E7-1326. Stephen J. Heldman, Denial Of Application

On November 18, 2005, the Deputy Assistant Administrator, Office of Diversion Control, Drug Enforcement Administration, issued an Order to Show Cause to Stephen J. Heldman of Cincinnati, Ohio (Respondent). The Show Cause Order proposed to deny Respondent's pending application for a DEA Certificate of Registration as a distributor of the List I chemicals ephedrine and pseudoephedrine on the ground that his registration would be inconsistent with the public interest. See 21 U.S.C. 823(h) & 824(a).

The Show Cause Order specifically alleged that Respondent was proposing to distribute products containing pseudoephedrine and ephedrine, which are precursor chemicals used to manufacture methamphetamine, to non-traditional retailers of these products such as convenience stores and gas stations. See Show Cause Order at 1-2. The Show Cause Order alleged that these retailers are sources for the diversion of these products into the illicit manufacture of methamphetamine. See id.

The Show Cause Order next alleged that during a pre-registration investigation, Respondent indicated that he had no prior experience in handling List I chemical products, that he was unaware of the problem of diversion of these products into the illicit manufacture of methamphetamine, and that he was proposing to store listed chemical products in a commercial self-storage locker which had inadequate security. See id. The Show Cause Order also alleged that while Respondent told investigators that he intended to distribute only traditional products containing pseudoephedrine, the primary business of one of his two proposed suppliers is the distribution of combination ephedrine products which are sold by gray market retailers. See id.

The Show Cause Order further alleged that during customer verifications, DEA investigators determined that several of Respondent's proposed customers obtained List I chemical products from other suppliers and had no intention of purchasing these products from him. See id. at 3. Finally, the Show Cause Order alleged that during an August 2005 investigation of another DEA registrant, DEA investigators determined that Respondent had obtained List I chemicals without being registered to do so. See id.

On November 25, 2005, the Government initially attempted to serve the Show Cause Order by Certified Mail, Return Receipt Requested, by sending it to the address Respondent gave on the application for his proposed registered location. The mailing, however, was returned unclaimed. Thereafter, on January 17, 2006, the Government served the Show Cause Order by First Class Mail. Since that date, neither Respondent, nor anyone purporting to represent him, has responded. Because (1) more than thirty days have passed since the service of the Show Cause Order, and (2) no request for a hearing has been received, I conclude that Respondent has waived his right to a hearing. See 21 CFR 1309.53(c). I therefore enter this final order without a hearing based on relevant material found in the investigative file and make the following findings.

Findings

Pseudoephedrine and ephedrine are List I chemicals that, while having therapeutic uses, are easily extracted from lawful products and used in the illicit manufacture of methamphetamine, a schedule II controlled substance. See 21 U.S.C. 802(34); 21 CFR 1308.12(d). As noted in numerous DEA orders, “methamphetamine is an extremely potent central nervous system stimulant.” Sujak Distributors, 71 FR 50102, 50103 (2006); A-1 Distribution Wholesale, 70 FR 28573 (2005). Methamphetamine is highly addictive; its abuse has destroyed lives and families and ravaged communities. Moreover, because of the toxic nature of the chemicals used to make the drug, its manufacture creates serious environmental harms. David M. Starr, 71 FR 39367 (2006).

On October 27, 2003, Respondent, a sole proprietor, applied for a registration as a distributor of List I chemicals at the address of his residence in Cincinnati, Ohio. According to the investigative file, on January 15, 2004, a DEA Diversion Investigator (DI) contacted Respondent requesting additional information. The DI also contacted Respondent on additional occasions to request information. On October 11, 2004, Respondent sent a letter to the DI providing the requested information. In this letter, Respondent informed the DIs that the List I chemical products would actually be kept in a storage unit at a commercial storage facility.

On December 16, 2004, the DIs conducted an on-site inspection of the facility. Respondent's proposed use of the facility raised substantial concerns. According to the investigative file, the entrance gate to the facility remained open long enough to allow unauthorized persons to obtain access to the facility. Moreover, while Respondent's storage unit had an alarm system, the alarm sounded only at the facility's office and not at the local police station. Furthermore, during the visit, the facility's office was unoccupied. Finally, the DIs noted that it was unclear who would be responsible for handling the products that were delivered to the storage facility.

During the course of the investigation, the DIs determined that Respondent engages in the business of distributing assorted products to convenience stores, gas stations, truck stops and liquor stores. Respondent told the DIs that he had no experience in the distribution of List I chemical products and that he had no knowledge of the diversion of these products into the illicit manufacture of methamphetamine.

Respondent provided the DIs with a list of proposed customers for List I products. A substantial number of the proposed customers were Ameristop Food Marts, a chain of company-owned and franchise-owned convenience stores in Ohio and adjacent states. One of the DIs contacted the buyer for Ameristop Corporation, who informed him that all company-owned stores and most of the franchise-owned stores were supplied by Liberty Distribution, a subsidiary of Ameristop Corp. The buyer acknowledged that Respondent had supplied some items to ten Ameristop stores but stated that Ameristop would discourage its stores from buying List I chemical products from Respondent or any other independent vendor.

