On September 22, 2015, the Antitrust Division of the Department of Justice, acting at the request of the Federal Trade Commission (FTC), filed a complaint and proposed final judgment in the United States District Court for the District of Columbia, alleging that Leucadia National Corporation (Leucadia)—the ultimate parent entity of Jeffries, LLC (Jeffries)—violated premerger reporting requirements for the second time in less than a decade. The final judgment imposed a US$240,000 civil penalty on Leucadia. Significantly, this is the second time in less than a month that a company has settled charges that it violated the HSR Act by wrongful reliance on an investment exemption to the HSR Act. See Third Point client alert.
Jeffries was an interest holder in Knight Capital Group Inc. (Knight Capital). In July 2013, Knight Capital consolidated with another financial services company, GETCO Holding Company LLC, to form KCG Holdings Inc. (KCG). Pursuant to the transaction, Jeffries’ interest in Knight Capital was converted into 16.5 million voting shares of KCG valued at US$173 million, far exceeding the US$70.9 million premerger notification reporting threshold in effect at the time of the conversion. Leucadia consulted experienced HSR counsel to determine if its acquisition, through Jeffries, of the KCG shares would be subject to the HSR Act’s reporting and waiting period requirements. Counsel advised that the acquisition would be exempt from HSR filing requirements under the institutional investor exemption, and Leucadia therefore did not file an HSR form to report its acquisition of voting securities of KCG.
Pursuant to 16 C.F.R. § 802.64, certain defined institutional investors, such as broker-dealers under 15 U.S.C. 78c(a)(4) or (a)(5), may acquire up to 15% of the voting securities of an issuer without observing the reporting and waiting period requirements if, among other things, the voting securities are held solely for the purpose of investment; however, the rule cautions that "no acquisition of voting securities of an institutional investor of the same type as any entity included within the acquiring person shall be exempt under this section." See 16 C.F.R. § 802.64(c)(1). According to Leucadia, the exemption applied because (1) Leucadia, through Jeffries, was acquiring approximately 13.5% of KCG’s outstanding voting securities, (2) Jeffries—the acquiring entity—qualified as a broker-dealer, (3) Jeffries was acquiring the securities solely for the purpose of investment, and (4) KCG did not qualify as a broker-dealer.1
The FTC disagreed, concluding that KCG was a broker-dealer under the HSR rules and therefore Leucadia’s acquisition of KCG shares was an “acquisition of voting securities of an institutional investor [KCG, a broker-dealer] of the same type as any entity included within the acquiring person [Jeffries, also a broker-dealer].” Accordingly, the exemption did not apply, and Leucadia was obligated to report the acquisition and observe the applicable waiting period prior to consummating the transaction.
Leucadia made a corrective filing to report its acquisition on September 19, 2014, and acknowledged that the acquisition was reportable. It also agreed to pay a fine of $240,000.
The FTC often does not impose penalties on parties who inadvertently violate the HSR Act so long as, among other things, it is their first violation of the HSR Act and they self-report their failure upon discovery and file corrective HSR forms soon thereafter. In Leucadia’s case, the failure to report its KCG acquisition was its second violation in less than a decade. Leucadia had already filed a corrective HSR filing in 2008 for a missed filing obligation in 2007. The agency did not impose a financial penalty for the 2007 violation, but informed Leucadia that it was responsible for establishing an HSR compliance program to avoid similar violations in the future. In light of this prior violation, the FTC commissioners voted 5-0 in favor of the complaint and the US$240,000 penalty.
This case highlights the importance of consulting experienced HSR counsel in advance of acquiring voting shares, non-corporate interests, or assets through any means. Although exemptions may apply, even when HSR threshold tests are satisfied, many of the exemptions are complicated and nuanced. If an acquiring person has missed a filing obligation in the past, and corrected its error, it may be prudent for that person not only to consult with experienced HSR counsel before all acquisitions, but also to instruct counsel to consult with the Premerger Notification Office (without identifying party names) to confirm application of an exemption to a given set of facts.