Acting Manhattan U.S. Attorney Announces Consent Decree With Chestnut Petroleum Distributors, Inc., And Affiliates Resolving Violations Of The Resource Conservation And Recovery Act

Defendants Admit to Failing to Follow Environmental Regulations Governing Underground Storage Tanks at Gas Stations; Agree to Injunction and $187,500 Civil Penalty

  Audrey Strauss, Acting United States Attorney for the Southern District of New York, and Peter D. Lopez, Regional Administrator of the U.S. Environmental Protection Agency (“EPA”), announced today that the United States has entered into a Consent Decree settling a civil lawsuit against Chestnut Petroleum Distributors, Inc., and its affiliates CPD Energy Corp., CPD NY Energy Corp., Chestnut Mart of Gardiner, Inc., Chestnut Marts, Inc., Greenburgh Food Mart, Inc., Middletown Food Mart, Inc., and NJ Energy Corp. (collectively, “Defendants”), for violating the Resource Conservation and Recovery Act (“RCRA”) in connection with their ownership or operation of underground storage tanks at 20 separate gas stations within the Southern District of New York and adjoining districts. 

Acting U.S. Attorney Audrey Strauss said:  “Today’s settlement holds Chestnut Petroleum Distributors, Inc., and its affiliates accountable for repeatedly failing to comply with regulations designed to prevent gasoline leaks from injuring public health and the environment, and ensures ongoing oversight of the defendants’ operations to protect the public in the future.”    

EPA Regional Administrator Peter D. Lopez said:  “Failure to regularly monitor underground storage tanks and address possible leaks risks contaminating groundwater, which is one of our most valuable natural resources. This settlement requires the companies to follow laws in place to mitigate safety threats and protect the environment.”                  

Petroleum products such as gasoline contain chemical compounds that pose substantial threats to human health.  Service stations typically store gasoline in underground storage tanks.  When operated conscientiously and monitored closely, underground storage tanks are a safe and effective means to store gasoline.  But when those tanks are not subjected to basic operational safeguards, they can endanger the public and the environment, for example by leaking petroleum into the water supply, discharging toxic vapors into the air, or even triggering fires or explosions.  EPA’s regulations under RCRA are designed to protect the public by requiring underground storage tank operators to reduce the likelihood of leaks, monitor for leaks so they can promptly be addressed, and maintain adequate insurance to conduct corrective action and compensate injured third parties should a leak occur.

The Consent Decree, which is subject to public comment and approval by the district court, resolves a lawsuit filed by the United States in May 2019, which alleges that Defendants repeatedly violated RCRA and related regulations at various times between 2011 and 2014 with respect to their ownership and/or operation of underground storage tanks at 20 gas stations. 

In the Consent Decree filed today, Defendants admit, acknowledge, and accept responsibility for failing to perform required actions at one or more facilities on various specified dates between 2011 and 2014.  This includes:

• failing to perform release (i.e., leak or spill) detection;
• failing to maintain and provide records of release detection monitoring;
• failing to operate corrosion protection systems (including inspecting and testing) for steel underground storage tank systems and failing to maintain and provide records of corrosion protection monitoring;
• failing to cap and secure underground storage tanks that were temporarily closed;
• failing to perform release detection for underground storage tanks that were temporarily closed;
• failing to report suspected releases or unusual operating conditions for underground storage tanks;
• failing to conduct release investigations and confirm suspected releases or unusual operating conditions; and
• failing to maintain insurance policies sufficient to take corrective action and compensate third parties for bodily injury and property damage caused by accidental releases arising from the operation of the underground storage tanks.  

Pursuant to the Consent Decree, Defendants are required to comply with the regulations applicable to underground storage tanks for all underground storage tanks at the facilities at issue, and to take various measures to ensure such compliance, including undertaking inspections, maintaining and operating an electronic environmental management system providing centralized electronic monitoring of release detection at all underground storage tanks at the facilities, monitoring the under-dispenser containment systems at all underground storage tanks at the facilities, and providing semi-annual reports to EPA.  Defendants also agree to undertake certain measures with respect to newly acquired facilities containing underground storage tanks, including providing notice to EPA of the planned acquisition, conducting a pre-acquisition assessment, and ensuring that all underground storage tanks at newly acquired facilities are promptly brought into compliance with all applicable regulations.

In addition to this injunctive relief, Defendants will pay a civil penalty of $187,500.  Defendants will also be subject to substantial penalties if they fail to comply with the terms of the Consent Decree.

