Former Valeant Executive And Former Philidor Ceo Convicted For Illegal Kickback Scheme
$9.7 Million in Illicit Kickbacks Were Laundered Through Secret Shell Companies
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced today the convictions of GARY TANNER, a former executive at Valeant Pharmaceuticals International, Inc. (“Valeant”), and ANDREW DAVENPORT, the former chief executive officer (“CEO”) of Philidor Rx Services LLC (“Philidor”), for engaging in a multimillion-dollar kickback scheme. TANNER and DAVENPORT were convicted on all counts of the Indictment today after a four-week trial before Senior United States District Judge Loretta A. Preska.
U.S. Attorney Geoffrey S. Berman said: “As a unanimous jury has found, Gary Tanner sold his loyalty to Andrew Davenport in exchange for $9.7 million. Tanner was entrusted by his employer to manage Valeant’s relationship with Davenport’s company. Davenport exploited that trust by promising a massive kickback in exchange for betrayal. Unbeknownst to his employer, Tanner became the fox guarding the henhouse. Our commitment to this prosecution shows that corruption of publicly traded companies will be rooted out and met with justice.”
According to the allegations in the charging documents and statements made in court proceedings:
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. 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 responsible for managing Valeant’s relationship with Philidor. TANNER was also responsible more broadly for Valeant’s alternative fulfillment (“AF”) program. Through its AF program, Valeant sought to increase doctor prescriptions and patient purchases of Valeant pharmaceuticals 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.
Valeant and Philidor began negotiations for Valeant to purchase Philidor, and Valeant ultimately purchased an option to buy Philidor (the “Option”) in exchange for $133 million in payments to Philidor’s owners, and the promise of $100 million in additional milestone payments if Philidor were to meet certain sales targets. Despite the duty of loyalty owed by TANNER to Valeant, during negotiations relating to the Option, TANNER and DAVENPORT secretly made preparations for TANNER to receive a multimillion-dollar kickback out of the money that Valeant was going to pay Philidor’s owners for the Option. Among other things, TANNER and DAVENPORT set up shell company bank accounts in order to launder the kickbacks to TANNER. While these preparations were underway, TANNER secretly advised DAVENPORT on his negotiations with Valeant. TANNER did this in contravention of his duties to Valeant and despite the fact that he was also internally advising Valeant in its negotiations with DAVENPORT about the Option.
In addition to secretly helping DAVENPORT negotiate against Valeant in exchange for the promise of a kickback from DAVENPORT, TANNER took other actions to benefit Philidor and DAVENPORT personally, and against the direction of his supervisors at Valeant. For example, TANNER’s supervisors directed him to identify other pharmacies that Valeant could use to distribute its drugs, in order to minimize the risks of overreliance on Philidor. TANNER deceived his supervisors into believing that he was pursuing their direction in good faith when, in fact, he lied about participating in meetings and doing due diligence on potential competitors to Philidor. In addition, TANNER helped Philidor and DAVENPORT secure favorable payment terms.
In order to keep their scheme hidden from Valeant, TANNER often used a Philidor email account that TANNER maintained in the name of “Brian Wilson” to communicate with DAVENPORT. TANNER also pretended to be Brian Wilson in at least one meeting that he and DAVENPORT participated in on behalf of Philidor.
In December 2014, Valeant acquired the Option. DAVENPORT, through two different entities that he controlled, received approximately $50 million of the $133 million received from Valeant. DAVENPORT transferred $9.7 million of that amount to TANNER through a shell company he controlled, and then to a shell company controlled by TANNER, an entity called Befrielse Consolidated, LLC (“Befrielse”). TANNER concealed his receipt of this money from Valeant, in violation of his fiduciary duties to Valeant, and in violation of Valeant’s conflict of interest policies. Prior to receiving the funds, TANNER had repeatedly certified to Valeant 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.
After the Option purchase was completed, TANNER continued to use his position at Valeant to advance the interests of Philidor and DAVENPORT, including by resisting Valeant’s efforts to collect payments from Philidor owed to Valeant and pursuing milestone payments under the terms of the Option in which he secretly expected to share. 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 :).”
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TANNER, 40, of Gilbert, Arizona, and DAVENPORT, 50, of Haverford, Pennsylvania, were convicted of four counts: (1) one count of conspiracy to commit honest services wire fraud, which carries a maximum potential penalty of 20 years in prison; (2) one count of honest services wire fraud, which carries a maximum potential penalty of 20 years in prison; (3) one count of conspiracy to violate the Travel Act, which carries a maximum potential penalty of five years in prison; and (4) one count of conspiracy to commit money laundering, which carries a maximum potential penalty of 20 years in prison.
Mr. Berman praised the work of the Federal Bureau of Investigation, and thanked the Securities and Exchange Commission for its cooperation and assistance.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force and its Complex Frauds and Cyber Crime Unit. Assistant U.S. Attorneys Robert W. Allen, Richard Cooper, and Amanda Kramer are in charge of the prosecution.