Novelty Distributors, Inc.; Revocation of Registration, 52689-52704 [E8-21035]

Agencies

• Drug Enforcement Administration
• Department of Justice

[Federal Register Volume 73, Number 176 (Wednesday, September 10, 2008)]
[Notices]
[Pages 52689-52704]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-21035]


-----------------------------------------------------------------------

DEPARTMENT OF JUSTICE

Drug Enforcement Administration

[Docket No. 08-33]


Novelty Distributors, Inc.; Revocation of Registration

    On January 17, 2008, I, the Deputy Administrator of the Drug 
Enforcement Administration, issued an Order to Show Cause and Immediate 
Suspension of Registration to Novelty Distributors, Inc. (Respondent), 
of Greenfield, Indiana. The Order immediately suspended and proposed 
the revocation of Respondent's DEA Certificate of Registration, 
003563NSY, as a distributor of the list I chemicals ephedrine and 
pseudoephedrine, on the grounds that its ``continued registration is 
inconsistent with the public interest,'' and ``constitute[d] an 
imminent danger to public health and safety.'' Show Cause Order at 1 
(ALJ EX. 1) (citing 21 U.S.C. 823(h), 824(a)(4), and 824(d)).
    More specifically, the Show Cause Order alleged that Respondent was 
storing listed chemical products at, and distributing them from, over 
100 unregistered locations throughout the United States, in violation 
of Federal law and regulations. Id. (citing 21 U.S.C. 822(e), 21 CFR 
1309.21 and 1309.23(a)).
    Next, the Show Cause Order alleged that Respondent was distributing 
quantities of listed chemical products ``to small retail outlets such 
as convenience stores'' in amounts ``far exceed[ing] what those retail 
outlets could be expected to sell for legitimate, therapeutic 
purposes.'' Id. at 2. The Order thus alleged that the ``listed chemical 
products distributed by [Respondent] in large quantities have been, and 
are likely to continue being, diverted to the clandestine manufacture 
of methamphetamine.'' Id. (citing cases). Relatedly, the Show Cause 
Order alleged that some ``[s]mall retail outlets that receive large 
quantities of * * * listed chemical products from [Respondent] sell 
such products to individuals in amounts that cannot be attributed to 
legitimate individual needs,'' that ``some of the retail outlets allow 
customers to make multiple purchases of scheduled listed chemical 
products within a single week, and in some cases, within a single 
day,'' and that ``[s]ome customers of these retail outlets purchased 
more than 9 grams of ephedrine or pseudoephedrine base within 30 days 
in violation of 21 U.S.C. 844(a).'' Id.\1\
---------------------------------------------------------------------------

    \1\ The Show Cause Order also alleged that ``[i]n November 2002, 
22 bottles of ephedrine products distributed by Novelty were found 
at an illicit methamphetamine laboratory in Connecticut.'' Show 
Cause Order at 2.
---------------------------------------------------------------------------

    The Show Cause Order further alleged that between January 1, 2007, 
and July 9, 2007, Respondent distributed listed chemical products ``on 
at least 284 occasions to 35 retail outlets,'' which had not self-
certified as required under Federal law. Id. (citing 21 U.S.C. 
830(e)(1)(A)(vii)). Id. Moreover, on three occasions subsequent to 
February 1, 2007, Respondent allegedly distributed 24-count bottles of 
listed chemical products to retailers in violation of Federal law, 
which effective April 9, 2006, required that non-liquid form products 
be sold only in blister packs. Id. at 2-3 (citing 21 U.S.C. 830(d)(2)). 
Relatedly, the Show Cause Order alleged that Respondent had distributed 
tablet-form products to retailers in Kentucky and North Carolina in 
violation of the laws of these States which ``prohibit the sale of non-
liquid ephedrine and pseudoephedrine except in a gel-cap product.'' Id. 
at 3.
    Finally, the Show Cause Order alleged that in July 2007, DEA had 
audited twenty listed chemical products which Respondent distributed. 
Id. at 2. The Show Cause Order alleged that Respondent ``could not 
account for more than 60,000 dosage units of two ephedrine products'' 
and that it also had ``overages for 16 different * * * listed chemical 
products.'' Id. The Order thus alleged that Respondent ``failed to 
maintain accurate records of its distributions and receipts of * * * 
listed chemical products in violation of 21 U.S.C. 830(a) and 21 CFR 
1310.04.'' Id.

[[Page 52690]]

    Based on the above allegations, I made the preliminary finding that 
the listed chemical products Respondent was distributing had been, and 
were ``likely to continue to be, diverted into the illicit manufacture 
of methamphetamine.'' Id. at 3. I also found that Respondent's 
``failure to maintain effective controls against diversion, including 
its distribution of large amounts of * * * listed chemical products 
that far exceed legitimate demand, contribute to the illicit 
manufacture of methamphetamine.'' Id. I thus came to the ``preliminary 
conclusion that [Respondent's] continued registration during the 
pendency of these proceedings would constitute an imminent danger to 
the public health and safety,'' and immediately suspended its 
registration. Id.
    On February 26, 2008, Respondent requested a hearing on the 
allegations. ALJ Ex. 2. The matter was assigned to Administrative Law 
Judge (ALJ) Gail Randall, who proceeded to conduct pre-hearing 
procedures. A hearing was held on March 24 through March 28, and March 
31 through April 2, 2008, at which both parties put on extensive 
testimony and introduced numerous documents into evidence.
    Moreover, on March 24, 2008, Respondent filed an interlocutory 
appeal in which it challenged the ALJ's denial of its motion to remove 
one of the Government's lawyers from participating in the hearing, on 
the ground that he was a necessary and indispensable witness to the 
events surrounding the execution of an administrative search warrant 
which was the subject of its motion to suppress. See ALJ Exs. 12 and 
13. On March 25, 2008, I denied Respondent's appeal on multiple 
grounds.\2\ ALJ Ex. 13.
---------------------------------------------------------------------------

    \2\ The grounds included that Respondent had not established 
that the Government's lawyer was a necessary and indispensable 
witness, and that Respondent had not cited a single case to support 
its contention that the conduct of the Government lawyer--even if 
true--was a violation of its constitutional rights. Denial of 
Interlocutory Appeal, at 2-3 (ALJ Ex. 13.) I also noted that the 
Agency had previously held that the exclusionary rule does not apply 
to proceedings under 21 U.S.C. 824, and that the Supreme Court had 
``repeatedly declined to extend the exclusionary rule to proceedings 
other than criminal trials.'' Id. (quoting Pennsylvania Bd. of 
Probation v. Scott, 524 U.S.C. 357, 363 (1998)).
---------------------------------------------------------------------------

    Following the hearing, both parties submitted briefs containing 
their proposed findings, conclusions of law, and argument. On May 21, 
2008, the ALJ issued her recommended decision (hereinafter, ALJ).\3\
---------------------------------------------------------------------------

    \3\ The decision was 165 pages in length.
---------------------------------------------------------------------------

