Anthony Civella

ANTHONY CIVELLA

Anthony "Tony Ripe" Civella

Antony Civella - son to Carl Civella, nephew to Nick Civella - was a powerful member of the Kansas City mafia. He was boss of the Kansas City family from 1983 until his death in 2006.

Anthony Civella was one of fourteen alleged mafia members who were served subpoenas after stepping off an airplane on March 2, 1969, requiring them to appear before a Federal Grand Jury investigating organized crime in Miami at 9:30 a.m. on March 5.

Anthony was an educated mobster. He was a pharmicist and owner of Duke's Plaza Drugs in Kansas City, MO.

Civella was licensed to sell liquor at Duke's Plaza Drugs until 1962 when his liquor license was revoked for violating the Sunday sales law.

In 1991 Civella was convicted on eight counts of fraud for illegally diverting pharmaceuticals during the 1980's. He was sentenced to 4 years in prison, and released in 1996.

The practice of illegally diverting prescription and over-the-counter (OTC) drugs is very common. In fact, the diversion schemes used by today's large pharmacetuical companies are basically the same as the one that led to Civella's felony conviction.

Civella defrauded Medicaid and Medicare for hundreds of thousands of dollars per year by diverting drugs through bogus long term care pharmacies. Today's big pharma executives use the same diversion scheme to defraud the government and taxpayers for tens of billions of dollars each year.

In 1993 Civella appealed his conviction, but the original guilty verdict was affirmed.

UNITED STATES of America, Appellee,

Donald V. COSTANZO, Appellant - Scott A. CLAWSON, Appellant - Anthony Thomas CIVELLA, Appellant.

Donald Costanzo, Scott Clawson, and Anthony Civella appeal from their convictions in the District Court on an array of mail fraud, wire fraud, and transportation of stolen goods charges. See 18 U.S.C. Secs. 1341, 1343, 2314 (1988). Civella also appeals from his sentence. For the reasons set forth below, we affirm.

The charges in this case arise out of a scheme to "divert" pharmaceuticals. Costanzo, Clawson, and Civella controlled a number of institutional pharmacies (that is, pharmacies that provided medication to patients in institutional settings such as nursing homes) in the Kansas City area. The scheme for which they were prosecuted involved the purchase of pharmaceuticals by these pharmacies and the subsequent resale of the drugs to a pharmaceutical wholesaler. It resulted from a particular opportunity available to institutional pharmacies: namely, drug manufacturers sell pharmaceuticals to institutional pharmacies at prices that may be as low as twenty-five percent of the prices at which the companies sell drugs to other customers. Defendants were able to garner large profits merely by reselling to a wholesaler drugs purchased from manufacturers at institutional prices.

One reason that drug manufacturers offer institutional pharmacies low prices is that manufacturers recognize that the amount that insurance companies and the government, which pay for many of the patients in institutions, will reimburse for pharmaceuticals is relatively low. In addition, drug manufacturers want doctors in institutions to be able to prescribe the manufacturer's drugs, since this increases the chances that the doctors will prescribe the same drugs to patients the doctor sees in other contexts. Finally, manufacturers hope that patients who are treated with a certain drug in an institutional setting will continue to use that particular medication after they are released from the institution.

In order to ensure that the sale of deeply discounted drugs to institutional pharmacies does not undermine their ability to sell to other purchasers at normal wholesale prices, manufacturers include what are known as "own-use clauses" in the contracts under which they sell drugs to institutional pharmacies. These clauses provide that drugs purchased at institutional prices may be dispensed only to patients in institutional settings. The clause used by Ciba-Geigy Corporation, the drug manufacturer involved in most of the instances of diversion for which defendants were charged, is fairly typical and provides that:

