TOKEN DETERRENT

Thomas Narog stood outside his rented storage unit in Fort Lauderdale, Fla.,
one day in July 1999 while a federal inspector checked the lock. The
66-year-old semi-retired mortgage broker wanted to go into a new business,
but he needed the U.S. Drug Enforcement Administration's approval. He wanted
to sell pseudoephedrine pills from the storage unit.

While Narog had no background in pharmaceuticals, he also had no
criminal record, and neither did the man he claimed as his sole customer.

The inspector handed Narog some brochures that warned pseudoephedrine
can be used to make methamphetamine, then told him to report any
suspicious orders to the DEA. Two weeks later, Narog had his permit,
and Seaside Pharmaceutical Co. was in business. It proceeded to supply
millions of pseudoephedrine pills to meth labs, federal law
enforcement officials say. The Narog case, outlined in DEA and court
records, illustrates a central reason why the nation failed to keep
vital chemicals from meth traffickers in the 1990s. The DEA did not
make full use of the powers it had won from Congress to shut down
illicit sales of the key meth ingredients. Instead, it created an
honor system that took distributors such as Narog at their word. Some
lied. Narog was charged with supplying the meth trade, and his trial
exposed gaps in DEA procedures. The DEA inspector who reviewed Narog's
application testified that he never contacted Narog's purported
customer, an investor in a Florida grocery chain. That customer, in
turn, told the court that Narog had spoken to him about selling
cigarettes, not pseudoephedrine. DEA agents began watching Narog eight
months after granting his license, when his TruChoice tablets started
showing up in huge quantities at California meth "superlabs." By then,
DEA officials say, Narog had bought 17 million pseudoephedrine pills
-- enough to treat 600,000 colds for a week or make a day's supply of
meth for 3 million people. Prosecutors said Narog's business was part
of a cross-country network of warehouses and intermediaries that
routed the pseudoephedrine into California via Oregon. Narog was
convicted in 2002 of supplying the meth trade, but an appeals court
this year ordered a new trial because of improper jury instructions.
Narog applied for DEA registration under a federal law designed to
prevent meth traffickers from obtaining the chemicals they needed.

Companies that wanted to sell pseudoephedrine were typically asked to
name their proposed customers and suppliers. But the drug agency's
inspectors did not always require answers.

And they did not consistently verify what they were told. To keep a
DEA permit, a dealer was supposed to record all purchases and sales,
and report any suspicious customers. But the drug agency rarely did
random audits to see whether companies were complying, a review of DEA
and court records shows. The law, which took effect in 1997, empowered
the agency to revoke a company's license if allowing sales to continue
was "inconsistent with the public interest." However, DEA records
obtained by The Oregonian through the Freedom of Information Act show
that 35 of 129 companies whose products were found in meth labs
received three or more warning letters without losing their licenses.
One registered pseudoephedrine seller on the East Coast remained in
business after 47 warning letters -- most recently in May 2003, the
records show. More than 200 DEA permit-holders did business from
houses, mobile homes or apartments, The Oregonian's investigation found.

The newspaper found at least 11 companies listed addresses that are
public storage facilities. DEA and court records show that the agency
gave pseudoephedrine permits to at least two companies convicted of
federal crimes.

One was convicted of interstate transport of stolen goods, the other
of sales of counterfeit pharmaceuticals. The DEA allowed some pill
manufacturers to keep licenses despite repeatedly selling large
quantities of cold tablets to people who were later convicted of meth
trafficking. Several current and former DEA officials said the drug
agency has historically placed a greater emphasis on cocaine and heroin.

Some veteran agents, they said, disparagingly referred to meth and
other synthetic drugs as "kiddie dope." In a statement, the DEA called
that characterization a "gross misrepresentation" of how its agents
view methamphetamine. The drug agency said it moved in 2000 to tighten
scrutiny over companies that sell pseudoephedrine. The DEA said it now
requires inspectors to verify customers, check criminal backgrounds
and visit the business addresses listed by applicants. The DEA said it
has always accorded a "high priority" to the battle against meth
traffickers and the criminals who supply their ingredients. Officials
declined The Oregonian's repeated requests to interview DEA
Administrator Karen Tandy. However, Terry Woodworth, the agency's
deputy director of diversion control, acknowledged last year that the
DEA had approved companies it should not have. "It calls into question
the effectiveness of the law, the effectiveness of the regulatory
controls, the effectiveness of the regulatory implementation, as well
as the effectiveness of the law enforcement," said Woodworth, who has
since retired. "Certainly, we've learned some lessons," he said.
"We've made some mistakes." Big-money "medicine" Congress began
cracking down on the chemicals used to make methamphetamine in 1988.
Each time new controls were imposed, the traffickers shifted to other
chemicals that were unregulated.

