Ackman’s Terrible Year Just Got Even Worse With News He Will Be Sued For Collusive Insider Trading

Ackman’s Terrible Year Just Got Even Worse With News He Will Be Sued For Collusive Insider Trading

Tyler Durden’s pictureSubmitted by Tyler Durden on 11/11/2015

It was in April 2014 when Valeant first revealed the collusive scheme it had hatched with financier Bill Ackman: upon consultation with Ackman, Valeant’s soon to be embattled CEO Michael Pearson would announce a hostile takeover bid of Allergan (this is before the company was acquired by white knight Actavis), but not before Ackman would load up on $4 billion in AGN shares (mostly in the form of calls) to generate massive profits when the news of the hostile offer not by Ackman but by a technically unrelated party was either leaked or announced.

At the time we said this smacks of criminal, and collusive, insider trading. From our April 22, 2014 post:

In yet another page of the activist investor’s sleaze book, last night Bill Ackman showed that when it comes to unethical way to generate “alpha” he truly may have no equal, when we learned that together with serial-acquirer and emplyee terminator Valeant, Ackman’s Pershing Square would join in on a debt-funded (thank you ZIRP) acquisition of botox maker Allergan.


Nothing about that is odd. Where the story, however, would becomes a near-criminal farce if the US actually had a regulator which itself was not an agency designed to promote and reward criminality (in hopes of getting a job there as a kickback), is that as Valeant was preparing to announce its bid, Pershing Square – well aware of what was coming – was buying, and buying, and buying Valeant stock. Actually, scratch that – Ackman bought almost no stock: in fact he only bought some $76 million in AGN stock in late February. The balance: all call options, accumulated on an almost daily basis through March all the way until April 21, the day the news was leaked.


As Bloomberg explained, Ackman began buying Allergan stock Feb. 25 and then in March switched to over-the-counter call options to accumulate his stake, regulatory filings show. A buying pause April 9 and 10 helped lower the price, before Ackman resumed in earnest April 11, according to two people familiar with the matter.


Valeant was interested in the unusual arrangement with Ackman because the hedge fund could amass more of Allergan’s shares before making a public disclosure, said a person familiar with the matter. The shares rallied the most since 2009 in the six days before the stake and bid were disclosed yesterday, soaring 22 percent, and trading volume last week approached the highest level in a year.


Why? Because Ackman had accumulated so many calls, it was in his interest at this point to leak the “news” about not his but Valeant’s involvement, which is always happy to trade off its balance sheet and future growth prospects in exchange for a pop in the stock price here and now, even if that means firing thousands of workers, and actually cutting back even more on the company’s own internal organic R&D spending.


Or said otherwise, if you know your “partner” is about to submit a takeover bid for a company, wouldn’t you buy every call option you can find ahead of the announcement? That is precisely what Ackman did.


Here is what Ackman’s furious call buying spree, which in turn pushed the stock price ever higher based on delta-hedging desks.



And this is the total amount of calls Ackman bought. Remember: he only bought $76 million in AGN stock on February 25 and 26.


Needless to say, Ackman made off like a bandit with a profit on his $4 billion initial stake in the hundreds of millions if not billions, once AGN stock soared.

Naturally, we screamed bloody murder but we assumed that because this is such a glaring example of insider trading we must have missed something – some massive loophole because not even Ackman would be so dumb as to engage in such a blatant frontrunning of material news in which not he but someone else was the acquiror of a company.

Sure enough, the very next day NYT‘s William Cohan scrambled to Ackman’s defense:

Mr. Ackman is no fool. Rather, he is brazenly intelligent — he once volunteered to me, unsolicited, his breathtaking SAT scores – and before leaping into this particular abyss he consulted, deliberately, with Robert Khuzami, the former head of enforcement at the S.E.C., who is now a $5 million-a-year-man at Kirkland & Ellis, the Wall Street law firm. Mr. Khuzami assured Mr. Ackman that buying nearly $4 billion of Allergan’s shares knowing that Valeant intended to start a hostile takeover at a premium to market did not violate the S.E.C.’s rule 10b5-1 about insider trading.

