Valeant’s latest legal threat could be costly

Faces fraud suit invoking U.S. RICO law

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has been selling assets, paying down debt and riding a recovery of its shares from their lowest point last spring. But one big uncertainty — its potential legal costs — just got bigger.

Lord Abbett & Co., the mutual fund company, filed a securities fraud lawsuit against Valeant on Wednesday alleging that it bought the drug giant’s debt securities at an artificially high price because of misinformation provided by Valeant. The suit, filed in federal court in New Jersey and alleging violations of New Jersey’s racketeer influenced and corrupt organizations (RICO) law, represents a new and potentially costly legal attack on Valeant, which is already facing lawsuits over alleged manipulation of drug prices.

By invoking the RICO law in New Jersey, the location of Valeant’s U.S. headquarters, Lord Abbett could seek a penalty three times as large as the losses it allegedly sustained from the decline in Valeant’s share price. Federal securities laws don’t allow investors to invoke national RICO laws in comparable shareholder suits.

Various parties have filed RICO suits against Valeant, but only over allegations that the company defrauded them through deceptive business practices, such as overcharging them for drugs. The losses claimed in those RICO cases, in the hundreds of millions of dollars, are small compared with the total of US$80 billion in investor losses claimed in Lord Abbett’s RICO suit. The existing securities fraud cases against Valeant, which claim a comparable total of investor losses, don’t contain the RICO threat of treble damages.

If other investors were to follow Lord Abbett’s lead, Valeant’s legal exposure could balloon. In its filings with the Securities and Exchange Commission, Valeant says that the class action suits are without merit and that it intends to fight them.

Valeant, through spokesman Arthur Shannon, declined to comment on the Lord Abbett complaint. The Lord Abbett suit was filed by Kasowitz Benson Torres LLP, which is working with Labaton Sucharow LLP, a class action firm, on the matter.

It’s impossible to estimate how much Valeant will ultimately pay out as a result of its voluminous legal entanglements, which include Justice Department and regulatory probes and lawsuits alleging it defrauded its clients and shareholders.

At the end of the last quarter, Valeant had US$162 million reserved to cover “probable and estimable” legal liabilities, settlements and other matters, according to its most recent quarterly filing.