What do pesticides and hedge funds have in common? Trade secrets and intellectual property protection, according to Philip Goldstein, managing member of Full Value Advisors, a hedge fund headquartered in Pleasantville, N.Y. Goldstein, the one-man hedge fund activism band who won a court ruling that ended with nullification of the Securities and Exchange Commission’s hedge fund registration act, has taken up another cause, which he says he expects to also end in court, according to Lipper’s Hedge World. At issue is section 13f-1 of the Securities Exchange Act of 1934. Goldstein last week field a 19-page document with the SEC arguing for exemption of his fund form the rule, which requires hedge fund managers to report portfolio holdings. The SEC argued that the disclosure is critical to investor protection. Goldstein disagrees. “As administered, there is no rational relationship between the disclosure scheme of [section] 13f-1 and any legitimate government interest,” he said. The hedge fund manager said he plans to wait a few weeks before following-up with regulators, but ultimately expects that his objections will work their way into the court system in the form of a lawsuit. Goldstein’s concern is that if hedge funds report their largest portfolio holdings, others will mimic those plans and start competing funds of their own. He cited companies including GuruFocus and Big Money Watch whose business models, essentially, are to follow 13f-1 filings to tell investors what hedge funds are doing. Jumping ahead to the court case, Goldstein points to precedent. In the 1984 case of Ruckelshaus v. Monsanto Co., the Supreme Court ruled in favor of pesticide company Monsanto, which argued that adhering to Environmental Protection Agency demands to publish the list of toxins used in its products would be akin to publishing its recipe for bug killer. Rather than comply, the company invoked Fifth Amendment rights, which the court upheld. In 2000, Phillip Morris argued that a Massachusetts statue requiring tobacco companies to publish the ingredients of all of their products would only serve to give competitors an advantage. In Phillip Morris v. Reilly, the court agreed. But others are not as certain Goldstein would have a rock-solid case this time around. “Unlike patents or trademarks or copyrights, trade secrets aren’t filed or registered with the federal government, or the state government,” said Robert J. Tosti, a partner and a member of the intellectual property practice at Edwards Angell Palmer & Dodge in Boston. “The issue is that it has value because of its secrecy and the company is taking reasonable measures to protect that secrecy. I don’t know if this meets those standards,” he said. “The information they’re being asked to disclose is old information. It’s what you’ve bought and sold over a certain period, not your investment strategy or philosophy.” David Marder, a partner at Robins, Kaplan, Miller and Ciresi in Boston agreed, adding that the disclosures to which Goldstein objects could be useful to regulators for the purposes of protecting investors. “I think the government has a compelling interest,” he said. “In order to regulate you need information—the most compelling information in this case is what are the holdings, and how much is there? Armed with that information, [the SEC] can do a lot of things, and all of these things are done with the interest of protecting the markets,” Marder said. “The SEC is more than within its right,” he said. “I think Mr. Goldstein has been emboldened by his victory in June, and now he thinks he can beat the SEC anytime he wants.”
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