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The events underlying this case began in 1985 when Costanzo and John Sansone formed a partnership with Lou Ferro, Sr., and Lou Ferro, Jr., to start an institutional pharmacy servicing nursing homes in Kansas City. The Ferros already owned a retail pharmacy in Kansas City named Penn Park Pharmacy, and the new partnership began to serve patients in nursing homes, as well as members of the general public, out of this pharmacy. Although the pharmacy was providing drugs to patients in institutional settings, it was not purchasing drugs at institutional prices. Business grew rapidly and before long Clawson was hired as an additional pharmacist. - Related: MO Board of Pharmacy Disciplinary Hearing

In 1986, Costanzo, Sansone, and both Ferros travelled to Las Vegas to investigate the possibility of opening another pharmacy to service a nursing home there. While in Las Vegas, they met Wilbur Swift and Martin Rubin, the owners of B.W. Wholesale, a pharmaceutical wholesaler that specialized in purchasing diverted pharmaceuticals. Swift suggested that Penn Park Pharmacy purchase drugs at institutional prices and resell them to B.W. Wholesale. Swift offered to pay Penn Park Pharmacy the cost of diverted pharmaceuticals plus a twenty-five percent markup and to pay all shipping costs. Swift said that diversion was legal, but that the pharmacy should not sign an own-use clause or B.W. Wholesale would not be able to purchase diverted pharmaceuticals from it. -- Related article: When Good Drugs Go Gray; Booming Underground Market Raises Safety Concerns , Counterfeit Drugs

After returning from Las Vegas, Costanzo asked Ferro, Jr., to investigate Swift's proposal. Ferro, Jr., attended a trade convention in New Orleans and spoke with representatives of pharmaceutical companies who informed him that Penn Park Pharmacy could purchase pharmaceuticals at institutional prices for its institutional patients. These representatives also told him that pharmacies could only purchase drugs at institutional prices if they signed own-use clauses and that these clauses prohibited the resale of the pharmaceuticals. Ferro, Jr., relayed this information to Costanzo and said that he did not believe that they should resell pharmaceuticals purchased at institutional prices.

In December 1986, Penn Park Pharmacy applied to join GeriMed, a buying group through which institutional pharmacies purchase drugs from manufacturers at institutional prices. To satisfy GeriMed's membership requirements, the pharmacy had to conduct its institutional business out of a location separate from its retail business. Therefore the partnership opened up a pharmacy named Penn Park Institutional Pharmacy ("Penn Park") at a new location. Shortly after this institutional pharmacy was opened, Costanzo and Sansone quarreled with the Ferros and the partnership was dissolved--the Ferros kept the retail pharmacy they originally had owned, and Costanzo and Sansone took the institutional pharmacy. Clawson also moved to the institutional pharmacy.

Following the split, Sansone executed institutional pricing contracts and credit applications on behalf of Penn Park with a number of individual drug manufacturers. Like the contract that the pharmacy executed with GeriMed, these agreements contained own-use restrictions so clearly set forth that anyone perusing the typically one-page agreements would recognize the restriction. Nevertheless, Sansone told Clawson and Robert Shuey, the other pharmacist at Penn Park, that he was planning to purchase drugs through the pharmacy and resell them to a wholesaler. Sansone also told Clawson and Shuey that this was a grey area under the law and asked them not to tell anyone about the diversion.

In the late spring of 1987, the actual drug diversion began. Sansone controlled the operation on Penn Park's end. The decision of what drugs to order for purposes of diversion, however, was based on purchase orders submitted to Penn Park by B.W. Wholesale. These purchase orders were structured to prevent drug manufacturers from detecting the diversion, principally by limiting the quantities of drugs ordered to quantities that B.W. Wholesale thought would not provoke suspicion. Although Penn Park was servicing some nursing homes, and therefore legitimately purchasing some drugs for its own use, the vast majority of the drugs Penn Park purchased once the diversion began were merely repackaged and shipped to B.W. Wholesale.

In September 1987, managers at G.D. Searle & Co.* ("Searle"), a pharmaceutical manufacturer from which Penn Park was purchasing drugs, began to question the large quantities and the unusual assortment of drugs that Penn Park was purchasing. Searle requested that Penn Park provide an audit of the drugs that Penn Park had purchased from Searle. Penn Park initially failed to provide the requested information, and Searle suspended the pharmacy's institutional pricing privileges.

