FORMER VALEANT EXECUTIVE AND FORMER PHILIDOR CEO CHARGED IN
MANHATTAN FEDERAL COURT FOR ILLEGAL FRAUD AND KICKBACK SCHEME
Kickbacks Paid Out of Valeant Corporate Funds Spent on Philidor
Option Were Laundered Through Secret Shell Companies
Preet Bharara, the United States Attorney for the Southern
District of New York, and William F. Sweeney Jr., the Assistant
Director-in-Charge of the New York Field Office of the Federal
Bureau of Investigation ("FBI"), announced today the arrests of
GARY TANNER, a former executive at Valeant Pharmaceuticals
International, Inc. ("Valeant"), and ANDREW DAVENPORT, the former
Chief Executive Officer ("CEO") of Philidor Rx Services LLC
("Philidor"), for engaging in a multimillion-dollar fraud and
kickback scheme. TANNER was arrested in Gilbert, Arizona, and will
be presented later today before a Magistrate Judge in Phoenix.
DAVENPORT was arrested this morning in Haverford, Pennsylvania, and
will be presented later today before a Magistrate Judge in
Philadelphia.
U.S. Attorney Preet Bharara said: "Today, we charge corporate
fraud at Valeant Pharmaceuticals. Gary Tanner, a former Valeant
executive, and Andrew Davenport, the CEO of Philidor, allegedly
concocted a fraudulent scheme to illegally use Philidor as a
vehicle for personal profit and self-dealing. Their alleged
kickback scheme illegally converted Valeant shareholder money into
their own personal nest eggs. As alleged, while purporting to be
arms-length business counterparts, the two men were, in fact,
partners in crime."
FBI Assistant Director-in-Charge William F. Sweeney said: "As
shareholders, we should be able to put our faith in those
responsible for making decisions on behalf of our investments. We
should be able to rely on them for placing our best interests above
their own. But as evidenced by today's charges, our right to honest
services is sometimes exploited by those who engage in kickback
schemes that pose significant risks to investors."
As alleged in the Complaint unsealed today in Manhattan federal
court:[1]
Valeant is a publicly traded pharmaceutical manufacturer
headquartered in Canada, with its principal place of business in
New Jersey. Philidor was a specialty mail-order pharmacy that was
formed in or about January 2013 with the assistance of Valeant,
including the provision of financing, personnel, and supervision.
During the course of Philidor's existence, at least 90 percent of
the drugs dispensed by Philidor were Valeant-branded drugs.
TANNER was the Valeant executive primarily responsible for the
Philidor relationship, as well as Valeant's alternative fulfillment
("AF") program more generally. Valeant's AF program attempted to
cause doctors to prescribe, and patients to purchase, Valeant
Pharmaceuticals instead of generic substitutes or alternatives by
helping obtain insurance coverage for those drugs or providing
other incentives for prescription and purchase of Valeant drugs. As
part of his work at Valeant, TANNER interacted directly with
Philidor's executives, including DAVENPORT, and senior Valeant
executives.
Despite being well compensated by Valeant to represent its
interests, TANNER used Valeant human and financial resources to
benefit Philidor and its largest owner, DAVENPORT, in a variety of
ways, including by arranging for Philidor to receive $2 million in
Valeant financing, as well as the support of numerous Valeant
staff, including a Valeant-paid sales force that was dedicated to
promoting sales through Philidor. DAVENPORT recognized the
importance of TANNER's support to Philidor's success, stating in an
email to TANNER concerning Philidor: "We both know that this
endeavor would face a nearly insurmountable uphill struggle to
succeed in the present Valeant environment without your confident
support and the efforts of your team."
Some of TANNER's actions benefiting Philidor placed Valeant and
its shareholders at risk. Among other things, TANNER resisted
efforts to diversify Valeant's AF program to include other
commercially available alternatives to Philidor, increasing
Valeant's dependence on Philidor and what is known as "payor risk,"
i.e., the risk that actions by insurers and other payors concerning
Philidor could adversely affect Valeant's financial performance.
When asked directly by senior Valeant executives whether he had a
financial interest in Philidor, TANNER falsely denied having any
such interests.
In the fall of 2014, TANNER and DAVENPORT took advantage of
Valeant's dependence on Philidor to help orchestrate Valeant's
agreement to purchase an option to acquire Philidor (the "Option
Agreement") at a cost to Valeant shareholders of almost $300
million, including $100 million in up-front payments, a $33 million
time-based milestone payment, and potential future
multimillion-dollar sales-based milestone payments.
