In the summer of 2014, the biggest activist hedge fund story on anyone's lips was whether Bill Ackman had broken securities laws when he had accumulated a massive $3 bilion stake, or roughly 9.7% of the outstanding stock of Allergan (using leverage via call options), in advance of Valeant's announcement it would launch a hostile offer for Allergan. The punchline: Ackman had secretly collaborated with Valeant management in advance of the material, public announcement which sent Allergan shares soaring and was the primary reason for Ackman's blockbuster year and billions in profits for Pershing Square.
The story came and went (nowhere) because the man who had given Ackman the SEC's tacit blessing that nothing bad would happen to Bill, as well as a green light to proceed with a trade that would land anyone else in prison, was none other than the former head of enforcement at the SEC, now a $5 million a year legal advisor at Kirkland and Ellis, Robert Khuzami (formerly general counsel of serial market manipulator Deutsche Bank). As a result, the SEC's inquiry into whether Ackman had broken insider trading laws was quickly forgotten.
However, aside from Ackman's allegedly criminal trading, there was another, perhaps even more important tangent, one which only Zero Hedge picked up on last summer: the topic of idea dinners among hedge funds, in which in order to mitigate the securities violation, numerous activist hedge funds would collude with each other as a means of limiting their legal exposure, while altogether profiting when one or more of their group went "hostile" on the target du jour.
This is what we said last August, when we asked "Is The SEC Asking These Hedge Funds Why They All Rushed Into Allergan Last Quarter?"
It remains to be seen if frontrunning the general public on collusive, material, non-public information that a strategic would be about to announce a bid for Allergan is indeed "completely lawful", however we do have a question: now that the SEC is formally investigating Ackman for what may be a massive frontrunning scam, is it also looking at all the other hedge funds which reported brand new stakes (some of which also entirely in the form of calls) in Allergan in the second quarter?
The reason we ask is that as everyone knows, in order to diffuse the scent of criminality and dilute their culpability, what hedge fund managers, especially of the activist variety, will do nearly all the time ahead of a significant public announcement of a major stake, is to hold an "idea dinner" in which they preannounce to a select group of close friends what they are doing. As such, what ends up happening is that the benefactor of what may be an illegal tip off, or in this case collusion, is not only entity, but numerous, thus making it very difficult for the SEC to isolate just who "leaker zero" was, and who benefited from the information - certainly complicated if the beneficiaries are more than a dozen.
Presenting exhibit A: this is the list of hedge funds and prop trading desks that according to Bloomberg (and CapIQ) announced brand new and quite material stakes, in Allergan, after building up a position some time in the second quarter, having no holdings as of the first quarter.
It goes without saying that the list of "position initiators" is the who's who of Idea Dinner participants with names such as York, Perry, Mason, Och Ziff, Eton Park, Viking, and so on.
So, to recap: if the SEC is indeed serious about getting to the bottom of the Allergan insider-trading scam, is it also looking into just how these hedge funds decided to buy into Allergan in a quarter in which the stock soared on the Valeant/Ackman news?
Because while it is perfectly legal if these funds did their homework and rather "mysteriously" all decided to buy into the stock at the same time, or put on M&A arbs after the hostile bid announcement, one wonders just how legal it would be if one or more of these investors only bought AGN stock after getting a "sure thing" tip from Ackman that he was about to go activist on Allergan with Valeant money, something which is certainly illegal.
All that said, we aren't holding our breath on the SEC actually doing its job for once, and certainly not before Pershing Square goes public. After all can't hinder "capital formation" in these here unrigged markets.
And so, 10 months later, our observations are once again proven prophetic... That, or the SEC reads this "fringe" website religiously for clues how to do its job, because as the WSJ reports the SEC has answered our question, and yes: the SEC is finally asking not only "these" hedge funds why they all rushed into Allergan (see above), but into every other collusive activist take out target.
According to the WSJ, the SEC is investigating "whether some activist investors teamed up to target companies without disclosing their alliances, potentially in violation of federal securities rules, according to people familiar with the matter."
The SEC’s enforcement division has recently opened multiple investigations and sent requests for information to a number of hedge funds, according to some of the people. Neither the names of the funds nor the companies they targeted could immediately be ascertained.
As part of a broader effort to promote transparency, the SEC is looking at whether certain investors coordinated their efforts without filing appropriate disclosures. Federal securities regulations require investors who jointly agree to buy, sell or vote securities to disclose those arrangements, and to designate themselves as a group if they together own at least 5% of a company’s stock or are soliciting votes from other shareholders. Such formal, disclosed alliances have included a recent effort by Barington Capital Group LP and Macellum Capital Management LLC to win board seats at retailer Children’s Place Inc.
The WSJ says that "the issue has taken on greater importance as activist hedge funds, which accumulate stakes in companies and agitate for changes such as stepped up share buybacks and asset sales, have become a major force in corporate America in recent years. Activists sometimes tip potential hedge fund allies to their trading plans, a Wall Street Journal investigation found last year. The practice isn’t illegal as long as they don’t coordinate their trades."
Unfortunately for said activist hedge funds, it is impossible to play dumb when virtually all of them decided to take stakes in Allergan in the same quarter as Ackman was building up his massive stake. The punchline: they could and would have only done that if they knew there was a guaranteed bullish catalyst imminent. Such as Valeant announcing a hostile bid for Allergan, a Valeant which was collaborating with the biggest activist hedge fund in the US currently, Pershing Square.
Surprisingly, until recently the SEC, perpetually clueless and corrupt, likened doing its job to cooking.
Michele Anderson, who heads the SEC’s office of mergers and acquisitions, said at a conference in March that changing the regulations on activist disclosures has proved to be “like peeling an onion,” where efforts to tackle one issue simply reveal another.
So, because it is difficult, it is best to not do your job at all, eh SEC?
But then something appears to have changed.
In a sign of the SEC’s new focus on the issue, the agency in March sent a letter to activist fund Bulldog Investors LLC about its campaign for board seats at Stewart Information Services Corp. , a provider of title insurance. The SEC asked whether Bulldog had any “agreements or understandings” with Foundation Asset Management LP, another fund that had run its own proxy fight at the company.
Bulldog co-founder Phil Goldstein said in an interview that the funds never made any agreement about trading or voting shares. Scrutiny from the SEC could chill legal discussions between investors, he said, adding that it isn’t surprising that underperforming companies would draw interest from several activists.
This is how the Bulldog guy justified collusive activity between activists:
“If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans,” he said. “They’re not a group. They just like the same music.”
What he left out is that the result of going to a Grateful Dead concert with other "fans" isn't a multi-million dollar payday for all said "fans" due to illegally collusive behavior.
Which is precisely what activist hedge fund "idea dinners" and other such collusive actions represent.
Apparently, even the most clueless SEC regulator, the one whose patronage of Wall Street means she has to recuse herself of pretty much doing her job entirely, SEC head Mary Jo White spoke up:
“Our role at the SEC is not to determine whether activist campaigns are beneficial or detrimental in any given circumstance,” Ms. White said. “Rather, the agency’s central focus is making sure that shareholders are provided with the information they need and that all play by the rules.”
Rules.
Funny. The only rule is when the activist community bribes the SEC to make sure this latest "investigation" goes away, to make sure there is no paper trail. Otherwise, the mere suggestion that the next hedge fund idea dinner may be bugged by an SEC mole will mean that in the coming years "activist" alpha, which in the past few years was the only "strategy" outperforming the market, will promptly disintegrate just like the concept of "fair and efficient" capital markets in a rigged, centrally-planned world disintegrated years ago alongside with retail interest in it.
