A recent press release by the U.S. Attorney’s Office, Southern District of Florida blasted the headline, Fraud Scheme Involving Baby Formula Leads to 18-Year Federal Prison Sentences for Swindlers. Health care fraud in South Florida should come as no surprise. With its large Medicare population, South Florida is a haven for all manner of medical fraud schemes. Years ago, an investigation of durable medical equipment suppliers in Miami Dade County found 1-in-3 did not exist at the address they supposedly occupied. Another investigation sought to identify and close down rouge pharmacies that ran up thousands of dollars in Medicare charges per day without serving a single customer. I digress, back to the press release:
A federal district judge in Miami has sentenced each of three South Florida residents to 220 months in prison after a jury found them guilty of orchestrating an elaborate fraud scheme that cheated U.S. manufacturers of infant formula, eye-care products, and other FDA-regulated items out of more than $100 million.
Wow! Sounds serious! There is no parole in federal prison. Those convicted have to serve 85% of their sentence before they are eligible to move to a halfway house or serve the remainder of their sentence in the community. That’s approximately 15 years, 7 months behind bars in a federal prison.
Here is what went down. Raoul Doekhie and Sherida Nabi, a married couple originally from Suriname, pretended to have government procurement contracts back in Suriname to import baby formula, eye-care products and some other medical devices. The couple also worked with a third person, Johnny Grobman, from Miami. Suriname is the smallest and one of the world’s poorest. Its standard of living is far below the United States. Thus, because of its poverty and distance from the American market, manufactures of baby formula agreed to sell products to the three at a steep discount, well below the wholesale prices charged in the United States. The three apparently paid for the products they bought but they sold them in the U.S. instead of Suriame like they had agreed. According to the Miami Herald:
The Fort Lauderdale couple is from Suriname and, at trial, prosecutors proved the trio worked a scam from 2013 to 2018 based on the lie that they had government procurement contracts in Suriname. U.S. manufacturers of infant formula and other products sold them to the trio at a reduced rate.
But, the trio just took the products and resold them in the United States for a profit. Meanwhile, they faked shipments to Suriname by a number of ways, including shipping the products to create export documentation, then immediately shipping them back without the products ever touching land. Or, sometimes, the trio just faked the export documentation.
It is common for manufacturers to charge lower prices in markets where income is lower. They can still make a small profit if they’re selling above marginal cost. Drug makers routinely charge Americans far more than citizens of other countries, for example.
Economists call it price discrimination when companies sell the same products at different prices in different markets. The problem for companies that engage in price discrimination is how to prevent arbitrage. That is, how to prevent goods sold at lower prices in one market from leaking back into the higher-priced markets. In this case the three fraudsters lied about shipping products to Suriname and sold them in the U.S., thus capturing the discounts in the form of arbitrage profits.
What struck me about this case was the length of the sentences for what would seem a low-stakes fraud case by Miami standards. This type of case would otherwise appear to be a small potatoes criminal case with a civil suit brought by the manufacturers. Why did the U.S. Attorney’s Office for the Southern District of Florida pursue this case so aggressively? Perhaps I found the answer.
In most cases of medical fraud the money is gone. Funds obtained through fraud are usually unrecoverable, as the fraudsters have lived it up and spent the money. Unlike most fraud schemes, these perpetrators seemingly saved and invested their loot. Their ill-gotten gains are subject to forfeiture. The government was able to freeze the brokerage accounts, seize the houses and recover assets worth $203 million, double the alleged fraud. Was this case about fraud? Or was it about forfeiture? Probably the latter.