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`https://www.forbes.com/sites/antoinegara/2016/11/17/two-are-charged-in...
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`NOV 17, 2016 @ 03:30 PM
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`24,734
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`The Little Black Book of Billionaire Secrets
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`Antoine Gara, FORBES STAFF
`FULL BIO
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`Gary Tanner and Andrew Davenport, the former CEO of Philidor Rx Services, have been
`arrested and charged with fraud. Preet Bharara, United States Attorney for the Southern
`District of New York, is accusing Tanner and Davenport of engaging in a "multi-million
`dollar fraud and kickback scheme" against Valeant Pharmaceuticals.
`
`Bharara's charges accuse Tanner, a former Valeant executive, and Davenport of
`fraudulently building Philidor, a Pennsylvania-based specialty pharmacy, through its
`near-exclusive access to Valeant. The complaint alleges Tanner and Davenport colluded
`to make Philidor the de facto sales channel for Valeant, while conspiring to evade
`oversight from Valeant's upper ranks and side-step the company's broader corporate
`policies.
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`It further states Tanner, who was fired by Valeant in 2015, concealed his interest in
`Philidor from the company and Davenport controlled the business through an entity
`called End Game LLC, which connected to his bank account, End Game LP. Ultimately,
`the conspiracy would yield Davenport $40 million and Tanner $10 million.
`
`"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," U.S. Attorney Bharara said in a statement. "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,” he added.
`
`"Valeant Pharmaceuticals International today learned that a criminal complaint was filed
`in relation to Philidor. Gary Tanner and Andrew Davenport were charged in the matter.
`The company, former CEO, former CFO and current executives have not been charges at
`this time," Valeant said in a statement Thursday. "The counts issued today include
`allegations that the charged parties engaged in actions to defraud Valeant as a company.
`Valeant continues to cooperate with all relevant authorities in this matter," it added.
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`ACRUX DDS PTY LTD. et al.
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`EXHIBIT 1560
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`IPR Petition for
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`U.S. Patent No. 7,214,506
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`Two Are Charged In Fraud And Kickback Scheme Against Valeant Pha...
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`https://www.forbes.com/sites/antoinegara/2016/11/17/two-are-charged-in...
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`Valeant Pharmaceuticals International Inc. Photographer: Ron Antonelli/Bloomberg [-]
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`Read More: Forbes Investigates Valeant's Prescription For Disaster
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`Philidor was part of Valeant's alternate fulfillment program, which sought to have doctors
`prescribe Valeant's branded products like Jublia and Solodyn instead of cheaper generics
`by finding price rebates or ways of expanding customers' insurance coverage on scripts.
`The pharmacy, mostly done via mail order, was consolidated by Valeant nearly two-years
`ago in a $100 million option purchase agreement. It now sits at the heart of one of the
`biggest stock collapses since the days of Enron and WorldCom.
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`Valeant became one of the hottest stocks on Wall Street under former CEO J. Michael
`Pearson, who with the backing of activist investors ValueAct Capital and Pershing Square
`sought to upend the pharmaceutical industry through a series of cost-cutting and tax-
`dodging acquisitions. For a brief time Valeant's epic rise made Pearson a billionaire, and
`its stalking of pharmaceutical takeovers helped turn ValueAct and Pershing Square into
`two of the hedge fund industry's hottest funds.
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`But the strategy ultimately failed.
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`Valeant shares have fallen nearly 90% in 14-months and the company narrowly averted a
`default on the $30 billion debt load it picked up during multi-year acquisition spree.
`Former CEO Pearson and his long-serving CFO Howard Schiller are now gone, and in
`their wake lies a laundry list of regulatory and criminal probes. Many of Valeant's
`problems tie to Philidor, where the first criminal charges have been now been leveled.
`Other issues facing the company include scrutiny on its drug price gouging, its financial
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`disclosures, its billing practices and investor lawsuits.
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`But instead of further plunging Valeant into disarray, Thursday's charges may be a
`surprising relief after months of scrutiny and sharp losses.
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`The complaint alleges that as a Valeant employee, Tanner, and his co-conspirator
`Davenport systemically misled the company about Philidor in an effort to keep the drug
`distribution relationship exclusive, generating millions in performance-based payments.
`At times, Valeant senior executives directed Tanner to diversify the company's fulfillment
`programs, mainly Philidor, but the complaint states Tanner resisted those efforts and
`devised a scheme with Davenport to advance their personal interests.
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`"Gary Tanner, the defendant, used his position of trust at Valeant to not only promote
`Philidor, but to resist efforts by Valeant to diversify its [fulfillment] program so that it not
`become overly dependent on Philidor," said Ryan F. Redel, a special agent with the
`Federal Bureau of Investigations, in a complaint unsealed Thursday.
