November 11, 2015

The Curious Case of Mr. Pearson’s 502,996 Shares

On Valeant Pharmaceutical’s conference call on November 10, embattled chief executive Michael Pearson offered several defenses of his company’s internal controls and procedures.

Similarly, in defending both himself and Valeant from the now constant drumbeat of controversy, one of Pearson's constant refrains has emphasized his commitment to transparency.

A March 14, 2014 Securities and Exchange filing suggests Pearson and Valeant have a long way to go on both of these fronts. Put bluntly, a footnote in a Valeant filing over 18 months old appears to show how Pearson made a handsome profit through what is referred to as an unspecified "error."

How handsome? Thanks to a rocketing stock price and corporate opacity, Pearson picked up a block of stock for $20 million less than it was then worth.

(Southern Investigative Reporting Foundation readers will recall our October 19 revelation of the company's secretive relationship with Philidor, its captive--and soon-to-be shuttered--specialty pharmacy that kicked off this trauma for Valeant. On October 25 a follow-up story was released.)

Let's start with why this is a truly unusual document for a Form 4, an often ignored class of company filings that disclose corporate insider share purchases and sales. Traditionally, the value of Form 4's are usually interpreted in connection to a broader context or event, like executives selling into a potential corporate share repurchase or their buying shares because of an improving sales outlook.

In this case, given the unusually heavy weighting Pearson's compensation plan has toward share price appreciation, a March 2014 Form 4 filing noting his acquisition of 502,996 restricted stock units--shares awarded only when share price appreciation triggers are met--was to be expected given Valeant's then soaring stock price.

But then take a look at the filing's footnote number two: On May 24, 2013, the Registrant delivered 502,996 vested performance share units (the "2010 PSU Grant") to Mr. Pearson in error. In connection with Mr. Pearson returning to the Registrant the value of such shares on the date of delivery (plus interest), Mr. Pearson has been credited with 502,996 vested share units to be delivered to him in accordance with the terms of the original 2010 PSU Grant.

The awarding of 502,996 shares to Pearson "in error" is difficult to imagine for anyone who understands the compartmentalization of a large company.

Valeant is a large, fully-staffed corporation and Pearson's compensation is closely scrutinized by both its board of directors and lawyers. As such, any clerical error would likely have been immediately caught.

Notwithstanding the error, there is no filing detailing the initial grant. The only mention  of the block prior to March 2014 is found buried in a footnote on page 32 of Valeant's 2013 Proxy noting that the 502,996 RSUs had met their vesting triggers. Previous RSU grants, especially one for 486,114 shares in 2011, don't seem to have generated any problems.

What we can say is that this is the kind of mistake that happens all too rarely in the professional lives of most people. On May 24, 2013, the date of the initial--and errant--restricted unit award Valeant's share price was $84.47; on March 11, 2014, the stock closed at $139.96, a difference of $55.49. According to the footnote, Pearson appears to have rectified the error by writing a check for the "value of such shares on the date of delivery."

The footnote's language suggests that "the date of delivery" is May 24, 2013, meaning that sometime before March 13, 2014--the date of the Form 4's filing with the SEC--Pearson wrote a check for about $42.48 million (plus an unspecified interest rate) to own a block of Valeant shares that was then worth over $70.39 million, a nearly $28 million differential.

It's not clear if these shares were part of the block of 1.3 million shares (out of 2 million originally) that Pearson had pledged to Goldman Sachs for a $100 million personal loan. The shares were seized by Goldman last week when he was unable to make an October 30 margin call.
The Southern Investigative Reporting Foundation requested comment from Valeant through Renee Soto at Sard Verbinnen, its outside public relations adviser. She said the company would not comment beyond its previously made disclosures. A follow up phone call was not returned.

 

 

 

9 thoughts on “The Curious Case of Mr. Pearson’s 502,996 Shares

  1. Just think if every person who read this story donated at least $5 . Roddy’s reporting cost and painstaking document research work here would be funded. I just gave $10 and hope more of you follow. Great investigative reporting is a rare breed these days and we must support it.

  2. Not sure what the nature of the original ‘mistake’ was, that’s not made clear. But it appears that he used it as a *free option*, if the stock rises he pays only the award date price, if it tanks, he kicks the shares back, claiming they were not validly issues.