Subsequently, on August 23, 2005, DEA DIs executed an Administrative Inspection Warrant at R J General Corporation, a Cincinnati-based firm which was soon to become—as in that day—an ex-DEA registered distributor of List I chemical products. During the inspection, the DIs interviewed Mr. John Meinerding, who admitted that R J General had sold List I chemical products to Respondent on various dates between January 7, 2004, and December 8, 2004. Of note, on October 11, 2004, Respondent had faxed a letter to DEA in which he stated that his firm was a “wholesale distributor.” Moreover, in response to a question regarding whether he would engage in retail sales of List I chemical products, Respondent answered: “No.”

Discussion

Under 21 U.S.C. 823(h), an applicant to distribute List I chemicals is entitled to be registered unless the registration would be “inconsistent with the public interest.” In making this determination, Congress directed that I consider the following factors:

(1) maintenance by the applicant of effective controls against diversion of listed chemicals into other than legitimate channels;

(2) compliance by the applicant with applicable Federal, State, and local law;

(3) any prior conviction record of the applicant under Federal or State laws relating to controlled substances or to chemicals controlled under Federal or State law;

(4) any past experience of the applicant in the manufacture and distribution of chemicals; and

(5) such other factors as are relevant to and consistent with the public health and safety.

Id.

“These factors are considered in the disjunctive.” Joy's Ideas, 70 FR 33195, 33197 (2005). I may rely on any one or a combination of factors, and may give each factor the weight I deem appropriate in determining whether an application for registration should be denied. See, e.g., Starr, 71 FR at 39367; Energy Outlet, 64 FR 14269 (1999). Moreover, I am “not required to make findings as to all of the factors.” Hoxie v. DEA, 419 F.3d 477, 482 (6th Cir. 2005); Morall v. DEA, 412 F.3d 165, 173-74 (D.C. Cir. 2005). In this case I conclude that Factors One, Two, Four, and Five establish that granting Respondent's application would be inconsistent with the public interest.

Factor One—Maintenance of Effective Controls Against Diversion

The investigative file establishes that Respondent does not have effective controls against diversion. In this case, it is unclear who would have access to List I chemical products upon their delivery to the storage facility and whether they would be handled in a manner which would prevent theft. See 21 CFR 1309.71(b). Furthermore, Respondent's proposed use of a commercial storage facility raises substantial questions about the adequacy of his security controls. Among other things, it appears that unauthorized persons can easily gain access to the facility. Moreover, Respondent has no control over the selection of the facility's other tenants or the persons they bring onto the property. See Sujak Distributors, 71 FR 50102, 50104 (2006). As I have previously explained, the use of commercial storage facilities presents an unacceptable risk that a criminal may gain access to the property and steal List I chemical products.

Finally, while the facility has an alarm system, the alarm sounds only at the facility's office. This raises the further question of whether the facility provides effective monitoring twenty-four hours a day. I thus conclude that Respondent does not maintain effective controls against diversion and that this factor alone is dispositive in concluding that granting him a registration would be inconsistent with the public interest.

Factor Two—The Applicant's Compliance With Applicable Laws

The investigative file contains disturbing evidence that Respondent repeatedly purchased List I chemicals products from R J General Corp., between January 7, 2004, and December 8, 2004. Moreover, in a letter which Respondent faxed to the DIs, he expressly stated that he did not engage in the retail sale of List I chemical products.

Federal regulations clearly state that “[n]o person required to be registered shall engage in any activity for which registration is required until the application for registration is approved and a Certificate of Registration is issued by the Administrator to such person.” 21 CFR 1309.31(a). Respondent did not have a registration, and the regulations no longer exempt an applicant from the requirement of obtaining a registration prior to distributing List I chemical products. Id. 1309.25.

Based on the evidence in the file, I conclude that Respondent violated federal law by distributing List I chemicals without the required registration. See 21 U.S.C. 822(a)(1). As I have previously noted, “[r]egistration in one of the essential features of the Controlled Substances Act.” Sato Pharmaceutical, Inc., 71 FR 52165, 52166 (2006). Respondent's engaging in the distribution of List I chemicals without first obtaining a registration is a serious violation of the Act. I therefore conclude that this factor also provides sufficient reason by itself to deny Respondent's application.^[1]

1

Factor Three—The Applicant's Experience in Distributing List I Chemicals

Beyond the misconduct discussed above, Respondent stated in his letter to the DIs that he had no experience in the sale of List I chemical products. Were there no evidence of Respondent having engaged in illicit activity, I would nonetheless conclude that his lack of experience bars his registration.

