backOn June 14, 2023, New Jersey District Court Judge Michael Shipp denied PricewaterhouseCoopers LLP’s (“PwC”) motion to dismiss a claim under Section 10(b) of the Securities Exchange Act of 1934 asserted in an amended complaint by the Lead Plaintiff in a putative securities class action related to Valeant Pharmaceuticals International, Inc.’s restatement of its 2014 financial statements.
Valeant restated its 2014 financial statements in 2016 after a forensic investigation determined that Valeant had made sales to Philidor RX Services, LLC (“Philidor”) in contemplation of an agreement that gave Valent an option to acquire Philidor, rather than in the ordinary course of business. Lead Plaintiff’s Section 10(b) claim alleges that PwC’s audit report on Valeant’s 2014 financial statements was materially false and misleading in light of the restatement and that PwC knew, or recklessly disregarded, that Valeant: (1) overstated its revenue; (2) failed to disclose Philidor as a variable interest entity in violation of GAAP; (3) maintained ineffective internal controls relating to the tone at the top of the organization and the accounting and disclosure for non-standard revenue transactions at quarter ends; and (4) excluded Philidor from Valeant’s internal control testing. Lead Plaintiff further alleges that PwC did not conduct its audit in accordance with PCAOB standards and ignored red flags regarding Valeant’s business practices and sales to Philidor.
In its motion to dismiss, PwC argued that Lead Plaintiff failed to sufficiently allege scienter given certain concessions made in the complaint, including: (1) a forensic investigation determined that Valeant provided PwC with inaccurate information; (2) the amount of restated revenue was less than 1% of Valeant’s 2014 revenue; and (3) PwC conducted multiple audit procedures relating to Valeant’s transaction with and sales to Philidor. Adopting the recommendation of a special master, however, the court found that the complaint satisfied the pleading requirements. The court noted that, while Valeant may have provided false information to PwC, PwC allegedly reviewed accurate information that contained red flags, including information relating to an increase in Valeant’s credit limit to Philidor ten days before Valeant acquired the option to acquire Philidor. The court acknowledged that the complaint does not allege that PwC had any particular motive to commit fraud but nevertheless concluded that its allegations sufficiently show strong circumstantial evidence of “conscious misbehavior or recklessness.”
The case is In re Valeant Pharmaceuticals International, Inc. Securities Litigation, No. 3:15-cv-07658 (D.N.J. June 14, 2023). Lead Plaintiff is represented by Robbins Geller Rudman & Dowd LLP. PwC is represented by Chiesa Shahinian & Giantomasi PC and Bartlit Beck LLP. A copy of the decision is attached.
