Are more charges on the way in Valeant-Philidor kickback case?

Valeant
Authorities may be looking at whether former executives at Valeant and Philidor could testify against their superiors in a fraud and kickbacks case.

Last week, U.S. federal authorities charged former Valeant exec Gary Tanner and former Philidor CEO Andrew Davenport with engineering a multimillion-dollar fraud and kickback scheme. But those charges may just be the beginning.

Authorities may be looking at whether they can turn the pair into cooperators who could testify against their superiors, Bloomberg reports—and the way lawyers for the charged execs paint the picture, those superiors weren’t in the dark.

Shortly after charges were filed, Davenport’s attorney characterized Valeant’s management team as “highly sophisticated and active,” as quoted by the news service, while Tanner’s attorney said his client “regularly communicated to his superiors what he was doing,” adding that “he was charged for doing his job.”

The saga began last October, when a short-seller accused Valeant of using now-dead specialty pharmacy Philidor to inflate its top line. In the days and months that followed, the drugmaker acknowledged that it had purchased an option to acquire the pharmacy and that it had incorrectly booked shipments to Philidor as revenue. After restating its financials to amend a $58 million mistake, Valeant accused then-CFO Howard Schiller of “improper conduct” that he denied.

However, the charges so far leveled by the U.S. Attorney for the Southern District of New York, Preet Bharara, claim the pair tried to defraud Valeant itself. Tanner steered Valeant’s business toward Philidor, and when Valeant forked over large sums of cash to Philidor for landing sales targets, Davenport took a cut and then sent millions Tanner’s way, according to the accusations.

Tanner also scored big when Valeant paid for the option to acquire Philidor, the federal complaint says. Of the $100 million Valeant paid, Davenport ultimately pocketed $40 million and kicked back $10 million to Tanner, who brought the potential deal to then-CEO J. Michael Pearson and Schiller in a meeting with Davenport.

But “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,” attorney Michael Bowe, who isn’t involved in the matter, told Bloomberg. “The answers to those questions will determine how far up the totem pole the criminal case goes.”

The big question: Whether they’ll go all the way up to former lead execs Pearson and Schiller. The complaint mentions “Executive 1”—a label that Bloomberg’s sources say refers to Tanner’s boss Laizer Kornwasser, one of three group chairmen to report directly to Pearson. As FBI Special Agent Ryan Redel wrote, after visiting Philidor, Executive 1 harbored concerns that Tanner was managing Philidor, rather than acting as an adviser, and that he questioned whether Tanner had financial interest in Philidor’s performance. But it’s unclear whether he reported those concerns to Pearson.

Separately, last month, Bloomberg reported that U.S. prosecutors were building an accounting fraud case against the embattled Canadian drugmaker and taking a close look at Pearson and Schiller’s actions.