Former Valeant and Philidor Executives Charged in Fraud and Kickback Scheme

The kickbacks were laundered through secret shell companies

The U.S. Department of Justice and Federal Bureau of Investigation have announced the arrests of Gary Tanner, a former executive at Valeant Pharmaceuticals International, Inc., and Andrew Davenport, the former Chief Executive Officer (CEO) of Philidor Rx Services LLC, for engaging in a multimillion-dollar fraud and kickback scheme. Each man is charged with 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.

The two men “allegedly concocted a fraudulent scheme to illegally use Philidor as a vehicle for personal profit and self-dealing,” said U.S. Attorney Preet Bharara. “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.”

The complaint, which was unsealed November 17 in Manhattan federal court, describes the background, the investigation, and the alleged crimes, summarized below:

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 Philidor’s existence, at least 90% 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 tried to cause doctors to prescribe, and patients to purchase, Valeant Pharmaceuticals’ products 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 resources to benefit Philidor and its largest owner, Davenport, in a variety of ways. He arranged 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 benefitting 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 under way, Tanner served as an advisor 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 hidden 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 was sent to entities that Davenport controlled, including 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. 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.

Counts one, two, and four against both men each carry a maximum sentence of 20 years in prison, and count three carries a maximum sentence of five years in prison.

Source: U.S. Department of Justice; November 17, 2016.