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Previous coverage | Soaring rise, rapid fall for Pharmed

Before its spectacular collapse, Pharmed Group was one of the great South Florida success stories, a medical supply company created by two brothers who started with nothing and built the eighth-largest Hispanic-owned business in America. In 2003, their profit was $48 million.

What happened to this once fabulous company, where brothers Carlos and Jorge de Céspedes often showed up for work in a Ferrari, Bentley or Porsche? How could it have crumbled so quickly?

Court documents show that in its last two years, Pharmed lost a huge amount of business after a major supplier and a major customer accused the company or its executives of shady business practices in civil lawsuits.

In the 1980s, the company faced similar accusations, according to a government investigator, a former Pharmed manager and a civil lawsuit. In the 1990s, a major supplier of the company accused Pharmed in a civil lawsuit of fraud and violating accepted business practices. Twice, Pharmed or its executives have been involved in criminal investigations.

The de Céspedes brothers insist that they have done nothing wrong. In fact, three of the lawsuits containing the most serious allegations were settled out of court for undisclosed terms. A fourth is still open, involving a Pharmed executive, but not the brothers themselves. The subject matter of that lawsuit is also under criminal investigation.

For more than a quarter century, the company operated in the highly competitive world of medical supply distribution, where firms buy products from manufacturers and sell to hospitals, doctors and pharmacies. It's a field where many companies have been accused of questionable pricing practices -- and Pharmed was no exception.

Most people, however, knew the highly visible brothers more for their personal charm and extravagant lifestyle.

LIVING THE LIFESTYLE

They often showed up in matching Bentleys at Chispa, their restaurant in Coral Gables. The basketball arena at Florida International University is named for Pharmed. Carlos is vice president of the Cuban American National Foundation. They bought a stake in the Charlotte Bobcats basketball team. They have frequently given inspiring speeches at business gatherings -- talking about how they started out as virtual orphans in Pedro Pan camps during the 1960s exodus from Cuba of unaccompanied children.

Within the industry, however, they have a different reputation.

As far back as the mid-1980s, says C. Richard "Rick" Allen, now deputy director of the Georgia Drugs and Narcotics Agency and then an agent, the brothers were under investigation concerning charges of defrauding drug manufacturers by obtaining supplies at low prices under false pretenses. The investigation died when the feds abruptly stopped a national investigation called Pharmoney.

In the 1990s, AmerisourceBergen Drug alleged in a civil lawsuit that Pharmed committed fraud. The case was settled out of court. In 2006, Johnson & Johnson accused Pharmed of fraudulently taking $22 million in rebates. That case went to arbitration; the results have not been made public.

Last year, the HCA hospital chain filed a civil lawsuit, accusing a Pharmed executive of bribing hospital workers in a "scheme" that an HCA lawyer said went "all the way to the top" of the Pharmed organization, according to a court transcript. The brothers' response: "This is totally untrue. We would not suggest that because Kendall Regional employees were involved in a scheme that it goes all the way to the top of HCA management."

The issues in the HCA suit are also being reviewed in a federal criminal investigation.

BROTHERS' STATEMENTS

The brothers did not respond directly to a detailed list of questions for this report, but they issued two statements about the company, of which they are the sole owners:

They attributed their bankruptcy to "a combination of factors: Overall changes in the healthcare economy. Changes in the industry model for our sector that squeezed out suppliers that were neither giant organizations nor tiny . . . niche players. . . . The loss of some very important customers."

About the accusations in the lawsuits: "We are a litigious society, but in our 27 years of operation prior to the bankruptcy, in our dealings with well over 1,000 vendors, we have been party to just a handful of civil suits, where were settled to our satisfaction. I am curious to know how many times The Miami Herald has been sued in the past 27 years."

In a separate e-mail, Carlos de Céspedes wrote, "My brother and I are tremendously proud of what we have been able to accomplish in Miami. Weve built a number of successful businesses that have employed many hundreds of people, paid a lot of taxes and supported a great many important community causes. . . .

"As to the various old legal and employee disputes about which you have inquired, " he wrote, "we would say simply that every business has its share of disputes and complications. Some of the matters you asked about had nothing to do with us or Pharmed.

"We have successfully resolved matters involving us and are disappointed The Herald would dredge them up simply to portray us in an unflattering light. You do not have sufficient information to understand most of these matters, and we are not going to comment on them in deference to the others involved."

The story of one of the area's most successful families is a distinctly South Florida saga involving two recurring themes -- the success of ambitious Cuban immigrants and an even older one, the collapse of once-great businesses into bankruptcy, a trend that started with real-estate firms of the 1920s.

