FR Doc E8-23395[Federal Register: October 3, 2008 (Volume 73,
Number 193)] [Notices] [Page 57655-57668] From the Federal
Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc08-93]
DEPARTMENT OF JUSTICE
Drug Enforcement Administration
[Docket Nos. 05-13 and 05-45]
Sunny Wholesale, Inc.; Revocation of Registration and
Denial of Application
On August 24, 2005, I, the Deputy Administrator of the Drug
Enforcement Administration, issued an Order to Show Cause and
Immediate Suspension of Registration to Sunny Wholesale, Inc.
(Respondent), of Forest Park, Georgia. ALJ Ex. 6. The Order
immediately suspended Respondent's DEA Certificate of
Registration, No. 004550SLY, which authorizes it to distribute
the list I chemicals ephedrine and pseudoephedrine, on the
ground that it was selling "excessive amounts'' of these
chemicals to convenience stores, id. at 6, which are the "primary
source'' for the diversion of these chemicals into the illicit
manufacture of methamphetamine, a schedule II controlled
substance.\1\ Id. at 4.
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\1\ On October 20, 2004, the Deputy Assistant Administrator
issued the initial Order to Show Cause to Respondent; the Order
proposed the revocation of its registration at its Forest Park
location and the denial of its pending application for a
registration at its Decatur, Georgia location. ALJ Ex. 1. Each
of the allegations of the initial Show Cause Order was repeated
verbatim in the subsequent Order to Show Cause and Immediate
Suspension of Registration. On November 19, 2004, Respondent,
through its counsel, requested a hearing on the allegations of
the first Show Cause Order. ALJ Ex. 2.
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More specifically, the Show Cause Order alleged that in July
2005, DEA Diversion Investigators (DIs) learned that records
seized from various north Georgia convenience stores which were "suspected
of illegally distributing listed chemical precursors,'' had "indicated
that [Respondent] had been distributing 60 count bottles of''
Max Brand pseudoephedrine, a product which has been repeatedly
found at illicit methamphetamine labs "in full case and double
case lots.'' Id. at 6. The Show Cause Order alleged that "law
enforcement officials [in Tennessee and Georgia] have observed
that an overwhelming proportion of precursors found at illicit
methamphetamine sites has involved non- traditional brands sold
through convenience stores,'' id. at 4, that DEA had retained an
expert in retail marketing and statistics who had concluded that
sales of pseudoephedrine products at convenience stores in
Tennessee and Georgia "averaged between $15.00 and $60.00 per
month'' per store and that sales of combination ephedrine
products were even lower, Id. at 5, and that "[c]onvenience
store purchases of case quantities of high count/high strength
pseudoephedrine products [are] consistent with diversion of the
products into the illicit manufacture of methamphetamine.'' Id.
at 6. The Show Cause Order further alleged that Respondent had
continued selling large amounts of pseudoephedrine "to
convenience stores and gas stations,'' notwithstanding that it
had been "put on notice of the potential illegal character of
its activities with the issuance of the original Order to Show
Cause'' which was served in October 2004. Id. "[B]ecause of the
substantial likelihood that [Respondent would] continue to
divert listed chemical products,'' I thus concluded that
Respondent's "continued registration, during the pendency of
these proceedings, would constitute an immediate danger to the
public health and safety.'' Id. at 7.\2\
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\2\ The Order also alleged that in July 2005, DEA DIs
discovered that Respondent "was also selling one-ounce bottles
of liquid iodine to several convenience stores,'' another
chemical used in the illicit manufacture of methamphetamine.
Show Cause Order at 6. The Order further alleged that "[i]odine
* * * has miniscule sales for use as an antiseptic, even in
pharmacies,'' that "[t]he likelihood of sales of iodine to
customers in convenience stores approaches zero,'' and that
while Respondent "sold between 48 and as many as 240 bottles of
iodine to individual convenience stores,'' it "never reported
these transactions * * * as extraordinary sales or suspicious
transactions.'' Id.
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In addition to the above, the Show Cause Order alleged that
during a July 2001 inspection, DEA DIs audited Respondent's
handling of listed chemical products and determined that it had "various
overages and shortages, including an unexplained shortage of
approximately 10,000 bottles of Max Brand, and (another
non-traditional brand) Heads Up 60 count bottles.'' Id. at 5.
The Show Cause Order alleged that while inventorying
Respondent's listed chemical products, it had "no traditional
brand * * * products but only `grey market' brands of
pseudoephedrine and combination ephedrine products'' which are
not sold at drug stores or supermarkets, but "are typically only
sold in locations where goods of these types are not expected to
be sold, such as liquor stores, head shops, gas stations, and
other small retail stores.'' Id.
The Show Cause Order further alleged that following the
inspection, DEA DIs conducted verifications of Respondent's
customers; the DIs allegedly found that some of the locations
were "non-existent,'' some were residences, and others included
such establishments as "liquor stores, gift shops, a Blimpie
restaurant * * * and a magazine store.'' Id. Relatedly, the
Order alleged that in seeking a registration for its Decatur
location, Respondent provided a list of its proposed list I
chemical customers which included "liquor stores, a lotto store,
a clothing store, a newsstand, and another distributor.'' Id. at
3.
The Show Cause Order also alleged that Respondent would not
maintain proper security of listed chemical products at its new
proposed location because while its owner, Mr. Shaukat Sayani,
had represented that his customers would place their orders "in
person'' and that Respondent would deliver the products by van,
the DIs had previously determined that Respondent did not
conduct business in this "manner at [its] Forest Park''
location. Id. The Show Cause Order further alleged that
Respondent "intended to co-mingle listed chemical products with
[[Page 57656]]
non-regulated products on the warehouse floor,'' that it "had
no procedure in place to detect theft or loss at the
warehouse,'' that its "proposed method of sales recordkeeping *
* * was inadequate to comply with 21 CFR 1310.06,'' and that it
had no means of "compar[ing] sales between its two * * *
locations in order to determine if excessive or suspicious
transactions were being encountered.'' Id. Relatedly, the Show
Cause Order alleged that warehouse security at the Forest Park
location was inadequate. Id. at 5.
On September 13, 2005, Respondent requested a hearing on the
allegations of the Order to Show Cause and Immediate Suspension
and moved to consolidate the two proceedings. ALJ Ex. 7. While
the hearing on the original Show Cause Order had been scheduled
to begin on September 20, 2005, Respondent's counsel sought a
continuance to obtain additional time to prepare. Accordingly,
the ALJ ordered that the original hearing be cancelled. On
December 14, 2005, the ALJ conducted a pre-hearing conference
and set the hearing for March 21, 2006. ALJ Decision (ALJ) at
2-3.
Thereafter, on February 27, 2006, Respondent's counsel filed
an emergency motion for a continuance. The ALJ granted the
motion and subsequently rescheduled the hearing to begin on
August 15, 2006. Id. at 3.
A hearing was held on August 15 through 18, 2006, at which
both parties called witnesses to testify and submitted
documentary evidence. At the hearing, Respondent also submitted
a motion for summary judgment. Id. (citing RX 26). Following the
hearing, both parties submitted briefs containing their proposed
findings of fact, conclusions of law, and argument.
On May 4, 2007, the ALJ ordered the parties to file a joint
status report regarding Respondent's Forest Park registration.
On June 11, 2007, the parties filed the report; the report
stated that "it is the position of the agency and Respondent
that [it] currently has a pending application for renewal of its
currently suspended registration.'' Joint Status Report at 2.
On August 17, 2007, the ALJ issued her recommended decision.
In her decision, the ALJ concluded that Respondent did not
maintain effective controls against diversion because it did not
"verify the legitimacy of its customers,'' sold "suspiciously
high quantities of iodine products to some customers'' even
though its owner "was repeatedly made aware of iodine's role as
a methamphetamine precursor,'' had "inadequate inventory
procedures [and] poor recordkeeping,'' and failed "to report
suspicious transactions.'' Id. at 29-30.
The ALJ also concluded that Respondent was not in compliance
with federal law because it "could not account for large
quantities of missing bottles of product,'' and "did not keep
adequate records'' of its sales which "hindered [its] ability to
ascertain whether a customer had purchased an amount above the
regulated threshold.'' Id. at 31. The ALJ further found that "Respondent
has distributed large, case quantities of pseudoephedrine and
ephedrine products,'' as well as "large amounts of 2% iodine,''
and that "even [its] witness concurred that some of [its] sales
were in excess of what would be expected.'' Id. at 32-33.
Finally, the ALJ noted that "[m]any of the `businesses' to which
Respondent sold list I chemical products operated within the * *
* non-traditional market for such products,'' that sales to the
non- traditional market create an "unacceptable risk of
diversion,'' and that "[s]ome of [Respondent's customers] did
not even appear to be tangentially related to the legitimate
sale of pseudoephedrine and ephedrine products.'' Id. at 34.
The ALJ did note that Respondent had improved its security
and had "conduct[ed] some investigations into some of its
customers' business identities.'' Id. at 34. The ALJ concluded,
however, that Respondent's "cooperation is dwarfed by the
significant risk of diversion posed [by its] continued sales of
listed chemical products to [non-traditional] customers without
adequate sales records or customer verification,'' and that it "has
not provided sufficient evidence * * * that its future conduct
would change to the degree necessary to eliminate the threat to
the public interest.'' Id. at 35.
The ALJ further rejected Respondent's arguments that the
Government was denying it equal protection of the laws under the
Due Process Clause of the Fifth Amendment. More specifically,
Respondent argued that it was being held " `to a different
standard than [the Government's] published rules dictate,' ''
id. (quoting Resp. Br. at 16), that the Agency had not "put
Respondent on notice as to what specific action would be a
violation [of its] rules and regulations,'' id. (quoting Resp.
Br. at 17), and that "the agency [was] `exercising uncontrolled
discretion.' '' Id. (quoting Resp. Br. at 20).
Finally, the ALJ rejected Respondent's contention that it was
entitled to judgment as a matter of law because its sales did
not exceed the 1,000 gram monthly threshold (which triggers
various reporting and recordkeeping) requirements. Id. at 37.
Citing several DEA decisions, the ALJ explained that "Respondent
need not exceed the Government's threshold of allowed sales in
order to [be deemed to have] act[ed] in a manner inconsistent
with the public interest.'' Id. (citations omitted).\3\
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\3\ The ALJ also noted that there was no evidence that
supported Respondent's contention that it is being discriminated
against because its owner "is a legal alien who is attempting to
operate a business in this country in accordance with its
laws.'' ALJ at 37 (quoting Res. Br. 24).
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While the ALJ did not make an express finding that
Respondent's continued registration is inconsistent with the
public interest, such a finding is implicit in her recommended
sanction that Respondent's registration at its Forest Park
location should be revoked and its pending application for a
registration at its Decatur location should be denied. ALJ at
38. Thereafter, both parties filed exceptions to the ALJ's
decision.
The Government's exception noted that while it concurred with
the ALJ's recommendation, it was "not apparent whether the ALJ
actually made a finding that Respondent's continued registration
would not be in the public interest.'' Gov. Exceptions at 1. The
Government thus requested that I "make a finding that
Respondent's continued registration and pending application for
registration are not in the public interest as that term is
used'' in the applicable provisions of the Controlled Substances
Act. Id.
