[Federal Register: October 3, 2008 (Volume 73, Number 193)]
[Notices]
[Page 57655-57668]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc08-93]
-----------------------------------------------------------------------
DEPARTMENT OF JUSTICE
Drug Enforcement Administration
[Docket Nos. 05-13 and 05-45]
Sunny Wholesale, Inc.; Revocation of Registration and Denial of
Application
On August 24, 2005, I, the Deputy Administrator of the Drug
Enforcement Administration, issued an Order to Show Cause and Immediate
Suspension of Registration to Sunny Wholesale, Inc. (Respondent), of
Forest Park, Georgia. ALJ Ex. 6. The Order immediately suspended
Respondent's DEA Certificate of Registration, No. 004550SLY, which
authorizes it to distribute the list I chemicals ephedrine and
pseudoephedrine, on the ground that it was selling ``excessive
amounts'' of these chemicals to convenience stores, id. at 6, which are
the ``primary source'' for the diversion of these chemicals into the
illicit manufacture of methamphetamine, a schedule II controlled
substance.\1\ Id. at 4.
---------------------------------------------------------------------------
\1\ On October 20, 2004, the Deputy Assistant Administrator
issued the initial Order to Show Cause to Respondent; the Order
proposed the revocation of its registration at its Forest Park
location and the denial of its pending application for a
registration at its Decatur, Georgia location. ALJ Ex. 1. Each of
the allegations of the initial Show Cause Order was repeated
verbatim in the subsequent Order to Show Cause and Immediate
Suspension of Registration. On November 19, 2004, Respondent,
through its counsel, requested a hearing on the allegations of the
first Show Cause Order. ALJ Ex. 2.
---------------------------------------------------------------------------
More specifically, the Show Cause Order alleged that in July 2005,
DEA Diversion Investigators (DIs) learned that records seized from
various north Georgia convenience stores which were ``suspected of
illegally distributing listed chemical precursors,'' had ``indicated
that [Respondent] had been distributing 60 count bottles of'' Max Brand
pseudoephedrine, a product which has been repeatedly found at illicit
methamphetamine labs ``in full case and double case lots.'' Id. at 6.
The Show Cause Order alleged that ``law enforcement officials [in
Tennessee and Georgia] have observed that an overwhelming proportion of
precursors found at illicit methamphetamine sites has involved non-
traditional brands sold through convenience stores,'' id. at 4, that
DEA had retained an expert in retail marketing and statistics who had
concluded that sales of pseudoephedrine products at convenience stores
in Tennessee and Georgia ``averaged between $15.00 and $60.00 per
month'' per store and that sales of combination ephedrine products were
even lower, Id. at 5, and that ``[c]onvenience store purchases of case
quantities of high count/high strength pseudoephedrine products [are]
consistent with diversion of the products into the illicit manufacture
of methamphetamine.'' Id. at 6. The Show Cause Order further alleged
that Respondent had continued selling large amounts of pseudoephedrine
``to convenience stores and gas stations,'' notwithstanding that it had
been ``put on notice of the potential illegal character of its
activities with the issuance of the original Order to Show Cause''
which was served in October 2004. Id. ``[B]ecause of the substantial
likelihood that [Respondent would] continue to divert listed chemical
products,'' I thus concluded that Respondent's ``continued
registration, during the pendency of these proceedings, would
constitute an immediate danger to the public health and safety.'' Id.
at 7.\2\
---------------------------------------------------------------------------
\2\ The Order also alleged that in July 2005, DEA DIs discovered
that Respondent ``was also selling one-ounce bottles of liquid
iodine to several convenience stores,'' another chemical used in the
illicit manufacture of methamphetamine. Show Cause Order at 6. The
Order further alleged that ``[i]odine * * * has miniscule sales for
use as an antiseptic, even in pharmacies,'' that ``[t]he likelihood
of sales of iodine to customers in convenience stores approaches
zero,'' and that while Respondent ``sold between 48 and as many as
240 bottles of iodine to individual convenience stores,'' it ``never
reported these transactions * * * as extraordinary sales or
suspicious transactions.'' Id.
---------------------------------------------------------------------------
In addition to the above, the Show Cause Order alleged that during
a July 2001 inspection, DEA DIs audited Respondent's handling of listed
chemical products and determined that it had ``various overages and
shortages, including an unexplained shortage of approximately 10,000
bottles of Max Brand, and (another non-traditional brand) Heads Up 60
count bottles.'' Id. at 5. The Show Cause Order alleged that while
inventorying Respondent's listed chemical products, it had ``no
traditional brand * * * products but only `grey market' brands of
pseudoephedrine and combination ephedrine products'' which are not sold
at drug stores or supermarkets, but ``are typically only sold in
locations where goods of these types are not expected to be sold, such
as liquor stores, head shops, gas stations, and other small retail
stores.'' Id.
The Show Cause Order further alleged that following the inspection,
DEA DIs conducted verifications of Respondent's customers; the DIs
allegedly found that some of the locations were ``non-existent,'' some
were residences, and others included such establishments as ``liquor
stores, gift shops, a Blimpie restaurant * * * and a magazine store.''
Id. Relatedly, the Order alleged that in seeking a registration for its
Decatur location, Respondent provided a list of its proposed list I
chemical customers which included ``liquor stores, a lotto store, a
clothing store, a newsstand, and another distributor.'' Id. at 3.
The Show Cause Order also alleged that Respondent would not
maintain proper security of listed chemical products at its new
proposed location because while its owner, Mr. Shaukat Sayani, had
represented that his customers would place their orders ``in person''
and that Respondent would deliver the products by van, the DIs had
previously determined that Respondent did not conduct business in this
``manner at [its] Forest Park'' location. Id. The Show Cause Order
further alleged that Respondent ``intended to co-mingle listed chemical
products with
[[Page 57656]]
non-regulated products on the warehouse floor,'' that it ``had no
procedure in place to detect theft or loss at the warehouse,'' that its
``proposed method of sales recordkeeping * * * was inadequate to comply
with 21 CFR 1310.06,'' and that it had no means of ``compar[ing] sales
between its two * * * locations in order to determine if excessive or
suspicious transactions were being encountered.'' Id. Relatedly, the
Show Cause Order alleged that warehouse security at the Forest Park
location was inadequate. Id. at 5.
On September 13, 2005, Respondent requested a hearing on the
allegations of the Order to Show Cause and Immediate Suspension and
moved to consolidate the two proceedings. ALJ Ex. 7. While the hearing
on the original Show Cause Order had been scheduled to begin on
September 20, 2005, Respondent's counsel sought a continuance to obtain
additional time to prepare. Accordingly, the ALJ ordered that the
original hearing be cancelled. On December 14, 2005, the ALJ conducted
a pre-hearing conference and set the hearing for March 21, 2006. ALJ
Decision (ALJ) at 2-3.
Thereafter, on February 27, 2006, Respondent's counsel filed an
emergency motion for a continuance. The ALJ granted the motion and
subsequently rescheduled the hearing to begin on August 15, 2006. Id.
at 3.
A hearing was held on August 15 through 18, 2006, at which both
parties called witnesses to testify and submitted documentary evidence.
At the hearing, Respondent also submitted a motion for summary
judgment. Id. (citing RX 26). Following the hearing, both parties
submitted briefs containing their proposed findings of fact,
conclusions of law, and argument.
On May 4, 2007, the ALJ ordered the parties to file a joint status
report regarding Respondent's Forest Park registration. On June 11,
2007, the parties filed the report; the report stated that ``it is the
position of the agency and Respondent that [it] currently has a pending
application for renewal of its currently suspended registration.''
Joint Status Report at 2.
On August 17, 2007, the ALJ issued her recommended decision. In her
decision, the ALJ concluded that Respondent did not maintain effective
controls against diversion because it did not ``verify the legitimacy
of its customers,'' sold ``suspiciously high quantities of iodine
products to some customers'' even though its owner ``was repeatedly
made aware of iodine's role as a methamphetamine precursor,'' had
``inadequate inventory procedures [and] poor recordkeeping,'' and
failed ``to report suspicious transactions.'' Id. at 29-30.
The ALJ also concluded that Respondent was not in compliance with
federal law because it ``could not account for large quantities of
missing bottles of product,'' and ``did not keep adequate records'' of
its sales which ``hindered [its] ability to ascertain whether a
customer had purchased an amount above the regulated threshold.'' Id.
at 31. The ALJ further found that ``Respondent has distributed large,
case quantities of pseudoephedrine and ephedrine products,'' as well as
``large amounts of 2% iodine,'' and that ``even [its] witness concurred
that some of [its] sales were in excess of what would be expected.''
Id. at 32-33. Finally, the ALJ noted that ``[m]any of the `businesses'
to which Respondent sold list I chemical products operated within the *
* * non-traditional market for such products,'' that sales to the non-
traditional market create an ``unacceptable risk of diversion,'' and
that ``[s]ome of [Respondent's customers] did not even appear to be
tangentially related to the legitimate sale of pseudoephedrine and
ephedrine products.'' Id. at 34.
The ALJ did note that Respondent had improved its security and had
``conduct[ed] some investigations into some of its customers' business
identities.'' Id. at 34. The ALJ concluded, however, that Respondent's
``cooperation is dwarfed by the significant risk of diversion posed [by
its] continued sales of listed chemical products to [non-traditional]
customers without adequate sales records or customer verification,''
and that it ``has not provided sufficient evidence * * * that its
future conduct would change to the degree necessary to eliminate the
threat to the public interest.'' Id. at 35.
The ALJ further rejected Respondent's arguments that the Government
was denying it equal protection of the laws under the Due Process
Clause of the Fifth Amendment. More specifically, Respondent argued
that it was being held `` `to a different standard than [the
Government's] published rules dictate,' '' id. (quoting Resp. Br. at
16), that the Agency had not ``put Respondent on notice as to what
specific action would be a violation [of its] rules and regulations,''
id. (quoting Resp. Br. at 17), and that ``the agency [was] `exercising
uncontrolled discretion.' '' Id. (quoting Resp. Br. at 20).
Finally, the ALJ rejected Respondent's contention that it was
entitled to judgment as a matter of law because its sales did not
exceed the 1,000 gram monthly threshold (which triggers various
reporting and recordkeeping) requirements. Id. at 37. Citing several
DEA decisions, the ALJ explained that ``Respondent need not exceed the
Government's threshold of allowed sales in order to [be deemed to have]
act[ed] in a manner inconsistent with the public interest.'' Id.
(citations omitted).\3\
---------------------------------------------------------------------------
\3\ The ALJ also noted that there was no evidence that supported
Respondent's contention that it is being discriminated against
because its owner ``is a legal alien who is attempting to operate a
business in this country in accordance with its laws.'' ALJ at 37
(quoting Res. Br. 24).
---------------------------------------------------------------------------
While the ALJ did not make an express finding that Respondent's
continued registration is inconsistent with the public interest, such a
finding is implicit in her recommended sanction that Respondent's
registration at its Forest Park location should be revoked and its
pending application for a registration at its Decatur location should
be denied. ALJ at 38. Thereafter, both parties filed exceptions to the
ALJ's decision.
The Government's exception noted that while it concurred with the
ALJ's recommendation, it was ``not apparent whether the ALJ actually
made a finding that Respondent's continued registration would not be in
the public interest.'' Gov. Exceptions at 1. The Government thus
requested that I ``make a finding that Respondent's continued
registration and pending application for registration are not in the
public interest as that term is used'' in the applicable provisions of
the Controlled Substances Act. Id.
