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FTC imposes $1 million civil penalty for HSR Act violations | Wilson Sonsini Goodrich & Rosati

Posted on by darion

As businesses await new filing requirements under the Hart-Scott-Rodino (HSR) Act, After the case was finalized, the Federal Trade Commission (FTC) made headlines by filing enforcement action and obtaining a nearly $1 million civil penalty from a GameStop executive for failing to file an HSR notice before purchasing voting securities on the open market.

Key conclusions

  • Visible violation for the first time:The complaint does not allege a prior violation of the HSR Act or an adequate filing of a corrective motion by defendant, which is a departure from prior enforcement actions where the FTC sought civil penalties only after a second violation.
  • Continuous monitoring of passive investors:The enforcement action is the latest example1 antitrust agencies that the acquirer improperly relied on the HSR exemption available to passive investors who intend to hold voting securities “solely for the purpose of investment” to avoid filing an HSR claim. Acquirers who intend to rely on the passive investor exemption should work with counsel to carefully examine their involvement in directing the company’s business decisions to ensure that they do not fall within the agencies’ narrow interpretation of the exemption.
  • Individuals must monitor HSR compliance:Persons acquiring voting securities in their personal capacity, including directors and executive officers, are subject to the requirements of the HSR Act and should consult with an attorney before making an acquisition that may exceed the thresholds set forth in the HSR Act.

Enforcement action

On September 18, 2024, the FTC announced that Ryan Cohen, CEO and chairman of GameStop, agreed to pay a civil penalty of nearly $1 million to settle allegations that his acquisition of Wells Fargo & Company (Wells Fargo) voting securities violated the HSR Act.

In March 2018, Cohen acquired more than 560,000 Wells Fargo voting securities through an open market purchase. According to the complaint, this acquisition exceeded the then-applicable HSR filing thresholds, requiring Cohen to file an HSR notification with the FTC and the U.S. Department of Justice (DOJ) and to undergo a waiting period before making the acquisition. The complaint alleges that Cohen failed to do so and continued to violate the HSR Act until he filed a corrective filing nearly three years later on January 14, 2021.

The enforcement action is notable because the complaint does not allege that Cohen had previously reported HSR Act violations to the FTC and DOJ. This is unlike many previous FTC enforcement actions that have been taken against defendants who had not already filed an HSR filing regarding past acquisitions.2

The enforcement action also shows that acquirers need to be careful when relying on the so-called “investment-only” exemption to avoid filing an HSR. Under the HSR Act, acquisitions of voting securities that exceed certain minimum thresholds must be reported to the FTC and DOJ, and the acquiring party must comply with a statutory waiting period before the acquisition can close. However, the HSR Act provides a narrow exemption from these filing requirements for certain acquisitions of voting securities made solely for investment purposes if the acquirer will own 10 percent or less of the issuer’s outstanding voting securities after the acquisition. This exemption, commonly referred to as the investment-only exemption or passive investor exemption, applies if the acquisition is for “solely investment” purposes, meaning that the acquirer has no intention of participating in the formulation, determination, or direction of the fundamental business decisions of the issuer.3

According to the complaint, Cohen’s purchase of Wells Fargo voting securities was not exempt under the investment-only exemption because Cohen intended to participate in and influence Wells Fargo’s business decisions when acquiring the voting securities. As evidence of his intent, the complaint points to an email Cohen sent to Wells Fargo’s CEO in February 2018 seeking a seat on Wells Fargo’s board and making suggestions about how Wells Fargo could improve its business.4 According to the complaint, these conversations between Cohen and the Wells Fargo CEO continued through at least April 2020, while Cohen was making additional open market purchases of Wells Fargo voting securities. The complaint notes that because open market acquisitions require an affirmative decision by the acquirer to make the purchase, Cohen’s failure to file an HSR notice cannot be attributed to excusable negligence.

Cohen will pay a civil penalty of $985,320 to settle the charges. This represents a daily civil penalty of approximately $927 for the nearly three-year period between the date Cohen acquired Wells Fargo voting securities in excess of the HSR thresholds and the date the HSR waiting period for him to file a corrective motion expired. The current maximum civil penalty for violations of the HSR Act is $51,744 per day.

(1) See, e.g., “Investment-Only Means Just That,” FTC blog post (August 24, 2015); United States v. Fayez Sarofim (October 27, 2016); United States v. VA Partners I, LLC (April 4, 2016).

(2) See, e.g., United States v. Biglari Holdings Inc. (December 22, 2021); United States v. Richard Fairbank (September 2, 2021); United States v. Third Point Offshore Fund, Ltd. (August 28, 2019).

(3) 16 CFR §802.9.

(4) Complaint about 5.