(Dow Jones circulated the following on April 4.)
CHICAGO — The hedge fund pursuing strategic reform at CSX Corp. (CSX) on Friday leveled allegations of insider trading against the chairman and board members of the U.S. railroad operator.
The Children’s Investment Fund made the allegations in a 62-page federal court filing, countering charges made last month by CSX against the London-based hedge fund.
CSX immediately responded that TCI’s “counterclaims are without merit”, though it didn’t provide comment on the individual charges made against its officers.
The testy exchange has intensified the months-long battle between TCI – which has a 4.2% stake in the fourth-largest U.S. rail operator by revenues – and CSX management, a contest that has taken on increasingly political overtones.
TCI is seeking to nominate a slate of five new directors to the 12-member board at a shareholders’ meeting on June 25. The fund, which has a history of shareholder activism in Europe, has challenged capital allocation and investment priorities at the Jacksonville, Fla.-based railroad.
CSX has, in turn, mounted a furious lobbying campaign in Congress and last month accused TCI and 3G Capital Partners, another hedge fund, of violating disclosure laws in building up a stake through swap contracts. TCI and 3G have disclosed a combined 8.7% stake in CSX, with another 11.5% held through swaps.
“CSX believes that TCI has filed counterclaims in an attempt to distract shareholders from the Company’s previously filed lawsuit against TCI, 3G Capital Partners and certain of their affiliates,” said CSX in a statement on Friday.
TCI has maintained it isn’t seeking control of CSX or to slash its capital expenditure at a time when the U.S. railroad industry is booming, fueling concern about its ability to meet future demand.
The fund was accused at a Congressional hearing last month of using ” aggressive” tactics that could lower railroad investment.
TCI’s suit alleged CSX directors have “gone to extraordinary lengths to entrench themselves in their current positions, including withholding from shareholders material facts regarding the Board’s violation of its own insider trading policies, code of ethics and bylaws, while at the same time enriching themselves by setting certain ‘spring-loaded’ stock grants for CSX insiders while in the possession of material non-public information.”
The fund said it had disclosed the dealings cited in the CSX suit last month.
TCI’s efforts have stirred a debate over railroad priorities at a time when the railroad industry is also seeking to fend off a threat of re-regulation and manage rising demand and fuel prices.
CSX has already responded with a raft of shareholder-friendly measures, including a $3 billion share-buyback program. Analysts said its operational performance has improved after lagging peers during the recent renaissance in the industry’s fortunes.
The U.S. railroad industry remains on a roll, despite the softening domestic economy. Imports and agricultural exports have filled capacity, providing operators with pricing power and boosting profits and investment in its aging infrastructure.
TCI is viewed as a politically-savvy operator, and has already emerged as the poster child for hedge-fund activism in Europe, with successful high-profile campaigns involving Deutsche Boerse AG (DB1.XE) and ABN Amro (ABN).
The fund blocked the German exchange operator’s planned takeover of the London Stock Exchange Group PLC (LSE.LN), leading to the ousting of its CEO. It pushed for a break-up of ABN Amro, a move which led to a contested takeover battle for the Dutch financial services group ultimately won by a consortium led by the Royal Bank of Scotland Group PLC (RBS).
CSX operates a 21,000-mile rail network across the eastern United States. It is one of the only four Class 1 railroads that emerged from industry consolidation at the end of the last century.
Foreign investors in U.S. airlines, oil companies and port operators have garnered criticism in Congress in recent years – notably in the controversy surrounding Dubai World Ports forced divestiture of U.S. container ports.