    In her decision, the ALJ found that the Government's evidence 
regarding the monthly expected sales of combination ephedrine products 
at convenience stores ($14.39) to meet legitimate demand was ``flawed 
and not credible.'' ALJ at 97. Relatedly, while acknowledging that 
``Respondent sells an approximate monthly average of $640.00 in SLC 
products to its convenience store customers,'' the ALJ observed that 
``there is no legitimate sales figure in the record'' by which the 
excessiveness of its sales (and the likelihood that the products were 
being diverted) could be judged. Id.
    Regarding the allegation that Respondent failed to maintain 
accurate records of its receipts and distributions, the ALJ concluded 
that the evidence pertaining to the audit did not establish 
``preponderating evidence either way to assist in analyzing the 
accuracy of * * * Respondent's handling'' of listed chemical products. 
Id. at 88. The ALJ concluded, however, that ``Respondent's 
recordkeeping is not adequate to conduct an effective audit of its SLC 
products.'' Id.
    The ALJ also rejected the allegation that Respondent had made 
numerous distributions to uncertified retailers based on testimony and 
documentary evidence that one of Respondent's officials had confirmed 
that these ``customers were, in fact, self-certified.'' Id. at 91. The 
ALJ further found unproven the allegation that Respondent had thrice 
distributed listed chemical products in bottles in violation of Federal 
law, noting that Respondent had provided ``documentary proof that the * 
* * product * * * had not been illegally distributed.'' Id. at 86. The 
ALJ also found unproven the Government's allegation that Respondent had 
distributed tablet-form products to retailers in Kentucky and North 
Carolina, noting that ``Respondent produced credible testimonial 
evidence to support a finding that these illegal sales in fact did not 
happen.'' Id.
    With respect to the allegation that Respondent was violating 
Federal law because it was distributing from over 100 drop-off points 
which were not registered, the ALJ noted that Respondent had challenged 
the Agency's interpretation in Federal District Court. Id. at 90-91. 
The ALJ found, however, that Respondent had been advised by a DEA Group 
Supervisor (GS) that its practice of shipping SLCs to numerous storage 
units which were not registered was illegal, that it had continued do 
so without even seeking clarification from the Agency, and that this 
conduct was ``not consistent with the requirements for a participant in 
a regulated industry.'' Id. at 91. However, because Respondent's 
declaratory judgment action was still ``pending in federal court,'' the 
ALJ ``conclude[d] that [the district court was] the proper venue for 
this issue'' and declined to address the statutory question.\4\ Id. at 
91 n.38.
---------------------------------------------------------------------------

    \4\ On August 7, 2008, the District Court granted the 
Government's motion for summary judgment and denied Respondent's 
cross-motion for summary judgment. See Entry on Cross Motions for 
Summary Judgment, Novelty, Inc., v. Tandy, No. 1:04-cv-1502-DFH-TAB 
(S.D. Ind., Aug. 7, 2008). Notably, the District Court held that the 
instructions in the Group Supervisor's letter were interpretive and 
not legislative rules, and were thus not subject to notice and 
comment rulemaking under 5 U.S.C. 553. Id. at 2. Pursuant to 5 
U.S.C. 556(e), I take official notice of the District Court's 
decision. I also take official notice of the August 13, 2008 letter 
submitted by Respondent's President. In his letter, Respondent's 
President stated that he has ordered a change to Respondent's 
distribution practices and ``reiterates its previously stated 
commitment to cooperate with [this Agency] and adhere to all 
conditions specified by [me] for [its] continued registration.'' 
Letter of Todd Green (Aug. 13, 2008).
    In his letter, Respondent's CEO does not state that Respondent's 
will waive its right to appeal the District Court's decision. 
Moreover, I conclude that in light of the extensive resources that 
have been devoted to litigating the issue of the lawfulness of 
Respondent's use of unregistered locations to store and distribute 
SLCs, as well as the importance of the issue to the regulated 
industry, the issue should be decided.
---------------------------------------------------------------------------

    Finally, the ALJ also found that following the suspension order, 
Respondent had attempted to enter into an agreement with one of its 
suppliers (BDI), under which its salespersons would still take orders 
for SLCs which would be shipped by BDI. ALJ at 92. Here again, the ALJ 
noted that there was no evidence that Respondent had asked the Agency 
if the arrangement was lawful. Id.
    The ALJ nonetheless concluded that Respondent had ``demonstrated a 
willingness to comply with the laws and regulations governing the 
distribution of SLC products,'' specifically noting that it had 
developed a training program for its customers, had provided them with 
the logbooks required by the CMEA, and lockable display cases for its 
products, and had upgraded its computer system. Id. at 98-99. The ALJ 
also noted that following the implementation of the CMEA, Respondent 
had ``acted to remove * * * non-complying SLC products from its 
customers' shelves and [to] properly dispose of'' them. Id. at 99.
    With respect to the audits, the ALJ observed that while they 
``appeare[d] to reveal significant overages and shortages,'' Respondent 
had ``credibly and adequately minimized those figures to a more 
acceptable margin of inventory error after analyzing its records and 
making its own audit

[[Page 52691]]

findings.'' Id. Finally, while the ALJ noted that Respondent's 
continued distributions to the drop-off points ``cause[s] concern,'' 
she further reasoned that except for the Group Supervisor's letter, it 
``had no notice from the [Agency] of any violations until the * * * 
Suspension Order was served'' on it, and that it ``ha[d] not been given 
an opportunity to remedy the flaws identified by the Agency [in] this 
action.'' Id. at 100. Based on what she characterized as its ``history 
of,'' and ``financial commitment to,'' compliance, the ALJ reasoned 
that revocation would not be an appropriate sanction. Id. at 100-01. 
Instead, the ALJ recommended that I impose compliance requirements on 
Respondent to ensure that it operated in the public interest. Id. at 
101.
    Thereafter, the Government filed exceptions to the ALJ's decision. 
Respondent likewise filed a 140 page brief which supported the ALJ's 
decision while also excepting to certain findings and conclusions.
    Having considered the entire record in this matter and all of the 
issues raised in the parties' exceptions, I hereby issue this Decision 
and Final Order. More specifically, I reject the allegations that 
Respondent distributed SLC products in violation of the CMEA and the 
laws of Kentucky and North Carolina as unsupported by substantial 
evidence. With respect to the allegations that Respondent engaged in 
284 distributions to uncertified retailers, I conclude that the 
evidence establishes only a single instance of distributing to an 
uncertified retailer and several instances of inaccurate recordkeeping 
in that Respondent's records of the addresses for several stores did 
not match the actual addresses of the stores, and that the Government 
has not proved by substantial evidence that the stores were uncertified 
on the date of the distributions.
    With respect to the audit, I conclude that because the ALJ found 
credible the testimony of one of Respondent's executives that the 
Agency's investigators had excluded certain transactions and inventory 
adjustments which it had provided to them, and the Government offered 
no rebuttal evidence, the allegation that Respondent had shortages and 
overages of various products is not proved. I find, however, that the 
evidence shows that Respondent's recordkeeping did not comply with 
federal law because it failed to maintain proper records of regulated 
transactions as required by Federal law and DEA regulations. See 21 
U.S.C. 830(a); 21 CFR 1310.03, id. 1310.04, id. 1310.06. Because of 
this, as well as evidence showing that Respondent's list of shipments 
included three shipments of a product with a date of July 16, 2007, 
even though it was then only July 9, 2007, I find that Respondent does 
not have adequate systems for monitoring the receipt and distribution 
of SLCs. 21 CFR 1309.71(b).
    With respect to the allegation that Respondent's sales of SLC were 
excessive and consistent with diversion, I agree with the ALJ that the 
Government's figure as to the expected monthly sales range is not 
supported by substantial evidence. I nonetheless conclude that 
Respondent does not maintain effective controls against diversion 
because its own evidence shows that it distributed SLCs to numerous 
stores in quantities that dwarfed what its average customer purchases, 
and that it did so even when it had previously developed concerns that 
a store was purchasing excessive quantities, and that it does not even 
enforce its own sales limit policies.
    Next, in contrast to the ALJ, I conclude that this proceeding is 
the appropriate forum to address the meaning of 21 U.S.C. 822(e) and 
the allegation that Respondent has repeatedly violated Federal law by 
distributing from unregistered locations. Consistent with the statutory 
text and purpose, I conclude that Respondent's practice of using 
unregistered self-storage units to store and distribute SLC products 
violated the Controlled Substances Act and DEA's regulation.
    Finally, for reasons set forth below, I reject the ALJ's 
recommended sanction that Respondent's registration be continued with 
conditions. As explained below, because Respondent repeatedly violated 
Federal law notwithstanding that it was advised that its use of the 
unregistered self-storage facilities was unlawful, does not even 
enforce its own policies with respect to limiting sales, and attempted 
to circumvent the suspension order, I conclude that revocation is 
necessary to protect the public interest. I make the following findings 
of fact.

