It’s been a rough couple of weeks for Bill Ackman, and this news isn’t going to make it any better.
Ackman’s hedge fund, Pershing Square, and pharmaceutical company Valeant are being sued for alleged insider trading by Allergan, their joint hostile takeover target.
“This case is about the improper and illicit insider-trading scheme hatched in secret by a billionaire hedge fund investor on the one hand, and a public-company serial acquiror on the other hand,” says the complaint. “… The method the Defendants chose was to operate in secret, flouting key provisions of the federal securities laws designed to protect investors from precisely this type of predatory conduct.”
Ackman bought just shy of 10% of Allergan this spring in an attempt to gain more pull in his and Valeant’s attempt to sway shareholders to vote for a buyout. It was a move that hearkened back to Wall Street’s 1980s corporate raider days when moves like that were called a “toehold.”
In this case, Allergan is specifically alleging that Valeant and Pershing have failed to disclose material information to push the takeover through, and circumvented insider trading laws — specifically SEC rule 14 e-3, which has to do with making tender offers for companies based on or while knowing material non-public information.
In February, the complaint alleges, Pershing Square, with a minuscule contribution promised from Valeant, created a shell company called PS1 LLC. It started buying Allergan shares after Valeant started showing signs that it would make a tender offer for Allergan, according to the lawsuit.
Meanwhile, Pershing and Valeant allegedly signed an agreement that they would not make a tender offer for Allergan.
According to the filing, “PS Fund 1’s LLC agreement was not amended to add Valeant as a member until April 6, 2014, and Valeant’s capital contribution — a minuscule 3 per cent of the total funds — was not made until April 10, 2014, just one day before PS Fund 1’s ownership of Allergan stock crossed the 5% threshold on April 11, 2014.”
PS Fund 1’s stake in Allergan reached 9.7% on April 21. On April 22, Pershing and Valeant announced that they would attempt a “friendly merger” Valeant between and Allergan.
Of course, we know this hasn’t been friendly. Allergan has been telling anyone who will listen that Valeant is a company with almost no organic growth that needs to make acquisitions to survive. Once Valeant owns a company, according to Allergan, it slashes its research and development and gobbles up its products, raising their prices until their patents wear out.
Allergan isn’t the only one saying this either. Famed short-seller Jim Chanos of Kynikos Associates, also believes Valeant is an “accounting rollup” and is shorting the stock.
Pershing Square had no immediate comment on this suit.
Both Valeant’s and Allergan’s stocks are down slightly on the news of this lawsuit.
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