The Consent Decree will be lodged with the District Court for a period of at least 30 days, and notice of the Consent Decree will be published in the Federal Register before the Consent Decree is submitted for the Court’s approval.  This will afford members of the public the opportunity to submit comments on the Consent Decree to the Department of Justice.

Acting U.S. Attorney Strauss thanked EPA’s attorneys and staff for their critical work on this matter.

Manhattan U.S. Attorney Files Civil Fraud Suit Against Anthem, Inc., For Falsely Certifying The Accuracy Of Its Diagnosis Data

  Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that the United States filed a civil fraud lawsuit today against ANTHEM, INC. (“ANTHEM”), alleging that ANTHEM falsely certified the accuracy of the diagnosis data it submitted to the Centers for Medicare and Medicaid Services (“CMS”) for risk-adjustment purposes under Medicare Part C and knowingly failed to delete inaccurate diagnosis codes.  As a result of these acts, ANTHEM caused CMS to calculate the risk-adjustment payments to ANTHEM based on inaccurate, and inflated, diagnosis information, which enabled ANTHEM to obtain millions of dollars in Medicare funds to which it was not entitled.

Manhattan U.S. Attorney Geoffrey Berman said:  “The integrity of Medicare’s payment system is critical to our healthcare.  This Office is dedicated to vigorously using all of the legal tools available, including the False Claims Act, to ensure the integrity of Medicare payments.  The case against Anthem today is an illustration of that commitment.” 

As set forth in the Complaint, Medicare Part C, also known as Medicare Advantage, provides health insurance coverage for tens of millions of Americans who opt out of traditional Medicare.  Under Medicare Part C, Medicare Advantage Organizations (“MAOs”), typically private insurers like ANTHEM, provide coverage for Medicare beneficiaries.  In return, MAOs receive capitated payments from CMS based on the patients’ medical conditions and demographic factors.  More specifically, MAOs like ANTHEM submit diagnosis data, typically passed along from beneficiaries’ healthcare providers, to CMS.  CMS then uses that diagnosis data, in conjunction with demographic factors, to calculate a “risk score” for each beneficiary and, in turn, the amount of the capitated payment that the MAO will receive for covering that beneficiary.

The Complaint alleges that ANTHEM, as one of the nation’s largest MAOs, operated dozens of Medicare Part C plans, including the Empire MediBlue plan in New York.  To supplement its collection of diagnosis codes besides what it received from healthcare providers, ANTHEM implemented a “retrospective chart review” program using a vendor called Medi-Connect.  Specifically, ANTHEM paid Medi-Connect to collect medical records from healthcare providers corresponding to services they rendered to ANTHEM’s Part C beneficiaries and then review those records to identify all diagnosis codes supported by the medical records.  ANTHEM then submitted to CMS any diagnosis codes identified by Medi-Connect that ANTHEM had not already submitted to CMS based on what providers initially reported. 

The Complaint further alleges that when ANTHEM asked healthcare providers to provide records to Medi-Connect, ANTHEM characterized its chart review program as an “oversight activity” that would “help ensure that the [diagnosis] codes have been reported accurately.”  In fact, however, ANTHEM did not use the information it received from Medi-Connect to check the accuracy of diagnosis codes it had submitted to CMS.  Specifically, when Medi-Connect’s review did not validate diagnosis codes that ANTHEM previously submitted to CMS, ANTHEM did not make any effort to verify or delete those codes. 

According to the Complaint, ANTHEM did not do so because deleting invalid diagnosis codes would have substantially reduced the additional revenue the chart review program generated for ANTHEM, which frequently exceeded $100 million per year.  Instead, ANTHEM treated its chart review program solely as a tool for revenue enhancement and viewed it as ANTHEM’s “cash cow.”    

As alleged in the Complaint, ANTHEM not only knowingly failed to delete diagnosis codes shown by its chart review program to be unsupported by the medical records, but also repeatedly made false statements to CMS.  Specifically, ANTHEM made false annual attestations to CMS certifying that its risk-adjustment data submissions were “accurate” according to its “best knowledge, information and belief.”  ANTHEM also falsely told CMS that it would “research and correct” risk adjustment data discrepancies.  As result of its false statements and its failure to delete inaccurate diagnosis codes, ANTHEM improperly obtained or retained millions of dollars in payments from CMS to which it was not entitled, in violation of the False Claims Act.

