A Closer Look at the CSX/TCI & Bear Stearns Cases

Two recent court cases have captured the attention of hedge funds. One pits a corporate raider cum philanthropist [TCI] against the increasingly desperate management of a old-line 100,000-car railroad (CSX). The other accuses two average-Joe hedge fund managers as the ones who originally infected patient zero in the global credit pandemic (Bear Stearns’ High Grade Structured Credit Strategies Enhanced Leverage Fund or “BSHGSCSELF” for short)

Many of the facts surrounding each case have been obfuscated by sensational reporting. CNN’s Lou Dobbs demanded, for example, that US legislators block the hostile take-over of CSX (CSX) by London-based activist hedge fund TCI on national security grounds. Likewise, many mass media outlets seem to have bought into prosecutors’ arguments that the duo who ran Bear Stearns’ now infamous CDO fund were personally responsible for the entire global credit crunch.

If you, like us, were left with more questions than answers after reading media accounts or watching news items pertaining to these cases, you’re in luck. You can read the entire CSX and Bear Stearns (BSC) complaints online - unedited and without comments - and reach your own conclusions about these important cases.

CSX vs. TCI: In a nutshell, CSX accused TCI of sidestepping reporting rules by using swaps rather than actual stock to increase its interest in the company. TCI argued that swaps didn’t count. However, the June 12 court ruling sided with CSX saying that although TCI didn’t technically own the CSX shares, it knew that its swap position would be hedged by the shares and, similarly, knew that closing out the position would trigger a sale of those shares. In addition, the judge felt that TCI had considerable influence over how those shares would be voted in a proxy battle (including the possibility that they not be voted at all).

But don’t take our word for it, click on the document at the left from the US District Court - Southern District.

The Bear Stearns Two: Apparently breaking the Geneva Convention, the Department of Justice paraded Bear’s ill-fated managers in front of the media last week, prompting cheers from some and accusation of a witch hunt from others. The June 18 indictment (right) from the US District Court - Eastern District (via the NYT) accuses the two of not sharing their concerns with investors just as the fund was tanking.

This case raises important questions for portfolio managers and particularly for hedge fund marketers and investor relations personnel. Unlike mutual fund marketing, hedge fund marketing usually involves a discussion of portfolio details - usually with the managers themselves. So the big question is: does the manager have to share all of the details of the often heated debates that occur within the investment team each day?

As one commentator put it last week, “We have to be wary of a rush to judgment. The question is whether these managers crossed the line from permissible spin to wilful misrepresentation.”

Bottom line: If you really want to get all the facts on these cases and avoid inherent biases in the media (including ours), we recommend you check out these documents yourself. You don’t have to be (Law & Order’s) Jack McCoy to understand them.

Comments

[notsosmart]

if 2 guys are discussing the the losses while selling their own but looking for new suckers it would be different if your money was involved.talking is one thing-selling another.ethics anyone?

[shoelover]

Can this get any more predictable?

[Allardyce]

The fall of the Empire is nigh!

[Seamus O'Bannion]

"Permissible spin"? Is that anything like public relations, which is professional lying for hire?