A recent conviction and sentencing of a Chief Executive Officer (“CEO”) and Chief Compliance Officer (“CCO”) of a medical device company underscores consequences of an ineffective compliance program. U.S. v. Caputo, et al (October 16, 2006, N.D. Ill.) is one of only a few cases where a CCO of a health care organization was tried and convicted in Federal Court. The CEO and CCO were found to have aggressively marketed an “off-label” use for a sterilizer of hospital re-useable medical supplies, which had not been approved by the Food and Drug Administration (“FDA”). A smaller scale sterilizer had been previously approved by the FDA, but the larger sterilizer had never been approved by the FDA.
Evidence at trial showed multiple marketing misrepresentations and even concealment of information to hospital customers and the FDA. Furthermore, there were numerous instances of patient health and safety problems associated with the use of the larger sterilizer. Customer complaints were received by the CCO and apparently ignored.
The Court found that the CEO and the CCO effectively carried out a bait and switch scheme on the FDA and its hospital customers by obtaining clearance on the smaller sterilizer, but using the clearance to sell the larger unapproved sterilizer to unsuspecting customers. The Court further found that the Defendants continued to sell the larger sterilizer, not only in defiance of law and specific FDA directives, but by using a pattern of deception and falsehoods until the FDA effectively shut down the Company.
According to the Court, the average Federal sentence faced by corporate executives has more than tripled in recent years as a direct result of the United States Sentencing Commissions 2002 Economic Crime Amendments and the impact of the Sarbanes-Oxley legislation.
The Court further pointed out that compliance officers are an organizations “first responder” and must focus on both proactive and reactive efforts to be effective. Compliance officers must emphasize the goals of crime detection and prevention and organizational ethical behavior. Reactive efforts of a compliance officer must be measured by how well a corporation responds when it learns that questionable and potentially illegal corporate conduct has occurred.
The Court found that the CEO and CCOs actions in this case were criminally inadequate and that the evidence showed that the CCO continually failed to prevent the ongoing illegal marketing of the Organizations sterilizer. The Court noted that corporate officials accused of criminal and civil fraudulent conduct in the health care industry often answer such charges with broad assertions of lack of criminal intent. The Court stated that corporate America should be aware that this type of defense will be effectively undercut by the use of a standard “ostrich” jury instruction.
The Courts highlighting of this jury instruction was not only to put corporate America on notice that it will be held accountable for disregarding potential warning signs of non-compliant activity, but that such an instruction was especially appropriate where both the CEO and CCO raised the general defense that they did not realize that their actions were illegal. The underlying message of this case is clear that compliance problems which are not proactively and reactively addressed may result in both individual and organizational liability.
A recent conviction and sentencing of a Chief Executive Officer (“CEO”) and Chief Compliance Officer (“CCO”) of a medical device company underscores consequences of an ineffective compliance program. U.S. v. Caputo, et al (October 16, 2006, N.D. Ill.) is one of only a few cases where a CCO of a health care organization was tried and convicted in Federal Court. The CEO and CCO were found to have aggressively marketed an “off-label” use for a sterilizer of hospital re-useable medical supplies, which had not been approved by the Food and Drug Administration (“FDA”). A smaller scale sterilizer had been previously approved by the FDA, but the larger sterilizer had never been approved by the FDA. 
