Fraud

Abbott Unit Is Guilty In Liquid-Nutrient Case

THOMAS M. BURTON and PATRICIA CALLAHAN / Wall Street Journal 23jul03

Unit Agrees to Pay $200 Million in Fines, And Civil Payments of $400 Million

EAST ST. LOUIS, IL—An Abbott Laboratories subsidiary pleaded guilty to a federal felony charge of obstructing a criminal investigation of fraud in the business of selling liquid nutritional products to nursing homes.

The North Chicago, Ill., company, in making the expected plea, agreed to pay more than $200 million in criminal fines and payments and $400 million in civil payments, to bring close the multiyear federal inquiry. The criminal fines would be paid by Abbott's CG Nutritionals subsidiary.

The case involved an undercover white-collar sting operation run by federal investigators who secretly made videotapes of company sales representatives.

While the federal judge in the case accepted the plea itself, in an unusual step he didn't immediately approve the terms of the plea agreement, which include the precise amount of fines to be paid.

Before agreeing to the terms, Chief Judge G. Patrick Murphy in the U.S. District Court for the Southern District of Illinois, in East St. Louis, Ill., said he needs to review an investigative report to be completed by the government's probation department.

"I can't make a horse run faster than it can," Judge Murphy told prosecutors and defense lawyers in a late-afternoon plea hearing in federal district court. He set an Oct. 27 hearing date to rule on whether he accepts those specific terms.

Another term of the plea agreement is that Abbott's CG Nutritionals unit would be under probation for five years. CG is part of Abbott's Ross Products business, which makes liquid nutrition and the pumps and tubing to administer it.

Abbott in June said it had set aside $622 million to cover the cost of resolving the criminal and civil cases with the federal government and state Medicaid officials. Under a civil settlement, Abbott would for five years have to abide by a corporate-integrity agreement requiring it to reform the sales and marketing practices of its tube-fed nutrition operations.

CG Nutritionals also agreed to be excluded from Medicaid and Medicare programs. That agreement is something of a technicality, however: CG is simply an Abbott manufacturing arm and never did such government business. Thus, the guilty plea is constructed to allow Abbott and its huge Ross division to continue doing federal business.

In simple form, the government case lays out an effort by Abbott to encourage its customers to overcharge Medicare. In a stipulation of facts that Abbott agreed to, the company admitted it wrote letters and other documents that were "attempts to mislead Medicare" about the true cost of the feeding equipment.

In the stipulation, Abbott admitted Ross Products offered upfront payments to customers, and, in the case of Southern Medical Distributors in Swansea, Ill. -- which turned out to be an undercover FBI operation -- called this payment a "signing bonus" or "conversion bonus."

The document filed with the court said Ross salespeople, by characterizing payments that way, told Southern Medical these amounts wouldn't have to be reported to the government as a discount. Thus, Ross "attempted to prevent and delay Medicare from determining the actual price." The government contends these payments were "illegal" inducements under federal antikickback law.