The Government also took exception to three of the ALJ's
factual findings (FOFs 52, 57, 58), pertaining to the testimony
of the Government's expert on the expected sale range of listed
chemical products at convenience stores and other
non-traditional retailers of these products. Id. at 2. More
specifically, the Government took exception to the ALJ's
findings that Respondent's expert had credibly testified that
the Government's expert had made several "flawed assumptions''
including "that everybody sells everything in'' the product
category, and that as a result, "the average convenience store
might sell $173.25 of list I chemical products per month,'' and
that "this number [is] more credible than the $82 value'' given
by the Government's expert.\4\ ALJ at 23-24; Gov. Exceptions at
2.
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\4\ The ALJ noted, however, that "even using this larger
number * * *. Respondent repeatedly sold list I chemical
products in excess of $173.25 per month.'' ALJ at 24.
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Because "Respondent sold in excess of both experts'
figures,'' the Government declined to "opine'' as to
[[Page 57657]]
whose expert's sales figures were "exactly correct'' or
whether "there is a more precise figure somewhere between their
numbers.'' Gov. Exceptions at 2-3. The Government nonetheless
urged that I not adopt the ALJ's finding because Respondent's
expert's "analysis of this case was not in detail, but quite
limited,'' and the expert "did not perform his own independent
analysis of the data, but only compared end data from two
different parts of [the Government expert's] report.'' Id. at 3.
In its exceptions, Respondent also noted that the ALJ had not
made a finding as to whether its continued registration would be
in the public interest and argued that "no such ruling would be
appropriate in this matter.'' Resp. Exceptions at 2. More
specifically, Respondent contends that it has "complied with
every request that was given to it by the DEA, repeatedly
requested of DEA what they wanted it to do and was willing to do
anything the DEA wanted.'' Id. at 3. It further contends that
the Show Cause Orders were based on Respondent's exceeding sales
levels, but that the Government's evidence on the expected sales
was "not credible,'' and that therefore, the Government has not
carried its burden of showing that its registration would be
inconsistent with the public interest. Id. at 4.
Respondent also takes exception to the ALJ's finding that it
has "inadequate inventory procedures.'' Id. at 4 (citing ALJ at
30). More specifically, Respondent contends that "there is no
requirement under any of the DEA rules to have an inventory
system, and [that it] is once again being asked to comply with
something that is not in the DEA rules.'' Id. at 5. Respondent
thus contends that it is "being held to [a] previously
unspecified and unpublished * * * guideline[ ],'' and that in
doing so, the Agency is violating its constitutional rights to
due process and equal protection. Id. at 5. Finally, Respondent
contends that the ALJ "ignore[d] the substantial remedial
actions that [it] had taken to correct problems of which the DEA
had notified it.'' Id.
Thereafter, the record was forwarded to me for final agency
action. Having considered the record as a whole, as well as the
exceptions of both parties, I adopt the ALJ findings of fact
except as expressly noted herein. I further conclude that the
Government has made out a prima facie case that Respondent's
registration would be inconsistent with the public interest and
that Respondent has failed to present sufficient evidence to
establish that it will maintain effective controls against
diversion in the future. I also reject Respondent's
constitutional claims and its motion for judgment as a matter of
law. I therefore also adopt the ALJ's recommended sanction that
Respondent's Forest Park registration be revoked and its
applications for renewal of the latter registration and for a
registration at its Decatur location be denied. I make the
following findings.
Findings
Respondent is a corporation which engages in the wholesale
distribution of assorted products to gas stations, convenience
stores, dollar stores, beauty stores, and other establishments.
Tr. 701. Respondent is owned by Mr. Sunny Sayani, id., and
operates two warehouses which are located in Forest Park and
Decatur, Georgia. Id. at 702. According to the record,
Respondent operates "a cash and carry'' business in which its
customers come to the warehouse to purchase the products they
need. RX 25a, Tr. 731.\5\
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\5\ Respondent's owner testified that it delivers, but that
the customer must "buy more than $1000'' to justify the expenses
of paying for the driver, gasoline and the truck. Tr. 731.
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Respondent currently holds DEA Certificate of Registration,
004550SLY, which authorizes it to distribute the list I
chemicals ephedrine and pseudoephedrine out of its Forest Park
warehouse. Tr. 245; GX 1. While Respondent's registration
expired on February 28, 2005, it filed a renewal application and
paid the requisite fee at some point in January 2005. See Joint
Status Report at 1-2. Accordingly, Respondent has a
registration, albeit one that has been suspended, at its Forest
Park location.
Methamphetamine and the Market for List I Chemicals
Both pseudoephedrine and ephedrine have therapeutic uses and
are lawfully marketed as non-prescription (OTC) drug products
under the Federal Food, Drug and Cosmetic Act. GX 15, at 3.
Pseudoephedrine is approved for marketing as a decongestant;
ephedrine (in combination with guaifenesin) is approved for
marketing as a bronchodilator.\6\ Id. at 4. Both pseudoephedrine
and ephedrine are, however, regulated as list I chemicals under
the Controlled Substances Act because they are precursor
chemicals that are easily extracted from OTC products and used
in the illicit manufacture of methamphetamine, a schedule II
controlled substance. See 21 U.S.C. 802(34); 21 CFR 1308.12(d);
GX 15, at 8 (noting that "the production of methamphetamine from
ephedrine or pseudoephedrine can be accomplished via a simple
one step reaction and can be accomplished with little or no
chemistry expertise'').
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\6\ In July 2005, the Food and Drug Administration issued a
notice of proposed rulemaking which proposes to remove
combination ephedrine/guaifenesin products from the OTC
monograph on the ground that these drugs are not safe and
effective for OTC use. 70 FR 40232 (2005).
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Methamphetamine is a highly addictive and abused
central-nervous system stimulant. GX 15, at 9. Methamphetamine
abuse has destroyed numerous lives and families and ravaged
communities. Id.; see also Rick's Picks, L.L.C., 72 FR 18275,
18276 (2007). Moreover, because of the toxic nature of the
chemicals used to make the drug, its illicit manufacture causes
serious environmental harms. Id.; GX 14, at 10. A DEA Special
Agent from the Atlanta Field Division testified regarding the
rapid growth of illicit manufacturing of methamphetamine during
his tenure in Atlanta. Tr. 29. According to the S/A's testimony,
over "a short period of time'' the number of meth. lab seizures
by DEA and local law enforcement had "multiplied by ten times.''
Id. Other evidence showed that between 1999 and 2004, the number
of seizures in the State of Georgia had increased from 34 to
229.\7\ See GXs 9 & 35.
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\7\ Between 1999 and 2004, the States adjacent to Georgia
also experienced large increases in the number of meth. lab
seizures. In Alabama, the number of seizures increased from 27
to 369; in Tennessee, the number increased from 106 to 1251; and
in South Carolina, the number increased from 5 to 153. See GXs 9
& 35.
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The Special Agent, who had debriefed over 200 individuals
involved in the illicit manufacture of methamphetamine, Tr. 39,
also testified that convenience stores, gas stations, and other
small retailers were the primary source of the ephedrine and
pseudoephedrine which was used by "mom-and-pop'' meth. labs. Id.
at 56 & 59. The Agent further testified that meth. cooks use
individuals known as "runners'' who would travel to different
stores and purchase small amounts each day to avoid detection.
Id. at 62. Moreover, runners generally avoided larger retailers
such as chain stores because these establishments have "too much
security'' and "too much video surveillance,'' id. at 56, and
have "been very militant on * * * limit[ing] sales'' of the
drugs. Id. at 102; see also id. at 100.
The S/A also testified that in some instances, meth. cooks
recruited multiple persons to go to smaller stores and buy the
maximum amount of product the store would sell them. Id. at 63.
Moreover, in some instances, either the owner or an employee of
a smaller
[[Page 57658]]
store would sell a case quantity of a listed chemical product
to a person affiliated with a lab. Id.
The Government also established that the overwhelming
majority of commerce in non-prescription drug products occurs in
drug stores, supermarkets, large discount merchandisers and
electronic shopping/mail order houses. GX 25. According to the
declaration of Jonathan Robbin,\8\ who has testified in numerous
DEA and federal court proceedings as an expert witness on the
market for list I chemical products containing pseudoephedrine
and ephedrine, "over 97% of all sales of non-prescription drug
products occur in drug stores and pharmacies, supermarkets,
large discount merchandisers and electronic shopping and mail
order houses.'' Id. at 4; see also GX 24, at 3.\9\ According to
Mr. Robbin, these retailers "constitute the traditional
marketplace where [nonprescription drugs for coughs, cold, nasal
congestion, and asthma] are purchased by ordinary consumers.''
GX 25, at 4.
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\8\ Mr. Robbin holds degrees from Harvard College and
Columbia University and is an expert in multivariate statistical
analysis and the processing of economic census and population
data. See GX 25, at 1-2. He also founded Claritas, Inc., a
company which is now the largest producer and seller of
census-based consumer marketing information products, systems
and services. Id. at 1.
\9\ According to this report, convenience stores selling
gasoline account for 1.75% of the non-prescription drug market;
convenience stores that do not sell gasoline account for .95% of
the market. GX 24, at 3. All other establishments combined
account for only .21%. Id.
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Mr. Robbin has further concluded that sales of
non-prescription drugs at convenience stores "account for only
2.2% of the overall sales of all convenience stores that handle
the line.'' Id. Moreover, only 4.87% of convenience store
shoppers purchase a non-prescription drug product, GX 24, at 5;
and only 4.59% of these shoppers purchase a pseudoephedrine
product.\10\ Id. at 4. Mr. Robbin thus concluded that .21% of
convenience store shoppers purchased a pseudoephedrine product.
Id. at 5. In another document, Mr. Robbin explained that by
extrapolating data from the 1997 U.S. Economic Census data and
information obtained from surveys of the National Association of
Convenience Stores, he had estimated that during 2005, "[t]he
expected average monthly convenience store sales of
nonprescription drug products containing pseudoephedrine (hcl)
in Georgia were * * * $82.'' GX 26 at 2.\11\
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\10\ While the text accompanying table 3 uses the figure of
5.59% as the percentage of non-prescription drug buyers who
purchase pseudoephedrine at convenience stores, the previous
table makes clear that the actual percent is 4.59%. Compare GX
24, at 5, with id. at 4.
\11\ Mr. Robbin noted that data from the 2002 Economic Census
for Florida (a neighboring State) indicated that the expected
sales were 21% lower than the data from the 1997 Economic Census
suggested. GX 26, at 1-2. Mr. Robbin thus stated that "using the
same factor as encountered in Florida would produce an updated
estimate of $65.'' Id. at 2.
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Respondent called as an expert witness, Dr. Danny N.
Bellenger. Dr. Bellenger holds a PhD in Business Administration
and is a Professor and Marketing Research Fellow at the Robinson
College of Business at Georgia State University. RX 31, at 2.
Dr. Bellenger previously served as chairman of the Department of
Marketing at Robinson, and was the Dean of the College of
Business at Auburn University. Id.
Dr. Bellenger disputed Mr. Robbin's figures for the expected
monthly sales range of pseudoephedrine at convenience stores.
Dr. Bellenger testified that he did not agree with the
conclusions of Mr. Robbin's reports and that reports did not "agree
with each other.'' Tr. 521. More specifically, Dr. Bellenger
noted that one of Mr. Robbin's reports stated that "two in 1,000
* * * convenience store shoppers would be expected to buy
Sudafed,'' but in another report, Mr. Robbin had stated "that
there's 120,000 purchasers or customers [who] come into a
convenience store.'' Id. at 523; see also GX 25, at 11 (stating
that "[t]he average annual number of shoppers in a convenience
store (excluding gasoline purchases) is about 120,000'').\12\
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\12\ With respect to the number of convenience store shoppers
who would purchase Sudafed, Dr. Bellenger testified that "[t]he
numbers which I've computed actually says its 2.7 [out of
1,000], but * * * that's a relatively minor difference.'' Tr.
