This content is from: Portfolio

The Morning Brief: Preet Bharara’s Stunning Defeat

U.S. Attorney Preet Bharara has thrown in the towel on a number of his high-profile, prized insider trading cases. On Thursday afternoon he said in a statement his office is moving to dismiss the charges against former SAC Capital honcho Michael Steinberg and six other defendants, adding, “insisting on maintaining guilty pleas in these cases would not be in the interests of justice.”

In the statement, Bharara adds: “These prosecutions were all undertaken in good faith reliance on what this Office and others, including able defense counsel for all those who pled guilty, understood to be the well-settled law before Newman.”

In December 2013 Steinberg was found guilty in the government’s first trial conviction of an SAC employee. He was convicted of four counts of securities fraud and one count of conspiracy stemming from trades in Dell and Nvidia Corp. However, one year later — in what is proving to be a seminal ruling — a federal appeals court vacated the insider trading convictions of two prominent hedge fund managers, Todd Newman and Anthony Chiasson. Essentially, the court ruled that the jury was given improper instructions. The court asserted that Newman and Chiasson were unaware of the sources of the insider trading information and that it was not apparent that these sources revealed the sensitive information for personal gain. The ruling, issued by the Second U.S. Circuit Court of Appeals, said that for people to be convicted of trading on inside information, they must know not only that the providers of the information gave it illegally but that they received it in exchange for some benefit — and not just that it was disclosed in breach of fiduciary duty, as the appeals panel says the jurors were erroneously informed.

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It was another crummy day for Valeant Pharmaceuticals International. The company’s fast-falling shares closed down another 7.37 percent on Thursday, to $109.87, after BMO Capital reportedly downgraded the stock from outperform to market perform and questioned the company’s structure. The stock had fallen more than 20 percent earlier in the trading session but rallied after the drug giant announced it would host a conference call on Monday to address all of the issues swirling around it.

In its report, BMO reportedly stated that while Valeant’s structure may not be illegal, it is “aggressive and questionable,” according to published accounts. “However, proof of a questionable business practice is not proof of financial wrong-doing.” BMO it also asserted that its analysis does not support the thesis that Valeant is similar to Enron, as alleged in the report published a day earlier by short-selling specialist Citron. “In fact it [BMO’s analysis] supports the opposite conclusion,” BMO adds. “But we cannot refute Citron’s allegation either.” BMO said its price target is $141.

Meanwhile, on Thursday Deutsche Bank told clients in a note that it remains cautious on the stock “given uncertainties related to the U.S. drug pricing environment, VRX’s specialty pharmacy distribution model, and related government inquiries.” It also conceded it has long been cautious about the risks associated with the company’s aggressive acquisition strategy.

“We suspect that new investors will focus not only on valuation but will want to take a very detailed approach in understanding the company on a bottoms-up basis, which could take some time,” DB states. “It will be important to see how the company and management team deal with a period of adversity after a long period of significant success.” It retained its newly reduced price target of $204, noting it assumes Valeant “deleverages relatively quickly while building cash on the balance sheet.”

UBS also maintained its support for the stock following Valeant’s Wednesday response to Citron, reminding clients it still has a Buy rating and $285 price target. “We believe as investors fully incorporate Valeant’s comments, shares will recoup more ground,’ it stated in a note. “We understand that investors in this market environment are extra cautious and continue to have a ‘sell first and ask questions later’ attitude. As questions are answered…we expect the stock to recoup lost ground.”

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Daniel Loeb’s Third Point Ventures was one of several companies to participate in a $1.425 million seed round of financing for Curacity, a travel media and booking platform that enables media companies to redirect consumers to a third-party travel site and get financial credit for a transaction. The financing round was led by Greycroft Partners.

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Lee Ainslie’s Dallas-based Maverick Capital participated in the $81 million, Series C financing of Collective Health, an enterprise health insurance software and services company. Maverick had already invested in the company during an earlier financing round.

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Shares of hedge fund favorite GNC Holdings plummeted more than 14 percent on Thursday after the Oregon Attorney General claimed the health products retail chain is selling supplements with unlabeled and unapproved ingredients. One of the ingredients Oregon singles out in its lawsuit is BMPEA, which it says is a synthetic chemical similar to amphetamine.

In a statement, GNC said: “The claims made by the Oregon Attorney General are without merit and GNC intends to vigorously defend against these allegations. In response to FDA statements regarding the regulatory status of BMPEA and picamilon, GNC promptly took action to remove from sale all products containing those ingredients.”

At the end of the second quarter, GNC’s largest shareholder was Ricky Sandler’s New York-based Eminence Capital, which owned about 6.7 percent of the shares. Other top-ten holders included three other New York-based hedge funds firms: TPG-Axon Capital Management, Samlyn Capital and LionEye Capital Management.

Meanwhile, shares of competitor Vitamin Shoppe fell more than 4 percent on the news. We reported last week that Clint Carlson’s Dallas-based Carlson Capital boosted its stake in Vitamin Shoppe to more than 2 million shares, or 6.94 percent of the nutritional products retail chain, in a 13D.

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