Even while TANNER was repeatedly certifying that he was in full
compliance with Valeant's Standards of Business Conduct, which
prohibited any conflicts of interest without full disclosure and
approval by company management, TANNER and DAVENPORT were making
preparations for TANNER to receive multimillion-dollar kickbacks
out of the sums paid by Valeant for the Philidor option. Among
other things, TANNER and DAVENPORT set up shell companies and shell
company bank accounts to be used to launder and distribute the
kickbacks. While these preparations were underway, TANNER served as
an adviser to his employer Valeant in its negotiations with
DAVENPORT over the Option Agreement, even while he secretly advised
DAVENPORT on his negotiations with Valeant using a secret Philidor
email account that TANNER maintained in the name of "Brian
Wilson."
When the Option Agreement was signed in December 2010, Valeant
sent $100 million to the bank accounts of the beneficial owners of
Philidor, including DAVENPORT; that sum was followed soon
thereafter by the $33 million time-based milestone payment. Over
$40 million of those sums were sent to entities that DAVENPORT
controlled, including to an entity called "End Game LP." DAVENPORT
kicked back close to $10 million of that sum to TANNER. Those sums
were laundered through shell company bank accounts, including a
company TANNER had created in the name of Befrielse Consolidated,
LLC ("Befrielse"). TANNER used the kickback funds to purchase a new
home, to pay for personal expenses, retire debts, and make
investments, among other things. DAVENPORT used his share of the
proceeds to purchase tens of millions of dollars in securities and
to purchase luxury goods and items, including the installation of a
$50,000 custom wine cellar.
After the Option Agreement was executed, TANNER continued to use
his position at Valeant to advance the interests of Philidor and
DAVENPORT, including by expanding the number of Valeant products
sold through Philidor and resisting Valeant's efforts to collect
cash from Philidor that Valeant was entitled to collect. In
communications concerning the scheme, using TANNER's secret Brian
Wilson email account, DAVENPORT discussed with TANNER how TANNER
would secretly continue to promote DAVENPORT's interests, even
while he purported to represent Valeant's interests as the Valeant
executive responsible for Philidor. Among other things, DAVENPORT
stated that he pictured his and TANNER's "butch and sundance ride
into the sunset (or off the cliff as in the flick)," to which
TANNER responded, using the secret Brian Wilson account: "[G]ave me
a good chuckle when I just saw it. Will have to keep playing the
game :)."
Neither the nature of Valeant's relationship to Philidor, nor
Valeant's increasing dependence on Philidor to achieve its sales
and profitability goals, was disclosed to the public by Valeant
until investor websites and news organizations revealed suspect
aspects of Philidor's operations and Valeant's connection to
Philidor in or about October 2015. Following and in connection with
these revelations, several insurers and other payors terminated
their contracts with Philidor, resulting in realization of the
payor risk that senior executives at Valeant had sought to avoid by
diversifying away from Philidor, and Valeant's stock price declined
dramatically.
* * *
TANNER, 39, of Gilbert, Arizona, and DAVENPORT, 48, of
Haverford, Pennsylvania, are each charged in four counts: one count
of conspiracy to commit honest services wire fraud; one count of
honest services wire fraud; one count of conspiring to violate the
Travel Act; and one count of conspiring to commit money laundering.
Counts One, Two, and Four each carry a maximum sentence of 20 years
in prison. Count Three carries a maximum sentence of five years in
prison.
The maximum potential sentences in this case are prescribed by
Congress and are provided here for informational purposes only, as
any sentencing of the defendants will be determined by the
judge.
Mr. Bharara praised the work of the FBI. He further thanked the
Securities and Exchange Commission for its cooperation and
assistance in this investigation. He added that the FBI's
investigation was ongoing.
The charges were brought in connection with the President's
Financial Fraud Enforcement Task Force. The task force was
established to wage an aggressive, coordinated and proactive effort
to investigate and prosecute financial crimes. With more than 20
federal agencies, 94 U.S. attorneys' offices, and state and local
partners, it is the broadest coalition of law enforcement,
investigatory and regulatory agencies ever assembled to combat
fraud. Since its formation, the task force has made great strides
in facilitating increased investigation and prosecution of
financial crimes; enhancing coordination and cooperation among
federal, state and local authorities; addressing discrimination in
the lending and financial markets; and conducting outreach to the
public, victims, financial institutions and other organizations.
Since fiscal year 2009, the Justice Department has filed over
18,000 financial fraud cases against more than 25,000 defendants.
For more information on the task force, please visit
www.StopFraud.gov.
This case is being handled by the Office's Securities and
Commodities Fraud Task Force and the Complex Frauds and Cybercrime
Unit. Assistant U.S. Attorneys Howard Master, Robert Allen, Richard
Cooper, and Ian McGinley are in charge of the prosecution.
The allegations contained in the Complaint are merely
accusations, and the defendants are presumed innocent unless and
until proven guilty.
16-304
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(END) Dow Jones Newswires
November 17, 2016 14:30 ET (19:30 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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