Filed: March 19, 1997

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 96-4536

(CR-91-378-HAR)

United States of America,

Plaintiff - Appellee,

versus

Robert Shulman,

Defendant - Appellant.

ORDER

The Court amends its opinion filed February 27, 1997, as

follows:

On page 6, third full paragraph, line 2 -- the phrase "the

district held" is corrected to read "the district court held."

For the Court - By Direction

/s/ Patricia S. Connor

Clerk
UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v. No. 96-4536

ROBERT SHULMAN,

Defendant-Appellant.

Appeal from the United States District Court

for the District of Maryland, at Baltimore.

John R. Hargrove, Senior District Judge.

(CR-91-378-HAR)

Argued: January 31, 1997

Decided: February 27, 1997

Before WILKINSON, Chief Judge, and WILLIAMS and

MICHAEL, Circuit Judges.

_________________________________________________________________

Affirmed by unpublished per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: Mark Daryl Rasch, Bethesda, Maryland, for Appellant.

Lawrence McDade, Deputy Director, Office of Consumer Litigation,

UNITED STATES DEPARTMENT OF JUSTICE, Washington,

D.C., for Appellee. ON BRIEF: Lynne A. Battaglia, United States

Attorney, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Robert Shulman appeals the sentence imposed by the district court

following his plea of guilty to one count of conspiracy to defraud the

United States, see 18 U.S.C.A. § 371 (West 1966 & Supp. 1996); one

count of wire fraud, see 18 U.S.C.A. § 1343 (West Supp. 1996); two

counts of making a false statement to the Food and Drug Administration (FDA), see 18 U.S.C.A. § 1001 (West Supp. 1996); and one

count of obstructing an FDA investigation, see 18 U.S.C.A. § 1505

(West Supp. 1996).1 He maintains that the district court erred in finding that the victims of his offenses suffered an economic loss in

excess of $80 million, resulting in the application of an 18-level

enhancement to his base offense level under the Sentencing Guidelines. See U.S. Sentencing Guidelines Manual § 2F1.1(b)(1)(S)

(1995). Because we conclude that the district court properly applied

a fraud loss enhancement under U.S.S.G. § 2F1.1(b)(1), we affirm

Shulman's sentence.

I.

Shulman was president, chief executive officer, chairman of the

board of directors, and a major shareholder of Bolar Pharmaceutical

Company, Inc., a manufacturer of generic drugs. As president and

chief executive officer of the company, he was responsible for the

overall management of Bolar and supervised the creation and testing

of various generic drugs for which Bolar hoped to obtain marketing

approval from the FDA. The several drugs that were the subject of his

guilty plea were identified, for purposes of this appeal, as "coversheet" drugs and generic Dyazide.

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1 Shulman also pled guilty to one count of price-fixing in violation of

the Sherman Act, see 15 U.S.C.A. § 1 (West Supp. 1996), which was

charged separately. He received a 21-month concurrent sentence which

he does not challenge.

 2
A. "Coversheet" drugs

In March 1985, FDA investigators discovered that the company

was manufacturing a number of generic drugs by formulas or processes not approved by the FDA. Once the FDA has approved the

manufacture and marketing of a generic drug according to a certain

formula, a manufacturer is required to seek FDA approval before

making any modification to that formula, regardless of how insignificant the modification may be. See 21 C.F.R. § 314.70 (1996). Accordingly, the FDA required Bolar to halt the distribution of, and perform

expensive bioequivalence studies2 on, several generic drugs.

As a result of that expensive and disruptive episode, Shulman

instructed Bolar employees to document future deviations from FDAapproved formulas or processes on "coversheets." When problems

were encountered with making a product by the FDA-approved master formula, Shulman instructed Bolar employees to make changes in

the ingredients or manufacturing process and then record the changes

on the "coversheet." Bolar's production department maintained a copy

of the coversheets to facilitate future production of the product, but

the coversheets were hidden from FDA investigators. The batch production records kept pursuant to FDA regulations and made available

to FDA investigators were completed by Bolar employees as if the

approved master formula, rather than the coversheet formula, had

been followed.

