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News January 14, 2008 Issue

Hedge Fund Manager Pays $1.1 Million to Settle FTC Suit

For the third time in three years, the Federal Trade Commission has sued a hedge fund manager for failing to comply with the Hart-Scott-Rodino Act.

On December 19, the FTC announced that it had sued San Francisco-based ValueAct Capital Partners for allegedly failing to make pre-acquisition notification filings with the FTC and failing to observe the required waiting period before making acquisitions of stock of three different companies.

ValueAct had previously run afoul of the HSR filing requirements back in 2003, but had made corrective filings and outlined steps it would take in the future to ensure that similar violations did not occur. At that time, the FTC did not bring charges, since it was the firm’s first violation.

The acquisitions that triggered the FTC proceeding stemmed from the creation of a "Master Fund" comprised of three combined hedge funds. As a result of that combination, the Master Fund held more than $100 million worth of one company’s shares. While the act of combining the funds was not itself a reportable event under HSR rules, the subsequent acquisition of the company’s shares, while over the $100 million threshold, was. HSR rules require certain persons acquiring more than $50 million of another entity’s voting securities to file a notification with the FTC and observe a waiting period before consummating the transition. A similar notification and waiting period is required after acquisitions of more than $100 million of that entity’s voting securities.

The FTC also alleged that the Master Fund made purchases of two other companies’ securities that exceeded 10 percent of the companies’ voting securities. That 10 percent threshold was important, because acquisitions made solely for the purpose of investment are exempt from the reporting requirements only if the investment securities do not exceed 10 percent of the issuer’s outstanding voting securities. Again, ValueAct failed to file the pre-acquisition notice and observe the waiting period, as required by the HSR Act.

ValueAct eventually made corrective filings for each of the three acquisitions. This time, however, the FTC didn’t give them a pass. To settle the FTC’s charges, ValueAct agreed to pay a civil penalty of $1.1 million.

In a statement announcing the proceeding, the FTC emphasized that ValueAct already had been on notice about the HSR filing requirements, yet still allegedly violated them. "The Commission takes compliance with the premerger notification rules seriously, and will not hesitate to seek civil penalties against companies or individuals that fall short of their filing responsibilities," said Jeffrey Schmidt, director of the FTC’s Bureau of Competition, in a statement. "While we are flexible and may forgive an inadvertent error, we are less so in cases where multiple errors have been made despite earlier promises of diligent oversight."

The previous HSR cases brought by the FTC were against Scott Sacane, in September 2005, and James Dondero, in May 2007.