Court to go forward with insider trading case against Valeant Pharmaceutical

Following months of allegations, California’s District Judge David Carter ruled that Canadian-based Valeant Pharmaceuticals International Inc. and hedge fund manager Bill Ackman would face an insider-trading lawsuit.

Carter disagreed with the arguments made by Valeant, activist hedge fund manager William Ackman and Ackman’s Pershing Square Capital Management. They claimed that the companies’ activities did not result in fraud.

Valeant is an international pharmaceutical company specializing in dermatology, gastrointestinal disorders, eye health, neurology and branded generics. The allegations stem from its involvement with purchasing and selling Allergan’s stocks. Allergan brands itself as the leading growth pharmacy.

To be more specific, the fraud charges are based on an incident that took place between February 2014 and April 2014. In February 2014, Valeant and Pershing Square worked together to help Valeant acquire Allergan. For this purpose, Valeant and Pershing Square created the PS Fund 1, with Valeant contributing $75.9 million. Thus, the two companies became “co-bidders” for Allergan and began acquiring Allergan’s stocks, with 600,000 stocks being bought on the second day of the fund’s existence.

By the time Valeant finally announced that it wished to purchase Allergan for $51 billion in April of that same year, PS Fund 1 helped acquire 9.7 percent of Allergan’s shares. Following Allergan’s board of directors’ refusal to merge the company with Valeant, the shares owned by PS Fund 1 went on sale with large profits for their holders.

To be specific, the stock price value increased from $125.54 per share in late February to $163.65 per share at closing in late April, which is when Pershing Square announced that it would sell Allergan’s stocks, a court document explaining the case states.

The charges were brought against Valeant in late December of 2014, claiming that the defendant violated multiple clauses of the Securities Exchange Act, including one that prohibits “trading while in possession of non-public material information in connection with a tender offer.”

Because the plaintiff—represented by Anthony Basile and others who were unnamed in the court document—was able to provide factual evidence and the claim was “facially plausible,” the case could not be dismissed.

“The pleadings must raise the right to belief beyond the speculative level; a plaintiff must provide ‘more than labels and conclusions’, and a formulaic recitation of the elements of a cause of action will not do,” the aforementioned court document clarifies.

But a charge for insider trading is not as simple as bringing forwards factual evidence that a company committed fraud when trading shares. Other factors are also taken into account, including the time frame in which trading took place.

“Private plaintiffs may bring an insider trading suit only if they traded ‘contemporaneously’ with the defendant,” the court document explains. “This requirement limits the private right of action to those who actually traded with someone who had an unfair advantage.”

The court document explains that the term “contemporaneously” leads to a lot of debate, as its time limit was never specifically defined, thus raising confusion as to whether the plaintiffs could really charge Valeant for insider trading. While some courts believe that contemporaneous trading has to occur on the same day as the insider trading, others—including the California court responsible for making a decision on Valeant’s case—believes that, in some cases, longer periods of time could also fall under contemporaneous trading.

Although Valeant acknowledged that some of its stock purchases were contemporaneous with other sales, the answer to the question of whether other purchases fell under this category is still unknown.

“Defendants acknowledge that Iowa PERS’s sales were contemporaneous with PS Fund 1’s stock purchases,” the court document elaborates. “However, the parties dispute whether Plaintiff’s Ohio STRS and Johnson’s sales satisfy the contemporaneous trading requirement.”

Lastly, there is the issue of insider knowledge. “Plaintiffs must plead [Valeant] knew they were in possession of material non-public information at the time of the trade and that they acted with the intent to deceive, manipulate, or defraud,” the court document explains.

Since the stock-related incident, Allergan has been trying to rebrand itself. As FiercePharmaMarketing website reports, Allergan’s website now sports a sleek new logo.

“Since [Actavis, Plc] snatched Allergan from hostile suitor Valeant last November, the company has worked hard to depict itself as a trailblazer—a drugmaker that rivals Big Pharma in size but puts its growth margins in shame,” the website states.

On similar note, Valeant is also trying to move on from the allegations and brace itself for the repercussions of the upcoming court case. The pharmaceutical has appointed the former Deputy Attorney General of the United States Mark Filip as the advisor to an ad hoc committee responsible for the insider trading allegations.

It may take a while for Valeant to fully erase the bad stigma that it has earned with the insider trading allegations, and the results of the upcoming lawsuit are highly unpredictable. With the strength of the evidence against them, it may be hard for Valeant to recover its reputation.