As a general rule, it’s a bad idea for a money manager to utter the words “insider trading” in any context. Hedge fund titan Bill Ackman is learning that lesson as the SEC begins an investigation of whether his hostile bid for Allergan violated the law. Indeed, Ackman’s public description of the deal now carefully avoids those troublesome two words.
Wall Street gasped in astonishment in April when Mr. Ackman’s hedge fund, Pershing Square, announced its audacious bid for Allergan, joining forces with drug-maker Valeant in an unsolicited $45.6 billion takeover proposal. Not only was it a whopping deal for a $15bn hedge fund, but it exploited an apparent loophole in insider-trading law.
Here’s what Mr Ackman said in response on CNBC:
“The way the rules work is you’re actually permitted to trade on inside information…as long as you didn’t receive the information from someone who breached…fiduciary duty or duty of confidentiality, et cetera.”
In a narrow sense, Mr. Ackman might be correct, although the SEC and a lawsuit filed recently by Allergan will test that proposition. But was it the best choice of words to use at the time? Probably not.
Mr. Ackman’s statement – widely repeated in news stories, tweets and tv broadcasts – smacked of arrogance. It reinforced the popular view that hedge funds bend the rules to suit their purposes in ways ordinary folk cannot. And while there is a lively academic and policy debate about the effectiveness and benefits of insider trading law, Bill Ackman shouldn’t be jumping into the fray. He’s got plenty of fights on his hands as it is.
Could he have taken a different approach to describe the deal? Well, after a bruising few months, Mr. Ackman seems to have got the message. His firm’s response today to news of the SEC investigation never mentions insider trading:
“There is nothing illegal, unethical or improper in taking a toehold position before a merger is proposed, even if it is not wanted by the target’s management.”
Ahh, isn’t that better? “Toehold position” is such a nice, friendly phrase. It suggests mountaineering, dance, even yoga – certainly not financial chicanery and double-speak.
We will see if this new language eases the pressure on Mr. Ackman. First impressions are hard to shake, so it will be an uphill fight. Of course, if he wins over Allergan’s shareholders, the legal and regulatory problems will likely go away.
In any event, the lesson for dealmakers is banish the words “insider trading” from your vocabulary altogether. Talk about the weather instead.