Eli Lilly & Co. will pay a combined $1.42 billion, including the largest criminal fine in history -- $515 million -- to settle charges that it illegally marketed the anti-psychotic drug Zyprexa for off-label use, federal prosecutors announced Thursday.

Zyprexa was approved by the Food and Drug Administration only as a treatment for schizophrenia and bipolar disorder, prosecutors said, but Lilly allegedly set out to market the drug to elderly patients as a treatment for dementia, Alzheimer's, agitation, depression and generalized sleep disorder.

In doing so, prosecutors said, Indianapolis-based Lilly ignored explicit warnings from the FDA that Zyprexa should not be so widely prescribed because of side effects such as weight gain that could lead to obesity and even the onset of diabetes in some patients.

In court papers filed Thursday, Lilly said it has agreed to pay $800 million to settle a spate of whistleblower lawsuits, including $438 million to the federal government and $362 million to states. It will also pay a total of $615 million to resolve the criminal probe, including $100 million in forfeiture, when it pleads guilty to a misdemeanor violation of the Food, Drug, and Cosmetic Act for promoting Zyprexa as a dementia treatment.

Nine whistleblowers -- all former Lilly sales representatives -- will share a reward of more than $78 million from the federal settlement and possibly up to $25 million more in still-to-be-negotiated rewards from the state settlements.

Attorney Michael Mustokoff of Duane Morris, who represents the six whistleblowers first to come forward in 2003, said a confidential deal has been struck among the nine as to how to divide the reward money.

Joining Mustokoff in filing the first suit were attorneys Stephen A. Sheller of Philadelphia and Gary Farmer of Rothstein Rosenfeldt Adler in Fort Lauderdale, Fla. Three later suits were filed by individual whistleblowers in 2005, 2006 and 2007.

Whistleblower suits, also called qui tam actions, are initially filed under seal in federal court and automatically referred to the U.S. Attorney's Office for possible criminal or civil prosecution.

Mustokoff said the Philadelphia U.S. Attorney's Office has become especially popular among qui tam lawyers because the prosecutors here are known to take the cases seriously, pursue them aggressively and produce results, often securing massive settlements for fraudulent schemes that are often national in scope and span several years or more.

In a press conference Thursday, Acting U.S. Attorney Laurie Magid was flanked by more than a dozen lawyers and investigators who had worked on the case, as well as representatives from the attorneys general of five states.

Magid said Lilly knew that its patent for Prozac was expiring and "wanted Zyprexa to be their new blockbuster drug."

Magid said Lilly mounted an "elaborate marketing campaign" and deployed an "army" of sales representatives who were trained to persuade doctors to use Zyprexa for a much larger patient base than the relatively narrow category of schizophrenics and manic depressives.

Because one of Zyprexa's side effects is sedation, Magid said, Lilly instructed its long-term care sales force to tell doctors in nursing homes that Zyprexa would help patients with sleep problems, behavioral issues and dementia.

"They claimed this side effect was a therapeutic benefit, not an adverse event, with the sales slogan '5 at 5,' meaning that five milligrams of Zyprexa at 5 p.m. would help their patients sleep," Magid said.

Zyprexa was approved by the FDA in 1996 and has been Lilly's top seller for years. It brought in $3.5 billion in revenue through the first three quarters of 2008, or roughly $1.5 billion more than the company's second best-seller, the antidepressant Cymbalta.

But the company has taken more than $1.6 billion in charges to settle claims that it improperly marketed the drug. Lilly in October said it expected to pay $1.42 billion to end the investigations. It set aside that amount, or $1.29 per share, in the third quarter, which resulted in the company's first quarterly loss in three years.

Earlier the same month, Lilly agreed to pay $62 million to 32 states and the District of Columbia to resolve accusations it marketed Zyprexa for pediatric care, for use in high doses and for dementia.

Lilly has also resolved more than 31,000 Zyprexa-related products liability claims and other lawsuits and class actions are still pending. A group of insurance companies, unions and others are suing Lilly for billions, saying it broke marketing laws and overcharged for the drug.

Ordinarily, whistleblower suits are litigated entirely in secret for months or even years before going public with the announcement of a settlement.

But in the Zyprexa case, because of a lawyer's e-mail mishap, the public got a rare glimpse behind the scenes in February 2008 when The New York Times reported that Lilly was in potentially 10-figure settlement talks with the Justice Department.

Soon after the Times report was published, the online Portfolio magazine reported that the paper's scoop was the result of an e-mail snafu when one of Lilly's lawyers at Pepper Hamilton in Philadelphia "mistakenly e-mailed confidential information" on the settlement talks to Times reporter Alex Berenson.

Portfolio said the intended recipient of the e-mail was attorney Bradford Berenson at Sidley Austin in Washington, D.C.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.