Pursuant to a proposed consent judgment, filed by the Department of Justice on behalf of the Federal Trade Commission, in the U.S. District Court for the District of Columbia, a Connecticut-based hedge fund manager will be required to pay $350,000 in civil penalties to settle charges that he failed to make four premerger notification filings required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”).
The HSR Act established a premerger notification system which requires the parties to acquisitions meeting certain size tests to file premerger notifications with the Federal Trade Commission and the Antitrust Division of the Department of Justice and to observe a waiting period before consummating the acquisition. The notification and waiting period are intended to give the federal antitrust agencies prior notice of and information about such acquisitions, and an opportunity to investigate and determine whether or not to challenge the proposed transaction before it is closed.
The federal antitrust agencies have promulgated Rules to carry out the purposes of the HSR Act. Among other things, the HSR Rules contain several reporting thresholds. A person who specifies a lower reporting threshold in an HSR notification form must comply with the Act’s notice and waiting period requirements again before crossing a higher threshold. The HSR Act provides that any person who fails to comply with any provisions of the Act is liable for a civil penalty of up to $11,000 per day for each day of the violation.
According to the government’s complaint, Scott R. Sacane controlled Durus Capital Management (N.A.), LLC (“Management”) because he was entitled to more than 50% of the profits of Management. In turn, Management controlled Durus Life Science Master Fund Ltd. (“Master Fund”) by reason of having the contractual power to designate a majority of the board of directors of Master Fund. Thus, Sacane was an “ultimate parent entity” of Master Fund within the meaning of the HSR Act Rules.
As can happen under the HSR Rules, the government alleged that Master Fund had a second ultimate parent entity, Durus Life Sciences Fund, LLC (“Durus”), which was managed by Management. According to the complaint, Durus held more than 50% of the voting securities of Master Fund, thus making it also an ultimate parent entity of Master Fund.
The Government’s complaint alleged that, on February 24, 2003, Master Fund acquired voting securities of Aksys, Ltd. (“Aksys”) valued at approximately $51.4 million, exceeding the HSR Rules then in effect $50 million reporting threshold, without either Sacane or Durus filing the required notification form or observing the waiting period. On April 24, 2005, Master Fund acquired additional voting securities of Aksys bringing its holdings to approximately 50.1%, thus exceeding another reporting threshold of the HSR Rules. Again, neither Sacane nor Durus filed the required notification form or complied with the HSR Act’s mandatory waiting period.
About July 23, 2003, Sacane’s counsel raised questions with him regarding the reportability of the Aksys acquisitions under the HSR Act. As a result, on August 29, 2003, Sacane submitted two HSR Act notifications on behalf of Durus, but none on behalf of himself. In January, 2005, the FTC informed Sacane that he also was an ultimate parent entity of Master Fund and Sacane submitted two premerger notification forms for the Aksys acquisitions on April 1, 2005. Therefore, the complaint charged Sacane with being continuously in violation of the HSR Act from February 25, 2003 through May 2, 2005.
On March 24, 2003, Master Fund acquired voting securities of Esperion Therapeutics, Inc. (“Esperion”) valued at approximately $50.4 million, exceeding the HSR Rules’ then $50 million reporting threshold. Master Fund continued acquiring additional shares of Esperion, and on June 3, 2003, its holdings totaled approximately $102.3 million, exceeding the HSR Rules’ then $100 million threshold. In neither case did Sacane or Durus file a premerger notification form or observe the HSR Act’s mandatory waiting period.
As with the Aksys acquisitions, Sacane’s counsel raised questions regarding the reportability of the Esperion acquisitions under the HSR Act. On August 29 2003, Sacane submitted two HSR notifications on behalf of Durus, but none on behalf of himself. As previously noted, in January, 2005, the FTC informed Sacane that he also was an ultimate parent entity of Master Fund and, on April 1, 2005, Sacane submitted two premerger notification forms for the Esperion acquisitions. The complaint alleged that Sacane was in continuous violation of the HSR Act with regard to the Esperion acquisitions from March 24, 2003 through May 2, 2005.
In commenting upon the proposed consent judgment, the Director of the FTC’s Bureau of Competition stated that the civil penalty imposed upon Sacane should put hedge funds, their managers, and securities traders on notice that they are not exempt from the premerger notification requirements of the HSR Act. She noted that Sacane “is an experienced fund manager who should have known and fulfilled his obligations” under the HSR Act.
This case also is an excellent example of why anyone who is a party to an acquisition that approaches the HSR Act’s minimum reporting threshold (now $53.1 million) should seek the advice of experienced HSR counsel. For it appears that, while Sacane’s counsel apparently recognized that the Aksys and Esperion transactions were required to be reported under the HSR Act, counsel failed to recognize that Sacane was an ultimate parent entity of Master Fund and had to comply with the report and waiting period requirements of the Act. It was an oversight that cost Sacane $350,000 in civil penalties.
Robert L. Magielnicki