Washington, D.C. — Today, Citizens for Responsibility and Ethics in Washington, the Government Accountability Project and New Rules for Global Finance, sent a letter urging the House and Senate to take up legislation to close a loophole in securities law allowing activist investors to secretly buy large stakes in companies before initiating hostile take overs, depriving the market of material information and significantly disadvantaging ordinary investors.
CREW Chief Counsel Anne Weismann stated, “Lawyers and academics have been urging the Securities Exchange Commission to fix this problem for years, with no result. Now it’s time for Congress to step in.”
Louis Clark, President and Corporate & Financial Accountability Director of the Government Accountability Project, said, “This reasonable and simple reform measure would impose a check on one of the ways certain market manipulators have learned how to expand their considerable wealth unfairly.”
SEC rules provide a ten-day period before stock purchasers are required to report having acquired at least a five percent ownership threshold in publicly traded companies. The Wall Street Journal has documented that during this ten-day window, activist hedge funds are tipping each other regarding their plans, while ordinary investors and targeted companies are left in the dark. Most recently, William Ackman and his hedge fund, Pershing Square Capital Management, partnered with Valeant Pharmaceuticals, used the ten-day window between the acquisition and required disclosure of a five percent stake in a company to go from owning just under five percent to nearly ten percent of their target, Allergan. Only after that period did Valeant disclose its intention to make an offer for the company. Once Pershing Square’s ownership interest became public, Allergan’s share price increased. Eventually, Mr. Ackman profited by $2.6 billion.
The five percent ownership rule was intended to promote transparency in the market so investors could make decisions on more equal information. But as things stand, activists like Mr. Ackman and those they tip benefit from outsized returns, injuring ordinary investors who don’t have access to the same information.
CREW, GAP and New Rules for Global Finance ask Congress to reduce the ten-day period to one day, add a two-day “cooling-off period” during which acquirers would be prohibited from acquiring additional beneficial ownership, and modernize the definition of “beneficial ownership” to prevent activists from acquiring control using stealth techniques and derivative instruments to evade the reporting requirements.
Ms. Weismann continued, “Activist hedge fund managers manipulate the laws and exploit gaps to hide their acquisitions, allowing them to reap outsize profits while ordinary investors are left in the cold. No wonder Americans think Wall Street is a rigged game.”