"It was a rag-to-riches story, " says Miguel De Grandy, a lobbyist for Pharmed. "As a Cuban American, I personally feel proud, Cuban American exiles should feel proud of what they did."

This report was put together from court documents and interviews, including many interviews the brothers gave to The Miami Herald over the years.

EARLY CHALLENGES

Sons of a dental surgeon from the Havana suburb of Marianao, Carlos was 11 and Jorge 8 when they arrived in Miami in 1961 as part of the Pedro Pan exodus, in which 14,000 children left the island unaccompanied by parents who feared that the Castro government was about to send the children to camps for indoctrination.

The brothers stayed first with a family friend. He died within three months, and they were transferred to a Pedro Pan camp in Florida City. They say that change so traumatized them that unlike other children, the brothers rejected offers to leave the camp for foster homes.

They remained in the camps for five years. Jorge was bruised by the experience. "For many, many years, I couldn't open up to anyone other than my brother, " he once said. He felt abandoned by his parents and sought a therapist's help.

Carlos viewed the camp time as a tough preparation for the American business world. After five years without parents, he said, "we weren't afraid of anything."

The experience turned them into entrepreneurs: Jorge earned a quarter each for writing "Hi, Mom" letters for other kids, who needed to send the letters to get their $1.40 weekly allowance.

At Monsignor Pace High School, Carlos earned $1.15 an hour cleaning up. At the end of the school year, he rescued old textbooks from lockers and resold them the next fall in the parking lot to new students.

Carlos went to Emory University, Jorge to Florida International. In the 1970s, they became pharmaceutical salesmen for SmithKline Beecham.

BUSINESS LAUNCHED

In 1980, sensing an untapped market for selling medical supplies to Latin America, they started Pharmed by installing an answering machine in a small storage room in Carlos' home.

"In six months, we had sold $700,000, " Carlos told The Herald. "We had no occupational license, nothing. I went to my accountant, and he said, 'You're going to jail.' I said, 'No, that's why I came to you.

Their first domestic customer was Jackson Memorial Hospital. Their first supplier was Johnson & Johnson. The company sold everything from sutures and pharmaceuticals to batteries and cleaning supplies.

In wholesale medical distribution, middlemen resell products to hospitals and others, generally making 4 percent to 8 percent in profit. It is fiercely competitive, and success depends on high volume.

A few big national names, led by Cardinal Health and McKesson, dominate the field. Thousands of smaller distributors hustle for what's left.

Pricing is complex. Hospitals generally negotiate deep discounts through group purchasing organizations or get low prices because drug makers know that patients likely will keep using a drug they are introduced to in the hospital.

Many distributors have tried to take advantage of the price differences. "Some distributors realized that if they needed 10 cases for the hospitals that qualified for the group purchasing price, they could order 20 cases and then sell the other 10 cases elsewhere at higher prices, increasing their profits, " says Joe Colonna, a consultant on medical-supply purchasing.

Distributors saw this as a business strategy. Manufacturers who later sued distributors over these practices called it fraud. Generally, those disputes have been handled in civil suits, but in the 1980s, law-enforcement agencies launched Pharmoney, a four-year national criminal investigation.

Allen, the deputy director of the Georgia Drugs and Narcotics Agency, said he first heard of Pharmed during the investigation of another Miami firm, Bravo Export Management.

In January 1987, the feds charged Bravo with illegally selling drugs bought at a hospital discount to a California wholesaler. Bravo ordered the drugs in the names of two other Miami companies, Belo Medical Center and South Florida Health Alliance, "an alleged hospital purchasing group, " according to the criminal indictment.

State corporation records show the South Florida Health Alliance was incorporated by the de Céspedes brothers. The indictment charges that a fraudulent invoice used in the scheme was sent to Jose M. Valdivia at Belo Medical Center. Valdivia was then Carlos' father-in-law. The address of Belo Medical Center was also the address of Pharmed Sales International at the time.

Bravo Export pleaded guilty and paid a $75,000 fine. Then the investigation stopped. In testimony before a House subcommittee in Washington in 1990, Allen said: "There were close to 100 guilty pleas. But there were also 40 to 50 other cases which were pending. In many of which the subjects had expressed a willingness, or at least an interest in entering a guilty plea."

One of the pending cases was Pharmed, Allen told The Miami Herald. But the investigation ended. The Justice Department gave no explanation.

In 1987, Wyeth Pharmaceuticals sued Belo Medical Center, South Florida Health Alliance and the de Céspedes brothers over allegations of improperly obtaining drug discounts. After nine years, the case was settled out of court in a confidential agreement.