The Government also took exception to three of the ALJ's factual
findings (FOFs 52, 57, 58), pertaining to the testimony of the
Government's expert on the expected sale range of listed chemical
products at convenience stores and other non-traditional retailers of
these products. Id. at 2. More specifically, the Government took
exception to the ALJ's findings that Respondent's expert had credibly
testified that the Government's expert had made several ``flawed
assumptions'' including ``that everybody sells everything in'' the
product category, and that as a result, ``the average convenience store
might sell $173.25 of list I chemical products per month,'' and that
``this number [is] more credible than the $82 value'' given by the
Government's expert.\4\ ALJ at 23-24; Gov. Exceptions at 2.
---------------------------------------------------------------------------
\4\ The ALJ noted, however, that ``even using this larger number
* * *. Respondent repeatedly sold list I chemical products in excess
of $173.25 per month.'' ALJ at 24.
---------------------------------------------------------------------------
Because ``Respondent sold in excess of both experts' figures,'' the
Government declined to ``opine'' as to
[[Page 57657]]
whose expert's sales figures were ``exactly correct'' or whether
``there is a more precise figure somewhere between their numbers.''
Gov. Exceptions at 2-3. The Government nonetheless urged that I not
adopt the ALJ's finding because Respondent's expert's ``analysis of
this case was not in detail, but quite limited,'' and the expert ``did
not perform his own independent analysis of the data, but only compared
end data from two different parts of [the Government expert's]
report.'' Id. at 3.
In its exceptions, Respondent also noted that the ALJ had not made
a finding as to whether its continued registration would be in the
public interest and argued that ``no such ruling would be appropriate
in this matter.'' Resp. Exceptions at 2. More specifically, Respondent
contends that it has ``complied with every request that was given to it
by the DEA, repeatedly requested of DEA what they wanted it to do and
was willing to do anything the DEA wanted.'' Id. at 3. It further
contends that the Show Cause Orders were based on Respondent's
exceeding sales levels, but that the Government's evidence on the
expected sales was ``not credible,'' and that therefore, the Government
has not carried its burden of showing that its registration would be
inconsistent with the public interest. Id. at 4.
Respondent also takes exception to the ALJ's finding that it has
``inadequate inventory procedures.'' Id. at 4 (citing ALJ at 30). More
specifically, Respondent contends that ``there is no requirement under
any of the DEA rules to have an inventory system, and [that it] is once
again being asked to comply with something that is not in the DEA
rules.'' Id. at 5. Respondent thus contends that it is ``being held to
[a] previously unspecified and unpublished * * * guideline[ ],'' and
that in doing so, the Agency is violating its constitutional rights to
due process and equal protection. Id. at 5. Finally, Respondent
contends that the ALJ ``ignore[d] the substantial remedial actions that
[it] had taken to correct problems of which the DEA had notified it.''
Id.
Thereafter, the record was forwarded to me for final agency action.
Having considered the record as a whole, as well as the exceptions of
both parties, I adopt the ALJ findings of fact except as expressly
noted herein. I further conclude that the Government has made out a
prima facie case that Respondent's registration would be inconsistent
with the public interest and that Respondent has failed to present
sufficient evidence to establish that it will maintain effective
controls against diversion in the future. I also reject Respondent's
constitutional claims and its motion for judgment as a matter of law. I
therefore also adopt the ALJ's recommended sanction that Respondent's
Forest Park registration be revoked and its applications for renewal of
the latter registration and for a registration at its Decatur location
be denied. I make the following findings.
Findings
Respondent is a corporation which engages in the wholesale
distribution of assorted products to gas stations, convenience stores,
dollar stores, beauty stores, and other establishments. Tr. 701.
Respondent is owned by Mr. Sunny Sayani, id., and operates two
warehouses which are located in Forest Park and Decatur, Georgia. Id.
at 702. According to the record, Respondent operates ``a cash and
carry'' business in which its customers come to the warehouse to
purchase the products they need. RX 25a, Tr. 731.\5\
---------------------------------------------------------------------------
\5\ Respondent's owner testified that it delivers, but that the
customer must ``buy more than $1000'' to justify the expenses of
paying for the driver, gasoline and the truck. Tr. 731.
---------------------------------------------------------------------------
Respondent currently holds DEA Certificate of Registration,
004550SLY, which authorizes it to distribute the list I
chemicals ephedrine and pseudoephedrine out of its Forest Park
warehouse. Tr. 245; GX 1. While Respondent's registration expired on
February 28, 2005, it filed a renewal application and paid the
requisite fee at some point in January 2005. See Joint Status Report at
1-2. Accordingly, Respondent has a registration, albeit one that has
been suspended, at its Forest Park location.
Methamphetamine and the Market for List I Chemicals
Both pseudoephedrine and ephedrine have therapeutic uses and are
lawfully marketed as non-prescription (OTC) drug products under the
Federal Food, Drug and Cosmetic Act. GX 15, at 3. Pseudoephedrine is
approved for marketing as a decongestant; ephedrine (in combination
with guaifenesin) is approved for marketing as a bronchodilator.\6\ Id.
at 4. Both pseudoephedrine and ephedrine are, however, regulated as
list I chemicals under the Controlled Substances Act because they are
precursor chemicals that are easily extracted from OTC products and
used in the illicit manufacture of methamphetamine, a schedule II
controlled substance. See 21 U.S.C. 802(34); 21 CFR 1308.12(d); GX 15,
at 8 (noting that ``the production of methamphetamine from ephedrine or
pseudoephedrine can be accomplished via a simple one step reaction and
can be accomplished with little or no chemistry expertise'').
---------------------------------------------------------------------------
\6\ In July 2005, the Food and Drug Administration issued a
notice of proposed rulemaking which proposes to remove combination
ephedrine/guaifenesin products from the OTC monograph on the ground
that these drugs are not safe and effective for OTC use. 70 FR 40232
(2005).
---------------------------------------------------------------------------
Methamphetamine is a highly addictive and abused central-nervous
system stimulant. GX 15, at 9. Methamphetamine abuse has destroyed
numerous lives and families and ravaged communities. Id.; see also
Rick's Picks, L.L.C., 72 FR 18275, 18276 (2007). Moreover, because of
the toxic nature of the chemicals used to make the drug, its illicit
manufacture causes serious environmental harms. Id.; GX 14, at 10.
A DEA Special Agent from the Atlanta Field Division testified
regarding the rapid growth of illicit manufacturing of methamphetamine
during his tenure in Atlanta. Tr. 29. According to the S/A's testimony,
over ``a short period of time'' the number of meth. lab seizures by DEA
and local law enforcement had ``multiplied by ten times.'' Id. Other
evidence showed that between 1999 and 2004, the number of seizures in
the State of Georgia had increased from 34 to 229.\7\ See GXs 9 & 35.
---------------------------------------------------------------------------
\7\ Between 1999 and 2004, the States adjacent to Georgia also
experienced large increases in the number of meth. lab seizures. In
Alabama, the number of seizures increased from 27 to 369; in
Tennessee, the number increased from 106 to 1251; and in South
Carolina, the number increased from 5 to 153. See GXs 9 & 35.
---------------------------------------------------------------------------
The Special Agent, who had debriefed over 200 individuals involved
in the illicit manufacture of methamphetamine, Tr. 39, also testified
that convenience stores, gas stations, and other small retailers were
the primary source of the ephedrine and pseudoephedrine which was used
by ``mom-and-pop'' meth. labs. Id. at 56 & 59. The Agent further
testified that meth. cooks use individuals known as ``runners'' who
would travel to different stores and purchase small amounts each day to
avoid detection. Id. at 62. Moreover, runners generally avoided larger
retailers such as chain stores because these establishments have ``too
much security'' and ``too much video surveillance,'' id. at 56, and
have ``been very militant on * * * limit[ing] sales'' of the drugs. Id.
at 102; see also id. at 100.
The S/A also testified that in some instances, meth. cooks
recruited multiple persons to go to smaller stores and buy the maximum
amount of product the store would sell them. Id. at 63. Moreover, in
some instances, either the owner or an employee of a smaller
[[Page 57658]]
store would sell a case quantity of a listed chemical product to a
person affiliated with a lab. Id.
The Government also established that the overwhelming majority of
commerce in non-prescription drug products occurs in drug stores,
supermarkets, large discount merchandisers and electronic shopping/mail
order houses. GX 25. According to the declaration of Jonathan
Robbin,\8\ who has testified in numerous DEA and federal court
proceedings as an expert witness on the market for list I chemical
products containing pseudoephedrine and ephedrine, ``over 97% of all
sales of non-prescription drug products occur in drug stores and
pharmacies, supermarkets, large discount merchandisers and electronic
shopping and mail order houses.'' Id. at 4; see also GX 24, at 3.\9\
According to Mr. Robbin, these retailers ``constitute the traditional
marketplace where [nonprescription drugs for coughs, cold, nasal
congestion, and asthma] are purchased by ordinary consumers.'' GX 25,
at 4.
---------------------------------------------------------------------------
\8\ Mr. Robbin holds degrees from Harvard College and Columbia
University and is an expert in multivariate statistical analysis and
the processing of economic census and population data. See GX 25, at
1-2. He also founded Claritas, Inc., a company which is now the
largest producer and seller of census-based consumer marketing
information products, systems and services. Id. at 1.
\9\ According to this report, convenience stores selling
gasoline account for 1.75% of the non-prescription drug market;
convenience stores that do not sell gasoline account for .95% of the
market. GX 24, at 3. All other establishments combined account for
only .21%. Id.
---------------------------------------------------------------------------
Mr. Robbin has further concluded that sales of non-prescription
drugs at convenience stores ``account for only 2.2% of the overall
sales of all convenience stores that handle the line.'' Id. Moreover,
only 4.87% of convenience store shoppers purchase a non-prescription
drug product, GX 24, at 5; and only 4.59% of these shoppers purchase a
pseudoephedrine product.\10\ Id. at 4. Mr. Robbin thus concluded that
.21% of convenience store shoppers purchased a pseudoephedrine product.
Id. at 5. In another document, Mr. Robbin explained that by
extrapolating data from the 1997 U.S. Economic Census data and
information obtained from surveys of the National Association of
Convenience Stores, he had estimated that during 2005, ``[t]he expected
average monthly convenience store sales of nonprescription drug
products containing pseudoephedrine (hcl) in Georgia were * * * $82.''
GX 26 at 2.\11\
---------------------------------------------------------------------------
\10\ While the text accompanying table 3 uses the figure of
5.59% as the percentage of non-prescription drug buyers who purchase
pseudoephedrine at convenience stores, the previous table makes
clear that the actual percent is 4.59%. Compare GX 24, at 5, with
id. at 4.
\11\ Mr. Robbin noted that data from the 2002 Economic Census
for Florida (a neighboring State) indicated that the expected sales
were 21% lower than the data from the 1997 Economic Census
suggested. GX 26, at 1-2. Mr. Robbin thus stated that ``using the
same factor as encountered in Florida would produce an updated
estimate of $65.'' Id. at 2.
---------------------------------------------------------------------------
Respondent called as an expert witness, Dr. Danny N. Bellenger. Dr.
Bellenger holds a PhD in Business Administration and is a Professor and
Marketing Research Fellow at the Robinson College of Business at
Georgia State University. RX 31, at 2. Dr. Bellenger previously served
as chairman of the Department of Marketing at Robinson, and was the
Dean of the College of Business at Auburn University. Id.
Dr. Bellenger disputed Mr. Robbin's figures for the expected
monthly sales range of pseudoephedrine at convenience stores. Dr.
Bellenger testified that he did not agree with the conclusions of Mr.
Robbin's reports and that reports did not ``agree with each other.''
