might have run afoul of disclosure guidelines in his surprise sale of
Bed Bath & Beyond Inc.
stock this month, securities lawyers said, but regulatory action against him appears unlikely.
Mr. Cohen sold his entire stake in the home-goods retailer on Aug. 16 and 17, just months after he took a significant position in the company and pledged to force changes there. Shares tumbled after news of his sales came out on the afternoon of the 17th, but meanwhile Mr. Cohen benefited from a huge surge in volume that enabled him to sell millions of shares while prices rose.
An ownership disclosure that Mr. Cohen filed on the morning he began selling included a trivial update about the size of his holdings and said he hadn’t done any trading in Bed Bath & Beyond during the prior 60 days.
The SEC requires activist investors to file the ownership disclosure, known as a 13D, when they acquire at least 5% of a company’s shares and plan to influence or control the company. SEC rules dictate that investors must promptly update the form to reflect any material changes to what they first disclosed, such as new plans to buy or sell shares.
Within minutes or hours of the ownership disclosure, Mr. Cohen began selling. Individual investors “have no idea he is dumping the stock against them,” said Joshua Mitts, a law professor at Columbia University who specializes in analytical research on trading strategies.
The Securities and Exchange Commission could investigate whether Mr. Cohen had a plan to sell before he filed the Aug. 16 update that he should have disclosed, according to former regulators and law professors who specialize in securities law. The SEC’s enforcement division hasn’t contacted him, according to a person familiar with the matter.
“The question here is at the time that Cohen filed that trivial update, had he firmed up his decision to sell?” said
a former director of the SEC division that oversees public-company disclosures. “And if he did or if he had, that omission is problematic.”
A person familiar with Mr. Cohen’s trading said his filings complied with rules, and he didn’t make any offers or seek any prices for his Bed Bath & Beyond shares before making the Aug. 16 ownership disclosure update.
Many large investors don’t formulate written plans to buy or sell, to avoid triggering the requirement to update the ownership disclosure, said
a securities and corporate law professor at the University of Michigan. “If you are properly lawyered, you don’t have a plan until you decide you are going to sell,” Mr. Pritchard said.
Instead, activist investors typically disclose that they could either buy or sell, which they say satisfies their disclosure requirements while giving them room to change their minds, according to lawyers who practice in the area. In some cases, investors have disclosed plans to sell their stakes before trading.
“If his intent was to truly do nothing” on the morning of Aug. 16, “then that is a hard enforcement case,” Mr. Mitts said. “If I were the SEC, I would want really clear evidence that the trading decision had been made.”
The SEC sometimes brings enforcement actions when it believes investors have violated these rules. In 2008, regulators said Tracinda Corp., the holding company of famed investor
The settlement order said the 13D calls for determining “whether additional disclosures are required before any such purchase or sale.”
Tracinda settled the enforcement action without paying a penalty.
In another case settled two years ago, private-equity firm WCAS Management Corp. paid $100,000 to settle SEC claims that it failed to update its disclosures about a plan to take over
The SEC said the private-equity firm should have filed the ownership-disclosure update once it “had abandoned its interest in acquiring Hanger” and formed a plan to sell its shares.
Earlier this year, the SEC proposed a rule that would require investors to file updates to their ownership disclosure within one business day. The current rule says the form must be promptly updated; the SEC has never defined a prompt time frame, but its staff generally expects changes to be disclosed within several days, according to former regulators.
The SEC declined to comment.
Bed Bath & Beyond stock has lost more than half its value since Mr. Cohen sold his shares. The company has selected asset manager Sixth Street Partners, a Dallas-based firm that makes loans to troubled companies, to provide new financing. Some vendors have been pulling credit to the company in recent weeks, sources have told The Wall Street Journal.
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Some analysts say Mr. Cohen took advantage of the exuberance of those who favor speculative securities known as meme stocks. These investors, who call themselves “apes,” are among individuals who purchased a net $131 million of Bed Bath & Beyond shares on Aug. 16 and 17, according to Vanda Research. Filings show Mr. Cohen sold $178 million of the stock over that period.
“The apes have a target on their back,” said
an accounting professor at the University of Pennsylvania’s Wharton School of Business who studies insider trading. “It’s either the CEOs of the companies who are going to exploit that or these outside individuals like Ryan Cohen.”
Write to Dave Michaels at email@example.com
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