* On May 23, 1985, Donald H. Rumsfeld, Secretary of Defense in the George W. Bush administration, who had served as president and chief executive officer at Searle since 1977, was named chairman.

Clawson then conceived the idea of creating fake drug utilization reports for nonexistent institutional patients that would show that the drugs purchased from Searle had been prescribed to these patients. Under Clawson's direction, an extensive effort to create fake drug utilization reports began. Several people worked keying patient profiles into the pharmacy's computer from 10:00 p.m. to 3:00 a.m. for three or four nights in a row, and the fake drug utilization reports then were submitted to Searle. The reports, however, failed to account for anywhere near the quantity of pharmaceuticals that Penn Park had purchased from Searle, and Searle terminated its contract with Penn Park. GeriMed too ended its relationship with Penn Park.

In December 1987, Sansone committed suicide. Thereafter Clawson ran Penn Park, including the diversion operation. In early 1988, the Missouri Board of Pharmacy conducted an audit of Penn Park. Wilson Winch, the auditor, determined that over ninety percent of the twenty drugs audited was unaccounted for (for a total of 770,000 missing pills of those twenty drugs alone). When Winch questioned Clawson, Clawson said that Penn Park was able to obtain institutional pricing because it serviced only nursing home patients. Clawson denied knowledge of any drugs being diverted to a wholesaler, saying that Sansone ran the business office and that he himself had nothing to do with that office. Winch's investigation was referred to the FBI.

In the spring of 1988, Sansone's heirs and Costanzo decided to sell Penn Park to Harvey Haynes. During and after negotiations for this sale, Costanzo and Clawson attempted to persuade Haynes to participate in diverting drugs, but Haynes repeatedly refused, insisting that such activity was illegal. The dialogue concerning the legality of diversion appears to have revolved principally around federal statutes regulating the pharmaceutical industry rather than around the own-use clauses in Penn Park's contracts. At one meeting attended by Clawson, however, Haynes's attorney said that signing a contract containing an own-use clause, intending all the while to violate the clause, could be considered fraud. The attorney subsequently repeated this opinion at a meeting attended by Costanzo. Following the sale of Penn Park to Haynes, diversion stopped at Penn Park. Shortly thereafter, Haynes fired Clawson.

Following his discharge at Penn Park, Clawson established a new institutional pharmacy named Care Pharmacy ("Care"). The earliest connections between Civella and diversion arise out of the establishment of Care. Clawson told an acquaintance that Sansone's widow's family was helping him finance Care; Sansone's widow, Fanny Jo Sansone, is Civella's daughter. In addition, by the time Care was founded, Swift and Rubin, the owners of B.W. Wholesale, had parted ways. Swift and Rubin became involved in a bidding war to obtain Care's diversion business that resulted in Rubin getting Care's business and in the markup Care earned on diverted pharmaceuticals increasing to forty percent (as compared to the twenty-five-percent markup at Penn Park). The determining factor in the decision of whether to deal with Swift or Rubin, however, does not appear to have been price; when Swift asked why he had not received Penn Park's business, Costanzo said that "the number one person in Kansas City liked Marty [Rubin] and thought he was a good kid and wanted to give him a chance." Transcript at 598.

Clawson travelled to Las Vegas to discuss the establishment of Care's diversion operation with Rubin. Rubin told Clawson that he should not use the mails or wires in executing the diversion, since to do so was illegal. Rubin understood that using the mails or wires in executing the diversion scheme could be mail fraud or wire fraud; it is not clear, however, that he communicated this reasoning to Clawson. Upon returning to Kansas City, Clawson executed, on behalf of Care, an application to purchase pharmaceuticals from Ciba-Geigy at institutional prices; this one page application contained a boxed, bold-faced own-use agreement. Care, however, never had a business location and never served any patients; rather, Care operated out of Clawson's residence and diverted all of the drugs it purchased. The vast majority of the drugs diverted by Care were Ciba-Geigy drugs.