By 1995, a combination of U.S. regulations and foreign export controls
had shut down the supply of ephedrine, the main ingredient of meth at
the time. So Mexican drug cartels, which had pioneered the superlabs
in California that churned out 80 percent of the nation's meth, began
buying huge quantities of ephedrine's chemical sibling,
pseudoephedrine. While Congress and the DEA slowly worked out a system
to regulate pseudoephedrine from 1995 to 1997, imports to the United
States surged by 27 percent, according to federal trade statistics. At
the same time, sales of cold medication grew 4 percent.

DEA officials think meth traffickers were stockpiling the chemical in
anticipation of federal control. The pills often were made by
little-known purveyors of generic vitamins, herbal remedies and
over-the-counter medicines on the East Coast. They sold their products
to middlemen who supplied knickknacks and candy to gas station
mini-marts. Middle Eastern immigrants in the wholesale trade called
their product dawa in Arabic. To their Mexican customers in
California, it was la medicina.

In any language, "the medicine" meant big money. The volumes were
staggering. Mainstream makers of cold pills sold their product in foil
"blister packs" of 30 pills each. Pill companies catering to Mexican
cartels packed their pseudoephedrine into bottles that held 120 pills,
and the bottles were crammed into crates that held as many as 17,000
pills each. Court records show that in 1997, at least five
little-known companies suspected of supplying the meth trade rivaled
the sales of the leading name-brand cold medicine, Sudafed. But in
December 1997, the DEA finally had the authority to control the last
remaining aspect of the trade in meth chemicals. The agency first had
gained the authority to turn away imports of ephedrine powder, then
the power to approve or reject companies seeking to sell ephedrine
tablets.

Now, it would decide who could sell pseudoephedrine products. The meth
trade, squeezed by each tightening of the chemical supply, was
destined for a crushing blow. But only if the DEA took full advantage
of its new powers. Flawed enforcement At first, the new system seemed
to be working as a deterrent. Mark Reichel, a federal public defender
whose clients include drug suspects in Fresno, Calif., said meth cooks
ran short of pseudoephedrine. "There was a big freakout," Reichel
said. "They were just doing anything to get their hands on pills." On
the street, federal data show, the purity of methamphetamine began to
fall, as did several indicators of meth abuse such as rehab and
emergency room admissions. In California, DEA officials put pressure
on businesses that sold pseudoephedrine products, including those
produced by Hammer Corp., a major Georgia manufacturer. Hammer's pills
had been repeatedly found in California meth labs, according to a
federal search warrant affidavit. California agents pursued multiple
criminal cases against some of the distributors. Three other purveyors
of Hammer products withdrew their applications for DEA registration
after the agency raised questions.

By 1998, Hammer's sales were down 75 percent from the year before. But
while the California DEA was turning up the heat, the DEA office in
Atlanta, where Hammer was located, granted the company's application
to sell pseudoephedrine in April 1998. "It kind of looks like the
right hand doesn't know what the left hand's doing, doesn't it?" said
Samantha Spangler, a federal prosecutor in Sacramento who worked on
the Hammer case. "I think there may have been that culture of lack of
communication in law enforcement between the left coast and the right
coast." Hammer's products continued to show up in the hands of
criminals after it was licensed, according to court records.

The company eventually pleaded guilty to supplying the meth trade --
its products tied to 71 meth labs, dumpsites, drug suspects and
undercover purchases from 1996 through 1999. Hammer officials did not
respond to written questions from The Oregonian. Beyond inconsistency,
DEA's approval process had deeper flaws. In Newton, N.J., pill-maker
Robert Occhifinto applied for a DEA permit in 1997 while serving an
18-month federal prison sentence for laundering $350,000 from
ephedrine sales to a California meth maker. Occhifinto's application
was filed on behalf of his company, NVE Pharmaceuticals, which
continued operating in his absence.

According to the DEA decision published in the Federal Register, the
NVE application portrayed Occhifinto's conviction as a failure to file
proper paperwork.

It also omitted another conviction for smuggling more than a kilogram
of hashish from Jamaica, the DEA notice said. DEA officials took two
years to reject Occhifinto's application. But the DEA allowed pending
applicants to keep doing business during the review.

In that time, Occhifinto's company made 36 sales totaling 3.5 million
pseudoephedrine tablets to a customer not registered with the DEA, the
agency said. Occhifinto told a DEA appeals officer that he took steps
to ensure his customers were legitimate; in fact, he told the DEA
about the sales of 3.5 million pills to the unregistered customer.

