(Reuters) – Tegna Inc (TGNA.N) said on Monday it was investigating an investor’s claim that the U.S. regional TV station operator should recover trading profits from its largest shareholder, hedge fund Standard General LP.
Hunter & Kmiec, a law firm representing a small Tegna shareholder, wrote to Tegna’s board last week asking it to investigate whether Standard General breached U.S. Securities and Exchange Commission (SEC) rules in its trading of Tegna’s stock, according to people familiar with the letter.
Standard General, which is engaged in a proxy contest to replace four of Tegna’s board directors, had disclosed earlier last week it converted about a quarter of its 9.7% stake in the company into swaps. These are derivative contracts that allowed Standard General to cash out on these shares while keeping economic exposure to them. The trades occurred between March 25 and March 31, according to a Standard General regulatory filing.
Hunter & Kmiec partner James Hunter argued in his letter to Tegna that if the swaps that Standard General entered into are settled by Tegna stock rather than cash, the hedge fund would have crossed the SEC’s 10% beneficial ownership threshold, that requires shareholders to forfeit profits from trades occurring within six months of each other.
Swaps that Standard General previously entered into for Tegna shares were also to be settled with more shares, as opposed to cash, according to the hedge fund’s regulatory filings.
This is because the SEC defines beneficial ownership as equity ownership or voting control, and regards shareholders who divest shares following Tegna’s record date of March 25 as still being be able to vote them in the company’s upcoming annual meeting of shareholders on April 30.
Hunter & Kmiec wrote in the letter that after Standard General crossed the 10% beneficial ownership threshold on March 25, any subsequent trading gain can be claimed by Tegna, and gave it 60 days for it to do so. It estimated Standard General’s profit from the trades at $4.84 million. Hunter declined to comment when contacted by email.
“We have received a stockholder demand alleging Section 16 short-swing trading liability by Standard General and are investigating the claim,” Tegna said in a statement.
“All our trading has been fully transparent and on-the-record, as well as in full compliance with all applicable laws. This is simply another attempt by Tegna to distract from the fact that we have expanded our ownership,” Standard General said in a statement. The hedge fund on Friday disclosed it had bought more Tegna shares, raising its stake to about 12%.
The SEC did not immediately respond to a request for comment.
While companies and hedge funds often engage in bitter rows during proxy fights, such a dispute over the trading of shares is rare. Hedge funds are generally mindful not to inadvertently cross the 10% beneficial ownership threshold in a company, because it can severely restrict their ability to trade its stock.
Reporting by Greg Roumeliotis in New York; Editing by Tom Brown