Findings

    Respondent is a corporation which is solely owned by its President, 
Mr. Todd Green. Respondent is a wholesale distributor of various sundry 
items to between 10,000 and 12,000 convenience stores throughout the 
United States.
    Since 1998, Respondent has held DEA Certificate of Registration, 
003563NSY, which authorizes it to distribute pseudoephedrine 
and ephedrine from its registered location of 351 W. Muskegon Drive, 
Greenfield, Indiana. GX 1. Respondent's registration expires on October 
31, 2008. Id.
    Both ephedrine and pseudoephedrine have FDA approved therapeutic 
uses. GX 19, at 3. Ephedrine is lawfully marketed under the Food, Drug, 
and Cosmetic Act for OTC use as a bronchodilator to treat asthma,\5\ 
and pseudoephedrine is lawfully marketed for OTC use as a decongestant. 
Id. at 3-4. Both substances are, however, regulated as schedule listed 
chemicals under the Controlled Substances Act because they are 
precursor chemicals which are frequently diverted into the illicit 
manufacture of methamphetamine, a schedule II controlled substance, a 
potent and highly addictive central nervous system stimulant. See 21 
U.S.C. 802(34); id. 812(c); 21 CFR 1308.12(d). Moreover, in the course 
of investigating methamphetamine trafficking, DEA has frequently found 
that the listed chemicals which are used by smaller illicit labs have 
been sold by convenience stores, gas stations, and other small 
retailers. GX 51, at 56, 59, 62, 66; GX 54, at 29-30.\6\ See also TNT

[[Page 52692]]

Distributors, 70 FR 12729, 12730 (2005) (noting testimony of Special 
Agent that ``80 to 90 percent of ephedrine and pseudoephedrine being 
used [in Tennessee] to manufacture methamphetamine was being obtained 
from convenience stores'').
---------------------------------------------------------------------------

    \5\ The FDA has, however, issued a notice of proposed rulemaking 
which would remove combination ephedrine-guaifenesin products from 
the OTC monograph on the grounds that they are not ``safe and 
effective for continued OTC availability.'' 70 FR 40232 (2005).
    The parties also extensively litigated the medical 
appropriateness of using combination ephedrine products to treat 
asthma. See ALJ 43-48. I find it unnecessary to make any findings on 
this issue as until the FDA issues a final rule, combination 
ephedrine-guaifenesin products can be lawfully marketed for this 
purpose.
    \6\ Based on the testimony of a witness whose experience was 
limited to the Shenandoah, Virginia valley, the ALJ found that the 
street price of a gram of methamphetamine is ``between $20.00 and 
$50.00 per gram.'' ALJ at 48-49. Based on this, as well as evidence 
regarding the yield and conversion rate, the ALJ found that ``it 
would cost a methamphetamine cook between $50.00 and $144.00 to 
produce 1 gram of methamphetamine.'' ALJ at 50. The ALJ thus 
concluded that ``using the Respondent's product to manufacture 
methamphetamine makes little monetary sense.'' Id. at 96.
    I reject the ALJ's finding regarding the street price of 
methamphetamine and her conclusion that using Respondent's product 
``makes little monetary sense.'' Id. As for her findings regarding 
the street price of methamphetamine, I note that it is based on 
anecdotal evidence and limited to a small region of the State of 
Virginia. Respondent does not, however, limit its distribution of 
SLCs to this region of the country. I further note that it runs 
counter to the data which this Agency obtains on a periodic basis, 
and which show that in most of the country, methamphetamine prices 
are substantially higher than they are in the Shenandoah Valley. See 
U.S. Dep't of Justice, National Illicit Drug Prices--December 2007, 
32-37 (Mar. 2008). In accordance with 5 U.S.C. 556(e), and 21 CFR 
1316.59(e), I take official notice of the methamphetamine street 
price data contained in this publication. Moreover, the ALJ's 
conclusion assumes that methamphetamine addicts engage in 
economically rational behavior. There is, however, no evidence in 
the record to support this assumption. I therefore reject the ALJ's 
conclusion.
    I also find that this witness's testimony that convenience 
stores are not the source of precursors in the Shenandoah Valley 
(ALJ at 49), to be anecdotal and contrary to the Agency's experience 
throughout the country. I thus give it no weight.
---------------------------------------------------------------------------

    Prior to the suspension of its registration, Respondent sold 
combination ephedrine and pseudoephedrine products under the brand 
names of Double Action, Mini, and Ephedrine Plus in package sizes of 
two, six, twelve and twenty-four count. Tr. 561, 692-93. Respondent 
sold these products to approximately 3,500 to 4,000 convenience stores 
in approximately thirty different States. Id. at 80-82, 558-60. 
Respondent does not carry any other OTC drug products. Id. at 552.
    Respondent employs approximately 150 sales persons, who typically 
visit each store every other week.\7\ Tr. 2046, 1290. Using its own 
tractor-trailers, Respondent ships products including SLCs from its 
Greenfield warehouse to each sales person's ``drop-off point,'' which 
is a unit in a commercial self-storage facility. Id. at 73-75. 
According to the testimony of Respondent's owner and CEO, Respondent 
was using approximately 150 to 180 drop-off points at the time the 
immediate suspension was served on it. Id. at 76. Both the driver who 
delivers the product to the drop-off point and the route sales person 
have keys to the storage unit. Id. While the sales persons are notified 
of each arriving shipment, SLCs can sit in the storage units for 
several days before the sales person retrieves them for delivery to the 
stores.\8\ Id. at 534, 668. Moreover, according to one of Respondent's 
executives, the SLCs can remain on the salesperson's truck for up to 
nine days depending upon the demand for the product. Id. at 1282, 1421.
---------------------------------------------------------------------------

