Aug. 15--The U.S. Securities and Exchange Commission is probing whether Valeant Pharmaceuticals and activist shareholder William Ackman violated insider trading laws in preparing their joint takeover bid for Botox maker Allergan Inc.
The SEC, following its standard policy, declined to comment on the investigation. But Ackman's hedge fund company, Pershing Square Capital Management, implicitly acknowledged it in an emailed statement. "We welcome the SEC's review of the facts," the company said.
News of the probe echoed allegations of insider trading made by Irvine-based Allergan in a federal lawsuit it filed against Valeant, Pershing Square and Ackman on Aug. 1. Allergan wants the court to make Ackman give up a significant portion of the Allergan shares he bought, saying that his purchases were illegal because he had non-public inside information of Valeant's plan to make an offer directly to Allergan shareholders.
"We are confident that the trading was completely lawful, as our reply to Allergan's frivolous lawsuit will make clear," a Valeant spokeswoman said Thursday. She declined to comment directly on the SEC probe.
Allergan declined to comment.
The Wall Street Journal, which first reported the SEC probe, said it was in its early stages and may not lead anywhere. The agency often probes unusual market events, and in many cases the investigations don't pan out.
Valeant's alliance with an activist shareholder took many analysts and investors by surprise, and some wondered early on whether it would pass legal muster.
From February to April, Ackman amassed a 9.7 percent stake in Allergan, making his fund the company's largest shareholder. He managed to skirt disclosure rules while doing so, by buying a large number of the shares in the form of derivatives known as "call options," which conferred the same ownership status on him as regular shares.
Ackman has used his position as top Allergan stakeholder to assist Valeant in its takeover plan. He is currently attempting to get the requisite 25 percent of Allergan shareholders to call for a special meeting, which would allow for a vote on a motion to fire six of Allergan's nine board directors and replace them with people more sympathetic to the takeover proposal.
Allergan is fighting fiercely to delay or avoid such a meeting. Its bylaws impose onerous reporting requirements on institutional shareholders before their holdings can be counted among the 25 percent needed to convene a meeting. And numerous observers believe that one of Allergan's objectives in filing the lawsuit is to postpone the meeting for as long as possible.
Allergan has also been waging a ferocious public campaign to discredit Valeant's business model and financial reporting methods. That has been at least partially responsible for driving Valeant's stock down. That, in turn, makes the takeover offer less attractive to investors, since more than half the deal is denominated in Valeant stock.
The offer was worth $48.7 billion at the market close Thursday, down from $54 billionMay 30, when Valeant increased its offer for the second time in a week.
Allergan's accusation of insider trading against Ackman and Valeant is based on its contention that they both knew, at the time of Pershing Square's share purchases, that the bid for Allergan would be taken over the head of its board and directly to the shareholders -- a process known as a tender offer.
Valeant and Ackman have denied this, saying they had intended for the merger to be a friendly one and only went hostile after Allergan's repeated rebuffs.
Pershing Square said Thursday that at the time they publicly unveiled their proposal to merge with Allergan, they had not "taken any steps whatsoever regarding a tender offer."
It wasn't until two months later that they took their bid directly to shareholders, Ackman's hedge fund noted. "There is nothing illegal, unethical or improper in taking a toehold position before a merger is proposed, even if it is not wanted by the target's management."
Allergan argues in its lawsuit that the idea of a friendly merger was only a ruse, that Valeant and Ackman knew all along they would end up making a hostile offer. Two years earlier, Allergan had refused to engage in merger discussions with Valeant, so its management was "well aware in early 2014 that Allergan was not likely to be supportive of a friendly merger, and ... began plotting an alternate course," the complaint alleges.
An initial hearing in the lawsuit is scheduled for Wednesday, when a judge will consider whether to put the case on a fast track.
An SEC investigation, on top of the lawsuit, could cause delays. Some analysts think that would not augur well for Valeant's bid -- and could compromise its deal-driven business strategy.
"I think the longer this goes on, the worse it is for Valeant," said David Amsellem, an analyst with Piper Jaffray & Co. "There's an opportunity cost to not being able to do other transactions, and I think Valeant at some point is going to have to assess whether the opportunity cost has become too much to bear."
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