Pharmed founders charged with fraud

Jul 22, 2008

Miami Herald--July 22, 2008


Carlos and Jorge de Céspedes, founders of Pharmed, once one of the largest Hispanic owned businesses in the country, were charged Tuesday with healthcare-related wire fraud and income tax evasion in federal court.

They face up to 25 years in prison.

Federal prosecutors filed the charges in an information, which is usually an indication that the defendants are willing to cooperate and plead guilty, but the U.S. attorney’s office refused to say whether that applied in this case.

The healthcare fraud charges relate to an alleged kickback scheme involving $2.5 million to $7.5 million that Kendall Regional Hospital paid Pharmed for goods it never received. Three hospital employees have already been charged in that case, and attorneys for the three say they are cooperating in the case.

The brothers were not immediately available for comment, but earlier this year, they vehemently denied the allegations of an HCA hospital chain attorney that the kickback ”scheme” went ”all the way to the top” of the Pharmed organization, according to a court transcript.

”This is totally untrue,” the brothers told The Miami Herald in a January e-mail. “We would not suggest that because Kendall Regional employees were involved in a scheme that it goes all the way to the top of HCA management.”

In the tax case, the brothers are charged with not paying $8 million taxes on $21 million in allegedly hidden income over three years — 2002, 2003 and 2004.

The tax and healthcare investigations were conducted separately, prosecutors said.

The brothers are expected to make their first court appearance at 1:30 p.m. Tuesday before a federal magistrate.

The dispute about Kendall Regional became public in June 2007 when the hospital’s owner, the HCA hospital chain, sued seven people, including a Pharmed assistant vice president, Erika Urquiza, but not Pharmed itself or the brothers. The lawsuit alleged Urquiza paid kickbacks to two Kendall Regional employees, who then ordered supplies from Pharmed that never were delivered. HCA paid Pharmed $3.5 million for the supplies, the lawsuit stated.

Court documents in the civil suit contain e-mails between Urquiza and hospital employee Victor Garcia that hint others were involved. Garcia frequently asked Urquiza when he was going to get paid. “I beg and plead every day, “ Urquiza responded at one point.

On March 19, 2007, Urquiza sent an e-mail to Sandra Johannes: “ANYTHING? $$$”

Johannes responded: ”Not today, but yes.” Her e-mail was signed with her name and title, executive assistant. Two former employees say she is the executive assistant to the brothers. Three days later, Urquiza received the money.

It’s been a huge fall for the brothers, who in 2003 earned a profit of $48 million. They often showed up in matching Bentleys at Chispa, their restaurant in Coral Gables, which is now closed. They went to basketball games at the Pharmed Arena on the campus of Florida International University. The Pharmed name has since been removed.

Carlos de Céspedes wrote The Miami Herald in an e-mail: “My brother and I are tremendously proud of what we have been able to accomplish in Miami. We’ve built a number of successful businesses that have employed many hundreds of people, paid a lot of taxes and supported a great many important community causes.”

Sons of a Havana dental surgeon, Carlos was 11 and Jorge 8 when they arrived in Miami in 1961 as part of the Pedro Pan exodus, in which 14,000 children were sent out of Cuba by parents who feared the Communist government was about to send the children to camps for indoctrination.

The brothers spent five years in camps in Miami-Dade until their parents arrived. Carlos went to Emory University, Jorge to Florida International. In the 1970s, they became pharmaceutical salesmen.

In 1980, they started Pharmed by installing an answering machine in a small storage room in Carlos’ home.

The medical supply business has complex pricing systems, with hospitals often getting deep discounts. Some distributors try to profit from these steep price differences, and manufacturers have vehemently objected.

That’s usually been done in civil lawsuits, but C. Richard ”Rick” Allen, a Georgia law enforcement official, told The Miami Herald the brothers were under criminal investigation for pricing schemes in the 1980s. That investigation was ultimately stopped without an indictment.

In 1987, Wyeth Pharmaceuticals sued the brothers and others over allegations of improperly obtaining drug discounts. The case was settled out of court in a confidential agreement.

In 1999, similar accusations came up when AmerisourceBergen, a large medical supply wholesaler, sued Pharmed, accusing the company of setting up a corporation to get price breaks. That case, too, was settled out of court.

In 2004, Roche Healthcare, the company’s largest supplier, abruptly stopped using Pharmed. That resulted in a drop of $300 million in annual revenue. In bankruptcy filings, Pharmed said Roche had ”eliminated the use of distributors.” Roche won’t say why it stopped using Pharmed, but a spokeswoman said the company still works with many distributors.

In 2005, Johnson & Johnson stopped using Pharmed, accusing the brothers of ”unjust enrichment” in collecting $22 million in rebates to which they were not entitled. Their dispute went to arbitration. The results were not revealed.

In June 2007, HCA launched its lawsuit. Pharmed filed for bankruptcy in October.