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In the spring of 1995, the Bayer Corp. had a problem. One of the drug maker’s major customers, the Kaiser Permanente Medical Care Program, was demanding a price break on an antibiotic that it bought in bulk for its members. At risk was Bayer’s $7 million in annual sales to Kaiser, the largest U.S. health maintenance organization, for Cipro, the medicine that became famous years later as the drug of choice for anthrax. The problem was the federal government. Bayer also sold Cipro to the Medicaid program, which provides health insurance for the poor. By law, drug sales to Medicaid must be essentially at the lowest price offered in the marketplace. A straightforward discount to Kaiser would require Bayer to pay Medicaid millions in rebates. Bayer, the U.S. subsidiary of Germany-based Bayer A.G., solved its problem with a “private labeling” program. The drug was still made by Bayer at its West Haven, Conn., facility, now bearing a Kaiser federal identification number. It was sold to Kaiser at a 40% discount, a new lower price not reported to the government. Playing a key role in launching this money-saving scheme was a newly promoted young Bayer marketing manager named George Couto. He did not invent the program-it was actually suggested by Kaiser. Instead, he helped negotiate and start it. More than four years later, the deal became the subject of a suit under the federal False Claims Act. By failing to report the Kaiser price for Cipro and a second drug, Adalat, the suit claimed, Bayer had defrauded the government of more than $100 million. In April of this year, in the largest Medicaid fraud settlement in U.S. history, Bayer agreed to plead guilty to a felony and to pay $257 million to settle the civil and criminal cases. The person behind these cases: the same George Couto, the plaintiff under the whistleblower law. Couto’s journey from corporate problem solver to whistleblower highlights a controversial aspect of one of the federal government’s more controversial business laws. Individuals who blow the whistle on corporate scandal can collect as much as 30% of any money recovered, even if they were complicit in the fraud. Payoffs to whistleblowers have been allowed since the False Claims Act (FCA) was passed during the Civil War to stop military suppliers from cheating the government. As one senator said at the time, the idea was to use “a rogue to catch a rogue.” The statute A 1988 amendment to the law imposed limitations. A judge may reduce an award if an individual “planned and initiated the violation.” A whistleblower convicted of a crime based on his role in the act cannot receive anything. No one accused Couto of initiating the labeling scheme. He joined the Kaiser negotiations in midstream. However, he admitted in a videotaped deposition that even as he negotiated the deal he suspected that it might be illegal. He continued to negotiate, closed the deal and then sought praise and a prestigious Bayer company award for his success. Corporate attorneys have complained for years that the whistleblower law offers a “lottery” ticket to disgruntled or conniving employees who participated in-and in some cases instigated-fraud. The government calls the statute a necessary weapon against defrauding the government, particularly in defense and health care. The law was revised in 1986 to give whistleblowers a greater percentage of any recovery. Since then, there has been a sharp increase in cases, with the government recovering more than $6.4 billion from companies. Although Bayer settled, it claims that the private labeling was legal. And its attorneys believe that Couto lied by saying that Bayer executives went forward with the deal even though they too suspected it was illegal. Couto cannot defend himself. Three months after his deposition and five months before the case settled, he died at age 39 of pancreatic cancer. “It was the bravest performance I think I have ever seen because he was so sick,” Assistant U.S. Attorney Susan G. Winkler said of Couto’s deposition, taken to preserve his testimony in case of a trial. She prosecuted the case for U.S. Attorney Michael J. Sullivan in Boston. Couto’s attorney, Neil V. Getnick of New York’s Getnick & Getnick, called Couto a hero and said his testimony was “the most extraordinary act of bravery I have ever witnessed.” Bayer’s outside counsel, Thomas C. Green, a partner in Chicago-based Sidley Austin Brown & Wood’s Washington office, sees it differently. “My own assessment is that his allegations were not worthy of belief,” Green said. “I think he was heavily engaged in revisionist history.” As the case worked its way through the justice system, millions were at stake for Couto, then his heirs. The beginning Couto had joined Bayer in 1992 in West Haven as a pharmacy affairs manager. A graduate of the Massachusetts College of Pharmacy, he had spent 10 years working as a pharmacist and pharmacy consultant. In 1995, he was promoted to corporate account manager, replacing Alan Mello, who had begun