Tr. 521. More specifically, Dr. Bellenger noted that one of Mr.
Robbin's reports stated that ``two in 1,000 * * * convenience store
shoppers would be expected to buy Sudafed,'' but in another report, Mr.
Robbin had stated ``that there's 120,000 purchasers or customers [who]
come into a convenience store.'' Id. at 523; see also GX 25, at 11
(stating that ``[t]he average annual number of shoppers in a
convenience store (excluding gasoline purchases) is about
120,000'').\12\
---------------------------------------------------------------------------
\12\ With respect to the number of convenience store shoppers
who would purchase Sudafed, Dr. Bellenger testified that ``[t]he
numbers which I've computed actually says its 2.7 [out of 1,000],
but * * * that's a relatively minor difference.'' Tr. 523. Dr.
Bellenger testified that he used ``the data that was in [Mr.
Robbin's] report, and [did] exactly the computations [Mr. Robbin]
did * * * and came out with * * * 2.7 customers in 1,000.'' Id. at
581. In his testimony, Dr. Bellenger did not specifically identify
which figures he used, and as explained above, it appears that one
of Mr. Robbins' reports contains a transcription error. See supra n.
10.
---------------------------------------------------------------------------
Dr. Bellenger explained that if two out of a 1,000 customers
purchased pseudoephedrine and a convenience store has 120,000
customers, at least 240 of these persons would buy the product over the
course of a year or ``twenty per month for an average convenience
store.'' Tr. 523. Dr. Bellenger testified that multiplying this number
``times the average retail price of * * * Sudafed'' gives an ``estimate
of about $170 * * * based on the numbers that are in the reports.'' Id.
Dr. Bellenger subsequently testified that he determined the average
price of Sudafed by ``looking at the wholesale prices and assuming a
markup,'' and that he ``also looked in Kroger to see what it cost, but
[the price] would vary a lot * * * by store.'' Id. at 662-63. However,
Dr. Bellenger did not ``recall the actual figure'' he used for the
retail price. Id. at 663. Nor did he explain what source he used for
the wholesale price figure, or what price he used.
Dr. Bellenger also testified that he confirmed his estimate by
multiplying the percentage of convenience store shoppers who purchase
pseudoephedrine (.0027) times the average annual merchandise sales of
convenience stores ($770,000). Dividing this figure by twelve results
in a monthly sales figure of $173.25, which is ``a similar number'' to
the sales figure obtained in the first method. Id. at 524.\13\
---------------------------------------------------------------------------
\13\ Notably, Dr. Bellenger used the figure which appears to be
based on a transcription error in one of Mr. Robbin's reports. If,
however, the .0021 (or 2.1 shoppers out of 1,000) figure is used,
see GX 24, at 5; the average monthly sale is $134.75.
---------------------------------------------------------------------------
Dr. Bellenger further testified that Mr. Robbin's methodology was
based on several assumptions which he contended ``are not consistent
with reality.'' Id. at 527. More specifically, he contended that one of
Mr. Robbin's assumptions was that ``all retailers [including]
convenience stores carry a full line of all'' non-prescription
medicinal products that are reported in the Economic Census's
merchandise line, and that this is ``not consistent with the common
practice'' because ``a convenience store * * * carries a much narrower
line of most products.'' Id. at 526; see also id. at 583, 664.
According to Dr. Bellenger, ``when the conveniences stores sell less
than a full line and the supermarkets and drugstores sell the full
line, * * * it distorts the numbers,'' by ``caus[ing] the estimate for
Sudafed for the convenience store to be lower than it actually should
be.'' Id. at 664.\14\
---------------------------------------------------------------------------
\14\ Dr. Bellenger also testified that one of Mr. Robbin's
reports assumed that all stores were ``expected to sell the same
amount,'' and that this requires the assumption that the stores are
``all the same size'' and ignores the stores' locations. Tr. 529. As
Dr. Bellenger further testified, ``[i]f you've got a very large
store attached to a gasoline station selling on the interstate, the
mix of products is not going to be the same as a small rural
store.'' Id. at 530. I note, however, that in one of the reports,
Mr. Robbin estimated a sales range which was based on ``differences
in sales occurring as a consequence of store size, location, hours,
advertising expenditures and management practices.'' GX 25, at 7.
This would appear to address Dr. Bellenger's testimony on this
point.
---------------------------------------------------------------------------
While the ALJ credited Dr. Bellenger's testimony that the monthly
expected sales figure of pseudoephedrine products at convenience stores
was $173.25, see ALJ at 24, I decline to adopt this finding. While Dr.
Bellenger's testimony that approximately 240
[[Page 57659]]
persons would purchase pseudoephedrine at a convenience store over the
course of a year calls into question the validity of the Government's
figure, he did not establish the source of the wholesale price
information (and the price) that he relied upon or the amount of markup
he used. As for his testimony regarding pricing at Kroger, he did not
testify as to what that price was, what size package it was, and stated
that the price would vary a lot by store. Finally, while Dr. Bellenger
``confirmed'' his estimate by multiplying the percentage of convenience
store shoppers who purchase pseudoephedrine by the average store's
sales volume, this methodology seems to require a major assumption in
its own right--that the average amount spent by a customer in
purchasing pseudoephedrine is the same as the average purchase of those
convenience store customers who buy other products.
Accordingly, I conclude that neither the Government's nor
Respondent's evidence reliably establishes the monthly expected sales
range.\15\ For purposes of this case, I assume without deciding that
Dr. Bellenger's figures are accurate.
---------------------------------------------------------------------------
\15\ Accordingly, I agree with the Government's exception and
decline to adopt the ALJ's finding.
---------------------------------------------------------------------------
Dr. Bellenger also testified regarding several other matters. With
respect to the size of a retailer's purchases, Dr. Bellenger testified
that buying a case quantity may be a legitimate business decision ``to
invest in more inventory so as to lower [its labor] cost of taking
inventory and processing order forms.'' Tr. 549. According to Dr.
Bellenger:
The simple fact that someone, in * * * their business model,
decides to order in large quantities is not necessarily suspicious
in and of itself. What would be suspicious to me is if someone
repeatedly ordered in large quantities. So I would think that
looking for repeated large quantity orders by the same store or a
combination of products which go into the production and ordering in
large quantities * * * of a group of products which are involved in
the manufacture of some illicit substance would be important for
determining suspicious orders.
Id. at 549-50.
Amplifying this testimony, Dr. Bellenger added that to purchase a
case quantity (144 bottles) is ``one of two things. It's a conscious
business decision where a store owner has decided it's more efficient
to order in large quantities, put it in the stockroom, and make fewer
orders, and have less labor involved.'' Id. at 570. Dr. Bellenger than
allowed that ``maybe there's some nefarious practice involved here,''
but that if this was so, ``you would see repeat purchases of large
quantities.'' \16\ Id. at 570-71.
---------------------------------------------------------------------------
\16\ Dr. Bellenger added that he was not ``sure how much of this
is stuff is required to make the illicit drugs in question,'' and
that he was ``not sure if 144 [bottles] will make enough to matter
or not.'' Id. at 571. The Government's evidence showed, however,
that Georgia and the adjacent States had experienced a proliferation
in smaller methamphetamine labs which typically produced a quarter
to a half ounce. Id. at 35. The evidence also showed that ``even
unskilled persons can obtain a 50-70% yield of methamphetamine.'' GX
15, at 8. Contrary to Dr. Bellenger's understanding, four sixty-
count bottles of 60 mg. pseudoephedrine would provide enough
material for even an unskilled person to manufacture a quarter ounce
of the drug; 144 bottles would provide enough material to make nine
ounces.
---------------------------------------------------------------------------
The ALJ also credited Dr. Bellenger's testimony that in reviewing
the various exhibits, he noted that while ``some of [Respondent's
customers] were buying by case lot,'' he did not find a pattern of the
customers ``buying [ten] 144s.'' Tr. 571 (cited at ALJ at 25).
Respondent's own evidence shows, however, that there were multiple
instances in which Respondent sold case quantities that suggest that
the sales were for an illicit purpose. See RX 12.
For example, during the year 2004, Respondent sold cases (144
bottles) of Max Brand Pseudo to the Coastal Food Mart of Rockmart,
Georgia, on eight occasions: January 21, February 2, March 4, April 19,
June 3, July 14, August 2, and September 5.\17\ Id. at 52, 82, 86, 91,
93, 97, 99. On cross-examination, Dr. Bellenger acknowledged that the
store was ``probably * * * buying in excess of what would be
expected,'' that ``a case over a six-month period is rational,'' but
this store's purchases ``would raise [his] suspicions.'' Tr. 619-20.
Moreover, when asked whether this store's retail sales would be ``many
standard distributions beyond'' the $175 figure he calculated for
average monthly sales, Dr. Bellenger answered: ``Right.'' Id. at 620.
Dr. Bellenger also acknowledged that it would not be logical for a
store to ``order additional inventory on a regular basis unless they
were selling it.'' Id. at 642.
---------------------------------------------------------------------------
\17\ Each case sold for $1006.56.
---------------------------------------------------------------------------
On re-direct, Dr. Bellenger opined that ``it would be highly
unlikely in the normal course of business'' for an entity like Sunny
Wholesale to detect these transactions. Id. at 646. According to Dr.
Bellenger, ``you've got to be looking real, real, real close'' to find
these transactions ``given the scope of [Respondent's] business,'' and
the fact that the product category was ``less than two percent of the
total business and these instances would account for a fraction of
that.'' Id. at 647.
The Coastal Food Mart was not, however, the only store to which
Respondent repeatedly sold large quantities of pseudoephedrine. During
the same year, it sold a case quantity to Chitra Inc.'s Quick Stop of
Rome, Georgia, on eight separate dates: January 4, April 8, June 14,
July 5, August 2, August 20, September 14, and October 11. See RX 12,
at 80, 91, 94, 95, 97, 98, 100, & 101. It sold a case to the Phillips
66 Mart of Hapeville on eight occasions: January 5, February 5, March
22, April 1, May 5, June 3, August 17, and September 12. See id. at 80,
84, 88, 89, 92, 93, 98 & 99.
It sold a case to the R & S Grocery of Columbus on nine dates:
January 21, February 2, March 2, April 1, May 5, June 21, July 7,
August 30, and September 29. See id. at 82, 86, 89, 92, 95, 96, 98, &
100. It sold a case to the Stop In of Bremen on nine occasions: January
5, February 3, March 2, April 1, May 5, June 1, July 27, August 20, and
September 14. See id. at 52, 80, 83, 86, 89, 92, 93, 98, 100.
Moreover, the record shows that there were instances in which
Respondent sold to two customers who used the same address. For
example, Respondent sold case quantities to the P & K Mini Mart, with
an address of 461 Columbia Drive, Carrollton, on January 6, February
10, March 4, April 8, and May 5. See id. at 53, 81, 84, 86, 89. Yet it
also sold a case to a customer it listed as the ``Quick Stop/Tushar/
BP'' with the same 461 Columbia Drive, Carrollton address, on February
2, March 4, April 8,\18\ May 5, July 22, and August 1. See id. at 54,
83, 86, 91, 96, 97. Moreover, Respondent sold a case to the DJ Food
Mart, with an address of 15582 HWY 27, Trion, on January 6, February
10, March 4, April 8, May 5, and June 15. See id. at 54, 81, 85, 87,
90, 94. It also sold a case to a customer it listed as ``BJ's Food
Market 1'' with the address of 15582 HWY 27 North, Trion, on
February 10, March 4, April 8, May 5, June 4, July 27, July 22, August
18, and September 5. See id. at 54, 84, 87, 90, 93, 96, 98, 99.
