Allergan, Inc. (NYSE:AGN) just filed a lawsuit against Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) and Pershing Square that may have hit below the belt – or at least in a highly vulnerable spot.


Allergan’s charges against Ackman and Valeant

The complaint charges that William Ackman’s Pershing Square hedge fund and Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) violated insider trading laws and failed to disclose material information in advance of a takeover. Ackman and Valeant both planed the purchase of Allergan stock and Ackman is documented to have purchased interest in this stock before this was public knowledge.

There are key points of the issue that illustrate why these charges could be so potentially damaging to Ackman and Valeant.

As previously reported in ValueWalk on multiple occasions, the practice of Ackman having material insider knowledge of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX)’s takeover was highly questionable.  In Congress last week the Securities and Exchange Commission’s released stunning thoughts on the issue, as reported in ValueWalk.  This key issue was generally not reported in the mainstream business press.

On the floor of Congress,  Securities and Exchange Commission Corporation Finance Director Keith Higgins addressed the issue at a House Financial Services hearing. The topic was insider trading issues related to Ackman’s acquisition of Allergan, Inc. (NYSE:AGN) stock in advance of a publically announced deal to acquire the company.

When addressing a hypothetical question regarding circumstances basically the same the Valeant Ackman deal, it was SEC Rule 14E3, cited in Allergan’s lawsuit, that pointed to the Ackman / Valeant vulnerability.

“When a bidder has taken substantial steps to commence a tender offer anyone who gets material non-public information from that bidder who trades on it is liable for insider trading irrespective of any breach of a duty,” Higgins said in testimony.

Allergan, Inc. (NYSE:AGN)’s lawsuit appears to be targeting this very issue.

Statements from Allergan about the lawsuit

“After careful consideration, Allergan decided to file the lawsuit in order to ensure that all of its stockholders have the opportunity to make decisions regarding their investment in the Company based on compliant, full and fair disclosures, and to ensure that any stockholders voting on corporate matters acquired their shares in accordance with the law,” Allergan said in a statement.

The complaint filed by Allergan, Inc. (NYSE:AGN) says that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX), Pershing Square and Ackman, violated Sections 13(d), 14(a), and 14(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), which prohibit insider trading and require full and fair disclosure for stockholders in the context of proxy solicitations and tender offers, and the rules promulgated by the U.S.Securities and Exchange Commission (“SEC”) under those Sections, including Rule 14e-3.

As reported in ValueWalk, Ackman hired former SEC enforcement director Robert Khuzami to work on his legal team. Days after the Allergan / Valeant deal was announced, and clearly before the SEC had time to even consider the matter, Khuzami said to the press:

“Anyone at SEC who has problems with this (Ackman’s legal insider trading in Allergan derivatives), talk to me.”

While Khuzami may be a powerful force inside the SEC, Allergan, Inc. (NYSE:AGN) is appealing to the rule of law in this case.

Allergan Lawsuit by ValueWalk

Wachtell Memo 4-25-14 by ValueWalk

Delaware Letter by ValueWalk

Cleary Gottlieb Memo_4!24!14 by ValueWalk