    \7\ Approximately 90% of the stores are on this schedule; the 
remaining stores are visited either weekly or monthly. Tr. 1290.
    \8\ It is undisputed that the SLCs are not shipped back to 
Respondent's registered location prior to their being distributed.
    At the hearing, an executive of Respondent insisted that ``we 
are not storing product in * * * unregistered locations,'' and 
added: ``Now your coming back into the definition of what is 
storage. We're not storing the product in that location,'' referring 
to the drop-off points. Tr. 666-67. See also id. at 668 (``We're not 
storing or keeping or whatever words you want to try and use, 
product in these warehouses, against the law. We're not doing 
it.''). The executive acknowledged, however, that products may stay 
in the storage units for ``a few days.'' Id. at 667. I therefore 
find that Respondent is storing products in the self-storage units.
    Respondent further asserted that its distribution system 
provided more security than shipping the products via such common 
carriers as UPS or Fed Ex. See Tr. 644-45. Yet an executive of 
Respondent acknowledged that it uses temporary drivers on a contract 
basis. Id. at 693, 697. Relatedly, Respondent's CEO offered 
testimony as to perceived security inadequacies at UPS, asserting 
that ``[p]roduct delivered by UPS could easily be stolen anywhere in 
the system.'' Id. at 157.
    On cross-examination, however, Respondent's CEO admitted that he 
had not taken a tour of a UPS facility. Id. at 161. When asked when 
he had last ``checked into the training that UPS personnel have with 
regard to handling [SLCs]?,'' he answered: ``I assume they don't 
have any training, since they're not DEA regulated facilities.'' Id. 
at 162. The ALJ did not address the credibility of the CEO's 
testimony. As ultimate factfinder, I reject it as lacking 
foundation.
---------------------------------------------------------------------------

    None of the drop-off points is registered with the Agency. Tr. 
1284. Moreover, the units do not have separate cages for storing SLCs, 
id. at 132, and the facilities have varying degrees of external 
security with some having cameras and requiring access codes while 
others have no additional security. Compare id. at 131, with id. at 538 
(former salesperson testifying that anyone could come off the road and 
access the door and padlock to his route storage unit).\9\ Moreover, 
DEA Investigators could not determine the addresses of thirty-four of 
the drop-off points. Tr. 1196-98.\10\
---------------------------------------------------------------------------

    \9\ There is no dispute that the security at Respondent's 
Greenfield warehouse is adequate. It is also undisputed that 
following the enactment of the CMEA, Respondent prepared a training 
video for its customers and supplied them with logbooks and cases 
for storing SLC products. Tr. 1390 & 1422; RXs 34, 47, & 48.
    \10\ On its list of shipments, Respondent used code numbers to 
indicate where products were being shipped to. Tr. 1196. Moreover, 
Respondent initially refused to turn over information identifying 
the addresses of the drop-off points for the sales routes, claiming 
that it was outside the scope of the warrant. Id. at 1197.
---------------------------------------------------------------------------

    In a letter dated May 5, 2004, the Diversion Group Supervisor of 
the Indianapolis, Indiana DEA District Office, advised Respondent that 
``any storage at, and distribution from, a location other than the 
registered location (including the use of delivery vehicles for 
overnight storage) is a violation of federal law.'' \11\ GX 100. Upon 
review of the letter, Respondent sought a declaratory judgment in 
Federal District Court challenging the interpretation set forth in the 
letter. Tr. 652-53. At no time, however, did Respondent change its 
practice of distributing to the drop-off points. Id. at 664-65. Nor did 
Respondent seek a review of the letter by officials at the Agency's 
headquarters. ALJ at 18.
---------------------------------------------------------------------------

    \11\ The letter also reviewed three scenarios ``in case 
[Respondent was] storing List I chemical products * * * and 
distributing them from satellite locations, such as commercial 
storage units, personal residences and or delivery vehicles.'' GX 
100, at 1. The first two scenarios involved sales representatives 
who picked up listed chemicals from a registered location either to 
fill a pre-placed order or a ``general order,'' and could not return 
the products ``to the registered location at the end of the day.'' 
Id.
    The third scenario was ``a company [that] ships orders 
containing List I chemicals to sales representatives at remote 
locations.'' Id. at 2. The letter further explained that ``DEA 
considers this to be freight forwarding and at this time * * * has 
no provisions that would permit freight forwarding for List I 
chemical products.'' Id.
---------------------------------------------------------------------------

    The record further establishes that at the time the listed chemical 
products are shipped from its Greenfield, Indiana warehouse (which is 
its only registered location) to the drop-off points, the products have 
not been sold to a particular store. Tr. 2079. Indeed, the amount of 
SLCs to be sold to a customer is not known until the route sales person 
visits the store and determines how much product the store needs. Id. 
at 1282. The sales person counts the product on hand, discusses the 
order with the store manager, and restocks the store. Id. at 631; 1422.
    Moreover, at the time an SLC order is placed, only the 
salesperson--and no one at Respondent's headquarters--knows how much 
the store has purchased. Id. at 633. The salesperson is required to 
enter the order information into a handheld computer which generates an 
invoice; this information is later transmitted back to Respondent's 
headquarters. Id. at 634. The salesperson is also required to return a 
paper copy of the invoice, as well as a shipping document which 
accompanies the delivery of the SLCs from the warehouse, to 
headquarters. Id. at 688. Under its system, while Respondent's 
headquarters can determine which salesperson has received product with 
a particular lot number, it cannot identify the specific store that 
obtained a particular lot number of a product. Id. at 1517.
    Respondent's CEO testified that a store could purchase up to a case 
of an SLC product in each ``service cycle.'' \12\ Id. at 101. 
Accordingly, most stores could purchase two cases per month of each 
product. Moreover, Respondent sold more than ten different SLC 
products. Id. at 623.
---------------------------------------------------------------------------

    \12\ With respect to the 24-tablet products, the record 
establishes that there were 144 packages in a case. Tr. 621. The 
record does not, however, establish how many packages there were in 
a case of the smaller size packages. Id. at 624.
---------------------------------------------------------------------------

    According to one of its executives, the company monitors the sales 
of each SLC product at each store throughout the week to determine 
whether a store ``is increasing [its] inventory more than [Respondent] 
expects [it] to,'' and if it is, the company contacts the salesperson 
to

[[Page 52693]]

inquire further. Id. at 2061-62. This executive also asserted that in 
this event, it would send in one of the salesperson's supervisors to 
visit with the sales person and determine the true inventory at a 
store. Id. Moreover, another executive claimed that he ``receive[s] a 
computer-generated report indicating any time that more than one case 
has been sold to a single retail location of a single'' product and 
issues a warning letter to its salespersons. Id. at 1431. Respondent's 
CEO and Owner further testified that if a customer obtained more than a 
case of a product, he ``would cut them off, [and] stop the sale of 
product to them.'' \13\ Tr. 159. See also RX 10, at 1 (asserting that 
stores purchasing ``unusual quantities'' would be ``monitored over the 
following 4 week period,'' and that ``[i]f further unusual activity is 
noted,'' Respondent ``will discontinue sales of all or part of the List 
I products sold to the store'').
---------------------------------------------------------------------------

