United States v. Global Distrib Inc ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-3003
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
GLOBAL DISTRIBUTORS, INC.,
and JOHN ASOOFI,
Defendants-Appellants.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 7992—Blanche M. Manning, Judge.
____________
ARGUED FEBRUARY 14, 2007—DECIDED AUGUST 17, 2007
____________
Before MANION, WOOD, and EVANS, Circuit Judges.
WOOD, Circuit Judge. Global Distributors, Inc.,
(“Global”) made eight large sales of Release, a cold medi-
cine containing pseudoephedrine, to four businesses in
Florida in the summer of 1999. The pseudoephedrine was
converted into almost a half million dollars’ worth of
methamphetamine. The government brought a civil action
against Global and John Asoofi, the owner and sole
shareholder of Global, for failing to demand proof of
identity from these four customers as required by the
Comprehensive Drug Abuse Prevention Control Act of
1970. The district court ordered summary judgment in
favor of the government and assessed the maximum
2 No. 06-3003
$25,000 fine per violation jointly against Global and Asoofi
for each of the eight violations.
Global and Asoofi challenge the district court’s grant of
summary judgment to the government, claiming that the
evidence did not show unequivocally that they had
failed to comply with the statute and its underlying
regulations. They also challenge the court’s imposition of
the maximum civil penalty against them. We agree with
the district court that summary judgment for the gov-
ernment was required, but we remand for reconsidera-
tion of the amount of fines to which the defendants
should be subjected.
I
John Asoofi owns and operates Global Distributors, Inc.,
which sells household products to local retail stores
for consumer sale. One of these products is the cold
medicine Release. The active ingredient in Release is
pseudoephedrine, which is a chemical regulated by the
U.S. Drug Enforcement Administration (“the DEA”)
because it can be used to produce methamphetamine.
Global was registered and licensed with the DEA to
distribute products containing pseudoephedrine; Asoofi
obtained that license on Global’s behalf.
The Comprehensive Drug Abuse Prevention Control Act
(“the Drug Abuse Act”) requires distributors of
pseudoephedrine to obtain and record the identity of each
party to whom they sell the chemical. 21 U.S.C. §§ 827,
830. These records must be available for inspection by
DEA officials. Id. In 1999, the DEA began investigating
Global’s sales of Release. The records that Global produced
for the DEA showed eight sales in June and July of 1999
of Release to four customers in Fort Myers, Florida: Last
Call, Last Call Liquor, Texaco Mart, and Back Bay Market.
No. 06-3003 3
Each sale involved more than 25,000 Release tablets,
which is above the sales amount that triggers compliance
with the Drug Abuse Act.
Global’s records did not meet the DEA’s requirements, as
they did not show that Global had obtained proof of
identity of these four customers before making the 1999
sales. Asoofi tried to explain the problem in several ways.
He claimed that he did not know proof of identity was
required. He also claimed that a former Global sales
representative, Naser Ali, had been responsible for the
sales at issue. Regardless of where the truth lay, the
DEA’s investigation showed that much of the Release
that Global sold to these four customers in 1999 made its
way into the illegal drug market through an individual
named Khaled Fatayer, a clerk at Last Call Liquor.
Fatayer was making purchases under the name of Last
Call Liquor, unbeknownst to the business’s owner; he
also arranged to receive the Release (for which he paid
cash) at Back Bay Market.
In 2002, the government brought this action against
Global; later, it added Asoofi as a defendant. It claimed
that both had violated Title II of the Drug Abuse Act, the
Controlled Substances Act, 21 U.S.C. § 801, et seq., which
sets out a regulated person’s obligations in ensuring and
recording purchasers’ identities before a sale of a con-
trolled chemical is completed. In August 2005, the dis-
trict court granted the government’s motion for sum-
mary judgment.
