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Bill Ackman pinpointed the moment he should've sold out of Valeant — and he's wrong

Linette Lopez
Bill Ackman

(Bill Ackman has sold out of one of his most controversial investments, Valeant Pharmaceuticals.Manuel Balce Ceneta/AP)

Bill Ackman has sold out of one of his most controversial investments, Valeant Pharmaceuticals, after three years of involvement with the company.

During that time, Valeant's stock fell from a high of about $257 to where it sits now, just under $11.

One might call it a teachable moment, in which hard, honest self-reflection is required.

For his part, Ackman told CNBC's Scott Wapner that he should've sold the stock 18 months ago, when the revelation of a secret pharmacy within Valeant combined with government scrutiny over its drug-pricing strategy began to drag the stock down.

Ackman also said he underestimated the damage that media coverage and the falling stock price would have on the company, Wapner reported.

As takeaways go, this is all wrong.

Bill, we were sitting right there the whole time

To understand why this is so wrong, you have to understand how Ackman got into Valeant in the first place. It wasn't through a purchase of the stock — at least not at first. It was by doing a deal that The New York Times' Andrew Ross Sorkin called "too clever by half."

It was his collaboration with former Valeant CEO Michael Pearson, the architect of Valeant's price hike and acquisition-driven business model, that marked the point where Ackman should've thought twice about the company.

In 2014, the two men appeared to devise a plan in which Valeant and Pershing would quietly buy up shares of another pharmaceutical firm, Allergan, using mostly Pershing's money. Once Pershing Square amassed a stake of just under 10%, Ackman and Valeant announced their intention to acquire Allergan.

If that sounds like insider trading to you, you're not alone. A California court is pondering that very thing based on SEC Rule 14 e-3. It basically says that if company A is planning to take over company B, anyone with knowledge of that bid can't trade in company B if the deal is in motion but still a secret.

Of course during his deposition for this case, Ackman said that this was not a takeover at all — at least that wasn't his intention. It was a merger. Very different.

valeant chart

(Markets Insider)

Back to the 2014 deal. Allergan did not want to be sold to Valeant, for various reasons, and argued that Valeant was not a profitable company but a rollup that required acquisitions to survive. That's when what Ackman called a "merger" quickly became a "hostile takeover" and when a white knight saved Allergan by outbidding Valeant.

Pershing Square made $2.6 billion anyway — a perfect Wall Street "heads I win, tails you lose."

This angered a number of shareholders who didn't know about the deal from the beginning. They make up the class of investors suing Pershing and Valeant over insider trading on the deal. If they win, Pershing stands to lose the $2.6 billion it made.

All this happened before Ackman owned a single share of Valeant stock. He didn't disclose a stake in the drugmaker until March 2015.

It wasn't until October of that year that Valeant's real troubles began. It was exposed that the company was using a secret internal pharmacy called Philidor that has been accused of committing insurance fraud. That's when Valeant's whole appeal to Wall Street began to unravel.

Ackman says this is the point at which he should've sold out; but he should actually have been the last person to be surprised by this. He knew what kind of company Pearson was trying to build, and how he was building it. More than that, Ackman had been warned by others to stay away.

Legendary short-seller Jim Chanos warned Ackman that Valeant was a problem. He even sent Ackman his research before Ackman announced his collaboration with the company. Ackman responded to that by saying on CNBC that Chanos had covered his short position in the company. Chanos had not.

Legendary Berkshire Hathaway investor Charlie Munger had spoken out about Valeant's acquisition rollup strategy, and its drug-pricing practices repeatedly, at one point calling it "a sewer." We know Ackman heard this, because he emailed Munger after that — in April of 2015, long before the specialty pharmacy was brought to light — to complain about the comments.

In other words, Valeant's shadiness was apparent to plenty of people: Munger, Chanos, and even the CEO who fought off an arguably sketchy plan to acquire his company. Ackman, manager of billions of other people's dollars, should've recognized that.

Ackman told Wapner Valeant was "a case where the company destroyed its reputation and it caused a loss of talent and focus."

It's not the only one.

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