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Valeant: Philidor Defendants Did Not Act Alone

|Includes: Bausch Health Companies Inc. (BHC)

A recent bloomberg article www.bloomberg.com/news/articles/2016-11-22/at-valeant-all-eyes-on-whether-philidor-defendants-acted-alone it describes that "[t]he case the government unveiled last week portrayed Valeant as the victim of fraud by Tanner and Davenport."

Without a shadow of a doubt, other Valeant senior executives (i.e. ex CEO or ex CFO) were colluding on a high level with both Gary Tanner & Andrew Davenport, both of whom were recently arrested. The Philidor option agreement was not $100M or $140M like most people may think, it was actually $300M.

According to the arrest report by FBI Special Agent Ryan Redel:

"The Option Agreement also forgave pre-existing obligations of Philidor, including a large line of credit that Philidor had accrued with Valeant as a result of certain large orders that Philidor had placed with Valeant with the participation of Valeant's senior executives at the end of the third quarter of 2014 and immediately prior to execution of the Option Agreement;" and the footnote to that sentence states "In all, Valeant's auditors concluded that the cost to Valeant of the Philidor acquisition approached $300 million."

Did you catch that? That's right, over $100M of "pre-existing "obligations" AKA "large orders" placed at the end of a quarter & right before the option agreement was executed -were basicially immediately forgiven. Who were these senior executives who placed those orders, and what were these orders even? Since the complaint didn't specifcally name Tanner/ Davenport, it's clear other senior execs were involved.

They have material weaknesses in their internal controls, and were still not effective as of 9/30/16. This is a huge red flag, and surprised it is not brought up more often. Their recent 10-Q has an Explanatory Note that says

"As of December 31, 2015, management determined that the Company did not maintain effective internal control over financial reporting due to theexistence of material weaknesses related to tone at the top of the organization and non-standard revenue transactions, particularly at or near quarter ends. As of September 30, 2016, due to the existence of these material weaknesses, management has concluded that the Company's disclosure controls and procedures were not effective. See Item 4 of this Form 10-Q and Item 9A of the 2015 Form 10-K for further information."

Huge red flag- that's right, the auditors put emphasis on "non-standard revenue transactions, particularly at or near quarter ends" on page 3 of the filing. Valeant sure loves engaging in shady transactions near quarter end. Material Weaknesses in internal control basically mean the financials cannot be relied upon, and that cannot be overlooked. Remember GTAT? they too had material weaknesses in internal control & unexpectedly declared bankruptcy.

The FBI complaint (pg 22) then says "On or about December 15, 2014, the day that the Option Agreement was executed, Valeant wired $31,386,370.40 from a bank account in Manhattan to a UBS account in Pennsylvania in the name of End Game LP (the "End Game LP Account"). The End Game LP Account did not have any other funds at the time of this transfer, and in fact was only opened on that date. The next day, on or about December 16, 2014, the entire $31,386,370.40 in the End Game LP Account was transferred by DAVENPORT to another UBS account in the name of an entity called End Game LLC (the "End Game LLC Account") . Both the End Game LP Account and End Game LLC Account listed DAVENPORT as the sole signatory of the accounts, and DAVENPORT'S home address as the addresses of the entities."

Why would $31M be wired to an entity named the "End Game LP"? Unlikely it was even mentioned in the option Agreement. Can you imagine what the bankers were even thinking when they saw that an account not even a day old had $31M wired in and immediately wired out to the "End Game LLC" bank account. There were several other transfers made by Valeant to the "End Game LP" account. Those facts alone prove that several senior executives were colluding to push these transactions through, those type of big transactions simply cannot have been done by just 2 people.

The defendents arrested reported on a routine basis to the ex CEO J. Michael Pearson, and ex CFO Howard Schiller, and likely were involved to cover up these $100M large orders immediately forgiven, and transfers to the End Game.

What's also peculiar is that on the day that Tanner/Davenport were arrested, Valeant issued a press release denouncing the both of them by stating

"The company, former CEO, former CFO, and current executives have not been charged at this time. Gary Tanner ceased to be a Valeant employee on September 13, 2015, and Andrew Davenport has never been an employee of the Company."

- but the FBI complaint (pg 8) says, "TANNER worked at Valeant until his termination in late August 2015. After being terminated by Valeant, TANNER was hired by Philidor, although he began negotiating a consulting agreement with Valeant to continue performing work for Valeant even while serving as a Philidor employee."

Valeant was continuing to have discussions with Tanner about continued employment, even after terminating him?! sure doesn't sound like they were too concerned with his recent behaivor. Valeant simply cannot play the Victim card here, the evidence is overwhelming that other senior executives were involved. The Valeant saga continues...

Supporting Documents

  1. u.s._v._tanner_davenport_complaint_0-1.pdf
  2. Valeant_Comments_On_Issued_Philidor_Criminal_Charg...
  3. Valeant_Ex-CEO__Ex-CFO_Are_a_Focus_of_U.S._Crimina...
  4. ValeantPharmaceuticalsInternationalInc-20161109-10...

Disclosure: I am/we are short VRX.