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Reports US

US stock market daily report (April 23, 2014, Wednesday)

April 24, 2014, Thursday, 05:55 GMT | 00:55 EST | 10:25 IST | 12:55 SGT
Contributed by Millennium Traders


Bill Ackman knew that Valeant Pharmaceuticals International, Inc. (VRX-NYSE) would be making an unsolicited bid for Allergan Inc. (AGN-NYSE). Ackman, a very wealthy man and a normally wise investor knew about the bid because, he and his $15 billion Pershing Square Capital Management were partners with Valeant in the bid. Trading on material, non-public information, Ackman will rake in nearly a billion dollars from the deal. Ackman clearly benefits from knowing about the Allergan deal before it happened and being a part of it. He also has promised to roll his Allergan stake into Valeant.

Combining forces with the health care giant, Valeant put in a bid of $50 billion for Allergan, maker of Botox. Ackman’s brilliant merger of activism, corporate raiding and front-running his own book - is sure to be a model for the next wave of hedge fund activism.

Ahead of the potential deal, for several weeks during March and April Ackman tallied up 4.99% purchase of Allergan stock - just under the 5% point at which he would have been required to report his stake. Ackman allowed the market to settle for a few days before making his final move. In a term he referred to as "rapid accumulation program" of Allergan stock, Ackman purchased call options and forward contracts which gave him the right to buy an additional 4.7% of Allergan, at a set price and date to be later determined.

On Tuesday April 22, 2014 - before announcing his joint bid - Ackman bought rights to additional shares of Allergan, bringing its total voting power to the equivalent of almost 10%. If the deal doesn't pan out, Ackman's Pershing Square will be required to pay Valeant a break-up fee if Allergan is bought out by someone else for a higher price, making Allergan's stake worth more.

Jeff Ubben of ValueAct Capital hedge fund had been pushing for the deal between Valeant and Allergan for nearly a year. Speaking at IMN's Active-Passive Investor Summit in New York Ubben said, "The deal was our idea. Ackman came up with the structure." Ubben's ValueAct owns $2.3 billion worth of Valeant shares. Ubben's partner Mason Morfit is on Valeant's board. Per Ubben, Valeant approached Allergan about a deal in 2013 that was declined. In February per Ubben, Ackman approached Valeant about an investment. Ubben says Ackman was initially interested in investing in Valeant but, Valeant's management told Ackman they were interested in Allergen. Ackman agreed to help Valeant with their bid for Allergan and came up with the deal structure.

In June 2003, the Securities and Exchange Commission filed securities fraud charges against Martha Stewart for insider trading activity. Stewart sold her shares of ImClone on December 27, 2001 after receiving information from her broker. Stephen M. Cutler, SEC's Director of Enforcement at the time said: "It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It's worse still when the individual engaging in the insider trading is the Chairman and CEO of a public company."

Insider trading, which is illegal, is the act of trading in shares of a publically traded company, based on non-public information. A question facing the 2nd U.S. Circuit Court of Appeals in New York on Tuesday is one that has divided lower court judges - whether to be convicted of insider trading, the recipient of non-public information must know that the source of the tip benefited from the disclosure.

Front running is the unethical practice of a broker trading an equity based on information obtained before their clients have been given the same information.

Question is, did Ackman participate in insider trading or front running, in the VRX and AGN deal?

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