizer.bextra/?hpt=Sbin
--the old VP in charge of going to jail has been replaced with the shell company in charge of being prosecuted for the main firm's misdeeds. This is a much nicer arrangement as there really is no shell company, so no one has to go to jail, or to be paid extra for running the risk.

A number of media sources have been discussing the recent settlement between US Federal prosecutors and Pfizer over the off-label marketing of Bextra. (See my previous post on that topic, http://brodyhooked.blogspot.com/search?q=bextra.) The angle that most of the media have explored is that the actual amount of money paid out by Pfizer in fines and lawsuits, even though it tops $2B, is so far short of the profits the company made from Bextra sales as to be a mere pittance. (CNN calculates that Pfizer has so far paid out the equivalent of three months' worth of profits for a drug that was on the market for several years.) The documented fact that Pfizer was engaged in this illegal off-label marketing of Bextra at the same time as it was pleading guilty to earlier instances of illegal off-label marketing, and promising up, down, and sideways that it had learned its lesson and would never do those terrible things again, shows that for the big companies, these fines are nothing more or less than a cost of doing business and therefore fail to serve as any form of deterrent against future wrongdoing.

CNN chose to shine its spotlight on a somewhat different angle. As I covered in the previous post, the basic Federal problem in prosecuting Pfizer was that it is "too big to jail" in much the same sense that the global banking giants are "too big to fail." The law requires that if Pfizer were to be successfully prosecuted for criminal offenses, it would be immediately banned from doing any business with either Medicare or Medicaid. This would have two consequences. First, a large number of patients who now depend on Pfizer drugs, including some brand name products for which there is no generic substitute, would be unable to get their medicines. Those people and their physicians could be expected to set up an immediate howl that would quickly be heard in the halls of Congress. Second, unable to sell to such huge markets, Pfizer would probably go bust. That would lead to the unemployment of thousands of company employees, most of whom had nothing to do with illegal marketing, in the middle of a severe recession, and the resulting howl would be heard immediately in the halls of Congress.

What to do? The creative Feds have successfully prosecuted a company for Pfizer's misdeeds. That company freely admitted its guilt and as a result is now banned from selling any drugs to Medicare or Medicaid. The company is called Pharmacia & Upjohn Co., Inc. Old-timers might recall that both Upjohn and Pharmacia are former drug firms that were bought out by Pfizer and thereupon ceased to exist as independent firms. Pharmacia & Upjohn Co., Inc. has no assets or employees and manufactures no drugs. It exists only as an on-paper shell company, totally owned by Pfizer. It was actually invented back in 2007 by Pfizer for the same purpose, to take the hit for an earlier prosecution. Since it happened to still be around, on paper, it was the best target to take the hit for this latest offense as well.

As I reviewed in that earlier post, Ann Woolner wrote in Business Week that nothing today prevents the Feds from prosecuting a drug firm and its executives under misdemeanor instead of felony charges. You can throw somebody in jail for certain misdemeanors. If you want to send a message to drug companies that they cannot get away with illegal behavior, while avoiding the serious consequences of a company like Pfizer actually going out of business, the best way to do this (says Woolner) is to charge some of their top executives with misdemeanors and throw them in the slammer for 6 months or whatever the law allows. What we would now have to guard against is these execs setting up shell companies of themselves and telling the Feds to put that shell company into jail instead of them. I guess when you have that kind of bankroll to hire the country's smartest lawyers, anything is possible.