[Federal Register: December 18, 2003 (Volume 68, Number 243)]
[Notices]
[Page 70538-70544]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de03-77]
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DEPARTMENT OF JUSTICE
Drug Enforcement Administration
[Docket No. 00-22]
OTC Distribution Company; Revocation of Registration
On May 9, 2000, the Deputy Assistant Administrator, Office of
Diversion Control, Drug Enforcement Administration (DEA), issued an
Order to Show Cause to OTC Distribution Company (``OTC'') as to why the
OTC's DEA Certificate of Registration as a distributor of List I
chemical products should not be revoked as being inconsistent with the
public interest, as determined by 21 U.S.C. 823(h). The Order to Show
Cause alleged that: (1) OTC (Respondent) had failed to comply with the
terms and conditions agreed to in a Memorandum of Agreement (MOA) with
the DEA, including the requirements: To abide by all laws relative to
listed chemicals, to report all sales and purchases to DEA monthly, to
prepare quarterly inventories, to contact the DEA field office
regarding questions about potential customers and to institute
effective control and procedures against diversion; (2) multiple
bottles of OTC pseudoephedrine were seized from an illicit
manufacturing lab in Oregon; (3) OTC failed to report an uncommon
method of payment as required by 21 CFR 1310.05(a); (4) OTC shipped
listed chemicals to an unregistered location in violation of the MOA;
(5) an audit of OTC's purchase orders and sales invoices revealed a
failure to comply with the regulatory requirements of 21 CFR
1310.06(a); (6) the audit also revealed that OTC was unable to account
for approximately 415,000 bottles of pseudoephedrine as a result of a
failure to maintain complete and accurate records; and (7) the monthly
sales spreadsheets OTC provided to the DEA underreported the company's
actual total pseudoephedrine sales by more than 200,000 bottles.
By letter dated June 6, 2000, Respondent, by counsel, filed a
request for a hearing on the issues raised by the Order to Show Cause
and the matter was docketed before Administrative Law Judge Gail A.
Randall. On July 17, 2000, the Administrator of the DEA issued an Order
of Immediate Suspension of Registration based on the fact that: (1)
After the Order to Show Cause was issued, a second audit of OTC's
inventory and records revealed a shortage of over 10,000 bottles of
pseudoephedrine; and (2) subsequent to the issuance of the Order to
Show Cause, the DEA sent four warning letters to the Respondent,
alleging that OTC's pseudoephedrine products had been found at various
sites related to the illegal manufacturing of methamphetamine.
Following prehearing procedures, a hearing was held in Arlington,
Virginia on September 5-6, 2000, and in Dallas, Texas on November 15-17
and December 5-7, 2000, and on May 8, 2001. At the hearing, both
parties called witnesses to testify and introduced documentary
evidence. After the hearing, both parties submitted Proposed Findings
of Fact, Conclusions of Law and Argument. On August 8, 2002, Judge
Randall issued her Recommended Rulings, Findings of Fact, Conclusions
of Law, and Decision of the Administrative Law Judge (Opinion and
Recommended Ruling), recommending that Respondent's DEA registration be
revoked. Both parties filed exceptions to the Opinion and Recommended
Ruling and on September 27, 2002, Judge Randall transmitted the record
of these proceedings to the Deputy Administrator.
[[Page 70539]]
The Acting Deputy Administrator has considered the record in its
entirety and pursuant to 21 CFR 1316.67, hereby issues her final order
based upon findings of fact and conclusions of law as hereinafter set
forth. Except as specifically noted, the Acting Deputy Administrator
adopts, in full, the Opinion and Recommended Ruling of the
Administrative Law Judge. Her adoption is in no manner diminished by
any recitation of facts, issues and conclusions herein, or any failure
to mention a matter of fact or law.
Pseudoephedrine is a List I chemical used as a precursor in the
clandestine production of methamphetamine. Most clandestine laboratory
operators use a variety of methods to conceal their purchases of
precursor chemicals and equipment from law enforcement and firms
distributing such chemicals and goods are required to carefully
scrutinize their sales transactions to prevent the unauthorized
purchase and use of such goods. Pseudoephedrine is lawfully marketed in
the United States for use as a decongestant in 30 or 60 mg. tablets and
the maximum recommended adult daily dose is four 60 mg. tablets per
day, amounting to 120 tablets per month. Ephedrine, also a List I
chemical which may be used as a precursor in the clandestine
manufacture of methamphetamine, is marketed for use as a bronchodilator
for asthma and may be used as a topical decongestant.
From 1994 until 1999, DEA clandestine laboratory seizures rose from
263 to 2,025 and in 1999, the national total for all State, local and
Federal agencies was 6,835. During an eight-month period in 2000, DEA
reported over 3,000 clandestine laboratory seizures. The overwhelming
majority of these laboratories were associated with the clandestine
manufacture of methamphetamine. Methamphetamine has a high abuse
potential and adverse impact on public health. Dependency is the
primary motivation for methamphetamine use and between 1993 and 1998,
3,903 methamphetamine-related deaths were reported in the Drug Abuse
Warning Network for the Primary Metropolitan and Statistical Areas of
San Diego, Los Angeles, San Francisco and Phoenix.