---------------------------------------------------------------------------
\18\ The record indicates that on this date, Respondent sold 96
bottles for a total sale of $671.04. RX 12, at 91.
---------------------------------------------------------------------------
Relatedly, Dr. Bellenger testified that ``unusual orders become
very challenging if there's a relatively small number of * * * those
orders * * * given the large numbers of people [a business is] dealing
with.'' Id. at 556. Dr. Bellenger acknowledged, however, that ``you
could create a computer program which would create an exceptions
report.'' Id. at 648. Dr. Bellenger nonetheless maintained that it
would be difficult to track these
[[Page 57660]]
purchases and that finding a high volume purchase ``in the normal
course of business would be an accident.'' Id. at 647.
I reject Dr. Bellenger's testimony regarding the difficulty of
detecting excessive purchases. As noted below, during an earlier
meeting with DEA investigators, Mr. Sayani stated that ``a typical
sale'' of listed] chemicals ``was two to three boxes,'' with each ``box
contain[ing] twelve bottles of 60-count tablets.'' Id. at 331. Notably,
during this meeting, the DI specifically told Mr. Sayani that an order
of ``ten boxes [or 120 bottles] would be suspicious,'' and that if a
customer ``requested cases quantities'' or 144 bottles, ``he was to
notify DEA.'' Id. at 336.
Moreover, Respondent's records show that many of these customers
were not trying to hide the size of their purchases by purchasing
smaller quantities on different dates. Rather, they were openly
ordering case quantities, see RX 12, at 79-101; and as found above,
several of these customers did so with disturbing frequency. Finally,
even crediting Dr. Bellenger's testimony that in some instances, a
convenience store owner could make a legitimate business decision to
purchase a case quantity, it does not require that much effort to call
up a customer's account history to determine how frequently the
customer was purchasing the products.
Respondent's History as a Registrant
In September 1999, Respondent applied for a DEA registration to
handle list I chemicals at its Forest Park warehouse. Tr. 703. Prior to
being granted the registration, DEA DIs conducted a pre-registration
inspection. Id.; see also id. at 323. During the inspection, a DI
provided Mr. Sayani with a copy of the DEA Chemical Handler's Manual
and a document which listed the thresholds for pseudoephedrine and
ephedrine (which trigger additional reporting and recordkeeping
obligations). Id. at 726-27. Moreover, Mr. Sayani told the DI that ``he
would deliver [the listed chemical products] to his customers.'' Id. at
323.\19\ Shortly after the inspection, Respondent obtained a
registration for this location.
---------------------------------------------------------------------------
\19\ Mr. Sayani made the same representation during the pre-
registration investigation of Respondent's application for the
Decatur location. Tr. 323.
---------------------------------------------------------------------------
On January 31, 2001, Respondent applied for a registration to
handle pseudoephedrine, ephedrine, and phenylpropanolamine, at its
Decatur warehouse. GX 2. Accordingly, on March 31, 2001, DEA DIs went
to Respondent's Decatur facility to conduct a pre-registration
inspection. Tr. 246. During the inspection, the DIs met with Mr. Sayani
and provided him with another copy of the Chemical Handler's Manual, as
well as notices stating that drug products containing
phenylpropanolamine were being used by drug traffickers to manufacture
amphetamine, GX 5, and combination ephedrine and pseudoephedrine were
being used to by traffickers to manufacture amphetamine and
methamphetamine. GX 6, Tr. 249. The DIs also provided Mr. Sayani with
notices pertaining to recordkeeping and reporting of theft and losses
of listed chemical products. Tr. 249.
The DI had previously requested that Mr. Sayani provide her with
lists of his suppliers, the products he intended to carry, and his
proposed customers. Id. 246-47. On the list of suppliers and products,
Mr. Sayani indicated that he intended to sell products distributed by
Compare Generics of Hauppauge, New York, including Max Brand and Heads
Up, two brands of products which ``are notoriously popular [with]
methamphetamine traffickers.'' \20\ GX 34, at 11; GX 27.
---------------------------------------------------------------------------
\20\ On its product list, Respondent also indicated that he
would be distributing four products from BDI Marketing, Inc.,
another firm whose products have been found at numerous illicit
methamphetamine labs. GX 4. However, according to the DI, none of
these products contained a list I chemical. Tr. 250.
Respondent also listed three other suppliers; the listed
chemical products he listed under these suppliers were nationally
recognized brands such as Tylenol, Advil, Nyquil, Contac, and Vicks
44. See GX 27.
---------------------------------------------------------------------------
During the inspection, the DIs reviewed the Chemical Handler's
Manual with Mr. Sayani, placing special emphasis on its provisions
pertinent to record keeping, security, the need to know his customers,
and requiring proof of identity from his customers. Tr. 321. The DIs
also discussed with Mr. Sayani the listed chemical thresholds and the
requirement to report suspicious orders. Id. Mr. Sayani again
represented that the listed chemical products ``would be delivered just
like they were at his Forest Park location.'' Id. at 323. The DI
observed, however, that Respondent did not ``deliver most of the time''
as ``[t]he majority of the time the customers were coming'' to the
warehouse. Id. at 324.\21\
---------------------------------------------------------------------------
\21\ The DI also obtained information that Respondent had a
single employee who was ``his delivery guy.'' Tr. 324. The position
was vacant for some unspecified period of time. Id. at 324-25.
---------------------------------------------------------------------------
Based on Mr. Sayani's list of proposed customers, one of the DIs
checked to see if DEA's computer system held information regarding the
customers. Id. at 255. The DI also visited several of the customers'
addresses to verify whether there was a business at the location. Id.
Moreover, the DIs' supervisor decided that before sending the
report on the Decatur application to DEA Headquarters, the DIs needed
to inspect Respondent's practices at its Forest Park warehouse because
the location had ``never been audited.'' Id. at 370. Accordingly, on
June 30, 2001, several DIs went to the Forest Park warehouse and
conducted an inspection. Id. at 255.
Upon their arrival, the DIs met with Mr. Sayani and asked him to
provide them with an inventory and a list of the listed chemical
products Respondent distributed. Id. at 256. One of the DIs also asked
him for a list of his customers and suppliers and provided him with
another copy of the Chemical Handler's Manual and several DEA notices.
Id. During the inspection, the DIs observed that Respondent's list I
products were co-mingled with other products in the warehouse and were
not stored in a secure area.\22\
---------------------------------------------------------------------------
\22\ At some point between 2002 and 2005, Respondent built a
cage at its Forest Park warehouse in which it stored its list I
chemical products and installed several security cameras. RX 25a.
The cage had a separate cash register and window at which the
products were paid for and delivered to the customer. Id.
---------------------------------------------------------------------------
The DIs then proceeded to conduct an audit of Respondent's handling
of list I products for the period January 1, 2001, through the close of
business on June 30, 2001. GX 31. The DIs selected eleven non-
traditional products to audit; with the assistance of Mr. Sayani, they
counted the actual number on hand of each of the selected products. Tr.
264 & 275; GX 30.\23\ Because Mr. Sayani did not have a previous
inventory of the products,\24\ id. at 260, the DIs assigned an opening
value of zero for each of the products. Id. at 377; GX 31. Assigning an
opening value of zero for a product should result in an overage if, in
fact, there was any of the product on hand on the beginning date of the
audit and the distributor is keeping (and provides) complete records of
its purchases and distributions.\25\ Tr. 269 & 377.
---------------------------------------------------------------------------
\23\ The DIs provided Mr. Sayani with a copy of the count. Tr.
362.
\24\ At the hearing, a DI testified that DEA's regulations do
not require that a list I chemical distributor keep an inventory.
Id. at 261.
\25\ Assigning an opening value of zero will also result in an
undercount of a shortage if any product had actually been on hand on
the opening date of the audit.
---------------------------------------------------------------------------
To complete the audit, the DIs requested that Mr. Sayani provide
them with his purchase invoices and sales invoices. Id. at 266. The
sales invoices did not, however, clearly indicate the package size
(e.g., whether it was a six count packet or 60 count bottle). Id. at
[[Page 57661]]
267. The DI therefore contacted Mr. Sayani and requested additional
information. Id. at 266-67. While Mr. Sayani then provided his sales
tracking reports, even these were sometimes lacking the necessary
information. Id. at 267.
The audit found that there were shortages with respect to six of
the eleven products.\26\ See GX 31. Most significantly, Respondent was
short 7640 sixty-count bottles of Heads Up and 3656 sixty-count bottles
of Max Brand. Id. Moreover, Respondent was short 284 sixty-count
bottles of Mini 2-Way Action. Id. Respondent was also short 180 six-
count packets of Max Brand, 154 six-count packets of Mini 2-Way Action,
and 262 packets of Max Brand Pseudo (24-count). Id.
---------------------------------------------------------------------------
\26\ As the DI explained, the audit was conducted by adding
Respondent's purchases to the opening inventory figure and comparing
that figure with the total of the ending inventory plus the amounts
which Respondent distributed to its customers. Tr. 268, GX 31.
---------------------------------------------------------------------------
Regarding the audit, Mr. Sayani testified that upon being served
with the Show Cause Order, which had alleged that he was short
approximately 10,000 bottles of Max Brand and Heads Up, he checked his
July 2001 inventory and had 2069 bottles on hand and did not ``know
where this 10,000 figure came from.'' Tr. 715. Mr. Sayani further
testified that because 10,000 bottles is a large amount, he ``would
know where [it] is going.'' Id. at 716.
The ALJ did not make ``precise findings'' on the amount of the
shortages. ALJ Dec. 30 at n.6. I do.
Notably, Mr. Sayani's testimony that he had 2069 bottles on hand
according to his July 2001 inventory is consistent with the total
amount of product that he and the DIs physically counted.\27\ Moreover,
the DIs found that the largest shortage was in the Heads Up 60-count
bottles, yet none of this product was on hand when the physical count
was on hand. See GX 31. The audit of this product was thus based
entirely on Respondent's records of its purchases and distributions; if
the amount was incorrect, Respondent could have produced his records to
show that.
---------------------------------------------------------------------------
\27\ Mr. Sayani did not state which products were included in
his 2069 figure. According to GX 31, the physical count found 1584
Max Brand (60 count) bottles, 36 Mini 2-Way (48-count) and 428 (60-
count) bottles, and 18 Mini Twins (60 count bottles). These products
would total 2066 bottles. I further note the testimony that Mr.
Sayani agreed with the results of the inventory. Tr. 266.
---------------------------------------------------------------------------
Moreover, for each of the audited products, the amount of the
shortages (11,296 60-count bottles of Max Brand and Heads Up) was
determined based on the discrepancy between the amount of these
products which Respondent obtained from his suppliers during the audit
period and the sum of the amount it had on hand on June 30 and the
amount its sales records showed it had distributed during the audit
period. Mr. Sayani's assertion aside, he offered no credible evidence
that gives me reason to reject the audit's finding. Accordingly, I
adopt as findings, the audit results as listed in GX 31.
As found above, during the visit, the DIs also discussed with Mr.
Sayani the size of a normal monthly sale to a single store of non-
traditional products. Id. at 330. Mr. Sayani told the DIs that ``[a]
typical sale was two to three boxes,'' with each ``box contain[ing]
twelve bottles of 60-count tablets.'' Id. at 331. As found above,
however, Respondent frequently sold listed chemical products in far
larger quantities and did so notwithstanding that the DIs had informed
him that sales of case quantities were suspicious and should be
reported to DEA. See RX 12; Tr. 336.
