FTC Obtains $250,000 Civil Penalty for Pre-Merger Filing Violations

At the Federal Trade Commission’s request, the U.S. Department of Justice (DOJ) today filed a complaint in federal district court to obtain civil penalties against James D. Dondero for violating the reporting requirements of the Hart-Scott-Rodino (HSR) Pre-merger Notification Act. The DOJ also filed a stipulation and proposed final judgment that requires Dondero to pay a $250,000 civil penalty to settle the case against him. Dondero is the ultimate parent entity of Highland Capital Management, L.P. (Highland), a hedge fund that specializes in senior bank loans.

“This significant but fair civil penalty should once again highlight the need for private individuals, counsel, and businesses – including hedge funds – to pay close attention to the Commission’s rules when considering a transaction where a pre-merger filing is required,” said Jeffrey Schmidt, Director of the FTC’s Bureau of Competition. “Our goal is to make the process as open and transparent as possible to ensure that all appropriate filings are made in a timely manner. But we will not hesitate to bring enforcement actions when violations occur.”

According to the Commission, in August 2003, Highland acquired shares in Neighborcare, Inc., which was then known as Genesis Health Ventures, putting its holdings above the $50 million HSR pre-merger filing threshold. However, Highland did not file pre-merger documents with the FTC, and continued to acquire Neighborcare shares, eventually holding more than $100 million in Neighborcare stock by the end of March 2004. Only then did Highland discover it had to file under the HSR Act, and made a corrective filing in April 2004. As part of the filing, Highland outlined the steps it would take to ensure such a violation did not occur in the future.

On April 25, 2005, however, Highland reported another HSR-related violation. In late February 2005, Dondero exercised an option to acquire 10,000 shares of stock in Motient Corporation (Motient). As Highland already had stock in Motient that had appreciated significantly, Dondero now held over $90 million in Motient voting securities after exercising the option. Despite the fact that he was required to report exercising the option to acquire the 10,000 shares, Dondero did not make an HSR filing with the Commission until the corrective filing was made on April 25.

The Court Settlement: The court order settling the Commission’s charges requires Dondero to pay a civil penalty of $250,000 for violating the HSR pre-merger rules. While the Commission took no enforcement action following his first violation, based on representations that he would put procedures in place to ensure similar violations did not occur, another violation took place less than one year later. Only then did the FTC commence its investigation against Dondero, resulting in the settlement announced today. The Commission can seek additional civil penalties if Dondero violates the HSR rules in the future.

The Commission vote to refer the complaint to the U.S. Department of Justice for filing on the FTC’s behalf was 5-0. It was filed in the U.S. District Court for the District of Columbia on May 21, 2007

Copies of the Commission’s order are available from the FTC’s Web site at www.ftc.gov. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/bc/edu/pubs/consumer/general/zgen01.shtm.

(FTC File No. 051-0184)