Bolar filed supplemental abbreviated new drug applications

(ANDAs) requesting approval of the changes and, as respective FDA

approvals were received, discontinued the coversheet practice on a

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2 When submitting an abbreviated new drug application (ANDA) seeking FDA approval to market a generic drug, an applicant must demonstrate that the generic formulation is bioequivalent to the name-brand

drug. See 21 C.F.R. § 314.94(a)(7) (1996). Generally speaking, "[b]ioequivalence means the absence of a significant difference in the rate and

extent to which the active ingredient or active moiety in pharmaceutical

equivalents or pharmaceutical alternatives becomes available at the site

of drug action when administered at the same molar dose under similar

conditions in an appropriately designed study." 21 C.F.R. § 320.1(e)

(1996) (emphasis omitted).

 3
product-by-product basis. Six supplemental ANDAs (relating to six

coversheet drugs) were never approved by the FDA, and formed the

basis for the indictment and the guilty plea. The Government contends, and on appeal Shulman apparently concedes, that Bolar

received approximately $70 million in revenue from the six remaining

drugs manufactured under the coversheet scheme.

B. Generic Dyazide

In 1987, Bolar submitted an ANDA to the FDA in an attempt to

obtain approval to market triamterene-hydrochlorothiazide, the

generic version of the name-brand drug Dyazide used to treat hypertension. To gain approval, FDA regulations required the submission

of a bioequivalence study. See 21 C.F.R. § 314.94(a)(7) (1996).

Accordingly, in January 1987, the FDA instructed Bolar to supply

samples of both generic Dyazide and name-brand Dyazide for bioequivalency testing at Pharmakinetic Laboratories in Baltimore,

Maryland. Because Bolar had experienced difficulty in maintaining

the stability of its generic Dyazide, Jacob Rivers, Bolar's vicepresident, substituted brand-name Dyazide in Bolar capsules for the

FDA to test. As a result, the FDA, believing that it was testing Bolar's

generic Dyazide, tested name-brand Dyazide against itself. Not surprisingly, the FDA approved Bolar's ANDA for generic Dyazide in

August 1987, and sales began immediately.

In June 1989, Pharmakinetic Laboratories informed Shulman that

it had discovered the fraudulent substitution in the bioequivalence

study. Immediately, Shulman began aggressively campaigning to

cover up the facts about the bioequivalence study's false samples. He

flew to Baltimore with Rivers and met with Pharmakinetic Laboratories' chief scientific officer, Mark Perkal, in an attempt to conceal the

fraudulent study. After Perkal stated that he had to consult with his

rabbi in New York City before taking such serious action, Shulman,

Rivers, and Perkal flew to New York where Perkal met with his rabbi

and ultimately agreed to participate in the cover-up. The next day,

Shulman had samples of the name-brand Dyazide used in the bioequivalence study removed from Pharmakinetic Laboratories' offices,

and had them replaced with samples of Bolar-manufactured product.

FDA investigators arrived at Pharmakinetic Laboratories two days

later.

 4
Despite Shulman's herculean efforts, the elaborate cover-up unraveled in January 1990. At that time, Bolar stopped selling generic Dyazide. During the time Bolar sold generic Dyazide, the company

earned approximately $142 million in gross sales of the drug. From

June 1989, the date Shulman admits he learned that the FDA approval

had been fraudulently obtained, until January 1990 when Bolar

stopped selling the drug, the company earned approximately $34 million in generic Dyazide sales.

C.

On November 7, 1991, Shulman pled guilty to one count of conspiring to defraud the United States, one count of wire fraud, two

counts of making a false statement to the FDA, and one count of

obstructing an FDA investigation. Although the plea agreement

between Shulman and the Government stipulated to the appropriate

application of the sentencing guidelines, the parties reserved the right

to contest the proper application of the loss enhancement provision

§ 2F1.1(b)(1) -- the Government taking the position that Shulman's

offense level should be increased by eighteen levels based on a loss

in excess of $80 million, and Shulman arguing that a loss enhancement of far less was appropriate.

