Valeant's "Sergeant Schultz Defense" Could Fail Against Securities Fraud Action

Sergeant Schultz of Hogan’s Heroes was notorious for being clueless. Whenever Schultz exclaimed, “I know nothing … I see nothing!”, it was difficult to hold him accountable for the goings on at Stalag 13. In legal parlance, the Sergeant Schultz defense connotes the ability to deny knowledge of the actions of others due to lack of evidence.

A recent class action lawsuit against Valeant VRX claims that denials of certain facts or key information was still damaging to investors. Based on the fact pattern, the Sergeant Schultz defense may not work this time.

Below are key details of the suit brought by Laura Potter and Robbins Geller Rudmand & Dowd LLP, and my interpretation:

Robbins Geller On Valeant’s Business Model

Valeant’s strategy of acquiring other pharmaceutical companies and cutting R&D costs helped the company’s stock skyrocket from $173 on February 20, 2015 to $263 on August 5, 2015 — a gain of over 50%. However, the company’s business practices came under fire in September.

On September 28, 2015:

Valeant issued a press release stating that it had issued a letter to employees relating to changes in the company’s share price to address [i] concern that Valeant’s business model is dependent upon large price increases in the U.S. pharmaceutical business and [ii] concern over Valeant’s exposure to U.S. drug price reimbursement.

Bloomberg reported that Democratic members of the House Oversight and Goverment Reform Committee sent a letter to Chairman Jason Chaffetz urging him to subpoena Valeant documents related to “massive price increases” for two heart drugs.

The September 28th letter also revealed that on July 31, 2015 members of the House Oversight Committee had a joint call with representatives from Valeant, and the Valeant representatives failed to adequately answer the members’ questions over the company’s skyrocketing prices.

The letter also stated that on August 12, 2015, Ranking Member Cummings sent a document request to Valeant, and that on September 3, 2015 Valeant sent a dismissive letter to Cummings refusing to provide any requested documents.