Leiner plans guilty plea

Leiner Health Products intends to plead guilty to mail fraud and pay a $10 million fine as part of a proposed plea deal with the U.S. Department of Justice, according to a document filed Monday with the U.S. Securities and Exchange Commission.

The plea arrangement -- which indicates that Leiner's over-the-counter drugs recalled last year did not cause public health problems -- follows a 14-month federal investigation into the company's production and distribution facility in Fort Mill Township.

The probe by the U.S. Food and Drug Administration led to product recalls and layoffs at the plant off Carowinds Boulevard. The company filed for Chapter 11 bankruptcy this spring, blaming economic hardships on lost sales after the Fort Mill problems.

'No adverse health effects'

As first reported Monday at heraldonline.com, the guilty plea to one count of mail fraud stems from a December 2006 incident where quality control officials at the Fort Mill plant "gave the false appearance" that a batch of drugs had passed quality tests, according to a document filed in U.S. Bankruptcy Court in Delaware. Leiner officials then "allowed the nonconforming drugs to be shipped to a customer," the document states.

In exchange for Leiner's plea, the Justice Department will agree not to further prosecute the company because "no adverse health effects" have been discovered related to the FDA violations, court records state. If adverse health effects come to light, the department would be allowed to prosecute further. The deal does not prohibit the Justice Department from prosecuting Leiner employees suspected of criminal activity related to the Fort Mill violations.

Leiner agreed to accept the plea arrangement in order to expedite its bankruptcy and sell the company, court records show.

"We are pleased to put these issues behind us," Leiner CEO Rob Reynolds stated in SEC documents filed Monday. "And we are committed to providing consumers with the best value and highest-quality products available in the marketplace."

Acting U.S. Attorney Kevin McDonald on Monday told The Herald the Justice Department won't comment on the investigation until the plea deal is finalized later this spring.

Probe led to recalls, layoffs

The federal investigation began in January 2007, when an employee inside the company's Fort Mill Township plant reported violations of good manufacturing practices to the FDA. Among the allegations were that the company manipulated quality test results and falsified records about product impurity results, according to an affidavit filed in U.S. District Court last year.

An FDA investigation at the plant followed, and a list of violations were found, including allowing drugs that failed quality tests to remain on the market, failing to adequately train staff, not cleaning equipment to standards and not identifying black specks found in some pills, according to an FDA report obtained by The Herald.

Common painkillers (ibuprofen and acetaminophen) and allergy medication (loratadine) were among the drugs listed in the report.

After the FDA probe, Leiner shut down all over-the-counter drug manufacturing and distribution last year. In April 2007, it recalled all of its over-the-counter products from store shelves, and in June, it laid off 540 Fort Mill workers.

The company's over-the-counter products formerly were sold as store brands at Wal-Mart, CVS, Costco and other retailers.

Leiner 'unable' to resume sales

In September, federal authorities executed a search warrant at the Fort Mill Township plant, seizing computer servers, e-mail accounts and numerous lab and personnel records, according to court records related to the plea deal. A grand jury also subpoenaed all documents and e-mail correspondence related to the over-the-counter drug program since January 2004.

Customer concerns about the Justice Department investigations left Leiner "virtually unable" to resume over-the-counter drug sales last fall, according to court documents, even after complying with Justice Department requests, revamping its quality control policies and receiving FDA approval to re-enter the market.

The company's vitamin and nutritional supplement line of products, although not cited in any of the FDA violations, has lost $10 million in profits because of the over-the-counter concerns, court documents state.

In early January, Leiner permanently closed its only other over-the-counter drug plant in Wilson, N.C., and outsourced all remaining orders for over-the-counter drugs, according to SEC filings.

Earlier this year, former Leiner CEO Bob Kaminski resigned, and former Chief Financial Officer Kevin McDonnell's employment was terminated. In March, the company filed for Chapter 11 bankruptcy.

Despite its troubles, Leiner still offers "attractive assets" to interested buyers, Derek Leckow, an analyst with Chicago's Barrington Research, recently told The Herald. He said Leiner had made several major investments in manufacturing facilities before the recalls. Those investments, combined with intellectual properties, give the company "real value" to competitors, he said.

Michigan-based Perrigo, Leiner's chief competitor, has not responded to Herald inquiries about whether it is interested in Leiner.

This story was originally published May 13, 2008 at 1:08 AM with the headline "Leiner plans guilty plea."