DealLawyers.com Blog

Earlier this week, the SEC brought an enforcement action against a hedge fund sponsor for alleged violations of Section 13(d)’s beneficial ownership reporting provisions.  Here’s an excerpt from this Steve Quinlivan blog describing the proceeding:

The hedge fund had a senior managing director and portfolio manager that became a candidate for a board seat on a public company and began acting as a de facto board member. On October 28, 2014, the portfolio manager and a financial analyst emailed a list of recommended changes to the public company’s lead outside director and Chief Executive Officer. The e-mail noted “operations are a mess” and that “[i]nvestors don’t have unlimited patience.”

On November 6, 2014, the public company, at the suggestion of the portfolio manager, formed a special sub-committee of the top three officers and the independent directors. Thereafter, the special sub-committee held regular discussions with management of the public company, including the consideration of proposals for cost cutting, capital allocation, oil well development, and changes to the tone at the top. The portfolio manager participated in these discussions even though he was not yet appointed to the public company board.

The hedge fund had reported its ownership interest in the company on a Schedule 13G, which allows certain large investors to report their position without complying with the more extensive disclosure obligations imposed under Schedule 13D. However, only those persons who qualify as “passive investors” are eligible to use Schedule 13G. Persons who may seek to exercise or influence control over the issuer can’t use 13G – and they have to promptly file a Schedule 13D once they’re no longer eligible for the short-form filing.

The hedge fund ultimately filed a 13D once its designee was elected to the Company’s board. The Division of Enforcement said that was too late – it alleged that the hedge fund’s actions prior to that time involved “substantial steps in furtherance of a plan, which was ultimately successful,” to place its designee on the board. Accordingly, it incurred an obligation to file a Schedule 13D in advance of the designee’s election. The parties consented to the entry of a cease & desist order and $260,000 in civil monetary penalties without admitting or denying the SEC’s allegations.

Much to the chagrin of activist targets, the SEC hasn’t brought a lot of Section 13(d) enforcement proceedings against activists, but as we blogged at the time, it did bring one last year against a group of activists for alleged disclosure shortcomings during the course of a campaign.

– John Jenkins