FTC Fines Hedge Fund Manager $350,000 for HSR Violations
The Federal Trade Commission recently accused a hedge fund manager of violating the Hart-Scott-Rodino Act by failing to report to the FTC and Department of Justice when his fund bought more than $50 million of stock in two different companies on two separate occasions. The hedge fund manager, Scott Sacane, agreed to pay a $350,000 fine. The fine here was relatively modest considering that Mr. Sacane’s total exposure was over $17 million or $11,000 per day for each day of violation. Hedge funds and other financial institutions that actively trade for house accounts (so-called proprietary trading) are particularly vulnerable to falling afoul (even inadvertently) of the reporting requirements of the HSR Act.
Mr. Sarcane got into trouble when his fund, Durus Life Science Master Fund, acquired stock in Aksys Ltd. and Esperion Therapeutics, Inc. Master Fund bought enough stock that his holdings exceeded several HSR thresholds, including the basic threshold of $50 million of voting securities. The fine for the Esperion acquisition is noteworthy because Mr. Sacane only acquired a minority and passive stake in the company.
Mr. Sacane and the other parent of Master Fund, Durus Life Science Fund, LLC, were required to make HSR filings prior to buying the stock because they “controlled” Master Fund for HSR purposes. Mr. Sacane, however, did not make a filing until long after the fund acquired $85 million (50.1%) of Aksys stock and $102.3 million (33%) of Esperion stock. By failing to file until April 1, 2005, he violated the HSR Act for 799 days with respect to the Aksys stock purchases and 771 days with respect to the Esperion stock purchases. As the HSR Act sets fines at $11,000 for each day of the violation, the maximum penalty could have been $17.27 million.
In this case, Mr. Sacane appears to have fallen into at least three HSR Act traps for the unwary financial investor. First, he may not have realized that he in fact controlled the hedge fund for HSR Act purposes. Second, he may have failed to realize these transactions were not exempt from the HSR Act Rules under either the investmentonly” or the “institutional-investor” exemptions. Third, he failed to aggregate the value of his holdings of the stock of each company to see whether the acquisition crossed the $50 million size-of-transaction threshold.
The investment-only exemption applies to acquisitions of 10% or less of the outstanding voting securities of a corporation if made as a passive investment. The institutional-investor exemption applies to stock acquisitions by institutional investors only where the investor will hold 15% or less of the outstanding voting securities. The aggregation rule means that an investor cannot avoid an HSR filing by making separate acquisitions of the stock of the same corporation, each of which is less than the filing threshold but, in the aggregate, above the threshold.
The antitrust authorities have made it clear that they will pursue civil penalties against investors who fail to file. In 2004 alone, the government levied penalties of $2 million, $800,000, and $1 million against Smithfield Foods, Bill Gates, and Manulife Financial Corporation, respectively, for failing to make an HSR filing.
In a press release announcing the Sacane settlement, Susan Creighton, Director of the FTC’s Bureau of Competition, said that this “significant penalty should put hedge funds, their managers, and securities traders on notice that they are not exempt from filing pre-merger notification forms.”
Even experienced investors may do well to consult HSR counsel before buying and selling significant amounts of voting securities. Morgan Lewis has experienced HSR lawyers who can help investors cut through the complex rules of the HSR Act, its regulations, and interpretations. Morgan Lewis also offers an on-line resource called HSRscan, which contains information about the HSR Act, its rules, and includes a table of other enforcement actions and penalties for violations of the HSR Act.
Investment Management FYI is a service of the Investment Management Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:
New York
Harry T. Robins
212.309.6728
hrobins@morganlewis.com
Washington, D.C.
Willard K. Tom
202.739.5389
wtom@morganlewis.com
Alexis J. Gilman
202.739.5128
agilman@morganlewis.com