2 Companies Learn The Value Of Corporate Honesty

| About: Valeant Pharmaceuticals (VRX)

Summary

It was obvious to me in 2012 that Chesapeake was promising gains it could not deliver.

Anyone who read the Citron report was given ample warning of Valeant's problems.

Ethics should matter in business, and they should matter to investors.

With Chesapeake Energy (NYSE:CHK) Founder Aubrey McClendon under indictment, and investigators surrounding Valeant Pharmaceuticals (NYSE:VRX), it might be a good time to talk about ethics.

The death of McClendon on Wednesday in a single-car accident is a terrible tragedy. But the question remains whether investors should have followed him, and that is what this article will discuss.

When businesses cross an ethical line, it's often the case that other lines will be crossed. Where there is smoke, there is often fire. Not always, but why do investors take the risk?

I had been on Chesapeake since early 2012. Back then it was trading in the mid-$20s. (It rose nearly $1 in Wednesday trade, to $3.70.) The stock actually rose as high as $30 two years after I began writing about it, but I was still willing to directly criticize McClendon while commenters here were calling his stock "one of the best long-term opportunities since Microsoft was in its infancy."

What did I see that others didn't? Heavy costs, for one. McClendon ignored the long-term truth of the oilpatch, its tendency to move quickly from shortage to glut.

Maybe I should have commented about McClendon's alleged business methods, on which he was personally indicted Tuesday, but I didn't have enough evidence to write it. It was a case of what I call my "spidey sense" - when you suspect something, say something.

The same thing was true of Valeant. I read the Citron report last year and started screaming "get out." I even suggested getting out in November, with the price near $90, but the bulls listened to others and the price went to $120 in December.

My timing isn't perfect but my instincts, again, were good. Valeant's business model, more like that of a private equity house than a pharmaceutical company, was at the very least unethical. Buying up drugs, cutting research, raising prices, and moving the profits to other countries got my "spidey sense" tingling again. Yet a lot of investors, some of them very large, have stayed with it and are going down with the ship.

The market's rough justice is often delayed, and thus, in the opinions of many denied. Big players seldom go to jail. They just lose their money, and the money of people they convinced to invest with them. Once the charge is made, investors owe it to themselves to seriously consider taking losses, or risk much larger losses down the road.

Ethics and regulatory regimes exist for a reason. They define lines which, if crossed, lead to actions that actually violate law. Breaking ethical rules isn't illegal, and going up to the ragged edge is just business, everyone has to if they want to survive. But if you don't take such lines seriously, as both a player and an investor, you are asking for trouble.

There are many highly ethical and profitable businesses you can invest in. There are also ethical charges made against businesses that are later proven to be untrue. But your retirement isn't a court of law. When there is smoke, there may be fire. Run away.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.