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ANALYSIS: DOJ Uses Price-Gouging Law to Bring Felony Charge

May 1, 2020, 12:36 PM

In a case that provides telling information about how the Justice Department intends to deal with violations of the Defense Production Act, the DOJ arrested two men for conspiring to obtain scarce N95-quality medical masks and resell them through a commission scheme at exorbitant prices, according to a criminal complaint filed in the U.S. District Court for the Eastern District of New York.

The DOJ charged Kent Bulloch and William Young Sr. with conspiracy to violate the DPA by hoarding and price-gouging personal protective equipment (PPE) that the Secretary of Health and Human Services has designated “scarce” under 50 U.S.C. § 4512. While the DPA violation is punishable by up to a year in jail, the men are charged under 18 U.S.C. § 371 with conspiracy to commit an offense or fraud against the U.S., which is a felony carrying a potential sentence of five years in jail, a maximum $250,000 fine, three years of supervised release and a $100 special assessment.

These aren’t the first defendants criminally charged with violating the DPA by trying to price gouge on scarce medical equipment during the Covid-19 crisis. The DOJ has said its task force on price-gouging and hoarding has numerous investigations underway, so more charges are likely. But it is interesting that the DOJ charged these defendants under a general conspiracy statute, both because the DPA criminal provisions are virtually unlitigated and because the conspiracy offense carries a much heavier penalty.

A criminal complaint against a Long Island man on April 24, for example, charged him with violation of the DPA alone. But under the right circumstances, others prosecuted for violating the DPA’s price-gouging and hoarding provisions likely face the same threat of charges under more severe penal statutes.

That’s important because, should a corporation be charged, a felony has additional implications for any company involved in government contracting. It’s also important from the standpoint of compliance and risk management to understand how severe the penalties might be for price gouging in violation of the DPA.

Two-Step Criminal Charge

The complaint was unsealed April 28, the DOJ said in a press release. Both defendants are scheduled to make an initial appearance, during which they will enter an initial plea to the charge. A formal indictment or information should follow, which should provide more details about the circumstances and may include additional charges against the defendants.

The complaint, which is filed for purposes of getting arrest warrants for the defendants, says that the defendants sought potential “investors” to invest in reselling 1 million KN95 respirator masks and millions of three-ply surgical masks for double or triple the purchase price. Bulloch, a lawyer, allegedly solicited the investors to put funds for the masks into his trust account. To evade price-gouging laws, Bulloch created and signed an escrow agreement for a purported investor saying that the profit on the masks wouldn’t exceed 10 percent, the complaint alleged. The investor had informed federal law enforcement and a federal agent had stepped in as the buyer’s agent.

Bulloch and Young allegedly tried to take a commission on the sale and encouraged big markups on the invoice and for further resale. But they didn’t appear actually to have the masks they were selling. According to the DOJ, there was no evidence that the “suppliers” working with Bulloch and Young had authority to sell the masks that they showed the agent in a warehouse. Boxes of masks in another location were actually shrink-wrapped, empty boxes.

The charge lays out a two-step crime. First, Young and Bulloch conspired to violate the DPA’s hoarding and price-gouging provisions, the DOJ alleged. Second, that crime serves as the foundation for the conspiracy charge under §371.

Upcharging Likely

It’s not uncommon for prosecutors to charge several different offenses based on one series of conduct, of course. It’s also not uncommon for prosecutors to ratchet up the charges to include those with much more severe penalties, like the five-year maximum sentence for defrauding the U.S., as opposed to the one-year charge for willfully violating the DPA. For one thing, criminal conduct frequently runs afoul of a number of laws at the same time. For another, multiple counts create more room to negotiate with defendants in plea discussions.

And the DOJ stressed in announcing the charges that this scheme is “precisely the type of price gouging” for which Attorney General William Barr created the DOJ task force. As such, one could expect the DOJ to allege a felony charge against the defendants if possible.

But the case points to the current high level of uncertainty surrounding DPA-based charges involving the reselling of any declared “scarce” product. Although the DPA itself specifies that violations are punishable by up to one year in prison, the DOJ believes that such a criminal violation is prosecutable under other laws as well.

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