During the initial sentencing hearing, the district court determined

that the amount of Bolar's sales of coversheet drugs and generic Dyazide was the appropriate measure of loss under U.S.S.G.

§ 2F1.1(b)(1). It accepted the Government's argument that economic

gain to the manufacturer was the proper measure of loss on the theory

that because the drug did not meet FDA specifications, it had no

value. Relying on this finding, the district court sentenced Shulman

to 60 months imprisonment and fined him $1,250,000. Shulman did

not appeal.

In 1995, Shulman filed a motion to vacate his sentence under 28

U.S.C.A. § 2255 (West 1994), arguing that the district court violated

Federal Rule of Criminal Procedure 32(c)(5) by failing to inform him

of his right to appeal. After the district court denied Shulman's § 2255

motion, he appealed. In an unpublished opinion, we vacated the district court's order denying his motion and remanded the case for

resentencing. See United States v. Shulman, No. 95-5603, 1996 WL

 5
245269, *1 (4th Cir. May 13, 1996) (per curiam) (stating that the

"government concedes that the district court failed to inform Shulman

at sentencing that he had the right to appeal his sentence" and "that

a failure to advise a defendant of his right to appeal is per se reversible error requiring resentencing").

At resentencing, Shulman argued that no losses were suffered by

Bolar customers because both the coversheet drugs and the generic

Dyazide were bioequivalent to FDA-approved drugs. Alternatively,

he argued that his actions resulted in a monetary loss of much less

than $80 million. According to Shulman, Bolar received only $36.5

million from drugs manufactured under the coversheet scheme, not

$70 million. In addition, he argued that only $34 million of generic

Dyazide sales should be attributed to him, not the $142 million in

total sales of the drug, because Bolar sold only $34 million of generic

Dyazide after he learned that FDA approval of the drug had been

fraudulently obtained.

The district court rejected Shulman's arguments and concluded that

his fraudulent conduct caused a loss of more than $80 million to customers of Bolar. Specifically, the district court found that Shulman

ran the conspiracy to evade FDA regulations from the very beginning,

that he was the moving force behind it, that he was a very active president "who controlled every facet of the company from start to finish"

(J.A. at 268), that all decisions were approved by him, and that his

motive was to get drugs on the market faster than anyone else in order

to make millions of dollars. In addition, the district court expressly

determined that Shulman knew or should have known about the

generic Dyazide fraud in August 1987 when the drug went on the

market, in light of his control of the company and his "conduct to

cover it up." (J.A. at 267.)

Finding that generic Dyazide sales by Bolar exceeded $124 million, the district court held that "the amount of money, 124 million dollars,

is a loss, not only a loss to the consumer, but it is a loss to his competitors . . . ." (J.A. at 269.) In addition, the district court made the following findings:

[The "coversheet" drugs] had no, absolutely no bioequivalency testing at all, you just throw together a formula, no

 6
testing whatsoever and put it there, shove it into the Food

and Drug Administration; and then before they even

approve it, you go out and sell it then. That comes up to

some -- I think you have been listed at 36 million.

(J.A. at 269.) Considering these losses together, the district court

imposed an 18-level enhancement to Shulman's base offense level

under U.S.S.G. § 2F1.1(b)(1)(S). The district court made several other

adjustments to reach a final adjusted offense level of 25.3 That offense

level, combined with a Criminal History Category I, resulted in a

guideline range of 57-71 months imprisonment. The district court

resentenced Shulman to 60 months imprisonment and reimposed a

$1,250,000 fine.

II.

The Sentencing Guidelines provide a base offense level of six for

crimes involving fraud or deceit, see U.S.S.G. § 2F1.1, and then

incrementally increase the offense level according to the amount of

loss suffered as a result of the fraud, see U.S.S.G. § 2F1.1(b)(1)(A)-

(S). We review the district court's application of the Sentencing

Guidelines under a "due deference" standard, examining factual determinations for clear error and legal conclusions de novo. See 18

U.S.C.A. § 3742(e); United States v. Daughtrey, 874 F.2d 213, 217-

18 (4th Cir. 1989). Because the district court's determination of the

amount of loss is a factual one, we will vacate Shulman's sentence

only if the district court's fraud loss determination was clearly erroneous. See United States v. Castner, 50 F.3d 1267, 1274 (4th Cir. 1995)

(citing United States v. West, 2 F.3d 66, 71 (4th Cir. 1993)).

