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TCI/3G Capital Partners' CSX stock transactions violated federal securities laws, U.S. district court says


Yesterday, the U.S. District Court for the Southern District of New York ruled that The Children's Investment Fund L.L.P. (TCI) and 3G Capital Partners Ltd. violated federal securities laws by failing to file required disclosures for swap transactions involving CSX Corp. shares. The court also rejected TCI's and 3G's counterclaims issued against CSX after the Class I filed a lawsuit in March claiming the two parties' transactions violated securities laws.

In its decision, the court ruled the defendants violated Section 13(d) of the Securities Exchange Act of 1934 by not filing a required disclosure within 10 days of acquiring beneficial ownership involving 5 percent of CSX shares and a required disclosure within 10 days after forming a group. In December, TCI and 3G formed a group whose members own 8.7 percent of outstanding CSX shares. The group has nominated five independent directors for election to CSX's board; an election will be held June 25 at CSX's annual shareholders meeting.

The court also ruled that the defendants "testified falsely in a number of respects, notably including incredible claims of failed recollection, to avoid responsibility for their actions," according to portions of the decision released by CSX.

"Defendants have sought to control CSX for over a year. As obstacles to control surfaced, they adapted their strategy for achieving control, making disclosures only when convenient to their strategy," the decision states. "Defendants' latest strategy for control will be tested at the annual shareholder meeting. And if this strategy is not successful, the court perceives a substantial likelihood that the defendants would craft a new strategy for control without regard to their disclosure obligations."

The ruling enjoins TCI and 3G from further violating federal securities laws but does not prohibit them from voting their shares on June 25. Any penalties for TCI's and 3G's misconduct will have to be assessed by the Securities and Exchange Commission and the U.S. Department of Justice, the court ruled.

TCI and 3G officials "strongly believe" they have complied with all securities laws and plan to appeal the decision, they said in a statement issued yesterday.

"This decision should not obscure the substance of the debate: CSX shareholders have been fully informed for six months through our SEC filings that TCI and 3G are acting as a group and that we have nominated five highly qualified directors for election to CSX's board of directors," the officials said. "We are confident that our proposed directors can help CSX significantly enhance its operations for the benefit of shippers, employees and shareholders."