FTC Fines Investor for Inadvertent First-Time Violation of the HSR Act

Authors:Bernard (Barry) A. Nigro Jr. (Washington, DC), Nathaniel L. Asker (New York), Aleksandr B. Livshits (New York), Nathaniel Bronstein (New York), Madison Chajson (New York)

The Federal Trade Commission recently announced a settlement of charges that Ryan Cohen, an investor and the Chairman and CEO of GameStop, violated Hart-Scott-Rodino Act reporting obligations in connection with open-market purchases of Wells Fargo stock. In a departure from historic practice, the FTC imposed a fine of almost $1 million, notwithstanding that the violation appears to have been inadvertent and there was no allegation that Mr. Cohen had previously violated the statute.[1] In doing so, the FTC put investors on notice that it may bring enforcement actions for first time, inadvertent HSR violations where the agency deems the violation to be the result of inexcusable negligence.

In general, the HSR Act requires an investor to file notification and observe a 30-day waiting period if, as a result of a transaction, the investor will hold voting securities of an issuer valued in excess of $119.5 million.[2] The HSR Act provides an exemption for acquisitions of up to 10 percent of an issuer's voting securities made "solely for the purpose of investment."[3] As alleged by the FTC, between March 2018 and September 2020, Mr. Cohen acquired Wells Fargo shares through over 20 open-market purchases, resulting in him holding Wells Fargo stock in excess of the applicable HSR filing threshold.[4] Although Mr. Cohen's acquisitions amounted to less than 10% of the outstanding Wells Fargo voting securities, the FTC alleged that he was ineligible for the "investment-only" exemption because he had periodically communicated with Wells Fargo management to advocate for a board seat and offer his ideas on how the company could improve its business.[5] Cohen made a corrective HSR filing in January 2021,[6] suggesting that the HSR Act violations were inadvertent.

Historically, the FTC has had a practice of exercising prosecutorial discretion and declining to fine parties for first-time, unintentional violations of the HSR Act that were the result of understandable or simple negligence, where the party promptly submits a corrective filing upon discovery of the error.[7] Here, however, the FTC fined an investor for an apparent first-time violation involving large, open-market acquisitions, which the FTC stated require an acquirer to decide affirmatively to acquire voting securities (as opposed to e.g., vesting of stock options). Combined with the size of the acquisitions, the FTC stated that it is "not excusable negligence" for the investor to be unaware of HSR Act legal requirements in this context.[8]

This is the second time that the FTC has deemed large, open-market acquisitions in violation of the HSR Act as inexcusable negligence,[9] placing investors on notice that such violations may trigger an enforcement action and fines even for first-time inadvertent violations. HSR Act compliance can be highly technical and investors should therefore consult with counsel to ensure potential investments are properly monitored for reporting obligations.

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