Arrest, lawsuits provide glimpse into coronavirus price-gouging playbook
Efforts to crack down on fraudulent 3M mask sales ended with a first criminal case this week when a used car salesmen was charged with trying to bilk New York City out of $45 million.
But it didn’t begin like many criminal cases do, with a law enforcement investigation. It started with the 3M company ramping up its own fraud detection unit after the coronavirus pandemic wiped out its supplies of medical-grade N95 masks, creating a market for profiteers.
Since March, the company has fielded hundreds of reports from government and hospital officials desperate to protect their workers and concerned about getting ripped off. The worst cases tend to land first in civil courts, where 3M uses trademark claims to ask judges to shut down those advertising the company’s wares at inflated prices.
Scrambling to chase any potential lead in the absence of a reliable federal supply chain, states and health systems are left to sift through hundreds of sketchy pitches.
“You really don’t want to be the guy who turns down 100 million masks by not taking a phone call,” said Luke Bosso, the chief of staff of Indiana’s economic development corporation, who has been charged with vetting suppliers. “It’s incredibly scary. In Indiana… we get 50 emails a day offering N95 masks.”
The New York case happened on a gigantic scale: a middleman promised to provide 7 million masks to the city for $45 million – four times 3M’s list price. The middleman was Ron Romano, 58, a New Jersey used car lot owner, who had drawn one of 3M’s 10 civil copyright infringement suits last month.
That case turned criminal Tuesday when the U.S. Attorney’s Office announced Romano’s arrest on charges of conspiracy to commit wire fraud and violate the Defense Production Act.
Read:The Department of Justice complaint against Ronald Romano
Across the county, 3M has accused others of seizing the moment: A financial consultant, one suit alleged, offered Florida up to 10 million masks at a 460% markup; a Utah-based health network, another said, tried to middleman a deal in California to sell masks at $4.95, a 400% markup; and from a base in a Las Vegas hotel room, a man tried to land a $14-billion deal with Indiana.
Inflated prices undermine 3Ms promises from as early as February that it would not increase prices on the N95 masks, which range from 68 cents to $3.40 depending on the model.
“Disappointingly, it’s not a small problem,” said Courtney Enloe, 3M’s vice president of litigation. “We’re agnostic as to how it’s stopped. Whether it gets shut down because we file a suit and get an injunction, or it’s passed on to state or federal authorities, we just want it shut down.”
Coronavirus creates astronomical demand
Masks have become the iconic symbol of this pandemic and N95s made by 3M are considered the gold standard. At first reserved for medical staff and first responders, demand exploded as the virus spread nationwide.
As the federal government’s own stockpile of the masks quickly vanished, President Donald Trump quarreled with 3M about increasing its production and diverting international supplies to the U.S. – which eventually led the company to double its output. The Defense Production Act enacted by the president also designates the masks a “scarce material” that is illegal to hoard and sell at above prevailing market rates.
More:U.S. companies kept shipping masks overseas even as hospitals ran out and despite warnings
Demand surged again after the CDC changed course on April 3, recommending all Americans wear masks in public.
Third party vendors swooped in, preying on innocent buyers with a variety of fake offers, counterfeits, deceptive marketing and fraud. By then, 3M was ready with a fraud hotline and website. Teams of 3M lawyers comb through online evidence of fraud and social media trails to demand websites be taken down.
“3M does not – and will not – tolerate individuals or entities deceptively trading off the fame and goodwill of the 3M brand and marks for their personal gain,” attorneys wrote again and again in the company’s resulting civil suits.
The company began trading tips with law enforcement authorities around the world, who can go further, obtaining warrants or using undercover agents to build criminal cases.
Yet litigation is not the company’s strongest tool, according to Enloe.
“At the end of the day our biggest job is to get the production numbers up,” she said. “Once the supply evens up with demand, this tremendous incentive will go away and this should end.”
N.J.-based scam called elaborate hoax
Text messages unsealed this week in the federal complaint reveal what prosecutors called a multifaceted and brazen effort to exploit the pandemic at its largest epicenter, in New York City.
The U.S. Attorney’s Office alleges Romano conspired in the scheme with a wide-ranging group of people: another car dealer employee, a heating equipment supplier, the former minister of foreign investment of an unnamed European nation, the CEO of a Philadelphia-based packaging company and his wife, and a Miami hedge fund attorney.
The setup was distinctly international, according to the complaint. Romano promised to source masks through a Mexico-based company and a Peruvian-based exporter working with a company in the Netherlands to procure masks made by 3M in Uruguay.
Prosecutors say that Romano texted a co-conspirator in early March about the get-rich quick scheme, “I’m working on a few deals that if I get any of them you might be buying a Ferrari.”
Romano’s paperwork quickly worked its way through New York City procurement managers and convinced enough people that the city approved the $45-million purchase order. But the deal collapsed after procurement staff sought verification from 3M and tried to authenticate the seller themselves by asking more questions.
New York officials sent an email in early April demanding documentation that the group was an authorized 3M dealer. The email was forwarded to Romano and his alleged co-conspirators, who responded, “Yikes.”
The same group had successfully reached an agreement with Florida Division of Emergency Management officials to buy masks at a 500% markup for $5.4 million, the complaint says, but were not able to find a supply of the face coverings. They did successfully sell $12,000 in masks to a naturopathic medical university at a 360% markup, according to the unsealed complaint. University officials sought to return the three-ply masks, the complaint says, because they were of inferior quality.
Romano did not respond to repeated messages seeking comment. A federal judge in New York had granted an injunction in early May to prevent him from advertising 3M masks in his civil case, initiated by 3M earlier this month. If convicted in the new criminal filing, he could face up to 31 years in prison.
Scammers try selling masks that don’t exist
In several of the 3M cases, people posing as brokers attempted to sell vast warehouses of masks that didn’t exist.
