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How Ackman Hopes to Beat Insider-Trading Lawsuit: QuickTake Q&A

Bill Ackman

Bill Ackman

Photographer: Patrick T. Fallon/Bloomberg

Billionaire investor Bill Ackman’s audacious partnership with Valeant Pharmaceuticals International Inc. to make a hostile bid for drug company Allergan Inc. in 2014 brought him a windfall of more than $2 billion even though it failed. It also led to a lawsuit by Allergan shareholders accusing Ackman of illegal insider trading. In a last-ditch bid to avoid a trial, Ackman plans to argue to a federal judge on Dec. 8 that no rules were broken and the suit should be tossed. The outcome may help clarify some of the hazier parts of insider-trading rules.

The takeover bid, which started out as a merger proposal, later turned into what’s called a tender offer, in which the buyer goes directly to the target’s shareholders rather than negotiating with the company’s board. The U.S. Securities and Exchange Commission prohibits trading on the basis of material, nonpublic information concerning such an offer, specifically when “substantial steps” have been taken to initiate it. The key question before U.S. District Judge David Carter is whether Valeant and Ackman were already working on a tender offer before Ackman quietly started buying up Allergan shares in late February 2014. The attempt fell apart when Allergan agreed to be bought by Activis Plc for just over $70 billion. But Ackman made a mint from his 10 percent stake in Allergan. Investors say he and Valeant knew their interest would spawn a bidding war, so they’d been tricked into selling shares too cheap.