523. Dr. Bellenger testified that he used "the data that was in
[Mr. Robbin's] report, and [did] exactly the computations [Mr.
Robbin] did * * * and came out with * * * 2.7 customers in
1,000.'' Id. at 581. In his testimony, Dr. Bellenger did not
specifically identify which figures he used, and as explained
above, it appears that one of Mr. Robbins' reports contains a
transcription error. See supra n. 10.
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Dr. Bellenger explained that if two out of a 1,000 customers
purchased pseudoephedrine and a convenience store has 120,000
customers, at least 240 of these persons would buy the product
over the course of a year or "twenty per month for an average
convenience store.'' Tr. 523. Dr. Bellenger testified that
multiplying this number "times the average retail price of * * *
Sudafed'' gives an "estimate of about $170 * * * based on the
numbers that are in the reports.'' Id.
Dr. Bellenger subsequently testified that he determined the
average price of Sudafed by "looking at the wholesale prices and
assuming a markup,'' and that he "also looked in Kroger to see
what it cost, but [the price] would vary a lot * * * by store.''
Id. at 662-63. However, Dr. Bellenger did not "recall the actual
figure'' he used for the retail price. Id. at 663. Nor did he
explain what source he used for the wholesale price figure, or
what price he used.
Dr. Bellenger also testified that he confirmed his estimate
by multiplying the percentage of convenience store shoppers who
purchase pseudoephedrine (.0027) times the average annual
merchandise sales of convenience stores ($770,000). Dividing
this figure by twelve results in a monthly sales figure of
$173.25, which is "a similar number'' to the sales figure
obtained in the first method. Id. at 524.\13\
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\13\ Notably, Dr. Bellenger used the figure which appears to
be based on a transcription error in one of Mr. Robbin's
reports. If, however, the .0021 (or 2.1 shoppers out of 1,000)
figure is used, see GX 24, at 5; the average monthly sale is
$134.75.
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Dr. Bellenger further testified that Mr. Robbin's methodology
was based on several assumptions which he contended "are not
consistent with reality.'' Id. at 527. More specifically, he
contended that one of Mr. Robbin's assumptions was that "all
retailers [including] convenience stores carry a full line of
all'' non-prescription medicinal products that are reported in
the Economic Census's merchandise line, and that this is "not
consistent with the common practice'' because "a convenience
store * * * carries a much narrower line of most products.'' Id.
at 526; see also id. at 583, 664. According to Dr. Bellenger, "when
the conveniences stores sell less than a full line and the
supermarkets and drugstores sell the full line, * * * it
distorts the numbers,'' by "caus[ing] the estimate for Sudafed
for the convenience store to be lower than it actually should
be.'' Id. at 664.\14\
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\14\ Dr. Bellenger also testified that one of Mr. Robbin's
reports assumed that all stores were "expected to sell the same
amount,'' and that this requires the assumption that the stores
are "all the same size'' and ignores the stores' locations. Tr.
529. As Dr. Bellenger further testified, "[i]f you've got a very
large store attached to a gasoline station selling on the
interstate, the mix of products is not going to be the same as a
small rural store.'' Id. at 530. I note, however, that in one of
the reports, Mr. Robbin estimated a sales range which was based
on "differences in sales occurring as a consequence of store
size, location, hours, advertising expenditures and management
practices.'' GX 25, at 7. This would appear to address Dr.
Bellenger's testimony on this point.
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While the ALJ credited Dr. Bellenger's testimony that the
monthly expected sales figure of pseudoephedrine products at
convenience stores was $173.25, see ALJ at 24, I decline to
adopt this finding. While Dr. Bellenger's testimony that
approximately 240
[[Page 57659]]
persons would purchase pseudoephedrine at a convenience store
over the course of a year calls into question the validity of
the Government's figure, he did not establish the source of the
wholesale price information (and the price) that he relied upon
or the amount of markup he used. As for his testimony regarding
pricing at Kroger, he did not testify as to what that price was,
what size package it was, and stated that the price would vary a
lot by store. Finally, while Dr. Bellenger "confirmed'' his
estimate by multiplying the percentage of convenience store
shoppers who purchase pseudoephedrine by the average store's
sales volume, this methodology seems to require a major
assumption in its own right--that the average amount spent by a
customer in purchasing pseudoephedrine is the same as the
average purchase of those convenience store customers who buy
other products.
Accordingly, I conclude that neither the Government's nor
Respondent's evidence reliably establishes the monthly expected
sales range.\15\ For purposes of this case, I assume without
deciding that Dr. Bellenger's figures are accurate.
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\15\ Accordingly, I agree with the Government's exception and
decline to adopt the ALJ's finding.
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Dr. Bellenger also testified regarding several other matters.
With respect to the size of a retailer's purchases, Dr.
Bellenger testified that buying a case quantity may be a
legitimate business decision "to invest in more inventory so as
to lower [its labor] cost of taking inventory and processing
order forms.'' Tr. 549. According to Dr. Bellenger:
The simple fact that someone, in * * * their business model,
decides to order in large quantities is not necessarily
suspicious in and of itself. What would be suspicious to me is
if someone repeatedly ordered in large quantities. So I would
think that looking for repeated large quantity orders by the
same store or a combination of products which go into the
production and ordering in large quantities * * * of a group of
products which are involved in the manufacture of some illicit
substance would be important for determining suspicious orders.
Id. at 549-50. Amplifying this testimony, Dr. Bellenger added
that to purchase a case quantity (144 bottles) is "one of two
things. It's a conscious business decision where a store owner
has decided it's more efficient to order in large quantities,
put it in the stockroom, and make fewer orders, and have less
labor involved.'' Id. at 570. Dr. Bellenger than allowed that "maybe
there's some nefarious practice involved here,'' but that if
this was so, "you would see repeat purchases of large
quantities.'' \16\ Id. at 570-71.
---------------------------------------------------------------------------
\16\ Dr. Bellenger added that he was not "sure how much of
this is stuff is required to make the illicit drugs in
question,'' and that he was "not sure if 144 [bottles] will make
enough to matter or not.'' Id. at 571. The Government's evidence
showed, however, that Georgia and the adjacent States had
experienced a proliferation in smaller methamphetamine labs
which typically produced a quarter to a half ounce. Id. at 35.
The evidence also showed that "even unskilled persons can obtain
a 50-70% yield of methamphetamine.'' GX 15, at 8. Contrary to
Dr. Bellenger's understanding, four sixty- count bottles of 60
mg. pseudoephedrine would provide enough material for even an
unskilled person to manufacture a quarter ounce of the drug; 144
bottles would provide enough material to make nine ounces.
---------------------------------------------------------------------------
The ALJ also credited Dr. Bellenger's testimony that in
reviewing the various exhibits, he noted that while "some of
[Respondent's customers] were buying by case lot,'' he did not
find a pattern of the customers "buying [ten] 144s.'' Tr. 571
(cited at ALJ at 25). Respondent's own evidence shows, however,
that there were multiple instances in which Respondent sold case
quantities that suggest that the sales were for an illicit
purpose. See RX 12.
For example, during the year 2004, Respondent sold cases (144
bottles) of Max Brand Pseudo to the Coastal Food Mart of
Rockmart, Georgia, on eight occasions: January 21, February 2,
March 4, April 19, June 3, July 14, August 2, and September
5.\17\ Id. at 52, 82, 86, 91, 93, 97, 99. On cross-examination,
Dr. Bellenger acknowledged that the store was "probably * * *
buying in excess of what would be expected,'' that "a case over
a six-month period is rational,'' but this store's purchases "would
raise [his] suspicions.'' Tr. 619-20. Moreover, when asked
whether this store's retail sales would be "many standard
distributions beyond'' the $175 figure he calculated for average
monthly sales, Dr. Bellenger answered: "Right.'' Id. at 620. Dr.
Bellenger also acknowledged that it would not be logical for a
store to "order additional inventory on a regular basis unless
they were selling it.'' Id. at 642.
---------------------------------------------------------------------------
\17\ Each case sold for $1006.56.
---------------------------------------------------------------------------
On re-direct, Dr. Bellenger opined that "it would be highly
unlikely in the normal course of business'' for an entity like
Sunny Wholesale to detect these transactions. Id. at 646.
According to Dr. Bellenger, "you've got to be looking real,
real, real close'' to find these transactions "given the scope
of [Respondent's] business,'' and the fact that the product
category was "less than two percent of the total business and
these instances would account for a fraction of that.'' Id. at
647.
The Coastal Food Mart was not, however, the only store to
which Respondent repeatedly sold large quantities of
pseudoephedrine. During the same year, it sold a case quantity
to Chitra Inc.'s Quick Stop of Rome, Georgia, on eight separate
dates: January 4, April 8, June 14, July 5, August 2, August 20,
September 14, and October 11. See RX 12, at 80, 91, 94, 95, 97,
98, 100, & 101. It sold a case to the Phillips 66 Mart of
Hapeville on eight occasions: January 5, February 5, March 22,
April 1, May 5, June 3, August 17, and September 12. See id. at
80, 84, 88, 89, 92, 93, 98 & 99.
It sold a case to the R & S Grocery of Columbus on nine
dates: January 21, February 2, March 2, April 1, May 5, June 21,
July 7, August 30, and September 29. See id. at 82, 86, 89, 92,
95, 96, 98, & 100. It sold a case to the Stop In of Bremen
on nine occasions: January 5, February 3, March 2, April 1, May
5, June 1, July 27, August 20, and September 14. See id. at 52,
80, 83, 86, 89, 92, 93, 98, 100.
Moreover, the record shows that there were instances in which
Respondent sold to two customers who used the same address. For
example, Respondent sold case quantities to the P & K Mini
Mart, with an address of 461 Columbia Drive, Carrollton, on
January 6, February 10, March 4, April 8, and May 5. See id. at
53, 81, 84, 86, 89. Yet it also sold a case to a customer it
listed as the "Quick Stop/Tushar/ BP'' with the same 461
Columbia Drive, Carrollton address, on February 2, March 4,
April 8,\18\ May 5, July 22, and August 1. See id. at 54, 83,
86, 91, 96, 97. Moreover, Respondent sold a case to the DJ Food
Mart, with an address of 15582 HWY 27, Trion, on January 6,
February 10, March 4, April 8, May 5, and June 15. See id. at
54, 81, 85, 87, 90, 94. It also sold a case to a customer it
listed as "BJ's Food Market 1'' with the address of 15582 HWY 27
North, Trion, on February 10, March 4, April 8, May 5, June 4,
July 27, July 22, August 18, and September 5. See id. at 54, 84,
87, 90, 93, 96, 98, 99.
---------------------------------------------------------------------------
\18\ The record indicates that on this date, Respondent sold
96 bottles for a total sale of $671.04. RX 12, at 91.
---------------------------------------------------------------------------
Relatedly, Dr. Bellenger testified that "unusual orders
become very challenging if there's a relatively small number of
* * * those orders * * * given the large numbers of people [a
business is] dealing with.'' Id. at 556. Dr. Bellenger
acknowledged, however, that "you could create a computer program
which would create an exceptions report.'' Id. at 648. Dr.
Bellenger nonetheless maintained that it would be difficult to
track these
[[Page 57660]]
purchases and that finding a high volume purchase "in the
normal course of business would be an accident.'' Id. at 647.
