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Don’t accuse U.S. antitrust enforcers of never giving Bill Gates a break. Gates agreed Monday to pay $800,000 to settle charges that he violated the Hart-Scott-Rodino Act in 2002 by acquiring more than $50 million of ICOS Corp. stock without first notifying regulators of the deal. Yet the news for Gates could have been worse. The Federal Trade Commission caught him committing a similar violation in 2001 amid his bitter fight with the Justice Department over allegations that Microsoft Corp. was an illegal monopolist. The agency did not hold the Microsoft prosecution against Gates. Enforcers let him slide on the HSR charge after he pledged to follow the notification law in the future. The Gates prosecution was the first of two HSR enforcement actions taken Monday. The government also settled a case against Manulife Financial Corp. related to its acquisition of John Hancock stock in the spring of 2003. Manulife agreed to pay $1 million in civil money penalties. Antitrust experts said the two cases are a warning to corporations to take HSR reporting requirements seriously. The law requires companies and individuals to notify the government before acquiring a company or its stock. The act exempts stock acquisitions undertaken solely for investment purposes. To qualify, the investment must constitute less than 10 percent of a company’s shares, and the investor cannot play any role in the company’s decision making. Antitrust enforcers said Gates and Manulife both improperly relied on the investment exemption to avoid making an HSR notification. This is the government’s third recent case involving abuse of the investment exemption. The Justice Department sued Smithfield Foods Inc. in 2003 for improperly buying IBP Inc. stock. Enforcers are seeking $5.5 million in penalties. Joe Sims, a partner at law firm Jones Day in Washington, said the government has trouble uncovering these types of violations. So it needs high-profile cases to ensure that companies and investors take reporting requirements seriously. “They always like to find a situation where they can get a highly visible person because that helps with deterrence,” Sims said. Gates first got into trouble for an HSR violation in 2001 after his Cascade Investment LLC increased his investment in Republic Services Inc. The FTC agreed not to seek civil money penalties after he agreed to establish a system to ensure future HSR compliance. Yet six months later he increased his holdings in ICOS, a Bothell, Wash.-based pharmaceutical company without first filing an HSR notice. The government said Gates did not qualify for the investment exemption because he intended to participate in running the business through his membership on the board of directors. Gates corrected the error on July 25, 2002, nearly three months after buying the stock. “Although the commission has often declined to seek penalties from a party that makes an inadvertent mistake and fails to file, once he is aware that he doesn’t have a complete understanding of the HSR Act he needs to go back and learn about the Act so he doesn’t make a second mistake,” said Barry Nigro, deputy director in the FTC competition bureau. “The commission will seek substantial penalties for the second mistake.” Cascade general counsel Mark Beatty said the second violation stemmed from the exercise of expiring stock options at Icos. He noted that Gates had no personal involvement in the failure to make the HSR filing. “We missed a filing but voluntarily notified the FTC of our mistake upon our own discovery of this,” Beatty said. “Since that time, we have cooperated fully with the FTC and will continue to do so as requested. In addition, a series of procedures has been implemented to avoid this type of oversight in the future.” The Manulife case stemmed from the insurer’s acquisition of John Hancock stock in the months before it agreed in September 2003 to acquire the company. Manulife argued that the stock purchases in the spring of 2003 were for investment purposes only. Assistant Attorney General R. Hewitt Pate said that explanation does not hold water. “Acquisition of stock in a firm that you are considering merging with is not an acquisition made solely for investment,” he said. The Department of Justice’s antitrust division agreed to seek less than the statutory maximum of $11,000 a day in penalties only because Manulife brought the violation to the government’s attention and agreed to settle before the agency had to expend significant resources on the matter, Pate said. A Manulife spokeswoman said the violation was inadvertent and stemmed from a misreading of the investment exemption. She noted that the government recognized the inadvertent nature of the error by agreeing to quickly settle. Antitrust experts said there is little justification for an investor or corporation to misconstrue the investor exemption. “It should be clear by now,” said John Sipple, counsel to the Washington office of Weil Gotshal & Manges. “The DOJ and FTC have narrowly construed the investment exemption. You have to be a passive investor.” Tefft Smith, a partner at Kirkland & Ellis in Washington, said it does not make sense to tempt prosecution by aggressively interpreting the investment exemption. “People are unwise to take those risks,” he said. “Everybody understands that this is an issue that people need to be aware of.” Copyright �2004 TDD, LLC. All rights reserved.

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