Following the inspection, several DIs were assigned to conduct
customer verifications.\28\ ALJ at 15-17. The verifications serve
several purposes including determining whether the customer actually
exists, the nature of its business and whether it is legitimate, and
whether the customer has a business relationship with the distributor.
Tr. 139, 145, 187, 202, 355-56. As the ALJ found, the verifications
produced ``mixed results.'' ALJ at 15.
---------------------------------------------------------------------------
\28\ According to the record, Mr. Sayani provided two separate
customer lists. One was a list which Mr. Sayani represented as being
his actual Forest Park warehouse list I customers; the other was a
list of his potential list I customers for his Decatur warehouse.
Tr. 373-74.
---------------------------------------------------------------------------
One DI, who was assigned twelve verifications, found that several
of the businesses were convenience stores, gas stations, and a liquor
store. Tr. 142-45. Moreover, upon visiting the addresses of three of
the customers, two of which were listed as businesses (Pamela's Unique
Clothing and Reliance Wholesale Supply), and one which was listed as an
individual (M.S.), the DI found that they were residences and that
there were no signs of businesses. Tr. 142 & 144. The DI further found
that the R.S. Corporation was a Blimpie restaurant, id. at 142, and
that Artistic Sales was a gift shop which did not sell list I
chemicals. Id. at 143.
Another DI testified that when she and her partner went looking for
Ashley's Boutique, they could neither find the store nor the address
that Mr. Sayani had given for it. Id. at 202-03, 233. The DIs further
found that the Atlanta Cleaners Plus ``was closed down.'' Id. at 203.
While the DIs found that the Matierra Mexicana 3 was a
supermarket, the store did not purchase items from Respondent. Id. at
203-04. Moreover, one of the establishments was a liquor and check
cashing store. Id. at 204.
Another customer (BDI Inc.) was a Shell gas station whose manager
stated that while he had purchased products from Respondent nine months
earlier, he no longer did so. Id. at 205. Moreover, the manager told
the DIs that Respondent ``did not deliver'' and that ``he had to drive
to [Respondent's] facility to pick up his products.'' Id. Finally, the
DIs determined that another customer (Golden Dealers) ``was a house
that was located in a cul-de-sac'' and there was no store on the
premises. Id. at 206.
Following the customer verifications, one of the DIs and her
supervisor met with Mr. Sayani and his attorney Henry D. Frantz, Esq.,
to discuss their concerns that some of Respondent's customers were not
legitimate. Id. at 254. More specifically, the DI told Mr. Sayani that
the DI had ``found numerous suspect customers that normally would not
be selling these type of products.'' Id. at 372. The DI also expressed
her concern that some of Respondent's customers were engaged in
wholesale distribution out of their homes and were therefore required
to be registered under 21 U.S.C. Sec. 823(h), but were not. Id. at
259.
Upon being informed by the DIs that ``some of the customers were
suspicious,'' Mr. Sayani stated that he had ``provided * * * a list of
the customers he thought * * * would purchase from him, whether it was
list I chemicals or other products that he handled.'' Id. at 254. At
the meeting, the DIs also provided Mr. Sayani and his attorney with a
list of 147 customers who they deemed suspicious and instructed him to
investigate them. Id. at 687.
Several weeks thereafter, Respondent's attorney wrote a letter to
the DIs reporting that 119 of the customers owned either a convenience
store or grocery. RX 8, at 1. Respondent's attorney further reported
that 14 of the customers had ``never purchased a list I'' product and
that three of them ``have a DEA license.'' Id. As for the remaining
suspicious customers, the letter stated that Respondent could not
contact eight of the customers and that three of them were jobbers who
had purchased small amounts. Id.
Respondent's attorney further wrote that it ``had tightened up * *
* his business with regard to checking out the customer on all sales
pertaining to list I chemicals.'' Id. More specifically, the letter
stated Respondent ``currently asks
[[Page 57662]]
for a tax identification number, business license[,] as well as a DEA
permit if the customer does not have a store.'' Id. at 2.\29\
---------------------------------------------------------------------------
\29\ The letter also stated that Respondent would ``cross-check
* * * all customers purchasing list I items between'' its two
warehouses, and that it was maintaining ``an updated inventory.'' RX
8, at 2.
---------------------------------------------------------------------------
At the hearing, Mr. Sayani testified that he did not go to a new
customer's store to verify whether it was legitimate ``because at the
time of opening the account, we get enough proof from them that they're
legitimate * * * or that they're who they say'' they are. Tr. 768. Mr.
Sayani acknowledged, however, that anyone who applied for a state or
local tax identification number would be issued one. Id. at 769.
At the hearing, Mr. Sayani further testified that upon being served
with the Show Cause Order, which referred to Max Brand and Heads Up as
non-traditional products, he stopped selling the products. Id. at 714.
As found above, the first Show Cause Order was dated October 20, 2004,
and served on Respondent no later than November 19, 2004, when his
counsel requested a hearing.
Contrary to Mr. Sayani's testimony, Respondent's ``Sales Tracking
Report'' indicates that it repeatedly sold Max Brand after the first
Show Cause Order was served and frequently did so in large quantities.
Moreover, there is evidence that it made multiple large sales to
several stores.
For example, on November 30, 2004, it sold $504 of Max Brand 2-Way
to the Lucky Star of Brookfield, Georgia. RX 12, at 67. This was
followed by two December 12, 2004 sales, each totaling $1509.84, to the
Dixie Stop of Twion and the Modern Kwik Shop of Summerville, id. at
101, and a December 19, 2004 sale of $504 to Jay Swaminarayan, Inc., of
Tifton, Georgia. Id. at 74. On February 13, 2005, it sold an additional
$861.12 of the products to both the Dixie Stop and the Modern Kwik
Shop.\30\ Id. at 104.
---------------------------------------------------------------------------
\30\ Respondent had also sold $1509.84 of the products to the
Modern Kwik Stop on November 14, 2004. RX 12, at 53.
---------------------------------------------------------------------------
On both November 29, 2004, and January 3, 2005, it sold $1006.56 of
the products to ABJ Ashburn, Inc., of Ashburn. Id. at 106 & 101.
Respondent made further sales of the products to this store on January
27, February 17, and February 25, when it sold $430.56 worth on each
date, and on both March 20 and April 2, when it sold $861.12 of the
products to this store. Id. at 101-2, 105-6.
Moreover, on January 8, 2005, it sold $861.12 of Max Brand
pseudoephedrine to Priya Nidhi, Inc., of Calhoun, Georgia. Id. at 53.
Notably, it has previously sold this establishment $1006.56 on October
15, 2004. Id. at 52.
On February 5, 2005, it made two separate sales of the products
(one totaling $504, the other totaling $430.56) to the West Gray BP of
Gray, Georgia, id. at 78 & 112; on February 18, 2005, it sold $504 of
the product to the Razk, Inc., Marathon of Douglasville. Id. at 64. And
on February 20, 2005, it made two separate sales (one worth $504, and
one worth $430.56 of the products) to Krishna Corp. of Huntsville,
Alabama. Id. at 72 & 107.
On January 13, February 6, March 1, and April 1, 2005, it sold
$430.56 worth of the products to the Texaco 10 Opelika of Phenix City,
Alabama; on January 13, it also sold an additional $576 of the products
to this store. Id. at 102, 104-06, 113. Moreover, on both February 20
and April 2, it sold $861.12 of the products to USA Trading Inc., of
Pheonex (sic) City, Alabama. Id. at 102 & 104. It also sold $861.12 of
the products to Thakurs Fuel, Inc., of Pinehurst, Georgia, on each of
these dates: February 25, March 20, and April 8, 2005. Id. at 103, 105
& 109.
The evidence further shows numerous other instances in which
Respondent sold large quantities of Max Brand as late as April 2005.
Id. at 110-12. More specifically, on April 3, 2005, Respondent sold
$861.12 of the product to each of the following stores: Amin
Enterprises, Inc. of Lithonia, the Coastal Food Mart of Rockmart, and
the Hill Top Gas Station of Bremen. Id. at 110-11. Moreover, on April
6, it sold $861.12 worth of the products to Wendel's JKF, Inc.,
Discount Tobacco 2, and Discount Tobacco; all three stores
were located in Americus, Georgia.\31\ Id. at 111. Finally, between
April 10 and 16, 2005, it sold $504 worth of the products to eleven
establishments (the DM Cotton Patch of Richland, DM Shopper Stop
334 of Cusetta, OM Traders 271, DM Shopper Stops
s 442 and 451, all of Cataula; KDC Inv. and RDSP, both of
Columbus; Hyaat Groceries of Covington; Jai Bhrahmani, Inc., of
Buchanan; Gainesville BP of Gainesville; all in Georgia, and Prem,
Inc., of Alexander City, Alabama. Id. at 111-12.
---------------------------------------------------------------------------
\31\ The address of Discount Tobacco 2 is listed as
137 N. Lee St; the address of Discount Tobacco is listed as 107
South Lee St. RX 12, at 111.
---------------------------------------------------------------------------
The ALJ specifically found--based on Mr. Sayani's testimony--that
``Respondent stopped selling Heads Up and Max Brand products because
they were identified as `non-traditional' items by the DEA in the
October 2004 Order to Show Cause.'' ALJ at 21. To the extent this
finding implies that Mr. Sayani stopped selling the products shortly
after service of the Order, it is inconsistent with the evidence which
shows that for approximately five months after the Order was served,
Respondent continued to sell these products. Indeed, Mr. Sayani's
testimony begs the question of why, if the products were identified in
the Show Cause Order, it took five months to stop selling them.
The Government also produced evidence showing that Respondent had
distributed iodine tincture to several of its customers. See GX 46, at
1, 2, 3, 15, & 16. Moreover, Respondent's evidence shows that it
distributed 2,852 (1 oz.) units of this product to a single store
between June 8, 2003, and November 6, 2004. RX 16, at 5.
Regarding the allegation that Respondent sold excessive quantities
of iodine to convenience stores, the Government offered anecdotal
evidence in the form of a DI's testimony that she had visited more than
100 convenience stores in both the course of her official duties and as
a consumer and had never been able to find tincture of iodine. Tr. 396.
But in contrast to the extensive evidence the Government introduced
regarding the expected sales range of pseudoephedrine and ephedrine at
convenience stores, it produced no such evidence with respect to iodine
tincture.
The Government also introduced into evidence several documents
indicating that iodine was used in manufacturing methamphetamine. The
first of these was a blue notice, which was reprinted in the Chemical
Handler's Manual, a copy of which was provided to Mr. Sayani at both
the pre-registration inspection and the schedule regulatory inspection.
Tr. 307. The notice stated that ``iodine became a federally regulated
List II chemical on 10/3/96,'' and that it was being provided to
``[m]ake you aware that iodine is being used to clandestinely produce
methamphetamine.'' GX 36a.
The Government also introduced into evidence an ``Information
Brief'' published by the National Drug Intelligence Center entitled:
Iodine in Methamphetamine Production. GX 36B; Tr. 308. The document
stated that ``[s]mall-scale methamphetamine producers who are unable to
obtain iodine crystals occasionally produce them from iodine tincture
by mixing iodine tincture with hydrogen peroxide.'' GX 36B, at 2. This
document further explained that ``[t]his is a time-consuming process
that yields a very small amount of iodine crystals in relation to the
amount of tincture and hydrogen peroxide use,'' and also noted that
``[i]odine tincture is not regulated
[[Page 57663]]
by law.'' Id. Putting aside the statement that iodine tincture was not
regulated, the Government produced no evidence that this document was
ever provided to Mr. Sayani.