The Ciba-Geigy salesman with whom Clawson dealt, Wilbur Dannar, was an experienced salesman who should have recognized from the quantity and selection of drugs Care was ordering that Care was diverting. This is particularly true since Dannar personally called Care's orders in to Ciba-Geigy, something Dannar did not do for his other customers. Dannar also would have known that Ciba-Geigy would not allow pharmaceuticals to be shipped to a residence that necessarily would lack appropriate storage facilities. Dannar ultimately was fired by Ciba-Geigy in 1991 as a result of his involvement in, or failure to detect, the diversion operation at Care and at the other institutional pharmacies operated by Costanzo, Clawson, and Civella. Dannar testified before the grand jury but died ten days before the trial of this case began.

In early 1989, Kian Shafe, a friend of Costanzo's, opened yet another institutional pharmacy, Kendallwood Pharmaceutical Company ("Kendallwood"). Clawson, who was hired as Kendallwood's pharmacist, told Rubin that this pharmacy was being opened to allow more drugs to be diverted without attracting the notice of drug manufacturers. At a meeting attended by Costanzo, Clawson, Civella, and Shafe, it was agreed that profits from the diversion operations at Care and Kendallwood would be divided with Costanzo, Clawson, and Fanny Jo Sansone's family receiving twenty-five percent each, Shafe receiving fifteen percent, and Carl Artese (a co-defendant whose case resulted in a hung jury) receiving ten percent. Clawson was to handle the diversion operation at both pharmacies. Under his direction, Kendallwood, like Care, dealt with Dannar at Ciba-Geigy, executed an application (containing an own-use clause) to purchase pharmaceuticals from Ciba-Geigy at institutional prices, and diverted all of the drugs it purchased. As at Care, the vast majority of the drugs diverted were Ciba-Geigy drugs.

Tape recordings made by law enforcement personnel of phone calls to and from Civella's residence in the spring of 1989 substantiate Civella's involvement in the diversion operation. In one conversation, Clawson said that he needed to write Civella a check and arranged a meeting with him. Police monitoring the meeting observed Clawson write a check and hand it to Civella; although no check written by Care to Civella himself was discovered, Clawson wrote a check on Care's account to Vince Civella, Civella's son, on the date of the meeting. In a second conversation, that was redacted before being played to the jury to exclude privileged statements, Clawson and Civella discussed the own-use clauses in the pharmacies' contracts. Finally, in a third conversation that followed a disagreement among Clawson, Shafe, and Artese over whether Artese's name should be added to the Care account, Civella told Clawson not to add Artese's name.

The diversion operation at Penn Park, Care, and Kendallwood was responsible for the diversion of a large quantity of pharmaceuticals. The government identified checks written by B.W. Wholesale and an affiliated company for pharmaceuticals diverted by Penn Park in the approximate amount of $814,000, and for pharmaceuticals diverted by Care and Kendallwood in the approximate amount of $309,000; thus defendants received payments for diverted pharmaceuticals in the approximate amount of $1,123,000. Based on the twenty-five-percent markup earned at Penn Park and the forty-percent markup earned at Care and Kendallwood, the profits from the diversion operation would have been roughly $251,000.

Throughout the events discussed above, defendants seem to have had concerns and discussions about the legality of diversion. At meetings held around the sale of Penn Park in which Costanzo and Clawson attempted to persuade Haynes to continue diverting, the issue of legality arose repeatedly. Although Haynes maintained that diversion was illegal, Arvid Zuber, an attorney representing the sellers, stated at a meeting attended by Clawson but not by Costanzo that diversion was legal.

Zuber conceded that diversion had to be hidden from manufacturers; he claimed that manufacturers were primarily interested in selling their products, only included own-use clauses in contracts because they were required to do so by law, and would not worry about diversion that was not flagrant.

