Securities Regulation Daily Investor agrees to pay $720,000 over alleged HSR violation
Friday, October 28, 2016

Investor agrees to pay $720,000 over alleged HSR violation

By Jeffrey May, J.D.

Investor Fayez Sarofim has agreed to settle charges that he violated the Hart-Scott-Rodino (HSR) Act after apparently improperly relying on the Act’s investment-only exemption when he failed to notify the antitrust agencies of acquisitions of voting securities of Kinder Morgan, Inc. (KMI) and Kemper Corporation. Sarofim has agreed to pay $720,000 in civil penalties under the terms of a proposed consent decree that, if approved by the federal district court in Washington, D.C., would resolve allegations in a simultaneously-filed complaint (U.S. v. Sarofim, October 27, 2016).

Investor-only exemption. There is a limited "investment-only" exemption to the HSR report-and-wait rules for passive investors acquiring less than 10 percent of a company’s outstanding voting securities. The HSR rules provide that securities are held "solely for the purpose of investment" if the person holding or acquiring the securities has "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer."

There has been criticism of the government’s interpretation of the investment-only exemption from some circles. Some call the government’s view too narrow and suggest that it can have a chilling effect on investment. As detailed below, Sarofim was a board member of the companies involved, and the government has found this sufficient to remove a transaction from the exemption.

KMI transactions. The complaint alleged that, in January 2001, Sarofim failed to report the acquisition of 237,000 shares of KMI—the largest energy infrastructure company in North America. This acquisition resulted in Sarofim—the second-largest shareholder in KMI—holding securities valued over the $15 million HSR threshold that was then in place.

Sarofim could not rely on the investment-only exemption because he was a member of the KMI board, in the government’s view. The Justice Department contended that his board membership necessarily caused him to participate in the formulation, determination, or direction of the basic business decisions of KMI. Sarofim purportedly failed to make HSR filings when he crossed the two subsequent filing thresholds related to his holdings in KMI. Corrective filings were made in November 2014.

Kemper transactions. Sarofim also was a member of the board of Unitrin Inc., the predecessor company to Kemper. In May 2007, Sarofim, while a Unitrin board member, acquired 10,000 shares of Unitrin on the open market and, as a result, held Unitrin voting securities valued over $59.8 million, the threshold that was then in place. Sarofim allegedly did not report the transaction, relying on the investment-only exemption. According to the government, Sarofim could not rely on the exemption because of his status as a Unitrin board member. The government pointed to other purchases throughout 2008. Unitrin has since changed its name to Kemper. Corrective filings were made in November 2014.

Settlement. Under the terms of the proposed final judgment, Sarofim has agreed to pay a $720,000 civil penalty. Although Sarofim was allegedly in violation of the HSR Act premerger notification rules for many years, the government adjusted the penalty downward from the maximum permitted under the HSR Act. The government pointed out that the violations were inadvertent and that the defendant promptly self-reported the violations after discovery. Also noted was the defendant's willingness to resolve the matter by consent decree.

The case is No. 16-cv-02156.

Attorneys: Jennifer Joy Lee, U.S. Attorney's Office, for the United States. Vadim M. Brusser (Weil, Gotshal & Manges LLP) for Fayez Sarofim.

Companies: Kinder Morgan, Inc.; Kemper Corp.; Unitrin Inc.

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