Back on April 22, we wrote an article titled "How Bill Ackman Scrambled To Acquire Over $3 Billion In Allergan Calls Knowing Valeant Would Submit A Bid" in which we presented the following chart:

... which showed how Bill Ackman had accumulated a massive 9.7% stake in AGN stock through call options, making him the largest stakeholder of the company.

What happened after this fervent accumulation spree, driven by Ackman's advance knowledge that Valeant would submit a bid for Allergan, is that news was purposefully leaked that Ackman was about to activist on Allergan in a fight that has lasted for just under 4 months but is so for not going quite Ackman's way with Allergan refusing to relent. The stock soared, and Ackman made a killing on his calls, allowing Pershing Square to return about 30% YTD, a fact which has prompted Bill Ackman to put his recent investing debacles with Herbalife and J.C.Penney behind him and boldly proclaim he is preparing to take his hedge fund public.

Our take on what Ackman did in collusion with Valenat was clear:

"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.

To be sure, Ackman has denied he frontran the Allergan announcement, saying he consulted countless lawyers among which even former SEC chief enforcer (and former Deutsche Bank compliance officer).

As NYT reported, "before leaping into this particular abyss he consulted, deliberately, with Robert Khuzami, the former head of enforcement at the S.E.C., who is now a $5 million-a-year-man at Kirkland & Ellis, the Wall Street law firm. Mr. Khuzami assured Mr. Ackman that buying nearly $4 billion of Allergan’s shares knowing that Valeant intended to start a hostile takeover at a premium to market did not violate the S.E.C.’s rule 10b5-1 about insider trading.... Indeed, the onetime regulator told Mr. Ackman that he was so sure of his legal advice that he would welcome his former S.E.C. colleagues to call him and discuss it with him."

It is unknown if the SEC called, but what is clear is that last week the SEC announced it had opened an investigation into whether Ackman broke insider-trading laws with his buying spree of AGN calls. Per the WSJ: "The Securities and Exchange Commission civil probe is focused on potential breaches of insider-trading laws, one of the people said. The inquiry is at a relatively early stage and may not lead to any enforcement action, the person added."

"We are confident that the trading was completely lawful," Valeant said Thursday.

It remains to be seen if frontrunning the general public on collusive, material, non-public information that a strategic would be about to announce a bid for Allergan is indeed "completely lawful", however we do have a question: now that the SEC is formally investigating Ackman for what may be a massive frontrunning scam, is it also looking at all the other hedge funds which reported brand new stakes (some of which also entirely in the form of calls) in Allergan in the second quarter?

The reason we ask is that as everyone knows, in order to diffuse the scent of criminality and dilute their culpability, what hedge fund managers, especially of the activist variety, will do nearly all the time ahead of a significant public announcement of a major stake, is to hold an "idea dinner" in which they preannounce to a select group of close friends what they are doing. As such, what ends up happening is that the benefactor of what may be an illegal tip off, or in this case collusion, is not only entity, but numerous, thus making it very difficult for the SEC to isolate just who "leaker zero" was, and who benefited from the information - certainly complicated if the beneficiaries are more than a dozen.

Presenting exhibit A: this is the list of hedge funds and prop trading desks that according to Bloomberg (and CapIQ) announced brand new and quite material stakes, in Allergan, after building up a position some time in the second quarter, having no holdings as of the first quarter.

It goes without saying that the list of "position initiators" is the who's who of Idea Dinner participants with names such as York, Perry, Mason, Och Ziff, Eton Park, Viking, and so on.

So, to recap: if the SEC is indeed serious about getting to the bottom of the Allergan insider-trading scam,is it also looking into just how these hedge funds decided to buy into Allergan in a quarter in which the stock soared on the Valeant/Ackman news?

Because while it is perfectly legal if these funds did their homework and rather "mysteriously" all decided to buy into the stock at the same time, or put on M&A arbs after the hostile bid announcement, one wonders just how legal it would be if one or more of these investors only bought AGN stock after getting a "sure thing" tip from Ackman that he was about to go activist on Allergan with Valeant money, something which is certainly illegal.

All that said, we aren't holding our breath on the SEC actually doing its job for once, and certainly not before Pershing Square goes public. After all can't hinder "capital formation" in these here unrigged markets.