  3. Your article fails to mention that the 502,996 shares in question are not actually issuable until the year 2019 pursuant to Pearson’s employment agreement. Or did you miss that? It’s right there at the top of page 52 of the 2014 proxy.

    That means that he’s actually underwater on these shares given the check he had to write — not exactly the impression your article gives.

    Setting all that aside, it’s pretty clear that these would have vested in 2014 anyway given the trajectory of the stock price, so the fact that they were erroneously credited to him a year early would have had no impact on his compensation, other than the interest that he apparently paid.

    • It sounds like you don’t understand basics of option theory. If someone ‘sells’ you an In The Money American option for the same price as an At The Money American Option (with all other terms like tenor, underlying asset, etc. being equal), that person is an idiot and/ or you are a thief.

      Similarly if someone accidentally gives you half a million shares in 2013 and a year later you both realize it, if you ‘give back the shares’, you have to give back the actual shares on that date, or the current market value on that date — not the market value from a year before. The ‘idiot’ who gave you those half million shares should be indifferent (aside from immaterial transaction costs) between receiving the cash and the shares to correct said idiot’s error. Instead, in the VRX case, there’s a very obvious asymmetry here that hurts the idiot and benefits Pearson.

      It’s possible that there’s just a massive disclosure mess-up here. But given what has been disclosed to date, this looks really quite bad.

  4. Well, to be honest I don’t get the point. Yes, it sounds like a terrible Story, great! But then, looking at the documents.. In the Proxy it says: “502,996 PSUs that have met their vesting triggers on March 21, 2013 and became deliverable”. The filing is from 04/11/13. They were delivered May 24, 2013. So very obviously Valeant and everyone else looking at the filing thought they are deliverable. Further the doc 4 says: “to be delivered to him in accordance with the terms of the original 2010 PSU Grant.” Now that would mean delivered in 2019 as A more careful reader of SEC documents pointed out. Probably they recogneized the error in 03/11/2014, they had to file it accordingly and they settled it by Pearson returning to the Registrant the value of the shares at that time and getting delivered the shares in 2019. Why should he return more than that? What did I miss, i.e. what is the deal here? Would be happy if you could write it in plain language, so that I understand it. 🙂

    • I think Jim Davis’s comment is the most succinct plain English take on this, given what has been disclosed to date by Valeant.

      The concern isn’t that Valeant made a mistake — these things happen every now and then. The problem is that, given current disclosure, a self serving sleight of hand seems to have occurred by Pearson.

      Pearson erroneously received 502,996 shares that he wasn’t eligible to yet receive. He returned “them” and “Mr. Pearson has been credited with 502,996 vested share units to be delivered to him in accordance with the terms of the original 2010 PSU Grant.”

      The sleight of hand is that he didn’t return the shares. He returned the old cash value of the shares ~$43MM (502,996 * $84.47, plus a small interest adjustment) on 11 March 2014, when the shares were currently worth ~$70MM (502,996 * $139.96).

      There may be a disclosure problem here — maybe Pearson asked to buy that exact amount from Valeant (not the open market) via a 100% margin loan, and Valeant messed up the accounting and then did a terrible job disclosing it after the fact…

      But barring a major disclosure cleanup, this looks an awful lot like theft or at an absolute minimum, non transparent self dealing. This combined with the margin loan call, and I wonder whether Pearson is remotely trustworthy. Ken Lay is the cheap shot analogy. Aubrey McClendon may be the more astute comparison.

  5. Well, to be honest I don’t get the point. Yes, it sounds like a terrible Story, great! But then, looking at the documents.. In the Proxy it says: “502,996 PSUs that have met their vesting triggers on March 21, 2013 and became deliverable”. The filing is from 04/11/13. They were delivered May 24, 2013. So very obviously Valeant and everyone else looking at the filing thought they are deliverable. Further the doc 4 says: “to be delivered to him in accordance with the terms of the original 2010 PSU Grant.” Now that would mean delivered in 2019 as A more careful reader of SEC documents pointed out. Probably they recogneized the error in 03/11/2014, they had to file it accordingly and they settled it by Pearson returning to the Registrant the value of the shares at that time and getting delivered the shares in 2019. Why should he return more than that? What did I miss, i.e. what is the deal here? Would be happy if you could write it in plain language, so that I understand it. 🙂

    • Well, why didn’t they just cancel the transaction? This would have been the obvious way to do it and wouldn’t have left Pearson with a free option.

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