By Tom Hals
WILMINGTON, Delaware (Reuters) - When the French firm at the center of a breast implant scandal sought to expand its U.S. business a decade ago, it turned to Donald McGhan, a pioneer in the implant industry with a history of legal troubles.
McGhan's career traces back to the laboratory at Dow Corning where the first breast implants were made in the early 1960s. By the time he partnered with France's Jean-Claude Mas, founder of Poly Implant Prothese (PIP), in 1999, he had been sued by shareholders who accused him of stealing money, was being investigated by the Securities and Exchange Commission for false accounting and had been replaced from his position as chief executive at one of the world's leading implant makers.
Separately, a Reuters review of securities filings, U.S. product liability lawsuits and interviews with doctors and patients found that saline implants made by PIP and distributed by its U.S. partner MediCor Ltd, founded by McGhan, continued to be used - dodging certain constraints imposed by the FDA - for at least two years after health regulators said they were adulterated and rejected them for sale in the United States.
McGhan has since been jailed for wire fraud for illegally using money from clients in a real estate company in an attempt to build yet another implant business.
The now-defunct PIP was recently found to have sold implants made with industrial-grade silicone to some 300,000 women worldwide, sparking a global health scare. France's government instructed 30,000 French women to have their implants replaced due to a high rupture rate, and the country's health minister has called for Mas to answer for the actions of a "shady business."
In the United States, where the FDA had banned all silicone implants from 1992-2006, PIP sold a line of saline-filled implants starting in 1996. The business accounted for up to 40 percent of its revenue, according to company securities filings. McGhan's MediCor signed on to distribute the products in 1999, but a year later the Food and Drug Administration (FDA) conducted a new review of the devices and decided there wasn't enough data to show they were safe.
The agency then sent an inspector to PIP's plant in France, who found multiple violations of accepted manufacturing practices and determined the products to be "adulterated," Reuters has reported.
Despite that, MediCor continued to book sales of the implants until 2002, according to a MediCor prospectus for a sale of its stock. Reuters interviews with three surgeons and two patients found cases in which women received implants after the 2000 rejection.
Several doctors told Reuters that while PIP had informed them about the FDA rejection, it was their understanding that they could use devices they had in stock to replace implants that ruptured or deflated.
"If you had three in the closet, you could use them. That sort of thing," said Patrick Hudson, a New Mexico plastic surgeon. Hudson said he used PIP implants to replace deflated devices for one of his patients after the FDA rejection. "I don't think even the replacement lasted very long."
Hudson said that nearly all of the 15 or 20 PIP devices that he used in patients eventually failed, which he attributed to the implant's thin membrane.
The FDA confirmed that PIP received a "compassionate use" exception to allow doctors to implant the devices in women whose PIP implants had ruptured or deflated, but only for up to 300 women.
"For women who were suffering from a ruptured implant of this type, it was felt that there were not other implants on the market that would give a satisfactory cosmetic appearance," said Dr. William Maisel, the deputy director and chief scientist of the FDA's devices division, in an interview. For example, if a woman needed to replace only one of two PIP implants, and wanted her body to look symmetrical.
Only women who had previously gotten PIP implants could get a new one under this program, and the FDA asked PIP to remove all other implants from the market in 2000, when the company withdrew its application.
However, it turns out the company did not fully comply with the FDA's requirement.
The FDA said it found out there were still PIP saline implants in the United States in 2002. The agency does not have the exact figures of how many implants were still not collected. But they asked the company to send out letters in 2002 and 2003 to more than 1,000 surgeons, asking them to send back all unused implants to PIP.
Only about 10 to 20 percent responded to the first letter, but more than half responded that they received the second letter, Maisel said.
"It's very unusual (that a company not withdraw its products)," Maisel said. "Our expectation certainly was that the company would remove their product from the market."
The FDA said it is now generally confident PIP's implants are off the U.S. market, as it received reports about 1,810 problems with PIP's saline implants through the end of 2000, and only 48 reports between 2001 and 2009.
FROM LAB TO JAIL CELL
McGhan, who is serving a 10-year sentence in Texas federal prison, turned down a request for an interview on his ties to PIP, delivered through a prison official. Lawyers who have represented him declined to comment.
