(Reuters circulated the following on June 5.)
CHICAGO — The U.S. Securities and Exchange Commission has weighed in on a legal dispute between CSX Corp. and two money managers trying to wage a proxy fight at the company, saying it disagrees with the railroad’s interpretation of disclosure rules.
In a separate development, a group of U.S. lawmakers also joined the fray by asking the U.S. Treasury Department to conduct a national security review of the investment by one of the two money managers in CSX.
In a letter to U.S. District Judge Lewis Kaplan in New York, who is expected to issue a decision soon on the litigation, the SEC deputy director for corporation finance said his office disagreed with CSX’s interpretation of disclosure rules around equity swap transactions.
Contrary to CSX’s view, SEC official Brian Breheny wrote he did not believe swap transactions carried out by hedge fund The Children’s Investment Fund (TCI) with bank counter-parties made the money manager the beneficial owner — with voting powers — of those shares and violated reporting requirements by failing to disclose beneficial ownership.
The swaps were not “not sufficient to create beneficial ownership” under federal securities laws, Breheny wrote.
In March, CSX sued TCI and 3G Capital Partners, alleging the two money managers violated federal securities laws aimed at preventing groups of investors from secretly coordinating their efforts.
CSX has alleged the money managers had built up larger stakes in the railroad than reported to the SEC through their use of swap derivatives. Judge Kaplan has been asked to rule on the case by June 12.
Breheny wrote that “a person that does nothing more than enter into an equity swap should not be found to have engaged in an evasion of the reporting requirements.”
The letter was in response to a May 22 letter from Kaplan, with two questions on beneficial ownership reporting provisions of federal securities laws.
CSX is engaged in an acrimonious proxy battle with TCI and 3G, which have proposed an alternate slate of five directors for CSX’s 12-member board with the aim of improving the railroad’s operating performance and corporate governance.
The Jacksonville, Florida-based railroad wants the court to to block that slate, bar them from voting some shares and force them to sell a portion of their stake.
CSX will hold its annual shareholder meeting in New Orleans on June 25.
Separately, six U.S. lawmakers asked the Treasury Department to review TCI’s investment in CSX, saying they were concerned it leaves the ownership and control of critical U.S. infrastructure in the hands of unknown investors.
“Very little is known about the investors in the TCI Group or those investors’ agenda. They are anonymous and invisible to government regulators and the nation,” said the letter dated June 3.
Senators who signed the letter include Evan Bayh, a Democrat from Indiana, Mel Martinez, a Republican from Florida, and Jim Bunning, a Republican from Kentucky.
Treasury leads an inter-agency Committee on Foreign Investment in the United States (CFIUS), which reviews foreign deals for national security risks.
A Treasury spokesman said the department was reviewing the letter. Under CFIUS laws, a company can either voluntarily submit to a national security review or one of the committee’s agencies can request a review.
CSX shares closed up $2.50, or 3.87 percent, at $67.17 on the New York Stock Exchange.