Pseudoephedrine bulk powder is usually imported from China or
India, tableted by DEA-registered manufacturers, distributed to various
distributors, wholesalers and then to retail outlets. Of DEA's
approximately 3,500 chemical registrants in 2000, over 3,100 were
distributors. While illegal diversion can occur at any point in the
distribution chain, it usually occurs after the manufacturer has sold
its product to a distributor.
OTC'c chemical background originated from the business operations
of L&M Vending company (L&M Vending), OTC's predecessor entity. On
April 30, 1997, Larry Petit filed for a DEA Registration on behalf of
L&M Vending. Subsequently, Tim Petit, brother of Larry Petit, filed an
Assumed Name Record and Copy Request with the Earl Bullock County
Clerk's Office, asserting ownership for the unincorporated business,
L&M Vending. Articles of Incorporation for L&M Vending were later
issued by the Office of Secretary of State of Texas, naming ``Larry
Petit,'' ``Mitzi Petit,'' and ``Timmy Petit'' as initial directors of
the corporation. Larry Petit was designated the initiated Registered
Agent for L&M Vending.
By letter of November 15, 1999, OTC informed the DEA that,
effective August 1, 1999, L&M. Vending no longer sold List I chemical
products, L&M Vending surrendered its DEA Certificate of Registration
and transferred to OTC, via invoice, all of its inventory of products
containing List I chemicals. Larry Petit, who had performed
confidential informant work for DEA in which L&M Vending was used,
testified at the hearing that OTC was formed in order to shift
legitimate List I chemical products sales away from L&M Vending's
informant operations. Due to policy changes within the agency, DEA
discontinued using Larry Petit applied as a cooperating source in
September of 1997. In May of 2001, L&M Vending was still in business,
supplying novelty merchandise to convenience stores.
Larry Petit testified during the hearing in this matter that Tim
Petit was the owner of L&M Vending and OTC. However, on June 30, 2000,
after these proceedings began, OTC filed Articles of Incorporation with
the Texas Secretary of State, listing Larry Petit, Mitzi Petit and
Timmy Petit as directors of the corporation. On May 5, 1999, Tom Petit
applied for a DEA Registration for OTC to distribute List I chemical
products. In connection with OTC's May 5, 1999, application for a DEA
Registration, on July 30, 1999, DEA and Larry Petit (on behalf of OTC),
entered into a Memorandum of Agreement (``MOA''). In the MOA DEA
promised to grant OTC a Certificate of Registration for chemical code
numbers 8112 (pseudoephedrine), 8113 (ephedrine) and 1225
(phenylpropanolamine), in exchange for Respondent's compliance with
requirements beyond those stated in Federal, State and local law.
Generally, the Respondent agreed to maintain complete records, review
each sale for any suspicious transaction, identify its customers and
promptly notify DEA in the event of a change in business or ownership.
A DEA registration was issued to OTC on or about July 30, 1999, and
was scheduled to expire December 31, 2000, if no renewal application
was filed. OTC was thus authorized to distribute List I chemical
products while its registration was valid, until July 17, 2000, when
the Administrator entered his Order of Immediate Suspension of
Registration.
On December 22, 2000, Tim Petit filed a renewal application for DEA
registration. The application was ``OTC Distribution.Co.'' typed in as
the registrant's name. However, handwritten below that entry was ``OTC
Distribution Inc.'' Additionally, in the explanation section of the
application, the words ``Temporary (sic.) Suspended'' were handwritten.
Tim Petit signed the renewal application, designating himself as
``President-Owner'' of the business. On August 31, 2000, OTC filed a
Designation of Representatives and Power of Attorney (Designation),
pursuant to 21 CFR 1316.50. The Designation, executed by Tim Petit,
appointed Larry Petit ``as representative of the sole proprietorship
and/or Corporation, nunc pro tunc to July 7, 1999 (for the
proprietorship) and June 30, 2000 (for the Corporation), to represent
either or both with regard to matters within DEA's jurisdiction.''
While Larry Petit provided testimony on behalf of the Respondent, Tim
Petit did not appear or testify at the hearing.
Both L&M Vending, Inc. and OTC conducted business through ``800''
numbers on vehicle cell phones. L&M Vending is not listed in the Dallas
area telephone directory. Larry Petit testified at the hearing that he
did not know whether or not OTC was listed in the telephone directory.
Testimony at the hearing also established that OTC had never had a
marketing plan, never advertised, had promotions, nor provided point-
of-sale advertising. Larry Petit did not know the number of
pseudoephedrine tablets sold in 2000, had not assessed the total market
for that product, was unaware of his market share for that product and
did not have a product catalogue or price list.
