The White Collar Appeal: Horse-Doping Case Provides Insight on Forfeiture and FDCA Issues

• In determining whether misbranding violations under the Food, Drug, and Cosmetic Act permit criminal forfeiture, the Second Circuit recently had to determine what exactly is a forfeiture statute.  In doing so, the court identified certain concrete characteristics that will identify a forfeiture statute.
• The court also had to identify the scope of the FDCA’s “intent to defraud or mislead” element required for felony violations of the statute, holding that what matters is whether, not whom, the defendant sought to defraud.
• In answering these questions, United States v. Fishman provides importance guidance regarding both the narrow issue of felony FDCA liability and the broader question of what kinds of statutes authorize civil and criminal forfeiture.

Background

Dr. Seth Fishman was a veterinarian who developed, manufactured, and sold performance enhancing drugs (PEDs) for horses.  Fishman and his salesperson (and codefendant) Lisa Giannelli sold the PEDs—which standard horse-racing tests could not detect—to trainers who wanted to give their horses an illicit advantage at the track.  Those horses won millions of dollars, with several trainers explicitly attributing the horses’ success to Fishman’s PEDs.

The government’s theory at trial was that Fishman and Giannelli committed felony adulteration and misbranding violations under the FDCA.  Under 21 U.S.C. § 333(a)(2), a felony FDCA violation requires either a prior FDCA conviction or, as relevant here, that the defendant commit the violation “with the intent to defraud or mislead.”  Fishman argued that the only people he could have defrauded were the state horse-racing regulators, who cannot support the FDCA’s intent-to-defraud-or-mislead element in these circumstances.  The district court, however, instructed the jury that “evidence of intent to defraud or mislead … state racing and drug regulators,” among others, was sufficient.

Fishman was convicted at trial, and the district court sentenced him to 11 years’ imprisonment, restitution of more than $25 million, and forfeiture of more than $10 million.  The basis for the forfeiture order was the value of the PEDs Fishman sold.  Under the Civil Asset Forfeiture Reform Act, cases involving crimes associated with statutes “for which the civil or criminal forfeiture of property is authorized” authorize the government to seek criminal forfeiture.  See 21 U.S.C. § 2461(c).  And the criminal forfeiture statute permits the government to obtain substitute assets where the property itself cannot be obtained.  See  21 U.S.C. § 853(p).  The district court held that 21 U.S.C. § 334, a provision of the FDCA that permits seizure of adulterated or misbranded drugs, was a forfeiture statute and thus that the court could order forfeiture of $10 million under the substitute-asset provision.

Holdings

Although the court addressed certain evidentiary issues and vacated the district court’s restitution award, we focus here on its resolution of the forfeiture and substantive FDCA issues.

Forfeiture.  The question the court faced was what constitutes a statute “for which the civil or criminal forfeiture of property is authorized” within the meaning of the Civil Asset Forfeiture Reform Act.  The court determined that such statutes are designed to (1) “confiscate property used in violation of the law,” (2) “require disgorgement of the fruits of illegal conduct,” (3) “impos[e] an economic penalty, thereby rendering illegal behavior unprofitable,” (4) “compensate the government’s investigation and enforcement expenditures,” or some combination of the foregoing.  The FDCA’s seizure provision, by contrast, is “a public safety statute.”  Its objective is “to eliminate misbranded or adulterated drugs from interstate commerce—by destruction in some cases, but also by export or by measures to bring the drugs into compliance with the FDCA.”  As a result, it does not qualify as a civil forfeiture statute under 21 U.S.C. § 2164(c), rendering the $10 million forfeiture award improper.

FDCA.  The Second Circuit held that evidence of intent to defraud or mislead state racing regulators sufficed for felony FDCA liability under this fact pattern.  Reasoning that the statute does not identify a particular class of victims to warrant felony liability, it would not “write in an implicit requirement that a defendant must defraud or mislead a particular victim.”  Misdemeanor misbranding is a strict liability offense, but for felony exposure, “[w]hat matters is the connection between the fraudulent intent and the offense of adulteration and misbranding: Was the misbranding undertaken with the intent to deceive?”

Key Takeaways

Fishman defines the focus of forfeiture.  The Second Circuit has articulated in Fishman what kinds of statutes will qualify as forfeiture statutes.  These includes ones that are designed to:  (1) confiscate property tainted by illegal conduct, (2) disgorge ill-gotten gains and ensure defendants do not profit from crime, or (3) reimburse the government for time and money spent investigating and prosecuting crime.  Defense counsel should seek to distinguish any statute on which the government relies that does not fit within one of these categories.

“Forfeiture” by any other name would not smell as sweet.  In concluding that 21 U.S.C. § 334 is not a forfeiture statute, the Second Circuit acknowledged that prior decisions had referred to “forfeiture” of drugs under the statute.  The court distinguished those decisions on the basis that they involved proceedings under Section 334, not attempts to shoehorn Section 334 into a criminal forfeiture order.  Yet it still implicitly conceded that it should have said “seizure” or “condemnation” instead of “forfeiture.”  That rare concession serves as a reminder that reasoned arguments can prevail notwithstanding prior decisions that appear to have rejected them. 

Courts that have adopted the convergence theory of fraud might reach a different conclusion regarding the FDCA intent-to-defraud-or-mislead element.  The Second Circuit’s holding in Fishman seemingly parallels its mail and wire fraud jurisprudence, which has rejected the so-called “convergence theory” of fraud.  Under that theory, which the Second Circuit rejected in United States v. Greenberg, 835 F.3d 295 (2d Cir. 2016), the party defrauded and the party injured must be the same.  Fishman, like Greenberg, holds that it does not matter that the targets of the deception—the state racing regulators—were not the victims of the misbranding scheme—other competitors or, perhaps, the horses themselves.  But not all courts have rejected the convergence theory.  In particular, the Ninth Circuit explicitly adopted the theory in United States v. Lew, 875 F.2d 219 (9th Cir. 1989), and the D.C. Circuit’s opinion in United States v. Abou-Khatwa, 40 F.4th 666 (D.C. Cir. 2022), suggests that convergence may be required in certain circumstances.  Defendants in the Ninth and D.C. Circuits may have a more favorable audience for the kind of argument that the Second Circuit rejected in Fishman.