Image source: Getty Images.

What happened

Shares of embattled drugmaker Valeant Pharmaceuticals (NYSE:BHC) tumbled 12.3% on Monday, screaming to a fresh 52-week low after reports hit the newswires of a possible criminal probe facing the now-former CEO and CFO of the company.

So what

According to the report from Bloomberg, citing people familiar with the matter, U.S. prosecutors could wind up filing criminal accounting fraud charges against former CEO J. Michael Pearson, and former CFO Howard Schiller, who ran the company briefly during Pearson's absence, based on purportedly hidden ties to Philidor Rx Services, a now-former drug distributor of Valeant's.

Previous probes have been examining whether Philidor had been acting as a neutral party between Valeant and insurers and disclosing if it had a tight-knit relationship with Valeant. If Philidor was not making these disclosures, then it could have been swaying insurers to purchase Valeant's pricier brand-name products when cheaper alternatives were available. The big question would be exactly how much did Pearson and Schiller know about what was going in, if anything illegal was going on to begin with. (Remember, this is merely speculation at this point, as criminal charges haven't been filed.)

A statement from the company that was issued after the closing bell reiterated its previous commentary -- namely, that the company is under investigation by the U.S. Attorney's Office for the Southern District of New York and that it intends to cooperate fully with any ongoing investigation. Further, the press release notes that the company won't be commenting on any rumors.

Now what

Image source: Getty Images.

At this point, nothing has materially changed for Valeant or its business model, since Wall Street is merely digesting rumors of what could happen. However, if charges were to be filed against Valeant's former execs, there is a possibility that the company itself could wind up facing repercussions that could include fines and/or sales restrictions. Neither would be preferable, given the company's relatively small cash position relative to its $30.77 billion in debt as of the end of the second quarter.

Ultimately, I'd encourage investors to do their best to overlook the rumors surrounding the possibility of criminal charges for its former executives, and instead focus their attention on Valeant's third-quarter earnings release a week from now on Nov. 8. In that report, Wall Street and investors will be looking for a stabilization in the company's flagship dermatology sales, continued success in divesting non-core assets, and a reduction in the company's net debt from the sequential second quarter. This report will tell investors far more about what they need to know about Valeant than an ongoing investigation will.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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