Before its spectacular collapse, Pharmed Group was one of the great South Florida success stories, a medical supply company created by two brothers who started with nothing and built the eighth-largest Hispanic-owned business in America. In 2003, their profit was $48 million.
What happened to this once fabulous company, where brothers Carlos and Jorge de Céspedes often showed up for work in a Ferrari, Bentley or Porsche? How could it have crumbled so quickly?
Court documents show that in its last two years, Pharmed lost a huge amount of business after a major supplier and a major customer accused the company or its executives of shady business practices in civil lawsuits.
The Herald article chronicled a striking list of allegedly "shady business practices."
Operating without a license:
In 1980, sensing an untapped market for selling medical supplies to Latin America, they started Pharmed by installing an answering machine in a small storage room in Carlos' home.
'In six months, we had sold $700,000,' Carlos told The Herald. 'We had no occupational license, nothing. I went to my accountant, and he said, `You're going to jail.' I said, 'No, that's why I came to you.'
The investigation of Bravo Export Management:
In January 1987, the feds charged Bravo with illegally selling drugs bought at a hospital discount to a California wholesaler. Bravo ordered the drugs in the names of two other Miami companies, Belo Medical Center and South Florida Health Alliance, 'an alleged hospital purchasing group,' according to the criminal indictment.
State corporation records show the South Florida Health Alliance was incorporated by the de Céspedes brothers. The indictment charges that a fraudulent invoice used in the scheme was sent to Jose M. Valdivia at Belo Medical Center. Valdivia was then Carlos' father-in-law. The address of Belo Medical Center was also the address of Pharmed Sales International at the time.
Bravo Export pleaded guilty and paid a $75,000 fine. Then the investigation stopped. In testimony before a House subcommittee in Washington in 1990, [Deputy Director of the Georgia Drugs and Narcotics Agency C. Richard 'Rick'] Allen said: 'There were close to 100 guilty pleas. But there were also 40 to 50 other cases which were pending. In many of which the subjects had expressed a willingness, or at least an interest in entering a guilty plea.'
One of the pending cases was Pharmed....
The suit by Wyeth:
In 1987, Wyeth Pharmaceuticals sued Belo Medical Center, South Florida Health Alliance and the de Céspedes brothers over allegations of improperly obtaining drug discounts. After nine years, the case was settled out of court in a confidential agreement.
The suit by Amerisource Bergen:
AmerisourceBergen, a large medical supply wholesaler, sued Pharmed. The allegation involved setting up a corporation to get price breaks. According to court records, Pharmed Vice President Rene Portela and Pharmed contract consultant Charles J. Sanchez incorporated Quality One Medical Group, which then signed papers promising its goods would go only to hospitals. Quality One set up a warehouse a couple of miles from Pharmed's Doral center.
In a deposition, Portela said Carlos de Céspedes asked them to create the corporation, which placed orders with AmerisourceBergen. When the goods were delivered to the Quality One warehouse, a Pharmed truck came 'immediately' to take them to the Pharmed warehouse, Portela stated.
AmerisourceBergen claimed it shipped goods worth $1.2 million to Quality One and didn't get paid. The company called Portela and demanded payment. 'That's when I really got scared,' Portela said. 'And then I asked them [Pharmed] what was going on.'
Court documents show Pharmed eventually paid $735,091 -- the cost of the goods if they would have gone to a hospital. Amerisource sued for the difference -- $443,624.
Pharmed's defense in court documents: Amerisource knew or should have known that Quality One planned to resell the items to Pharmed. In 2002, the case was settled out of court on undisclosed terms.
The accusations by Johnson & Johnson:
The next big blow came in January 2005, when Johnson & Johnson ended its 25-year relationship. J&J filed a demand for arbitration, accusing Pharmed of fraud and the brothers of 'unjust enrichment' in collecting $22 million in rebates to which they were not entitled.
Pharmed sued J&J for 'reprehensible, intentional, malicious' defamation. A judge sent the case to arbitration. J&J won't comment.
The investigation of Commissioner Diaz:
As Pharmed struggled, [Miami-Dade] Commissioner [Jose 'Pepe'] Diaz co-sponsored in 2006 an ordinance requiring Jackson Memorial Hospital to give preference to local suppliers. For the four previous years, he received at least $475,000 in salaries, loans and bonuses from companies controlled by the brothers.
Diaz has been under investigation by federal authorities looking into possible 'honest services fraud' in his role as a public servant because Diaz took a fishing trip to Cancun with Carlos de Céspedes and Miami developer Sergio Pino. Diaz later voted for a major Pino development plan.
Federal investigators would not comment on the status of the investigation.
The suit by HCA:
In June, HCA sued seven people, including a Pharmed assistant vice president, Erika Urquiza, 36, but not Pharmed itself or the brothers. The lawsuit alleges that Urquiza paid kickbacks to two employees of HCA's Kendall Regional Medical Center, who then ordered supplies from Pharmed that never were delivered. HCA paid Pharmed $3.5 million for the supplies, the lawsuit states.
The de Cespedes brothers commented on their roles in all this litigation thus:
We are a litigious society, but in our 27 years of operation prior to the bankruptcy, in our dealings with well over 1,000 vendors, we have been party to just a handful of civil suits, where were settled to our satisfaction.
As to the various old legal and employee disputes about which you have inquired, we would say simply that every business has its share of disputes and complications. Some of the matters you asked about had nothing to do with us or Pharmed.
We have successfully resolved matters involving us and are disappointed The Herald would dredge them up simply to portray us in an unflattering light. You do not have sufficient information to understand most of these matters, and we are not going to comment on them in deference to the others involved.
Pharmed is now bankrupt, although its name lives on. "The basketball arena at Florida International University is named for Pharmed." "The brothers promised to donate $1 million to Florida International University," however, "FIU officials say that so far, Pharmed has contributed a third of the promised amount."
Nearly all physicians swear oaths to put the care of their patients ahead of any personal interests, and to treat their patients ethically and honestly. Physicians who fail to conduct themselves ethically are liable to be sanctioned by state medical boards, however imperfect that process may be. In today's complex health care environment, physicians must work within a vast web of large organizations, which influence health care and physicians' practices in myriad ways. The vast amounts of money that flows through the health care system may provide plenty of incentives for shady business practices.
Yet although these health care organizations' operations affect patients' health and safety, they are not subject to any more ethical requirements than are trash hauling companies. Such organizations rarely have internal codes of conduct, and their leaders rarely face significant sanctions for unethical conduct.
Thus, is it any wonder that "shady business practices" are widespread in health care?
So shouldn't organizations whose operations affect peoples' lives and health be held to higher ethical standards than your local trash hauler? Inquiring minds want to know....
But until the leaders of health care organizations are subject to enforceable ethical standards, expect more "shady business practices," and, in turn, more costs, less access, and worse quality.