(Reuters) — A U.S. judge said Valeant Pharmaceuticals (NYSE:VRX, TSE:VRX) and activist hedge fund manager William Ackman must face a lawsuit accusing them of insider trading in Allergan (NYSE: AGN) before making an unsuccessful takeover bid for the maker of Botox.
In a Nov. 9 decision, U.S. District Judge David Carter in Santa Ana, Calif., rejected arguments by Valeant, Ackman and Ackman’s Pershing Square Capital Management that the lawsuit should be dismissed because their activity was not fraudulent.
The lawsuit was filed on behalf of investors who sold Allergan shares in the 2 months before the defendants on April 22, 2014, announced an unsolicited $51 billion bid for Allergan.
Pershing had by then quietly amassed a 9.7% stake in Allergan, which soared in value after the bid was announced. Investors said Pershing bought those shares knowing that Valeant was preparing a bid that could, and later did, become hostile.
Valeant and Ackman said there was no intent to defraud, and that they breached no duties by sharing information before the takeover bid became public.
But the judge, without ruling on the merits, found “serious questions” as to whether “substantial steps” had been taken toward a possible hostile bid, which would have required Valeant to disclose more or Ackman to stop his buying.
“Plaintiffs must plead defendants knew they were in possession of material nonpublic information at the time of the trade and that they acted with the intent to deceive, manipulate, or defraud,” Carter wrote. “Plaintiffs have alleged both elements.”
Valeant spokeswoman Laurie Little said the Laval, Quebec-based company was disappointed with the decision, and believes it complied with securities laws.
“We look forward to presenting evidence to establish that we did nothing improper,” she added.
Michael Shipley, a lawyer for Pershing and Ackman, declined to comment. Allergan is not a defendant.
The lead plaintiffs are the State Teachers Retirement System of Ohio, the Iowa Public Employees Retirement System, and Allergan employee Patrick Johnson, court papers show. Their lawyers did not immediately respond to requests for comment.
Allergan was bought in March by Dublin-based Actavis (NYSE:ACT) for about $70.5 billion, the combined company announced at the time. Actavis was renamed Allergan which, the next month, dropped its own lawsuit accusing Valeant and Pershing of insider trading.
Pershing remains a large shareholder in Valeant, whose shares have tumbled in recent months over concerns about its financial practices and drug pricing.