In the Memorandum of Agreement which OTC entered into with DEA in
1999 in order to become registered, the company agreed to maintain
records of receipt, distribution and returns of each transaction of
listed chemical products, even if the transaction was not a regulated
transaction. These records were to include information as to the
purchaser's identity, date of transaction, full description of the
product and
[[Page 70540]]
method of transfer and the method of payment. Receipt and distribution
records were to be maintained at the registered location or at Larry
Petit's daughter-in-law's, Tita Petit's, office, be readily retrievable
and maintained for two (2) years after the transaction. Distribution of
all List I chemical products were to be made under the name OTC.
Larry Petit further agreed to mail photocopies of receipt and
distribution records of listed chemical products to DEA on a monthly
basis and submit monthly reports to DEA of mail order sales of listed
chemical products. OTC was not in compliance with the MOA because OTC
failed to regularly provide the requisite purchase records to DEA for
its listed chemical products. OTC also failed to provide DEA with
monthly purchase records, although it did provide monthly sales
records. Both were required by the MOA.
Respondent also agreed in the MOA that Larry Petit would personally
review each sale by OTC of listed chemical products for suspicious
orders, any and all of which were to be promptly reported to DEA.
Although not required of List I chemical distributors by law, under the
MOA, Respondent was obligated to take quarterly inventories of its List
I chemical products, which would include the List I chemical's name,
strength, form of packaging, amount in stock, date of inventory and a
witnessed signature of the person taking the inventory.
OTC was also required to keep two forms of identification on file
for all customers and maintain a separate file on each customer
purchasing List I chemical products. For retail customers, the file
should include a copy of the customer's business license and
photographs of the establishment bearing the company name. If the
company was a DEA registrant, that status was to be verified with the
DEA Dallas Field Division. OTC was also to ensure the ``ship to''
address of retail customers matched the addresses on business licenses
maintained in the customer files.
OTC's List I chemical products were to be received and stored only
at 12617 Gaslite Drive, Dallas, Texas and DEA approval was required
before OTC could use any other storage facility. OTC also agreed to
provide advance notification to the Dallas Field Division of any
planned ownership change in OTC and promptly notify DEA if OTC
Distribution Co. discontinued business.
During a pre-registration investigation of Respondent's premises
conducted July 28, 1999, DEA Investigators reviewed the terms of the
proposed MOA point by point with Larry Petit, who was permitted to ask
questions and make comments on the terms of the agreement. Larry Petit
did suggest some changes and DEA agreed to allow OTC's books to be kept
at Tita Petit's residence, separate from OTC's registered location.
Larry Petit was advised that he would have to very carefully and fully
identify OTC's customers and comply with regulations stipulated in the
Code of Federal Regulations. Copies of regulations and warning sheets,
advising the DEA had seized combination ephedrine and pseudoephedrine
at clandestine methamphetamine laboratories, were also provided. Larry
Petit was instructed that OTC should have a photocopy of customer's
applications or DEA licenses or of photographic identification or
driver's licenses and should physically verify that the company
existed.
The Acting Deputy Administrator agrees with the Administrative Law
Judge that this MOA is a valid and binding agreement between DEA and
Respondent.
On March 30, 2000, DEA Diversion Investigators went to Tita Petit's
residence. Since August 1999, Tina Petit had worked for OTC, assisting
Larry Petit in keeping the company's List I chemical product records,
and the records were maintained at her residence. The Diversion
Investigators asked for OTC's purchase and sales records, and Tita
Petit produced hardcopy sale and purchase invoices which she confirmed
were ``all the records.'' The records were found to be incomplete in
that they did not indicate when and if a product was actually received.
Tita Petit indicated she and Larry Petit were trying to ``work out the
problem'' and at that time there was no real way to tell when a
shipment had been received. During this period they were working with
OTC's main supplier of List I chemical products, OTC Brokerage, Inc.
(``OTCB''), to match up invoices. In a May 10, 2000, letter to DEA,
Larry Petit indicated OTCB had not provided OTC with complete purchase
records.
The Diversion Investigators attempted to conduct an audit of the
company's List I chemical products. The audit covered the period July
30, 1999, to March 30, 2000. In addition to the incomplete receiving
records, the Diversion Investigators found inconsistencies in the sales
records. The Investigators went to some of OTC's suppliers in an
attempt to determine exactly how much product was received by OTC
during the audit period. They were not able to obtain all the
information they needed. The audit disclosed shortages of several
products including thousands of bottles of pseudoephedrine.
Diversion Investigators conducted another inspection on May 23,
2000. They inventoried approximately 1,500 bottles of List I chemical
products on hand, a figure Larry Petit certified. Using Respondent's
list of sales of the month of May 2000 and purchase and sales documents
from OTC, and two of its suppliers for that month, DEA personnel
determined that for the month of May 2000, OTC had additional shortages
of 10,589 bottles of List I chemical products.
