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Law360 (June 24, 2020, 5:44 PM EDT )
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| Craig Carpenito |
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| Nicholas Grippo |
Our mission is clear: to investigate, prosecute — and, where possible, prevent — fraud against the public and the government related to COVID-19.
Among the illegal conduct the DOJ has encountered these past few months is the hoarding and price-gouging of critical medical supplies, including personal protective equipment and other fraudulent conduct that seeks to capitalize on the surging demand for these materials.
This article will address the legal authorities that govern the DOJ's enforcement efforts in combating hoarding and price-gouging, the DOJ's nationwide COVID-19 hoarding and price-gouging task force and its areas of focus, and some of the prosecutions the task force has brought during the pandemic.
The Defense Production Act and the 2020 Executive Orders
The DOJ's principal tool to combat hoarding and price-gouging is the Defense Production Act of 1950,[1] a federal law passed during the Korean War to assist the government in its civil defense and war mobilization efforts.
The DPA confers broad authority on the president to combat hoarding and price-gouging. Under the DPA, the president may require parties to:
- Accept and perform contracts deemed necessary to the national defense;[2]
- Allocate materials, services and facilities in such manner as deemed necessary or appropriate for the national defense;[3] and
- Prohibit hoarding scarce materials in excess of the reasonable demands of business, personal, or home consumption, or for the purpose of resale at prices in excess of the prevailing market price.[4]
The DPA also gives the president a range of administrative and civil enforcement tools to enforce compliance with the act,[5] and imposes criminal penalties for willful violations of the DPA and of regulations and orders issued under the act.[6]
In response to the pandemic, President Donald Trump issued three executive orders delegating these authorities to the secretary of the U.S. Department of Health and Human Services and to the secretary of the U.S. Department of Homeland Security for purposes of preventing hoarding and ensuring the effective allocation of scarce or threatened materials.[7]
In Executive Order 13910, the president delegated to HHS his authority to designate health or medical resources necessary to combat the spread of COVID-19 as scarce or threatened materials, the hoarding of which is prohibited under Section 102 of the DPA.[8] Executive Order 13910 also delegated to HHS the authority to enforce Section 102 using the tools available under the DPA.
Executive Order 13911 delegated these same powers to DHS. On March 25, by published notice, HHS designated 15 categories of health and medical resources as scarce or threatened materials, thus triggering the prohibitions under Section 102 of the DPA. That designation expires 120 days after the notice date, unless superseded by a subsequent notice.
A violation of Section 102 of the DPA requires the government to prove the following: (1) that the defendant accumulated designated materials; (2) that accumulation of at least some of the materials took place after March 25; and (3) that the defendant accumulated the materials either in excess of his or her reasonable needs of business, personal, or home consumption, or for the purpose of resale at prices in excess of prevailing market prices.
To establish criminal liability, the government must also prove that the defendant acted willfully. A violation of Section 102 is a misdemeanor that carries a maximum penalty of one year in prison.
With respect to the DPA's price-gouging provision, the statute does not define "in excess of prevailing market prices," nor have federal courts had an opportunity to interpret it. But the DOJ's enforcement efforts to date, coupled with other publicly available information, provide guidance to practitioners and businesses operating in the PPE markets.
As an initial matter, the decisions the DOJ makes to open investigations or to bring charges seek to help the public health response to COVID-19, not hinder it. This means that, as a practical matter, the DOJ focuses on profiteering.
Many established manufacturers and distributors of PPE have not meaningfully increased their prices since the start of the pandemic, and those prices are publicly available. Accordingly, prices that substantially exceed those benchmarks may trigger government scrutiny.
The DOJ's Hoarding and Price-Gouging Task Force
In March, Attorney General William Barr announced a nationwide task force to address COVID-19-related market manipulation, hoarding and price-gouging. The hoarding and price-gouging task force was directed to develop effective enforcement measures and best practices, work closely with other agencies empowered to designate particular items and equipment as scarce, and coordinate nationwide investigations and prosecutions of these illicit activities.
Each U.S. attorney's office, as well as relevant DOJ components, designated an attorney to serve as a member of the task force. Today, the task force consists of over one hundred federal prosecutors around the country who have prioritized the task force's work in addition to their preexisting duties in their districts.
These prosecutors work with federal and state law enforcement agencies to investigate and prosecute hoarding and price-gouging and related misconduct. And they coordinate their efforts with the task force leadership in the U.S. Attorney's Office for the District of New Jersey, the office of the deputy attorney general, and the office of the attorney general.
Since its inception, the task force has opened hundreds of investigations involving allegations of hoarding and price-gouging, counterfeiting or misbranding of medical devices, and fraud, among other violations. The task force has also commenced numerous enforcement actions. In addition, through prompt and vigorous investigations, the DOJ has disrupted numerous potential price-gouging operations.
Examples of Task Force Prosecutions
Under the task force's leadership, prosecutors around the country have charged multiple cases covering a broad range of allegedly criminal conduct.[9]
On the price-gouging front, federal prosecutors in the U.S. District Court for the Eastern District of New York charged the DOJ's first criminal case under the DPA on April 24 in U.S. v. Amardeep Singh.[10] The complaint alleges that the defendant used his retail sneaker and sports apparel store to amass and sell large quantities of PPE — including face masks, surgical gowns, gloves and disinfectant products — at exorbitant prices.
As one example alleged in the complaint, the defendant purchased disposable three-ply masks for $.07 per mask, but then resold them for $1.00 per mask, a markup of approximately 1,328%.