Shulman challenges the district court's loss calculation. First, he

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3 The district court appropriately increased Shulman's offense level by

two for more than minimal planning, see U.S.S.G. § 2F1.1(b)(2)(A); by

four because he was an organizer or leader of the criminal activity, see

U.S.S.G. § 3B1.1(a); and by two for obstruction of justice, see U.S.S.G.

§ 3C1.1. It reduced Shulman's offense level by three for acceptance of

responsibility. See U.S.S.G. § 3E1.1. And, the district court acquiesced

in the Government's motion for a 4-level downward departure to reflect

Shulman's substantial assistance. See U.S.S.G. § 5K1.1.

 7
argues that United States v. Chatterji, 46 F.3d 1336 (4th Cir. 1995),

not United States v. Marcus, 82 F.3d 606 (4th Cir. 1996), is controlling. In Chatterji, the defendant, Dulal Chatterji, pled guilty to fraudulent conduct involving two products manufactured by Quad

Pharmaceutical -- vancomycin and ritodrine hydrochloride. See

Chatterji, 46 F.3d at 1339-40. In order to save time and money in the

production of vancomycin, Chatterji prepared fewer research and

development lots for stability testing than required by the FDA. The

fraud thus resulted in FDA approval based on two valid lots of vancomycin, rather than the required three lots. See id. at 1338-39. The

Chatterji court noted, however, that repeated tests of vancomycin produced by Quad after fraudulently obtaining FDA approval "revealed

that in every instance the drug met all FDA requirements for safety

and effectiveness." Id. at 1339. In addition, Chatterji directed the

addition of slightly more of an inert ingredient in the production of

ritodrine than was called for in the approved formula. The Chatterji

court stated that the "minor formula change did not render Quad's

ritodrine less effective or pose any danger to consumers who used the

drug." Id. Thus, the Chatterji court held that "Quad's products were

exactly what they purported to be: vancomycin and ritodrine,

approved by the FDA, manufactured in a certain strength and dosage,

and producing the specified therapeutic benefits that FDA requirements were intended to ensure." Id. at 1341. "In sum," the Chatterji

court stated, "this is not a situation in which a drug with fraudulentlyobtained FDA approval harms consumers, fails to produce its

intended effects, or is something less than its is represented to be." Id.

at 1342. Consequently, the Chatterji court reversed the district court's

loss calculation and held that the government had failed to show consumer loss resulting from Chatterji's fraud on the FDA.

In Marcus, 82 F.3d at 606, we addressed another fraud-on-the-FDA

scenario. There, we found that the drugs sold by Halsey Drug Company as a result of the defendant's fraud were not approved by the

FDA, not tested for safety and efficacy, and, therefore, were altogether "something less than [they] were represented to be." Id. at 609-

10 (quoting Chatterji, 46 F.3d at 1341). We stated that there was a

critical difference between the formula change at issue in

Chatterji and the one at issue [in Marcus]. In Chatterji, the

modification of the formula for ritodrine was merely an

 8
insignificant change that implicated only the shelf life of the

drug; it was undisputed that the modification in no way

could have affected the bioequivalence of the drug and

thereby its safety or therapeutic value.

Id. at 610. In Marcus, however, the defendant stipulated that the reason for the change in the formula was the problem the drug had in

passing dissolution tests -- a problem bearing on the therapeutic

value of the drug. See id. In addition, the defendant in Marcus (in

contrast to the defendant in Chatterji) conceded that the modification

to the formula would have been viewed by the FDA as significant,

requiring additional (and expensive) bioequivalence testing. See id.

