In yet another page of the activist investor's sleaze book, last night Bill Ackman showed that when it comes to unethical way to generate "alpha" he truly may have no equal, when we learned that together with serial-acquirer and emplyee terminator Valeant, Ackman's Pershing Square would join in on a debt-funded (thank you ZIRP) acquisition of botox maker Allergan. Nothing about that is odd. Where the story, however, would becomes a near-criminal farce if the US actually had a regulator which itself was not an agency designed to promote and reward criminality (in hopes of getting a job there as a kickback), is that as Valeant was preparing to announce its bid, Pershing Square - well aware of what was coming - was buying, and buying, and buying Valeant stock. Actually, Akman scratch that - Ackman bought almost no stock: in fact he only bought some $76 million in AGN stock in late February. The balance: all call options, accumulated on an almost daily basis through March all the way until April 21, the day the news was leaked.

Bloomberg explains:

Ackman began buying Allergan stock Feb. 25 and then in March switched to over-the-counter call options to accumulate his stake, regulatory filings show. A buying pause April 9 and 10 helped lower the price, before Ackman resumed in earnest April 11, according to two people familiar with the matter. Valeant was interested in the unusual arrangement with Ackman because the hedge fund could amass more of Allergan’s shares before making a public disclosure, said a person familiar with the matter. The shares rallied the most since 2009 in the six days before the stake and bid were disclosed yesterday, soaring 22 percent, and trading volume last week approached the highest level in a year.

Why? Because Ackman had accumulated so many calls, it was in his interest at this point to leak the "news" about not his but Valeant's involvement, which is always happy to trade off its balance sheet and future growth prospects in exchange for a pop in the stock price here and now, even if that means firing thousands of workers, and actually cutting back even more on the company's own internal organic R&D spending.

Or said otherwise, if you know your "partner" is about to submit a takeover bid for a company, wouldn't you buy every call option you can find ahead of the announcement? That is precisely what Ackman did.

Here is what Ackman's furious call buying spree, which in turn pushed the stock price ever higher based on delta-hedging desks.

And this is the total amount of calls Ackman bought. Remember: he only bought $76 million in AGN stock on February 25 and 26.

But back to Ackman and why securities laws are there for some, but not for others.

U.S. securities law “allows a company like Pershing to get a running start as there is not disclosure of the intent to take over a firm” until 10 days after acquiring more than 5 percent of the target’s shares, said James Cox, a professor at Duke University School of Law.

It goes without saying that Valeant, which as noted previously has zero regard for its long-term futures and is delighted to saddle the company with epic amounts of debt if that means keeping shareholders friendly is a great match for an activist like Ackman:

Ackman is partnering with a voracious acquirer in Valeant Chief Executive Officer Mike Pearson, who took the helm at the Laval, Quebec-based company in 2008 and has since spent at least $19 billion buying more than 35 companies. Rather than spend what Pearson says can be billions of dollars developing drugs from scratch, he buys companies with existing products, such as Bausch & Lomb for $8.7 billion last year, his biggest acquisition to date. That spending spree has left Valeant with debt of about $17 billion, according to data compiled by Bloomberg -- another reason a partnership on a deal this big makes sense.

And since Valeant's proposes to buy Allergan involves only $48.30/share in cash, with the balance of the implied $152.88/share acquisition price to be funded by debt, Valeant's debt load is about to get even more epic-er.

But that's only bad news for company employees. For activist shareholders, who will have used the company like a dirty rag, amassing enough shares, pardon, calls in under two months to make a killing, what happens to Valeant or Allergan or any other corporation in the US, none of this matters - only the daily P&L (courtesy of the Fed's zero cost debt policy) does.

Source: 13-D