Will Judge David Carter Force Valeant, Ackman To Disgorge $2 Billion Insider Trading Profits?

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Edgar Allen Poe. Source: Poetry Society

Valeant (VRX) and Pershing Square’s (PSHZF) Bill Ackman announced they settled the Allergan (AGN) insider trading case for $290 million. A court is now questioning whether the settlement was “reasonable and fair”:

A U.S. court on Tuesday asked Valeant Pharmaceuticals International Inc (VRX.TO) and activist investor Bill Ackman’s Pershing Square (PSH.AS) to appear for a hearing to discuss the proposed settlement in an insider trading lawsuit.

The hearing, set for Jan. 16, comes after Pershing Square and Valeant last week decided to pay $290 million to settle the lawsuit that accused them of insider trading before bidding for Allergan Plc (AGN.N) in 2014 …

The court has “substantial questions regarding whether the settlement amount is reasonable and fair,” according to documents filed in the U.S. District Court, Central District of California.

The lawsuit was filed on by Allergan shareholders who sold AGN shares months before Valeant and Pershing Square made a bid to acquisition Allergan. The shareholders intimated that had they known Valeant would put Allergan in play they might have waited to sell the shares at a higher price. The lawsuit implied Bill Ackman profited from material, non-public information the AGN shareholders did not have access to.

The Situation

I understand the claimants originally sued for $2 billion. The lawsuit has been around for a while. In early December Judge David Carter denied a request by Valeant and Ackman to throw out the allegations by Allergan shareholders. This implied a court hearing could take place as early as this month. Anything can happen and court and I assumed neither Valeant or Ackman wanted to face an uncertain outcome. This also gave the AGN shareholders tremendous leverage, or so I assumed.

The fact that the case was settled for only $290 million (about 15 cents on the dollar) was shocking to me. Others saw it as a masterstroke by Ackman and Valeant:

 

Both Ackman and Valeant will be able to pay their share of total $290 million pay out from cash on hand or monies already reserved for. I had originally thought the pay out could have been as much as (1) up to $2 billion to settle AGN shareholder claims and (2) the disgorgement of the approximately $2 billion Ackman made on his AGN trade and shared with Valeant. A pay out of $2 – $4 billion could be sizeable enough to hurt cash flow and sink the shares of VRX and PSHZF.

Did A Crime Occur?

The fact pattern suggests Ackman and Valeant traded on material non-public information. The trades might have been legal had they been looking to merge Valeant with Allergan. They ultimately made a tender offer for AGN shares, and that’s where it gets murky. A jury trial might have ultimately decided if insider trading occurred. The settlement avoids a jury trial and allows both companies not to admit to any wrongdoing.

However, letting both companies off with a small monetary settlement could give the impression it is legal to engage in insider trading. A commenter on my previous article voiced this sentiment:

Commenter: What did Martha Stewart do wrong then? if they made 2B and had to give back less than 300M and no jail time, it sounds like you can actually trade on insider information.

If we are truly a nation of laws then insider trading should not be allowed. The court is now questioning whether the settlement was “reasonable and fair.” My interpretation of the court’s reticence is that a $290 million payment could potentially be considered unfair compared to (1) the $2 billion in profits from the AGN trades and (2) the $2 billion in damages shareholders claimed the AGN trades caused. I believe a potential outcome is that a court could force VRX and Ackman to disgorge their profits in addition to any settlement with shareholders.

Conclusion

On Trump And The Global Economy

Wuyi, Coconut Rob, Shock Exchange, Professor Brogman stunt for the ‘gram

I believe the AGN insider trading case could have some tail risk. If VRX and PSHZF are required to disgorge profits from their AGN trades it could sink both stocks. Both stocks remain a sell.

Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.

The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?

 

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