When looking at the situation from 10,000 feet, there might be reason to suspect some unethical conduct occurred with Pershing Square Capital Management LP's purchase of shares and options totaling 9.7% of Allergan Inc.
When you delve into facts that are publicly available such suspicions deteriorate, as Pershing Square took the role as a partner in the unsolicited offer.
To provide some basic background: Pershing Square, whose CEO is William A. Ackman, has partnered with Valeant Pharmaceuticals International Inc. to make an unsolicited $45.6 billion offer of cash and stock to take over Allergan. Pershing Square, with knowledge of Valeant's interest in an acquisition, bought a $4 billion stake in Allergan, amounting to 9.7% of the company and becoming its largest shareholder. Was Pershing Square's action in conflict with the CFA Institute's ethical standard, prohibiting use of non-public information for an investment advantage?
According to the CFA Institute Code of Ethics and Standards of Professional Conduct's Standard II (A) on material non-public information, a member or candidate in possession of material non-public information could not act or entice others to act. Prohibited actions include the buying or selling of shares or derivative instruments of the company in which the person was in possession of the protected information.
In Pershing Square's role as a partner in the offer, it would not have been prevented from purchasing shares of Allergan. Such a limitation would be akin to prevent Pershing Square from buying shares of any firm in which it intend to engage as an “activist investor.” The Pershing Square and Valeant intent to proceed together toward a full purchase of Allergan removes the fact that Valeant was interested in acquiring the firm from the scope of materially protected information as outlined by Standard II (A).
Had Pershing Square solely been involved as a potential financier of the unsolicited offer, as Barclays and the Royal Bank of Canada have been identified as doing, then our standard would raise some questions around its trading practices. That is, if Pershing Square had been only supplying funding to Valeant, then knowing of the planned merger would be considered material non-public information. Just as under the existing situation, if Barclays or RBC employees traded on Allergan, they would likely be out of compliance with the CFA Institute standard. In a role of this nature as just a potential financier, Pershing Square's knowledge that Valeant intended to make the offer would be considered material information that would limit its ability to trade until the offer was publicly announced.
The role performed by an individual or firm is an important factor in determining what actions are allowed or disallowed.
Glenn Doggett, a chartered financial analyst, is director, standards of practice, CFA Institute, Charlottesville, Va.
