Hi-Tech CEO’s Get-Out-Of-Jail Card: Full Recall Of Weight Loss Supplements

Hi-Tech Pharmaceuticals’ CEO and senior VP will remain in jail until they convince a federal judge they disseminated “a proper recall notice” for each of their products; the notices were distributed to “all retailers and anyone else associated with the products;” and their products are not available in retail stores.

Hi-Tech Pharmaceuticals Inc. CEO Jared Wheat’s disputes with regulatory agencies continue as Federal Trade Commission enforcement leads a judge to send him to jail until he complies with an order to recall the firm’s weight loss supplements marketed with unsubstantiated claims.

Wheat has a history of battles with regulators and previously was sentenced to prison in an unrelated case investigated by FDA. He once accused FDA of “bullying tactics” in ordering DMAA products off the market, but he might consider FDA’s enforcement restrained in comparison with the ruling in the FTC case.

Wheat and Hi-Tech senior VP Stephen Smith surrendered to authorities following a Sept. 2 order in the U.S. District Court for the Northern District of Georgia in Atlanta that they were in contempt of a May 2014 court order by failing to recall products branded as Fastin, Lipodrene, Benzedrine and Stimerex-ES. Motions filed Sept. 4 to delay their incarceration were denied and they were taken into custody the next day.

According to the ruling, Wheat and Smith must convince the commission and U.S. District Court Judge Charles Pannell Jr. that they disseminated “a proper recall notice” for each of the products, the notices were distributed to “all retailers and anyone else associated with the products” and links to the notices “are prominently displayed on each page of the company’s website.”

Hi-Tech also must show that its weight loss products are no longer available in retail stores, FTC said Sept. 8.

In an email, FTC Bureau of Consumer Protection Director Jessica Rich said the enforcement against Hi-Tech was “a strong signal” that FTC “will vigorously prosecute violations of orders intended to protect the public," and the federal court “sent its own signal that it will not tolerate non-compliance with its orders."

FTC would not estimate how long Wheat and Smith will remain in custody before Hi-Tech Pharmaceuticals complies with the order, but agency officials noted the firm has other employees. Additionally, attorneys for Wheat and Smith “have stated publicly that they will undertake efforts to ensure the recall is effectuated if their clients are incarcerated,” FTC officials said.

The agency also pointed out what while Pannell will determine whether the conditions in the order are met after attorneys for Wheat and Smith file a motion seeking their release, FTC will have input on the decision. In a hearing on the motion, FTC attorneys would have an opportunity to present evidence that the conditions have not been met, or to agree that Wheat and Smith have complied after being jailed.

FTC previously won a $40 million judgment against Hi-Tech, among the agency’s largest ever against a dietary supplement manufacturer, after the firm, in violation of a 2008 federal court order, continued to market weight loss products with unsubstantiated claims such as “rapid fat loss,” “fat burner,” “thermogenic” and “curbs the appetite.”

Blanket Rejection Of Hi-Tech Argument

According to Pannell’s order, the judge rejected Hi-Tech Pharmaceuticals’ arguments and much of its evidence introduced in an August hearing to show the firm was complying with his May order to recall its products. He noted in his ruling that FTC officials have found the firm’s weight loss supplements available as recently as August.

“The continued availability of violative products in retail stores is not surprising considering the lack of effort by the defendants to comply with the court’s order and effectuate a complete recall,” Pannell wrote.

He also noted Hi-Tech’s own expert witness agreed with him that a recall announcement the firm circulated more “closely resembles a legal brief than a recall notice” and that it included several paragraphs of unnecessary information, including that the firm was appealing the court’s decision.

“The defendants chose to use an argumentative and confusing recall notice rather than a recall notice designed to inform recipients of the purpose of the letter and facilitate the return of violative products. To compound the issues with the recall notice, the defendants did not distribute the recall notice in a manner that would reach everyone necessary to effectuate a complete recall of the violative products,” Pannell wrote.

The judge said the recall notice “lacks important information to assist retailers with the recall” and does not:

• “identify the products by lot or unit numbers, expiration dates, serial numbers, UPC codes or other common forms of product identification”
• “indicate that Hi-Tech will cover any expenses incurred in returning the products to the company”
• “provide instructions on how to return violative products to the company”
• “indicate that this matter is urgent through use of the word ‘urgent’ or other means”
• “clearly inform the reader that it is a recall notice by including the words ‘recall notice’ conspicuously on the document.”