Because the regulatory scheme imposed by federal law is complex and the risk of diversion is substantial, this is not a line of business that is suitable for a new entrant to learn through on-the-job training. Accordingly, numerous DEA final orders have made clear that an applicant's lack of experience in distributing List I chemicals is a factor which weighs heavily against granting an application for a registration. Tri-County Bait Distributors, 71 FR 52160, 52163 (2006); Jay Enterprises, 70 FR 24620, 24621 (2005); ANM Wholesale, 69 FR 11652, 11653 (2004). I therefore conclude that this factor further supports the denial of Respondent's application.

Factor Four—Other Factors That Are Relevant to and Consistent With Public Health and Safety

Numerous DEA orders recognize that convenience stores and gas-stations constitute the non-traditional retail market for legitimate consumers of products containing pseudoephedrine and ephedrine. See, e.g., Tri-County Bait Distributors, 71 FR at 52161; D & S Sales, 71 FR 37607, 37609 (2006); Branex, Inc., 69 FR 8682, 8690-92 (2004). DEA orders also establish that the sale of certain List I chemical products by non-traditional retailers is an area of particular concern in preventing diversion of these products into the illicit manufacture of methamphetamine. See, e.g., Joey Enterprises, 70 FR 76866, 76867 (2005). As Joey Enterprises explains, “[w]hile there are no specific prohibitions under the Controlled Substances Act regarding the sale of listed chemical products to [gas stations and convenience stores], DEA has nevertheless found that [these entities] constitute sources for the diversion of listed chemical products.” Id. See also TNT Distributors, 70 FR 12729, 12730 (2005) (special agent testified that “80 to 90 percent of ephedrine and pseudoephedrine being used [in Tennessee] to manufacture methamphetamine was being obtained from convenience stores”); OTC Distribution Co., 68 FR 70538, 70541 (2003) (noting “over 20 different seizures of [gray market distributor's] pseudoephedrine product at clandestine sites,” and that in eight month period distributor's product “was seized at clandestine laboratories in eight states, with over 2 million dosage units seized in Oklahoma alone.”); MDI Pharmaceuticals, 68 FR 4233, 4236 (2003) (finding that “pseudoephedrine products distributed by [gray market distributor] have been uncovered at numerous clandestine methamphetamine settings throughout the United States and/or discovered in the possession of individuals apparently involved in the illicit manufacture of methamphetamine”).

Significantly, all of Respondent's proposed customers participate in the non-traditional market for ephedrine and pseudoephedrine products. Moreover, many of Respondent's proposed customers have other suppliers. Finally, Respondent's lack of knowledge regarding the diversion of List I chemicals into the illicit manufacture of methamphetamine is also disconcerting.

DEA orders recognize that there is a substantial risk of diversion of List I chemicals into the illicit manufacture of methamphetamine when these products are sold by non-traditional retailers. See, e.g., Joy's Ideas, 70 FR at 33199 (finding that the risk of diversion was “real, substantial and compelling”); Jay Enterprises, 70 FR at 24621 (noting “heightened risk of diversion” should application be granted). Under DEA precedents, an applicant's proposal to sell into the non-traditional market weighs heavily against the granting of a registration under factor five. So too here.

Because of the methamphetamine epidemic's devastating impact on communities and families throughout the country, DEA has repeatedly denied an application when an applicant proposed to sell into the non-traditional market and analysis of one of the other statutory factors supports the conclusion that granting the application would create an unacceptable risk of diversion. Thus, in Xtreme Enterprises, 67 FR 76195, 76197 (2002), my predecessor denied an application observing that the respondent's “lack of a criminal record, compliance with the law and willingness to upgrade her security system are far outweighed by her lack of experience with selling List I chemicals and the fact that she intends to sell ephedrine almost exclusively in the gray market.” More recently, I denied an application observing that the respondent's “lack of a criminal record and any intent to comply with the law and regulations are far outweighed by his lack of experience and the company's intent to sell ephedrine and pseudoephedrine exclusively to the gray market.” Jay Enterprises, 70 FR at 24621. Accord Prachi Enterprises, 69 FR 69407, 69409 (2004).

The investigative file in this case supports even more adverse findings than those which DEA has repeatedly held are sufficient to conclude that granting an application would be inconsistent with the public interest. Here, Respondent clearly lacks effective controls against diversion, has no experience in the elicit wholesale distribution of List I chemical products, and yet intends to distribute these products to non-traditional retailers, a market in which the risk of diversion is substantial. Furthermore, the file establishes that Respondent violated federal law by distributing List I chemicals without a registration. Given these findings, it is indisputable that granting Respondent's application would be “inconsistent with the public interest.” 21 U.S.C. 823(h).

Order

Pursuant to the authority vested in me by 21 U.S.C. 823(h), and 28 CFR 0.100(b) & 0.104, I order that the application of Respondent Stephen J. Heldman, for a DEA Certificate of Registration as a distributor of List I chemicals be, and it hereby is, denied. This order is effective February 28, 2007.

Dated: January 20, 2007.

Michele M. Leonhart,

Deputy Administrator.

Footnotes

1.  Because of the seriousness of this misconduct, I conclude that even though there is no evidence that Respondent has ever been convicted of an offense related to listed chemicals, this factor is entitled to no weight.