I reject Dr. Bellenger's testimony regarding the difficulty
of detecting excessive purchases. As noted below, during an
earlier meeting with DEA investigators, Mr. Sayani stated that "a
typical sale'' of listed] chemicals "was two to three boxes,''
with each "box contain[ing] twelve bottles of 60-count
tablets.'' Id. at 331. Notably, during this meeting, the DI
specifically told Mr. Sayani that an order of "ten boxes [or 120
bottles] would be suspicious,'' and that if a customer "requested
cases quantities'' or 144 bottles, "he was to notify DEA.'' Id.
at 336.
Moreover, Respondent's records show that many of these
customers were not trying to hide the size of their purchases by
purchasing smaller quantities on different dates. Rather, they
were openly ordering case quantities, see RX 12, at 79-101; and
as found above, several of these customers did so with
disturbing frequency. Finally, even crediting Dr. Bellenger's
testimony that in some instances, a convenience store owner
could make a legitimate business decision to purchase a case
quantity, it does not require that much effort to call up a
customer's account history to determine how frequently the
customer was purchasing the products.
Respondent's History as a Registrant
In September 1999, Respondent applied for a DEA registration
to handle list I chemicals at its Forest Park warehouse. Tr.
703. Prior to being granted the registration, DEA DIs conducted
a pre-registration inspection. Id.; see also id. at 323. During
the inspection, a DI provided Mr. Sayani with a copy of the DEA
Chemical Handler's Manual and a document which listed the
thresholds for pseudoephedrine and ephedrine (which trigger
additional reporting and recordkeeping obligations). Id. at
726-27. Moreover, Mr. Sayani told the DI that "he would deliver
[the listed chemical products] to his customers.'' Id. at
323.\19\ Shortly after the inspection, Respondent obtained a
registration for this location.
---------------------------------------------------------------------------
\19\ Mr. Sayani made the same representation during the pre-
registration investigation of Respondent's application for the
Decatur location. Tr. 323.
---------------------------------------------------------------------------
On January 31, 2001, Respondent applied for a registration to
handle pseudoephedrine, ephedrine, and phenylpropanolamine, at
its Decatur warehouse. GX 2. Accordingly, on March 31, 2001, DEA
DIs went to Respondent's Decatur facility to conduct a
pre-registration inspection. Tr. 246. During the inspection, the
DIs met with Mr. Sayani and provided him with another copy of
the Chemical Handler's Manual, as well as notices stating that
drug products containing phenylpropanolamine were being used by
drug traffickers to manufacture amphetamine, GX 5, and
combination ephedrine and pseudoephedrine were being used to by
traffickers to manufacture amphetamine and methamphetamine. GX
6, Tr. 249. The DIs also provided Mr. Sayani with notices
pertaining to recordkeeping and reporting of theft and losses of
listed chemical products. Tr. 249.
The DI had previously requested that Mr. Sayani provide her
with lists of his suppliers, the products he intended to carry,
and his proposed customers. Id. 246-47. On the list of suppliers
and products, Mr. Sayani indicated that he intended to sell
products distributed by Compare Generics of Hauppauge, New York,
including Max Brand and Heads Up, two brands of products which "are
notoriously popular [with] methamphetamine traffickers.'' \20\
GX 34, at 11; GX 27.
---------------------------------------------------------------------------
\20\ On its product list, Respondent also indicated that he
would be distributing four products from BDI Marketing, Inc.,
another firm whose products have been found at numerous illicit
methamphetamine labs. GX 4. However, according to the DI, none
of these products contained a list I chemical. Tr. 250.
Respondent also listed three other suppliers; the listed
chemical products he listed under these suppliers were
nationally recognized brands such as Tylenol, Advil, Nyquil,
Contac, and Vicks 44. See GX 27.
---------------------------------------------------------------------------
During the inspection, the DIs reviewed the Chemical
Handler's Manual with Mr. Sayani, placing special emphasis on
its provisions pertinent to record keeping, security, the need
to know his customers, and requiring proof of identity from his
customers. Tr. 321. The DIs also discussed with Mr. Sayani the
listed chemical thresholds and the requirement to report
suspicious orders. Id. Mr. Sayani again represented that the
listed chemical products "would be delivered just like they were
at his Forest Park location.'' Id. at 323. The DI observed,
however, that Respondent did not "deliver most of the time'' as "[t]he
majority of the time the customers were coming'' to the
warehouse. Id. at 324.\21\
---------------------------------------------------------------------------
\21\ The DI also obtained information that Respondent had a
single employee who was "his delivery guy.'' Tr. 324. The
position was vacant for some unspecified period of time. Id. at
324-25.
---------------------------------------------------------------------------
Based on Mr. Sayani's list of proposed customers, one of the
DIs checked to see if DEA's computer system held information
regarding the customers. Id. at 255. The DI also visited several
of the customers' addresses to verify whether there was a
business at the location. Id. Moreover, the DIs' supervisor
decided that before sending the report on the Decatur
application to DEA Headquarters, the DIs needed to inspect
Respondent's practices at its Forest Park warehouse because the
location had "never been audited.'' Id. at 370. Accordingly, on
June 30, 2001, several DIs went to the Forest Park warehouse and
conducted an inspection. Id. at 255.
Upon their arrival, the DIs met with Mr. Sayani and asked him
to provide them with an inventory and a list of the listed
chemical products Respondent distributed. Id. at 256. One of the
DIs also asked him for a list of his customers and suppliers and
provided him with another copy of the Chemical Handler's Manual
and several DEA notices. Id. During the inspection, the DIs
observed that Respondent's list I products were co-mingled with
other products in the warehouse and were not stored in a secure
area.\22\
---------------------------------------------------------------------------
\22\ At some point between 2002 and 2005, Respondent built a
cage at its Forest Park warehouse in which it stored its list I
chemical products and installed several security cameras. RX
25a. The cage had a separate cash register and window at which
the products were paid for and delivered to the customer. Id.
---------------------------------------------------------------------------
The DIs then proceeded to conduct an audit of Respondent's
handling of list I products for the period January 1, 2001,
through the close of business on June 30, 2001. GX 31. The DIs
selected eleven non- traditional products to audit; with the
assistance of Mr. Sayani, they counted the actual number on hand
of each of the selected products. Tr. 264 & 275; GX 30.\23\
Because Mr. Sayani did not have a previous inventory of the
products,\24\ id. at 260, the DIs assigned an opening value of
zero for each of the products. Id. at 377; GX 31. Assigning an
opening value of zero for a product should result in an overage
if, in fact, there was any of the product on hand on the
beginning date of the audit and the distributor is keeping (and
provides) complete records of its purchases and
distributions.\25\ Tr. 269 & 377.
---------------------------------------------------------------------------
\23\ The DIs provided Mr. Sayani with a copy of the count.
Tr. 362.
\24\ At the hearing, a DI testified that DEA's regulations do
not require that a list I chemical distributor keep an
inventory. Id. at 261.
\25\ Assigning an opening value of zero will also result in
an undercount of a shortage if any product had actually been on
hand on the opening date of the audit.
---------------------------------------------------------------------------
To complete the audit, the DIs requested that Mr. Sayani
provide them with his purchase invoices and sales invoices. Id.
at 266. The sales invoices did not, however, clearly indicate
the package size (e.g., whether it was a six count packet or 60
count bottle). Id. at
[[Page 57661]]
267. The DI therefore contacted Mr. Sayani and requested
additional information. Id. at 266-67. While Mr. Sayani then
provided his sales tracking reports, even these were sometimes
lacking the necessary information. Id. at 267.
The audit found that there were shortages with respect to six
of the eleven products.\26\ See GX 31. Most significantly,
Respondent was short 7640 sixty-count bottles of Heads Up and
3656 sixty-count bottles of Max Brand. Id. Moreover, Respondent
was short 284 sixty-count bottles of Mini 2-Way Action. Id.
Respondent was also short 180 six- count packets of Max Brand,
154 six-count packets of Mini 2-Way Action, and 262 packets of
Max Brand Pseudo (24-count). Id.
---------------------------------------------------------------------------
\26\ As the DI explained, the audit was conducted by adding
Respondent's purchases to the opening inventory figure and
comparing that figure with the total of the ending inventory
plus the amounts which Respondent distributed to its customers.
Tr. 268, GX 31.
---------------------------------------------------------------------------
Regarding the audit, Mr. Sayani testified that upon being
served with the Show Cause Order, which had alleged that he was
short approximately 10,000 bottles of Max Brand and Heads Up, he
checked his July 2001 inventory and had 2069 bottles on hand and
did not "know where this 10,000 figure came from.'' Tr. 715. Mr.
Sayani further testified that because 10,000 bottles is a large
amount, he "would know where [it] is going.'' Id. at 716.
The ALJ did not make "precise findings'' on the amount of the
shortages. ALJ Dec. 30 at n.6. I do.
Notably, Mr. Sayani's testimony that he had 2069 bottles on
hand according to his July 2001 inventory is consistent with the
total amount of product that he and the DIs physically
counted.\27\ Moreover, the DIs found that the largest shortage
was in the Heads Up 60-count bottles, yet none of this product
was on hand when the physical count was on hand. See GX 31. The
audit of this product was thus based entirely on Respondent's
records of its purchases and distributions; if the amount was
incorrect, Respondent could have produced his records to show
that.
---------------------------------------------------------------------------
\27\ Mr. Sayani did not state which products were included in
his 2069 figure. According to GX 31, the physical count found
1584 Max Brand (60 count) bottles, 36 Mini 2-Way (48-count) and
428 (60- count) bottles, and 18 Mini Twins (60 count bottles).
These products would total 2066 bottles. I further note the
testimony that Mr. Sayani agreed with the results of the
inventory. Tr. 266.
---------------------------------------------------------------------------
Moreover, for each of the audited products, the amount of the
shortages (11,296 60-count bottles of Max Brand and Heads Up)
was determined based on the discrepancy between the amount of
these products which Respondent obtained from his suppliers
during the audit period and the sum of the amount it had on hand
on June 30 and the amount its sales records showed it had
distributed during the audit period. Mr. Sayani's assertion
aside, he offered no credible evidence that gives me reason to
reject the audit's finding. Accordingly, I adopt as findings,
the audit results as listed in GX 31.
As found above, during the visit, the DIs also discussed with
Mr. Sayani the size of a normal monthly sale to a single store
of non- traditional products. Id. at 330. Mr. Sayani told the
DIs that "[a] typical sale was two to three boxes,'' with each "box
contain[ing] twelve bottles of 60-count tablets.'' Id. at 331.
As found above, however, Respondent frequently sold listed
chemical products in far larger quantities and did so
notwithstanding that the DIs had informed him that sales of case
quantities were suspicious and should be reported to DEA. See RX
12; Tr. 336.
Following the inspection, several DIs were assigned to
conduct customer verifications.\28\ ALJ at 15-17. The
verifications serve several purposes including determining
whether the customer actually exists, the nature of its business
and whether it is legitimate, and whether the customer has a
business relationship with the distributor. Tr. 139, 145, 187,
202, 355-56. As the ALJ found, the verifications produced "mixed
results.'' ALJ at 15.
---------------------------------------------------------------------------
\28\ According to the record, Mr. Sayani provided two
separate customer lists. One was a list which Mr. Sayani
represented as being his actual Forest Park warehouse list I
customers; the other was a list of his potential list I
customers for his Decatur warehouse. Tr. 373-74.