The Administrative Law Judge found that as a chemical registrant,
OTC had an obligation to maintain records regarding List I chemical
products and to keep purchasing records and sales records. Further,
pursuant to paragraph 7 of the MOA, OTC was required to keep an
inventory of all List I chemicals on a quarterly basis. Pursuant to the
MOA, OTC was also required to keep sales invoices. The sales invoices
DEA obtained March 30, 1999, were retained pursuant to that
requirement, but those records were incomplete. More than half of the
179 invoices (98) did not denote the method of transfer, which should
be recorded in accordance with DEA regulations. The MOA also required
recordation of the method of payment, yet approximately 56 or 57 of the
total invoices reviewed failed to note method of payment.
In the months following its pre-registration inspection, OTC
provided DEA with sales records in accordance with the MOA, but not the
required purchase records. The purchase records were, however, promptly
produced in January or February 2000 after they were requested.
Between July 1999 and February 2000, Koehn Enterprises of
Texarkana, Texas purchased 600 cases of pseudoephedrine product from
OTC. On February 15, 2000, a DEA Diversion Investigator went to the
location that OTC shipped to and found Koehn's registered location to
be a day care center and that its List I chemical products were being
stored at another unregistered address. Koehn also had been arrested on
state charges for unlawful transfer of precursor chemicals. DEA was
advised that Koehn made many shipments of List I chemicals to Las
Vegas, Nevada to customers taken over from OTC. Koehn was unable to
account for 97 cases of pseudoephedrine which it had received from OTC.
OTC was also receiving, processing and distributing orders
containing List I chemical products at the AIT Freight
[[Page 70541]]
facility. When an air shipment came into AIT, OTC's salesman would come
to the facility and break down the shipment into orders. While some
would be given to AIT for re-shipment, others would be given by OTC's
salesman to customers who came to AIT's dock. On May 12, 2000, the
salesman was seen supervising the loading of apparent pseudoephedrine
product into a rental truck, which then left the area. Thus it appeared
that OTC was shipping or distributing List I chemicals from an
unregistered location.
From April to June 2000, Respondent kept an organized chart of
pseudoephedrine product activity. This chart included: Detailed
information as to customers' identity and addresses, DEA registration
numbers, dates of request, invoice numbers, types of carrier used to
deliver the product, quantities of product sold, any amounts returned,
OTC purchase order numbers, the customers' purchase order numbers,
specific product information and the payment numbers.
With regard to customer compliance, OTC sent a packet of
information to its customers containing information about reporting
suspicious orders, complying with DEA regulations and restricting terms
of resale. It also sent a contract to retailers selling OTC products
which required implementing and educating store employees on a
``maximum purchase policy'' and compliance with all DEA regulations.
OTC also sent a conditions of sales contract to its distributor
customers, explaining its requirements for resale of pseudoephedrine
and ephedrine products. A suspicious orders guide sheet was also
provided both retail and distributor customers, enumerating a list of
suspicious factors found in the DEA's Chemical Handler's Manual. It
also explained that distributors, who were most familiar with their
customers and circumstances, must use their best judgment in
identifying suspicious orders. Govt. Ex. 11 at 5. With regard to OTC's
customer files, most contained photographs of their facilities and
photocopies of their representative's driver's license.
OTC reported suspicious transactions to DEA by letter five times
between November 18, 1999, and June 22, 2000. Its predecessor, L&M
Vending, also reported suspicious transactions by letter on five
occasions between March and July 1999.
DEA has implemented a system of documenting and informing a company
that products it has manufactured or distributed have surfaced at a
site associated with clandestine drug manufacturing. Fourteen DEA
Warning Letters were addressed to Respondent between January 6, 1999,
and October 18, 2000, enumerating over 20 different seizures of OTC's
pseudoephedrine product at clandestine sites. These letters documented
the seizure of 28,423 bottles of 60-count List I chemical product, 116
bottles of 100-count List I chemical product and 32,589 bottles of 120-
count List I chemical products. During the period November 1999 to July
2000, OTC pseudoephedrine product was seized at clandestine
laboratories in eight states, with over 2 million dosage units seized
in Oklahoma alone.
OTC sold List I chemical products to Tobacco Wholesale. Sales
increased from 110 cases in February 2000 to over 800 cases by May
2000. Larry Petit thought this was appropriate, as that firm would
become OTC's regional distributor in Oklahoma. He also testified he had
an agreement with another List I chemical wholesaler, Branex to be
OTC's regional distributor in Florida. However, this was not a written
agreement, but one orally negotiated by OTC's salesman. Petit was
unaware if OTC had a special price agreement with Branex, whether he
had assessed Branex's ability to compete in the Florida pseudoephedrine
market or if Branex had been asked to provide OTC a list of its retail
customers.
