The case seemed ready for the government's final press release.
After months of negotiations, Chi Yang agreed to plead guilty in connection with fraudulent sales made by his Dublin, Calif.-based biotech company. Even though he would admit to making a false statement, not fraud, Yang would still have to do prison time. He would also owe hundreds of thousands of dollars in fines and restitution.
Then the deal reached Oakland, Calif., federal Judge Saundra Armstrong.
In what observers call a highly unusual move, Armstrong refused to accept Yang's plea. She raised questions last month about whether Yang actually committed all of the elements of the crime to which he agreed to plead.
"It is not my practice to accept guilty pleas from people who are not guilty," Armstrong said, according to a transcript of the June 10 hearing.
The development represented a stumble in the government's ongoing efforts in the arena of health care fraud. It put prosecutors Stacey Geis and Ioana Petrou in the tenuous position of trying to reformulate the plea agreement with defense lawyer Edwin Prather of Clarence & Dyer -- after the judge appeared skeptical about the government's case. The two sides couldn't agree, and Armstrong recently set a trial date.
"We regret that we were unable to resolve the matter without a trial," U.S. Attorney Joseph Russoniello said in an e-mailed statement. "But, as is true for those cases in which settlement is unavailable, for whatever reason, we are prepared to proceed to trial."
Prather was out of the office last week and could not be reached for comment. According to Stanford Law School professor Robert Weisberg, a white-collar specialist, the situation would have put Prather in an awkward spot, too, vis a vis his own client. The defense lawyer had been advocating for the deal.
"Both sides' lawyers should have known this could happen," Weisberg said.
Yang, an immigrant from Taiwan, borrowed $50,000 from his parents to launch SynPep in the early 1990s, according to court documents. He used his extensive medical training to synthesize peptides, linear chains of amino acids, for laboratory customers, which included the National Institute of Health, Walter Reed Army Medical Center, Lawrence Livermore National Laboratory and Merck.
SynPep did well, but Yang and his employees allegedly took a criminal turn: They supplied customers with false measurements to make it seem that some peptides were purer than they actually were, when in fact they were not what the customer ordered.
Prosecutors hit Yang and his company with a 14-count indictment in 2006, part of a larger push by the government into the health care and biotech space. Petrou, the Northern District of California's health care coordinator, crafted a deal with Brisbane, Calif.'s InterMune for illegal off-label marketing that same year, and she recently had the grand jury indict that firm's former CEO. She is also part of an investigation into Scios Inc., a Johnson & Johnson subsidiary.
"SynPep allegedly falsified graphs that were used in support of cancer or AIDS research, and that research may now be called into question," then-U.S. Attorney Kevin Ryan said at the time of Yang's indictment. "This indictment demonstrates our continuing commitment to ensuring corporate integrity in the biotech industry."
The case was a tough one to negotiate, according to the government, because the highly technical nature of the evidence made loss and materiality difficult to nail down. A settlement conference last fall with Chief Magistrate Judge James Larson failed to produce a plea.
By the spring, though, the two sides had come together. Chang would be sentenced to a year and a day in jail, making him eligible for release in nine months. He would then serve 12 months of home confinement, and be on the hook for a $100,000 fine. SynPep, which shut down following Yang's indictment, would have to pay a $500,000 fine plus $573,000 in restitution. Yang personally guaranteed the victims' award.
NOT SO FAST
Both prosecutors and Prather pushed the deal in their sentencing papers: Geis contended the prison sentence sent a strong deterrent message, while the defense added that Yang's professional reputation would be ruined.
So when it came time to appear before Armstrong last month, the procedure started off like the thousands of plea hearings federal judges routinely administer, sometimes seemingly by rote.
"Mr. Yang, did you have an opportunity to, um, to read this plea agreement in its entirety and to discuss it thoroughly with your counsel before you signed it?" Armstrong asked.
"Yes," Yang said.
"And does the plea agreement represent the entire agreement that you have with the government?"
Things soon went awry.
Geis had trouble describing the elements of the crime. Then, when Armstrong asked Yang to tell her what he did, the defendant tried to read from the plea agreement.
"Count eight is the peptide, the chromatogram was altered," Yang said, referring to the allegedly falsified purity measurement.
"So tell me what you did," Armstrong instructed.
"I didn't do it. I didn't even know that peptide ship out," Yang said, "but the peptide was altered, the chromatogram, by the employees."
This caused a problem for Armstrong, who probed whether Yang could plead guilty if the false statements were made by employees, and Yang was just deliberately ignorant. Eventually, Armstrong concluded that standard to be extremely tough for the government, and declined to apply it.
With Armstrong hammering both Geis and Petrou and musing that perhaps the case should go to trial, Prather requested a two-week break. At that point, his client tried to change his story, saying he did in fact authorize the alterations, just not for the peptides charged in the indictment.
"I have to listen to what you say you did and what you didn't do," Armstrong said. "And then I have to decide on my own whether or not that makes you guilty of the crime. If it doesn't make you guilty of the crime, then I'm not going to take the guilty plea."
"I plead guilty," Yang said. "I plead guilty to --"
The judge cut him off: "You, in my court, you can't plead guilty to a crime that you are not of the position that you have engaged in conduct which makes you guilty of a crime."
These kinds of questions raised by a judge could lead a defense lawyer to conclude that the judge might not even let the case go to a jury, said Quinn Emanuel Urquhart Oliver & Hedges partner John Potter, a white-collar health care defense lawyer who is not involved in Yang's case.
"If the judge has already heard all the facts in the course of a change-of-plea, and upon hearing the facts, the judge concluded those facts don't give rise to crime, at the close of the government's case, the judge could grant a Rule 29," Potter said, which would result in a dismissal.
Of course, it could also go the other way: A jury could convict Yang, who would then face far more prison time than he would have under the plea deal, said Hastings College of the Law professor Rory Little.
The events point to some of the inherent difficulties in the plea-bargaining process, Little said. When prosecutors and defense lawyers agree on a punishment, they must then find a charge that will carry the right sentencing guideline, and then fit the facts into the statute. That can be messy.
"Some judges will accept anything: 'You got health care fraud, the guy's pleading to speeding, I'll take it,'" Little said.
But since signing off on plea bargains has become so perfunctory, the chance for a judge to actually play a meaningful role could be appealing for the jurist, the professor said.
Yang is now scheduled for trial Nov. 3.