---------------------------------------------------------------------------
One DI, who was assigned twelve verifications, found that
several of the businesses were convenience stores, gas stations,
and a liquor store. Tr. 142-45. Moreover, upon visiting the
addresses of three of the customers, two of which were listed as
businesses (Pamela's Unique Clothing and Reliance Wholesale
Supply), and one which was listed as an individual (M.S.), the
DI found that they were residences and that there were no signs
of businesses. Tr. 142 & 144. The DI further found that the
R.S. Corporation was a Blimpie restaurant, id. at 142, and that
Artistic Sales was a gift shop which did not sell list I
chemicals. Id. at 143.
Another DI testified that when she and her partner went
looking for Ashley's Boutique, they could neither find the store
nor the address that Mr. Sayani had given for it. Id. at 202-03,
233. The DIs further found that the Atlanta Cleaners Plus "was
closed down.'' Id. at 203. While the DIs found that the Matierra
Mexicana 3 was a supermarket, the store did not purchase items
from Respondent. Id. at 203-04. Moreover, one of the
establishments was a liquor and check cashing store. Id. at 204.
Another customer (BDI Inc.) was a Shell gas station whose
manager stated that while he had purchased products from
Respondent nine months earlier, he no longer did so. Id. at 205.
Moreover, the manager told the DIs that Respondent "did not
deliver'' and that "he had to drive to [Respondent's] facility
to pick up his products.'' Id. Finally, the DIs determined that
another customer (Golden Dealers) "was a house that was located
in a cul-de-sac'' and there was no store on the premises. Id. at
206.
Following the customer verifications, one of the DIs and her
supervisor met with Mr. Sayani and his attorney Henry D. Frantz,
Esq., to discuss their concerns that some of Respondent's
customers were not legitimate. Id. at 254. More specifically,
the DI told Mr. Sayani that the DI had "found numerous suspect
customers that normally would not be selling these type of
products.'' Id. at 372. The DI also expressed her concern that
some of Respondent's customers were engaged in wholesale
distribution out of their homes and were therefore required to
be registered under 21 U.S.C. Sec. 823(h), but were not. Id. at
259.
Upon being informed by the DIs that "some of the customers
were suspicious,'' Mr. Sayani stated that he had "provided * * *
a list of the customers he thought * * * would purchase from
him, whether it was list I chemicals or other products that he
handled.'' Id. at 254. At the meeting, the DIs also provided Mr.
Sayani and his attorney with a list of 147 customers who they
deemed suspicious and instructed him to investigate them. Id. at
687.
Several weeks thereafter, Respondent's attorney wrote a
letter to the DIs reporting that 119 of the customers owned
either a convenience store or grocery. RX 8, at 1. Respondent's
attorney further reported that 14 of the customers had "never
purchased a list I'' product and that three of them "have a DEA
license.'' Id. As for the remaining suspicious customers, the
letter stated that Respondent could not contact eight of the
customers and that three of them were jobbers who had purchased
small amounts. Id.
Respondent's attorney further wrote that it "had tightened up
* * * his business with regard to checking out the customer on
all sales pertaining to list I chemicals.'' Id. More
specifically, the letter stated Respondent "currently asks
[[Page 57662]]
for a tax identification number, business license[,] as well
as a DEA permit if the customer does not have a store.'' Id. at
2.\29\
---------------------------------------------------------------------------
\29\ The letter also stated that Respondent would "cross-check
* * * all customers purchasing list I items between'' its two
warehouses, and that it was maintaining "an updated inventory.''
RX 8, at 2.
---------------------------------------------------------------------------
At the hearing, Mr. Sayani testified that he did not go to a
new customer's store to verify whether it was legitimate "because
at the time of opening the account, we get enough proof from
them that they're legitimate * * * or that they're who they
say'' they are. Tr. 768. Mr. Sayani acknowledged, however, that
anyone who applied for a state or local tax identification
number would be issued one. Id. at 769.
At the hearing, Mr. Sayani further testified that upon being
served with the Show Cause Order, which referred to Max Brand
and Heads Up as non-traditional products, he stopped selling the
products. Id. at 714. As found above, the first Show Cause Order
was dated October 20, 2004, and served on Respondent no later
than November 19, 2004, when his counsel requested a hearing.
Contrary to Mr. Sayani's testimony, Respondent's "Sales
Tracking Report'' indicates that it repeatedly sold Max Brand
after the first Show Cause Order was served and frequently did
so in large quantities. Moreover, there is evidence that it made
multiple large sales to several stores.
For example, on November 30, 2004, it sold $504 of Max Brand
2-Way to the Lucky Star of Brookfield, Georgia. RX 12, at 67.
This was followed by two December 12, 2004 sales, each totaling
$1509.84, to the Dixie Stop of Twion and the Modern Kwik Shop of
Summerville, id. at 101, and a December 19, 2004 sale of $504 to
Jay Swaminarayan, Inc., of Tifton, Georgia. Id. at 74. On
February 13, 2005, it sold an additional $861.12 of the products
to both the Dixie Stop and the Modern Kwik Shop.\30\ Id. at 104.
---------------------------------------------------------------------------
\30\ Respondent had also sold $1509.84 of the products to the
Modern Kwik Stop on November 14, 2004. RX 12, at 53.
---------------------------------------------------------------------------
On both November 29, 2004, and January 3, 2005, it sold
$1006.56 of the products to ABJ Ashburn, Inc., of Ashburn. Id.
at 106 & 101. Respondent made further sales of the products
to this store on January 27, February 17, and February 25, when
it sold $430.56 worth on each date, and on both March 20 and
April 2, when it sold $861.12 of the products to this store. Id.
at 101-2, 105-6.
Moreover, on January 8, 2005, it sold $861.12 of Max Brand
pseudoephedrine to Priya Nidhi, Inc., of Calhoun, Georgia. Id.
at 53. Notably, it has previously sold this establishment
$1006.56 on October 15, 2004. Id. at 52.
On February 5, 2005, it made two separate sales of the
products (one totaling $504, the other totaling $430.56) to the
West Gray BP of Gray, Georgia, id. at 78 & 112; on February
18, 2005, it sold $504 of the product to the Razk, Inc.,
Marathon of Douglasville. Id. at 64. And on February 20, 2005,
it made two separate sales (one worth $504, and one worth
$430.56 of the products) to Krishna Corp. of Huntsville,
Alabama. Id. at 72 & 107.
On January 13, February 6, March 1, and April 1, 2005, it
sold $430.56 worth of the products to the Texaco 10 Opelika of
Phenix City, Alabama; on January 13, it also sold an additional
$576 of the products to this store. Id. at 102, 104-06, 113.
Moreover, on both February 20 and April 2, it sold $861.12 of
the products to USA Trading Inc., of Pheonex (sic) City,
Alabama. Id. at 102 & 104. It also sold $861.12 of the
products to Thakurs Fuel, Inc., of Pinehurst, Georgia, on each
of these dates: February 25, March 20, and April 8, 2005. Id. at
103, 105 & 109.
The evidence further shows numerous other instances in which
Respondent sold large quantities of Max Brand as late as April
2005. Id. at 110-12. More specifically, on April 3, 2005,
Respondent sold $861.12 of the product to each of the following
stores: Amin Enterprises, Inc. of Lithonia, the Coastal Food
Mart of Rockmart, and the Hill Top Gas Station of Bremen. Id. at
110-11. Moreover, on April 6, it sold $861.12 worth of the
products to Wendel's JKF, Inc., Discount Tobacco 2, and Discount
Tobacco; all three stores were located in Americus, Georgia.\31\
Id. at 111. Finally, between April 10 and 16, 2005, it sold $504
worth of the products to eleven establishments (the DM Cotton
Patch of Richland, DM Shopper Stop 334 of Cusetta, OM Traders
271, DM Shopper Stops s 442 and 451, all of Cataula; KDC Inv.
and RDSP, both of Columbus; Hyaat Groceries of Covington; Jai
Bhrahmani, Inc., of Buchanan; Gainesville BP of Gainesville; all
in Georgia, and Prem, Inc., of Alexander City, Alabama. Id. at
111-12.
---------------------------------------------------------------------------
\31\ The address of Discount Tobacco 2 is listed as 137 N.
Lee St; the address of Discount Tobacco is listed as 107 South
Lee St. RX 12, at 111.
---------------------------------------------------------------------------
The ALJ specifically found--based on Mr. Sayani's
testimony--that "Respondent stopped selling Heads Up and Max
Brand products because they were identified as `non-traditional'
items by the DEA in the October 2004 Order to Show Cause.'' ALJ
at 21. To the extent this finding implies that Mr. Sayani
stopped selling the products shortly after service of the Order,
it is inconsistent with the evidence which shows that for
approximately five months after the Order was served, Respondent
continued to sell these products. Indeed, Mr. Sayani's testimony
begs the question of why, if the products were identified in the
Show Cause Order, it took five months to stop selling them.
The Government also produced evidence showing that Respondent
had distributed iodine tincture to several of its customers. See
GX 46, at 1, 2, 3, 15, & 16. Moreover, Respondent's evidence
shows that it distributed 2,852 (1 oz.) units of this product to
a single store between June 8, 2003, and November 6, 2004. RX
16, at 5.
Regarding the allegation that Respondent sold excessive
quantities of iodine to convenience stores, the Government
offered anecdotal evidence in the form of a DI's testimony that
she had visited more than 100 convenience stores in both the
course of her official duties and as a consumer and had never
been able to find tincture of iodine. Tr. 396. But in contrast
to the extensive evidence the Government introduced regarding
the expected sales range of pseudoephedrine and ephedrine at
convenience stores, it produced no such evidence with respect to
iodine tincture.
The Government also introduced into evidence several
documents indicating that iodine was used in manufacturing
methamphetamine. The first of these was a blue notice, which was
reprinted in the Chemical Handler's Manual, a copy of which was
provided to Mr. Sayani at both the pre-registration inspection
and the schedule regulatory inspection. Tr. 307. The notice
stated that "iodine became a federally regulated List II
chemical on 10/3/96,'' and that it was being provided to "[m]ake
you aware that iodine is being used to clandestinely produce
methamphetamine.'' GX 36a.
The Government also introduced into evidence an "Information
Brief'' published by the National Drug Intelligence Center
entitled: Iodine in Methamphetamine Production. GX 36B; Tr. 308.
The document stated that "[s]mall-scale methamphetamine
producers who are unable to obtain iodine crystals occasionally
produce them from iodine tincture by mixing iodine tincture with
hydrogen peroxide.'' GX 36B, at 2. This document further
explained that "[t]his is a time-consuming process that yields a
very small amount of iodine crystals in relation to the amount
of tincture and hydrogen peroxide use,'' and also noted that "[i]odine
tincture is not regulated
[[Page 57663]]
by law.'' Id. Putting aside the statement that iodine
tincture was not regulated, the Government produced no evidence
that this document was ever provided to Mr. Sayani.
To counter the Government, Respondent introduced a copy of a
Notice of Proposed Rulemaking (NPRM) in which the Agency
proposed "the control of chemical mixtures containing greater
than 2.2 percent iodine.'' DEA, Changes in the Regulation of
Iodine Crystals and Chemical Mixtures Containing Over 2.2
Percent Iodine, 71 FR 46144, 46145 (Aug. 11, 2006); RX 28. The
NPRM expressly stated that "[i]odine two percent tincture and
solution U.S.P. are sold at a wide variety of retail outlets and
have household application as antiseptic and antimicrobial
products. These products will not become regulated under the
proposed regulation.'' 71 FR at 46146. The NPRM further noted
that "[w]hile the regulatory controls placed on iodine apply to
iodine crystals, they have not pertained to iodine tinctures
(which are considered chemical mixtures).'' Id. (emphasis
added).
