SEC Scrutinizes Hedge Fund Activists for Securities Regulations Violations

According to the Wall Street Journal, the Securities and Exchange Commission (SEC) is investigating whether certain hedge fund activists have been working in concert without filing the appropriate securities regulations disclosures.

Under Rule 13D, investors who work together to either buy, sell or vote securities must disclose those alliances by making a filing with the SEC if they own more than five percent of a company’s stock or are seeking votes from other company shareholders. That disclosure must be made within 10 days after the group crosses the 5% ownership threshold in any one company.

The SEC considers a group to have been formed if the investors involved have reached any type of mutual agreement on how shares will be voted or on the timing of trading a company’s stock. The WSJ reports that the SEC has opened a number of investigations into whether certain hedge fund activists have been working in concert without making the appropriate filings.

In March 2015, the SEC settled eight cases involving corporate insiders who allegedly failed to update their stock ownership filings to show their activities undertaken to purchase several companies. The defendants in each case agreed to settle the matters without admitting or denying the SEC’s allegations.

The SEC’s scrutiny comes on the heels of a WSJ investigation in 2014 that found some hedge fund activists routinely tip off potential partners to their trading intentions. As long as they do not coordinate their trades, this practice is legal. However, some watchdog groups have called the practice into question, saying that hedge funds are using this method to skirt the reporting regulations and leave other investors in the dark.

In April 2015, several financial watchdog groups — including the Government Accountability Project, Citizens for Responsibility and Ethics in Washington and New Rules for Global Finance — sent a letter to the chairs of the financial committees in Congress asking for a change in the rules on how hedge fund activists report their ownership in targeted companies. The letter asked Congress to consider shortening the 10-day window to one day and to impose a two-day “cooling off” period before investors could purchase any additional shares.

The Cogdell Law Firm is a boutique law firm focusing on large, complex business and criminal financial-related litigation, including white collar criminal defense, securities fraud, health care fraud investigation, criminal appeals and state criminal defense. When results matter most, contact Dan Cogdell at (713) 426-2244 or dan@cogdell-law.com.

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