Here’s a reminder for all of us about the need to disclose securities pledged as collateral for margin loans—a reminder that comes at the expense of Carl Icahn and his affiliated master limited partnership, Icahn Enterprises L.P. In these Orders, the SEC disclosed settled charges against Icahn and IEP for failure to “disclose information relating to Icahn’s pledges of IEP securities as collateral to secure personal margin loans worth billions of dollars under agreements with various lenders.” According to the Chief of SEC Enforcement’s Complex Financial Instruments Unit, the “federal securities laws imposed independent disclosure obligations on both Icahn and IEP. These disclosures would have revealed that Icahn pledged over half of IEP’s outstanding shares at any given time….Due to both disclosure failures, existing and prospective investors were deprived of required information.” To settle the charges against them, Icahn and IEP agreed to pay civil penalties of $500,000 and $1.5 million. According to this article in Axios, the loans cost Icahn a lot more than $2 million. See also, these articles from AP, Reuters and CNBC.
IEP is a publicly traded, master limited partnership that is a diversified holding company listed on the Nasdaq Global Select Market with almost 430 million depositary units outstanding and over $20 billion in assets. IEP funds are private funds managed by a general partner affiliated with IEP, owned 60/40 by IEP and Icahn. Icahn was a founder of IEP, and he and his wholly owned entities owned approximately 86% of IEP’s outstanding depositary units. He has served as Chair of the general partner of IEP and a named executive officer of IEP. According to the Order, “Icahn and IEP have historically pursued activist investment strategies in publicly traded companies pursuant to which both often have beneficial ownership reporting obligations under Section 13(d)(1) of the Exchange Act.”
Reg S-K Item 403(b) requires public companies to disclose the security ownership of management in Part III of Form 10-K, including the amount of pledged securities. The Order recited the policy rationale, which was explained in the adopting release: “‘[t]o the extent that shares beneficially owned by named executive officers, directors and director nominees are used as collateral, these shares may be subject to material risk or contingencies that do not apply to other shares beneficially owned by these persons’ and… such circumstances ‘have the potential to influence management’s performance and decisions.’”
Under Exchange Act Section 13(d), any person, including a group, who directly or indirectly acquires beneficial ownership of more than 5% of a registered equity security is required to file beneficial ownership statements, Schedules 13D and !3G, and to amend those statements if any material changes occur. Information required for Schedule 13D includes “a description of any contracts or other arrangements between the person(s) filing the Schedule 13D and any person with respect to any securities of the issuer, including among other things, ‘for any of the securities that are pledged,’” as well as the filing as exhibits of copies of loan guarantee agreements.
The Order alleged that, from at least December 31, 2018 through December 31, 2020, Icahn had pledged IEP depositary units in amounts ranging from 51% to 65% of outstanding IEP units and his interests in the IEP Funds as collateral for margin loan agreements with various lenders in principal amounts ranging from $150 million to $1.8 billion. The loan agreements provided for margin calls in the event of certain declines in the closing market price of IEP’s depositary units. As described in the Order, in July 2023, Icahn and certain of his lenders entered into an amended and consolidated margin loan agreement in the principal amount of approximately $3.7 billion, which involved his pledge of “approximately 320 million IEP depositary units and $2 billion of his interests in the IEP Funds as collateral,” as well as a guarantee of the pledged collateral by certain of Icahn’s wholly-owned entities.
Because Icahn was a director of the general partner of IEP and a named executive officer of IEP, under Item 403(b), IEP was required to disclose his pledged units. According to the Order, IEP represented that it and its outside advisors were aware of the pledges, but failed to disclose them in IEP’s Forms 10-K for at least the years ended December 31, 2018 through December 31, 2020. These Forms 10-K were then incorporated by reference into at least 18 other IEP public filings. It was not until February 2022 that “IEP disclosed for the first time in a footnote to its beneficial ownership chart in Item 12 of its Form 10-K for the year ended December 31, 2021 that Icahn had pledged 167,658,659 IEP depositary units as collateral to secure personal margin loans. Icahn’s pledges reflected approximately 57% of all IEP depositary units outstanding at that time.”
As described in the Order, Icahn (and his wholly owned entities) filed an initial Schedule 13D in 1990 as a beneficial owner of more than 5% of IEP’s outstanding depositary units. Icahn filed a number of amendments disclosing pledges in 1995, 2003 and 2005, “but failed to disclose the amount of units pledged or describe the terms of any agreements.” Although, since 2005, Icahn had entered into “dozens” of margin loan agreements that involved pledges of IEP depositary units and his interests in the IEP Funds as collateral, he failed to file any amendments to his Schedule 13D describing his margin loan agreements until July 2023. The 2023 amendment did describe “the general terms of the Amended Margin Loan Agreement, under Item 6, including the names of the lenders, the principal payments owed, amount of IEP depositary units and interests in the IEP Funds pledged as collateral, and general description of a default event. The amendment to Schedule 13D did not, however, attach the Omnibus Guaranty Agreement, as required to be disclosed under Item 7 of Schedule 13D. On July 5, 2024, Icahn filed an amendment to Schedule 13D that attached the Omnibus Guaranty Agreement.” The Order states that “Icahn has represented that he disclosed his various margin loan agreements and amendments to his advisors. Icahn’s disclosures do not excuse his violations because an individual retains legal responsibility for compliance with the filing requirements, including the obligation to assure that the filing is accurately made.”
The SEC charged that IEP violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, and ordered it to pay a civil money penalty of $1.5 million. In addition, the SEC charged that Icahn violated Section 13(d)(2) of the Exchange Act and Rule 13d-2(a) thereunder and imposed a civil penalty of $500,000.
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