Federal Criminal Charges Pressed Against Product Diverters

November 7, 2008

Six individuals, including New Yorker Dina Wein Reis, have been charged with conspiracy and wire fraud arising from their scheme to defraud consumer product manufacturers by diverting their products. The seven-count Indictment was returned by a federal grand jury in Indianapolis, in the United States District Court for the Southern District of Indiana, on October 22, 2008. The Indictment lists one count of conspiracy to commit fraud, 18 U.S.C. §§ 1349, and six counts of wire fraud, 18 U.S.C. §§ 1343 and 2. It also seeks forfeiture of Defendants’ properties and bank accounts.

The Indictment alleges that between January 2000 and October 2008, Defendants fraudulently obtained consumer goods at discounted prices from at least four manufacturers and distributors (referred to as “Corporate Victims” in the Indictment) of consumer products by falsely informing them that Defendants would donate those products to non-profit organizations for promotional purposes. Instead, Reis and the others sold the goods at a substantial profit to wholesalers, retail stores and others.

Diversion is generally recognized as the process of moving genuinely branded products outside agreed upon distribution channels. Consumer product manufacturers frequently set aside a portion of their products to be sold to legitimate charitable organizations, to various programs that market and promote the manufacturers’ products, or to authorized retailers outside of the United States for substantially discounted prices. In so doing, manufacturers aid humanitarian organizations, engender goodwill for their product, and increase sales for their product by promoting it to a new sector of the market. Pharmaceutical and consumer product diverters take advantage of these programs by operating through a series of complex and sophisticated machinations, including the use of shell companies, fictitious references and aliases. Diverters employ a variety of techniques to obtain deeply discounted prices from manufacturers and distributors by falsely informing them that they will donate the goods to non-profit organizations – as the Reis Defendants did – or that they will distribute them for promotional purposes to institutions such as college campuses, nursing homes/assisted living facilities, prisons, hospitals and campgrounds. Others hold themselves out as institutions or closed-door pharmacies when in fact these are fronts for retail operations. In many cases, diverters divert the products into the gray market even when they sign contracts or Own Use forms that expressly prohibit the distribution of product into unauthorized channels.

Product diversion has substantial financial and regulatory implications, exposing manufacturers in some cases to losses in the tens of millions, if not hundreds of millions, of dollars. The US Attorney’s office estimates Reis’s diversion to be in the range of $20 Million. For drug manufacturers, diversion can compromise compliance with Prescription Drug Marketing Act. Diversion can also result in the sale of outdated drugs, thereby placing the public at risk.

Reis and her companies have been sued numerous times in connection with their diversion activities. McGuireWoods’ Life Sciences team has extensive experience in pursuing Reis as well as other consumer and pharmaceutical product diverters to recoup losses sustained by diversion.