Valeant Ex-CEO Wasn't Swayed by Philidor Warning, Witness Says

(Bloomberg) -- Valeant Pharmaceuticals International Inc.’s former leadership approved a $133 million investment in a mail-order pharmacy in 2014 even after being warned of a potentially corrupt relationship at the heart of the deal, an ex-official at the drug manufacturer testified.

The option-purchase agreement with Philidor Rx Services LLC is at the center of the government’s fraud and money-laundering trial of former Valeant executive Gary Tanner and ex-Philidor Chief Executive Officer Andrew Davenport. Tanner, who managed Valeant’s relationship with Philidor, allegedly manipulated his employer into the deal in exchange for a $9.7 million kickback.

Former Valeant official Laizer Kornwasser, the government’s star witness, testified Tuesday under cross-examination that Valeant’s then-CEO Michael Pearson didn’t heed his warning that Tanner may have had a secret stake in Philidor, potentially undermining the prosecution’s portrayal of Valeant as the primary victim in the case.

Pearson "ultimately decided to go forward with the transaction notwithstanding your express concerns, isn’t that correct?" Howard Shapiro, Tanner’s lawyer, asked. Kornwasser, who was Tanner’s boss, agreed.

Kornwasser secretly recorded his 2014 warning to Pearson in a meeting in the CEO’s office; a 15-second snippet was played for the jury Monday. Shapiro noted Tuesday that the jury never got to hear Pearson’s response to the warning, and Kornwasser has said he can’t discuss the conversation.

Kornwasser conceded that he didn’t "resign in protest" after Pearson went ahead with the transaction. Kornwasser also agreed that he and Valeant continued to work closely with Philidor and expanded the number of product lines that would go through the mail-order company.

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, causing its stock to plummet and sparking questions about its business model. Pearson resigned from the Canadian company in 2016.

Defense attorneys on Tuesday sought to undermine Kornwasser’s credibility and honesty by noting that he paid his nanny and housekeeper in cash for 17 years, avoiding employee-related taxes, right up until he began cooperating with the government. Kornwasser, who hasn’t been charged, also admitted that he’d secretly recorded a conversation with his mother while she was in the hospital.

The defense has also argued 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 Shapiro put it. The U.S. says that’s irrelevant.

According to the criminal complaint, Tanner used an alias email account to secretly work against Valeant’s interests and then set up an offshore account to get his kickback from Davenport. The U.S. is expected to wrap up its case Wednesday, at which point the defense lawyers may call their own witnesses.

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

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