Robert Khuzami, who served as General Councel of the criminal disaster that is Deutsche Bank until 2009 and whom we profiled years ago, is shown below in this photo from his SEC days:


Alas, as recent events involving Ackman’s investment in Valeant have demonstrated, not only is Ackman’s intelligence suddenly very much in question, but so is his entire research methodology: how many other managers would allocate billions into a company they never fully diligences and which has cost Ackman over $2 billion in losses if it wasn’t for two things: hubris and laziness.

And now we get a second confirmation that Ackman may not only not have been “brazenly intelligent” but was downright stupid when moments ago we learned that a District Judge in Santa Ana, California, David Carter, has said Valeant and Ackman must both face a lawsuit accusing them of insider trading in Allergan before making an unsuccessful takeover bid for the maker of Botox.

In other words, the judge has tacitly admitted that precisely what we said Ackman (and Valeant) criminally did with Allergan, is what may have happened.

As Reuters reports the Judge rejected arguments by Valeant, Ackman and Ackman’s Pershing Square Capital that the lawsuit should be dismissed because their activity was not fraudulent.

The lawsuit was filed on behalf of investors who sold Allergan shares in the two months before the defendants on April 22, 2014 announced an unsolicited $51 billion bid for Allergan.


Pershing had by then quietly amassed a 9.7 percent stake in Allergan, which soared in value after the bid was announced. Investors said Pershing bought those shares knowing that Valeant was preparing a bid that could, and later did, become hostile.

Again, exactly as we said happened on April 22, 2014.

Naturally, Valeant and Ackman said there was no intent to defraud, and that they breached no duties by sharing information before the takeover bid became public.  

But the judge, without ruling on the merits, found “serious questions” as to whether “substantial steps” had been taken toward a possible hostile bid, which would have required Valeant to disclose more or Ackman to stop his buying.

“Plaintiffs must plead defendants knew they were in possession of material nonpublic information at the time of the trade and that they acted with the intent to deceive, manipulate, or defraud,” Carter wrote. “Plaintiffs have alleged both elements.”

And now it’s off to court. Valeant spokeswoman Laurie Little said the Laval, Quebec-company was disappointed with the decision, and believes it complied with securities laws. “We look forward to presenting evidence to establish that we did nothing improper,” she added. 

Valeant’s adversary in court, and the lead plaintiffs on the insider trading suit, are the State Teachers Retirement System of Ohio, the Iowa Public Employees Retirement System, and Allergan employee Patrick Johnson.

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But the biggest irony in all this is that the only reason Ackman proceeded with an action that clearly is collusive insider trading, is that he got a greenlight by a former SEC head of enforcement that this was legal!

Let that sink in: the person whose job it was to be the first line of defense against blatantly criminal activity greenlight precisely the action that a district judge now says stinks of insider trading.

No wonder said SEC enforcer Robert Khuzami, formerly of Deutsche Bank (wink wink), is currently paid a $5 million salary at Kirkland and Ellis to defend Wall Street criminals.

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We look forward to the lawsuit and will be amused to find if, as we expected all along, Ackman is forced to repay the billion or so in illegally obtained proceeds. Considering the state his hedge fund finds itself in, he too may soon need a loan from Valeant.

And speaking of Valeant, today’s news was hardly welcome – the stock closed down another 6% at the lows.


While Ackman is not a publicly traded corporation, we are confident his value followed the same intraday trajectory. But a bigger question is what happens to Pershing Square: since Ackman made over $1BN on his AGN long; if found guilty of insider trading he will have to sell more of Pershing Square’s already distressed holdings, largest among them, ironically, being Valeant stock.

Will LPs wait around until the end of the lawsuit or will they frontrun (or frontbike) Ackman’s own selling of his own stake from his own fund?

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Full District Court Judge ruling below:

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