Former OtisMed CEO Receives Two-Year Prison Term

The former president/CEO of OtisMed Corporation will be spending the next two years in jail for selling unapproved knee replacement surgical tools nationwide.

Charlie Chi, 46, of San Francisco, Calif., pleaded guilty in December 2014 to three counts of distributing adulterated medical devices in interstate commerce in violation of the federal Food, Drug, and Cosmetic Act (FDCA) after having been told by the U.S. Food and Drug Administration (FDA), legal counsel and his own board of directors not to do so. In addition to his 24-month prison term, Chi must serve one year of supervised release and pay a $75,000 fine.

OtisMed Corp., based in California, was bought by Kalamazoo, Mich.-based Stryker Corp. in 2009 after the fraudulent sales occurred. But as part of the deal reached in federal court in Newark, N.J., Stryker’s OtisMed unit agreed to pay $80 million in criminal and civil penalties after pleading guilty to a felony charge. 

“The sentencing of OtisMed’s CEO ought to send a clear message to others in positions of authority within the medical device and pharmaceutical industries: the Department of Justice will vigorously prosecute not only corporations, but also the individuals at their helm who are responsible for endangering public health and safety in pursuit of profit,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.

OtisMed did not seek FDA approval in 2006 for its marketing and distribution of the plastic guides (called OtisKnee) that fit on a patient’s knee and help surgeons determine precisely where to cut the bone in order to accommodate an implant. Over the next three years, the company sold more than 18,000 guides, generating $27 million. A number of those patients required removal of the replacements, prosecutors said, but it could not be determined if the OtisKnee products were the cause.

The company sought FDA approval to market the device in 2008, but was denied in September 2009. The FDA said OtisMed failed to show the devices were safe and effective, leaving patients at risk. Without the approval, OtisMed was prohibited from marketing or distributing the device.

Against the advice of the company Board of Directors and lawyers, Chi ordered two employees to send 218 devices from California to surgeons in the week following the FDA’s rejection. The shipments, which included 16 devices to six surgeons in New Jersey, were made on Sept. 10, 2009. Prosecutors contended that Chi’s actions were prompted by his concern about the reputation of the device and the company.

“The defendant betrayed the trust of patients whose doctors were using his unapproved surgical device for a serious medical procedure,” said U.S. Attorney Paul J. Fishman (New Jersey).  “With everything else people have to deal with when they are facing surgery, they shouldn’t have to worry whether their doctor is using equipment that has been approved for use. The punishment meted out to Chi and his company is appropriate.”

As part of the plea agreement with the government, OtisMed is barred from participating in Medicare and Medicaid for 20 years, prosecutors said. Stryker will conduct a review and audit to determine whether other devices have appropriate approvals, and share the results with the government.

When OtisMed became a subsidiary of Stryker in November, 2009, Stryker was not aware Chi had shipped the devices without FDA approval. The company fired Chi after discovering his behavior.

“With more than 600,000 knee replacements performed each year, patients rely on FDA to help ensure that the devices are safe and work as intended,” said Director George M. Karavetsos of the FDA’s Office of Criminal Investigations. “When manufacturers ignore FDA requirements, they risk endangering patients’ health and quality of life. We will continue to protect the public health by bringing to justice those who disregard FDA regulations.”

Chi’s sentence marks the culmination of a long-term investigation conducted jointly by the FDA’s Office of Criminal Investigations, under the direction of Special Agent in Charge Antoinette V. Henry, and the Department of Health and Human Services’ Office of Inspector General (HHS-OIG), under the direction of Special Agent in Charge Scott J. Lampert. Counsel to the HHS-OIG and FDA’s Office of Chief Counsel to the FDA also assisted. The National Association of Medicaid Fraud Control Units, along with the Medicaid Fraud Control Unit of the Massachusetts Attorney General’s Office, helped coordinate settlements with the various states.