In discussing the rationale for the proposed rule, the NPRM
further explained that because "seven percent iodine tincture
and solutions are the predominant iodine-containing chemical
mixtures diverted by traffickers * * * these chemical mixtures
should be subject to CSA chemical regulatory controls.'' Id. at
46149. The NPRM then noted that "[t]wo percent iodine tincture
and solutions are also diverted, but DEA has not documented the
frequent diversion of these materials at clandestine
laboratories. Therefore, DEA does not intend to regulate the two
percent iodine tincture or solution at this time.'' Id.
Respondent also called as a witness a sales representative
for the company which supplied him with iodine tincture. The
sales rep. testified that he had sold Respondent iodine tincture
with an iodine concentration of only one to two percent, Tr.
437-38, and there is no evidence refuting this. See RX 11a &
b. The sales rep. further testified that it was his
understanding that a DEA registration was not required to sell
these products, and that while he had been selling the products
for eight to nine years, he had "no idea'' that iodine tincture
was being diverted into the illicit manufacture of
methamphetamine. Tr. 439 & 442.
Discussion
Section 304(a) of the Controlled Substances Act provides that
a registration to distribute a list I chemical "may be suspended
or revoked * * * upon a finding that the registrant * * * has
committed such acts as would render [its] registration under
section 823 of this title inconsistent with the public interest
as determined under such section.'' 21 U.S.C. 824(a)(4).
Moreover, under section 303(h), "[t]he Attorney General shall
register an applicant to distribute a list I chemical unless the
Attorney General determines that registration of the applicant
is inconsistent with the public interest.'' 21 U.S.C. 823(h). In
making the public interest determination, Congress directed that
the following factors be considered:
(1) Maintenance by the applicant of effective controls
against diversion of listed chemicals into other than
legitimate channels;
(2) Compliance by the applicant with applicable Federal,
State, and local law;
(3) Any prior conviction record of the applicant under
Federal or State laws relating to controlled substances or to
chemicals controlled under Federal or State law;
(4) Any past experience of the applicant in the manufacture
and distribution of chemicals; and
(5) Such other factors as are relevant to and consistent
with the public health and safety.
Id. Sec. 823(h).
"These factors are considered in the disjunctive.'' Joy's
Ideas, 70 FR 33195, 33197 (2005). I may rely on any one or a
combination of factors, and may give each factor the weight I
deem appropriate in determining whether a registration should be
revoked or an application for a registration should be denied.
See, e.g., David M. Starr, 71 FR 39367, 39368 (2006); Energy
Outlet, 64 FR 14269 (1999). Moreover, I am "not required to make
findings as to all of the factors.'' Hoxie v. DEA, 419 F.3d 477,
482 (6th Cir. 2005); Morall v. DEA, 412 F.3d 165, 173-74 (D.C.
Cir. 2005).
While I reject the Government's allegations based on
Respondent's sales of iodine tincture, I nonetheless conclude
that the evidence under factors one, four, and five make out as
prima facie case that Respondent's continued registration would
be "inconsistent with the public interest.'' 21 U.S.C. 823(h).
Moreover, while I acknowledge that Respondent has improved its
physical security, it has otherwise failed to demonstrate that
it has adequate procedures in place to protect the public from
the diversion of listed chemical products. Finally, I find
especially disturbing Respondent's conduct in continuing to sell
large quantities of listed chemical products even after the
service of the initial Show Cause Order.
Finally, I reject Respondent's argument that revoking his
registration would violate its constitutional right to due
process because it has not sold listed chemicals "in excess of
the quantities authorized in the published rules * * * of the
DEA.'' Resp. Prop. Findings at 16. I also find unavailing his
claim--based on the ALJ's finding that his inventory procedures
were inadequate--that it "is once again being asked to comply
with something that is not in the DEA rules,'' and that this is
another violation of its right to due process. Resp. Exceptions
at 6. Accordingly, Respondent's Forest Park registration will be
revoked; its pending renewal application for its Forest Park
facility and its application for a registration at its Decatur
facility will also be denied.
Factor One--Maintenance of Effective Controls Against
Diversion
Under DEA precedent and regulations, this factor encompasses
a variety of considerations and is not limited to whether the
registrant maintains adequate physical security of listed
chemical products. ALJ at 29-30. A DEA regulation requires the
consideration of the adequacy of a registrant's "systems for
monitoring the receipt, distribution, and disposition of List I
chemicals in its operations.'' 21 CFR 1309.71(b)(8). Relatedly,
a registrant must exercise a high degree of care in monitoring
its customer's purchases. Rick's Picks, 72 FR 18275, 18278
(2007), John J. Fotinopoulos, 72 FR 24602, 24605 (2007), D &
S Sales, 71 FR 37607, 37610 (2006); Joy's Ideas, 70 FR 33195,
33197-98 (2005).
It is undisputed that Respondent upgraded its physical
security by building storage cages, installing video cameras,
and assigning a person to distribute the products from the cage.
This, however, is only one part of a registrant's obligation to
maintain effective controls against diversion.
Here, the record shows that Respondent's procedures for
verifying the legitimacy of its listed chemical customers were
wholly inadequate to prevent diversion. Moreover, those
procedures remain so. While following the meeting in which
agency investigators notified Respondent of their concerns
regarding the legitimacy of its customers, Respondent's counsel
stated that it had "tightened up'' its procedures and was
requiring that its customers produce a tax identification number
and business license, RX 8, at 1-2 2, these documents can be
easily obtained by anyone. While Mr. Sayani
[[Page 57664]]
testified that this provided "enough proof'' that his
customers were "legitimate,'' he did not have an employee
personally visit a new customer to determine whether it was a
legitimate business with a need for listed chemical products.
Moreover, Respondent generally operated as a "cash and
carry'' business and only delivered if a customer ordered at
least $ 1,000 worth of the items and requested that it do so.
Thus, a customer could be obtaining listed chemical products
from multiple sources and Respondent would have no knowledge of
this. See Holloway Distributing, 72 FR 42118, 42124 (2007)
(noting a registrant's obligation to determine whether a
customer is receiving listed chemical products from other
suppliers).
As the results of the customer verifications demonstrate,
Respondent was indifferent to its obligation to determine
whether a potential list I customer had a legitimate need for
the products. Moreover, Mr. Sayani's testimony indicates that
Respondent did not change its practices. Indeed, Respondent's
practices are fundamentally inconsistent with its obligations as
a registrant, and are a prescription for wide-spread diversion.
Id., see also D & S Sales, 71 FR at 37610. Respondent's
unwillingness to reform them provides reason alone to conclude
that it does not--and will not--maintain effective controls
against diversion and that its registration would be "inconsistent
with the public interest.'' 21 U.S.C. 823(h).
Buttressing this finding is the evidence pertaining to the
audit. As found above, the audit, which covered a six-month
period, found that Respondent had massive shortages of several
listed chemical products including 7640 sixty-count bottles of
Head Up, 3656 sixty-count bottles of Max Brand, and 284
sixty-count bottles of Mini 2-Way Action.\32\ See GX 31. In
total, Respondent was short 11,580 sixty-count bottles of
pseudoephedrine and combination ephedrine products, or nearly
695,000 dosage units. This was so notwithstanding that the DIs
used 0 as the opening inventory for each of the products (the
consequence of this is that if any product had, in fact, been on
hand on the opening date of the audit, the audit would result in
an undercount of the shortage), and that the time period was of
limited duration.
---------------------------------------------------------------------------
\32\ Respondent also had substantial shortages of three other
products. GX 31.
---------------------------------------------------------------------------
Based on the ALJ's finding that its "lack of an inventory
system, alone, provides persuasive weight against Respondent's
continued registration,'' ALJ at 30 n.6, Respondent argues that "there
is no requirement under any of the DEA rules to have an
inventory system, and [that it] is * * * being asked to comply
with something that is not in the DEA rules.'' Resp. Exceptions
at 6. Respondent contends that it is "being held to * * *
unpublished DEA guidelines,'' and that this is "a violation of
due process * * * and equal protection guarantees.'' Id.
Respondent is correct that there is no regulation which
explicitly requires that it maintain an inventory system.
However, in enacting section 303(h), Congress made plain that in
determining the public interest, the Attorney General was to
consider the applicant's (and in a revocation/suspension
proceeding, the registrant's) "maintenance * * * of effective
controls against diversion of listed chemicals into other than
legitimate channels.'' 21 U.S.C. 823(h).
Moreover, in 1995, DEA promulgated 21 CFR 1309.71(a), which
directed that "[a]ll applicants and registrants shall provide
effective controls and procedures to guard against theft and
diversion of List I chemicals.'' This regulation, which remains
in effect, further explained that "[i]n evaluating the
effectiveness of security controls and procedures, the
Administrator shall consider * * * [t]he adequacy of the
registrant's or applicant's systems for monitoring the receipt,
distribution, and disposition of List I chemicals in its
operations.'' 21 CFR 1309.71(b)(8).
Federal law further requires that a registrant report "any
regulated transaction involving an extraordinary quantity of a
listed chemical,'' 21 U.S.C. 830(b)(1)(A), and a "regulated
transaction'' is based on "the quantitative threshold or the
cumulative amount for multiple transactions within a calendar
month.'' 21 CFR 1310.04(f). Federal law also requires a
distributor to report to this Agency "any unusual or excessive
loss or disappearance of a listed chemical under the control of
the regulated person.'' 21 U.S.C. 830(b)(1)(C). Accordingly, to
satisfy 21 CFR 1309.71(b)(8), a registrant's recordkeeping must
be sufficient so as to enable it to comply with its reporting
obligations under Federal law.\33\ See Fotinopoulos, 72 FR at
24605.
---------------------------------------------------------------------------
\33\ Typically, this requires no more than maintaining the
records that a registrant keeps in the normal course of
business. See, e.g. , DEA, Implementation of the Domestic
Chemical Diversion Control Act of 1993, 60 FR 32447, 32451
(1995) (noting "that most of the information required by the
regulations is already maintained in general business records
for all transactions'').
---------------------------------------------------------------------------
Here, Respondent has no satisfactory explanation as to the
disposition of approximately 11,580 sixty-count bottles or
695,000 dosage units of listed chemical products. Whether the
shortages are due to poor recordkeeping, theft, or some other
reason, the magnitude of these shortages provides a further
reason to conclude that Respondent does not maintain effective
controls against diversion and that its continued registration
would be "inconsistent with the public interest.'' 21 U.S.C.
823(h).
Factor Four--Respondent's Past Experience in Distributing
Listed Chemicals
Under this factor, the ALJ further concluded that Respondent
made "excessive sales of both list one chemical products and
iodine'' that "pose a risk to the public interest.'' ALJ at 32.
While the ALJ found the testimony of Respondent's expert "more
persuasive'' than the Government's evidence on the expected
sales level of list I chemical products, as she further
explained, even the Respondent's expert witness "concurred that
some of the [sales of] Respondent's List I chemical products * *
* were in excess of what would be expected.'' Id. at 33. While I
adopt the ALJ's conclusions with respect to list I chemicals, I
reject them with respect to iodine.
With respect to its distributions of iodine, the ALJ found
that "Respondent has knowingly distributed large amounts of 2%
iodine, another methamphetamine precursor.'' ALJ at 32. In
support of her conclusion, the ALJ relied on the testimony of
Respondent's expert that there were "five instances where the
quantity [of iodine] purchased might be suspiciously high,'' Tr.
571, as well as on Mr. Sayani's testimony that he was aware that
one of his customers was purchasing hundreds of bottles but that
he thought the customer was distributing to other small
retailers. Id. at 744; see also ALJ at 32.
