DOJ Investigates PBMs, Market-Makers

The media has recently reported Justice Department investigations into both pharmacy-benefit managers (PBMS) and best execution of customer trades by wholesale market-making companies.

PBM Investigations

According to the Wall Street Journal, the Southern District of New York has requested information from Johnson & Johnson, Merck and Endo concerning their contracts with PBMs. PBMs administer drug benefit plans for employers and health insurers.

Last year, AstraZeneca paid the Justice Department $7.9 million to resolve allegations that it paid kickbacks in violation of the False Claims Act through its contractual relationships with a pharmacy benefit manager. The whistleblower lawsuit alleged that the pharmaceutical company provided price concessions on other products in exchange for sole and exclusive status on certain formularies.

It is unknown whether the DOJ investigations are similar to the case against AstraZeneca or whether they involve different allegations.

Trade Execution Investigation

The Justice Department has also issued subpoenas to electronic trading firms Citadel and KCG over their trade executions, according to Reuters. The article indicates that they are looking at high-speed trading firms which pay retail brokerages to sell them customer order flow.

The practice has been controversial because it involves a potential conflict of interest as well as a potential violation of the securities regulations concerning best execution. Brokers are required to give customers, with certain caveats, the best available price on the market when they enter into a transaction.

The Reuters article suggests that the DOJ’s capacity to undertake such an investigation, which would probably normally be done by the U.S. Securities and Exchange Commission, was a result of its investigations into residential mortgage-backed securities. There is also reportedly a separate probe into these firms (and others) by the New York State Attorney General.