By Nate Raymond
NEW YORK (Reuters) - A former Valeant Pharmaceuticals International Inc <VRX.TO> executive and the former CEO of mail order pharmacy Philidor Rx Services were arrested on Thursday on charges that they engaged in a multimillion-dollar fraud and kickback scheme.
Federal prosecutors in Manhattan accused Gary Tanner, a ex-senior Valeant director, of secretly working with former Philidor Chief Executive Officer Andrew Davenport to promote the specialty pharmacy's business within the Canadian drugmaker.
The scheme culminated in Valeant agreeing to pay $100 million for the right to buy now-defunct Philidor, resulting in Davenport earning $40 million, $10 million of which he covertly kicked back to Tanner, prosecutors said.
The charges came amid what prosecutors said was an ongoing probe of Laval, Quebec-based Valeant, which has been the subject of a number of recent investigations related to Philidor, including by congressional panels and the U.S. Securities and Commission.
The Federal Bureau of Investigation arrested Tanner, 39, and Davenport, 48, on Thursday morning at their residences in Arizona and Pennsylvania, respectively, authorities said.
Valeant said in a statement that Tanner no longer works for the company and that the charges included allegations that the defendants defrauded the drugmaker. It said it is cooperating with authorities.
Tanner's attorney, Howard Shapiro, in a statement said he planned to prove his client's innocence at trial, saying that he had "been charged with a crime for doing his job." A lawyer for Davenport did not respond to requests for comment.
The development is the latest to hit Valeant, whose stock has plunged more than 90 percent since August 2015 amid intense criticism of its drug pricing and business practices and various investigations.
Valeant, whose biggest investor is Bill Ackman's Pershing Square Capital Management, has disclosed it received subpoenas seeking information related to its ties to Philidor and its accounting treatment for sales by specialty pharmacies.
At a news conference, Manhattan U.S. Attorney Preet Bharara said investigators continued to look for potential corruption and fraud at Valeant that may have harmed shareholders and the marketplace.
"I made it more clear here than even I usually do that the investigation is ongoing," Bharara said. "We're still continuing to look at a lot of different things in connection with Valeant and the relationship with Philidor."
Tanner and Davenport were charged with four counts, including conspiracy to commit wire fraud and conspiracy to commit money laundering in a criminal complaint filed in Manhattan federal court.
Valeant shares fell 5 percent early Thursday after news of the arrests broke. The price later recovered, closing up 0.67 percent, or 12 cents, at $17.98 in trading in New York.
Founded in 2013, Philidor was a specialty mail-order pharmacy formed with Valeant's assistance, prosecutors said. At least 90 percent of the drugs it dispensed were Valeant-branded products, they said.
Valeant's ties to Philidor emerged in October 2015 following a report issued by short-selling firm Citron Research focused partly on Philidor.
Until that month, neither the nature of Valeant's relationship to Philidor nor its increasing dependence on the pharmacy to achieve its sales and profitability goals, had been disclosed to the public, the complaint said.
Following subsequent revelations, several insurers terminated contracts with Philidor, and Valeant cut ties with the pharmacy. Philidor terminated its operations in January.
In March, Valeant announced that CEO Michael Pearson would leave, as the company said a board investigation of its dealings with Philidor found accounting problems dating to December 2014.
Valeant at that time said the committee found that "improper conduct" by former Chief Financial Officer Howard Schiller and the company's corporate controller contributed to the pharmaceutical company's need to restate results.
Schiller, who stepped down in 2015 and left Valeant's board this year, has denied wrongdoing. Lawyers for Pearson and Schiller did not respond to requests for comment on Thursday.
The case is U.S. v. Tanner, U.S. District Court, Southern District of New York, No. 16-mj-7388.
(Reporting by Nate Raymond in New York, additional reporting by Ransdell Pierson in New York and Deena Beasley in Los Angeles; Editing by Dan Grebler and Cynthia Osterman)