The U.S. Department of Justice announced charges against former Valeant Pharmaceuticals (VRX) and Philidor Rx Services executives for engaging in "a multi-million dollar fraud and kickback scheme."
Both Gary Tanner, a former executive at Valeant, and Andrew Davenport, the former CEO of pharmacy benefit manager Philidor Rx Services LLC will be charged. Tanner was Valeant's executive director of commercial analytics, while Davenport created Philidor.
Both were arrested on charges that they allegedly laundered and stole money that belonged to Valeant shareholders.
"They had, in effect, illegally converted Valeant shareholders' money into their own nest eggs," said Preet Bharara, U.S. Attorney for the Southern District of New York at a press conference on the matter held in New York at noon Thursday.
Valeant had "standards of business conduct" in place that prohibited employees from engaging in business relationships outside of the company. This, though, didn't stop Tanner from allegedly working with Davenport, who promised to pay Tanner $10 million if he pushed Davenport's interest at Valeant.
Davenport also allegedly benefited from Valeant's agreement to pay $100 million for the option to purchase Philidor. Davenport received $40 million from that transaction, which he allegedly put into shell companies.
According to the investigation's findings, an unnamed Valeant executive was suspicious that Tanner held a stake in Philidor. These suspicions were based on Tanner's influence at Philidor and his efforts to advance Philidor's interest within Valeant.
Though the executive asked Tanner if he had any equity interest in Philidor repeatedly, Tanner denied involvement in the company.
Meanwhile, though, Tanner and Davenport allegedly had begun crafting shell companies and bank accounts to "receive and launder" kickbacks in the summer of 2014.
Tanner and Davenport joked via email that they'd be "riding into the sunset together," Bharara said during the press conference.
Tanner and Davenport allegedly cost Valeant shareholders almost $300 million by taking advantage of the company's pre-existing relationship with Philidor, Bharara said.
"Tanner used Valeant human and financial resources to benefit Philidor and its largest owner, Davenport, in a variety of ways," according to the Department of Justice's press release.
Right before the press conference began, Martin Shkreli, who founded Turing Pharmaceuticals, which eventually went under due to price gouging of drugs, weighed in on Valeant via Twitter.
"The victim here is Valeant," Shkreli tweeted. "These guys can try and flip but they basically ripped off [Valeant] Pearson may have thrown them at [the Southern District of New York], even."
Shkreli compared the fraud to Aeropostale's (AERO) case with Christopher Finazzo, its former executive who got eight years in jail for fraud.
Drugmaker Valeant has been under the microscope for its alleged accounting problems and steep price hikes on drugs the company acquired during years of acquisitions fueled by debt. Tanner was ousted earlier this year, as was the company's CFO Howard Schiller. In March Valeant pinned the blame for these issues on both its former CFO and CEO.
"The company, former CEO, former CFO, and current executives have not been charged at this time," Valeant officials said in a statement. "Gary Tanner ceased to be a Valeant employee on September 13, 2015, and Andrew Davenport has never been an employee of the company."
Valeant's shares, which have already taken a massive hit this year, fell another 5.5% on the news, hitting $16.90 per share Thursday morning.
This is after shares tumbled 25% just a week ago, on Nov. 8, when the beleaguered company reported dismal third quarter earnings.
During its third quarter earnings call, the Laval, Canada-based drugmaker didn't only cut its 2016 outlook to a level that the new CFO Paul Herendeen said he "feels good about the quality of."
Herendeen also admitted on the conference call that the company's revenues and Ebitda are anticipated to fall below 2016 levels in 2017-a statement that prompted CEO Joseph Papa to step in to say that the company is "not trying to give '17 guidance."