II
We review a district court’s decision to grant summary
judgment de novo. Alexander v. Wis. Dep’t of Health and
Family Servs., 263 F.3d 673, 680 (7th Cir. 2001). At the
outset, it is important to define exactly what require-
ments the Controlled Substances Act (“the Act”) and its
4 No. 06-3003
underlying regulations impose on Global and Asoofi. The
Act makes it illegal for “a regulated person to engage in
a regulated transaction without obtaining the identifica-
tion required.” 21 U.S.C. § 842(a)(9). Global is a “regulated
person” under the Act because it distributes a listed
chemical (pseudoephedrine) in quantities above the
threshold established by the statute. 21 U.S.C. §§ 802(34),
(38). Asoofi, as Global’s owner and agent, is also a “regu-
lated person” and subject to the Act. Id. at § 802(3).
The “identification required” is further defined by the
Controlled Substances Act as requiring a “[r]ecord of
regulated transactions,” which includes specific obliga-
tions for the “regulated person.” 21 U.S.C. § 830(a).
Specifically,
[i]t is the duty of each regulated person who engages
in a regulated transaction to identify each other party
to the transaction. It is the duty of such other party to
present proof of identity to the regulated person. The
Attorney General shall specify by regulation the types
of documents and other evidence that constitute proof
of identity for purposes of this paragraph.
21 U.S.C. § 830(a)(3). The Act’s regulations address proof
of identity in detail:
(a) Each regulated person who engages in a regulated
transaction must identify the other party to the transac-
tion. For domestic transaction, this shall be accom-
plished by having the other party present documents
which would verify the identity, or registration status
if a registrant, of the other party to the regulated
person at the time the order is placed. For export
transactions, this shall be accomplished by good faith
inquiry through reasonably available research docu-
ments or publicly available information which would
indicate the existence of the foreign customer. No
proof of identity is required for foreign suppliers.
No. 06-3003 5
(b) The regulated person must verify the existence and
apparent validity of a business entity ordering a listed
chemical, tableting machine or encapsulating machine.
For domestic transactions, this may be accomplished
by such methods as checking the telephone directory,
the local credit bureau, the local Chamber of Commerce
or the local Better Business Bureau, or, if the business
entity is a registrant, by verification of the registra-
tion. For export transactions, a good faith inquiry to
verify the existence and apparent validity of a foreign
business entity may be accomplished by such methods
as verifying the business telephone listing through
international telephone information, the firm’s listing
in international or foreign national chemical directo-
ries or other commerce directories or trade publica-
tions, confirmation through foreign subsidiaries of the
U.S. regulated person, verification through the country
of destination’s embassy Commercial Attache, or
official documents provided by the purchaser which
confirm the existence and apparent validity of the
business entity.
(c) When transacting business with a new representa-
tive of a firm, the regulated person must verify the
claimed agency status of the representative.
(d) For sales to individuals or cash purchasers, the type
of documents and other evidence of proof must consist
of at least a signature of the purchaser, a driver’s
license and one other form of identification. Any
exports to individuals or exports paid in cash are
suspect and should be handled as such. For such
exports, the regulated person shall diligently obtain
from the purchaser or independently seek to confirm
clear documentation which proves the person is
properly identified such as through foreign identity
documents, driver’s license, passport information and
6 No. 06-3003
photograph, etc. Any regulated person who fails to
adequately prove the identity of the other party to the
transaction may be subject to the specific penalties
provided for violations of law related to regulated
transactions in listed chemicals.
(e) For a new customer who is not an individual or
cash customer, the regulated person shall establish the
identity of the authorized purchasing agent or agents
and have on file that person’s signature, electronic
password, or other identification. Once the authorized
purchasing agent has been established, the agent list
may be updated annually rather than on each order.
The regulated person must ensure that shipments are
not made unless the order is placed by an authorized
agent of record.
(f ) With respect to electronic orders, the identity of the
purchaser shall consist of a computer password,
identification number or some other means of identifi-
cation consistent with electronic orders and with
§ 1310.07(e).
21 C.F.R. § 1310.07 (emphasis added). We furnish the
regulations in full here because the defendants cite only to
bits and pieces of them, leaving an inaccurate picture of
their obligations. The government also fails to set out with
any specificity what the regulations require Global and
Asoofi to do for each of the customers at issue here.
