Last year Valeant tried to buy Botox-maker Allergan in a bid the company later abandoned.

A U.S. judge has refused to dismiss an insider trading lawsuit filed by two pension funds against Quebec-based Valeant Pharmaceuticals and hedge fund manager Bill Ackman over their activities before last year's failed attempt to acquire Botox-maker Allergan.

District Judge David Carter of California ruled this week that the case filed on behalf of investors who sold their shares prior to the $51 billion US hostile takeover bid should proceed.

Big pension funds suing

The plaintiffs, including Iowa Public Employees' Retirement System and the State Teachers Retirement System of Ohio, allege that Valeant Ackman and his Pershing Square Capital Management had non-public information and acted to "deceive, manipulate and defraud" by purchasing Allergan shares knowing they would proceed with a takeover.

But the defendants argued the case should be dismissed, in part, because they didn't violate any securities laws.

Valeant spokeswoman Laurie Little said the company remains convinced it complied with the law.

Pershing and Ackman both declined comment.

Dublin-based Actavis bought Allergan for $70.5 billion US last March. Allergan subsequently dropped its own insider trading lawsuit against Valeant and Pershing Square.

Valeant is currently battling a sharp decrease in its stock price over allegations of drug price gouging, accusations it has denied, as well as a controversy about its relationship with Philidor Rx Services, a U.S. mail-order pharmacy.

Valeant shares dropped $6.30 today to trade at $98.30 on the TSE.