negotiating the new Cipro deal with Kaiser. Couto’s new position put him in the thick of the negotiations. If Bayer failed to offer a sufficient discount to Kaiser, Mello had said in a memo, Kaiser would turn to competitor Johnson & Johnson for a less expensive antibiotic. A memo from Mello to Ronald Wright, a Bayer in-house lawyer, indicated that Kaiser had requested so-called private labeling of the Cipro bottles as a way to meet Kai-ser’s price demands. A Kaiser executive said the company had used private labeling in the past, Couto testified. Bayer sought the advice of outside counsel to make sure the private-label deal was legal under the “best price” law. It turned to outside counsel Kinsey S. Reagan, a partner with Washington’s Kleinfeld, Kaplan & Becker. Reagan wrote to Bayer counsel Wright that it was “reasonable to conclude” that the proposed deal was legal. He based his conclusion, he said, on Department of Health and Human Services regulations and a conversation with a government official. Couto received a copy of Reagan’s memo. He then proceeded, during the summer of 1995, to complete the deal with Kaiser. Couto’s deposition was given at the U.S. attorney’s office in Boston during four, four-hour sessions conducted from Aug. 15 to Aug. 18, 2002. The short days were meant to accommodate Couto, who was between chemotherapy sessions, his attorney, Getnick, said. “It was my responsibility to, basically, pick up where Alan [Mello] left off and continue to investigate the what we call operational or the process of bringing that contract and the manufacture of the drug to fruition,” Couto said in his videotaped deposition, appearing thin but otherwise not showing signs of his illness. “And what did you do to fulfill those responsibilities?” asked prosecutor Winkler, deputy chief of the U.S. attorney’s health care fraud unit. “A variety of things,” Couto said. “Internal discussions with senior management about what such a program entails, education or discussion with the folks on the production side so they would know what this would involve for them in the production side and, quite honestly, direct negotiations with Kaiser.” During this deposition, Couto comes across as a meticulous professional who produced copious notes and detailed memos during his days at Bayer. These documents, however, left a contradictory paper trail, which Bayer’s counsel, ultimately, would try to exploit. In a memo to his boss, Len LaBonia, Couto boasted about his role and that of a dozen other Bayer employees who worked on the Cipro deal. “Faced with the potential of losing all of Kaiser’s [Cipro] business . . . due to deep, deep discounting and our need to balance Kaiser’s sales with impact on [government] best pricing scenarios, Brian Shortell, and myself constructed various contracting scenarios,” he wrote. He went on, “Kaiser’s challenge to us was unlike any other we had. We responded professionally, efficiently, and most of all, very quickly. We could not have done so without those mentioned above, their supportive personnel, and senior management support.” Award seeker Couto later sought for himself and his Kaiser-Cipro team a company honor called the President’s Achievement Award, even though he had testified that early in the process he thought the private labeling was “potentially illegal.” He said he had doubts about the value of the advice from Reagan and had discussed his doubts with Bayer counsel Wright and other executives. Couto claimed that Reagan, in 1993, had given Bayer poor advice concerning the legality of Bayer paying pharmacists to promote its hypertension drug Adalat. The program was ended abruptly after 11 states claimed Bayer was making illegal payments. The company settled with the states for $605,000. Couto testified that “it was a little bit unbelievable that we were going back to the well, so to speak, to ask K.S. Reagan his legal advice on this new private labeling program when in our opinion, my opinion especially, he did us quite a disservice two years earlier in the pharmacy information program.” Reagan, in a faxed reply to The National Law Journal, said he “strongly disagreed” with Couto’s characterizations and opinions on his representation of Bayer. He refused to comment further. Wright is deceased. Bayer outside counsel Green believed the government’s case rested on Couto’s credibility. Seeing Couto as full of contradictions, he tried to portray him as an opportunist who tried to capitalize on the Kaiser deal, then sought to make millions by attacking it. “Were you a participant in the conspiracy that you allege occurred at Bayer with respect to the private-labeling program of Kaiser?” Green asked. “I was a facilitator of the program,” Couto responded. “Do you believe that being a facilitator makes you a co-conspirator?” “Well, when I took over the job, the decision to move forward really had already been made, and it was my job to continue to see it through.” “Did you ever take credit for the private-labeling program?” “The answer is yes, but there is a ‘but’ that goes along with that.” “Well, give me the but.” “I took credit for the program not because of what the program did so far as evasion of Medicaid and best prices. I took credit for the program more on my actions and how I was able to get the entire company to do something in a relatively short period of time, including folks from regulatory, quality assurance, production, people who really never spoke to each other on a daily basis. I took credit for the ability of the team to do something.” “You took credit for the ability to convince a team of people to do something illegal?” “I didn’t say that.” “Well, you think what you did was illegal; isn’t that right?” “I think what we did was illegal, right.” “So then aren’t you taking credit for putting a team together to do something that was illegal which you then understood to be illegal?” “The decision to private label Cipro had already been made. I took credit and I was proud of the fact and still am of the people that were able to work on a project to get it done.” A few moments later, Green asked, “So your testimony is that throughout your tenure as the market manager for HMOs and with respect to this program with Kaiser, you yourself did nothing wrong; is that right?” “No, I didn’t say that either.” “Which is it? Did you do something wrong or not do something wrong?” “I was part of a whole group, a facilitator of the program, that launched the initial private labeling in 1995.” “Well, tell me in your own mind, in your own words, did you do something wrong or didn’t you do something wrong?” “In retrospect, it should not have been done.” Architect Green said in an interview that 12 to 18 current and former Bayer employees would have testified that “Mr. Couto was one of the principal architects of the private label project and was enamored of his creativity in that regard and throughout his career at Bayer sought to take credit for the program.” None of the more than 20 individuals who worked closely with Couto on the Kaiser deal and were mentioned either in his memos or in his deposition would talk to the NLJ . Bayer told its employees not to speak to the press about the case. In addition, a federal grand jury in Boston had been investigating the Bayer-Kaiser transaction and employees of both companies were called as witnesses, a lawyer involved in the case said. The investigation has since ended with no indictments. Couto’s lawyers dismiss criticism of Couto and portray him as a responsible manager who didn’t fully realize that Bayer had done something wrong until well after the deal was done. Couto testified that his enlightenment came precisely on Feb. 9, 1999. That morning he attended a mandatory ethics training class at Bayer at which a video of Helge Wehmeier, then the company chief executive, was shown. “And in that video he says everyone is expected to obey the law, not only the letter of the law but the spirit of the law as well,” Couto testified. Later that day, Couto attended a staff meeting at which it was disclosed how much revenue Bayer kept from the Medicaid program because of the private labeling with Kaiser over Cipro and, later, the drug Adalat. The amount was $97 million over four years, Couto testified, far more than the $2.8 million a year he had first calculated. Two days later, Couto claimed, he placed a sealed envelope, containing a message, on the desk of LaBonia, his boss. “According to the class on ethics training that I attended on February 9th, Wehmeier’s video calls for us obeying ‘not only the letter of the law, but the spirit of the law as well,’ ” Couto’s note said. “ I’m wondering how this should be interpreted regarding [Bayer's] continued and expanded private labeling activities?” Couto said LaBonia never responded to his memo. Couto said he also called an 800 fraud “hot line” at the federal Healthcare Finance Administration. Since he only got a recording, he did not leave a message, he said. LaBonia declined to comment. Late in 1999, after reading about Getnick & Getnick’s success representing whistleblowers, Couto contacted the firm and laid out his claim. “Right from the start, this case appeared quite serious, the evidence quite strong,” Getnick said. In February 2000, a year after the ethics class, Couto filed his whistleblower suit against Bayer. Under the law, because the Department of Justice decided to intervene in the case and file suit, Couto was entitled to between 15% and 25% of the government’s recovery. Couto testified that he decided to sue after talking with co-workers and reading news accounts of whistleblower cases. “Are you telling me that at no time did you ever stop even in your head to make a kind of tentative calculation of what 25 percent of 97 million might be?” Green asked. “No, I didn’t say that,” Couto said. “I said I never consciously made a computation of what a recovery would be since I have no basis for what the dollar amount would be. I know percentages. I know 97 million.” “Did you make any unconscious assessment of it?” “I don’t know what I do unconsciously.” “You