On Wednesday, September 18, the Federal Trade Commission (FTC) announced a settlement agreement with prominent activist investor and GameStop CEO Ryan Cohen. Under the agreement, Cohen will pay a $985,320 civil penalty for failing to file the required notification under the Hart-Scott-Rodino (HSR) Act before completing his purchase of more than 562,000 shares of Wells Fargo & Company stock.
Individual Compliance with the HSR Act
The HSR Act requires notification of transactions resulting in holdings valued over an annually-adjusted amount—currently $119.5 million—prior to the transaction being completed. While the HSR Act comes up most often in the context of mergers between companies, individuals must also comply with these requirements when their transactions surpass the reporting threshold and do not qualify for an exemption.
One of these exemptions, known as the “Investment-Only Exemption” allows investors to avoid HSR reporting for stock purchases resulting in holdings of less than 10% of a company’s outstanding voting securities, so long as the investment will be passive. The FTC has long stated that it views this exemption narrowly and that the exception does not apply to investments by persons who intend to seek a board seat or otherwise intend to influence the target company’s operations or business decisions.
FTC Complaint Against Cohen
In the complaint against Cohen, the FTC determined that Cohen’s purchases should have been reported and did not qualify for the Investment-Only Exemption because Cohen—a well-known activist investor—clearly intended to influence Wells Fargo’s business. For example, the FTC cited an email from Cohen to Wells Fargo’s CEO in which Cohen sought a position on Wells Fargo’s Board of Directors and made suggestions on how Wells Fargo could improve its operations.
This enforcement action marks a more aggressive approach from the FTC regarding HSR Act violations. Historically, the FTC has not fined first-time violators of the HSR Act unless there was evidence that the offender intentionally violated the HSR Act or knowingly took a position inconsistent with the HSR Act’s rules, such as improperly claiming the applicability of the Investment-Only Exemption. For example, in 2012, the FTC fined Biglari Holdings Inc., a company associated with activist investor Sardar Biglari, for not making an HSR filing based on the claimed applicability of the Investment-Only Exemption, despite actively seeking board representation.
Here, the FTC makes no allegation that Cohen is a repeat offender, nor does it allege Cohen knowingly failed to file based on an improper application of the Investment-Only Exemption. Instead, the FTC alleges that (1) open market acquisitions have to be made intentionally and (2) “given the scope of Cohen’s open market acquisitions, it was not excusable negligence for him to be unaware of HSR Act legal requirements.” This appears to be the first instance where a person was fined for a negligent failure to file without the presence of aggravating circumstances. Nevertheless, the lack of aggravating circumstances may be reflected by the relatively low size of the fine: Cohen was fined less than $1 million but was facing a maximum potential fine of over $39 million.
This action comes on the heels of a separate and unrelated HSR enforcement action announced by the Department of Justice (DOJ) last month. In that case, the DOJ imposed a $3.5 million penalty on Legends Hospitality for “gun jumping” in connection with its acquisition of ASM Global. According to the DOJ’s complaint, Legends violated the HSR Act by coordinating with and exercising control over ASM before the expiration of the HSR waiting period. Specifically, Legends signed a contract allowing ASM to operate a venue on its behalf and discussed competitive bidding strategies with ASM while the DOJ was still reviewing the transaction. The Legends case marks the first gun-jumping enforcement action since 2017.
Takeaways from Recent Enforcement Activity
Together, these recent actions highlight the antitrust agencies’ aggressive enforcement approach and increased attention to all types of transactions. Both firms and individuals engaging in a transaction should be vigilant in ensuring compliance with the HSR Act, as penalties for violations are high, and ignorance of the law will not excuse noncompliance.
For more information about the HSR Act and its requirements, please contact the authors or the Bass, Berry & Sims Antitrust Team.