It may be tough for people to accept that one of the world's most respected companies faces criminal charges for its alleged role in a multiyear conspiracy to illegally fulfill and distribute pharmaceuticals ordered online. Yet it may be hard for even the most ardent FedEx Corp. supporter to read the 26-page federal indictment without arching an eyebrow.
The 15-count indictment, returned last Thursday by a grand jury in San Francisco, is breathtaking in the scope and severity of its allegations against Memphis-based FedEx; its largest unit, FedEx Express; and its FedEx Services division. The indictment charges that over a period starting no later than January 2000 and running through 2010, FedEx shipped drugs on behalf of two online pharmacies despite being repeatedly notified beginning in early 2004 that they were breaking the law. The government has asked for either a maximum potential fine of $1.6 billion, a figure reached by doubling the government's estimate of FedEx's gross gains from the alleged practices, or having FedEx placed on a five-year probation and paying a lesser financial penalty.
The pharmacies cited in the indictment, Chhabra-Smoley Organization and Superior Drugs, regularly filled and distributed prescription drugs and controlled substances without a doctor's valid prescription or without the recipient having a physical exam or diagnosis or visiting a physician, according to the indictment. Recipients only had to complete an online questionnaire, an illegal means of obtaining prescription drugs or controlled substances, the indictment read.
In the case of Chhabra-Smoley, which operated as an illegal Internet pharmacy and fulfilled orders for illegal pharmacies, FedEx continued to distribute drugs and controlled substances even after Vincent Chhabra, one of the principals, was arrested in December 2003, and the company's main fulfillment pharmacy was shut down, according to the indictment. FedEx employees were aware as far back as July 2002 that state and local officials had closed various online and fulfillment pharmacies operated by Chhabra-Smoley. Yet FedEx continued to ship for the account as it apparently reconstituted itself with Smoley at the helm over the next four to five years, according to the indictment.
In the case of Superior, an illegal fulfillment pharmacy that filled orders for illegal Internet pharmacies, FedEx knew the nature of its operations yet still opened 50 accounts for Superior and its pharmacy customers that enabled Superior to fill orders, the indictment read. FedEx employees would help prepare Superior's packages for shipment even though they were aware the company was operating illegally, according to the indictment.
FedEx's credit policies toward Internet pharmacies played a key part in the conspiracy, according to the indictment. In June 2004, FedEx established an online credit policy dedicated to online pharmacies. During the 2004-2006 time period, as the government intensified its crackdown on illegal online pharmacies, FedEx ordered that all of its online pharmacy accounts be placed on restricted credit terms and that applicants provide FedEx with a security deposit or a bank letter of credit, according to the indictment. The purpose of the policy tightening was to stanch the flow of lost revenue arising from FedEx's shipping large quantities of drugs only to be left holding the bag as pharmacies operating illegally were put out of business, the indictment said.
The closure of illegal online pharmacies also hurt sales employees whose compensation was pegged in part to beating their prior year's results. To protect those employees while continuing to do business with rogue accounts, FedEx decided in March 2007 to reclassify all known online pharmacy accounts to "catchall" status, according to the indictment.
So-called catchall accounts were not assigned to a specific account executive. In addition, the performance of an account placed in this category did not impact the yearly sales goals of sales executives or their managers, the indictment read. According to the indictment, the move was prompted in part by a 2006 comment attributed to an unidentified managing director who told a vice president of sales that "these types of accounts will always result in a loss at some point. They have a very short lifespan and will eventually be shut down by the [U.S. Drug Enforcement Administration]."
FedEx's policies also put its drivers in harm's way, according to the indictment. Starting in 2004, FedEx drivers reported customers demanding packages or jumping on the vehicles to demand the package. Drivers would be threatened if they didn't relinquish a package on the spot, according to the indictment. In response, FedEx began holding high-risk packages for pickup at designated stations rather than deliver them to the respective addresses, according to the indictment.
FedEx issued a statement declaring its innocence and vowing to vigorously fight the allegations. In the statement, Patrick Fitzgerald, FedEx's senior vice president, marketing and communications, said the company would immediately shut off shipping privileges for illegal pharmacies once the government provided it with a list of those companies. Although it has asked for such a list, none has been provided, the company said.
FedEx framed its argument largely as a privacy issue, saying it has no authority to invade its customers' privacy. In a controversial statement, FedEx said the government is suggesting that the company assume "criminal responsibility" for the legality of the contents in each of the 10 million packages it carries each day.
In March 2013, UPS Inc., FedEx's chief rival, paid $40 million in what is known as a "nonprosecution agreement" with the government to settle charges similar to those levied against FedEx. In the aftermath of the settlement, UPS beefed up its compliance and training programs, according to Susan L. Rosenberg, a company spokeswoman. UPS also joined the "Center For Safe Internet Pharmacies," a coalition of large Internet, e-commerce, and credit card companies tasked with promoting the use of safe online pharmacies through education, enforcement, and information sharing.
Rosenberg said the charges brought against UPS were not as detailed as the allegations in the FedEx case. Unlike FedEx, UPS does not believe the issue of online pharmaceutical distribution is built around privacy concerns. "It's a matter of supply chain integrity," she said. Rosenberg added that she doesn't recall any worries at UPS that it was being asked to police the contents of its customers' shipments.
Satish Jindel, president of consultancy SJ Consulting, said the indictment does little but demonstrate the government's desire to grandstand in an effort to grab headlines. FedEx employs thousands of people all over the world, and low-level employees being unaware of the circumstances, he said, could have carried out the alleged misdeeds. FedEx has a well-deserved reputation for integrity, and there is no way top management would have encouraged employees to break the law, he said. Jindel added that the company is not law enforcement and should not be responsible for determining what companies can operate legally and which cannot. He believes it will reach a settlement similar to that of UPS.
The financial markets have taken a sanguine view of the matter. FedEx stock has been climbing since July 18, the first day of New York Stock exchange trading after the indictment was filed. David G. Ross, who follows FedEx and the parcel industry for Stifel, Nicolaus & Co., said in a Monday note that investors are dismissing the issue as "nonsensical" and immaterial to the company's financial outlook. Ross said the company's decision to hold certain packages at pickup locations reflects concerns over employee safety and customer privacy and not a willingness to "turn a blind eye" to unlawful shipments.
The more significant impact, according to Ross, would be a greater regulatory compliance burden on transportation providers, which could cause shipment delays and further stress an already overtaxed U.S. infrastructure. "Without sharper regulatory guidelines, imputing liability for failing to generally determine the contents of a package could be a slippery slope," he said.