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Former Valeant Executive and Philidor CEO Charged for Illegal Fraud and Kickback Scheme

Garry Tanner, a former executive at Valeant Pharmaceuticals, Inc., and Andrew Davenport, the former Chief Executive Officer of Philidor Rx Services, was arrested for engaging in a multimillion-dollar fraud and kickback scheme. Tanner was arrested in Gilbert, Arizona, and was presented on Thursday before a Magistrate Judge in Phoenix. Davenport was arrested on Thursday morning in Haverford, Pennsylvania, and was presented later on Thursday before a Magistrate Judge in Philadelphia.

As alleged in the Complaint unsealed on Thursday, November 16, in Manhattan federal court:

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 for the philidor relationship, as well as Valeant’s alternative fulfillment (“AF”) program more generally. Valeant’sAF program attempted to cause doctors to prescribe, and patients to purchase, Valeant Pharmaceuticals instead of generic substituted 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 diretly 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.