In Marcus, we characterized the distinction between the Chatterji

and Marcus factual scenarios as "pivotal":

Since the modification to the formula for ritodrine in

Chatterji had no potential to affect the bioequivalence or

therapeutic value of the drug, not only was the ritodrine

actually safe and effective, but it also was known to be safe

and effective when marketed. Marcus, on the other hand,

agreed that the change in the formula for quinidine gluconate posed the potential to affect the bioequivalence of the

drug. Accordingly, the drug was of unknown safety and efficacy.

Id. Accordingly, we held in Marcus that "consumers did not receive

that for which they bargained -- an FDA-approved drug of known

safety and efficiency." Id. (citing Castner, 50 F.3d at 1276 & n.8).

Because consumers would not purchase a drug of unknown efficacy

and safety, gross sales of the drug were the appropriate measure of

fraud loss. See id.

Here, Shulman concedes that "[a]ll but the most minor modifications of FDA approved formulas have the potential to affect the bioequivalences of the drug" (Appellant's Br. at 8), but then claims that

the safety and efficacy (and bioequivalence) of the"coversheet" drugs

was known because "[i]n each case where a change was made Bolar

performed both dissolution testing and a dissolution profile of the new

drug to ensure that the active ingredient dissolved in vitro at the same

 9
rate as that of the innovator," (Appellant's Br. at 12). Thus, Shulman

argues, the bioequivalence of the "coversheet" drugs was known (by

Bolar, not the FDA) at the time Bolar marketed them, just as the bioequivalence of the ritodrine in Chatterji was known at the time it was

marketed. As in Chatterji, Shulman argues, consumers were not

defrauded and no loss occurred because they got what they paid for

-- generic drugs bioequivalent to brand-name drugs.

Shulman's claim that "[e]very cover sheet drug sold passed these

required tests prior to sale" (J.A. at 33), however, is not supported in

the record. We are unable to say, as the Chatterji court did, that testing of the coversheet drugs conducted after FDA approval was fraudulently obtained "revealed that in every instance the drug met all FDA

requirements for safety and effectiveness." Chatterji, 46 F.3d at 1339.

Indeed, we are unable to say after reviewing the record whether any

such tests were even conducted. Thus, we conclude that the "coversheet" drugs sold were of unknown bioequivalence. As a result, "consumers did not receive that for which they bargained-- an FDAapproved drug of known safety and efficiency." Marcus, 82 F.3d at

610. Accordingly, under Marcus, gross sales of the coversheet drugs

-- which the district court found to total $36 million4 -- is the proper

measure of fraud loss. See id.

With respect to the Dyazide, it is undisputed that FDA-approval

was obtained fraudulently. Shulman contends, however, that no loss

occurred because "[s]hortly after approval Bolar commissioned an

independent clinical study to compare its product with that of the

innovator, SmithKline. This study was not required to be performed

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4 Evidently, the district court accepted Shulman's argument that Bolar

received $36.5 million in revenue from drugs manufactured under the

coversheet scheme -- not $70 million as the Government contended. We

note that on appeal, Shulman concedes that Bolar received $70 million

in revenue from coversheet drugs. (Appellant's Reply Br. at 4-5 (stating

that "the gross sales of cover sheet drugs were, in fact, $70 million").)

Because we conclude that the total amount of loss resulting from Shulman's fraud far exceeded $80 million as is required for the maximum 18-

level enhancement under U.S.S.G. § 2F1.1(b)(1)(S), the district court's

error in underestimating the amount of loss resulting from the coversheet

fraud is unimportant.

 10
by the FDA, and far exceeded the FDA requirements to demonstrate

bioequivalence of Bolar's Dyazide." (Appellant's Br. at 17.) Again,

however, the record does not support Shulman's contention that postfraud tests confirmed the bioequivalence of the drug. Thus, as with

the coversheet drugs, we conclude that the generic Dyazide was of

unknown bioequivalence. Under Marcus, gross sales of the generic

Dyazide -- which the district court found totalled $124 million5 --

is the proper measure of fraud loss. See Marcus, 82 F.3d at 610.

