7.21.2009 The SEC charged New York-based investment adviser Perry Corp. with securities law violations for failing to report that it had purchased substantial stock in a public company. The securities laws require institutional investors like Perry to report the acquisition and ownership of more than 5% of the common stock of a public company.
The SEC found that the firm failed to disclose that it had acquired nearly 10% of the common stock of Mylan Laboratories, Inc. At the time, Mylan had announced a proposed acquisition of King Pharmaceuticals, Inc., that was subject to shareholder approval. Perry had entered into an investment strategy known as “merger arbitrage” and would profit from a Mylan-King merger. To increase the likelihood of the merger, Perry separately purchased the Mylan voting shares and entered into a series of “swap” transactions—hedging transactions through the use of derivative instruments—designed to avoid any financial exposure from its ownership of those shares.
According to the SEC’s order, Perry made a determination not to file the required disclosure statement after allegedly concluding that it acquired the Mylan shares “in the ordinary course of its business” and was thus entitled to defer its reporting obligations. However, according to the SEC, Perry’s acquisition of Mylan shares was not “in the ordinary course” of its business. “Qualified institutional investors” can defer their reporting obligations only when they acquire securities as part of their ordinary market making or passive investment activities. When institutional investors acquire ownership of securities for the purpose of influencing the direction or management of an issuer, or affecting or influencing the outcome of a transaction—such as acquiring shares for the primary purpose of voting those shares in a contemplated merger—the acquisition is not made and the shares are not held in the “ordinary course” of business. Perry was required to disclose its acquisition of more than 5% of Mylan shares within 10 days of the acquisition.
Click http://www.sec.gov/news/press/2009/2009-165.htm to access the SEC press release.