Federal Judge Rules Against Investment Firms in CSX Case
 
June 16, 2008
 

On June 11, 2008, U.S. District Judge Lewis Kaplan held that activist hedge funds, The Children’s Investment Fund (TCIF) and 3G Capital Partners (3G), violated disclosure rules by using equity swaps to evade the reporting requirements of Section 13(d) and Regulation 13D. Under the Regulation 13D disclosure rules, investors must disclose when they have the power to vote or sell more than 5% of a company’s outstanding stock. However, equity swaps convey to buyers an equity interest in securities, not the power to vote or sell securities. TCIF and 3G had argued that they were a party to an equity swap and thus were not required to disclose their approximate 12% equity interest in railroad operator CSX, based in Jacksonville, Florida. In a letter to Judge Kaplan, Brian Breheny, Deputy Director of the Division of Corporation Finance, had expressed the SEC staff’s interpretive position that the “economic or business incentives that the [swap counterparty] may have to vote the shares as the other party wishes” is not enough to create in the shares a beneficial acquisition of voting power. Judge Kaplan, however, did not agree with Breheny’s amicus and found that TCIF and 3G violated Regulation 13D.

(CSX Corporation v. The Children’s Investment Fund Management (UK) LLP, et al., No: 08 Civ. 2764 (LAK) (S.D.N.Y. Jun 11, 2008))

Please Click Here to view the article.