    \13\ While the ALJ credited the CEO's testimony, the e-mails 
discussed in note 14 below, show otherwise. See, e.g., RX 56, at 3. 
Moreover, Respondent did not identify a single store which it had 
refused to sell SLCs to.
---------------------------------------------------------------------------

    According to one of Respondent's executives, between January 17, 
2007 and January 17, 2008, that there had been ``approximately 35 to 
45'' violations of the one case limit, and most of the violations had 
occurred before July 2007, when the Agency executed the administrative 
warrant. Id. at 1433. The ALJ, however, credited the testimony of a DEA 
DI who reviewed Respondent's sales records for the period between 
January and July 2007, and found that its salespersons exceeded the one 
case limit 85 times. Tr. 1496-1506; GX 68.
    The same executive stated that Respondent had only started issuing 
written warnings to its salespersons after August 2007 because of a 
computer ``glitch'' which had resulted in the reports not being issued 
as scheduled. Id. at 1435. Moreover, while Respondent introduced into 
evidence a few e-mails indicating that the company had cut off 
supplying 100-count bottles to several stores, Respondent did not 
identify a single store to which it had refused to sell ephedrine.\14\ 
Indeed, according to its own evidence, one of the stores (BPM55), which 
it had previously stopped selling 100-count products to because of its 
excessive purchases, was allowed to purchase products with a retail 
value of more than $7300 a month, in the three months prior to the 
issuance of the suspension order. Compare RX 56, at 1, with RX 27a, at 
1.
---------------------------------------------------------------------------

    \14\ The record contains several e-mails indicating that 
Respondent directed its employees to not sell 100 count ephedrine to 
several stores. See RX 56. While the e-mails expressed concerns 
about the excessiveness of these stores' sales of ephedrine 
products, notably, Respondent did not cut off all sales of the 
products to any of the stores. See id. Moreover, while it restricted 
its sales ``to a maximum of [one case] every 2 weeks'' and 
prohibited the sale of 100 count ephedrine to store number BPM55, 
this store was its leading SLC customer in the three months prior to 
the issuance of the suspension order, during which it purchased 
products with an average of retail value of $7317.77 per month. 
Compare RX 56, at 1, with RX 27A, at 1.
---------------------------------------------------------------------------

    According to one of its executives, Respondent's SLC customers 
purchased SLCs with an average retail sales value of $640 per month, 
with the majority of the products containing ephedrine. Id. at 563-64. 
Moreover, according to one of Respondent's exhibits, in the three 
months prior to the issuance of the suspension order, it distributed 
listed chemicals products with an average monthly retail sales value 
greater than $2000 to approximately 120 of its customers. RX 27A. 
Respondent also distributed listed chemical products with an average 
monthly retail sales value in excess of $3000 to thirty-four customers, 
and product with average monthly retail sale value greater than $4000 
to nine customers. Id. Finally, Respondent distributed to its two 
largest customers, products with an average monthly retail sales value 
of $5056 and $7314 respectively. Id.
    At the hearing, the Government put forward expert testimony to the 
effect that the expected sales range of ephedrine products at 
convenience stores to meet legitimate demand was $14.39 per month. GX 
25, at 8. In his declaration, the Government's expert stated that U.S. 
Economic Census data show that only about 31.5% of all convenience 
stores (45,077 stores) carry non-prescription drug products. GX 99, at 
7. According to his declaration, the Government's expert then applied 
``these statistics'' to the National Association of Convenience Stores 
2007 Survey revenue data which show that convenience stores sold a 
total of $292,000,000 of cough and cold remedies during 2006, to 
calculate the annual and monthly average sale of cough and cold 
products at a convenience store. Id. According to the Government's 
expert, stores carrying the HBC line had average annual sales of all 
cough and cold products of $4,080.18, and average monthly sales of 
$340.01. Id.; see also id. at Table 2.
    The Government's expert did not explain, however, why he used the 
total number of stores carrying the HBC line \15\ (71,565 stores) 
rather than the smaller number of stores that he had determined carried 
non-prescription drug products ( 45,077 stores). See id. at Table 2. 
Moreover, the Government did not rebut the testimony of Respondent's 
expert that because of legislation in twelve States, convenience stores 
can no longer sell ephedrine products and that the stores in these 
States comprise 23% of the nation's convenience stores. RX 59, at 10. 
This suggests that at most, 34,709 convenience stores nationwide carry 
ephedrine products. Id.\16\
---------------------------------------------------------------------------

    \15\ The HBC line includes analgesics, stomach remedies, 
vitamins, other OTC drugs, grooming aids, feminine hygiene, family 
planning, baby care, skin care, cosmetics, and some other 
unspecified products.
    \16\ Respondent's expert also pointed out that some convenience 
stores that carry non-prescription drug products may not sell any 
ephedrine. RX 59, at 10.
---------------------------------------------------------------------------

    Next, the Government's expert determined the percentage of cough 
and cold remedies comprised of ephedrine products. GX 99, at 8. 
According to the Government's expert, ``[t]his factor was derived from 
a tabulation of MRI data showing asthma remedy usage by retail channel 
(in this case, convenience stores).'' Id. Based on this data, which was 
included at Table 1, the Government's expert concluded that ephedrine 
products constitute 8.36% of cough and cold remedies sold at 
convenience stores. Id. Multiplying this figure times the average 
monthly total sales of cough and cold products, the Government's expert 
concluded that the average monthly sale of all ephedrine products at 
convenience stores selling the products was $28.43.\17\ Id.
---------------------------------------------------------------------------

    \17\ As part of its case, the Government entered into evidence a 
declaration prepared by its expert in another matter. See GX 25. In 
this document, the expert stated that he had also looked at data 
which included ``cumulated observed transactions,'' such as scanner 
data obtained by Information Resources, Inc. Id. at 7. The 
Government's expert also testified that in preparing GX 25, he had 
reviewed scanner data to determine ``the proportion of the 
nonprescription drug category that included preparations for the 
treatment of asthma containing ephedrine.'' Tr. 313 & 500. However, 
in his rebuttal declaration, the Government's expert made no mention 
of having used scanner data. See GX 99.
---------------------------------------------------------------------------

    Respondent's expert stated, however, that the MRI Survey (which is 
a survey of 50,000 consumers) does not provide sufficient information 
to support the Government's expert's figure that ephedrine products 
constitute 8.36% of cough and cold remedies sold at convenience stores. 
RX 59, at 11. Respondent's expert noted that the MRI Survey (which was 
included as an attachment to RX 59) ``reports absolutely no information 
about any ephedrine products,'' and ``reports absolutely no information 
on whether consumers bought either an asthma remedy or a cough and cold 
remedy from convenience stores.'' Id. (emphasis deleted).