The Government's own evidence establishes, however, that the
2% iodine product which Respondent sold "is not regulated by
law,'' GX 36B at 2, and the NPRM which announced the Agency's
intent to regulated iodine tinctures containing more than 2.2
percent iodine noted that 2% iodine tincture products "are sold
at a wide variety of retail outlets and have household
application as antiseptic and antimicrobial products.'' 71 FR
46146. The same NPRM also explained that the "frequent
diversion'' of two percent iodine tincture at clandestine
laboratories "has not [been] documented.'' Id. at 46149.
[[Page 57665]]
Furthermore, DEA's regulations provide that two conditions
must be met for a chemical mixture to be exempted from
regulation. 21 CFR 1310.13(a). First, "[t]he mixture [must be]
formulated in such a way that it cannot be easily used in the
illicit production of a controlled substance.'' Id. Sec.
1310.13(a). Second, "[t]he listed chemical or chemicals
contained in the chemical mixture cannot be readily recovered.''
Id. Sec. 1310.13(b). Given the criteria for exempting a chemical
mixture from regulation, neither the ALJ nor the Government
explained why large sales of 2% iodine tincture are, by
themselves, enough to give rise to a reasonable belief that the
chemical contained therein is likely to be diverted.
Here, there is no evidence that Respondent sold these
products with knowledge that they would be diverted for use in
the illicit manufacture of methamphetamine, and in any event,
the Government's allegation that Respondent was selling
excessive amounts of iodine tincture is not supported by
substantial evidence. The Government's evidence is limited to
the testimony of a diversion investigator that she had visited
100 convenience stores and had never found iodine tincture. Yet
the Agency's NPRM noted that these products, which have several
legitimate uses, are sold at "a wide variety of retail
outlets.'' 71 FR at 46146.
More importantly, even assuming that the investigator was
specifically looking for iodine tincture at the convenience
stores she visited, the testimony amounts to nothing more than
anecdotal evidence. As such, it does not conclusively establish
the extent to which these products are sold at convenience
stores and the statistical improbability that Respondent's sales
of these products were to meet legitimate demand. Indeed, the
evidence stands in contrast to the quantum of the evidence the
Government introduced regarding the expected sales levels of
list I chemical products at convenience stores.\34\ Accordingly,
I conclude that Respondent's sales of iodine do not support a
finding that its continued registration is inconsistent with the
public interest.
---------------------------------------------------------------------------
\34\ Because 2% iodine tincture is not regulated, the
Government's allegation that it engaged in regulated
transactions which it failed to report as suspicious
transactions is also rejected.
---------------------------------------------------------------------------
On the other hand, Respondent's sales of list I chemical
products clearly were excessive and support a finding that its
continued registration is inconsistent with the public interest.
Even assuming that the monthly expected sales figure of $173 for
pseudoephedrine given by Respondent's expert is accurate, and
that some stores might make a legitimate business decision to
purchase a case quantity to reduce their costs, the evidence
shows that Respondent repeatedly sold case quantities to
multiple customers including the Coastal Food Mart, Chitra
Inc.'s Quick Stop, the Phillips 66 Mart, the R & S Grocery,
and the Stop In.
The evidence also shows that Respondent sold case quantities
to two customers which gave the same address. For example,
between January 6 and August 1, 2004, Respondent sold a total of
eleven cases to the P & K Mini Mart and the Quick Stop/Tushar/BP,
both of which used the same address. Moreover, between January 6
and September 5, 2004, it sold a total of fifteen cases to the
DJ Food Mart and BJ Food Market 1, which gave their respective
addresses as 15582 HWY 27 and 15582 HWY 27 North in Trion,
Georgia. With respect to the Coastal Food Mart, which purchased
eight cases between January 21 and September 5, 2004, even
Respondent's expert acknowledged that this store's purchases
were many times the expected norm. Tr. 619-20. And as found
above, several of Respondent's customers purchased even larger
amounts of list I chemical products than did the Coastal Food
Mart. As Respondent's expert allowed with respect to those
customers who were repeatedly purchasing large quantities, "maybe
there's some nefarious practice involved here'' and the
customers are "doing something that * * * they shouldn't be
doing.'' Id. 570.\35\
---------------------------------------------------------------------------
\35\ As DEA has found in numerous other cases, where there is
a pattern of distributions which are so large as to be
statistically improbable to meet legitimate demand, a finding
that the products have been diverted is warranted. See Holloway
Distributing, 72 FR at 42125; T. Young Associates, Inc., 71 FR
60567, 60572 (2006); D & S Sales, 71 FR at 37611; Joy's
Ideas, 70 FR at 33198.
---------------------------------------------------------------------------
Respondent raises two arguments in response to the
allegations that it sold excessive quantities of list I chemical
products. First, it argues that given the nature and size of its
business, it would be "almost impossible to find'' the excessive
sales. Resp. Prop. Findings at 15.
Second, it argues that is "has not sold any restricted item
in excess of the quantities authorized in the published rules
and regulations * * * which show the threshold quantities of
restricted items the wholesalers * * * are allowed to sell
without * * * putting their DEA license at risk.'' Id. at 16.
Relatedly, Respondent raises again a due process argument that "[i]f
the Government is proceeding on any basis other than Respondent
having exceeded the sale quantity thresholds which the
Government has specifically published (such as `not in the
public interest'), then the Government is proceeding under a
rule or statute which is void for vagueness as it does not put
Respondent on notice as to what specific action would be
violative of [its] rules and regulations.'' Id. at 17-18.
As for the argument that it would be nearly impossible to
detect excessive purchases, Respondent's expert acknowledged
that a computer program could be written to detect such
purchases. Tr. 648. Nor would it require more than minimal
effort to call up a customer's account to determine the
frequency and amounts of its purchases before selling additional
amounts of the products to it.
Also unavailing is Respondent's contention that because it
did not sell more than the threshold quantities, its
registration cannot be revoked. Contrary to Respondent's
understanding, selling under threshold amounts does not relieve
a registrant from its obligation to taking necessary measures "to
determine the ultimate disposition of [its] products.'' Rick's
Picks, 72 FR at 18278. The thresholds simply trigger additional
recordkeeping and reporting requirements. As I explained in
Rick's Picks:
Congress's imposition of recordkeeping and reporting
requirements for regulated transactions does not mean that one
can engage in below-threshold transactions without any further
obligation to determine whether the products are likely to be
diverted. Indeed, DEA has found that products which have been
distributed to non-traditional retailers in sub-threshold
transactions are routinely diverted. Contrary to Respondent's
view, the threshold provisions pertaining to regulated
transactions do not create a safe harbor which allows a
registrant to sell list I chemicals without any further duty to
investigate how the products are being used.
Id. Cf. United States v. Kim, 449 F.3d 933, 944 (9th Cir.
2006) ("[T]he recording and reporting statutes establish no safe
harbor from prosecution under [21 U.S.C.] 841(c)(2).''). I
therefore reject Respondent's contention (as raised in both its
Exceptions and Motion for Judgment as a Matter of Law) that this
proceeding should be dismissed because it did not sell in excess
of the thresholds.
Finally, there is no merit to Respondent's related contention
that it has been denied fair "notice as to what specific action
would be violative of [DEA's] rules and regulations.'' Resp.
Prop. Findings at 18. Contrary to
[[Page 57666]]
Respondent's view, the standards, which it was expected to
conform to, were identifiable "with ascertainable certainty'' by
reviewing DEA's public pronouncements. Trinity Broadcasting,
Inc., v. FCC, 211 F.3d 618, 628 (D.C. Cir. 2000).
In section 304(a), Congress made clear that a registration is
subject to revocation where a registrant "has committed such
acts as would render his registration * * * inconsistent with
the public interest as determined under'' under section 303. 21
U.S.C. 824(a)(4). And in section 303(h), Congress clearly
provided that one of the criteria for determining the public
interest is whether a registrant maintains "effective controls
against diversion of listed chemicals into other than legitimate
channels.'' Id. Sec. 823(h)(1). The statute itself thus provides
fair warning to a registrant that is must not sell to diverters.
Moreover, in several decisions which pre-dated nearly all of
the listed chemical distributions discussed above, this Agency
made clear that selling in quantities that greatly exceed
legitimate demand for these products supports a finding of
diversion and that such conduct can be the basis for the
revocation of a registration. See, e.g., Branex, Inc., 69 FR
8682, 8690-94 (2004) \36\ (revoking registration noting that
distributor's sales of pseudoephedrine to convenience stores
greatly exceeded the expected sales range at such stores and
supported a finding that the pseudoephedrine was likely
diverted); MDI Pharmaceuticals, 68 FR 4233, 4238 (2003)
(revoking registration on ground that "firm distributed large
quantities of pseudoephedrine tablets to smoke shops and * * *
convenience stores in quantities that apparently exceeded
legitimate demand for these products''); Ace Wholesale &
Trading Co., 67 FR 12574, 12576 (2002) (revoking registration on
grounds that registrant "was distributing large quantities of
pseudoephedrine to [a convenience store] and other
establishments that appeared far in excess of legitimate
demand'').\37\ In these decisions, all of which were also
published on the Agency's Web site as well as in the Federal
Register, DEA provided fair warning that Respondent's conduct in
selling large quantities of listed chemicals could result in the
revocation of its registration.
---------------------------------------------------------------------------
\36\ The Branex decision was published in the Federal
Register on February 25, 2004, before Respondent made many of
the case quantity distributions.
\37\ In addition, in publications such as the Chemical
Handler's Manual, DEA explained that "[i]t is fundamental for
sound operations that handlers take reasonable measures to
identify their customers, understand the normal and expected
transactions typically conducted by those customers, and,
consequently, identify those transactions conducted by their
customers that are suspicious in nature.''Chemical Handler's
Manual 15 (2002).
The Chemical Handler's Manual also sets forth numerous
criteria for recognizing suspicious transactions including "resell[ing]
to non-traditional outlets for regulated OTC products, e.g.,
hair salons, head shops, drug paraphernalia stores, liquor
stores, record stores, video shops, auto parts stores,'' and "resell[ing]
large volumes into the `independent convenience store' market.''
Id. at 42. The manual also listed as relevant criterion "[a]ny
customer who asks for large bottle sizes, 60 count or higher,''
or "buy[s] only the largest size available.'' Id.
---------------------------------------------------------------------------
Respondent's argument rings hollow for another reason. In the
first Show Cause Order, Respondent was put on notice that "Max
Brand products have been found on numerous occasions in
situations related to the illicit manufacture of methamphetamine,''
Show Cause Order I, at 3; that the monthly expected sales range
of pseudoephedrine products at convenience stores in Georgia "averaged
between $15 and $60,'' id. at 4; and that its sales of listed
chemical products were "wildly inconsistent with the expectation
of sales'' by convenience stores. Id. at 5. Mr. Sayani even
testified under oath that at the "end of 2004, starting of
2005,'' and after receiving the Show Cause Order, he had stopped
selling Max Brand products. Tr. 713. Respondent's records
establish, however, that it continued to sell the products for
months past the date when Mr. Sayani claimed it had stopped; it
also shows numerous instances in which Respondent sold half-case
quantities or larger for several months thereafter.\38\ I thus
reject Respondent's contention that it lacked fair warning that
its excessive sales could be grounds for the revocation of its
registration.
---------------------------------------------------------------------------
\38\ Relatedly, Mr. Sayani told the DI during one of the 2001
inspections that "a typical sale'' would be two to three boxes
containing 12 bottles; in the same conversation, the DI told Mr.
Sayani that a sale of a case quantity would be suspicious. Tr.
