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Canadian Authorities Could Be Looking Into Valeant

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Canadian Authorities Could Be Looking Into Valeant
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Regulators' involvement with Valeant Pharmaceuticals Intl Inc (NYSE: VRX) could last quite a while, according to John P. Gavin, CFA, founder and CEO of Probes Reporter, the research firm that broke Monday's news of an undisclosed SEC investigation into the Canadian pharmaceuticals company. 

Valeant later confirmed the report to Bloomberg. Shares are down 16 percent from their open on Monday this week.

The stock is down over 70 percent since accounting concerns first began to circulate among analysts and the media.

Canadian Authorities Could Be Looking Into Valeant

Gavin joined Benzinga's PreMarket Prep show Tuesday morning to discuss Valeant.

According to his research, the SEC is "investigating something pertaining to conduct, transactions or disclosures."  He also mentioned that it's possible Canadian authorities are working on an investigation of their own.

A spokesperson from Quebec's Autorite des Marches Financiers told Benzinga the agency continues to "closely analyze the situation surrounding Valeant," adding that it's "concerned about some allegations which were made public."

The agency declined to comment further.

Gavin explained what might be happening in Canadian circles. "Back in October when this story broke there was references to Quebec’s securities regulator having not yet started a formal investigation, but watching the situation very seriously," he said.

"I am certain that the Quebec authorities have begun their own investigation by now as well. And the SEC and the Canadian authorities cooperate."

'This Isn't Going Away'

In the context of market action, Gavin said he doesn't think investors will care about this news for much longer, even if they should.

"This is a massive company and you have massive accusations of accounting fraud. Big companies don’t move that fast. To have had a problem-solving restatement occur in just a few months -- just doesn’t happen," Gavin said.

"You need the auditor, you need the audit committee, you need the depth and complexity of the investigation to complete itself. So that itself tells you this isn’t going away."

Why Didn't Valeant Management Think This Was Material?

Gavin believes this newly disclosed investigation began back in October or November, but the fact that company officials kept it hidden significantly damages their credibility.

"The problem, and this is where investors need to worry, is this management judged that it wasn’t material. Even though it's formal and involves subpoenas, they judged that it wasn't material until they were essentially forced to disclose it yesterday," he added.

 

"They were planning to just bury it in the 10-K. Now by waiting, waiting, waiting and having us put the pressure that ultimately caused them to disclose this, their credibility is badly damaged." 

Little Reason To Believe In Valeant

He went on to add that, though some will continue to look for a positive outlook, there's little reason to have belief in Valeant.

"This has all the feeling of a management that’s hunkered down. Their attitude is, ‘There ain’t nothing wrong here until you can prove it.’ And they’re not going to help you with it. I think the sell-side, God bless them, will look for reasons to get positive, although I’m sure a lot of them are very frustrated right now," Gavin explained.

"But this could get worse before it gets better."

The Big Question

The big question for investors could be whether or not Valeant is going down the same road as Enron. The comparison has been made before.

"When federal prosecutors and U.S. attorneys are investigating you, those are criminal probes. So this company is facing both civil investigations from the SEC certainly and criminal exposure on an array of matters," Gavin answered.

"We don’t know what they are in detail but yes, criminal charges could result from this."

Valeant Pharmaceuticals could not be reached for comment.

PreMarket Prep is Benzinga's morning show with exclusive commentary from analysts, executives, and traders. You can listen to the show live from 8-9:30 a.m. EST here, or listen to the podcast here

Hear the full interview with John at 12:19 in the clip below.

Latest Ratings for VRX

DateFirmActionFromTo
Nov 2016MizuhoDowngradesNeutralUnderperform
Nov 2016Rodman & RenshawDowngradesBuyNeutral
Nov 2016Morgan StanleyMaintainsOverweight

View More Analyst Ratings for VRX
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