Valeant Pharmaceuticals International Inc. signage is displayed on a monitor on the floor of the New York Stock Exchange. (Photographer: Michael Nagle/Bloomberg)

Valeant’s Latest Legal Threat Could Be Especially Costly

(Bloomberg) -- Valeant Pharmaceuticals International Inc. has been selling assets, paying down debt and riding a recovery of its shares from their lowest point last spring. But one big uncertainty -- its potential legal costs -- just got bigger.

Lord Abbett & Co., the mutual fund company, filed a securities fraud lawsuit against Valeant on Wednesday alleging that it bought the drug giant’s debt securities at an artificially high price because of misinformation provided by Valeant. The suit, filed in federal court in New Jersey and alleging violations of New Jersey’s racketeer influenced and corrupt organizations (RICO) law, represents a new and potentially costly legal attack on Valeant, which is already facing lawsuits over alleged manipulation of drug prices.

By invoking the RICO law in New Jersey, the location of Valeant’s U.S. headquarters, Lord Abbett could seek a penalty three times as large as the losses it allegedly sustained from the decline in Valeant’s share price. Federal securities laws don’t allow investors to invoke national RICO laws in comparable shareholder suits.

Various parties have filed RICO suits against Valeant, but only over allegations that the company defrauded them through deceptive business practices, such as overcharging them for drugs. The losses claimed in those RICO cases, in the hundreds of millions of dollars, are small compared with the total of $80 billion in investor losses claimed in Lord Abbett’s RICO suit. The existing securities fraud cases against Valeant, which claim a comparable total of investor losses, don’t contain the RICO threat of treble damages.

If other investors were to follow Lord Abbett’s lead, Valeant’s legal exposure could balloon. In its filings with the Securities and Exchange Commission, Valeant says that the class action suits are without merit and that it intends to fight them.

Valeant, through spokesman Arthur Shannon, declined to comment on the Lord Abbett complaint. Valeant shares declined 4.3 percent to $14.11 at 1:20 p.m. in New York.

The Lord Abbett suit was filed by Kasowitz Benson Torres LLP, which is working with Labaton Sucharow LLP, a class action firm, on the matter.

Legal Challenges

It’s impossible to estimate how much Valeant will ultimately pay out as a result of its voluminous legal entanglements, which include Justice Department and regulatory probes and lawsuits alleging it defrauded its clients and shareholders. 

The new RICO suit could add new pressures to a company that admitted accounting improprieties in 2015 and is grappling with $28 billion in debt. Under an agreement with lenders, Valeant doesn’t need to deduct from its earnings any legal costs up to $500 million in any 12-month period, as long as no single charge exceeds $250 million. Any amount paid to Lord Abbett or other plaintiffs above those figures would reduce earnings as calculated by debt holders.

At the end of the last quarter, Valeant had $162 million reserved to cover “probable and estimable” legal liabilities, settlements and other matters, according to its most recent quarterly filing.

Marc Kasowitz, a partner at the law firm representing Lord Abbett, has served as a personal attorney to Donald Trump for decades, although his involvement in the president’s legal affairs has diminished recently. Michael Bowe, the Kasowitz Benson partner directly involved in the Valeant suit, also counseled the White House this summer on how to handle special counsel Robert Mueller’s probe of Russian interference in last year’s election.

(A previous version of this article corrected the type of Valeant securities owned by Lord Abbett.)