ALLEGATIONS DISMISSED

Alfred Botet, a Pharmed manager in the 1980s, says the company was doing things then that would lead to accusations in lawsuits over the next two decades. He says he quit because he was convinced the company "wasn't on the up and up."

Botet said the company warehouse had four bays and four entrances. "Strange things happened. . . . The inventories started getting mixed up, " and there was "really no control" in separating hospital-bound supplies from other supplies.

He said he saw pallets of supplies leave the warehouse for hospitals and then come back. "Lots of goods were never delivered." He said large hospitals at the time had bad inventory control and couldn't keep track of goods.

Botet said he went to the Miami-Dade state attorney's office with his views about Pharmed. "But nothing came of that, " he said.

The Miami Herald asked the brothers about all of Botet's allegations. They did not respond.

In 1999, similar accusations came up when AmerisourceBergen, a large medical supply wholesaler, sued Pharmed. The allegation involved setting up a corporation to get price breaks. According to court records, Pharmed Vice President Rene Portela and Pharmed contract consultant Charles J. Sanchez incorporated Quality One Medical Group, which then signed papers promising its goods would go only to hospitals. Quality One set up a warehouse a couple of miles from Pharmed's Doral center.

In a deposition, Portela said Carlos de Céspedes asked them to create the corporation, which placed orders with AmerisourceBergen. When the goods were delivered to the Quality One warehouse, a Pharmed truck came "immediately" to take them to the Pharmed warehouse, Portela stated.

AmerisourceBergen claimed it shipped goods worth $1.2 million to Quality One and didn't get paid. The company called Portela and demanded payment. "That's when I really got scared, " Portela said. "And then I asked them [Pharmed] what was going on."

Court documents show Pharmed eventually paid $735,091 -- the cost of the goods if they would have gone to a hospital. Amerisource sued for the difference -- $443,624.

Pharmed's defense in court documents: Amerisource knew or should have known that Quality One planned to resell the items to Pharmed. In 2002, the case was settled out of court on undisclosed terms.

PROTECTED BY THE LAW

Colonna, the consultant, says that even when distributors are accused of charging inappropriate prices, manufacturers can't force them out of business because federal law makes it illegal for suppliers to gang up on a distributor like Pharmed.

Meanwhile, Pharmed grew and prospered, setting up distribution centers in Tampa and Cleveland.

"Our status as a minority company has really helped, " Carlos said in 2002. One example: Arjo, an Illinois firm that makes patient-lifting devices, used Pharmed as its distributor for HCA hospital sales because the chain requested it, to boost its business with minorities.

Ludvig Anderberg, Arjo's chief financial officer, says that in most cases, Arjo shipped the devices directly to the hospitals, but HCA paid Pharmed for the devices, and Pharmed took its profit before paying Arjo. When Pharmed declared bankruptcy, Arjo was out $1.4 million.

Pharmed was aggressive in making sure its minority status was recognized. At one point, it sued SmithKline Beecham and its South Florida representative, Leo Gonzalez, accusing the firm of prejudice in not using a Hispanic supplier in South Florida. The company replied that it already had enough distributors and that prejudice had nothing to do with it. The case was eventually dismissed at the request of all parties.

BROTHERS PROSPER

The brothers were doing very well. Jorge earned $16.3 million in 2001, according to his income-tax return -- introduced in a lawsuit. In 2003, their best year, Pharmed had $584 million in revenue. The following year, Hispanic Magazine listed Pharmed as the eighth-largest Hispanic-owned business in the United States.

The brothers thought about taking Pharmed public but decided against it. "I have a Ferrari, " Carlos said in 2002. "I don't want an old lady who has 10 shares asking: 'Why does he have a Ferrari?

Carlos and his wife, Martha, bought a home on the waterfront in Coconut Grove that is now worth $2.4 million, plus a $500,000 condo in Miami Beach. Jorge and his wife, Yvonne, own a home in Southwest Ranches now worth $1.8 million and a $500,000 Hollywood oceanfront condo.

The brothers formed a venture-capital company, The Astri Group, which started the Gables restaurant and hired Miami-Dade Commissioner Jose "Pepe" Diaz.

The brothers promised to donate $1 million to Florida International University, which prompted the school to name its basketball facility Pharmed Arena. FIU officials say that so far, Pharmed has contributed a third of the promised amount.

BELOW THE SURFACE

Behind the scenes, however, problems were developing. In August 2004, Roche Healthcare, the company's largest supplier, abruptly stopped using Pharmed, resulting in a $300 million reduction in annual revenue.