Enloe said buyers should watch for indicators of fraud, like promising huge quantities and maintaining 3M had authorized price markups.
“If someone says they can access 2 billion masks you immediately have to question it given [3M] has just recently ramped up production to 1.1 billion masks in a year,” Enloe said.
That’s what happened in Indiana when a man reached out to state procurement managers with an offer to sell 5 billion marked-up 3M masks. Emails from a trademark suit brought by 3M say he wanted to charge as much as $14.25 billion for a supply of the masks he said were sourced directly from 3M.
Bosso – the Indiana official vetting offers – was targeted in that pitch in an April 14 email from Nevada. A man allegedly offered “a nice Easter gift for you and the State of Indiana” for 100 million N95 masks at $2.82 a piece.
“Guys, any chance this is real?” Bosso asked colleagues, according to emails attached to 3M’s civil suit.
He said the offer came with some telltale signs of a possible scam: a newly created company with a tiny, unsophisticated online presence and aggressive sales tactics encouraging the state to act quickly to avoid missing out on the deal.
This case and others also suggest the mask sellers know they’re under the microscope. Many allegedly forged signoffs from 3M officials, according to the civil suits, faked sales to other reputable organizations and even demanded buyers sign non-disclosure agreements in an apparent attempt to shield the sale from regulators.
Indiana tipped off 3M attorneys who say their investigation indicates the Nevada company’s front man, Zachary Puznak, actually was living in a motel in Las Vegas. He scoffed when asked to provide proof that he was legitimate.
“Nobody [from 3M] has time or interest in satisfying paranoid irrationality,” Puznak wrote, according to the suit, adding that the state’s diligence was “quite sad . . . for the people of Indiana.”
USA TODAY reached out to Puznak on a phone registered to him. The man who answered said he was not Puznak, but would pass on a message. He hung up and no one ever called.
Responding to 3M’s suit last week, an Indiana federal judge issued a temporary restraining order against Puznak and his company, barring them from using the 3M name.
That leaves Bosso still searching for quality masks. With 3M-branded ones back-ordered for months, Indiana has turned to another international distributor that makes similar masks – and charges a premium, $5 or more apiece.
Unknown vendors come out of woodwork
Since the pandemic began, rural Florida emergency management director, Mitch Smeykal, said his Okeechobee County office has been inundated daily with vendors pitching gowns, masks, sanitizer and other supplies with huge markups that often prove too good to be true.
He placed an order early on directly with 3M. The products were on backorder, but Smeykal says he decided it would be better to wait for 3M than deal with an unknown middleman.
“We avoid new vendors during any time of crisis,” Smeykal said.
Smeykal compared the chain of events to hurricanes, when vendors suddenly pop up to take advantage of desperation. With storms, needs usually include things like food and cleaning supplies.
Private buyers like Kelly Adelberg also have had to separate solid opportunities from hazardous profiteers. The chief operating officer for urgent care provider Treasure Coast Medical Associates said she also gets emails and calls daily from unknown solicitors hawking personal protective equipment, including masks, and coronavirus test kits.
But these vendors cannot guarantee the quality of their goods, she said, or even when the products will arrive.
“They’re all saying PPE is available again but it’s not,” Adelberg said. “And I can’t take a chance on a company that you Google, and they don’t even have a website … I can’t take any chances with my employees.”
Most of the traditional vendors in Adelberg’s supply chain are still out of masks, forcing the clinics to overpay for critical supplies. Recently, they paid $1,460 for 60 masks –more than $24 apiece. Before the pandemic, the same N95s went for about $2.
Some companies ‘wandered’ into the business
Not all businesses or individuals targeted by the 3M suits launched elaborate schemes to defraud people. Some were legitimate entities that Enloe said may have wandered down the wrong path during the pandemic.
The company accused King Law Center, a central Florida law firm, of pretending to be affiliated with 3M as a vendor to try to sell the state 5 million N95 respirators at inflated rates. The firm and 3M agreed to a settlement in mid-May without admitting wrongdoing and the case was subsequently dismissed.
King Law Center director Sharon K. Dudley told USA TODAY that she “acted in good faith,” referring other questions to her attorney, John Brennan.
Brennan said that in the past the firm had worked to supply health care clients with supplies during other emergencies, like hurricanes. He said the firm was unaware it was working with an unauthorized 3M dealer, who set the prices. He declined to name them.
3M also sued RX2Live, a Utah-based franchiser of health care services, alleging they tried to persuade a group of California hospitals to overpay for N95 masks.
RX2Live attorney Lloyd Eisenberg said the company was working as a reseller for another distributor. Once 3M sued, the franchiser quickly pulled the product listing and entered into an agreement to no longer advertise 3M products.
“We had no idea where the third party was getting whatever they were selling through us,” Eisenberg said. “This was an unfortunate situation.”
In Georgia, Auta Lopes, founder and CEO of 1 Ignite Capital was sued by 3M for work in Florida. The company alleged she had offered state officials 10 million masks at a 460% markup.
A financial consultant, Lopes said it was the first time she had acted as a middleman for medical supplies. She settled the case and told USA TODAY she was prohibited from discussing it.
Despite the lawsuit, Lopes said she plans to continue operating in the coronavirus supply chain “now that the doors are open” with medical suppliers. With vendors backlogged or sold out, she said entrepreneurs with expertise in finding supplies can help.
“There is a lot of business and a lot of opportunities,” she said. “The opportunity is there to help other people.”
Nick Penzenstadler and Josh Salman are reporters on the USA TODAY investigations team. Nick can be reached firstname.lastname@example.org or @npenzenstadler, or on Signal at (720) 507-5273. Josh can be reached at email@example.com or @joshsalman, or (941) 361-4967.