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4/7/2008



Rail News: Rail Industry Trends

TCI files suit in U.S. district court as counterclaim to CSX's allegations of federal security law violations


The punches/counterpunches continue between CSX Corp. and The Children's Investment Fund Management L.L.P. (TCI).

On Friday, TCI filed a counterclaim in the U.S. District Court for the Southern District of New York denying CSX's claim, in a lawsuit filed last month, that TCI and its investment partner 3G Capital Partners Ltd. violated federal securities laws.

In December, TCI and 3G Capital Partners formed a group whose members own about 11.5 percent of CSX's outstanding common shares. The group has nominated five independent directors, who will stand for election at CSX's annual shareholders meeting to be held June 25.

CSX alleges the two parties violated Section 13(d) of the Securities Exchange Act of 1934, claiming TCI employed swap agreements to evade Section 13(d) filing requirements. In addition, TCI's disclosures concerning the 11.5 percent share swap position are "materially misleading because they fail to disclose that, by virtue of agreements, understandings or relationships with TCI, swap counterparties intend to vote CSX shares in accordance with TCI's wishes," CSX officials said in a statement released last month.

The Class I alleges that TCI's and 3G Capital Partners' disclosures concerning their formation of a Section 13(d) group are "false and misleading," denying the investing public of pertinent information regarding the group and its intentions.

CSX's lawsuit has "nothing whatsoever to do with their professed concern that shareholders have inadequate information to make an informed vote" at the annual shareholders meeting, TCI officials said in their counterclaim.

"All of the material information about which CSX claims shareholders should be informed (e.g., TCI and 3G's alleged beneficial ownership of CSX stock) already has been put before CSX shareholders in SEC filings, CSX press releases and media coverage of this dispute," they said. "Further, CSX could have alleged more than one year ago that TCI misstated its beneficial ownership of CSX stock. However, it strategically waited until after the record date had passed in order to evaluate the shareholder base and likely outcome of the 2008 board election. CSX has used this lawsuit to reset the record date to a future date in the hope of manipulating a more favorable vote outcome."

Rather than TCI and 3G Capital Partners being the ones that have violated federal securities laws, CSX's board and Chairman, President and Chief Executive Officer Michael Ward are the parties that have done so, the counterclaim states.

They have "committed violations of the federal securities laws through materially false and misleading disclosures concerning, among other things: compensation set and awarded to directors and senior management of CSX while the board and senior management were aware of material nonpublic information in violation of CSX's insider trading policy, and the nature of the bylaw amendments that the company has submitted for shareholder approval," TCI officials said.

In a statement released Friday, CSX officials said TCI filed the counterclaim as an "attempt to distract shareholders” from the Class I's previously filed lawsuit.

"In its complaint, CSX alleges violations by TCI and 3G of federal securities laws that would effectively undermine the integrity of the voting process at the CSX annual meeting," they said. "CSX is committed to protecting the interests of all shareholders and to continuing the company's industry-leading record of shareholder value creation. The company believes the TCI counterclaims are without merit and will defend against them vigorously."


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