(Bloomberg) -- The legal woes that caused investors to flee Valeant Pharmaceuticals International Inc. a few years back are about to be publicly dissected for the first time as a former executive accused in a multimillion-dollar fraud goes on trial in Manhattan.
Federal prosecutors allege Gary Tanner, a onetime senior director at Valeant, conspired with Andrew Davenport, the ex-chief executive officer of a mail-order pharmacy, to secretly steer the drugmaker’s business to the retailer in exchange for massive financial kickbacks.
The former business partners, who have denied wrongdoing, appeared Wednesday in Manhattan federal court as defense attorneys and prosecutors selected a jury and prepared to give their opening statements. The trial before U.S. District Judge Loretta Preska is expected to last three to four weeks.
Valeant was a hedge-fund favorite before probes into its business practices and alleged price gouging caused the stock price to collapse and pushed Chief Executive Officer Michael Pearson out the door. Bill Ackman’s Pershing Square Capital Management sold its stake at a loss of almost $4 billion. The shares peaked at $346 in 2015 and now trade around $23.
In the case against Tanner and Davenport, the former CEO of Philidor Rx Services LLC, Valeant is portrayed as a victim. The company, the U.S. claims, was deprived of Tanner’s "honest services," which is part of the alleged conspiracy. The men were arrested in November 2016 and charged with fraud and money laundering.
Tanner and others at Valeant helped Davenport create Philidor in January 2013. Tanner then allegedly conspired with Davenport to push Valeant business toward the mail-order pharmacy and cut out Philidor’s rivals. Davenport ultimately earned more that $40 million under the arrangement, and sent $10 million back to Tanner in a “concealed kickback” scheme, the U.S. claims.
Tanner, when asked by his managers at Valeant about his relationship with Philidor, allegedly denied there was any conflict. In emails between the two men, Davenport invoked images of Butch Cassidy and the Sundance Kid, saying the two would “ride into the sunset” together.
Tanner used the name “Brian Wilson” to send emails related to the scam, the U.S. says. Those emails are expected to be central to the government’s case.
The 2016 complaint against the men helped explain how the pharmaceutical giant became linked to Philidor, which Valeant secretly controlled and used to increase sales. Valeant disclosed the link in October 2015, beginning a long fall in the share price, sparking waves of questions about the company’s transparency and business model, and leading to accounting restatements and the exit of top executives and board members.
Defense attorneys have argued in recent court filings that former Valeant employee Alison Pritchett, who later joined Philidor as a senior manager, should be granted immunity by the government so she could testify in the trial. The lawyers said Pritchett would be able to testify that Tanner’s use of the alias email account -- described by the defense as the "centerpiece" of the U.S. case -- was in-line with business practices and wasn’t a secret. Pritchett could also testify that there were no viable alternatives to Philidor with which Valeant could have done business, the lawyers said.
But in a twist, Pritchett asserted her Fifth Amendment rights before the trial and declined to testify unless she was granted immunity, the government said in a May 1 court filing. That prompted defense lawyers to file a last-ditch request for a court order that would have forced the U.S. to grant Pritchett immunity.
On Wednesday, while potential jurors were at lunch, Preska turned down the defense, saying the government still has ongoing "good faith investigations" relating to Pritchett. The judge also said that the business reason behind the creation of the alias account was less important than how Tanner used it, making Pritchett’s testimony less relevant.
Pritchett’s attorney, Richard Janis, said the Fifth Amendment is intended to protect innocent people and that his client is only a "subject" of the investigation because her work at the company falls within the scope of the ongoing government probe. Wednesday’s ruling assures Pritchett won’t testify, he said.
"The government has told me on more than one occasion that they have no information at this point that would lead them to conclude that she has any criminal exposure," Janis said in a phone call. "No responsible defense attorney would allow his client to testify under those circumstances without immunity."
The case is U.S. v. Tanner, 17-cr-00061, U.S. District Court, Southern District of New York (Manhattan).
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