To counter the Government, Respondent introduced a copy of a Notice
of Proposed Rulemaking (NPRM) in which the Agency proposed ``the
control of chemical mixtures containing greater than 2.2 percent
iodine.'' DEA, Changes in the Regulation of Iodine Crystals and
Chemical Mixtures Containing Over 2.2 Percent Iodine, 71 FR 46144,
46145 (Aug. 11, 2006); RX 28. The NPRM expressly stated that ``[i]odine
two percent tincture and solution U.S.P. are sold at a wide variety of
retail outlets and have household application as antiseptic and
antimicrobial products. These products will not become regulated under
the proposed regulation.'' 71 FR at 46146. The NPRM further noted that
``[w]hile the regulatory controls placed on iodine apply to iodine
crystals, they have not pertained to iodine tinctures (which are
considered chemical mixtures).'' Id. (emphasis added).
In discussing the rationale for the proposed rule, the NPRM further
explained that because ``seven percent iodine tincture and solutions
are the predominant iodine-containing chemical mixtures diverted by
traffickers * * * these chemical mixtures should be subject to CSA
chemical regulatory controls.'' Id. at 46149. The NPRM then noted that
``[t]wo percent iodine tincture and solutions are also diverted, but
DEA has not documented the frequent diversion of these materials at
clandestine laboratories. Therefore, DEA does not intend to regulate
the two percent iodine tincture or solution at this time.'' Id.
Respondent also called as a witness a sales representative for the
company which supplied him with iodine tincture. The sales rep.
testified that he had sold Respondent iodine tincture with an iodine
concentration of only one to two percent, Tr. 437-38, and there is no
evidence refuting this. See RX 11a & b. The sales rep. further
testified that it was his understanding that a DEA registration was not
required to sell these products, and that while he had been selling the
products for eight to nine years, he had ``no idea'' that iodine
tincture was being diverted into the illicit manufacture of
methamphetamine. Tr. 439 & 442.
Discussion
Section 304(a) of the Controlled Substances Act provides that a
registration to distribute a list I chemical ``may be suspended or
revoked * * * upon a finding that the registrant * * * has committed
such acts as would render [its] registration under section 823 of this
title inconsistent with the public interest as determined under such
section.'' 21 U.S.C. 824(a)(4). Moreover, under section 303(h), ``[t]he
Attorney General shall register an applicant to distribute a list I
chemical unless the Attorney General determines that registration of
the applicant is inconsistent with the public interest.'' 21 U.S.C.
823(h). In making the public interest determination, Congress directed
that the following factors be considered:
(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;
(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.
Id. Sec. 823(h).
``These factors are considered in the disjunctive.'' Joy's Ideas,
70 FR 33195, 33197 (2005). I may rely on any one or a combination of
factors, and may give each factor the weight I deem appropriate in
determining whether a registration should be revoked or an application
for a registration should be denied. See, e.g., David M. Starr, 71 FR
39367, 39368 (2006); Energy Outlet, 64 FR 14269 (1999). Moreover, I am
``not required to make findings as to all of the factors.'' Hoxie v.
DEA, 419 F.3d 477, 482 (6th Cir. 2005); Morall v. DEA, 412 F.3d 165,
173-74 (D.C. Cir. 2005).
While I reject the Government's allegations based on Respondent's
sales of iodine tincture, I nonetheless conclude that the evidence
under factors one, four, and five make out as prima facie case that
Respondent's continued registration would be ``inconsistent with the
public interest.'' 21 U.S.C. 823(h). Moreover, while I acknowledge that
Respondent has improved its physical security, it has otherwise failed
to demonstrate that it has adequate procedures in place to protect the
public from the diversion of listed chemical products. Finally, I find
especially disturbing Respondent's conduct in continuing to sell large
quantities of listed chemical products even after the service of the
initial Show Cause Order.
Finally, I reject Respondent's argument that revoking his
registration would violate its constitutional right to due process
because it has not sold listed chemicals ``in excess of the quantities
authorized in the published rules * * * of the DEA.'' Resp. Prop.
Findings at 16. I also find unavailing his claim--based on the ALJ's
finding that his inventory procedures were inadequate--that it ``is
once again being asked to comply with something that is not in the DEA
rules,'' and that this is another violation of its right to due
process. Resp. Exceptions at 6. Accordingly, Respondent's Forest Park
registration will be revoked; its pending renewal application for its
Forest Park facility and its application for a registration at its
Decatur facility will also be denied.
Factor One--Maintenance of Effective Controls Against Diversion
Under DEA precedent and regulations, this factor encompasses a
variety of considerations and is not limited to whether the registrant
maintains adequate physical security of listed chemical products. ALJ
at 29-30. A DEA regulation requires the consideration of the adequacy
of a registrant's ``systems for monitoring the receipt, distribution,
and disposition of List I chemicals in its operations.'' 21 CFR
1309.71(b)(8). Relatedly, a registrant must exercise a high degree of
care in monitoring its customer's purchases. Rick's Picks, 72 FR 18275,
18278 (2007), John J. Fotinopoulos, 72 FR 24602, 24605 (2007), D & S
Sales, 71 FR 37607, 37610 (2006); Joy's Ideas, 70 FR 33195, 33197-98
(2005).
It is undisputed that Respondent upgraded its physical security by
building storage cages, installing video cameras, and assigning a
person to distribute the products from the cage. This, however, is only
one part of a registrant's obligation to maintain effective controls
against diversion.
Here, the record shows that Respondent's procedures for verifying
the legitimacy of its listed chemical customers were wholly inadequate
to prevent diversion. Moreover, those procedures remain so. While
following the meeting in which agency investigators notified Respondent
of their concerns regarding the legitimacy of its customers,
Respondent's counsel stated that it had ``tightened up'' its procedures
and was requiring that its customers produce a tax identification
number and business license, RX 8, at 1-2 2, these documents can be
easily obtained by anyone. While Mr. Sayani
[[Page 57664]]
testified that this provided ``enough proof'' that his customers were
``legitimate,'' he did not have an employee personally visit a new
customer to determine whether it was a legitimate business with a need
for listed chemical products.
Moreover, Respondent generally operated as a ``cash and carry''
business and only delivered if a customer ordered at least $ 1,000
worth of the items and requested that it do so. Thus, a customer could
be obtaining listed chemical products from multiple sources and
Respondent would have no knowledge of this. See Holloway Distributing,
72 FR 42118, 42124 (2007) (noting a registrant's obligation to
determine whether a customer is receiving listed chemical products from
other suppliers).
As the results of the customer verifications demonstrate,
Respondent was indifferent to its obligation to determine whether a
potential list I customer had a legitimate need for the products.
Moreover, Mr. Sayani's testimony indicates that Respondent did not
change its practices. Indeed, Respondent's practices are fundamentally
inconsistent with its obligations as a registrant, and are a
prescription for wide-spread diversion. Id., see also D & S Sales, 71
FR at 37610. Respondent's unwillingness to reform them provides reason
alone to conclude that it does not--and will not--maintain effective
controls against diversion and that its registration would be
``inconsistent with the public interest.'' 21 U.S.C. 823(h).
Buttressing this finding is the evidence pertaining to the audit.
As found above, the audit, which covered a six-month period, found that
Respondent had massive shortages of several listed chemical products
including 7640 sixty-count bottles of Head Up, 3656 sixty-count bottles
of Max Brand, and 284 sixty-count bottles of Mini 2-Way Action.\32\ See
GX 31. In total, Respondent was short 11,580 sixty-count bottles of
pseudoephedrine and combination ephedrine products, or nearly 695,000
dosage units. This was so notwithstanding that the DIs used 0 as the
opening inventory for each of the products (the consequence of this is
that if any product had, in fact, been on hand on the opening date of
the audit, the audit would result in an undercount of the shortage),
and that the time period was of limited duration.
---------------------------------------------------------------------------
\32\ Respondent also had substantial shortages of three other
products. GX 31.
---------------------------------------------------------------------------
Based on the ALJ's finding that its ``lack of an inventory system,
alone, provides persuasive weight against Respondent's continued
registration,'' ALJ at 30 n.6, Respondent argues that ``there is no
requirement under any of the DEA rules to have an inventory system, and
[that it] is * * * being asked to comply with something that is not in
the DEA rules.'' Resp. Exceptions at 6. Respondent contends that it is
``being held to * * * unpublished DEA guidelines,'' and that this is
``a violation of due process * * * and equal protection guarantees.''
Id.
Respondent is correct that there is no regulation which explicitly
requires that it maintain an inventory system. However, in enacting
section 303(h), Congress made plain that in determining the public
interest, the Attorney General was to consider the applicant's (and in
a revocation/suspension proceeding, the registrant's) ``maintenance * *
* of effective controls against diversion of listed chemicals into
other than legitimate channels.'' 21 U.S.C. 823(h).
Moreover, in 1995, DEA promulgated 21 CFR 1309.71(a), which
directed that ``[a]ll applicants and registrants shall provide
effective controls and procedures to guard against theft and diversion
of List I chemicals.'' This regulation, which remains in effect,
further explained that ``[i]n evaluating the effectiveness of security
controls and procedures, the Administrator shall consider * * * [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).
Federal law further requires that a registrant report ``any
regulated transaction involving an extraordinary quantity of a listed
chemical,'' 21 U.S.C. 830(b)(1)(A), and a ``regulated transaction'' is
based on ``the quantitative threshold or the cumulative amount for
multiple transactions within a calendar month.'' 21 CFR 1310.04(f).
Federal law also requires a distributor to report to this Agency ``any
unusual or excessive loss or disappearance of a listed chemical under
the control of the regulated person.'' 21 U.S.C. 830(b)(1)(C).
Accordingly, to satisfy 21 CFR 1309.71(b)(8), a registrant's
recordkeeping must be sufficient so as to enable it to comply with its
reporting obligations under Federal law.\33\ See Fotinopoulos, 72 FR at
24605.
---------------------------------------------------------------------------
\33\ Typically, this requires no more than maintaining the
records that a registrant keeps in the normal course of business.
See, e.g. , DEA, Implementation of the Domestic Chemical Diversion
Control Act of 1993, 60 FR 32447, 32451 (1995) (noting ``that most
of the information required by the regulations is already maintained
in general business records for all transactions'').
---------------------------------------------------------------------------
Here, Respondent has no satisfactory explanation as to the
disposition of approximately 11,580 sixty-count bottles or 695,000
dosage units of listed chemical products. Whether the shortages are due
to poor recordkeeping, theft, or some other reason, the magnitude of
these shortages provides a further reason to conclude that Respondent
does not maintain effective controls against diversion and that its
continued registration would be ``inconsistent with the public
interest.'' 21 U.S.C. 823(h).
Factor Four--Respondent's Past Experience in Distributing Listed
Chemicals
Under this factor, the ALJ further concluded that Respondent made
``excessive sales of both list one chemical products and iodine'' that
``pose a risk to the public interest.'' ALJ at 32. While the ALJ found
the testimony of Respondent's expert ``more persuasive'' than the
Government's evidence on the expected sales level of list I chemical
products, as she further explained, even the Respondent's expert
witness ``concurred that some of the [sales of] Respondent's List I
chemical products * * * were in excess of what would be expected.'' Id.
at 33. While I adopt the ALJ's conclusions with respect to list I
chemicals, I reject them with respect to iodine.
With respect to its distributions of iodine, the ALJ found that
``Respondent has knowingly distributed large amounts of 2% iodine,
another methamphetamine precursor.'' ALJ at 32. In support of her
conclusion, the ALJ relied on the testimony of Respondent's expert that
there were ``five instances where the quantity [of iodine] purchased
might be suspiciously high,'' Tr. 571, as well as on Mr. Sayani's
testimony that he was aware that one of his customers was purchasing
hundreds of bottles but that he thought the customer was distributing
to other small retailers. Id. at 744; see also ALJ at 32.
