Recent HSR enforcement action underscores that the FTC is not playing games with HSR Act violations

The US antitrust agencies are routinely on alert for violations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), even in instances where there are no competitive or otherwise apparent antitrust concerns. To showcase this, last week, the Federal Trade Commission (“FTC”) announced an approximately $1 million civil penalty against an individual for his alleged failure to file his open market acquisition of Wells Fargo & Company (“Wells Fargo”) shares. In doing so, the FTC alleged he could not benefit from the “investment-only” exemption.

The HSR Act⁽¹⁾ requires that parties file HSR Act Notifications and observe statutory waiting periods before consummating certain acquisitions of voting securities, non-corporate interests or assets.⁽²⁾ The waiting period aims to give the antitrust agencies time to investigate proposed transactions for any violations of federal antitrust laws.

On September 18, 2024, the FTC filed a complaint and proposed settlement in the United States District Court for the District of Columbia against Ryan Cohen, the managing partner of RC Ventures, LLC and the Chairman and CEO of GameStop Corp., for an alleged violation of the HSR Act in relation to his unreported acquisitions of Wells Fargo voting securities dating back as early as 2018—over six years ago. To settle this alleged violation, Mr. Cohen agreed to pay a civil penalty of just under $1 million ($985,320).

In March 2018, Mr. Cohen acquired 562,077 voting shares of Wells Fargo in the open market. This acquisition resulted in Mr. Cohen’s aggregate holding of Wells Fargo shares exceeding the relevant HSR Act threshold. Having exceeded the filing threshold, Mr. Cohen’s acquisition triggered an HSR Act filing requirement absent an applicable exemption.

The only exemption conceivably available to Mr. Cohen at the time is 16 CFR § 802.9, known as the “investment-only” exemption, which exempts certain acquisitions of voting securities that constitute 10% or less of the issuer’s outstanding voting securities and are made solely for the purpose of investment by the acquirer. Here, Mr. Cohen’s aggregate holdings never exceeded 10% of Wells Fargo’s outstanding voting securities.

In the FTC’s view, from the outset, Mr. Cohen’s clear intention was to participate in the formulation of Wells Fargo’s business operations and not “solely for the purpose of investment.” Specifically, Mr. Cohen expressed an immediate interest in becoming a member of the Wells Fargo Board of Directors aiming to “improve its operations” and its mobile app.⁽³⁾ Additionally, for over two years, Mr. Cohen had “periodic communications” with Wells Fargo leadership on how to improve the business and advocating for a board seat.

The FTC noted that “open market purchases require an acquirer to decide affirmatively and actively to acquire voting securities” and therefore “it was not excusable for him to be unaware of HSR Act legal requirements.⁽⁴⁾“Fortunately, Mr. Cohen was in violation of the HSR Act from the date of his open market purchase on March 22, 2018, through the expiration of the waiting period for his corrective filing on February 16, 2021.

Civil Penalties⁽⁵⁾ may be assessed for each day that a party is in violation of the HSR Act. The maximum civil penalty for an HSR Act violation at the time that Mr. Cohen made his corrective HSR Act filing was $43,792 per day.⁽⁶⁾ Ultimately, Mr. Cohen agreed to pay a $985,320 civil penalty which accounts for only 2.1% of the maximum possible penalty.

Three key takeaways

1. The settlement serves as an important reminder that despite an apparent lack of competitive or other antitrust concerns, the antitrust enforcement agencies are continuing to monitor and look for failure to file HSR Act violations regardless of when the failure to file occurred.

2. The “investment-only” exemption is very narrowly constructed by the FTC. Actions such as nominating board members, being a competitor to the target issuer or taking any action to influence the business decisions of the issuer (among others) can all suggest an intention that is inconsistent with an investment-only purpose.

3. While historically, the agencies have not sought HSR enforcement actions against first-time individual violators that otherwise raise no antitrust concerns, this settlement is a reminder that the agencies ultimately retain such discretion, including in instances where they do not believe a defendant’s acquisition stemmed from excusable dishonesty.⁽⁸⁾

Footnotes

(1) 15 U.S.C. § 18a (1976).

(2) Premerger Notification and Waiting Period, 15 USC § 18a(a) and (b).

(3) Complaint at 5, United States v. CohenYeah. 1:24-cv-02670 (DDC Sep. 18, 2024).

(4) Historically, the FTC has not sought violations for a defendant’s first time failing to file if such violations were based on denial and the transaction did not otherwise raise other antitrust concerns (eg, indicia of a lessening of competition); this exercise of criminal discretion appears in several prior HSR Act violation settlements involving individuals (eg, Complaint at 5, United States v. MacAndrews & Forbes Holdings Inc.Yeah. 1:13-cv-00926 (DDC June 20, 2013) and Complaint at 5, United States v. DolanYeah. 1:18-cv-02858 (DDC Dec. 6, 2018)). Here, despite no allegation that Mr. Ryan had any previous history of failing to file, the FTC noted Mr. Cohen’s actions did not constitute “excusable offense.”

(5) 16 CFR § 1.98; adjusted pursuant to Fed. Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (28 U.S.C. § 2461).

(6) Note that the Complaint cites the maximum penalty in effect at the time of Mr. Cohen’s corrective filing ($43,792 per day), and as such, the 2.1% calculation is based off this maximum penalty dollar figure. Per rule 16 CFR 1.98, however, the FTC could have assessed penalties based on the current in-effect maximum penalty amount ($51,744 per day). “This section makes inflation adjustments in the dollar amounts of civil monetary penalties provided by law within the Commission’s jurisdiction. The following maximum civil penalty amounts apply only to penalties assessed after January 10, 2024, including those penalties whose associated violation predated January 10, 2024…”

(7) Premerger Notification; Reporting and Waiting Period Requirements, 21 Fed. Reg. 33450, 33465 (July 31, 1978).

(8) See footnote 4.

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