In 1989, defendants had a series of discussions regarding the effect of pending federal legislation on the legality of diversion. Clawson asked Rubin to come to Kansas City to meet the partners in Care and Kendallwood and discuss the issue. Rubin met Costanzo, Clawson, Civella, Shafe, Artese, and an attorney who represented Civella at the Airport Hilton in Kansas City. The final result of the meeting was that Civella's attorney would await an opinion from Rubin's attorney regarding the legality of diversion. No mention was made of own-use clauses at the Airport Hilton meeting. Moreover, the opinion that Rubin's attorney ultimately provided to Civella's attorney was simply a response by the FDA to a question posed regarding the legality of reselling pharmaceuticals; in asking the question, Rubin's attorney deliberately had avoided any mention of own-use restrictions.III.

BULK ACETAMINOPHEN (TYLENOL) / PARACETAMOL

Kansas City pharmacist pleads guilty to 22 counts of Medicaid fraud

September 25, 2002

Kansas City, Mo. — A Kansas City pharmacist pleaded guilty today to 22 counts of Medicaid fraud in connection with his falsely billing the Missouri Medicaid program more than $29,000 for drugs that were neither prescribed nor dispensed. A Jackson County grand jury indicted Louie A. Ferro Jr. (DOB - 4/5/52) on the charges in April 2001 at the request of Attorney General Jay Nixon and the Jackson County Prosecuting Attorney.

The indictment charged that Ferro provided false statements to the Medicaid program between May 2000 and February 2001 in order to receive payments. Ferro owned and operated Penn Park Pharmacy, 2929 Baltimore Ave.

An investigation by the Attorney General's Medicaid Fraud Control Unit, in cooperation with the Kansas City Police Department and the Prosecuting Attorney, determined that Ferro used the Medicaid numbers of six Medicaid recipients to illegally bill for the drugs Diflucan, Zyprexa, Risperdal and Lorabid.

Ferro entered his guilty plea before Circuit Judge Charles E. Atwell.

Judge sentences KC pharmacist on fraud; orders him to pay largest Medicaid restitution amount in state history

January 13, 2003

Kansas City, Mo. — A Jackson County judge on Friday evening (Jan. 10) sentenced a Kansas City pharmacist to four years in prison and ordered him to pay almost $945,000 in restitution to the state Medicaid program. Attorney General Jay Nixon, who obtained the conviction against Louis A. Ferro Jr., said the restitution amount for Medicaid was the largest ever ordered in a Missouri court.

"We will continue to be very aggressive against anyone who defrauds state taxpayers through illegal Medicaid billing, as this record restitution shows," Nixon said.

Circuit Judge Charles E. Atwell sentenced Ferro to four years in prison on the counts and ordered him to pay $944,977 in restitution, a civil penalty of $110,000 and investigative and prosecution costs of $19,396.69.

An investigation by the Attorney General's Medicaid Fraud Control Unit, in cooperation with the Kansas City Police Department and the Jackson County Prosecuting Attorney, determined that Ferro used the Medicaid numbers of six Medicaid recipients to illegally bill for the drugs Diflucan, Zyprexa, Lorabid and Risperdal (Risperdal is made by Johnson & Johnson).

When Good Drugs Go Gray; Booming Underground Market Raises Safety Concerns

By MELODY PETERSEN

December 14, 2000

The price spikes and shortages of flu vaccine this year have exposed a dark corner of the drug industry, a booming gray market where medications obtained illegally are repeatedly resold, bouncing from warehouse to warehouse like so many pinballs.

The Office of Criminal Investigation at the Food and Drug Administration has opened an inquiry recently into how small drug distributors obtained thousands of vials of this year's flu vaccine and whether any laws were broken as the vaccine was diverted into this gray market, according to officials informed about the investigation.

The small distributors offered the flu vaccine to hospitals and clinics at as much as five times the normal price. But even more disconcerting to regulators and health officials is the possibility that the gray market vaccine was ruined as it was repeatedly shipped. Flu vaccine is supposed to be refrigerated and shipped on dry ice.

