TheCorporateCounsel.net

June 11, 2007

Jail Bait? Failure to File Schedule 13Ds and Forms 3

A couple of recent cases have highlighted situations where beneficial ownership reporting by hedge funds is called into question, in one instance with a particularly draconian result – potential imprisonment.

The U.S. Attorney for the Southern District of New York announced that the founder and manager of two hedge funds pleaded guilty to three counts of violating federal securities laws arising from the activities of his funds in acquiring substantial positions in the securities of two public companies. In addition to defrauding the funds’ investors about transactions that resulted in losses of $88 million, the manager was charged with failing to file on Schedule 13D to report an interest of 5% or more of one company’s stock (he and his funds controlled over 80 percent of the stock), and failing to file a Form 3 to report his beneficial interest of more than 10% in another company (while falsely reporting ownership of under 10% in a Schedule 13D).

The SEC also commenced a civil action in this case back in 2005 that is still pending. Actions such as this one should come as no surprise to those who have heard the SEC Staff publicly express the point that compliance with the beneficial ownership reporting requirements has been – and will remain – a high priority.

While the failure to file accurate beneficial ownership reports was obviously important for the markets in the common stock of the companies involved, the lack of accurate beneficial ownership information was also crucial for the manager to carry out his fraudulent scheme, as any reporting of his interests would have informed his investors that he was not acting in accordance with the funds’ investment policies. Alan Dye has blogged more about this case on his Section16.net Blog.

And Another Schedule 13D/G Action…

Recently, the Delaware Chancery Court addressed the situation of a hedge fund that reported its “investment only” intent on Schedule 13G when it was potentially considering the nomination of a short slate of directors to the company’s board. While the case of Openwave Systems Inc v. Harbinger Capital Partners principally involved the hedge fund’s failure to timely nominate its director candidates under Openwave’s advance notice bylaw provisions, the court took particular note of the fund’s status as a Schedule 13G filer in assessing whether it was really in a position to nominate its own directors within the required timeframes of the advance notice bylaw provisions, as well as in rejecting the fund’s allegation that the board of Openwave reduced the number of directors in response to Harbinger’s potential “threat.”

On DealLawyers.com, we have posted a copy of the opinion in our “Schedule 13Ds” Practice Area.

NASPP’s “15th Annual Conference”: Program Announced!

The full program – with over 40 panels! – for the NASPP Annual Conference was just announced. This conference brochure lists all the panels. Register today.

This year’s conference will be held at the San Francisco Marriott from October 10-12 – and already is on track to have well over 2000 attendees. Make your hotel reservations now before the hotel is sold out. With the October 9th pre-conference – “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” – being so popular, this will happen very soon…

- Dave Lynn