At Valeant, All Eyes on Whether Philidor Defendants Acted Alone

  • First U.S. charges may be part of effort to pursue others
  • Executives were sophisticated and active, defense lawyers said

Gary Tanner and Andrew Davenport stand accused of trying to defraud Valeant Pharmaceuticals International Inc. But to hear their lawyers tell it, the two were just doing their jobs, in full view of sharp-minded Valeant executives.

The two are the first to face charges after more than a year of rising scrutiny on Valeant and a federal investigation into the drug company’s relationship with mail-order pharmacy Philidor Rx Services LLC. The lawyers’ comments suggest this won’t be the end of troubles for Valeant or its former executives.

Authorities may be seeing if they can turn the defendants into cooperators who will testify against their superiors. Davenport’s lawyer effectively laid down a marker on the day of the pair’s arrest last week, saying Valeant’s managers were “sophisticated and active.”

“Given Philidor was no secret to Valeant management, and the very serious misconduct that took place, the lower level participants arrested thus far will certainly be asked who among senior management knew what and when,” said Michael Bowe, an attorney at Kasowitz, Benson, Torres & Friedman LLP, who isn’t involved in the matter. “The answers to those questions will determine how far up the totem pole the criminal case goes.”

Attorneys for Davenport and Tanner didn’t respond to requests for comment about their legal strategies. Valeant declined to comment, referring to its Nov. 17 statement that the company continues to cooperate with investigators.

Hidden Kickbacks

Tanner, a senior Valeant executive, worked with others at the drugmaker to help set up Philidor, a pharmacy that distributed Valeant drugs, prosecutors said in federal charges. Davenport was Philidor’s chief executive officer, controlling a large chunk of its equity. Tanner and Davenport engaged in a hidden kickback scheme, prosecutors said: Tanner steered Valeant’s business away from rivals and toward Philidor, they said, and when Valeant handed out big cash payments to Philidor for meeting sales targets, Davenport got a cut and then sent millions of dollars back to Tanner.

Prosecutors’ allegations about the hidden kickback are a new wrinkle to long-running questions about Valeant. The drugmaker disclosed in October 2015 that it controlled Philidor and severed its ties to the pharmacy the same month, raising questions about its transparency and sending its shares plummeting. This year, Valeant restated its earnings to reflect that part of what it had been booking as its own sales had really been a shifting of inventory to Philidor, which was effectively an undeclared arm of the company.

Authorities are looking into potential accounting fraud charges related to Valeant and Philidor, people familiar with the situation have said.

Internal Report

The case the government unveiled last week portrayed Valeant as the victim of fraud by Tanner and Davenport. The government’s investigation has been informed in part by an internal inquiry ordered up by Valeant itself. The drugmaker hired an outside law firm, Kirkland & Ellis LLP, to look into alleged misdeeds involving Philidor. The firm’s findings were shared with authorities, helping them to file charges in the matter relatively quickly, according to a person familiar with the matter.

Kirkland & Ellis declined to comment through Daniel Kahn, a spokesman.

The Valeant investigation continues, Manhattan U.S. Attorney Preet Bharara said on Nov. 17. Federal prosecutors in Manhattan and agents at the Federal Bureau of Investigation in New York have also looked closely at Michael Pearson, Valeant’s former CEO, and Howard Schiller, the ex-chief financial officer, people familiar with the matter have said. Neither man was accused of wrongdoing in the charges unveiled Thursday.

Pearson’s lawyer, Bruce Yannett, declined to comment. Dan K. Webb, an attorney for Schiller, didn’t respond to a request for comment.

Seed Funding

According to the Nov. 17 federal complaint, Tanner approached Valeant managers with the idea of helping to set up Philidor. The pharmacy was founded in early 2013 by Davenport and others, according to the complaint, with Valeant providing seed funding, expertise and some employees.

In the summer of 2013, according to documents released by a U.S. Senate committee, several Valeant senior managers signed off on a “contract approval form” formalizing Philidor’s relationship with the drugmaker, including Pearson and Schiller.

Tanner’s link to Valeant’s CEO was Laizer Kornwasser, who joined the company in January 2013, the same month Philidor was founded. Kornwasser, an executive vice president, was Tanner’s boss, according to a 2013 company presentation. Kornwasser, in turn, was one of three group chairmen who reported directly to Pearson, according to the presentation.

Click here to read more about Laizer Kornwasser

The federal complaint against Tanner and Davenport doesn’t name Kornwasser, but refers to an “Executive 1” who people familiar with the matter said was Kornwasser. Kornwasser, who hasn’t been accused of wrongdoing, didn’t respond to requests for comment by e-mail and telephone.

In the complaint, FBI Special Agent Ryan Redel writes that Executive 1, after visiting Philidor, worried that Tanner appeared to be managing Philidor, not simply advising it. Tanner admitted to his boss that he knew this would be a concern, according to the complaint, and said he had tried to delay his boss’s visit for that reason.

Compliance Concerns

Tanner was asked by his manager whether he had any financial interest in Philidor’s performance and he said he didn’t, according to the complaint. The complaint doesn’t say whether the boss reported his concerns up to the CEO at the time, Pearson. A compliance officer, too, expressed concerns internally about Tanner’s role at Philidor, according to the complaint.

Executives at Valeant continued to support the Philidor relationship. All agreements between the two firms were drafted by legal counsel, Seana Carson, Valeant’s chief compliance officer, told investors in an Oct. 26, 2015 presentation. By October 2014, Valeant executives and board members had visited Philidor, Carson said, adding that the pharmacy’s in-house counsel and head of compliance were hired with input from Valeant.

As Tanner worked closely with Philidor, including steering business away from other specialty pharmacies, the startup became a 450-employee sales force almost exclusively for Valeant, according to the U.S.

Pitch to CEO

In October 2014, according to the complaint, Tanner convened a meeting between Davenport, the CEO and CFO -- who were Pearson and Schiller -- to discuss Valeant’s potential acquisition of Philidor.

Valeant agreed to pay $100 million for the option to acquire Philidor in December 2014, of which Davenport ultimately received $40 million, according to the complaint. That’s when Davenport began secretly kicking back $10 million to Tanner, authorities said.

In the hours after the charges were filed, attorneys for Davenport and Tanner said their clients were innocent, and characterized Valeant’s management team as savvy and hands-on.

“Andy Davenport worked with full transparency and, along with a broad Valeant team, built a best in class pharmacy,” his lawyer, Jonathan Rosen, said in a Nov. 17 statement. “Philidor also benefited Valeant, which is why Valeant and its highly sophisticated and active management team sought to buy it.”

On the same day, Tanner’s lawyer, Howard Shapiro, said his client’s job at Valeant was to expand and promote Philidor.

“He performed that job exceptionally well, greatly benefiting Valeant’s shareholders, and regularly communicated to his superiors what he was doing,” Shapiro said, adding: “He was charged for doing his job.”

— With assistance by Caroline Chen, Neil Weinberg, and Robert Langreth

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