The Government's own evidence establishes, however, that the 2%
iodine product which Respondent sold ``is not regulated by law,'' GX
36B at 2, and the NPRM which announced the Agency's intent to regulated
iodine tinctures containing more than 2.2 percent iodine noted that 2%
iodine tincture products ``are sold at a wide variety of retail outlets
and have household application as antiseptic and antimicrobial
products.'' 71 FR 46146. The same NPRM also explained that the
``frequent diversion'' of two percent iodine tincture at clandestine
laboratories ``has not [been] documented.'' Id. at 46149.
[[Page 57665]]
Furthermore, DEA's regulations provide that two conditions must be
met for a chemical mixture to be exempted from regulation. 21 CFR
1310.13(a). First, ``[t]he mixture [must be] formulated in such a way
that it cannot be easily used in the illicit production of a controlled
substance.'' Id. Sec. 1310.13(a). Second, ``[t]he listed chemical or
chemicals contained in the chemical mixture cannot be readily
recovered.'' Id. Sec. 1310.13(b). Given the criteria for exempting a
chemical mixture from regulation, neither the ALJ nor the Government
explained why large sales of 2% iodine tincture are, by themselves,
enough to give rise to a reasonable belief that the chemical contained
therein is likely to be diverted.
Here, there is no evidence that Respondent sold these products with
knowledge that they would be diverted for use in the illicit
manufacture of methamphetamine, and in any event, the Government's
allegation that Respondent was selling excessive amounts of iodine
tincture is not supported by substantial evidence. The Government's
evidence is limited to the testimony of a diversion investigator that
she had visited 100 convenience stores and had never found iodine
tincture. Yet the Agency's NPRM noted that these products, which have
several legitimate uses, are sold at ``a wide variety of retail
outlets.'' 71 FR at 46146.
More importantly, even assuming that the investigator was
specifically looking for iodine tincture at the convenience stores she
visited, the testimony amounts to nothing more than anecdotal evidence.
As such, it does not conclusively establish the extent to which these
products are sold at convenience stores and the statistical
improbability that Respondent's sales of these products were to meet
legitimate demand. Indeed, the evidence stands in contrast to the
quantum of the evidence the Government introduced regarding the
expected sales levels of list I chemical products at convenience
stores.\34\ Accordingly, I conclude that Respondent's sales of iodine
do not support a finding that its continued registration is
inconsistent with the public interest.
---------------------------------------------------------------------------
\34\ Because 2% iodine tincture is not regulated, the
Government's allegation that it engaged in regulated transactions
which it failed to report as suspicious transactions is also
rejected.
---------------------------------------------------------------------------
On the other hand, Respondent's sales of list I chemical products
clearly were excessive and support a finding that its continued
registration is inconsistent with the public interest. Even assuming
that the monthly expected sales figure of $173 for pseudoephedrine
given by Respondent's expert is accurate, and that some stores might
make a legitimate business decision to purchase a case quantity to
reduce their costs, the evidence shows that Respondent repeatedly sold
case quantities to multiple customers including the Coastal Food Mart,
Chitra Inc.'s Quick Stop, the Phillips 66 Mart, the R & S Grocery, and
the Stop In.
The evidence also shows that Respondent sold case quantities to two
customers which gave the same address. For example, between January 6
and August 1, 2004, Respondent sold a total of eleven cases to the P &
K Mini Mart and the Quick Stop/Tushar/BP, both of which used the same
address. Moreover, between January 6 and September 5, 2004, it sold a
total of fifteen cases to the DJ Food Mart and BJ Food Market
1, which gave their respective addresses as 15582 HWY 27 and
15582 HWY 27 North in Trion, Georgia.
With respect to the Coastal Food Mart, which purchased eight cases
between January 21 and September 5, 2004, even Respondent's expert
acknowledged that this store's purchases were many times the expected
norm. Tr. 619-20. And as found above, several of Respondent's customers
purchased even larger amounts of list I chemical products than did the
Coastal Food Mart. As Respondent's expert allowed with respect to those
customers who were repeatedly purchasing large quantities, ``maybe
there's some nefarious practice involved here'' and the customers are
``doing something that * * * they shouldn't be doing.'' Id. 570.\35\
---------------------------------------------------------------------------
\35\ As DEA has found in numerous other cases, where there is a
pattern of distributions which are so large as to be statistically
improbable to meet legitimate demand, a finding that the products
have been diverted is warranted. See Holloway Distributing, 72 FR at
42125; T. Young Associates, Inc., 71 FR 60567, 60572 (2006); D & S
Sales, 71 FR at 37611; Joy's Ideas, 70 FR at 33198.
---------------------------------------------------------------------------
Respondent raises two arguments in response to the allegations that
it sold excessive quantities of list I chemical products. First, it
argues that given the nature and size of its business, it would be
``almost impossible to find'' the excessive sales. Resp. Prop. Findings
at 15.
Second, it argues that is ``has not sold any restricted item in
excess of the quantities authorized in the published rules and
regulations * * * which show the threshold quantities of restricted
items the wholesalers * * * are allowed to sell without * * * putting
their DEA license at risk.'' Id. at 16. Relatedly, Respondent raises
again a due process argument that ``[i]f the Government is proceeding
on any basis other than Respondent having exceeded the sale quantity
thresholds which the Government has specifically published (such as
`not in the public interest'), then the Government is proceeding under
a rule or statute which is void for vagueness as it does not put
Respondent on notice as to what specific action would be violative of
[its] rules and regulations.'' Id. at 17-18.
As for the argument that it would be nearly impossible to detect
excessive purchases, Respondent's expert acknowledged that a computer
program could be written to detect such purchases. Tr. 648. Nor would
it require more than minimal effort to call up a customer's account to
determine the frequency and amounts of its purchases before selling
additional amounts of the products to it.
Also unavailing is Respondent's contention that because it did not
sell more than the threshold quantities, its registration cannot be
revoked. Contrary to Respondent's understanding, selling under
threshold amounts does not relieve a registrant from its obligation to
taking necessary measures ``to determine the ultimate disposition of
[its] products.'' Rick's Picks, 72 FR at 18278. The thresholds simply
trigger additional recordkeeping and reporting requirements. As I
explained in Rick's Picks:
Congress's imposition of recordkeeping and reporting
requirements for regulated transactions does not mean that one can
engage in below-threshold transactions without any further
obligation to determine whether the products are likely to be
diverted. Indeed, DEA has found that products which have been
distributed to non-traditional retailers in sub-threshold
transactions are routinely diverted. Contrary to Respondent's view,
the threshold provisions pertaining to regulated transactions do not
create a safe harbor which allows a registrant to sell list I
chemicals without any further duty to investigate how the products
are being used.
Id. Cf. United States v. Kim, 449 F.3d 933, 944 (9th Cir. 2006)
(``[T]he recording and reporting statutes establish no safe harbor from
prosecution under [21 U.S.C.] 841(c)(2).''). I therefore reject
Respondent's contention (as raised in both its Exceptions and Motion
for Judgment as a Matter of Law) that this proceeding should be
dismissed because it did not sell in excess of the thresholds.
Finally, there is no merit to Respondent's related contention that
it has been denied fair ``notice as to what specific action would be
violative of [DEA's] rules and regulations.'' Resp. Prop. Findings at
18. Contrary to
[[Page 57666]]
Respondent's view, the standards, which it was expected to conform to,
were identifiable ``with ascertainable certainty'' by reviewing DEA's
public pronouncements. Trinity Broadcasting, Inc., v. FCC, 211 F.3d
618, 628 (D.C. Cir. 2000).
In section 304(a), Congress made clear that a registration is
subject to revocation where a registrant ``has committed such acts as
would render his registration * * * inconsistent with the public
interest as determined under'' under section 303. 21 U.S.C. 824(a)(4).
And in section 303(h), Congress clearly provided that one of the
criteria for determining the public interest is whether a registrant
maintains ``effective controls against diversion of listed chemicals
into other than legitimate channels.'' Id. Sec. 823(h)(1). The statute
itself thus provides fair warning to a registrant that is must not sell
to diverters.
Moreover, in several decisions which pre-dated nearly all of the
listed chemical distributions discussed above, this Agency made clear
that selling in quantities that greatly exceed legitimate demand for
these products supports a finding of diversion and that such conduct
can be the basis for the revocation of a registration. See, e.g.,
Branex, Inc., 69 FR 8682, 8690-94 (2004) \36\ (revoking registration
noting that distributor's sales of pseudoephedrine to convenience
stores greatly exceeded the expected sales range at such stores and
supported a finding that the pseudoephedrine was likely diverted); MDI
Pharmaceuticals, 68 FR 4233, 4238 (2003) (revoking registration on
ground that ``firm distributed large quantities of pseudoephedrine
tablets to smoke shops and * * * convenience stores in quantities that
apparently exceeded legitimate demand for these products''); Ace
Wholesale & Trading Co., 67 FR 12574, 12576 (2002) (revoking
registration on grounds that registrant ``was distributing large
quantities of pseudoephedrine to [a convenience store] and other
establishments that appeared far in excess of legitimate demand'').\37\
In these decisions, all of which were also published on the Agency's
Web site as well as in the Federal Register, DEA provided fair warning
that Respondent's conduct in selling large quantities of listed
chemicals could result in the revocation of its registration.
---------------------------------------------------------------------------
\36\ The Branex decision was published in the Federal Register
on February 25, 2004, before Respondent made many of the case
quantity distributions.
\37\ In addition, in publications such as the Chemical Handler's
Manual, DEA explained that ``[i]t is fundamental for sound
operations that handlers take reasonable measures to identify their
customers, understand the normal and expected transactions typically
conducted by those customers, and, consequently, identify those
transactions conducted by their customers that are suspicious in
nature.''Chemical Handler's Manual 15 (2002).
The Chemical Handler's Manual also sets forth numerous criteria
for recognizing suspicious transactions including ``resell[ing] to
non-traditional outlets for regulated OTC products, e.g., hair
salons, head shops, drug paraphernalia stores, liquor stores, record
stores, video shops, auto parts stores,'' and ``resell[ing] large
volumes into the `independent convenience store' market.'' Id. at
42. The manual also listed as relevant criterion ``[a]ny customer
who asks for large bottle sizes, 60 count or higher,'' or ``buy[s]
only the largest size available.'' Id.
---------------------------------------------------------------------------
Respondent's argument rings hollow for another reason. In the first
Show Cause Order, Respondent was put on notice that ``Max Brand
products have been found on numerous occasions in situations related to
the illicit manufacture of methamphetamine,'' Show Cause Order I, at 3;
that the monthly expected sales range of pseudoephedrine products at
convenience stores in Georgia ``averaged between $15 and $60,'' id. at
4; and that its sales of listed chemical products were ``wildly
inconsistent with the expectation of sales'' by convenience stores. Id.
at 5. Mr. Sayani even testified under oath that at the ``end of 2004,
starting of 2005,'' and after receiving the Show Cause Order, he had
stopped selling Max Brand products. Tr. 713. Respondent's records
establish, however, that it continued to sell the products for months
past the date when Mr. Sayani claimed it had stopped; it also shows
numerous instances in which Respondent sold half-case quantities or
larger for several months thereafter.\38\ I thus reject Respondent's
contention that it lacked fair warning that its excessive sales could
be grounds for the revocation of its registration.
---------------------------------------------------------------------------
\38\ Relatedly, Mr. Sayani told the DI during one of the 2001
inspections that ``a typical sale'' would be two to three boxes
containing 12 bottles; in the same conversation, the DI told Mr.
