Ex-Valeant Official Says He Suspected Secret Financial Stake

(Bloomberg) -- A former Valeant Pharmaceuticals International Inc. executive told a jury how he became concerned that one of his senior directors had a secret financial interest in a mail-order pharmacy that did business with the drug company.

Laizer Kornwasser, one the government’s star witnesses in the fraud and money-laundering trial of Gary Tanner and Andrew Davenport, the former head of Philidor Rx Services LLC, took the witness stand Monday in Manhattan federal court. He said Tanner wasn’t following through on his responsibility to find additional mail-order pharmacies with which Valeant could do business, suggesting he wanted to keep all of the business at Philidor.

“Hey, maybe Gary has a financial stake in this and we don’t know," Kornwasser said in a secretly recorded conversation with Michael Pearson, Valeant’s then-chief executive officer, that was played in court. Kornwasser could be heard telling the CEO that he knows the idea sounds "crazy." Prosecutors didn’t play Pearson’s response.

Tanner is accused of taking a $9.7 million kickback from Davenport after manipulating Valeant into paying $133 million in 2014 for an option to buy the mail-order pharmacy. The scandal over Valeant’s relationship with Philidor erupted the next year, causing its stock to plummet and leading to the exit of top executives and board members.

The case, filed in 2016, helped explain how Valeant became linked to Philidor, which the pharmaceutical giant secretly controlled and used to increase sales. Valeant disclosed the link in October 2015, sparking questions about its transparency and business model.

Kornwasser said he struck a deal with prosecutors to testify against Tanner in exchange for a court order that his testimony can’t be used against him by the government. He said he requested the so-called immunity order out of an "abundance of caution" and didn’t do anything wrong. Kornwasser, who hasn’t been accused of wrongdoing, also said he planned to invoke his Fifth Amendment right against self-incrimination at times during his testimony, without elaborating.

The former executive, who received a Harvard MBA and dabbled in investment banking before joining the pharmaceuticals industry, said he grew suspicious of Tanner and ultimately decided not to back Valeant’s option deal with Philidor.

Prosecutors showed Kornwasser numerous emails between him and Tanner in which the defendant indicated he was taking various steps to seek out new mail-order pharmacies -- something that Kornwasser considered to be a priority to mitigate risk.

"I did not want Valeant to have all its eggs in one basket," Kornwasser testified.

‘Brian Wilson’

Instead, Kornwasser said, Tanner appeared to use his research into other mail-order pharmacies to help Philidor prevail over competitors. Tanner used an alias email account under the name Brian Wilson in those exchanges, according to copies shown in court, and Kornwasser said he wasn’t aware of the pseudonym and didn’t approve it.

One such email between "Brian Wilson" and Davenport discussed competitor Irmat Pharmacy’s efforts to gain a foothold in the business -- exactly the kind of development Valeant would have wanted Tanner to foster. But the men instead discussed how they want to "bury" Irmat.

Kornwasser also testified he became concerned that Tanner was too close to Philidor after Tanner said he was adjudicating claims for the mail-order company -- something he said a manufacturer shouldn’t be involved in because it requires the handling of personal health information.

The defense argues that Kornwasser fabricated his concerns about Tanner in order to deflect attention from his involvement in Valeant’s practice of sending large quantities of product to Philidor "to make numbers," as defense attorney Howard Shapiro put it.

"He’s involved in conduct that the government might see as impermissible channel stuffing," Shapiro said in court.

During the cross-examination, Shapiro questioned Kornwasser extensively about Valeant’s relationship with Philidor, presenting emails and meeting notes indicating the manufacturer was aware of Tanner’s involvement with the mail-order company and took no actions to punish him.

The case is U.S. v. Tanner, 17-cr-00061, U.S. District Court, Southern District of New York (Manhattan).

©2018 Bloomberg L.P.