Mas's lawyer Yves Haddad said his client declined to comment on any ties to McGhan. Mas, who is recuperating from a December surgery in the Var region in southern France, is the subject of an Interpol arrest warrant for a drunk driving incident in Costa Rica. French authorities are considering whether to press charges against any PIP executives.
People who have encountered McGhan describe him as a persuasive salesman who succeeded in spreading his vision for the implant industry among doctors and investors.
"McGhan is the actual architect of the breast implant industry as we know it today," said Pierre Blais, a former advisor to Canada's health regulator. Blais now runs a program that gathers data on implant removals, and offers the information up to government agencies, health insurers and litigators. "He is the true father of all this, with all its sins and glory."
* McGhan got his start in the Dow Corning lab that created the first implants from silicone in 1963 in Hemlock, Michigan, according to Blais. By the mid 1970s, he and several Dow colleagues launched a new implants company, McGhan Medical Corp.
* McGhan sold McGhan Medical to manufacturing giant 3M Corp, bought it back in 1984 and merged it two years later with Inamed Corp, which grew to be one of the largest breast implant makers worldwide along with Johnson & Johnson's Mentor unit. Inamed is now part of Allergan.
* In 1998, McGhan was replaced as Inamed's chairman and chief executive, according to Inamed's securities filings.
* A year later, looking to build yet another implants business, McGhan founded MediCor and signed a deal to become PIP's distributor in the United States.
While McGhan created, sold, bought and merged implants businesses, the industry was rocked by a series of health scares through the 1980s and early 1990s. The devices were found to rupture and leak, and women brought thousands of product liability lawsuits against manufacturers including Dow Corning and 3M. The FDA banned silicone implants for most women from 1992 to 2006 pending additional safety data.
Most of the lawsuits were resolved in a $4 billion class action settlement in 1994. 3M ended up contributing $325 million. Dow Corning ended up bankrupt. Inamed, which estimated it held 40 percent of the global $275 million breast implant market in the mid 1990s, contributed about $32 million shortly after it replaced McGhan.
Among Inamed's many problems under McGhan's tenure was a cash shortage so dire it risked breaking the law by not paying payroll tax on time, according to securities disclosures by its auditors Coopers & Lybrand, who resigned. That prompted regulators to investigate, and Inamed said at the time it was fully cooperating.
To prop up Inamed, McGhan began diverting money from Medical Device Alliance Inc, a liposuction company that he had founded in 1995, according to a lawsuit filed in Nevada state court by company shareholders in 1999. McGhan and his partners raised $14 million from investors to finance research and testing by Medical Device Alliance, the lawsuit said.
"He would run around in a private jet that MDA financed, naturally, and try to impress people with his wealth and try to get doctors and others to put in a lot of money," said Kathryn Tschopik, an attorney who represented MDA shareholders whose money was allegedly diverted by McGhan.
As soon as investors wired money to MDA, McGhan diverted it to Inamed, she alleged. McGhan had argued the money was loaned by MDA to Inamed and was a permitted use of MDA's funds, according to securities disclosures by Inamed.
A receiver was appointed to replace McGhan at MDA, according to Nevada state court records. MDA's shareholders were eventually repaid by McGhan and other defendants, who were able to fund the settlement in part thanks to a sharp rise in Inamed's stock price, Tschopik said.
McGhan also paid a $50,000 fine in 2000 to the Securities and Exchange Commission to settle claims he filed false financial reports for Inamed in 1996 and 1997. He neither admitted nor denied the SEC's claims.
MCGHAN AND MAS "FIT TOGETHER"
As Mas was looking to turn the implants into a global export, McGhan offered Mas his skill as a respected technician and salesman, but also business acumen and a familiarity with doctors in the United States, Blais said.
"The two fit together. Mas made something McGhan could use. McGhan took the initiative to import Mas implants," Blais said.
Even though the FDA rejected PIP's implants in 2000, PIP and McGhan's MediCor aimed to eventually win approval, according to MediCor securities filings. In anticipation of returning to the United States, PIP merged with a shell corporation called Heritage Worldwide Inc in 2003, giving it a U.S.-listed stock.
MediCor soon became its second-largest shareholder, behind an entity owned by Jean-Claude Mas, with a stake of about 7 percent, according to a securities disclosure from Heritage.
