SEC’s Order in the Perry Case Effectively Creates a Presumption that Beneficial Ownership Acquired as Part of an Activist or Merger Arbitrage Strategy Is Not “In the Ordinary Course,” and thus May Require the Filing of a Schedule 13D

On July 21, 2009, the Securities and Exchange Commission (SEC) settled with New York-based hedge fund manager Perry Corp. over alleged securities law violations for failure to report that a fund it managed (Perry) had purchased a significant amount of stock in a public company.  The SEC Order found that Perry failed to disclose its acquisition of nearly 10 percent of the common stock of Mylan Laboratories Inc., a company that had just announced a proposed acquisition of King Pharmaceuticals Inc.  Perry was engaged in a merger arbitrage strategy and would have benefited from the Mylan-King merger.  The conclusions in the Order raise several questions about the obligation of a hedge fund to file a Schedule 13D, particularly if the fund is engaged in merger arbitrage or activist strategies.  Specifically, the Order appears to significantly narrow the circumstances in which beneficial ownership of the equity of a publicly traded company may be considered acquired “in the ordinary course” when acquired by a hedge fund following a merger arbitrage or activist strategy.  In fact, it may effectively create a presumption that such trading is not in the ordinary course, and thus any hedge fund following such a strategy that crosses the five percent threshold must file a Schedule 13D within 10 days of crossing the threshold, as explained more fully in this article.  In addition, the Perry Order highlights the ongoing tension between hedge funds and regulators over how much transparency hedge funds need to provide to the public.  We outline the filing requirements under Section 13(d)(1) of the Securities Exchange Act of 1934, provide a comprehensive summary of the Perry Order then describe the implications of the Perry Order for the obligations of hedge funds to file Schedule 13Ds (and 13Gs).  We also discuss the implications of the Perry Order for filing obligations based on beneficial ownership arising out of total return equity swap positions, and confidentiality concerns raised by the Order.

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