SEC Weighs In on CSX Lawsuit

The Securities and Exchange Commission doesn’t think there is a need for hedge funds to include certain derivatives when calculating how they report ownership stakes in companies, according to a June 4 letter.

The SEC's assistance was prompted by U.S. District Judge Lewis Kaplan, after an issue of derivatives came up during litigation between railroad operator CSX Corp. and two hedge funds; 3G Partners and the Children's Investment Fund Management.

In the past, certain companies have argued that hedge funds use derivative, total-return equity swaps to hide their true ownership interests.

In the current legal battle, Florida-based CSX argued that TCI used a certain type of derivative as a means to have greater influence during a proxy dispute in terms of the way underlying shares were voted.

The SEC stated in their letter that it "disagrees" with CSX's position saying, "as a general matter, 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."

A CSX spokesman released a statement saying, "The letter gives the views of the staff of the SEC on the general legal standard in one of the many issues in CSX's lawsuit against the TCI Group. The Court will determine the appropriate legal standard on this issue and how it is applied to the specific facts of this case. CSX will wait for the Court's decision on this and all of the other issues in the lawsuit."