There were instances when Larry Petit also did not check on the
trade references supplied by customers or know if anyone from OTC had
checked on their downstream customers. Petit also admitted that he
ignored references supplied by customers even though he referred to the
reference as a ``bad guy.''
In the traditional market, Pfizer is the manufacturer and
distributor of the Sudafed product line and one of the largest sellers
of pseudoephedrine products in the United States. Pfizer's major
customers include retail trade outlets such as drug and grocery store
chains and mass merchandisers. From August 1999 to April 2000, OTC sold
almost one-third the number of pseudoephedrine products sold by Pfizer
nationwide. Pfizer's representative was not aware of OTC as a
competitor and concluded OTC's brand was not sold in the same market as
Sudafed.
The L. Perrigo Company is the largest manufacturer of over-the-
counter pharmaceutical products for the ``store brand'' market, which
are sold under various labels and compete with nationally advertised
brands. From August 1999 until April 2000, OTC sold over one-third the
number of tablets of pseudoephedrine product sold by Perrigo. Perrigo's
representative had never seen or heard of the OTC's product and
concluded it was neither a national brand nor a competitor of
Perrigo's.
During the hearing and in post-hearing filings, the Government
asserted that Respondent's registration should be revoked on public
interest grounds. It argued that OTC failed to maintain effective
controls against diversion, that the MOA bound OTC to additional
requirements with which OTC failed to comply and that OTC failed to
take corrective action after being notified of possible diversion of
its product. The Government also contends OTC failed to comply with
relevant Federal, State and local law by failing to report a regulated
transaction which included a suspicious method of payment to DEA,
failure to identify the other party to a regulated transaction, failure
to keep and maintain records of regulated transactions and failure to
keep and maintain accurate inventory records.
The Government contends OTC's principal manager was aware of DEA
regulatory requirements and knew, through DEA Warning Letters, that its
pseudoephedrine product was being diverted to the illicit production of
methamphetamine. The Government further argues OTC was not providing
listed chemical products for the traditional and recognized therapeutic
market.
Respondent contends it substantially satisfied its regulatory
obligations, entered into a voluntary agreement imposing additional
responsibilities, substantially followed those obligations and
attempted to consult with DEA to improve its operations. It further
points to Larry Petit's extensive work with the DEA. While
acknowledging violation of the record-reporting provision of the MOA
when it failed to provide purchase orders to DEA, it argues this
violation does not justify revocation, given OTC's remedial efforts to
rectify that error.
Pursuant to 21 U.S.C. 823(h) and 824(a)(4), the Acting Deputy
Administrator may revoke a DEA Certificate of Registration and deny any
pending application for renewal for such registration, if she
determines that registrant's continued registration would be
inconsistent with the public interest. Section 823(h) requires that the
following factors be considered in determining the public interest:
(1) Maintenance by the applicant of effective controls against
diversion of listed chemicals into other than legitimate channels.
(2) Compliance by the applicant with applicable Federal, State and
local law.
[[Page 70542]]
(3) Any prior conviction record of the applicant under Federal or
State laws relating to controlled substances or to chemicals controlled
under Federal or State law.
(4) Any past experience of the applicant in the manufacture and
distribution of chemicals; and
(5) Such other factors as are relevant to and consistent with the
public health and safety.
These factors are to be considered in the disjunctive; the Acting
Deputy Administrator may rely on any one or a combination of factors
and may give each factor the weight she deems appropriate in
determining whether a registration should be revoked or an application
for registration denied See Henry J. Schwartz, Jr., M.D., 54 FR 16422
(1989).
As a preliminary matter, the Administrative Law Judge refused the
Government's request to take official notice that ``no business entity,
intended to be a going concern, operates in such a fashion as OTC
did.'' The Acting Deputy Administrator agrees that the broad assertion
of OTC's illegitimacy as an on-going business entity embodied in this
particular request is not appropriate for official notice. However, the
Acting Deputy Administrator disagrees with the Administrative Law
Judge's broad conclusion that DEA possesses ``no specialized knowledge
pertaining to general business practices of legitimate business
entities'' (ALJ Decision at 47). The DEA does possess special expertise
in many areas of business operations, both legitimate and illegitimate,
which relate to the manufacture and distribution of controlled
substances and List I chemicals.
Nevertheless, deciding whether or not ``any'' business entity,
intending to be an ongoing concern, would operate as OTC did, does
require a qualitative analysis of the evidence in the particular record
on a finding which could materially impact the outcome. The request
also does not involve an ``obvious and notorious'' fact (See Attorney
General's Manual at 79), is open to dispute and is not capable of ready
and certain verification. Considering the foregoing and the scope of
the request, the Acting Deputy Administrator will not take official
notice of the specific fact which was requested.
Nevertheless, certain facts established in the record do indicate
numerous deviations from what would be considered sound business
practices of companies engaged in distributing regulated chemicals. As
did the Administrative Law Judge, these facts will be considered by the
Acting Deputy Administrator in determining the public interest in OTC's
continued registration.