Sayani that a sale of a case quantity would be suspicious. Tr. 330-
31. Many of Respondent's sales were well in excess of a typical
sale. Respondent thus not only ignored the DI's instruction, it also
ignored its own understanding of the market. Moreover, at the
various visits, Respondent was provided with a copy of several
notices which explained that pseudoephedrine and combination
ephedrine were being diverted into the illicit manufacture of
methamphetamine.
---------------------------------------------------------------------------
Accordingly, while Respondent was authorized to distribute list I
chemicals for approximately six years, its experience is characterized
by its frequent disregard of its obligation to protect against the
diversion of these products. This conclusion provides an additional
basis, which is sufficient by itself, to find that Respondent's
continued registration is ``inconsistent with the public interest.'' 21
U.S.C. 823(h).
Factor Five--Such Other Factors as Are Relevant to and Consistent With
Public Health and Safety
As found above, the illicit manufacture and abuse of
methamphetamine have had pernicious effects on families and communities
throughout the nation.\39\ Cutting off the supply sources of
methamphetamine traffickers is of critical importance in protecting the
public from the devastation wreaked by this drug.
---------------------------------------------------------------------------
\39\ As found above, methamphetamine trafficking has increased
substantially in Georgia and the adjacent States.
---------------------------------------------------------------------------
While listed chemical products containing both ephedrine and
pseudoephedrine have legitimate medical uses, DEA orders have
established that convenience stores, gas-stations, and other small
retailers, constitute the non-traditional retail market for legitimate
consumers of products containing these chemicals. See, e.g., Tri-County
Bait Distributors, 71 FR 52160, 52161-62 (2006); D & S Sales, 71 FR at
37609; Branex, Inc., 69 FR 8682, 8690-92 (2004). DEA has further found
that there is a substantial risk of diversion of list I chemicals into
the illicit manufacture of methamphetamine when these products are sold
by non-traditional retailers. See, e.g., Joy's Ideas, 70 FR at 33199
(finding that the risk of diversion was ``real'' and ``substantial'');
Jay Enterprises, Inc., 70 FR 24620, 24621 (2005) (noting ``heightened
risk of diversion'' if application to distribute to non-traditional
retailers was granted). For this reason, DEA has repeatedly revoked the
registrations and denied an application for registration when a
registrant distributes (or an applicant proposes to distribute) listed
chemicals to non-traditional retailers and other evidence (such as
excessive sales, inadequate diversion controls, previous violations/
criminal convictions or a lack of adequate experience) confirm that the
registrant/applicant is unlikely to responsibly handle the products.
See Rick's Picks, 72 FR at 18278-80; John J. Fotinopoulos, 72 FR at
24605-07; Tri-County Bait Distributors, 71 FR at 52163-64; D & S Sales,
71 FR at 37610-12; Joy's Ideas, 70 FR at 33197-99; Xtreme Enterprises,
67 FR 76195, 76197-98 (2002).
The record here likewise establishes a substantial nexus between
the sale of non-traditional list I chemicals products and the diversion
of these products into the illicit manufacture of
[[Page 57667]]
methamphetamine. According to the testimony of a DEA Special Agent, who
had debriefed more than 200 individuals involved in the illicit
manufacture of methamphetamine, convenience stores, gas stations and
other small retailers were the primary and preferred source of
pseudoephedrine and ephedrine that was used by smaller meth. labs. Tr.
56 & 59; see also TNT Distributors, 70 FR 12729, 12730 (2005) (noting
Special Agent's testimony that ``80 to 90 percent of ephedrine and
pseudoephedrine being used [in Tennessee] to manufacture
methamphetamine was being obtained from convenience stores'').
The record establishes that Respondent's list I customer base was
comprised primarily of the same type of establishments. More
specifically, Respondent's list I customers included gas stations,
convenience stores, dollar stores, liquor stores, beauty stores, gift
shops, and some customers (such as those located at private residences)
whose business was not even clear. As the ALJ observed ``[s]ome of
these businesses did not even appear to be tangentially related to the
legitimate sale of pseudoephedrine and ephedrine products.'' ALJ at 34.
As the ALJ further noted, notwithstanding the substantial risk of
diversion present when distributing to these establishments, as well as
the testimony that non-traditional retailers were the primary supply
source for illicit meth. cooks, Respondent offered no evidence that it
``would cease dealing with'' these establishments. Id.
Moreover, while Respondent disputed the amount of monthly sales of
pseudoephedrine at convenience stores to meet legitimate demand, it did
not challenge the Government's evidence that sales of non-prescription
drugs account for only a small percentage of the total sales of
convenience stores that handle the products. Nor did it offer any
evidence to refute the Government's evidence that only a small number
(approximately two in one thousand) of convenience store customers
purchase a pseudoephedrine product. And even using the monthly expected
sales figures put forth by its expert, as found above, Respondent
repeatedly sold to multiple non-traditional retailers quantities of
list I chemical products that greatly exceeded legitimate demand for
these products.
Having concluded that the Government made out its prima facie case,
the ALJ then turned to assessing whether Respondent had produced
sufficient evidence that it would protect the public interest from the
diversion of the products. Id. at 34. As the ALJ noted, Respondent did
improve its physical security. Id. The ALJ also noted that Respondent
had conducted ``some investigations into some of its customer's
business identities.'' Id. Yet at the hearing, Mr. Sayani testified
that he did not go to a new customer's store to verify whether it was a
legitimate business and that a new customer's presentation of a tax
identification number and business license provided sufficient proof of
the customer's bona fides. Tr. 768-69. Mr. Sayani offered no testimony
that Respondent was willing to change this practice.\40\
---------------------------------------------------------------------------
\40\ There was also evidence that on one occasion, Respondent's
attorney reported an incident involving an individual who, in
attempting to purchase products, admitted to Mr. Sayani that he did
not have a store, and then showed Mr. Sayani a van full of products
which he had purchased from a competitor of Respondent. RX 29. While
the letter provided information regarding the practices of
Respondent's competition, it did not report the name of the
individual or give the license plate number (or a description) of
the van. See id.
---------------------------------------------------------------------------
The ALJ nonetheless concluded that Respondent ``does demonstrate a
willingness to comply with DEA directions'' because it did not handle
list I chemical products at its Decatur location while its application
was pending and at its Forest Park location after that registration was
suspended. ALJ at 34-35. The ALJ also reasoned that Respondent
``stopped selling non-traditional listed chemical products in 2004,
after the DEA served its first Order to Show Cause.'' Id. at 35.
Both the handling of a list I chemical product at an unregistered
location and the distribution of a list I product out of a location
with a suspended registration would, however, constitute felony
offenses under Federal law. See 21 U.S.C. 841(f)(1); id. Sec.
843(a)(9); id. Sec. 844(a). Even if Respondent's compliance with these
provisions is probative of its willingness to cooperate (a debatable
proposition given that its non-compliance would expose it to
substantial criminal penalties), the remaining basis for the ALJ's
conclusion is not supported by the record.
As found above, Respondent continued selling non-traditional
products--and made numerous large quantity transactions--well into
April 2005, approximately five to six months after service of the first
Show Cause Order. Indeed, Mr. Sayani's testimony regarding when
Respondent stopped selling the products is clearly refuted by the
documentary evidence. The weight of the evidence thus does not support
the ALJ's conclusion that Respondent is willing to comply with DEA's
direction.
In any event, notwithstanding her finding, the ALJ concluded that
Respondent's ``cooperation is dwarfed by the significant risk of
diversion posed to the public by * * * Respondent's continued sales of
listed chemical products to [non-traditional retailers] without
adequate sales records or customer verification.'' ALJ at 35. While
Respondent contends that the ALJ ``ignore[d] the substantial remedial
actions that [it] had taken to correct [the] problems of which'' it was
notified, Resp. Exceptions at 6, the ALJ considered them and properly
concluded that they only partially addressed the problems identified by
the Agency. See ALJ at 35 (noting that Respondent has ``not provided
sufficient evidence to convince [the Agency] that its future conduct
would change to the degree necessary to eliminate the threat to the
public interest'').
In short, Respondent offered no evidence of its willingness to
change its practices for determining whether its customers are
legitimate. It offered no evidence that it has in place systems to
accurately account for the products it handles and to properly identify
those customers who are purchasing excessive quantities.
Likewise, it has offered no credible evidence that it is willing to
change its practices to limit its sales of these products. Its claim
that it stopped selling the products shortly after service of the first
Show Cause Order, is contradicted by the documentary evidence.
Moreover, its argument that the thresholds establish the ``quantities
of restricted items the wholesalers * * * are allowed to sell without *
* * putting their DEA license at risk, [and] are what both the
Government and the public are bound to abide by,'' Resp. Prop. Findings
at 16--a theme which is repeated throughout its brief--makes plain its
view that it can continue to sell up to the thresholds with no
obligation to limit its distributions to those establishments at which
there is only limited consumer demand for these products for their
lawful use. Because this view is fundamentally inconsistent with a
distributor's obligation under the CSA, I conclude that Respondent's
registration ``is inconsistent with the public interest.'' 21 U.S.C.
823(h).\41\
---------------------------------------------------------------------------
\41\ Respondent also contends that ``the Government had no
reasonable justification in summarily proceeding to seize his
products and summarily revoke his license without affording him a
due process right to a hearing.'' Id. at 20. Respondent ignores,
however, that section 304(d) of the CSA expressly authorizes the
suspension of ``any registration simultaneously with the institution
of proceedings under this section, in cases where he finds that
there is an imminent danger to the public health and safety.'' 21
U.S.C. 824(d).
Respondent does not argue that the statute is unconstitutional.
Nor could it, as the Supreme Court has repeatedly upheld the use of
post-deprivation process in emergency situations. See, e.g., Gilbert
v. Homar, 520 U.S. 924 (1997). Moreover, in this case, the evidence
of Respondent's continued large sales of listed chemical products,
even after being served with the first Show Cause Order, supports
the finding that Respondent's continued registration during the
pendency of the proceeding posed an imminent danger to public health
and safety. Respondent could also have sought review of the
suspension in a ``court of competent jurisdiction.'' 21 U.S.C.
824(d).
Finally, Respondent asserts that ``the effect of the DEA's
arbitrary actions [in its] case [is] to discriminate against him
because he is a legal alien'' in violation of his right to equal
protection of the laws. Resp. Prop. Findings at 25. Respondent does
not, however, contend that the Agency is intentionally
discriminating against its owner, see Hernandez v. New York, 500
U.S. 352, 359-60 (1991), a requirement for stating a claim under the
Equal Protection Clause, and in any event, it has produced no
evidence to support its claim. Respondent is just one of many list I
chemical distributors whose registrations have been revoked for
committing acts inconsistent with the public interest.
---------------------------------------------------------------------------
[[Page 57668]]
Order
Pursuant to the authority vested in me by 21 U.S.C. 823(h) &
824(a), as well as 28 CFR 0.100(b) & 0.104, I order that DEA
Certificate of Registration, 040450SLY, issued to Sunny Wholesale,
Inc., 120 Forest Parkway, Forest Park, Georgia, be, and it hereby is,
revoked, and that its application to renew this registration be, and it
hereby is, denied. I further order that Sunny Wholesale, Inc.'s,
application for a DEA Certificate Registration at 2935 N. Decatur Road,
Suite C, Decatur, Georgia, be, and it hereby is, denied. These orders
are effective November 3, 2008.
Dated: September 26, 2008.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E8-23395 Filed 10-2-08; 8:45 am]
BILLING CODE 4410-09-P