The envelopes containing the notice also failed to impress the judge. The envelopes lacked words such as “recall,” “urgent” or “notice,” but they were printed with an “advertisement for certain products, including one of the products subject to the recall – Lipodrene,” according to the ruling.

Pannell also found the firm’s online announcement of the recall underwhelming. “While the defendants eventually included a link to the recall notice on the company website, they did not do so in a manner that would allow people to easily locate the link. The defendants tried to hide it,” he wrote.

Hi-Tech Pharmaceuticals’ website on Sept. 12 had an “under construction” note for its weight loss product selection while the recall notice remained in the position noted by the judge. The firm, which also provides contract manufacturing services, continues marketing supplements for health care, strength training, “neuro” enhancement and sexual enhancement.

The ruling also says that a Hi-Tech employee testified that recall letters were sent in 2,402 “separate pieces of mail,” for “every customer of Hi-Tech, to include the large distributors down to the smallest retailer.”

However, FTC evidence included a December 2011 mailing from the firm with more than 3,700 retailers and distributors.

Pannell notes a similar disparity between the volume of inventory Hi-Tech is expected to recall and the amount of product its retail and distributor customers have returned. A chart the firm submitted indicated eight companies have returned product, with one returning 2,916 bottles of Lipodrene and the other seven returning 67 bottles of Fastin, Stimerex-ES and Lipodrene.

“The court finds that the defendant’s recall efforts have been ineffective,” Pannell wrote.

Ruling Doubts Defendants’ ‘Good Faith’

The judge also was critical of Wheat and Smith for failing to take responsibility to conduct the recall. He noted that FTC called Wheat as a witness during the August hearing, but due to an unrelated and ongoing grand jury investigation, the CEO invoked his Fifth Amendment right against self-incrimination “for the majority of the questions asked by the FTC.”

In addition to being sent to jail on the contempt charge and being investigated by a grand jury, Wheat was ordered in 2009 to serve 50 months in federal prison and forfeit $3 million gained through the production and marketing of counterfeit drugs – including Xanax, Vioxx and Viagra (Also see "Hi-Tech CEO sentenced for fake drugs" - Pink Sheet, 9 Feb, 2009.).

Pannell pointed out that Smith, who was responsible for operating Hi-Tech while Wheat was incarcerated from March 2009 through September 2010, was a defendant when the judge issued his May 2014 order that the firm recall its weight loss products.

However, Smith testified in August that he did not become aware of his obligation to recall all violative products from retail stores until the end of June 2014. “The earliest documented date on which Smith contacted retailers to inform them of the recall is July 15, 2014,” the judge wrote.

Moreover, Pannell said while Wheat and Smith argued they do not have the ability to comply with the recall order because they cannot force third-party retailers to return the violative products, they did not offer any evidence that retailers refused to return product despite being notified of the recall.

“The court is confident that even the least cooperative retailers will return the violative products if they receive proper notification of the recall and are provided assistance in returning the violative products. Rather than a lack of cooperation by retailers, the evidence shows that the defendants have failed to take proper action,” the judge wrote.

Pannell also noted that Wheat and Smith during the August hearing did not “present substantiated evidence of their good faith to comply” with his recall order, but they “spent a significant portion of the … hearing attacking the FTC for a lack of assistance with the recall.”

The judge agreed that “FTC should have taken additional action” and pointed out that at the conclusion of the August hearing the agency “had not even issued a press release informing the public of the recall.” However, “inaction by the FTC does not absolve the defendants,” Pannell wrote.

The court ordered Hi-Tech, Wheat and Smith to perform a recall, not the FTC. Accordingly, the court finds “by clear and convincing evidence that the defendants are in contempt” and “have not undertaken to recall Fastin, Lipodrene, Benzedrine and Stimerex-ES from all retail stores in good faith,” according to the ruling.

Hi-Tech, in unrelated litigation filed in November 2013, alleged FDA used a “campaign of intimidation” to force firms to cease manufacturing products with dimethylamylamine, an ingredient used primarily in strength training that FDA has linked to cardiovascular problems (Also see "Hi-Tech Lawsuit Calls FDA DMAA Enforcement “Bullying Tactics”" - Pink Sheet, 25 Nov, 2013.).