Although the government might have helped this court
more if it had spent less time addressing defenses that
Global and Asoofi have jettisoned in this court and more
analyzing the regulation, our review is of course de novo.
We think it most useful to identify Global’s specific
obligations under the Controlled Substances Act and its
regulations, and then to compare those obligations with
Global’s actions in the eight sales at issue here.
No. 06-3003 7
Under 21 C.F.R. § 1310.07(a), Global was required to
“identify the other party to the transaction.” Because the
transactions were domestic, “this shall be accomplished by
having the other party present documents which would
verify the identity, or registration status if a registrant, of
the other party to the regulated person at the time the
order is placed.” Id. Global and Asoofi have presented no
evidence that the buyers of Release in the eight transac-
tions at issue presented any documents verifying their
identities or registration statuses at the time of their
orders. This alone is a violation of the identity regula-
tions and the Act.
The next requirement in the regulations required Global
to “verify the existence and apparent validity of a business
entity ordering a listed chemical.” 21 C.F.R. § 1310.07(b).
The regulation offers a number of ways to accomplish this
task, including “by such methods as checking the tele-
phone directory, the local credit bureau, the local Chamber
of Commerce or the local Better Business Bureau, or, if the
business entity is a registrant, by verification of the
registration.” Global claims that it verified business
entities’ identities “either by checking an internet tele-
phone directory or by a phone call directly to the business.”
In a footnote, Global says that it “also obtained some
information about the business addresses and contact
information from Naser Ali [a former employee of Global],
who had arranged for the sales.” As evidence of its verifica-
tions, Global offers Asoofi’s affidavit and a “printout of
sample internet phone book listing for Back Bay Market,”
one of the four customers in the eight transactions
at issue.
Even if one telephone call to a number furnished by the
customer could suffice for verification of identity under
the regulation, no evidence of such a telephone call exists
here. The printouts that Global proffered, printed well
after this litigation began, provide no evidence that those
8 No. 06-3003
listings existed at the time of its contested sales or that
anyone at Global ever saw them. Moreover, Global does
not state which customers’ numbers it looked up in a
telephone directory and which ones it called.
Asoofi’s affidavit, the other possible evidence of compli-
ance, stated that prior to shipping any orders via Airborne
Express, “the information that was furnished by Ali was
rechecked. It was unusually [sic] rechecked by using
internet yellow pages.” Although testimony alone can
defeat summary judgment motions in some cases, assert-
ing a conclusion is no substitute for detail where detail
is needed to support a claim. See Albiero v. City of
Kankakee, 246 F.3d 927, 933 (7th Cir. 2001). In Albiero,
the party opposing summary judgment “put[ ] forth only
his own affidavit that no violations existed . . . based not
on a personal [knowledge] but on a policy.” Id. This is
exactly what Asoofi has done here, and it is not sufficient.
See also Drake v. Minn. Mining & Mfg. Co., 134 F.3d 878,
887 (7th Cir. 1998) (holding that Rule 56 “requires af-
fidavits that cite specific concrete facts establishing the
existence of the truth of the matter asserted”).
Global does not address 21 C.F.R. § 1310.07(c), which
requires a regulated person to “verify the claimed agency
status of the representative” when it is “transacting
business with a new representative of a firm.” For one of
the four customers at issue, Texaco Mart, Global states
that Lisa Lawson was the agent placing the orders and
was in fact the store manager. But Global does not provide
any evidence that it verified this fact prior to the govern-
ment’s lawsuit. Global notes that it had an alleged practice
of obtaining a signature from an agent when making a
delivery, but this tells us nothing about how or when the
status of the agent was verified.
Both the government and the defendants also pay little
heed to 21 C.F.R. § 1310.07(d). This regulation applies
No. 06-3003 9
to sales to “cash purchasers,” and requires “at least a
signature of the purchaser, a driver’s license and one other
form of identification.” In the government’s summary
judgment motion and its statement of facts to this court,
the government alleges that the deliveries to Back Bay
Market were “paid for . . . in cash.” Global and Asoofi
appear to concede that this is true. All they have to prove
the delivery, however, is a signature on the Airborne
Express receipt. This falls short of subpart (d)’s require-
ment of a signature plus two forms of identification.