The Acting Deputy Administrator also agrees with the Administrative
Law Judge that OTC Distribution Company's Certificate of Registration
was not terminated as a matter of law when, after initiation of these
proceedings, Tim Petit filed Articles of Incorporation with the State
of Texas in the name of ``OTC Distribution, Inc.'' Ambiguity as to the
Respondent's intent to alter its status as a sole proprietorship to
that of corporation and to use a renewed certificate to carry out its
business, was generated by conflicting notations on the December 22,
2000, application for renewal of registration signed by Tim Petit.
However, no requests for a modification to change the registrant's
name or transfer the certificate of registration to a new corporate
entity were ever submitted. The Government also did not introduce
evidence of conduct by OTC Distribution Co., consistent with a
conclusion that OTC Distribution Co. had ceased existence or
discontinued business. Neither was any Texas law offered to support the
conclusion that, by operation of law, OTC Distribution Co. ceased legal
existence or discontinued business, simply upon filing of the articles
of incorporation. Accordingly, the Acting Deputy Administrator agrees
with the Administrative Law Judge that OTC Distribution Company's DEA
Certificate of Registration remains a viable, if temporarily suspended,
registration whose fate cannot be decided by summary disposition.
With respect to factor one, maintenance of effective controls
against diversion, the Acting Deputy Administrator agrees with the
Administrative Law Judge that Respondent's physical storage facility
met or exceeded minimum security requirements. However, while physical
security is a focus of 21 CFR 1309.71 (2000), the Acting Deputy
Administrator agrees with the Government's exception to the Opinion and
Recommended Ruling, that the Administrative Law Judge's discussion on
this factor was unnecessarily limited to the adequacy of storage and
physical access to Respondent's List I chemical products.
Among the factors required to be considered by the Acting Deputy
Administrator under the general security requirements of 21 CFR
1309.71, is ``[t]he adequacy of the registrant's or applicant's systems
for monitoring the receipt, distribution and disposition of List I
chemicals in its operations.'' 21 CFR 1309.71(b)(8). Further, prior
agency rulings have applied a more expansive view of factor one than
mere physical security. See, e.g., Alfred Khalily, Inc., 64 FR 31,289,
31,292 (1999) and NVE Pharmaceuticals, Inc., 64 FR 59,215, 59,217-18
(1999) (failure to identify a party to a transaction or engaging in
transactions with non-registered entities fell under factor one); State
Petroleum, Inc., 67 FR 9,994, 9,994 (2002); Hadid International, Inc.,
67 FR 10,230, 10,231 (2002) and Aqui Enterprises, 67 FR 12,576, 12,578
(2002) (recordkeeping inadequate to track sales and customers within
factor one).
Respondent's failure to maintain adequate administrative records
and controls to permit a more precise audit of its List I chemical
products, its inability or unwillingness to fully comply with its
record keeping and report obligations under the MOA, its distribution
of List I chemical products directly to customers from a freight
facility loading dock and substantial seizures of OTC pseudoephedrine
products from illicit sites, all weigh against Respondent as to factor
one.
With regard to factor two, compliance with applicable law, the
Acting Deputy Administrator agrees with the Administrative Law Judge
that OTC was bound to comply with the provisions of the MOA, in
addition to the recordkeeping, reporting and identification
requirements in the Code of Federal Regulations. OTC then failed to
provide the DEA with adequate inventory records, complete sales
invoices or with any purchase records.
With regard to the accountability audits conducted by DEA Diversion
Investigators which resulted in their finding of overages and shortages
of listed chemicals, Respondent has filed exceptions to the Opinion and
Recommended Ruling of the Administrative Law Judge. OTC argues the
audits were not undertaken in a ``manner that lends credibility to
their results'' and ``were based on erroneous assumptions.''
Respondent's Exceptions at 4. However, the inability of DEA personnel
to precisely account for the receipt and distribution of OTC's List I
chemical products was principally attributable to Respondent's failure
to maintain adequate records. The Acting Deputy Administrator is
particularly troubled that Respondent was placed on notice by the terms
of the MOA as to its need to maintain accountability for the List I
chemicals it distributed--through its own records--and nevertheless
failed to fully comply with those requirements either by intent,
ignorance or neglect.
There was a substantial deviation between the results of two
investigators
[[Page 70543]]
as to the number of unaccounted for bottles from the audit.
