SEC, Swaps and Schumer

A battle over whether some activist hedge fund managers will be able to continue to sneak up on certain target corporations is being waged in the courts, the Securities and Exchange Commission and now even on Capitol Hill

Sen. Charles Schumer, D-NY, sent a letter June 17 to SEC Chairman Christopher Cox expressing his concern that no penalties or injunctions were connected to a district judge’s ruling on June 11 that activist investor, The Children’s Investment Fund, violated securities laws by forming a group with another investor, 3G Capital Partners, and not disclosing that partnership when it was required by SEC rules. (Schedule 13D rules).

The court also ruled that TCI used so called “cash settled equity swaps,” to get around SEC disclosure rules. Railroad operator CSX Corp., TCI’s target, argues that the violations did not give executives sufficient time to prepare for the incoming TCI campaign.

CSX, frustrated with the court’s decision not to issue a substantive penalty, is appealing it to the 2nd Circuit Court of Appeals. The railroad operator is seeking to have TCI’s 8.7% equity stake “sterilized,” so these shares can’t be voted in the proxy contest.

The court argues that it was hamstrung from giving CSX the relief it sought, leaving the issue of penalties to the SEC, which may not provide that relief.

Seeing that the SEC may remain mum, Schumer has decided to prod the agency a bit, while also taking matters into his own hands. In a letter to SEC Chairman Christopher Cox, Schumer said that legislation might need to be considered to make sure penalties are included with these kinds of rulings.

“I am considering introducing legislation to correct this gap in the law, and would be very interested in discussing potential remedies, including the implications of granting CSX’s request for voting rights sterilization and increased civil penalties, with the SEC,” Schumer wrote. “The uncertainty created by this ruling will likely have a detrimental effect on the financial markets.”

And Schumer isn’t the only lawmaker prodding TCI in favor of CSX. Five lawmakers including Sen. Evan Bayh, D-Ind., is chairman of the Senate Banking Committee's Security and International Trade and Finance subcommittee, are pushing the Committee on Foreign Investment in the U.S., an interagency panel that examines U.S.-foreign deals for national security threats, to review the deal.

That would be an unusual review.

Representatives from both CSX and TCI testified before Congress earlier this year. Having lawmakers on Capitol Hill respond to TCI’s insurgency looks like it’s becoming an integral piece of CSX’s response strategy. TCI might need to hire some Washington lobbyists before this all swaps out. -- Ron Orol