Shulman also argues that the district court erred in determining that

the substitution by Rivers of brand-name Dyazide for Bolar generic

Dyazide in the bioequivalence study was a "reasonably foreseeable"

act in furtherance of the conspiracy to submit false data to FDA. He

contends that only $34 million in generic Dyazide sales were reasonably foreseeable to him.

To calculate the amount of loss under U.S.S.G. § 2F1.1(b)(1) correctly, district courts must first apply the principles of relevant conduct.6

Cf. United States v. Irvin, 2 F.3d 72, 78 (4th Cir. 1993) (holding that

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5 On appeal, Shulman did not dispute that sales of generic Dyazide

actually totalled $142 million. Apparently the district court transposed

the numbers in coming up with a total of $124 million. The district

court's error in this respect is irrelevant. See U.S.S.G. § 2F1.1(b)(1)(S)

(fraud involving loss in excess of $80 million).

6 The relevant conduct provision of the Sentencing Guidelines,

§ 1B1.3, provides that specific offense characteristics, i.e., the loss

amount that should be attributed a defendant under § 2F1.1, is to be

determined on the basis of the following:

(1)(A) all acts and omissions committed, aided, abetted, counseled, commanded, induced, procured, or willfully

caused by the defendant; and

 (B) in the case of a jointly undertaken criminal activity . . .

all reasonably foreseeable acts and omissions of others

in furtherance of the jointly undertaken criminal activity,

that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense.

U.S.S.G. § 1B1.3(a)(1)(A)-(B).

 11
district courts must apply relevant conduct principles in determining

the quantity of narcotics properly attributable to each coconspirator);

United States v. Gilliam, 987 F.2d 1009, 1012-13 (4th Cir. 1993)

(stating that "in order to attribute to a defendant for sentencing purposes the acts of others in jointly-undertaken criminal activity, those

acts must have been within the scope of the defendant's agreement

and must have been reasonably foreseeable to the defendant"). The

district court's determination regarding the "reasonable foreseeability" of acts of coconspirators is a factual question that we will overturn only if clearly erroneous. See United States v. Vinson, 886 F.2d

740, 742 (4th Cir. 1989). At sentencing, a district court need support

its findings of fact only by a preponderance of the evidence. See

United States v. Morgan, 942 F.2d 243, 246 (4th Cir. 1991).

The district court considered the rather broad conspiracy to which

Shulman pled guilty and made specific factual findings concerning

Shulman's role in (and control of) the conspiracy. Specifically, the

district court determined that Shulman either knew or should have

had knowledge of exactly what was going on and some subordinate substituted brand names, such as in the case we

have, then I think he had knowledge of that or he should

have known that this was a part of the game that he was

playing with the Food and Drug Administration.

(J.A. at 266-67.) As a result, the district court attributed the entire loss

resulting from the Dyazide fraud to Shulman, not just the "34 million

which was sold after [he was] notified -- at least he alleged that he

was notified that there was a problem." (J.A. at 268.) After reviewing

the parties' briefs, the record, and after hearing argument on this

issue, we conclude that the district court was not clearly erroneous in

determining by a preponderance of the evidence that the total gross

sales of generic Dyazide were reasonably foreseeable to Shulman and

should be attributed to him as fraud loss under principles of relevant

conduct.

III.

Based on the foregoing, we conclude that the district court did not

clearly err in determining that Shulman was responsible for fraud loss

 12
totalling $36 million relating to the coversheet drugs, and fraud loss

totalling $124 million relating to the generic Dyazide. As a result, we

conclude that the district court properly increased Shulman's base

offense level by eighteen levels under U.S.S.G.§ 2F1.1(b)(1)(S) for

fraud in excess of $80 million. Accordingly, we affirm the sentence

imposed by the district court.7

AFFIRMED

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7 Shulman also argues that the district court deprived him of due process by considering at sentencing "unsupported, hearsay and inaccurate

`facts' nowhere found in the record." (Appellant's Br. at 44.) After

reviewing the parties' briefs and the transcript of sentencing, and after

hearing argument on this issue, we conclude that Appellant's contentions

on this issue are without merit.

 13