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The Scandal of Reincarnated Rats

Corporate Crime in the Pharmaceutical Industry

by RUSSELL MOKHIBER

John Braithwaite is back.

The famed Australian corporate criminologist is teaming up with a former European pharmaceutical executive – Graham Dukes – and together they are completing a new book on corporate crime in the pharmaceutical industry.

The working title – Corporations, Crime and Medicines.

It’s due out early next year.

Thirty years ago, Braithwaite finished his magnum opus – Corporate Crime in the Pharmaceutical Industry (Routledge Kegan & Paul).

The book documented widespread fraud and corruption worldwide.

“In the latter part of the 1980s, I thought that the pharmaceutical industry was actually improving in its standards,” Braithwaite told Corporate Crime Reporter in an interview. “Ciba Geigy was one company that had come under particularly aggressive attack from the consumer movement. And Ciba Geigy was responding and setting up corporate social responsibility policies with a new risk management initiative that it was trying to get other companies to join up with.”

“Pfizer became the number one company in the industry. It was sending senior executives to Australia to talk to me. They were really interested in what kind of internal procedures they could be putting in place to make sure that folks like Graham and I would not be making the kinds of critiques that were in Corporate Crime in the Pharmaceutical Industry.

“I was encouraged by that. I think actually I wasn’t conned. In the course of the 1980s, there was progress.”

“I actually finished the research for Corporate Crime in the Pharmaceutical Industry in 1980. But the book was held up for concerns about libel.”

“But 30 years on, the situation has in fact become worse in most respects. Perhaps there has been some improvement in terms of safety and manufacturing processes among the majors. But on the other hand, the largest pharmaceutical corporations in the world have done a major disservice in the way they have approached the generic industry and, in a sense, stigmatized the generic industry.”

“In Corporate Crime in the Pharmaceutical Industry, we concluded that 19 of the 20 largest U.S. pharmaceutical companies had engaged in serious corrupt activities in the course of the 1970s. And there was really no other industry in the United States that had such a consistent pattern. There were other industries – like the defense industry – that were doing terribly corrupt things. But in terms of top to bottom corruption, the pharmaceutical industry was the worst in the United States.”

“And in some ways, we are inclined to conclude that today it is even worse.”

In the area of research fraud, things are again worse 30 years later.

“A big part of the 1984 book was fraud in safety and testing of drugs,” Braithwaite said. “Remember the GD Searle company, of which Donald Rumsfeld was a CEO? They had the scandal of reincarnated rats. The rats would die when a drug was tested on them. And they would be replaced with living rats. That kind of blatant fraud is not dead in the pharmaceutical industry. There is a lot more sophisticated fraud in the form of suppression of negative safety and efficacy studies. And the boosting of positive studies.”

“But still, there is quite a lot of plain old fashion losing of negative data. And that is the same as the throwing away of the dead rat and replacing the dead rat with the reincarnated rat.”

“You generate data that a drug does not work. And you just suppress that data. It’s as if the study were never conducted and you start again and do another study until you get one that shows you what you want to find. Go to another university professor who will tell you what you want to hear.”

“That situation is, if anything. worse rather than better.”

On the Wall Street meltdown, Braithwaite says the situation could have easily been prevented.

“There was a lot of evidence that there was systemic mortgage fraud – liar loans, false representation of income and employment status of people on loans,” Braithwaite said. “And that had to do with a shift of the nature of capitalism. Banks issuing loans were no longer as interested as they should have been in assessing the capacity of the borrower to repay. Why? Because it was a move from a risk management financial sector to a risk shifting financial sector. You just slice and dice the loans and spread the risk around to a lot of other banks.”

“But it seems to me that there was a ready regulatory response to that. It was knowable that there was a problem. You had the FBI reporting as early as 2004 and 2005 that there was an epidemic of mortgage fraud in the United States. You had this huge trend up in housing loan defaults starting in the mid 2000s. These were very clear red flags.”

“The simple regulatory strategy was for prudential regulators to go to mortgage brokers and banks and say – look, your portfolio of loans has twice the default rate of the average in our state. We want to sit down with you and look into why that is. And if that very simple regulatory inspection measure had been taken, it would have quickly become apparent that there was a pattern of fraud in the loans that they were issuing. And that would have been the early preventive step.”

“And you wouldn’t have necessarily had to prosecute those banks. You would have wanted to go around the country and stop the problem. That would be the most important thing. You would prosecute the ones with the worst patterns of conduct. But the more important thing would be return to integrity in the way loans are issued. Banks return to being interested in ensuring that these were levels of repayment that could be made.”

Russell Mokhiber edits the Corporate Crime Reporter.

[For the complete transcript of the Interview with John Braithwaite, see 26 Corporate Crime Reporter 1(12), January 2, 2012, print edition only.]