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Attorney: Pharmacy tied to outbreak paid out $70M

Jay Lindsay, Associated Press

SPRINGFIELD, Mass. (AP) -- An attorney for creditors of a pharmacy blamed for a nationwide meningitis outbreak said Thursday that the firm paid out $70 million to company insiders over the last six years.

Attorney David Molton made the disclosure at a U.S. Bankruptcy Court hearing in Springfield as he argued that creditors should be allowed to seek a freeze on New England Compounding Center's assets.

Molton said the company had paid its four owners, or companies they owned, $37 million over the last two years, $68 million over the last four and $70.5 million over the last six. That history of large payouts to insiders showed there was a "grave, grave, grave risk" its remaining assets would be further depleted before creditors get paid, he said.

"When money came in, it went out," Molton said.

Judge Henry Boroff granted the motion and scheduled a hearing Friday on arguments about tying up the companies' assets.

A tainted steroid produced by the Framingham-based compounding pharmacy has been linked to a fungal meningitis outbreak that's killed 44 people and has sickened more than 600. The outbreak was discovered in Tennessee in September and subsequent inspections turned up unsanitary conditions and lax sterility testing at the firm's Framingham office.

The pharmacy filed for Chapter 11 bankruptcy in December, saying it wanted to set up a compensation fund to victims. About 150 claims have been filed to date.

The firm listed $1.6 million in assets, versus $885,000 in liabilities — not counting any judgments against it — and plaintiffs' attorneys have said the company acknowledges it won't have enough money to adequately compensate victims.

Molton's disclosures Thursday of large payments to company owners comes days after New England Compounding Center reported in court filings that in the firm's final 11 months, it paid out more than $16 million to its four owners, Barry Cadden, Lisa Cadden, Greg Conigliaro and Carla Conigliaro. The firm also disclosed about $90,000 in American Express card purchases by the three of the owners, largely for routine expenses such as gas and groceries, including some after it shut down in October.

In a motion Tuesday, the Official Committee of Unsecured Creditors, represented by Molton and including family members of victims, said the company had been "looted" by its owners in its last year of existence.

But the company replied in a statement that there were no indications as late as the end of September that it was in trouble.

"On the contrary, the company had experienced significant growth and was a thriving corporate entity," it said. "The cash flow patterns and expenditures identified as part of the Chapter 11 process were consistent with the routine operations of NECC throughout 2012."

The company said a large part of what was paid out to the owners was for taxes.

Daniel Cohn, an attorney representing NECC during the bankruptcy, said Thursday that the owners have indicated they are amenable to returning about $6 million they received since July 10, the date their attorneys have determined they were effectively insolvent, due to liabilities accruing amid the burgeoning but still undiscovered outbreak.

But outside court, creditors' committee attorney William Baldiga said the company may have been insolvent far longer. But he said it was unknown how much of the disbursed money creditors could claim now, or actually get back.

Also Thursday, Boroff agreed an independent trustee should be appointed to oversee the firm's bankruptcy proceedings. U.S. Trustee William Harrington was expected to quickly make that appointment.

The NECC had initially opposed the appointment of a trustee, saying it would delay the creation of the victims' compensation fund. But Cohn said once it became clear the creditors wanted a trustee, "one thing we did not want to do was create a battle."