[[Page 52694]]

    Respondent's expert further opined that the MRI Survey asks three 
questions which ``are inadequate to form an estimate'' of the 
percentage of cough and cold remedies constituting ephedrine. RX 59, at 
11. The first question is: ``How many times in'' various time periods 
has the person used one of numerous products? See Survey of the 
American Consumer 2-106. While the survey includes a list of non-
prescription cold, sinus, and allergy remedies, none of the products 
listed contain ephedrine. Survey at 12. Nor does it appear that an 
ephedrine product is listed anywhere in the survey.
    As for the remaining two questions, the survey asks whether a 
person has had asthma in the last twelve months, and whether they have 
used a prescription drug, a non-prescription drug, an herbal remedy, or 
have not treated the condition at all. Id. at 15. The survey does not 
ask any further questions regarding the use of non-prescription drugs 
to treat asthma.
    Finally, with respect to the use of convenience stores, the survey 
asks only whether the consumer has purchased a non-prescription/OTC 
drug at a convenience store in the last 30 days. Id. at 43. Again, the 
survey does not inquire further as to what type of drug the consumer 
may have purchased at a convenience store. The Government's expert did 
not explain how the data obtained in the answers to these questions 
supported his conclusion that ephedrine products constitute 8.36% of 
the cough and cold remedies purchased at convenience stores.\18\
---------------------------------------------------------------------------

    \18\ Respondent's expert noted that she was informed by its 
executives that ephedrine products constituted 60% of its customers' 
SLC sales. RX 59, at 12. Even if this is an accurate figure with 
respect to its customers, Respondent does not allow them to purchase 
SLCs from other suppliers, Tr. 626-27, and it does not sell any 
nationally-branded OTC pseudoephedrine remedies such as Sudafed or 
Claritin D. The figure is thus based on a biased sample.
---------------------------------------------------------------------------

    The Government's expert further stated that he used ``[a]nother MRI 
tabulation showing the route of the drug (powder, tablet, liquid, mist, 
skin patch, etc., etc.), [which] enabled the estimate to be further 
adjusted to reflect tablets only * * * resulting in the final estimate 
of $14.78.'' Id. The Government's expert thus concluded that 52% of 
ephedrine users use tablets rather than inhalers, id. at Table 2; 
multiplying this figure times the average monthly sales of $28.43, the 
expert concluded that the average monthly sale of tablet-form ephedrine 
products at convenience stores was $14.78. Id. at 8.\19\
---------------------------------------------------------------------------

    \19\ Because the average retail price for a box of the two 
leading brands of ephedrine was $7.19, the Government's expert then 
further reduced the average monthly sales figure from $14.78 to 
$14.39 ``to reflect the purchase of exactly two boxes of 24 count 
ephedrine tablets.'' Id. at 9.
---------------------------------------------------------------------------

    The MRI survey asks, however, only about the mode of administration 
with respect to cold, sinus and allergy remedies and not asthma 
remedies. Survey, at 12. Here again, it is unclear why this data 
provides a reliable basis for estimating the percentage of asthma 
sufferers who use tablets versus inhalers.
    I thus agree with the ALJ that the Government has not proved by 
substantial evidence that the monthly expected retail sales value of 
ephedrine products at convenience stores to meet legitimate demand is 
$14.39.\20\ On the other hand, it is undisputed that no ephedrine 
product ranks in the top 200 of over-the-counter and health-and-beauty 
care products which are sold in drug stores, supermarkets, and mass 
merchandisers. See GX 99, at 4. It is also undisputed that 
approximately 97% of the sales of non-prescription drugs occurs at 
pharmacies, supermarkets, warehouse clubs, department stores, 
electronic shopping/mail order houses, and other general merchandise 
stores. GX 25A, at C2. Moreover, convenience stores (both those with 
and without gasoline) account for approximately 1.14% of the total 
commerce in non-prescription drugs. Id. The Government, however, 
produced no evidence as to the annual sales of combination ephedrine 
products such as Primatene Tablets and Bronkaid, which are sold at 
pharmacies, supermarkets, and other large volume retailers of non-
prescription drugs.
---------------------------------------------------------------------------

    \20\ The Government offered evidence regarding visits or 
telephone contacts made by various Diversion Investigators (DIs) to 
eighteen pharmacies which were apparently located near some of 
Respondent's customers. See ALJ Dec. at 23-33. At least half the 
pharmacies did not carry any ephedrine products. See id. As for the 
remaining pharmacies, the Government produced evidence as to their 
sales levels of ephedrine products with respect to only four of the 
pharmacies. This evidence showed that the pharmacies were selling 
minimal quantities of tablet-form ephedrine products, with the most 
that any store sold being 71 boxes in a four-and-a-half month 
period. See, e.g., GXs 26, 27, 28 & 29.
    The Government did not establish that it used a statistically 
valid sampling technique in choosing the pharmacies the DIs 
interviewed. The evidence thus amounts to nothing more than a 
collection of anecdotes. To the extent the evidence is offered to 
show that there is little demand at pharmacies for these products, 
it is of limited probative value.
---------------------------------------------------------------------------

Evidence of Diversion

    In September 2002, DMD Pharmaceuticals, a supplier to Respondent, 
shipped it an entire lot of sixty-count bottles of a combination 
ephedrine (25 mg.) product.\21\ Tr. 1079. Two months later, twenty-two 
bottles of this lot were found at an illicit methamphetamine laboratory 
in Thompson, Connecticut. Id. at 1077. DEA subsequently issued a 
warning letter to DMD. Id. at 1077-78.
---------------------------------------------------------------------------

    \21\ According to the testimony of a DI, DEA issued DMD a 
warning letter. Tr. 1078. Upon receipt of the letter, DMD's 
compliance manager told the DI that he would look into to whom the 
product was shipped. Id. Subsequently, the DI received a phone call 
from DMD's compliance manager and owner informing her that ``that 
entire lot had been sold to'' Respondent in September 2002. Id. at 
1079. The ALJ credited this testimony, see ALJ at 13, as do I.
---------------------------------------------------------------------------

    Several months later, while completing a previously-commenced 
inspection of Respondent, a DI discussed the matter with two of its 
executives. Id. at 1082-83. While the executives provided the DI with 
the names of two salespersons whose territory included or was near the 
part of Connecticut where the lab was found, they could not identify 
which specific stores had obtained the ephedrine. Id. at 1084.
    As part of the investigation that gave rise to this proceeding, DIs 
based in four States visited a number of Respondent's customers. At a 
Roadrunner Market in Bristol, Tennessee, a DI testified that during the 
``time period of July 23rd through August 23rd'' of 2007, three 
customers had purchased quantities that far exceeded nine grams.\22\ 
Tr. 730-733. While 439 gel caps in 25 mg. strength is the dosage form 
equivalent to the nine gram limit, M.W. had bought 56 boxes totaling 
1,344 gel caps or approximately 27 grams. GX 46. During the same 
period, C.M. purchased 23 boxes totaling 552 gel caps (approximately 
11.3 grams), and E.B. purchased 52 boxes totaling 1,248 gel caps or 
approximately 25.6 grams. Id. The DI also found other evidence of 
repetitive purchasing patterns at the stores, but the logbooks were 
missing information such as the number of dosage units and/or strength 
of the product. See GX 80.
---------------------------------------------------------------------------

    \22\ It is noted that the time period which was reviewed 
exceeded thirty days. Even assuming that these persons did not 
violate Federal law in purchasing these products, given the dosing 
instruction for these products (one tablet every four hours and no 
more than six tablets every twenty-four hours), their purchases are 
not consistent with the use of the products to treat asthma. See, 
e.g., RX 9, at 1. Moreover, the ``Drug Facts'' warning label for 
Respondent's Double Action Ephedrine (25/200 mg.) product further 
advises to ``Stop use and ask a doctor if * * * cough persists for 
more than 1 week.'' Id.
---------------------------------------------------------------------------

