DECEMBER 1998 · VOLUME 19· NUMBER 12

RJR: Caught Smuggling
Northern Brands International Inc., a unit of R.J. Reynolds Tobacco International Inc., pled guilty in December and will pay a total of $15 million in criminal fines and forfeitures for aiding and abetting customers who evaded more than $2.5 million in U.S. excise taxes by fraudulently transporting within the United States cigarettes that were intended to be exported.

"This guilty plea may be the first time an affiliate of a major tobacco company has been convicted of a federal crime in the United States," says U.S. Attorney Thomas Maroney in Binghamton, New York.

The guilty plea is the result of an ongoing four-year investigation into a massive scheme to defraud the U.S. and Canadian governments of tax revenues by smuggling tobacco and liquor products from the U.S. into Canada through the St. Regis Mohawk Indian Reservation (Akwesasne) in northern New York. The investigation has resulted in more than 20 individual felony convictions.

The smuggling conviction is especially important because it shows that the spike in smuggling following a Canadian excise tax increase was not the "natural" result of consumers responding to price differentials between cigarettes in the United States and Canada, but a corporate-facilitated phenomenon.

Hudson Foods: Lying Charged
Hudson Foods and two former employees were indicted in December on charges of lying to the U.S. Department of Agriculture in an effort to delay a recall of 25 million pounds of hamburger meat in 1997.

The two company officials were indicted for misleading investigators during their attempt to determine the source of a July 1997, E.coli 0157:H7 outbreak in ground beef produced at Hudson's Columbus, Nebraska facility.

Fifteen people in Colorado became ill after eating the contaminated meat. Scientific testing determined their illnesses were linked to ground beef from the Columbus facility. Due to this contamination, the company recalled all existing ground beef, originating from that Hudson facility, which totaled approximately 25 million pounds.

In January 1998, Tyson Foods purchased Hudson.

Michael J. Gregory, who at the time of the outbreak was Hudson's national quality control manager and recall coordinator in Rogers, Arkansas, and Brent Wolke, who at that time was manager of Hudson's Columbus, Nebraska, plant, were charged with making false statements and conspiring to provide false and misleading information to USDA concerning the production and distribution of Hudson ground beef.

Federal officials alleged that the misrepresentations resulted in a delay in the identification of potentially contaminated product, thus increasing the threat to consumers.

"I am bitterly disappointed," said James "Red" Hudson, former chair of the board at Hudson, in a statement. "I remain convinced that Hudson Foods and all its employees acted properly and honorably in handling the recall. No one, at the USDA or anywhere else, was more concerned than Hudson Foods and its people with the wholesomeness of our product and the safety of our customers. The overreaction of the USDA in Washington in this incident destroyed my company's good name, and led to the demise of Hudson Foods Inc. as it existed."

Anxiety Over Drug Prices
The Federal Trade Commission (FTC) in December charged Mylan Laboratories, the nation's second largest generic drug manufacturer, and three other companies with restraint of trade, monopolization and conspiracy to monopolize the markets for two widely-prescribed anti-anxiety drugs, lorazepam and clorazepate.

The alleged illegal activity allowed Mylan to increase the price of the two drugs used by millions of people in the United States dramatically, federal officials alleged.

In January 1998, the company raised the wholesale price of clorazepate from $11.36 to approximately $377 per bottle of 500 tablets.

And, in March, the wholesale price of lorazepam went from $7.30 for a bottle of 500 tablets to approximately $190.

The FTC is seeking at least $120 million from Mylan and the other defendants -- an estimate of the ill-gotten gains resulting from the illegal conduct.

Attorneys general from 10 states announced that they intend to file a similar complaint seeking damages and other relief.

In a statement, Mylan said it believes it has "meritorious defenses to these lawsuits and said it intends to vigorously defend them." The company said it believes that "the FTC lawsuit is an unprecedented and improper extension of the FTC's authority."

"The monetary harm that Mylan and others caused is only half the story," says William Baer, director of the FTC's Bureau of Competition. "Mylan made its enormous profits on drugs that are used to treat anxiety and hypertension and are widely-prescribed to treat the elderly and infirm. Consumers take lorazepam and clorazepate for long periods of time and it can be dangerous to discontinue their treatment too quickly. Mylan's illegal conduct deprived some consumers of access to these important drugs and put some consumers' health at risk."

Generic drugs are chemically identical versions of branded drugs that are marketed after the patent on the branded drug has expired. Generic drugs typically are sold at substantial discounts from the price of branded drugs.

-- Russell Mokhiber