McGhan also provided support in other ways. MediCor paid $1.66 million in claims owed by PIP to U.S. women with deflated implants, according to securities disclosures. In 2004, MediCor also forgave some of the $3.4 million PIP owed to it in return for transferring to MediCor PIP's application for FDA approval of its saline implants. At the time, PIP's total revenues for 2003 were $8.4 million and the company booked a net loss of $1.8 million, according to securities disclosures.
Despite the FDA's decision in May 2000 to withhold approval, surgeons continued to use PIP's saline implants in at least a dozen women in California, Michigan, Nevada, New Mexico, Texas and Utah for more than a year afterward, according to lawsuits brought by patients who suffered deflated implants. Only half of them received the implants as replacements.
Doctors were beginning to notice high rupture rates for the products. Grant Stevens of Marina Del Rey, California began to track data on 500 PIP devices implanted between 1996 and 2000 and compare them with 500 implants from Mentor from the same period.
Stevens found the PIP products deflated at a rate that was 3.5 times higher than the Mentor implants. The study was published in the journal Plastic and Reconstructive Surgery in 2006.
Blais, who tracks implants that are removed, also estimated the failure rate after five years at 70 percent, which he attributed to the implants' thin walls, one of the features that made it popular. "The simple act of walking is very abrasive and the shells (of the PIP implants) are not capable of withstanding this vigor and will fail very quickly," he said.
Laine Wich, a Texas dental hygienist and mother of two, had PIP's saline product implanted more than six months after the FDA rejection. While doctors said they operated under the assumption they could use PIP implants as replacements, Wich said they were her first implants from the company. In 2006, they deflated.
"I chose them because they felt more natural," Wich said. She said she followed the advice of her plastic surgeon, Neil Saretsky of Dallas, about the product choices. "I just trusted what he said."
By the time Wich had completed additional surgery to fix the problem, she had spent $10,000 out of pocket. PIP and MediCor offered warranties for up to 10 years, but Wich said it was never honored.
Messages left with the office of Saretsky, who was also listed as a MediCor shareholder in the company's securities disclosures, were not returned.
Nancy Ewert of Bakersfield, California, received PIP replacement implants after the FDA withdrew its approval. She said her doctor told her the PIP products were the only choice, unless she wanted to pay for another brand. "I didn't know they were pulled off the market."
By the time it became clear that PIP's implants would not drive business for MediCor, McGhan was scrambling for cash to buy yet another breast implant maker.
In May 2004, MediCor signed an agreement to buy Eurosilicone SA, a breast implant maker, for $40 million, according to McGhan's guilty plea for wire fraud. But McGhan was turned down for financing after meeting with various potential lenders, according to his plea agreement. He had until June 30, 2004 to find the cash.
Within weeks, he agreed to buy yet another company called Southwest Exchange Inc, which acted as an intermediary for real estate transactions and was sitting on $100 million of client escrow accounts, more than enough to buy Eurosilicone.
McGhan bought Southwest Exchange on June 28 for $3 million and within two days began sweeping out client money to buy the French implant maker, according to a lawsuit brought by Southwest Exchange clients in Nevada in 2007.
"They had to buy a company, steal the money, launder the money and get it out of the U.S." in a matter of days, said Robert Brace, an attorney who sued McGhan over McGhan's management of Southwest Exchange. "It was an amazing feat, really."
For two years, while the real estate bubble continued to inflate, Southwest Exchange's escrow accounts overflowed with readily available cash to prop up MediCor and, according to the lawsuit, fund a lavish lifestyle. The lawsuit by Southwest Exchange's clients alleges that McGhan diverted their money to buy a 19-seat jet, $1,000 dinners and private schooling for children of the McGhan family. Brace said McGhan even bought a golf course.
When the U.S. real estate market began to founder in the middle of 2006, the net client inflows into Southwest Exchange became severe outflows. McGhan was unable to meet the client cash demands and within a year the Southwest Exchange had collapsed, according to his guilty plea.
By the end of 2007, MediCor was also bankrupt, and McGhan would eventually plead guilty to wire fraud in 2009, according to his guilty plea and bankruptcy court filings. PIP said MediCor's bankruptcy left it with an unpaid debt of $28 million, which represented the sales MediCor had promised but failed to deliver in the U.S. market. The claim was never paid. In 2009, PIP also filed for bankruptcy.
(Additional reporting by Anna Yukhananov in Washington; Editing by Michele Gershberg and Claudia Parsons)