But the DEA cited the sale as one of the grounds for rejecting NVE's
application, effective December 1999. Mountain Express The DEA had the
power to review records of companies registered to sell
pseudoephedrine and ephedrine, but the biggest prosecutions of illegal
chemical sales seldom arose from routine audits.

When the DEA shut down suppliers, it frequently came after a massive
volume of their products had made their way to meth labs. The most
wide-ranging investigation after the pseudoephedrine law was enacted,
for example, was initiated not by the DEA but by an alert security
officer at a Federal Express office in Los Angeles. In September 1999,
the officer opened a suspicious box and found thousands of
pseudoephedrine pills.

When the recipient arrived, the FedEx employee tailed him to his
destination and called the DEA, according to an investigator's
affidavit filed in federal court. The package was sent by Hassan
Zaghmot, an Aurora, Colo., resident whose application to sell
pseudoephedrine was approved by the DEA in July 1998. After receiving
his license, Zaghmot fabricated an elaborate paper trail showing
shipments to legitimate customers, according to government testimony.
However, it proved unnecessary because the DEA didn't check his
records until after the FedEx tip. The ensuing investigation of
Zaghmot, dubbed Operation Mountain Express, revealed a national web of
deception.

DEA officials said businesses across the country had obtained DEA
pseudoephedrine permits to form a 10-man syndicate called "the
Commission" with Zaghmot. Its purpose, according to the DEA, was to
set black-market prices and coordinate shipments. By the time the
agents shut down the ring in 2000, officials said, the Commission and
its customers had moved an estimated 3 metric tons of pills to meth
labs -- enough for 36 million doses of meth at street purity. Mitchel
Krause, attorney for a Florida man convicted of illegally selling
Zaghmot's and Narog's pseudoephedrine, said the DEA did little more
than rubber-stamp the licenses of such wholesalers. He said the
wholesalers appreciated that DEA officials were not watching closely.
"I don't know if they looked the other way," Krause said of DEA
officials, "or whether they were just negligent in what they did.
"Maybe they didn't think the defendants would figure it out." Cultural
divide The DEA has always been divided on the importance of
controlling synthetic drugs and their ingredients. The job of chemical
control fell to civilian employees called diversion investigators.
They had no authority to serve warrants, pay informants or claim overtime.

Agency veterans say the door-kicking, Mafia-infiltrating special
agents of DEA legend held meth in low esteem; they thought even less
of unarmed bureaucrats. The funding flowed accordingly. John Buckley,
a retired diversion investigator, recalled watching an old-timer at
DEA headquarters weighing the promotion of an agent who had made a
career busting amphetamine dealers. "If it ain't heroin," Buckley
recalled the reviewer saying, "he ain't getting the grade." Gene
Haislip, head of the DEA's Office of Diversion Control from 1980 to
1997, said he once phoned Florida agents about a 1-ton load of
ephedrine powder headed to California by truck. "You're sending us out
to check on some (expletive) powder, when we're up to our ears in
cocaine?" Haislip recalled the Florida agents saying. "We don't have
time to do that." The load was found only because a New Mexico state
trooper happened to stop the truck on a traffic violation. "They were
working heroin, cocaine traffickers, the mob, organized crime, big
cases," said Portland agent Debora Podkowa, describing her early
contacts with other DEA offices concerning East Coast chemical
suppliers. "They looked at what we did in the West as 'kiddie dope.' "
So deeply were these attitudes ingrained, when lawmakers offered money
for 100 new chemical investigators and agents in 1989, the Justice
Department declined, according to congressional records.

Haislip's office warned in 1992 that short staffing would allow for
only "minimum fulfillment" of the DEA's responsibility to control the
chemical trade. The agency now spends about $20 million a year --
about 1 percent of its $1.7 billion budget -- to monitor all
manufacturers, importers and suppliers of drug precursor chemicals.

It deploys 100 people to track 3,000 companies. By comparison, the
agency fields more than 4,500 special agents to catch drug dealers.
Internal and external management critiques repeatedly flagged the
agency's ambivalence toward chemical control and the role of diversion
investigators over three decades.

By the late 1990s, the agency was fighting lawsuits from 250 current
and former diversion investigators. The investigators alleged their
bosses routinely called on them to do the same criminal work as
special agents, without the benefits or pay. "The special agents
always get the cars and best equipment," said John Coleman, a retired
DEA chief of operations and former head of the agency's Boston and
Newark, N.J., field divisions.

