Allergan shareholders sue Pershing, Valeant for insider trading

December 18, 2014

Did you think the whole Allergan/Pershing Square/Valeant takeover mess ended last month when Allergan’s board voted to accept a better offer from Actavis and Valeant withdrew its bid? Think again. On Tuesday, an Allergan shareholder who sold stock right before Pershing and Valeant first announced their joint bid for Allergan in April brought a class action claiming that Pershing and Valeant owe damages to him and other Allergan shareholders because they violated insider trading prohibitions when they acquired a toehold in Allergan.

The shareholder complaint, filed in federal court in Santa Ana, California, makes pretty much the same allegations as Allergan’s own insider trading suit against Pershing and Valeant, which the company filed in August, in the teeth of the takeover fight. And why not? In that case, U.S. District Judge David Carter of Santa Ana ruled in November that Allergan had raised “serious questions” about whether Pershing and Valeant violated the Williams Act prohibition on trading by a non-bidder in advance of a tender offer. Judge Carter, you probably recall, refused to enjoin Pershing from voting its shares at a special shareholder meeting but did require Valeant and Pershing to file a disclosure alerting Allergan investors of the risk that the would-be acquirers might be liable under the Williams Act.

After Pershing and Valeant dropped the offer for Allergan, they told Judge Carter that Allergan’s suit was moot. Allergan, however, said that its assistant general counsel, Karah Parschauer, who is also a plaintiff in the case, intends to press on with individual claims that Pershing’s illegal acquisition of Allergan stock cost her around $100,000 as an Allergan shareholder. According to the latest status report in the case, Allergan is pushing for discovery from Pershing and Valeant, which plan to file a motion to dispose of the case.

The damages theory for Allergan investors who sold shares before Pershing and Valeant went public is that Pershing profited at their expense. Allergan’s share price spiked when Pershing and Valeant announced their unusual joint bid, which brought Pershing a quick profit of about $1 billion on its 9.7 percent toehold. By the time Allergan agreed to Actavis’ takeover offer in November, Pershing had made $2.5 billion from its investment in Allergan. The new class action, like Parschauer in the pending Allergan suit, claims that Pershing took illegal advantage of its knowledge of the takeover bid. The shareholders on the other side of Pershing’s purchases contend they missed out when Allergan’s stock price spiked.

It’s rare but not unprecedented for shareholders to bring claims as the supposed victims of insider trading. Shareholders in Elan and Wyeth, for example, sued SAC Capital in federal district court in Manhattan after the U.S. government exposed what has been called the most profitable insider trading scheme in history, SAC Capital’s sale of Elan and Wyeth shares based on advance word of confidential inside information about bad test results on a drug they were jointly developing. Investors who bought shares during the period in which SAC was dumping its stake claimed that SAC owes them compensation for their losses. The Securities and Exchange Commission has since recommended that Elan and Wyeth investors receive a portion of its $600 million settlement with SAC, but the shareholders are continuing to litigate their claim that SAC’s insider trading amounted to a racketeering conspiracy that entitles them to treble damages.

The funny thing about the end of the Allergan takeover fight had seemed to be that everyone won: Pershing and Valeant made money from their Allergan stock when Actavis agreed to top Valeant’s offer; Allergan’s board kept the company out of Valeant’s clutches; and Allergan investors, many of whom bought shares after Valeant’s initial offer, ended up with stock worth about $60 more per share than it was worth when the whole takeover campaign began. As Bloomberg columnist Matt Levine said in November, Allergan’s deal with Actavis “leaves a smile on everyone’s face.”

Tuesday’s class action is a reminder that not quite everyone was smiling.

I reached out to representatives of Pershing and Valeant. Both defendants declined to comment.

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