Antitrust Law Daily Wrap Up, TOP STORY: Misinterpretation of institutional investor exemption leads to civil penalty for HSR violation, (Sep 22, 2015)

By Jeffrey May, J.D.

An exception to the premerger filing obligations under the Hart-Scott-Rodino (HSR) Act for acquisitions by institutional investors did not apply to holding company Leucadia National Corporation's acquisition of more than 16 million shares of KCG Holdings, Inc. (KCG) voting securities in July 2013. As a result, Leucadia has agreed to pay a $240,000 civil penalty to settle charges that it violated the HSR Act by completing the acquisition without observing the Act's notification and waiting period requirements (U.S. v. Leucadia National Corp., Case 1:15-cv-01547).

Today, the Department of Justice Antitrust Division filed a complaint, on behalf of the FTC, in the federal district court in Washington, D.C. against Leucadia over its failure to report a conversion of its ownership interest in the financial services company KCG. At the same time, the Justice Department filed a proposed final judgment with the court that would resolve the allegations.

The voting securities held as a result of the July 1, 2013 acquisition by Leucadia through its wholly-owned subsidiary—global investment banking firm Jefferies Group LLC—represented approximately 13.5 percent of KCG's outstanding voting securities, valued at approximately $173 million. At the time of the transaction, HSR reporting and waiting requirements applied to most transactions that resulted in the acquiring person holding more than $70.9 million, unless the transaction was otherwise exempted.

Institutional investor exemption. According to the complaint, experienced HSR counsel had advised Leucadia that the transaction was exempt under Section 802.64 of the HSR Rules. Section 802.64 allows institutional investors, such as broker-dealers, to acquire up to 15 percent of the voting securities of an issue without filing under the HSR Act and observing the waiting period, if the voting securities are acquired solely for the purposes of investment. There is an exception to this exemption where the acquisition involves voting securities of an institutional investor of the same type as any entity included within the acquiring person.

The complaint contends that the determination that KCG was not a broker-dealer within the meaning of the HSR rules was incorrect. Because both Jeffries and KCG were broker-dealers, the exemption under Section 802.64 did not apply. Leucadia issued a corrective filing in September 2014; however, the holding company was in violation of the Act from July 1, 2013 until October 20, 2014, when the waiting period expired.

Civil penalties. The government decided to seek civil penalties against Leucadia because this was the holding company’s second strike. Leucadia had avoided a civil penalty for an earlier HSR filing issue with respect to a 2007 transaction. While the maximum amount of a daily civil penalty for HSR violations is $16,000, the settlement was deemed “an appropriate civil penalty.”

The government has moved for immediate entry of the final judgment. Where the consent decree provides for only the payment of civil penalties, it has been the practice of the Department of Justice to seek immediate entry of the final judgment. It is the government's position that the procedures of the Antitrust Procedures and Penalties Act or Tunney Act are not required.

Attorneys: Kenneth A. Libby for FTC and U.S. Department of Justice. John M. Sipple, Jr. (Weil, Gotshal & Manges LLP) for Leucadia National Corp.

Companies: Leucadia National Corp.; KCG Holdings, Inc.

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