On September 26, 2018 Judge Michal A. Schipp of the U.S. District Court for New Jersey largely denied the defendants’ motions to dismiss, allowing investors’ securities and New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO) claims to move forward in a direct action against Valeant Pharmaceuticals International, Inc. and certain of its senior executives.

Case Background

On January 2, 2018, several New York City Pension Funds and Retirement Systems filed a securities and New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO) direct action against Valeant Pharmaceuticals International, Inc., certain of its senior executives, its auditor PricewaterhouseCoopers (PwC), and the brokers on whom they relied when purchasing certain debt securities to recover damages that the plaintiffs suffered from purchasing or acquiring Valeant stock and bonds between January 3, 2013 and March 14, 2016.

The New York City Pension Funds and Retirement Systems had retained Cohen Milstein to pursue this direct action on their behalf rather than remain passive class members in the pending securities class action, Potter v. Valeant Pharmaceuticals International, Inc. et al., Case No. 3:15-cv-07658, U.S. District Court, District of New Jersey. As a result, they are able to pursue additional claims not pursued by the class, including the New Jersey RICO claims.

Plaintiffs’ allege that beginning in 2008 Valeant, under the direction of its new CEO, Michael Pearson, its senior executives, its auditor, PwC, and others were engaged in an elaborate enterprise designed to portray Valeant to investors as a drug manufacturer that achieved sustainably high “organic growth” in profits, revenue, and valuation due primarily to improved marketing. Specifically, Valeant’s scheme involved price gouging by acquiring drug manufacturers and then massively increasing the prices of their newly-acquired drugs. These price hikes were possible because Valeant created a captive pharmacy network, through Philidor, a Pennsylvania-based mail-order pharmacy founded in 2013 with the assistance of Valeant, that pursued a host of illegal and deceptive practices to help Valeant avoid the substitution of generic drugs, including altering physician prescriptions and automatically refilling prescriptions that patients neither requested nor needed. Valeant then misreported the revenue it collected, deliberately concealing, for example, its ownership and control of Philidor from regulators, ultimately leading to the restatement of Valeant’s audited financial statements. The scheme orchestrated by this “Valeant Enterprise” slowly began to unravel in September 2015, when reports revealed that Congress was inquiring into Valeant’s drug pricing practices. The defendants fought back for months with a campaign of misinformation, but in the end, the true nature and scope of Valeant’s deceptive practices was revealed over a period of several months, causing a fall in Valeant shares by more than 90% and destroying over $80 billion in Valeant’s market capitalization. The Valeant Enterprise’s misconduct was so widespread and its impact so devastating that commentators have dubbed it the “Pharmaceutical Enron.”

Valeant remains the focus of several government investigations, including investigations by the U.S. Securities and Exchange Commission (SEC), the State of Texas, the State of North Carolina, and both houses of Congress, as well as a criminal probe by the U.S. Department of Justice. On May 22, 2018, a jury in federal court in Manhattan convicted a former senior executive at Valeant, Gary Tanner, and the former CEO at Philidor, Andrew Davenport, of criminal charges of fraud and conspiracy in connection with the massive scheme to fraudulently sell Valeant drugs.

Case name: New York City Employees’ Retirement System, et. al. v. Valeant Pharmaceuticals International, Inc., Case No. 3:18-cv-00032, U.S. District Court, District of New Jersey.