Nevertheless, using the smaller numbers, the Administrative Law Judge
characterized OTC's unaccounted for product as being ``unacceptably
large.'' However, in its exceptions, Respondent points to the inability
of OTC's supplier, OTCB, to provide exact figures as to the amount of
product it shipped to OTC during the audit period, thus degrading the
reliability of the figures the Diversion Investigator was required to
use in making her calculations. The Administrative Law Judge adequately
acknowledged the inherent difficulty in arriving at a bottom line using
the records that were available. It also should be noted that OTC was
required to maintain complete records of all listed chemicals it
received. Nevertheless, given the large figures of unaccounted for
product, it was reasonable to infer that even given the problems in
accuracy noted in the record here, there were still unacceptably large
quantities of unaccounted for List I chemical products in OTC's
records. Further, the gravaman of the Administrative Law Judge's
opinion in this section was OTC's internal failure to maintain adequate
records. The Acting Deputy Administrator agrees and concludes that
failure is significant and contributes to the risk to the public
interest of OTC's chemical products being diverted to the illicit
market. See, e.g., In the Matter of David N. Pruitt, 57 FR 11,339,
11,340 (1992).
Based on inclusion of the unregulated product Maxinol, in the
computation chart prepared by one of the Diversion Investigators based
on OTCB records (Govt. Ex. 95) and photographs of that product taken
during the May 23, 2000, inspection, Respondent's exceptions further
challenge the overall validity of the audits. However, it was jointly
stipulated by the parties that Maxinol does not contain a List I
chemical and the Administrative Law Judge's findings relating to that
audit and her decision were not premised on the apparent 1296
unaccounted for bottles of Maxinol. Indeed, the six other products in
the computation chart which did form the basis for the judge's findings
regarding the audit, are all products containing List I chemicals and
reflect large quantities of unaccounted pseudoephedrine product,
including a shortage of 54,403 bottles of OTC's 120-count 60 mg.
product. The Acting Deputy Administrator finds Respondent's exception
to be without merit.
The Administrative Law Judge concluded Respondent engaged in
suspicious regulated transactions involving uncommon methods of
delivery and payment. Such transactions are required to be reported to
the DEA pursuant to 21 CFR 1310.05(a)(1) (2000). With regard to
delivery, OTC representatives received, processed and distributed
orders containing List I chemical products directly from a freight
facility, an unregistered location. These transactions would be
regarded as suspicious transactions. However, the Acting Deputy
Administrator agrees with the Administrative Law Judge that there was
insufficient evidence showing Respondent shipped List I chemical
products to an unregistered location in connection with sales to
Worldwide Wholesale.
The Administrative Law Judge found OTC engaged in a suspicious,
unreported transaction when it accepted $70,000.00 in cash from T.J.
Wholesale as part of a transaction for products containing List I
chemicals. Noting the finding that Larry Petit did not think the
payment suspicious, Respondent has filed an exception asserting the
Administrative Law Judge's decision in effect, improperly places the
characterization as to what constitutes a ``suspicious order in the
hands of the Agency after the fact.''
While the seizure of pseudoephedrine, sold by OTC to T.J. Wholesale
and later discovered in illicit laboratories, had not yet been reported
to OTC by a Warning Letter, the suspicious circumstances of the cash
transaction were readily apparent to any reasonable person. Larry
Petit's explanation, that he did not think it unusual for someone going
to Las Vegas to have $70,000.00 cash, begs the relevant question. While
perhaps a ``big-time'' gambler might carry cash for that purpose, that
does not explain why a legitimate business enterprise would purchase a
substantial amount of List I chemical products with cash, let alone
$70,000.00 worth of pseudoephedrine.
In addition to the testimony of a Diversion Supervisor that payment
in cash is suspicious, payment in cash and by cashier's check were
identified as reasons to consider a particular transaction as being
suspicious in the very materials OTC sent its own customers. OTC also
included cash payments as suspicious in proposed conditions of sale
contracts with its customers. (See Govt. Ex 11 at 4.) That Larry Petit
recognized the unusual nature of the transaction was also indicated by
his testimony that he told T.J. Wholesale's representative that he
would take the cash ``one time only'' and ``I don't operate my company
that way.'' (Tr. at 1295.) Given the foregoing, the Acting Deputy
Administrator concludes Larry Petit recognized the unusual nature of
this transaction and it should have been reported to DEA at the time.
The Administrative Law Judge found OTC engaged in over-the-
threshold regulated transactions of pseudoephedrine products with a
non-registrant. (Finding of fact 47.) This involves sales to the Red
Coleman Stores. Respondent filed exceptions to this finding, arguing
Red Coleman is a retail distributor which did not have to be registered
with DEA. The Acting Deputy Administrator agrees the evidence is
ambiguous on this point and insufficient to show the Red Coleman Stores
engaged in over-the-threshold retail transactions requiring that
company's registration. Accordingly, the Administrative Law Judge's
finding of sales to a non-registrant in violation of DEA regulations
will not be adopted.
Regarding factor three, relevant conviction record, the
Administrative Law Judge found that neither the Respondent nor its
principal officers have any prior conviction record relevant to the
handling of List I chemicals.
Regarding factor four, applicant's experience in distributing
chemicals, the Administrative Law Judge found that the officers of OTC
and Larry Petit in particular, had extensive experience with
distributing List I chemicals, much of which stemmed from the operation
of L&M Vending Company and Larry Petit's work with DEA.