More recently, in late May, prosecutors in the Southern District of New York announced hoarding and price-gouging charges against a man who allegedly attempted to defraud New York City into paying him approximately $45 million for PPE masks at excessive prices that he did not possess and was not authorized to sell.[11]
The complaint alleges that the defendant offered the city millions of 3M Co. N95 respirators at more than a 400% markup from the list price for such respirators, and separately offered three-ply N99 face masks to the Florida Division of Emergency Management at prices marked up by more than 500% from the manufacturer's prices.
Prosecutors brought similar charges against a licensed pharmacist in New York who, according to the allegations in the complaint, sold N95 respirators to customers for up to 50% more than he paid to acquire them.[12]
Some of the task force's investigations into price-gouging activity have revealed evidence of outright fraud. In these prosecutions, the government alleges the defendants neither possessed the PPE nor had the means to acquire it; instead, these individuals deceived (or attempted to deceive) victims into sending them upfront payments for PPE transactions that never materialized. These defendants typically have been charged with violating the federal wire fraud statute.
For instance, in U.S. v. Donald Allen and Manuel Revolorio,[13] the defendants allegedly misrepresented the nature of their business experience, their inventory of PPE and their right to resell PPE to purported purchasers of PPE. The complaint alleges that the defendants created a website in furtherance of the fraud that falsely claimed that their company had contracts and agreements in place to resell millions of masks and attempted to pressure a potential purchaser to wire more than $4 million to secure those masks.
In U.S. v. Paul Penn,[14] the defendant is accused of attempting to defraud a foreign government in connection with an attempted sale of 50 million 3M Model 1860 respirator masks. The government alleges that Penn, through his company, Spectrum Global Holdings LLC, agreed to act as a middleman in exchange for a cut of the $317 million sales price. The negotiated sales price for these masks was more than 500% higher than the previous normal market value for the masks.
Although the alleged scheme sought to defraud the victim foreign government out of a large upfront payment, law enforcement disrupted a wire transfer from the victim before the funds reached the intended recipients.
The task force's enforcement efforts are not confined to domestic misconduct, or to price-gouging by PPE resellers. Federal prosecutors also have taken action to hold accountable foreign manufacturers who send defective or misbranded materials into the U.S.
In recent weeks, the task force has announced criminal prosecutions against two Chinese manufacturers. In U.S. v. King Year Packaging and Printing Co. Ltd.[15] and U.S. v. Crawford Technology (HK) Co. Ltd.,[16] the government alleges that the manufacturers caused misbranded and defective respirator masks to be shipped into the U.S. in violation of the federal Food, Drug, and Cosmetic Act.
Those masks purported to satisfy certain filtration standards — standards that reflect the masks' ability to guard against the spread of bacteria and viruses — but, as alleged in the complaints, they did not.
The task force's work has not been limited to charging criminal cases. We also have executed warrants to seize evidence, financial accounts that hold funds believed to be proceeds of criminal activity, and stockpiles of PPE. And we have taken steps to reallocate PPE to those in need.
For example, on April 2, the DOJ announced the distribution of PPE, including hundreds of thousands of N95 respirator masks, to those on the front line of the COVID-19 response in New York and New Jersey. The Federal Bureau of Investigation discovered the supplies on March 30 during an investigation coordinated by the task force.
The task force alerted HHS, which used its authority under the DPA to order that the supplies be sold to the U.S. In addition to the N95 respirator masks, the DOJ seized a cache of hundreds of thousands of medical-grade gloves, surgical masks, gowns and other medical supplies. The PPE was ultimately redistributed to state and local authorities for further distribution to front line health care providers.
Conclusion
The DOJ will continue to aggressively investigate and prosecute hoarding and price-gouging of scarce medical materials and other offenses related to COVID-19.[16] If you have information regarding such conduct, we encourage you to report it to the National Center for Disaster Fraud's National Hotline or the DOJ.[17] You can also report such conduct to the U.S. attorney's office in your district or other federal law enforcement agency.
Craig Carpenito is the U.S. attorney for the District of New Jersey and leader of the U.S. Department of Justice's national COVID-19 hoarding and price-gouging task force. Prior to being sworn in as U.S. attorney on Jan. 4, 2018, he was a partner at Alston & Bird LLP and a co-chair of the firm's litigation and trial practice group and its government and internal investigations team. He previously served in the U.S. Attorney's Office for the District of New Jersey from 2003 to 2008.
Nicholas Grippo is an assistant U.S. attorney in the U.S. Attorney's Office for the District of New Jersey and currently serves as the deputy chief of the Criminal Division overseeing the Healthcare Fraud, Opioids Enforcement, Government Frauds, and Asset Recovery and Money Laundering Units. He also serves as one of the regional coordinators for the DOJ's COVID-19 hoarding and price-gouging task force.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of Portfolio Media Inc. or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] 50 U.S.C. § 4501 et seq.
[2] 50 U.S.C. § 4511(a)(1).
[3] Id. § 4511(a)(2)
[4] Id. § 4512.
[5] See id. §§ 4554–4556.
[6] Id. § 4513.
[7] See Executive Orders 13909-11.
[8] 50 U.S.C. § 4512.
[9] The cases discussed below are still pending. They have not resulted in convictions, acquittals, or other dispositions. The defendants in these cases are presumed innocent unless and until proven guilty.
[10] 20 MJ 326 (EDNY).
[11] See United States v. Ronald Romano, 20 Mag 5276 (SDNY, May 26, 2020).
[12] United States v. Richard Schirripa, a/k/a "the Mask Man," 20 Mag 5275 (SDNY, May 26, 2020).
[13] 20 MJ 318 (EDNY, April 27, 2020).
[14] SDGA, May 28, 2020.
[15] 20 MJ 416 (EDNY, June 5, 2020).
[16] 20 MJ 15272 (DNJ, June 17, 2020).
[17] You can call (866) 720-5721. You can also submit a report using the complaint form found at www.justice.gov/coronavirus.
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