Finally, defendants were required to comply with 21
C.F.R. § 1310.07(e). (Section 1310.07(f) of the regulations
does not apply to this case because the sales were not
electronic.) It is not entirely clear from the record whether
the customers at issue here were new customers, but
because Global and Asoofi claim compliance with
§ 1310.07(e), we can infer that they were. This regulation
applies to transactions with new customers who are not
“an individual or cash customer.” For those customers, “the
regulated person” must “establish the identity of the
authorized purchasing agent or agents and have on file
that person’s signature, electronic password, or other
identification.” Id. Importantly, “[t]he regulated person
must ensure that shipments are not made unless the order
is placed by an authorized agent of record.” Id. Again, the
only record of signatures that the defendants have on file
comes from the Airborne Express receipts; there is no
evidence that the defendants conducted any other identity
checks to ensure that the agents were who they say
they were. The Airborne Express receipts obviously were
not obtained before the shipments were made, despite the
fact that the regulations make the timing an important
factor. See § 1310.07(e). Defendants therefore failed to
comply with this regulation section as well.
10 No. 06-3003
III
The defendants also challenge the district court’s
imposition of the maximum allowable monetary penalties
under the statute. We review the assessment of civil
penalties under the Controlled Substances Act for abuse of
discretion. Advance Pharm., Inc. v. United States, 391 F.3d
377, 398 (2d Cir. 2004). Abuse of discretion is found “only
if the district court relied on clearly erroneous findings
of fact or made an error in its construction or application
of relevant law.” Id.The district court relied on the Second Circuit’s approach
to this issue, Advance, 391 F.3d at 377. We, too, find the
way that the Advance court structured its analysis to be
helpful. In Advance, the court held that a district court
may consider “a number of factors” in assessing a civil
penalty, including: “(1) the level of defendant’s culpability,
(2) the public harm caused by the violations, (3) defen-
dant’s profits from the violations, and (4) defendant’s
ability to pay a penalty.” Advance, 391 F.3d at 399.
Although the district court gave Global an opportunity
to file a memorandum on damages, and Global availed
itself of that option, Global did not “challenge[ ] the
arguments in the government’s damages memorandum.”
Instead, it continued to present excuses for its underly-
ing behavior. The district court thus took as undisputed
the facts in the government’s memorandum and drew
inferences from those facts. It found that the defendants
“knew about the reporting requirements and chose not to
follow them, then tried to plead ignorance . . . [then]
changed essential facts in [their] story.” These findings are
supported by the record that was before the court. We
agree with the court that they give rise to an inference
of culpability.
The defendants argue that Asoofi’s culpability “if it
exists at all” is significantly removed from the ultimate
No. 06-3003 11
social harm his actions caused. The defendants allege that
“each of [the] challenged sales . . . was to undoubtedly
legitimate businesses.” Defendants also argue that imper-
fect record-keeping in only eight instances is not “indica-
tive of the manner in which Asoofi operated his business”
and that the sales were not made in order to “knowingly
divert[ ] legitimate medicine for illicit purposes.” These
arguments are unpersuasive. Sales to at least two of the
four customers were made to allegedly unauthorized
agents, which Global would have discovered had it met
its most basic obligations under the regulations. Thus,
even though only a small number of sales are at issue
in this case, the district court did not err in its conclu-
sions about the defendants’ culpability.
The district court was concerned about the harm this
pseudoephedrine would cause in in the illegal metham-
phetamine market. This is a serious point, which defen-
dants do not address effectively, presumably because they
would like to avoid the fact that precisely the risk that
the regulations were designed to avert came about here:
a significant amount of the Release made its way into
that illicit market. As the district court stated, the Re-
lease at issue in this case was converted into “almost half
a million dollars’ worth of methamphetamine.” This factor
cuts in favor of a stiff penalty, because the controlled
substances made their way into the hands of unauthorized
users and significantly endangered the public. The defen-
dants’ compliance with the regulations would presumably
have prevented much, if not all, of this harm.