    A different DI visited the Smoker Friendly No. 4 Store in Little 
Falls, New York, and obtained the logbooks. Tr. 785-86, 791-92. The 
logbooks showed that between July 27, 2007, and August

[[Page 52695]]

27, 2007, four persons had purchased more than nine grams. K.S. bought 
984 tablets of ephedrine 25 mg. (more than 20 grams), and A.P. bought 
768 tablets of ephedrine 25 mg. (approximately 15.7 grams). GX 45. 
Moreover, Richard and Robert R., who had the same last name and used 
the same address, respectively purchased 600 and 696 tablets of 
ephedrine 25 mg. Id. These purchases amounted to 12.3 and 14.25 grams. 
Id.
    Another DI visited the Mason of New York convenience store of 
Jamestown, New York, and obtained the logbook. Tr. 1484. The logbook 
entries were frequently missing information as to the strength of the 
ephedrine tablets that had been purchased. Nonetheless, the logbook 
showed that there were five individuals who, even if they had purchased 
only 12.5 mg. ephedrine, had nonetheless purchased more than nine grams 
during the period between July 21 and August 21, 2007. More 
specifically, M.M. purchased 1,368 tablets (14 grams),\23\ A.J. 
purchased 1,014 tablets (10.4 grams), J.B. purchased 1,548 tablets 
(15.9 grams), J.H. purchased 1,068 tablets (10.9 grams), and R.B. 
purchased 1,002 tablets (10.3 grams).\24\ GX 49.
---------------------------------------------------------------------------

    \23\ A person named Chris M. (with the same last name and 
address as M.M.) purchased an additional 360 tablets. GX 49.
    \24\ All of these calculations assume that these persons bought 
12.5 mg. tablets; if they bought 25 mg., then the amount of 
ephedrine was double. Moreover, the DI found that four other persons 
had purchased quantities which would exceed nine grams if the 
strength of the tablets was 25 mg.
---------------------------------------------------------------------------

    A Pennsylvania-based DI likewise found evidence of purchases that, 
while technically not in violation of the CMEA, raised a strong 
suspicion that the ephedrine was being diverted. For example, at the 
CoGo of Somerset, Pennsylvania, a DI found that S.M. had bought 384 
dosage units between August 16 and 23, 2007. GX 75. At 12.5 mg. 
strength, this amounted to 3.9 grams. This individual had also bought 
three twenty-four count boxes on three consecutive days.\25\ Id. 
Moreover, another DI visited a CoGos in Midland, Pennsylvania, and 
found evidence that a person had bought 620 dosage units of 12.5 mg. 
between May 1 and May 31, 2007, and an additional 636 dosage units 
between June 1 and June 15, 2007. Tr. 1486; GX 41.
---------------------------------------------------------------------------

    \25\ At two stores, the DI did not find any evidence of 
purchases in excess of the limit and was told by the managers that 
the products were primarily purchased by hospital workers and truck 
drivers who used them to stay awake on their jobs. Tr. 872-73; 886-
87.
---------------------------------------------------------------------------

The Allegation That Respondent Distributed Listed Chemicals to 
Uncertified Retailers

    Effective September 30, 2006, the CMEA prohibited a retailer from 
selling schedule listed chemical products unless the retailer had self-
certified to the Attorney General that all ``individuals who are 
responsible for delivering such products into the custody of purchasers 
or who deal directly with purchasers by obtaining payment for the 
products * * * have * * * undergone training provided by the seller to 
ensure that the individuals understand the requirements that apply'' to 
the sale of the products. 21 U.S.C. 830(e)(1)(VII). As stated above, 
the Government alleged that between January 1, 2007, and July 9, 2007, 
Respondent made 284 distributions of listed chemical products to 
thirty-five retailers who were not self-certified.
    As support for the allegation, a DEA DI testified that using a 
document supplied by Respondent which listed the customers by code 
number, store name and address, she conducted a spot check to see if 
the stores were listed in the Agency's database of stores that had 
become certified. Tr. 1213-19. The DI further testified that the 
results of her inquiry were reported in a thirteen page document, which 
listed the distributions by Respondent's store code number, the date, 
Respondent's product code, and quantity. Id. at 1218, see also GX 40 
(listing stores and transactions).
    At the hearing, Respondent produced numerous documents that refuted 
the allegation. For example, the Government listed twenty-five Speedway 
stores that were located in Indiana and Kentucky which had obtained 
SLCs from Respondent between April 10 and July 9, 2007. GX 40, at 3, 6 
& 7. Respondent, however, introduced into evidence, a letter dated 
April 3, 2007 from an executive of Speedway Super America to DEA's 
registration unit submitting a CD-Rom with the certification data for 
the company's stores in Indiana and Kentucky. RX 57. Respondent also 
submitted copies of each store's certification. See RX 57A. While each 
of the certifications was dated July 5, 2007, the Government did not 
rebut Respondent's evidence that the Agency considers a chain retailer 
who submits information on a CD-Rom to be self-certified on the date 
the information is received by the Agency. Tr. 1335-36.
    At most, the evidence suggests that Respondent made a single 
distribution to a single store before it obtained its certification. 
Compare GX 40, at 14, with RX 57, at 18. According to these exhibits, 
Respondent distributed a listed chemical product on January 18, 2007, 
to an independent convenience store located in Centreville, Virginia, 
prior to the store obtaining certification on March 8, 2007.\26\
---------------------------------------------------------------------------

    \26\ The store's certification shows that it was completed 
online at DEA's self-certification Web page. RX 57, at 18.
---------------------------------------------------------------------------

    The evidence did show, however, several instances in which 
Respondent's records contained erroneous information. For example, 
Respondent's records listed the address of store XTM7480 as 1451 Dorsey 
Road, Hanover, Maryland. GX 39, at 100. The store's DEA Certificate 
states, however, that its address is 7500 Ridge Road, Hanover, MD. RX 
57, at 14. Respondent's records likewise listed the address of store 
XTM7520 as 7300 Washington Blvd., Dorsey, MD. GX 39, at 100. According 
to its DEA certificate, the store's address was 7300 Washington Blvd, 
Elkridge, MD. RX 57, at 15. Also, Respondent's record listed the 
address of store MTO102 as 995 Old Airport Road, Bristol, TN. GX 39, at 
33. The store's DEA certificate, however, gives its address as 1001 
Airport Road, Bristol, Va. RX 57, at 16.\27\
---------------------------------------------------------------------------

    \27\ Likewise, Respondent's records list the address for store 
BGP1 as 1699 N. Dixie Hwy, Monroe Michigan. GX 39. The store's DEA 
certificate gives its address as 1488 N. Dixie Hwy., Monroe, 
Michigan. RX 57, at 21.
---------------------------------------------------------------------------

The Allegations That Respondent Distributed Products in Forms That 
Could Not Be Lawfully Sold Under the CMEA and State Laws

    Effective April 9, 2006, the CMEA prohibited a retailer from 
selling a listed chemical ``product in nonliquid form (including gel 
caps) at retail unless the product is packaged in blister packs * * * 
containing not more than 2 dosage units, or where the use of blister 
packs is technically infeasible, the product is packaged in unit dose 
packets or pouches.'' 21 U.S.C. 830(d)(2). The Government alleged that 
subsequent to February 1, 2007, Respondent distributed 24-count bottles 
of listed chemical product to retailers on three occasions.
    In support of this allegation, the Government introduced a document 
which lists three distributions of Respondent's product  
17902, Mini 2 Way 25 mg. gel caps in 24 count bottles, to three stores 
(PTR3295, PTR3438, and PTR3973).\28\ See GX 66 & 37. A DI testified 
that the three transactions were found in Respondent's sales records. 
Tr.