Prosecutors have won some recent cases, but gray market pharmacies and wholesalers have operated on the fringes of the drug industry for years, despite federal lawmakers' attempts to shut them down. Most often, the gray marketers get their product by setting up a pharmacy that says it is buying discounted drugs for nursing homes. Drug companies have long given deep discounts to nursing homes, hospitals and other institutions. But instead of sending the drugs to such institutions, the gray market pharmacy sells the drugs to a small wholesaler at a profit.

One small wholesaler may sell to another, who sells to another, each taking a profit and sometimes violating federal and state laws that restrict the reselling of prescription drugs.

Government investigators and prosecutors say the drugs that flow through this underground market could be valued at more than $1 billion* -- roughly 1 percent of last year's total prescription drug sales.

*This vastly understates the true value of diverted drugs.

For consumers, the gray market means greater risks that drugs will be spoiled by improper handling, and an increased chance that the drugs they buy are counterfeit. And, if a drug is recalled, it may be impossible to find those that have traveled through the gray market.

In the case of the flu vaccine, the federal investigators believe that gray market distributors may have obtained the medication after some pharmacies promised to use it in nursing homes, the sources said. The Centers for Disease Control and Prevention had asked manufacturers to try to get the vaccine to elderly and other at-risk patients first. But instead, these pharmacies may have sold the vaccine to a small distributor, who then sold it to another, starting a string of sales.

''Is it being properly packaged and shipped as it travels these routes?'' asked Joseph H. Deffenbaugh, a professional practice associate at the American Society of Health-System Pharmacists in Bethesda, Md. ''You just don't know.''

In addition to raising safety questions, the gray market can increase the price of some drugs. Some small distributors have offered flu vaccine to hospitals at prices as high as $15 a dose. The hospitals say they normally buy the vaccine for $2 or $3 a dose.

Congress passed a law in 1987, the Prescription Drug Marketing Act, that tried to eliminate the gray market for all drugs. But regulators and other experts say it has had little effect. ''The law and regulations are just fraught with loopholes,'' said Stephen J. Haynes, who retired last year from his job as special agent in charge of the investigative operations division of the F.D.A.'s Office of Criminal Investigation. ''Something needs to be done.''

Mr. Haynes said that while he was at the F.D.A., he investigated cases of manufacturers selling a drug to a major wholesaler, which then sold it to a gray market pharmacy, after which it passed through three or four secondary distributors before finally reaching pharmacy shelves. Some drugs make a full circle, returning to the large wholesaler who first received the drug, experts say. And it can all take place in a few days.

''It becomes hard to know where the drug originated,'' Mr. Haynes said, ''and whose hands it has passed through.''

In the simplest terms, the gray marketers make their money by buying low and selling high. ''This is incredibly lucrative,'' said Marc N. Garber, an assistant United States attorney in Las Vegas, who has prosecuted many cases involving illegal drug diversion, including one against Bindley Western Industries, one of the five largest national drug wholesalers. That company pleaded guilty in August and agreed to pay $20 million to settle the charges.

Mr. Garber said that in a separate case, one man who was convicted of illegally diverting drugs through his wholesale business was able to move medicines worth $100 million in just two years.

In another case, federal prosecutors say that Darin D. Asay and Wendy E. Almanza, a married couple, made $5 million to $10 million in illegal profits by setting up pharmacies across the West that said they were buying drugs for nursing homes. The two, who lived in Evergreen, Colo., have each pleaded guilty to fraud and are awaiting sentencing. Claiming that the young couple obtained most of their wealth illegally, the government seized their $6 million mountain home, $1.4 million in savings, artwork and a new $63,000 Range Rover.

John S. Tatum, a lawyer in Aurora, Colo., who represents Ms. Almanza, confirmed the particulars of the case but declined to make his client available for an interview.

Many of the gray marketers thrive in Sun Belt areas like Southern California and Nevada.

Keith W. Macdonald, executive secretary of the Nevada Pharmacy Board, said investigators had found that some of the pharmacies that diverted drugs were just storefronts or vacant warehouses without shelves. And even as some of the diverters are prosecuted, he said, many have found ways to keep operating, changing the name and location of their business and finding people willing to sign state licensing papers for them.

