Teva alleges fraud by Rimsa's previous owners

Erez Vigodman Photo: Eyal Yizhar

In its response to the New York court, Teva also accuses Rimsa of trickery to deceive the Mexican regulator.

Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) has made many acquisitions over the years, some successful and some less so, but none of its acquisitions escalated into counter lawsuits and severe accusations between Teva and the sellers - until Teva acquired Mexican company Rimsa.

Teva acquired Rimsa a year ago for $2.3 billion, and the acquisition was completed five months later. Two weeks ago, the former owners of Rimsa, the Espinosa Abdala brothers, filed a lawsuit against Teva, alleging that it was trying to escape the deal using false allegations of fraud.

Teva made its response yesterday a lawsuit against the brothers in a New York court. Teva is alleging fraud and violation of the acquisition contract: "Defendants affirmatively lied and concealed extraordinary legal violations to obtain $2.3 billion through the sale of a Mexican pharmaceutical manufacturer and its intellectual property. Plaintiffs (Teva) have suffered substantial losses as a result."

Teva also said in its lawsuit, "Rimsa was engaged in a years-long scheme to sell defective and unlawful products and to conceal those violations from Mexican regulators." The claim describes the ordinary process of obtaining approval to market a drug in Mexico, including the submitting of a request to COFEPRIS - the Mexican regulator.

Teva alleged that Rimsa had used sophisticated trickery to avoid the legal requirements, and had submitted documents containing consistent manipulation of data pertaining to the products' formula. It then launched the existing products, even though in some cases these differed completely from the formulas submitted for approval.

According to the statement of claim, Rimsa referred to this procedure internally as a "fast track." Teva is alleging that the Mexican company was well aware that its plan was illegal. In 2010, for example, its quality manager sent an e-mail to company executives warning that COFEPRIS might discover the fraud. The statement of claim says, "Quoting provisions of Mexican criminal law, she pleaded, 'I am really very worried, and I do not want to suffer the legal consequences of what we are doing outside the law. You know I have two children that depend solely on me . . . .'"

Teva alleges that Rimsa bolstered its methods of concealing fraud from the regulator through the use of duplicate documents and computer systems to keep the real information to itself, while delivering false information to the regulator.

Teva said that the fraud also included false reporting of Rimsa's suppliers of active ingredients, its laboratory trials, and that in many cases, "Rimsa concealed test results showing that products would not remain stable." Teva stated that in 2015, 40% of Rimsa's product did not comply with the rules.

Teva alleges that the Espinosa Abdala brothers were perfectly aware of what was being done, had even managed the plan, and had "blatantly lied to Teva during the acquisition." According to Teva, in a meeting in New York and a visit to the plant in Mexico, they presented misleading information to Teva. "The ultimate lies came in the acquisition agreements themselves," Teva's statement of claim alleges. "In those contracts, the Espinosas made a series of broad representations and warranties. One of them - entitled 'Compliance with Applicable Laws' - represented that Rimsa was 'currently conducting, and ha[d] since January 1, 2010, conducted [its] operations in compliance in all material respects with the Laws, judgments and orders applicable to [it].' That was a lie, and the Espinosas knew it. Far from complying with applicable laws, Rimsa had built its corrupt business model on outright regulatory fraud."

Teva added that it had relied on the misleading information provided to it, alleging, "Teva conducted thorough due diligence to confirm that belief. But the fraudulent double paperwork prevented Teva from being able to detect the violations."

Teva went on to allege that the documents that Rimsa sent it during due diligence through Goldman Sachs, which worked with Rimsa, were misleading. A check of Rimsa's 18 leading products aroused no suspicions "only because it was shown fraudulent paperwork for the products," and that "The head of Teva’s regulatory affairs due diligence team believes that the violations are so serious that, had Teva received true information during the site visit, he would have recommended against proceeding with the acquisition at any price."

Teva alleges that after signing the deal, and before it was completed, Leopoldo Espinosa Abdala ordered Rimsa's management to delete e-mails referring to the fast track and the duplicate documents.

Production of 44 items halted

A week after completing the acquisition, Teva received an anonymous e-mail entitled, "Corruption," warning about the fraud. Teva investigated, and discovered "what the Espinosas had known all along that the Espinosas were corrupt and that Rimsa was selling countless products in violation of the law."

Teva realized that it could not continue selling the products, and began a dialogue with COFEPRIS, which responded by conducting an inspection of the Rimsa plant. The regulator ordered Teva to halt production of 44 items, and eventually closed the entire plant.

In its statement of claim, Teva wrote that it had paid $2.3 billion on the basis of forecasts including continued marketing of the products, stating, "At this point it is unknown when, if ever, the defective products will return to the market. The Espinosas thus defrauded Teva out of the value it reasonably expected to obtain for the $2.3 billion it paid in the transaction." Furthermore, Teva asserts that the purchased business was so corrupt that it jeopardizes Teva's reputation as a manufacturer of high-quality drugs.

Teva is asking the court for a number of remedies, including over $2.3 billion in compensation and lawyers' fees.

The company today announced, "Teva is committed to improving the health and welfare of its patients all over the world. The safety of patients and the quality of its products are our top priority in all the markets in which we operate. We are committed to continuing to launch products in the Mexican market and ensuring the growth of our business activity in Mexico. Teva has already begun to implement corrective measures, and will continue working with the employees, and in full cooperation with the Mexican authorities, in order to achieve a solution for the situation."

A petition was filed this week with the New York Central District Court for approval of a derivative lawsuit against Teva, executives, and directors in the company, including CEO Erez Vigodman and CFO Eyal Deshe, and against Citigroup, which served as Teva's advisor for the acquisition. The petition alleged that these parties had violated their duty of care, and had been negligent in performance of their duty, thereby causing damage to Teva.

The petition was filed by a shareholders with a small holding in Teva, who alleged, "The amount of damage caused to Teva is still unclear, but a conservative estimate is in the hundreds of millions of dollars."

Published by Globes [online], Israel business news - www.globes-online.com - on September 29, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Erez Vigodman Photo: Eyal Yizhar
Erez Vigodman Photo: Eyal Yizhar
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018