By Moynihan
Bill Ackman’s giant blank-check company has been slapped with a lawsuit that claims it has been operating illegally, even as the billionaire investor’s hedge fund allegedly rakes in “staggering” fees to run it.
The suit – which is being brought against Ackman’s Pershing Square Tontine Holdings by former SEC commissioner Robert Jackson and Yale Law professor John Morley – alleges that the so-called SPAC, or special-purpose acquisition company, has been improperly acting as an investment company instead of an operating company.
That’s because Ackman’s mega-fund – which last month scrapped a $4 billion deal to buy a 10 percent stake in Universal Music Group, the home of Drake, Taylor Swift and Billie Eilish – has only been used to make an investment.
SPACs, on the other hand, are supposed to take a company public, according to the lawsuit. Therefore, Jackson and Morley argue it should be regulated under the Investment Company Act of 1940, whose rules are more burdensome than those that regulate SPACs.
“Investing in securities is all the company has ever done since its I.P.O.,” the complaint notes.
Since Ackman’s fund Pershing Square Capital ought to be regarded as an investment advisor, it also should face restrictions on its fees, according to the suit. Currently, the SPAC proposes to pay the fund with stock warrants that allow it to buy shares under sweetheart terms that wouldn’t pass muster under federal law, the suit claims.
“The Defendants have received securities that under any plausible estimate are worth hundreds of millions of dollars – an unreasonable payment for the work performed,” according to the suit
“The complaint bases its allegations, among other things, on the fact that PSTH owns or has owned U.S. Treasurys and money market funds that own U.S. Treasurys, as do all other SPACs while they are in the process of seeking an initial business combination,” according to the statement. “PSTH has never held investment securities that would require it to be registered under the Act, and does not intend to do so in the future.”
In June, Ackman announced he’d use his SPAC to buy the UMG stake after nearly a year of searching for a target. After pushback from the SEC, which among other issues questioned whether the deal met the New York Stock Exchange’s listing requirements, he announced he would be purchasing a stake through his hedge fund instead of a SPAC.
Nevertheless, the lawsuit argues Ackman was making investments illegally and should still be held accountable. Regardless of the outcome, the suit could have a chilling effect on SPACs if investors are worried they could face litigation.
SPACs are shell companies that raise money in the public markets and then use that money to merge with a private company and take it public. This year alone, there have been 389 SPAC IPOs.
As the sector has grown hotter, SEC Commissioner Gary Gensler has vowed to crackdown on the investment vehicles and introduce more regulation.