In bankruptcy filings, Pharmed said it lost the business because Roche "eliminated the use of distributors." Roche won't say why it stopped using Pharmed, but spokeswoman Kim Cayz says: "We obviously work with distributors."

The next big blow came in January 2005, when Johnson & Johnson ended its 25-year relationship. J&J filed a demand for arbitration, accusing Pharmed of fraud and the brothers of "unjust enrichment" in collecting $22 million in rebates to which they were not entitled.

Colonna, the consultant, says suppliers began to offer rebates in an attempt to stop the questionable pricing practices they viewed as being so prevalent in hospital discounts. He says manufacturers told distributors, "You have to prove to me where the surgical gloves are going to get the better price. In that case, I will then rebate you the difference.

Without Roche and J&J, Pharmed revenue plummeted from $584 million in 2003 to $146 million in 2005. The once highly profitable firm ended up losing $19 million that year.

Pharmed sued J&J for "reprehensible, intentional, malicious" defamation. A judge sent the case to arbitration. J&J won't comment.

DIAZ INVESTIGATION

As Pharmed struggled, Commissioner Diaz co-sponsored in 2006 an ordinance requiring Jackson Memorial Hospital to give preference to local suppliers. For the four previous years, he received at least $475,000 in salaries, loans and bonuses from companies controlled by the brothers.

Diaz has been under investigation by federal authorities looking into possible "honest services fraud" in his role as a public servant because Diaz took a fishing trip to Cancun with Carlos de Céspedes and Miami developer Sergio Pino. Diaz later voted for a major Pino development plan.

Federal investigators would not comment on the status of the investigation.

Carlos said he didn't know about the ordinance beforehand. But he applauded local companies getting more work, and he hired De Grandy to lobby public hospitals for more business.

Quietly, the company was selling off assets. In September 2006, it sold the inventory of its Ohio operation for $3.4 million. The Tampa center was closed. Last March, Pharmed sold some warehouses in Doral for $8.1 million.

Embarrassing lawsuits were cropping up, such as Citicorp Vendor Finance's demand for $130,000 in unpaid phone equipment.

The final blow came last May, when the HCA hospital chain stopped using Pharmed as a supplier -- a further loss of $21 million in annual revenue.

In June, HCA sued seven people, including a Pharmed assistant vice president, Erika Urquiza, 36, but not Pharmed itself or the brothers. The lawsuit alleges that Urquiza paid kickbacks to two employees of HCA's Kendall Regional Medical Center, who then ordered supplies from Pharmed that never were delivered. HCA paid Pharmed $3.5 million for the supplies, the lawsuit states.

The lawsuit claims Urquiza and her husband Luis used Gator Sports Collectibles to pay the hospital employees. State records show the company was incorporated by Charles J. Sanchez, who has been listed as the officer/registered agent of many companies started by the de Céspedes brothers, including Quality One, the corporation named in the AmerisourceBergen lawsuit.

In the incorporation papers for Gator Sports, Sanchez gave an address that was the same as Pharmed's headquarters in Doral. Sanchez and Luis Urquiza both say Sanchez incorporated the company as a favor to the Urquizas, not the brothers.

In the lawsuit, HCA states "the Pharmed Scheme Defendants have made extraordinary efforts to hide their ill-gotten gains, and they continue to do so."

Court documents contain e-mails between Urquiza and hospital employee Victor Garcia that hint others were involved. Garcia frequently asked Urquiza when he was going to get paid. "I beg and plead every day, " Urquiza responded at one point.

On March 19, Urquiza sent an e-mail to Sandra Johannes: "ANYTHING? $$$"

Within a minute, Johannes responded: "Not today, but yes." Her e-mail was signed with her name and title, executive assistant. Two former employees say she is the executive assistant to the brothers.

Three days later, Urquiza received the money.

Urquiza's attorney is George M. Evans, who has represented Pharmed in numerous corporate matters, including the lawsuit brought by Wyeth. Evans said, "Due to the ongoing investigation, my clients have been instructed not to respond to your questions."

NO TALK OF DEFEAT

The brothers insist they are not finished. In their recent statement to The Miami Herald, they said: "Our recent business reversals are disappointing, but we fully intend to put these matters behind us and build new businesses that will also contribute to Miamis economy and quality of life."

In fact, they recently updated the corporate registration of one of their companies, Belo Medical Center Purchasing.

Meanwhile, Pharmed is vanishing in bankruptcy court. Most of its remaining supplies have been sold for $916,000. Last Monday, the headquarters and warehouse were auctioned off for $10.8 million. The sale is expected to close Friday.

Miami Herald staff writer Jay Weaver contributed to this report.

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