[[Page 52696]]

1442-45. According to Respondent's customer list, each of the stores 
was owned by The Pantry chain. See GX 39.
---------------------------------------------------------------------------

    \28\ According to Respondent's sales records, two of the 
distributions (to stores PTR3295 and PTR3438) occurred on February 
7, 2007; the other distribution (to store PTR3973) occurred on April 
23, 2007. GX 66, Tr. 1442-43.
---------------------------------------------------------------------------

    Respondent's record of shipments showed, however, that the product 
had not been shipped after January 2006. RX 40, at 152. Moreover, 
Respondent presented e-mail correspondence between it and an employee 
of The Pantry. More specifically, Respondent requested that The Pantry 
check its scanner data to determine whether it had sold the bottled 
product at the three stores after February 1, 2007. RX 46, at 2-3. In 
an e-mail, a Pantry employee reported that she had checked the item 
number for the three stores ``from Feb. 2007-Feb. 2008 and [that] there 
was no movement at any of the three locations for this item.'' RX 46, 
at 1.\29\ Based on the totality of the evidence, I find that the 
Government has not proved this allegation.
---------------------------------------------------------------------------

    \29\ Respondent's CEO attributed the data as resulting from its 
salesperson[s] having entered the wrong product code in their 
computer. Tr. 68. Another of Respondent's testified that that it had 
reprogrammed its computer system to prevent a salesperson from 
selling an item that was prohibited. Id. at 1404. Yet even after the 
reprogramming, there were several instances in which salespersons 
entered the codes for discontinued products. Id. at 1405. The same 
executive acknowledged that he did not know if the salespersons 
still had obsolete products in their storage units. Id.
---------------------------------------------------------------------------

    The Government also alleged that Respondent distributed tablet-form 
products to retailers in Kentucky and North Carolina, after these 
States prohibited the sale of non-liquid products other than in gel-cap 
form at establishments that are not pharmacies. In support of the 
allegation, the Government introduced a document which listed four 
distributions of Respondent's product  017550, Ephedrine Plus 
Blister 24 Count. See GX 37 & 65. Three of the distributions were made 
to three stores owned by Circle K Midwest which were located in 
Kentucky (CKM 3212, CKM 3247, and CKM 3248); the other store was owned 
by The Pantry and located in North Carolina (PTR3972). See GX 39, at 
10, 11 & 65. According to Respondent's records, the distributions 
occurred on March 27 and 28, and July 9, 2007.
    An executive of Respondent testified that its records pertaining to 
the four distributions were erroneous. Tr. 1347-50. Moreover, 
Respondent's records did not show any shipments of this product after 
December 26, 2005. RX 40, at 159. Finally, in an e-mail, an employee of 
The Pantry reported that ``there was no movement'' of the product at 
store number 3972. RX 46, at 1.\30\ Because the ALJ found credible 
Respondent's explanation and did not produce sufficient evidence to 
reject this finding, I find that Government has proved only that 
Respondent's records were erroneous and that it did not violate North 
Carolina or Kentucky law.
---------------------------------------------------------------------------

    \30\ Respondent also submitted an e-mail from an employee of 
Circle K., which states that she checked the stores' sales going 
back to April 30, 2007, and that the stores had not sold the 
product. RX 46, at 5. The e-mail is thus not probative of whether 
Respondent distributed the products in violation of Kentucky law.
---------------------------------------------------------------------------

The DEA Audits

    On July 9, 2007, as part of an administrative inspection of its 
registered location, DEA Investigators took a physical count of 
Respondent's listed chemical products then on hand. Tr. 1163. The DIs 
also obtained an initial inventory dated December 25, 2005, from 
Respondent's records. Id.; see GX 4. Both the beginning and ending 
inventories were certified as correct by Ryan Polk, Respondent's Chief 
Financial Officer. GX 4. Pursuant to an agreement with the DIs, 
products which were stored in the returns portion of Respondent's 
storage cage which included out-of-date products, broken blister packs, 
and single loose pills were not counted. Tr. 1494-95. The products had 
not, however, been logged back into Respondent's records. Id.
    DEA Investigators audited twenty different products by adding 
Respondent's receipts (including returns, Tr. 1182) to the beginning 
inventory (GX 34) \31\ and comparing this figure with the sum of the 
closing inventory and Respondent's shipments to its salespersons (GX 
35) and returns to its suppliers. See GX 4, at 3. Of further note, 
Respondent's list of shipments indicated that it had made three 
separate shipments of product  17121 (totaling more than 2300 
units \32\) to three of its salespersons on July 16, 2007, 
notwithstanding that this date was a week into the future. GX 35, at 
29.
---------------------------------------------------------------------------

    \31\ According to the DI, the investigators ``asked to see 
receipts for the products audited for a time period. And we were, 
instead, given this three-page summary.'' Tr. 1170. Relatedly, the 
DI testified that while Respondent gave them a 157 page list of its 
shipments, the document used product codes and the Investigators had 
to ask several times for a document which identified the products. 
Id. at 1180-81.
    \32\ This product was a six-count blister pack. See GX 32, at 1.
---------------------------------------------------------------------------

    According to the DIs' calculations, only one of the products in 
which there was activity balanced,\33\ two of the products had sizable 
shortages, and the remaining had overages. Id. More specifically, the 
DI identified Respondent's product code 17902 (Mini 2-Way 25 
mg. 24 count gel cap bottles) as being short nearly 28,000 bottles. Tr. 
1186. Moreover, the DI concluded that Respondent was short 32,913 units 
of product code  17903 (Mini 2 Way 12.5 mg. gel cap 6 ct. 
blister packs). See GX 4, at 3.
---------------------------------------------------------------------------

    \33\ While two other products balanced, the computation chart 
indicates that there was no beginning or closing inventory of, and 
no activity in, these products. GX 3, at 6.
---------------------------------------------------------------------------

    The DI further testified that ``because we got different numbers 
when comparing [Respondent's] receipts versus their warehouse 
documentation,'' Tr. 1186, she conducted an additional audit of four 
products by obtaining information from Respondent's suppliers in order 
to verify its receipts. Id. at 1187. According to the DI, for these 
four products, there were substantial differences between the 
quantities that were reported by the suppliers and the information 
provided by Respondent. Id. With respect to product  17121 
(Double Action 6 ct. ephedrine 25 mg. tablets), Respondent had 
represented that its receipts were 656,688, but according to the DI, 
the suppliers had claimed to have sold it only 429,024 units resulting 
in an overage of more than 275,000 units. Tr. 1188; GX 4, at 3. The DI 
also found overages in the other thre