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Law360 (April 6, 2020, 10:01 PM EDT ) Investigators from the U.S. Attorney's Office in Pittsburgh said Monday that they broke up a fake sale of medical masks to protect against the new coronavirus, potentially saving California-based Kaiser Permanente from spending more than $7 million on nonexistent equipment.
U.S. Attorney Scott Brady told Law360 on Monday that an Australian broker allegedly representing a Middle Eastern company that purported to have up to 39 million of 3M's N95 respirators in a Georgia warehouse was working on a deal with a Pittsburgh-based broker to sell masks to Kaiser Permanente. But neither the Pittsburgh man nor Kaiser was aware that the warehouse was a scam, Brady said.
"3M said 'there was no way someone has 39 million masks in a warehouse, because we only make 20 million a year,'" Brady said. "It was clear this was a fraud being perpetrated, not only on the middleman in Pittsburgh but on Kaiser Permanente."
Brady said that a joint state and federal COVID-19 fraud task force was continuing to work with partners overseas to investigate where the scam originated and who might be liable. There were no charges filed as of Monday, but for now, he said, it was a victory to break up a fake deal that might have cost Kaiser millions that could still be spent on real equipment to fight and treat the highly contagious respiratory illness.
The investigation began with a tip to the FBI that someone was trying to broker a deal for millions of N95 masks being held in a Georgia warehouse, Brady said. With emergency powers to investigate hoarders and either seize their hoards or negotiate a fair-market price for the supplies' distribution, he said, investigators from Pittsburgh, Georgia and the FBI went looking for the cache of masks but discovered it did not exist.
The Pittsburgh broker, whom Brady did not name but said appeared to be a legitimate businessman and victim of the scheme, was looking to buy the masks for $3.50 each and make an initial sale of up to 2 million of them to Kaiser Permanente at a slight markup, a representative of the U.S. Attorney's Office said.
A warning about price-gouging and fraud on 3M's website notes that the list price for its N95 respirators ranged from $0.68 to $3.40 apiece.
A representative of Kaiser Permanente said it had been working with intermediaries to source protective equipment in response to the pandemic. The Service Employees International Union-United Healthcare Workers announced it had learned of the purported 39 million-mask cache in late March, and Kaiser was ready to buy up to 6 million masks from the supplier.
"Despite multiple requests, the supplier repeatedly failed to provide reliable information about where we could verify and inspect the shipment," said spokesperson Marc T. Brown. "Because the supplier could not confirm the existence of the shipment, we withdrew from the arrangement and no money ever changed hands. We learned shortly afterward that the supplier never had possession of the masks."
Kaiser was cooperating with investigators and continued to work with intermediaries to successfully buy additional protective equipment, Brown said.
Brady said that since its launch in mid-March, the task force has already investigated 80 substantiated tips of fraud, scams or price-gouging related to the pandemic.
"Every scheme we have seen in the past, whether it's a traditional con man, mail fraud, wire fraud … or all of the cyber-fraud, we're now seeing packaged with a new COVID-19 wrapper," he said.
He said his office recently shut down a website fraudulently claiming to sell medication for fighting COVID-19 from Canada. Other federal authorities around the country are fighting off scams, including a U.K. man charged in Los Angeles with marketing fake cures and scammers claiming to get people their stimulus payments sooner for a fee.
--Editing by Haylee Pearl.
Correction: An earlier version of this article had the wrong price per mask. The error has been corrected.
For a reprint of this article, please contact reprints@law360.com.
