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The Morning Brief: David Einhorn Warns of Bubble 2.0

Greenlight Capital's David Einhorn just unveiled his next big short: The tech sector. In a letter to investors, Einhorn said his firm is shorting a basket of momentum stocks on the grounds that the market for those stocks looks similar to the overheated tech stock market just before the last dot-com crash, according to a CNBC report. "The current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm," the letter stated, according to the report. Call it Bubble 2.0.

Greenlight also announced that it closed out four short positions, including its famous Chipotle Mexican Grill short, which ultimately lost the firm money. Greenlight Capital fell 1.5 percent in the first quarter, according to the report.

Meet Val-Gan, the pharmaceutical company William Ackman intends to create by joining forces with Montreal-based Valeant Pharmaceuticals International to take over Botox-maker Allergan, a plan Ackman's Pershing Square disclosed in SEC filings on Monday. Not the greatest name, Ackman acknowledged in a joint press conference with Valeant chairman and CEO Michael Pearson in New York on Tuesday, but the Canadian pharmaceutical executive and the activist hedge fund manager let the world know they expect the deal to be very good for shareholder value and bring cost savings of around $2.7 billion. "I assure you Valeant still cares about every penny. Bill Ackman paid for this," Pearson quipped as the conference began.

This is an unusual deal for Ackman in all kinds of ways. As an activist investor he might urge a target company to be acquired, but he is not usually a buyer. He said his six pages of disclosures were a "record for Pershing Square" as is the size of the investment itself: at $4 billion Allergan is his biggest investment ever. Nor has Ackman invested in pharmaceutical companies before; he said he's usually turned off by patents that are constantly coming and going, high risk, and a perception that pharma companies tend to be bad at deals. But Bill Doyle, a former classmate of Ackman's who joined Pershing Square last year — and previously worked with Pearson at McKinsey — stood up and touted Valeant's capabilities when it comes to making smart acquisitions and avoiding risky M&A's. The Wall Street Journal observed that there was little talk from Pershing Square about Allergan, the stock it owns 9.7 percent of and wants Valeant to buy. In fact, an audience member asked Ackman why he didn't just buy Valeant shares since he likes the company so much. As he explained, he couldn't buy the stock because he had insider information on Valeant.

For its part, Allergan released a statement on Tuesday saying its board would review the proposal. Valeant made a bid for Allergan last year that the company rejected. If there's a difference now, say observers, it's that the Allergan board will have to consider how tough it is to fight an activist hedge fund manager.

An appeal being argued in a New York Court could have implications for at least some of the 80 people who have been convicted in the government's long-running crackdown on insider trading.

Attorneys for Level Global co-founder Anthony Chiasson and Diamondback Capital Management portfolio manager Todd Newman are arguing that the two men should not have been found guilty of insider trading because they did not know that the information they used to make their trading decisions was obtained illegally in exchange for a payoff, according to a Wall Street Journal report.

If Chiasson and Newman win their appeal, legal observers say, it could change how courts define insider trading — and ultimately result in other convictions being overturned, at least for those whose lawyers can make similar arguments. Two federal appeals court judges on Tuesday made comments indicating that prosecutors may have defined insider trading too broadly, according to the report. Prosecutors have argued that they only needed to prove that the recipients of the information in question knew that information was not public and was in breach of fiduciary duty.

"We sit in the financial capital of the world, and the amorphous theory you have gives precious little guidance to all these financial institutions and all these hedge funds out there about a bright-line theory as to what they can and cannot do," said Judge Barrington Parker, one of three judges on a panel of the U.S. Court of Appeals for the Second Circuit in Manhattan, according to the report.

Stay tuned

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