Diversion investigators "are the 9-to-5 crew. They get what's left
over." "Swimming with sharks" While diversion investigators fought
internal battles over their proper place within the DEA, the agency
faced pressure from the outside to rein them in.

A trade group alleged harassment when a member was subpoenaed for
refusing to answer parts of a 34-question DEA application. A
mail-order business said the DEA was intruding on its customers'
privacy by demanding their names and addresses. The U.S. Small
Business Administration warned the DEA that the registration process
"could have a tremendous impact" on an important segment of the
economy. Congress proposed in July 1998 to reduce the penalty for
failing to report or keep proper records to $500 from $25,000. The
Clinton administration assured lawmakers there was no need: The DEA
did not plan to punish chemical registrants. Mary Lee Warren, deputy
assistant attorney general, testified that most chemical diversion
investigations resulted in "at most, a letter of admonition." DEA
officials were aware of the concerns.

>From the beginning, they had pushed back the deadline for registering
and allowed companies to sell pseudoephedrine while the DEA reviewed
their applications. Later, they lowered the registration fee to $116
from a proposed $595. Headquarters officials asked field offices to
report monthly how many companies were processed. In the field,
investigators recognized that rejecting a company could create huge
delays.

Applicants could contest rejections before one of the agency's three
administrative law judges, who also heard appeals filed by the
nation's 1 million registered doctors and retail pharmacies. Hearings
took six months to schedule, and a final decision could take two
years. Diversion investigators experienced in regulating prescription
drug sales found themselves confronting an entirely different
clientele. "Now, all of a sudden, we've got some guy operating out of
his garage," recalled Detroit investigator Jim Geldhof. "He says, 'I'm
handling pseudoephedrine, and I'm going to sell to these gas
stations.' "In a way," Geldhof said, "we were kind of swimming with
the sharks with these guys." Meanwhile, staffing was limited.

Agency officials ultimately decided to devote only six hours to
investigate each applicant, after initially estimating 14 hours was
needed.

For follow-up audits, the agency could spare the equivalent of six
people to check up on the nation's 3,000 DEA-registered distributors.
"With the volume we were receiving, just a flood of applications in
'97, the perceived pressure was on to get them over, get them done,"
said Marsha R. Jones, a DEA diversion program manager working in
Detroit at the time. Learning experiences Operation Mountain Express,
the investigation that began with a tip from FedEx, ended in July 2000
with the arrest of 140 people accused of supplying pseudoephedrine to
Mexican drug cartels operating in California. Days later, Attorney
General Janet Reno held a news conference to tout it as a DEA success
story. "This operation should send a message," Reno said. ". . .
Whether you are a dealer, a manufacturer, or one who makes it all
possible by providing the chemical ingredients, you will be held
accountable." Tandy, then a top narcotics attorney under Reno, was
livid.

She noted that the DEA itself had licensed many of the people charged
with supplying pseudoephedrine to meth traffickers. According to
people familiar with the case, Tandy posed a steely question to DEA
officials afterward. How, Tandy asked, could you let this happen?
Today, Tandy runs the DEA. President Bush chose her in 2003 to be the
first woman to lead the agency, part of the Justice Department. DEA
officials, federal prosecutors and state regulators say Mountain
Express made the agency more skeptical of people seeking to sell
pseudoephedrine. Frank Sapienza, a retired DEA chemicals official,
said the agency's approach toward applicants used to be "looking at
the glass as half full, instead of half empty." Now companies must
show a good reason for selling the product, said Geldhof, the Detroit
investigator. "We really are looking now to say, 'Unless there's a
really good basis for it, we're going to deny this thing,' " he said.
The agency said it is doing a better job tracking the sales of the
nation's 3,000 registered pseudoephedrine distributors. From 2001 to
2003, the DEA conducted what it called "periodic investigations" of
more than 1,300 of those companies. On average, that meant each
company stood a one-in-seven chance of being visited by an inspector
each year. The DEA said it has moved to revoke or deny licenses to 143
companies. After the Mountain Express case, pseudoephedrine brokers in
the United States began looking for a new, unregulated source of
pills. Canada required no license to sell pseudoephedrine. U.S.
brokers began hauling pseudoephedrine by the truckload from Quebec to
Detroit to Los Angeles. From 1997 to 2001, Canada's legal imports of
pseudoephedrine quadrupled to about 140 metric tons. Under U.S.
pressure, Canada responded in 2003 with a DEA-style licensing system
for pseudoephedrine dealers. The haven provided by Canada demonstrated
that control over the chemicals needed for meth required more than
U.S. regulation. It would also take help from the handful of nations
where pseudoephedrine is made.

News researchers Lynne Palombo and Margie Gultry contributed to this report.