The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Schedule 13D

  • From Vol. 10 No.13 (Mar. 30, 2017)

    Court to Rule on Novel Issue of Insider Trading Law in Case Against Leon Cooperman and Omega Advisors

    In September 2016, the SEC commenced a civil enforcement action against hedge fund manager Leon G. Cooperman and his investment advisory firm, Omega Advisors, Inc. (Omega), charging that Cooperman received and traded on material nonpublic information (MNPI) and committed more than 40 violations of the beneficial ownership reporting requirements under federal securities laws. See “Alleging Dozens of Violations, SEC Charges Leon Cooperman and Omega Advisors With Insider Trading and Failing to Make Regulatory Filings” (Sep. 29, 2016). In response to the defendants motion to dismiss the SEC’s complaint for failure to state a claim for insider trading and improper venue for the reporting violations, the U.S. District Court for the Eastern District of Pennsylvania (Court) recently dismissed the reporting violation claims but ruled that the SEC’s insider trading claims could proceed. In the Court’s Memorandum that accompanied its Order, the Court addressed a novel issue under the misappropriation theory of insider trading as to whether a defendant could be held liable for insider trading premised on an explicit agreement not to trade that was entered into after he received MNPI but before he traded on it. This article summarizes the Court’s Memorandum. For more on the misappropriation theory of insider trading, see “How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks? (Part Two of Two)” (Aug. 15, 2013); and “When Does Talking to Corporate Insiders or Advisors Cross the Line Into Tipper or Tippee Liability Under the Misappropriation Theory of Insider Trading?” (Jan. 10, 2013).

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  • From Vol. 3 No.1 (Jan. 6, 2010)

    Delaware Chancery Court Rules that Rival Bidder’s Lawsuit against Harbinger Capital Partners Hedge Funds Alleging Use of Non-Public Information to Hinder Bidder’s Acquisition Efforts May Proceed

    On December 22, 2009, Vice Chancellor J. Travis Laster of the Delaware Chancery Court, refused to dismiss a lawsuit brought by NACCO Industries, Inc., a Delaware holding company that owns the firm which markets Hamilton Beach appliances, against Applica, Inc., a Florida corporation that markets appliances under the Black & Decker label, as well as Harbert Management Corporation, an investment manager, and its affiliated Harbinger Capital Partners hedge funds (collectively, Harbinger).  The suit arises out of NACCO’s failed bid to purchase Applica in 2006 – a bid that began with Applica’s execution of a merger agreement with NACCO, continued with Applica’s termination of that agreement and ended with Harbinger winning Applica in a bidding contest.  NACCO complained that Harbinger’s success purportedly resulted from its advanced receipt of non-public tips through an intermediary from Applica insiders regarding the proposed Hamilton Beach-Applica merger, its resultant quiet and inexpensive accumulation of a controlling shareholder stake in Applica before Applica entered into and then terminated that agreement and its concomitant allegedly fraudulent Schedule 13D and 13G filings which failed to disclose its competing interest in Applica.  As a result, NACCO asserted claims against Applica for breach of contract and breach of the implied covenant of good faith and fair dealing; against Harbinger for tortious interference with contract, fraud, equitable fraud and aiding and abetting a breach of fiduciary duty; and against all defendants for civil conspiracy.  The court, though recognizing that potentially legitimate reasons existed for Harbinger’s conduct, nonetheless allowed the tortious interference and fraud counts to proceed against it.  In contrast, the court had “no difficulty” finding evidence inferring that Applica breached its contract with NACCO.  This article details the background of the action and the most salient portions of the court’s legal analysis.

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  • From Vol. 2 No.30 (Jul. 29, 2009)

    SEC’s Order in the Perry Case Effectively Creates a Presumption that Beneficial Ownership Acquired as Part of an Activist or Merger Arbitrage Strategy Is Not “In the Ordinary Course,” and thus May Require the Filing of a Schedule 13D

    On July 21, 2009, the Securities and Exchange Commission (SEC) settled with New York-based hedge fund manager Perry Corp. over alleged securities law violations for failure to report that a fund it managed (Perry) had purchased a significant amount of stock in a public company.  The SEC Order found that Perry failed to disclose its acquisition of nearly 10 percent of the common stock of Mylan Laboratories Inc., a company that had just announced a proposed acquisition of King Pharmaceuticals Inc.  Perry was engaged in a merger arbitrage strategy and would have benefited from the Mylan-King merger.  The conclusions in the Order raise several questions about the obligation of a hedge fund to file a Schedule 13D, particularly if the fund is engaged in merger arbitrage or activist strategies.  Specifically, the Order appears to significantly narrow the circumstances in which beneficial ownership of the equity of a publicly traded company may be considered acquired “in the ordinary course” when acquired by a hedge fund following a merger arbitrage or activist strategy.  In fact, it may effectively create a presumption that such trading is not in the ordinary course, and thus any hedge fund following such a strategy that crosses the five percent threshold must file a Schedule 13D within 10 days of crossing the threshold, as explained more fully in this article.  In addition, the Perry Order highlights the ongoing tension between hedge funds and regulators over how much transparency hedge funds need to provide to the public.  We outline the filing requirements under Section 13(d)(1) of the Securities Exchange Act of 1934, provide a comprehensive summary of the Perry Order then describe the implications of the Perry Order for the obligations of hedge funds to file Schedule 13Ds (and 13Gs).  We also discuss the implications of the Perry Order for filing obligations based on beneficial ownership arising out of total return equity swap positions, and confidentiality concerns raised by the Order.

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