The third factor is the amount of profits that Global
made from the contested sales. The district court found
that “Global received $11,000 for its eight sales” at
issue here. Defendants argue that this figure was their
gross revenue from the sales; their profit was a much more
modest $2000. The $11,000 figure came from the govern-
ment’s damages memo to the district court, which the
12 No. 06-3003
defendants failed to challenge in the district court. Which-
ever number is used, however, the comparison between
Global’s profit and the $200,000 fine is striking.
In Advance, the defendant received a $2 million fine
based on about $2 million in profits. Advance, 391 F.3d at
400. The Advance court did not use any specific formula,
nor does any law, regulation, or decision require any
particular ratio between civil penalties and profits. In the
context of a double jeopardy analysis, the Fourth Circuit
has held that a civil penalty cannot be grossly dispropor-
tionate to the government’s loss where the purpose of the
fine is remedial. Thomas v. Comm’r, 62 F.3d 97, 100-01
(4th Cir. 1995). Nonetheless, civil penalties ought to bear
some relation to the conduct being punished. Although the
Release that Global sold produced methamphetamine
worth a half million dollars, none of those illegal drugs
reached the public. In light of that fact, it is more appro-
priate in this case to focus on the defendants’ profits,
rather than the public harm caused by their actions, which
was minimal in non-monetary terms. That would suggest
that a lower fine would be adequate.
The fourth factor is the defendant’s ability to pay the
penalty. The district court found that Asoofi “owns real
property with an aggregate market value exceeding
$2,000,000” and “is the sole shareholder of Global, which
did $12,000,000 in business last year [2004].” The district
court also relied on Dun & Bradstreet’s credit rating of
Global as “fair.” Asoofi counters with the fact that his real
property is encumbered by more than $1 million in loans
and mortgages. The government retorts that he has
forfeited his right to point this out because Global never
objected to the evidence of its ability to pay in the dis-
trict court. Again, the district court noted the defendants’
lack of denials of any of the government’s factual asser-
tions in its damages memo. But even assuming that the
mortgages and loans should have been considered, Asoofi
No. 06-3003 13
still has approximately $900,000 of unencumbered value
in his real property, which would give him the ability to
pay the $200,000 fine. Further, Asoofi is the sole share-
holder of Global, and therefore he was a likely beneficiary
of Global’s $12,000,000 in business done in 2004. That
performance alone would allow Global or Asoofi to pay a
$200,000 fine.
Lists of factors like those suggested in Advance should
not be taken as exclusive, nor did the district court treat
it that way. The court also took into account Asoofi’s
alleged use of false social security numbers and aliases,
as well as his changing stories regarding his former
employee Ali. The alleged aliases and false social security
numbers come from the facts that the district court found
were undisputed by defendants. There is less than meets
the eye with respect to this evidence, however. Although
Asoofi’s name was spelled several ways, we suspect that
there are many individuals in the United States for
whom a credit check would show multiple spellings of their
names. Recording of social security numbers by multiple
vendors is also prone to inadvertent errors. With no
evidence of fraudulent use, the government’s list of social
security numbers and aliases is entitled to very little
weight in determining the appropriate level of the mone-
tary penalties.
Looking at the record on fines as a whole, we are con-
cerned that the district court may not have taken some of
the ameliorating factors adequately into account. We
emphasize that a focus on Global’s profits alone would be
equally flawed, since such an approach would ignore the
social harm to which its conduct gave rise. While we do
not rule out the possibility of justifying a steep penalty
for Global and Asoofi’s behavior, we conclude that the
district court’s justification for the penalty imposed here
falls short, even under the abuse of discretion standard
of review.
14 No. 06-3003
IV
We AFFIRM the district court’s grant of summary judg-
ment for the government, but we REMAND the case for
reconsideration of the penalties assessed against the
defendants.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-17-07