never kind of in your most imaginative moments tried to reflect on what 25 percent of 97 million would be and what you might earn or be awarded in the course of this litigation? Never happened-is that what you’re telling me?” “I think it was more if there was a settlement, I might be lucky enough to enjoy some of that money, yes.” Later: “If it was not your intention to make money when you filed your suit, I think I should ask you to share with me why you did file your lawsuit.” “Well, it’s pretty simple actually. I was-I continually got more and more uneasy as the private-labeling program expanded, as more people learned about it, as Bayer began to use it almost as a routine marketing practice. It was one drug, then it was two drugs and now it’s three drugs and then it was . . . doing something that I knew never was in the intent of the law, certainly the spirit of the law.” On April 16, the U.S. attorney’s office in Boston announced the $257 million settlement and plea agreement with Bayer. The amount included a $5.6 million criminal fine and full restitution to the Medicaid program, plus “substantial additional damages,” a memo by Winkler said. She would not say how much. Bayer pleaded guilty to one felony count of failing to list private-label Cipro with the Food and Drug Administration in 1995, a crime that is much less than what Couto alleged. Winkler said the government was satisfied with the resolution because the settlement went beyond full restitution; because Bayer agreed to institute a corporate compliance program; and because Bayer would make direct payments to damaged parties, including state Medicaid programs and government-subsidized clinics and hospitals covered by a similar best-price law. Winkler wrote in her memo that the death of Couto was a factor in reaching the plea. With his deposition possibly not admissible in a criminal trial, the government might have faced evidentiary obstacles in trying to prove that Bayer intended to defraud the government. Getnick, Couto’s lawyer, said, “The fact that George Couto would not be available to testify, and the risk that his deposition could not be used in court was a litigation risk for the government and likely improved Bayer’s position in negotiating a criminal plea.” Green said Couto’s testimony wasn’t a factor in Bayer settling. “I thought George Couto was thoroughly unconvincing and thoroughly unworthy of belief and presented no substantive or corroboration to his claims,” he said. “By and large, he was not a compelling factor in our equation.” Green acknowledged that one reason Bayer agreed to settle was that the Justice Department agreed not to try to exclude Bayer from doing future business with the government. Another Bayer attorney, Nathan C. Sheers, also of Sidley Austin, said in an e-mail, “Bayer maintains that the practice of private labeling itself was not wrong, improper or fraudulent in any way, as alleged by Mr. Couto and the government.” Asked if Couto was complicit in the fraud, Winkler replied, “When Congress enacted the False Claims Act, Congress made a determination that people who know about and to some extent are involved in conduct are the people who should be rewarded for doing the right thing and turning in the wrongdoers.” Getnick said, “I believe that George Couto told the truth. I believe he was subjected to significant cross-examination, and I believe his testimony held up.” A critic One of the leading corporate defense experts on the False Claims Act said in an interview about the law that Congress should alter it so that complicit whistleblowers cannot benefit. “The FCA . . . encourages whistleblowers to allow fraudulent conduct to continue because it increases the damages,” said John T. Boese, a Washington-based partner at New York’s Fried, Frank, Harris, Shriver & Jacobson. A whistleblower should be required to report the conduct to the compliance officials in the company . . . .If the person is personally involved in the wrongful conduct, why should all the other employees and shareholders have to pay for that crooked employee’s conduct?” Boese is the author of Civil False Claims and Qui Tam Actions. Getnick said the law provides much-needed protection for the public. “The bottom line is that citizens don’t like corporations stealing from the federal government,” he said. The share of the recovery that a successful whistleblower gets is decided by the prosecution and the whistleblower’s lawyer, unless they can’t agree and then a judge must decide. The amount is based on the whistleblower’s contribution to the case. Because the government intervened, Couto’s maximum possible share was 25%. Winkler said that she doesn’t know of a whistleblower ever receiving the maximum. Couto came close. He was awarded 24% of the federal government’s share, $34 million. Divorced, he said in the deposition, his three young children are the main beneficiaries. His family, through Getnick, declined to comment. Aronson’s e-mail address is [email protected].

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