United States v. Fallon

UNITED STATES OF AMERICA v. DONNA FALLON, Appellant UNITED STATES OF AMERICA v. DEAN VOLKES, Appellant UNITED STATES OF AMERICA v. DEVOS LTD LLC d/b/a GUARANTEED RETURNS, Appellant

Nos. 19-2775, 19-2788, 19-2792

United States Court of Appeals, Third Circuit

September 30, 2022

Argued: March 16, 2021

On Appeal from the United States District Court for the Eastern District of Pennsylvania (District Court Nos 2-14-cr-00574-003, 2-14-cr-00574-002, &2-14-cr-00574-001) District Judge: Petrese B. Tucker

Robert J. Cleary [ARGUED]

William C. Komaroff

James R. Anderson

Proskauer Rose LLP

Counsel for Appellant Donna Fallon

Lisa A. Mathewson [ARGUED]

The Law Offices of Lisa A. Mathewson, LLC

Counsel for Appellant Dean Volkes

Douglas E. Grover

Richard H. Dolan [ARGUED]

Thomas A. Kissane

Schlam Stone & Dolan LLP

Counsel for Appellant DEVOS, LTD

William M. McSwain

Robert A. Zauzmer

Patrick J. Murray

Elizabeth M. Ray

Nancy Rue [ARGUED]

Office of United States Attorney

Counsel for Appellee United States of America

Before: KRAUSE, PHIPPS, and FUENTES, Circuit Judges.

OPINION OF THE COURT

FUENTES, CIRCUIT JUDGE.

The three Appellants-Devos LTD LLC, which trades under the name "Guaranteed Returns"; Dean Volkes, the company's owner and Chief Executive Officer; and Donna Fallon, the company's Chief Financial Officer and Volkes's sister-appeal their convictions arising from multiple schemes to defraud their clients, including the United States Government. For the reasons explained herein, we will vacate Appellants' conviction for conspiracy to launder money, vacate the sentences, and remand for resentencing, including a recalculation of the forfeiture award. For all other convictions, we will affirm.

I. Background

A. Factual Background

Guaranteed Returns was a "reverse distributor" of pharmaceutical products. It provided inventory management services to healthcare providers (such as hospitals, pharmacies, long-term care facilities, and doctors' offices) by returning unused or expired pharmaceutical drugs to the drug manufacturers, for which the provider can normally receive a refund. Because healthcare providers need multiple pharmaceuticals from a variety of manufacturers, each with different return policies for their products, reverse distributors perform this service for their clients in exchange for a fee, which is typically a percentage of the return value of the drugs.

To obtain a refund, the provider must either physically return the pharmaceutical to the manufacturer, or certify that it has been destroyed. The manufacturer then issues the refund, either in the form of a credit to the healthcare provider's account at the relevant wholesaler,^[1] or as a money refund by a wire transfer or check. Reverse distributors like Guaranteed Returns manage this process for their clients: a provider sends its pharmaceuticals to the reverse distributor who returns the drugs on the provider's behalf. As a consequence, both the drugs and the funds that reverse distributors receive from manufacturers for returning those drugs are the property of the healthcare-provider clients.

Providers will also send non-returnable pharmaceuticals to reverse distributors. These include unexpired pharmaceuticals that the providers no longer need but that may become eligible for a refund upon expiration. These are commonly known as "indates."^[2] Reverse distributors can keep track of these indates, "age" them until they are returnable, and then submit them for a refund when the time comes.

To run their operations efficiently, reverse distributors return all pharmaceuticals eligible for a refund to a single manufacturer in one "batch." These batches can be comprised of different drugs submitted on behalf of different healthcare providers. The manufacturer, in accordance with its policy, will then either credit the individual healthcare provider's account at the relevant wholesaler, or remit a lump-sum payment to the reverse distributor who then issues refunds- less a service fee-to its healthcare-provider clients whose drugs were in the batch. For Guaranteed Returns, the lumpsum refunds were wired directly to the company's general operating account, and the company then issued refund checks from that account to the relevant clients, less a service fee.^[3] Guaranteed Returns used a database management software called FilePro to track the information necessary to determine how much money to remit to which clients from the lump-sum refunds. Each healthcare-provider client had a separate account in FilePro. This software tracked the pharmaceuticals received, to which client they belonged, the date they arrived, and the date of return, among other information. For indates, FilePro also tracked the date on which these pharmaceuticals would become eligible for a refund.