Mr. Berman thanked the Office of Counsel to the Inspector General for the Department of Health and Human Services and the Commercial Litigation Branch at the Civil Division of the Department of Justice for their extensive assistance.

To Hold Corporate Executives Accountable for Misconduct, Comptroller Stringer and the NYC Retirement Systems Call for Clawback Policy at Gilead, Inc.

For years, Gilead has been embroiled in controversy for potentially engaging in anti-competitive practices that kept the HIV prevention drug, Truvada, unaffordable for millions

New shareholder proposal calls for a “Clawback” policy that would hold corporate executives financially accountable for misconduct – such as anti-competitive practices – by giving the Board of Directors the ability to recoup profits made as a result of wrongdoing

Clawback policies ensure misconduct is not rewarded and help companies limit risks and foster long-term sustainable growth 

Following a class-action lawsuit alleging that Gilead, Inc., a pharmaceutical company engaged in anti-competitive practices to delay generic alternatives to HIV prevention and management drugs in order to charge exorbitant prices, today New York City Comptroller Scott M. Stringer and the New York City Retirement Systems (“the Systems”) announced a new shareholder proposal to hold senior Gilead executives accountable for potential misconduct. The shareholder proposal submitted to Gilead’s board of directors would, if adopted, give the board the ability to recoup or “clawback” compensation paid to senior executives as a result of misconduct or failed oversight – and help companies limit reputational and regulatory risks while fostering long-term sustainable growth. This is the first year that Comptroller Stringer and the Systems are calling for this reform at Gilead, Inc and comes as part of the partnership with Investors for Opioid and Pharmaceutical Accountability.

“Ethics matter – and companies should hold their employees accountable when they commit misconduct. There is strong evidence that suggests Gilead purposefully raised drug prices to exorbitant levels – and that people living with HIV were denied the medicine they need to survive. It’s outrageous and now the company is facing long-term consequences,” said New York City Comptroller Scott M. Stringer. “When Wells Fargo defrauded customers, a clawback policy held executives accountable. Money made as a result of misconduct should not pad the pockets of bad-actors – and clawback policies ensure that misconduct is not rewarded. As long-term shareholders, Gilead must prove to investors that they have substantive measures to hold executives accountable. It’s not just the right thing to do, it’s a smart policy to help set a proper tone at the top for ethical conduct and thereby promote long-term sustainable growth.”

The Comptroller and the NYC Retirement Systems’ proposal specifically urges the Compensation Committee of the Board of Directors to adopt a policy “to provide that the Committee will (a) review, and determine whether to seek recoupment of incentive compensation paid, granted or awarded to a senior executive if, in the Committee’s judgment, (i) there has been misconduct resulting in a violation of law or Gilead policy that causes significant financial or reputational harm to Gilead and (ii) the senior executive either committed the misconduct or failed in his or her responsibility to manage or monitor conduct or risks; and (b) disclose the circumstances of any recoupment if the circumstances of the underlying misconduct are public.”

In 2013, the Comptroller’s office successfully negotiated an expanded clawback policy at Wells Fargo. Three years later, following a letter from Comptroller Stringer, the board of directors used the expanded clawback policy to recoup $60 million from the company’s CEO and another executive in the aftermath of the Wells Fargo fake account scandal. Since 2014, the Comptroller’s office has filed 18 clawback-related proposals, which were enacted by 11 companies.

Comptroller Stringer serves as the investment advisor to, and custodian and a trustee of, the New York City Pension Funds. The New York City Pension Funds are composed of the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System.

Manhattan U.S. Attorney Announces Lawsuit Against Chestnut Petroleum Distributor, Inc., For Violations Of The Resource Conservation And Recovery Act

Suit Alleges Defendants Repeatedly Violated Environmental Regulations

  Geoffrey S. Berman, the United States Attorney for the Southern District of New York (“SDNY”), and Peter D. Lopez, Regional Administrator of the U.S. Environmental Protection Agency (“EPA”), announced today that the United States has filed a civil lawsuit against Chestnut Petroleum Distributor, Inc., and its affiliates CPD Energy Corp., CPD NY Energy Corp., Chestnut Mart of Gardiner, Inc., Chestnut Marts, Inc., Greenburgh Food Mart, Inc., Middletown Food Mart, Inc., and NJ Energy Corp. (collectively, “Defendants”), for violating the Resource Conservation and Recovery Act (“RCRA”) at 20 separate gas stations within the Southern District of New York and adjoining districts. 

