GABRIEL L. IMPERATO

The conviction and sentencing of a chief executive officer (CEO) and chief compliance officer (CCO) of a medical device company in U.S. v. Caputo, et al (October 16, 2006, Northern District Court of Illinois) shows the individual and corporate consequences of an ineffective compliance program. In this case, the CEO and CCO were found to have aggressively marketed an “off-label” use for a sterilizer of hospital re-usable medical supplies, which had not been approved by the Food and Drug Administration (FDA). They allegedly obscured the narrow scope of FDA approval for a smaller sterilizer and made misrepresentations to sell the larger sterilizer to hospital customers. The CEO and CCO continued selling the larger sterilizer to unsuspecting hospital customers who were under the misimpression that they were buying a device which had been cleared by the FDA. The CCO was also found to have made misrepresentations and even concealment of information to hospital customers and the FDA. Furthermore, the CCO failed to comply with FDA regulations by not opening a complaint file or conducting an investigation of complaints of serious injuries caused by residue on instruments sterilized in the larger unapproved medical device.

The court found that the CEO selected the CCO for that role and manipulated the CCO to engage in the fraudulent scheme. Together, they were found to have engaged in a prolonged, massive fraud upon the FDA and its hospital customers by marketing an illegal sterilizer that put the general public and patients at risk for their health and safety. The CEO and CCO were ultimately convicted on criminal counts of mail and wire fraud, conspiracy, and the introduction of an altered or misbranded device into interstate commerce.

The court emphasized that an organization must promote an organizational culture that encourages ethical conduct and exercise due diligence to prevent and detect misconduct. The court pointed to the enhanced compliance requirement called for by the 2004 amendments to the Sentencing Guidelines for organizations for effective compliance programs, which require, among others, standards and procedures, resources, authority, training, incentives and discipline, auditing, monitoring, and evaluation for a compliance program. The court also noted the importance of the CCO as the corporate “fire personnel” and an organization’s “first responder.” The court discussed that the proactive efforts necessary for effective compliance must emphasize the goals of crime detection and prevention and organizational ethical behavior. The court noted that the reactive efforts of a compliance officer must be measured by how well a corporation reacts when it learns that questionable and potentially illegal corporate conduct has occurred. The court found instead that the CCO in this case subverted those standards and actually aided and abetted and later covered up the illegal marketing scheme in direct violation of FDA regulations.

Finally, before upholding each of the sentences in this case, the court put corporate America on notice that broad assertions of lacking criminal intent for such conduct will be undercut by the use of a standard “ostrich” jury instruction, and was given in this case which suggests that knowledge may be proved by the defendants’ conduct and surrounding facts and circumstances and may be inferred from a combination of suspicion and indifference to the truth. The underlying message in this case is clear–compliance problems which are not proactively and reactively addressed may result in both individual and organizational liability.

Gabriel L. Imperato is managing partner of the Fort Lauderdale office of Florida-based Broad and Cassel law firm.



September 2007