In 2001, the Government started doing business with Guaranteed Returns. The Department of Defense ("DoD") contracted with Guaranteed Returns to handle pharmaceutical returns for a number of government facilities. DoD and Guaranteed Returns entered into another agreement in 2007. Guaranteed Returns's proposal for the second contract specifically stated that it would inventory, warehouse, and age the Government's indates, and then return the indates when eligible, for its usual fee. Guaranteed Returns's 2001 contract did not refer to indates by name, but the company specifically included indates in the 2007 contract. The company also required its clients to use a return authorization form when sending drugs for credit that purported to give Guaranteed Returns wide discretion concerning pharmaceuticals that were not "immediately creditable."^[4] The Government began investigating Guaranteed Returns after the District of Columbia noticed that it did not receive the full refund on a return of some of its pharmaceuticals.^[5] The Defense Criminal Investigative Service investigated, and the Government eventually uncovered a series of schemes that Guaranteed Returns used to defraud its clients. Four such schemes are described below.

1. The Indates Scheme

Volkes devised and implemented a scheme to return indated drugs to manufacturers on Guaranteed Returns's own behalf-not on behalf of the client who owned the drugs-and to keep the refund money. To do this, in 2007, Volkes instructed his IT staff to change the programming in FilePro to divide each of Guaranteed Returns's clients into two categories: "managed" and "unmanaged." "Managed" clients were thought to pay close attention to whether they received refunds or credits for indates, while "unmanaged" clients were thought not to do so. The computer program diverted indates from unmanaged clients by reclassifying them as the property of Guaranteed Returns, listing them in FilePro as the property of a non-existent client labeled "GRX Stores." The program did not affect the indates for "managed" clients. When Guaranteed Returns received the lump-sum payment from manufacturers for returning a batch of pharmaceuticals, it would pay "managed" clients the amount owed but kept for itself the amount that should be owed to "unmanaged" clients for the indate refunds. To ensure that the scheme was not uncovered, when submitting batches of pharmaceuticals to manufacturers for refunds, Guaranteed Returns attributed each drug to the healthcare provider from whom Guaranteed Returns had diverted the drug.

2. The G-13 Scheme

Volkes also devised a scheme to divert indates from managed clients. In late 2010, he instructed his IT staff to reclassify every thirteenth expiring indate product of a managed client as the property of GRX Stores, if the value of the product was less than $3,000. Volkes wanted to avoid stealing products that were so valuable that they might catch the client's attention.

3. The Three-Year Cutoff Scheme

In 2011, Volkes developed another scheme to divert indates from managed clients. Volkes instructed his IT staff to reclassify indates that were received more than three years earlier as the property of the GRX Stores.

4. Adjustment Scheme

Not all of Guaranteed Returns and Volkes's schemes involved indates. In fall 2010, Volkes directed his IT staff to create a program that "adjusted" downward the amount of refunds that were due to certain clients. This adjustment program skimmed a certain percentage from the lump-sum refund that was owed to clients and reassigned it to the fictious GRX Stores. Volkes had the program installed on Fallon's computer so that Fallon could decide when to run the adjustment program and what percentage to skim from the clients' refunds. Volkes did this in order to repay a loan he had taken out to satisfy a civil judgment against him issued by a Missouri court.

5. Money Laundering Conspiracy

In addition to the fraud schemes, the Government alleged that Guaranteed Returns, Volkes, and Fallon conspired to launder the fraud proceeds corresponding to the indate products that had been diverted from clients and reclassified as belonging to GRX Stores. Since the company received all refund payments as a lump-sum from manufacturers, the Government alleged that the fraud proceeds were initially commingled with the "legitimate" refunds due to clients, as well as the company's service fees, in the lump-sum refund received into the company's general operating account. Once clients were paid, the Government alleged that Appellants transferred the fraud proceeds out of the general operating account and eventually into Volkes's personal account through a series of complex transactions designed to conceal the nature, location, source, ownership, and control of these proceeds.

B. Procedural History

The Government brought 64 charges against Guaranteed Returns,...