U.S. Attorney Geoffrey S. Berman stated:  “As alleged in the complaint, Defendants repeatedly failed to comply with regulations designed to prevent gasoline leaks from threatening public health and the environment.  Today’s lawsuit seeks to hold Defendants accountable for their conduct and ensure that the public is protected in the future.”    

EPA Regional Administrator Peter D. Lopez said:  “Failure to monitor and maintain tanks to prevent leaks can pose a serious safety risk, as the leaking underground tanks can release toxic components that can seep into the soil and the groundwater.  This lawsuit seeks to hold the companies responsible for properly managing their tanks to reduce these risks where these gas stations are located.”                          

Petroleum products such as gasoline contain chemical compounds that pose substantial threats to human health.  Service stations typically store gasoline in underground storage tanks.  When operated conscientiously and monitored closely, underground storage tanks are a safe and effective means to store gasoline.  But when those tanks are not subjected to basic operational safeguards, they can endanger the public and the environment, for example by leaking petroleum into the water supply, discharging toxic vapors into the air, or even triggering fires or explosions.  EPA’s regulations under RCRA are designed to protect the public by requiring underground storage tank operators to reduce the likelihood of leaks, monitor for leaks so they can promptly be addressed, and maintain adequate insurance to conduct corrective action and compensate injured third parties when a leak occurs.

As alleged in the complaint filed in federal district court today, Defendants repeatedly violated RCRA and its related regulations at various times from 2011 to 2014.  These violations included failing to perform release (i.e., leak or spill) detection, and failing to maintain and provide records of release detection monitoring.  In some instances, Defendants failed to secure underground storage tanks that were temporarily closed, and failed to investigate or report suspected releases or unusual operating conditions.  Defendants also failed at times to maintain insurance policies sufficient to take corrective action and compensate third parties for bodily injury and property damage caused by accidental releases arising from the operation of the underground storage tanks. 

The lawsuit seeks injunctive relief and an order imposing civil penalties for Defendants’ violations. 

Former Chief Financial Officer Of Osiris Therapeutics, Inc., Pleads Guilty To Lying To Auditors

   Joon H. Kim, the Acting United States Attorney for the Southern District of New York, and Philip R. Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (“USPIS”), announced that PHILIP JACOBY, the former chief financial officer of Osiris Therapeutics, Inc. (“Osiris”), a developer and producer of regenerative medicine products, was charged by criminal information (the “Information”) and pled guilty today to lying to Osiris’s auditors in connection with the auditors’ review of Osiris’s 2014 10-K and Third Quarter 2015 10-Q filings.  JACOBY pled guilty before U.S. District Judge Denise Cote.

Acting Manhattan U.S. Attorney Joon H. Kim said:  “Philip Jacoby, the former CFO of a pharmaceutical company, admitted today to lying to auditors conducting an examination of the financial well-being of his company.  Jacoby fabricated documents, made false statements, and asked others to backdate critical transactions in furtherance of his scheme to mislead auditors. For his criminal conduct, which ultimately misled those looking to invest in his publicly traded company, Jacoby faces time in federal prison.”

Inspector-in-Charge Philip R. Bartlett said:  “In a misguided effort to avoid a restatement of Osiris’s fourth quarter revenue numbers, Philip Jacoby lied about the conversion of $1.1 million dollars of consignment inventory to a final sale.  He wasn’t so clever when he left a paper trail of evidence Postal Inspectors followed right back to him.”

According to allegations contained in the Information and statements made in public Court proceedings:

Osiris, headquartered in Columbia, Maryland, is a publicly traded company specializing in the research, development, and marketing of regenerative medicine products.  Osiris sold its products either through its direct sales force, or, more typically, through numerous distributors.  Osiris’s securities traded under the symbol “OSIR” on the NASDAQ stock exchange. 

From in or about 2008 up to and including in or about September 2015, JACOBY held the position of chief financial officer (“CFO”) of Osiris.  From in or about September 2015 through in or about January 2016, JACOBY held the position of principal accounting officer.  During the period that JACOBY was the CFO of Osiris, he signed Osiris’s quarterly and yearly financial reports.  These reports were required to be filed with the United States Securities and Exchange Commission (“SEC”) and provided the investing public with information regarding Osiris’s financial performance.

