Investors claiming they lost out in the hostile takeover bid for Allergan Inc. have filed a potential class action against the two companies that made the unusual but failed run at the Irvine maker of Botox.
The federal suit, filed by lawyers from Cotchett, Pitre & McCarathy LLP of Burlingame and Bottini & Bottini Inc. of La Jolla, accuses Valeant Pharmaceuticals International Inc. and Pershing Square Capital Management LP of insider trading, and it seeks damages of as much as $5 billion, according to plaintiffs' attorney Francis A. Bottoni Jr. Basile v. Valeant Pharmaceuticals International Inc., SACV0402004 (C.D. Cal, filed Dec. 16, 2014)
The charges of insider trading closely match allegations in Allergan's own lawsuit against the two companies, according to Bottini and outside experts. The new case is "a copycat suit," said Nicholas O'Keefe of Kaye Scholer LLP's office in Palo Alto.
Despite the fact that much of Allergan's own suit against the hostile suitors became moot when the company agreed to be acquired by "white knight" Actavis PLC in mid-November, "anyone else is free to bring another" insider trading claim, O'Keefe said.
Allergan launched its litigation "as a way of defending against Pershing Square and Valeant," he said. But the lawsuit is still active. On Wednesday, the parties agreed to a scheduling order setting trial for June 28, 2016. Allergan Inc. v. Valeant Pharmaceuticals International Inc., SACV0401214 (C.D. Cal, filed Aug. 1, 2014).
The case includes a claim by one unhappy investor, Allergan assistant general counsel, Karah H. Parschauer, that she lost potential profits of at least $100,000 on her sale of company stock because of the defendants' insider trading. The defendants have told the court they may file a motion for summary judgment opposing her claim as soon as next week.
The new suit by Cotchett and Bottini is filed on behalf of a potential class of thousands, Bottini said anyone who sold Allergan common stock between Feb. 25 and April 21 this year. That last date was when Valeant announced its takeover bid. According to the complaint, hedge fund Pershing Square had set up a subsidiary to buy Allegan stock, which Valeant later invested in. In the run-up to the hostile bid, the fund acquired enough stock to own a 9.7 percent interest in Allergan.
As a result of the later sale of the Botox maker, the fund amassed paper profits of about $2.5 billion, according to the complaint.
It claims potential class members also could have profited handsomely if they too had known about the impending takeover tender offer. The complaint says the two companies plotted the complex transaction together. That means Pershing Square and its owner William A. Ackman had advance inside knowledge of the material fact of the impending takeover bid. Attorneys for Allergan and Pershing Square did not return calls seeking comment on the new lawsuit.
And while Valeant, as the "offering person" making the hostile tender offer for Allergan, cannot be liable for insider trading based on its knowledge of its own plans, it can be liable for tipping off Pershing Square, Bottini said. In the earlier lawsuit, the companies argued that they were "cobidders" for Allergan, meaning they were the same "offering person" under federal securities law and therefore immune from insider trading charges.
The class action complaint argues at length that the companies actions' show they were separate "persons" and worked to maintain that separation and to keep their connection hidden.
One point in the plaintiffs' favor may be an order Nov. 4 by U.S. District Judge David O. Carter largely denying Allergan's request for an injunction preventing Pershing Square from voting its shares in an upcoming shareholder meeting. But he also concluded "that Plaintiffs have at least raised serious questions as to whether substantial steps to commence a tender offer were taken before PS Fund 1 began purchasing Allergan shares."
Keker & Van Nest LLP securities defense litigator Michael D. Celio said Carter's ruling likely prompted the new lawsuit. "Obviously, this statement has something to do with why this case was filed," he said.
Celio also described the class plaintiffs' position as "a very aggressive and unprecedented" argument under securities law. He said it is not unknown for an acquiring company and a hedge fund or other investor to work together prior to a takeover bid.
He also noted that the named plaintiff in the case, Anthony Basile, had made about $88,000 on his Allergan investment in a single day. "It makes him an odd plaintiff," Celio said.
If the plaintiffs attorneys were trying to advance an analysis of the "cobidder" law, "this is really not a very favorable case" because the lead plaintiff did quite well despite the alleged insider trading.
"You'd prefer a case where you could show some serious harm," he said.
But Bottini noted that during the few months involved, an average of 3 million shares of Allergan were traded every day. "The idea is they could've received a lot more money," he said.