''There are people,'' Mr. Macdonald said, ''who have been in this market for years.''

Martin Paul Rubin of Las Vegas, who has two prior convictions relating to fraud on drug companies, was indicted in September in Los Angeles for helping to operate what prosecutors said was a sophisticated ring that illegally obtained drugs at greatly reduced prices and then resold them in the gray market.

Kenneth I. Kahn, Mr. Rubin's lawyer, denied the charges, saying the government had no evidence that Mr. Rubin had broken any laws.

Such cases are often very difficult to prosecute. In May, a federal judge said that Wilbur Swift, who operates a distribution business in California, and his three partners could not be charged criminally in a federal case in Kansas City, Mo. Prosecutors said the four men had participated in a scheme involving pharmacies buying discounted drugs, saying they were for nursing homes, and then reselling them.

Judge Scott O. Wright, in United States District Court for the Western District of Missouri, said the drug companies appeared to be engaging in illegal pricing practices by having different prices for different customers. Therefore, Judge Wright said, Mr. Swift and his partners could not be held criminally liable for defrauding the companies. The government has appealed.

Bruce C. Houdek, Mr. Swift's lawyer, said the drug companies appeared to know that Mr. Swift and his fellow defendants were reselling drugs. If the companies have a slow-selling drug, he said, ''they open up the gates and sell their drugs cheaper.''

''They cast a blind eye,'' he said.

Mr. Tatum, Ms. Almanza's lawyer, agreed. ''It is hard for me to believe that the drug companies do not know what is going on,'' he said.

But the drug companies say that is not true. Some have even hired investigators to track wholesalers that may be violating the law. Other drug companies send auditors to wholesalers and pharmacies, and cut off those that raise suspicions.

Drug manufacturers don't need to hire investigators to "track wholesalers." They have extensive Information Technology systems that track precisely the daily movement of their drugs through the distribution system.

The Schering-Plough Corporation, for example, conducts reviews of any person or business that it has questions about, said William J. O'Donnell, a company spokesman. ''We make sure people are who they say they are,'' he said.

Since this article was published, Schering-Plough, like almost all pharmaceutical manufacturers, has admitted to defrauding government healthcare programs over and over and over again, It has paid more than $1.3 billion in fines for its illegal pricing, kickbacks, and marketing practices. In 2006, after Schering-Plough pleaded guilty to criminal conspiracy, it was forced to shutdown its Schering Sales subsidiary. Federal and State governments are currently suing Schering-Plough again for defrauding Medicaid. Its liability may result in billions of dollars in payments, fines and penalties.

But it is clear, Mr. Haynes and other experts say, that if the drug companies did not use a tiered pricing system, much of the gray market would disappear.

The price differences can be substantial. In Mr. Swift's case, prosecutors found that Parke-Davis, a unit of Pfizer and the maker of Accupril, a blood pressure drug, was selling the medicine to a retail pharmacy for $73.75, while charging the pharmacy that was allegedly buying for nursing homes $38.18.

The problem is made worse, prosecutors say, when the big wholesalers, the first stop in the distribution system for most drugs, are not vigilant about trying to stop the illegal activity if they grow suspicious. Indeed, some investigations have found the big distributors doing substantial business with the gray marketers.

In August, Bindley Western Industries pleaded guilty to conspiracy for its involvement with distributors that were buying and reselling discounted drugs. According to court papers, Bindley Western shipped discounted drugs to pharmacies even though company managers knew the drugs would be illegally resold. One manager at Bindley's warehouse in San Dimas, Calif., received $500,000 from some of the small wholesalers in exchange for information on which pharmacies would sell them discounted drugs, according to the settlement agreement that the company signed. The wholesalers were not named in the case.

Michael D. McCormick, the company's general counsel, said Bindley Western, which agreed this month to be acquired by Cardinal Health, had strengthened its programs aimed at stopping diversion. Mr. McCormick said he could not comment further because the government was continuing its investigation and could file charges against other businesses or individuals. All charges against Bindley, he said, have been settled.

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