With respect to factor five, such other factors relevant to and
consistent with public health and safety, the Administrative Law Judge
noted the serious impact upon the public interest of the diversion of
List I chemical products into the illicit production of
methamphetamine. Acknowledging the distinction between ``Traditional''
and ``Non-Traditional'' markets, the Administrative Law Judge concluded
OTC engaged in unusual business practices, raising suspicions as to the
exact source of OTC's customer base and intended purpose of its
business operations.
Specifically, OTC was not listed in the Dallas area telephone
directory, did not have a marketing plan during its formation and early
days of operation, has no product catalog or price list, never engaged
in promotions or advertising and had no employees. Additionally, Larry
Petit did not know OTC's market share of List I chemical products.
However, the evidence showed OTC sold over 92 million tablets of
pseudoephedrine product
[[Page 70544]]
from August 1999 until April 2000. This is a sizable share compared to
the sales of the two largest sellers of pharmaceutical pseudoephedrine
products in the United States, Pfizer and Perrigo. Despite the
``share'' of the potential market that OTC's millions of tablets
represented, neither the Pfizer or Perrigo representatives were even
aware of OTC as a possible competitor.
Further, the government established that between January 6, 1999
and October 18, 2000, 14 Warning Letters enumerated over 20 different
seizures of OTC's pseudoephedrine products from illicit sites,
including 28,423 bottles of 60-count product, 116 bottles of 100-count
product and 32,589 bottles of 120-count products. The Acting Deputy
Administrator agrees with the Administrative Law Judge that these
warning letters demonstrate the movement of OTC's List I chemical
products into the illicit market, an additional factor that OTC's
continued handling of these products creates a risk to the public
health and safety by fueling the activities of that illicit market.
The Acting Deputy Administrator has considered the totality of the
circumstances, including Respondent's favorable evidence. Martha
Hernandez, M.D., 62 FR 61,145, 61,147 (1997). In this regard, Larry
Petit's relationship with DEA as a cooperating source; OTC's financial
audit and efforts undertaken to improve the company's financial records
and better monitor its billing and shipping records and invoices; OTC's
willingness to take action in response to several DEA Warning Letters;
its acceptable customer compliance files; and the filing of some
suspicious transaction reports by OTC are all noted. The Acting Deputy
Administrator has also taken into consideration OTC's prompt
notification to the Dallas Field Division of its receipt of product
that came into its possession inadvertently after the Order of
Immediate Suspension had been served on it, a fact pointed out in
Respondent's Exceptions to the Opinion and Recommended Ruling.
On the other hand, Larry Petit's experience as a cooperating source
should have sensitized him to the threat of criminal activity posed by
diversion of List I chemical products and the need for OTC's full
compliance with both DEA regulations and the terms of its MOA. Further,
while the financial audit was a positive business step, it did not
focus on the more pressing need for regulatory compliance and strict
record keeping actions necessary to ensure future accountability in the
handling of listed chemical products.
The Acting Deputy Administrator concludes Respondent's registration
with DEA would be inconsistent with the public interest. Although some
positive efforts have been undertaken after initiation of these
proceedings, OTC's track record has been one of non-compliance with
recordkeeping requirements of List I chemical products and an inability
to account for large quantities of List I chemical products. OTC
further failed to fully comply with the terms of the MOA, failing to
provide complete sales records, adequate inventory records or purchases
records as required. Further, OTC's handling and delivery of List I
chemical products at AIT's unregistered and insecure freight facility
creates an unacceptable risk of diversion.
The Acting Deputy Administrator agrees with the Administrative Law
Judge that DEA has insufficient assurances that Respondent, under the
possible direction of Tim Petit, will be able to aggressively correct
its List I chemical product handling practices and recordkeeping
problems to a level that would justify its continued registration as
being in the public interest. In the past, under the direction of Larry
Petit, Respondent's disregard for the regulations and its obligations
under the MOA make questionable its commitment and ability to comply
with the DEA statutory and regulatory requirements designed to protect
the public from the diversion of listed chemicals. See, e.g., Seaside
Pharmaceutical Co., 67 FR 12,580, 12,583 (2002); Aseel, Incorporated,
Wholesale Division, 66 FR 35,459, 35,461 (2001).
Accordingly, the Acting Deputy Administrator of the Drug
Enforcement Administration, pursuant to the authority vested in her by
21 U.S.C. 823 and 824 and 28 CFR 0.100(b) and 0.104, hereby orders that
DEA Certificate of Registration, 0044580RY, previously issued to OTC
Distribution company, be, and it is, hereby revoked. The Acting Deputy
Administrator further orders that any pending applications for renewal
or modification of said registration be, and they hereby are, denied.
This order is effective December 18, 2003.
Dated: November 26, 2003.
Michele M. Leonhart,
Acting Deputy Administrator.
[FR Doc. 03-31219 Filed 12-17-03; 8:45 am]
BILLING CODE 4410-09-M