Little more than a year ago, the complex relationship between pharmaceutical giant Valeant and Philidor Rx Services, a Pennsylvania-based mail-order pharmacy, first drew the attention of government investigators and the press.  Now, two former executives—once from each company—have been charged by federal prosecutors with multiple counts of fraud and conspiracy.

On November 17, 2016, ex-Valeant executive Gary Tanner and former Phildor CEO Andrew Davenport were arrested and charged in a fraud and kickback scheme that netted the pair over $40 million. U.S. attorney Preet Bharara hinted in a statement issued at the time of the arrests that the investigation is not complete and more arrests may be in the offing.  Bharara went on to say,

"Today, we charge corporate fraud at Valeant Pharmaceuticals. Gary Tanner, a former Valeant, 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. Their alleged kickback scheme illegally converted Valeant shareholder money into their own personal nest eggs. An alleged, while purporting to be arms-length business counterparts, the two men were, in fact, partners in crime."

Additional investigations into Valeant’s business practices, including inquiries by Congress and the Securities and Exchange Commission continue as well.

The complaint itself describes a complex scheme that encompassed multiple shell companies (including the ironically named “End Game LLC”) and unlikely email aliases such as “Brian Wilson,” “Peter Parker” and “Jack Reacher.” 

Tanner was initially hired by Valeant as its Executive Director of Commercial Analytics, but by spring of 2013 had been named the Senior Director (and later Vice President) for Valeant’s “Access Solutions Team,” a rather euphemistic title for a job that entailed providing incentives for insurers, doctors and patients to insist on branded Valeant drugs, even when cheaper generics were available (also known as “alternative fulfillment”).

Tanner and Davenport engaged in an ongoing relationship that ultimately established Philidor as nearly the sole fulfillment outlet for Valeant’s drugs in the alternative fulfillment market (according to the complaint, at least 90 percent of the drugs dispensed by Philidor were Valeant-branded drugs). Tanner, instead of acting in the best interests of his employer, is alleged to have used his position at Valeant to support and provide financing for Phildor.  Tanner dedicated a large percentage of his time and that of his subordinates to building Phildor, despite the fact that he was responsible for Valeant’s alternative fulfillment program as a whole, which included numerous preexisting fulfillment agreements with other companies.  Ultimately, the pair went so far as to invent a false competitor for Philidor’s business and used the threat of losing Philidor as a Valeant-exclusive pharmacy to convince Valeant to sign on to a purchase option agreement with Philidor.

Once the purchase option agreement was signed, the kickback scheme went into operation.  Davenport, who owned nearly 30% of Philidor, received $40 million from the purchase option agreement and related sales-based “milestone payments.” Then, by funneling the money through a series of shell companies and bank accounts, Davenport kicked back $10 million to Tanner.

Once the purchase option agreement was signed, the kickback scheme went into operation.  Davenport, who owned nearly 30% of Philidor, received $40 million from the purchase option agreement and related sales-based “milestone payments.” Then, by funneling the money through a series of shell companies and bank accounts, Davenport kicked back $10 million to Tanner.

The Valeant / Philidor investigation was conducted by the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force involves more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, and is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants and an increasing number of those cases are focused on the drug and pharmacy industry.