Although Osiris was initially a research and development company, by at least in or about 2014, Osiris’s management was focused on the company’s “top line,” or gross revenue growth.  Osiris was especially focused on being able to demonstrate quarter-over-quarter revenue growth, that is, reporting revenue for each quarter that was greater than the previous quarter’s.  For example, a former CEO of Osiris (the “CEO”) regularly prepared internal presentations emphasizing the company’s historical quarter-over-quarter revenue growth and emphasizing the need to achieve future growth.  Similarly, in public earnings calls run by the CEO and in its earnings press releases, Osiris touted its revenue performance and quarter-over-quarter revenue growth. 

Improper Accounting at Osiris With Respect to Distributor-1

Between approximately 2010 and approximately 2015, Distributor-1 was a distributor for Osiris’s Ovation product, among other products.  Distributor-1 was owned in its entirety by a sole principal (“Owner-1”).

In or about September 2013, the Food and Drug Administration (“FDA”) informed Osiris that Ovation failed to meet certain regulatory requirements and thus required pre-marketing approval from the FDA, which Ovation did not have.  Thereafter, Osiris agreed with the FDA that it would not sell Ovation after December 31, 2014. 

In order to maintain access to Ovation following December 31, 2014, Distributor-1 agreed to take possession of a significant quantity of Ovation prior to December 31, 2014, and by December 2014 was in possession of approximately $1.8 million worth of Ovation.  Because Distributor-1 lacked the ability to pay for such a large purchase, the Ovation was shipped to Distributor-1 on consignment.  Because the product was on consignment, under governing accounting rules Osiris could not properly recognize revenue until Distributor-1 had sold the product to an end user or Distributor-1 otherwise agreed to purchase the product.

In or about December 2014, JACOBY requested that Owner-1 convert some or all of the consigned inventory to inventory owned by Distributor-1 by December 31, 2014.  To the extent other revenue recognition criteria were satisfied, completion of the actual sale of the inventory to Distributor-1 by December 31, 2014, would have allowed Osiris to recognize revenue for that product in 2014 and reference that revenue in the 2014 10-K it would subsequently file.

Notwithstanding internal pressure to make sales, however, JACOBY and Owner-1 did not reach a final agreement regarding the conversion of the consigned inventory until at least in or about January 2015.  Despite the fact that no agreement was reached in 2014, Osiris, at the direction of JACOBY, booked approximately $1.1 million in revenue related to the conversion of consignment product in the fourth quarter of 2014 (the “Distributor-1 Transaction”).

Jacoby Conveys False Information to Auditors After Improper Accounting Is Questioned

In or about October 2015, the Company’s auditors (the “Auditors”), in connection with an inspection by the Public Company Accounting Oversight Board (the “PCAOB”), requested additional documentation and information supporting Osiris’s recognition of revenue in December 2014 relating to the Distributor-1 Transaction.  In an effort to deceive the Auditors and the PCAOB, JACOBY provided or caused to be provided false, inaccurate, and misleading information to the Auditors. 

For example, in or about October 2015, JACOBY and others prepared a memorandum from Osiris to its Auditors attempting to justify the recognition of $1.1 million of revenue from the Distributor-1 Transaction in the fourth quarter of 2014.  In the memorandum, JACOBY falsely represented that on December 31, 2014, JACOBY had “discussed the sale terms with [Owner-1] via a conference call, and [Owner-1] agreed to purchase 933 units of Ovation for $1,072,950.”  As JACOBY well knew, no telephone call had taken place on December 31, 2014. 

Similarly, on or about November 5, 2015, JACOBY created a letter, backdated to December 29, 2014, purporting to memorialize an agreement between Osiris and Distributor-1 (the “Backdated Letter”).  That same day, JACOBY used his personal email account to send the Backdated Letter by email to Owner-1 stating:

“attached is something that I think you should find and send to me in an email saying you had this in your file from late last year, and just came across it – and that it does memorialize our several phone conversations . . . . . Call me if necessary, but write a wonderfully warm and convincing email, please – send it to my Osiris email.”

Owner-1 complied and sent the Backdated Letter to Jacoby’s Osiris email account.  JACOBY then forwarded Owner-1’s email containing the fraudulent Backdated Letter to the CEO and the then-CFO of Osiris, who forwarded the document to the Auditors. 

           

PHILIP JACOBY, 65, pled guilty to one count of making fraudulent statements to Osiris’s auditors, which carries a maximum sentence of 20 years in prison.  The defendant also faces a maximum fine of $5 million.  Sentencing before Judge Cote has been scheduled for February 2, 2018, at 11:00 a.m.    

The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.    

           

Mr. Kim praised the investigative work of the United States Postal Inspection Service and also thanked the SEC, which filed a parallel civil case today.