330- 31. Many of Respondent's sales were well in excess of a
typical sale. Respondent thus not only ignored the DI's
instruction, it also ignored its own understanding of the
market. Moreover, at the various visits, Respondent was provided
with a copy of several notices which explained that
pseudoephedrine and combination ephedrine were being diverted
into the illicit manufacture of methamphetamine.
---------------------------------------------------------------------------
Accordingly, while Respondent was authorized to distribute
list I chemicals for approximately six years, its experience is
characterized by its frequent disregard of its obligation to
protect against the diversion of these products. This conclusion
provides an additional basis, which is sufficient by itself, to
find that Respondent's continued registration is "inconsistent
with the public interest.'' 21 U.S.C. 823(h).
Factor Five--Such Other Factors as Are Relevant to and
Consistent With Public Health and Safety
As found above, the illicit manufacture and abuse of
methamphetamine have had pernicious effects on families and
communities throughout the nation.\39\ Cutting off the supply
sources of methamphetamine traffickers is of critical importance
in protecting the public from the devastation wreaked by this
drug.
---------------------------------------------------------------------------
\39\ As found above, methamphetamine trafficking has
increased substantially in Georgia and the adjacent States.
---------------------------------------------------------------------------
While listed chemical products containing both ephedrine and
pseudoephedrine have legitimate medical uses, DEA orders have
established that convenience stores, gas-stations, and other
small retailers, constitute the non-traditional retail market
for legitimate consumers of products containing these chemicals.
See, e.g., Tri-County Bait Distributors, 71 FR 52160, 52161-62
(2006); D & S Sales, 71 FR at 37609; Branex, Inc., 69 FR
8682, 8690-92 (2004). DEA has further found that there is a
substantial risk of diversion of list I chemicals into the
illicit manufacture of methamphetamine when these products are
sold by non-traditional retailers. See, e.g., Joy's Ideas, 70 FR
at 33199 (finding that the risk of diversion was "real'' and "substantial'');
Jay Enterprises, Inc., 70 FR 24620, 24621 (2005) (noting "heightened
risk of diversion'' if application to distribute to
non-traditional retailers was granted). For this reason, DEA has
repeatedly revoked the registrations and denied an application
for registration when a registrant distributes (or an applicant
proposes to distribute) listed chemicals to non-traditional
retailers and other evidence (such as excessive sales,
inadequate diversion controls, previous violations/ criminal
convictions or a lack of adequate experience) confirm that the
registrant/applicant is unlikely to responsibly handle the
products. See Rick's Picks, 72 FR at 18278-80; John J.
Fotinopoulos, 72 FR at 24605-07; Tri-County Bait Distributors,
71 FR at 52163-64; D & S Sales, 71 FR at 37610-12; Joy's
Ideas, 70 FR at 33197-99; Xtreme Enterprises, 67 FR 76195,
76197-98 (2002).
The record here likewise establishes a substantial nexus
between the sale of non-traditional list I chemicals products
and the diversion of these products into the illicit manufacture
of
[[Page 57667]]
methamphetamine. According to the testimony of a DEA Special
Agent, who had debriefed more than 200 individuals involved in
the illicit manufacture of methamphetamine, convenience stores,
gas stations and other small retailers were the primary and
preferred source of pseudoephedrine and ephedrine that was used
by smaller meth. labs. Tr. 56 & 59; see also TNT
Distributors, 70 FR 12729, 12730 (2005) (noting Special Agent's
testimony that "80 to 90 percent of ephedrine and
pseudoephedrine being used [in Tennessee] to manufacture
methamphetamine was being obtained from convenience stores'').
The record establishes that Respondent's list I customer base
was comprised primarily of the same type of establishments. More
specifically, Respondent's list I customers included gas
stations, convenience stores, dollar stores, liquor stores,
beauty stores, gift shops, and some customers (such as those
located at private residences) whose business was not even
clear. As the ALJ observed "[s]ome of these businesses did not
even appear to be tangentially related to the legitimate sale of
pseudoephedrine and ephedrine products.'' ALJ at 34. As the ALJ
further noted, notwithstanding the substantial risk of diversion
present when distributing to these establishments, as well as
the testimony that non-traditional retailers were the primary
supply source for illicit meth. cooks, Respondent offered no
evidence that it "would cease dealing with'' these
establishments. Id.
Moreover, while Respondent disputed the amount of monthly
sales of pseudoephedrine at convenience stores to meet
legitimate demand, it did not challenge the Government's
evidence that sales of non-prescription drugs account for only a
small percentage of the total sales of convenience stores that
handle the products. Nor did it offer any evidence to refute the
Government's evidence that only a small number (approximately
two in one thousand) of convenience store customers purchase a
pseudoephedrine product. And even using the monthly expected
sales figures put forth by its expert, as found above,
Respondent repeatedly sold to multiple non-traditional retailers
quantities of list I chemical products that greatly exceeded
legitimate demand for these products.
Having concluded that the Government made out its prima facie
case, the ALJ then turned to assessing whether Respondent had
produced sufficient evidence that it would protect the public
interest from the diversion of the products. Id. at 34. As the
ALJ noted, Respondent did improve its physical security. Id. The
ALJ also noted that Respondent had conducted "some
investigations into some of its customer's business
identities.'' Id. Yet at the hearing, Mr. Sayani testified that
he did not go to a new customer's store to verify whether it was
a legitimate business and that a new customer's presentation of
a tax identification number and business license provided
sufficient proof of the customer's bona fides. Tr. 768-69. Mr.
Sayani offered no testimony that Respondent was willing to
change this practice.\40\
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\40\ There was also evidence that on one occasion,
Respondent's attorney reported an incident involving an
individual who, in attempting to purchase products, admitted to
Mr. Sayani that he did not have a store, and then showed Mr.
Sayani a van full of products which he had purchased from a
competitor of Respondent. RX 29. While the letter provided
information regarding the practices of Respondent's competition,
it did not report the name of the individual or give the license
plate number (or a description) of the van. See id.
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The ALJ nonetheless concluded that Respondent "does
demonstrate a willingness to comply with DEA directions''
because it did not handle list I chemical products at its
Decatur location while its application was pending and at its
Forest Park location after that registration was suspended. ALJ
at 34-35. The ALJ also reasoned that Respondent "stopped selling
non-traditional listed chemical products in 2004, after the DEA
served its first Order to Show Cause.'' Id. at 35.
Both the handling of a list I chemical product at an
unregistered location and the distribution of a list I product
out of a location with a suspended registration would, however,
constitute felony offenses under Federal law. See 21 U.S.C.
841(f)(1); id. Sec. 843(a)(9); id. Sec. 844(a). Even if
Respondent's compliance with these provisions is probative of
its willingness to cooperate (a debatable proposition given that
its non-compliance would expose it to substantial criminal
penalties), the remaining basis for the ALJ's conclusion is not
supported by the record.
As found above, Respondent continued selling non-traditional
products--and made numerous large quantity transactions--well
into April 2005, approximately five to six months after service
of the first Show Cause Order. Indeed, Mr. Sayani's testimony
regarding when Respondent stopped selling the products is
clearly refuted by the documentary evidence. The weight of the
evidence thus does not support the ALJ's conclusion that
Respondent is willing to comply with DEA's direction.
In any event, notwithstanding her finding, the ALJ concluded
that Respondent's "cooperation is dwarfed by the significant
risk of diversion posed to the public by * * * Respondent's
continued sales of listed chemical products to [non-traditional
retailers] without adequate sales records or customer
verification.'' ALJ at 35. While Respondent contends that the
ALJ "ignore[d] the substantial remedial actions that [it] had
taken to correct [the] problems of which'' it was notified, Resp.
Exceptions at 6, the ALJ considered them and properly concluded
that they only partially addressed the problems identified by
the Agency. See ALJ at 35 (noting that Respondent has "not
provided sufficient evidence to convince [the Agency] that its
future conduct would change to the degree necessary to eliminate
the threat to the public interest'').
In short, Respondent offered no evidence of its willingness
to change its practices for determining whether its customers
are legitimate. It offered no evidence that it has in place
systems to accurately account for the products it handles and to
properly identify those customers who are purchasing excessive
quantities.
Likewise, it has offered no credible evidence that it is
willing to change its practices to limit its sales of these
products. Its claim that it stopped selling the products shortly
after service of the first Show Cause Order, is contradicted by
the documentary evidence. Moreover, its argument that the
thresholds establish the "quantities of restricted items the
wholesalers * * * are allowed to sell without * * * putting
their DEA license at risk, [and] are what both the Government
and the public are bound to abide by,'' Resp. Prop. Findings at
16--a theme which is repeated throughout its brief--makes plain
its view that it can continue to sell up to the thresholds with
no obligation to limit its distributions to those establishments
at which there is only limited consumer demand for these
products for their lawful use. Because this view is
fundamentally inconsistent with a distributor's obligation under
the CSA, I conclude that Respondent's registration "is
inconsistent with the public interest.'' 21 U.S.C. 823(h).\41\
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\41\ Respondent also contends that "the Government had no
reasonable justification in summarily proceeding to seize his
products and summarily revoke his license without affording him
a due process right to a hearing.'' Id. at 20. Respondent
ignores, however, that section 304(d) of the CSA expressly
authorizes the suspension of "any registration simultaneously
with the institution of proceedings under this section, in cases
where he finds that there is an imminent danger to the public
health and safety.'' 21 U.S.C. 824(d).
Respondent does not argue that the statute is
unconstitutional. Nor could it, as the Supreme Court has
repeatedly upheld the use of post-deprivation process in
emergency situations. See, e.g., Gilbert v. Homar, 520 U.S. 924
(1997). Moreover, in this case, the evidence of Respondent's
continued large sales of listed chemical products, even after
being served with the first Show Cause Order, supports the
finding that Respondent's continued registration during the
pendency of the proceeding posed an imminent danger to public
health and safety. Respondent could also have sought review of
the suspension in a "court of competent jurisdiction.'' 21 U.S.C.
824(d).
Finally, Respondent asserts that "the effect of the DEA's
arbitrary actions [in its] case [is] to discriminate against him
because he is a legal alien'' in violation of his right to equal
protection of the laws. Resp. Prop. Findings at 25. Respondent
does not, however, contend that the Agency is intentionally
discriminating against its owner, see Hernandez v. New York, 500
U.S. 352, 359-60 (1991), a requirement for stating a claim under
the Equal Protection Clause, and in any event, it has produced
no evidence to support its claim. Respondent is just one of many
list I chemical distributors whose registrations have been
revoked for committing acts inconsistent with the public
interest.
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[[Page 57668]]
Order
Pursuant to the authority vested in me by 21 U.S.C. 823(h)
& 824(a), as well as 28 CFR 0.100(b) & 0.104, I order
that DEA Certificate of Registration, 040450SLY, issued to Sunny
Wholesale, Inc., 120 Forest Parkway, Forest Park, Georgia, be,
and it hereby is, revoked, and that its application to renew
this registration be, and it hereby is, denied. I further order
that Sunny Wholesale, Inc.'s, application for a DEA Certificate
Registration at 2935 N. Decatur Road, Suite C, Decatur, Georgia,
be, and it hereby is, denied. These orders are effective
November 3, 2008.
Dated: September 26, 2008.
Michele M. Leonhart,
Deputy Administrator.
[FR Doc. E8-23395 Filed 10-2-08; 8:45 am]
BILLING CODE 4410-09-P
NOTICE: This is an
unofficial version. An official version of these publications may be obtained
directly from the Government Printing Office (GPO).