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`Furthermore, it was Tanner, secretly a beneficial Philidor owner, who Valeant's upper
`ranks and board relied on to manage the Philidor program. "Ultimately, we have to trust
`the management team and the people that we have providing oversight (i.e. Gary
`[Tanner], compliance person, etc) to do their jobs and make sure this [i.e. Philidor] is
`running correctly," a Valeant executive wrote to Pearson just before they struck the $100
`million Philidor purchase option in late 2014. Ahead of the deal, Valeant's board toured
`Philidor.
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`Emails uncovered by the FBI, however, indicate Valeant's faith in Tanner and Davenport
`was misguided. Specifically, the suit alleges Philidor pushed Valeant products in an
`uneconomic manner to reach sales milestones, netting Tanner and Davenport millions
`that they spent on homes, investments and even a $50,000 custom wine cellar. As
`Philidor collected heavy performance milestones through 2015, it appears Davenport and
`Tanner were aware of a spiraling scheme to defraud Valeant, which would eventually be
`uncovered as the company took a greater hold over the business.
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`"They are too deep in our sh*t," Davenport said in an email to Tanner, according to the
`complaint. "Can picture our butch and sundance ride into the sunset (or off the cliff as in
`the flick) as our wiggle room/ability to operate independently gets whittled down to
`nothing," the email added.
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`That's exactly what seems to have eventually happened. In August and September of 2015,
`when trying to collect a $25 million performance payment, 80% of which would have
`accrued to Davenport, Valeant CEO Pearson severed communication with Tanner and
`never transferred the funds. Within weeks, Philidor would be revealed in media reports,
`creating a 14-month tailspin for Valeant.
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`"I have learned that 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 about
`October 2015," states FBI special agent Redel. Following these revelations, Valeant
`suffered the "payor risk that senior executives at Valeant had sought to avoid by
`diversifying away from Philidor, and Valeant's stock price declined dramatically," his
`complaint concludes.
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`Philidor is accused of pushing Valeant's costly pharma products through dubious
`distribution and billing practices with insurers and pharmacy benefit managers. Valeant,
`which claims it never owned Philidor, shuttered the business a year ago after PBMs
`including CVS Health and Express Scripts cut ties with it due to what they deemed were
`improper charges. Separately, media reports alleged that Philidor employees doctored
`scripts in order to push Valeant products.
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`“It was Gary Tanner’s job at Valeant to grow and promote Philidor. He performed that job
`exceptionally well, greatly benefiting Valeant’s shareholders, and regularly communicated
`to his superiors what he was doing,” said Howard Shapiro, a lawyer for Tanner at
`WilmerHale. "We will demonstrate his innocence at trial," he added.
`
`“Philidor also benefited Valeant, which is why its highly sophisticated and active
`management team sought to buy it,” said Jonathan Rosen, a lawyer for Davenport. "Mr.
`Davenport earned his success with integrity and hard work and will vigorously defend
`himself and his good name,” he added.
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`"I commend the U.S. Attorney’s office for aggressively pursuing an investigation to hold
`these executives accountable for their corrupt business practices," said Rep. Elijah E.
`Cummings, Ranking Member of the House Committee on Oversight and Government
`Reform. "I have repeatedly requested interviews with Mr. Tanner and several other
`Valeant employees to determine how deep their involvement was with Philidor, but
`Valeant refused to cooperate with Congress and prevented information about their
`relationship from coming to light sooner,” he added.
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`Since Philidor's closure, Valeant's sales and profits have plunged. A review of the unit also
`caused Valeant to restate its earnings after finding $58 million in incorrectly booked sales
`related to Philidor. And now, the business may prompt a series of criminal charges.
`Tanner and Philidor CEO Andrew Davenport have been arrested, meanwhile Bloomberg
`reported earlier in November U.S. Attorney Preet Bharara may bring charges against
`Pearson and Schiller.
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`After initially falling over 5%, Valeant shares were rising slightly in early afternoon trading
`at $17.88. The company hit a high of $262 a share in mid-2015, before the Southern
`Investigative Reporting Foundation uncovered Philidor that October. James Chanos, head
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`of hedge fund Kynikos Associates and a Valeant short-seller, said earlier this week the
`company's collapse may create $40 billion in hedge fund losses, the most in history.
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`Read FORBES' investigation: Prescription For Disaster
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`Hedge Fund ValueAct Capital's Valeant Legacy
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`Bill Ackman Is Now Valeant's Top Holder As Sequoia, T. Rowe Exit
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`Valeant Hands Out Bonuses As Compensation For Challenging Times
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`Valeant Has Its Day In Washington
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`Here's How Much New Valeant CEO Can Make
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`Five Lessons Big Pharma Should Learn From Valeant's Collapse
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`Valeant Plunge Rekindles Memories Of Bill Ackman's Days At The Racetrack
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`Gallery
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`Launch Gallery
`9 images
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