Activist hedge fund TCI battles to limit damage from US court judgment

A court case over a Florida railroad firm has handed a victory to embattled corporate managers

"Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so. A few cross that line." Chris Hohn, head of the London-based hedge fund TCI – The Children's Investment fund – crossed that line.

For half-a-decade, Mr Hohn has been one of the most powerful and feared managers in the hedge fund world, an aggressive activist shareholder who almost single-handedly claimed the scalp of the chairman of the German stock exchange and ended the independence of Dutch bank ABN Amro. But thanks to a damning ruling in a New York court (the quote above is a direct one, from Judge Lewis Kaplan), Mr Hohn is this week struggling to limit the damage from a trashing of his reputation that could hurt his ability to browbeat corporate managements in the future.

The ruling is also a notable public relations victory for corporate managers in the perennial fight against what they call short-term hedge fund aggressors demanding share price-boosting lurches in strategy – and using dubious tactics to achieve their aims.

This particular court battle is the latest bitter twist in an attempt by TCI and its allies to take control of CSX, a Florida railroad and haulage company that Mr Hohn believed had been short-changing its shareholders with years of complacent management.

TCI wants to put its own representatives on the CSX board, and the issue comes to a head at a shareholder meeting a week today. CSX chief executive Michael Ward believes the court ruling could save him and, by implication, other managers targeted by Mr Hohn.

"Ask yourself who is best suited to represent your interests," Mr Ward demanded of shareholders. "Board members who have a proven track-record of creating value and a plan for building the value of your investment, or a group that has violated securities laws, testified falsely in federal court and made numerous suggestions that could have destroyed value."

Mr Hohn "respectfully disagrees" with the judge's ruling and TCI says it will appeal. Judge Kaplan said that Mr Hohn and his partner Snehal Amin had made courtroom statements that were "not credible" and that they "testified falsely" during the trial. In particular, Mr Hohn was found to have dropped hints to other hedge fund managers that he intended to attack CSX, and to have effectively amassed a co-ordinated group of rebel investors that should have been disclosed long before TCI told the company it had been working with allies. TCI also used derivative contracts to hide the fact that they controlled many more CSX shares than they had let on to the Securities and Exchange Commission, which requires disclosure of significant stakes. The judge warned that Mr Hohn and TCI could not be trusted to stick to reporting requirements in the future.

The fight over the future of CSX has reached a level of bitterness that eclipses even Carl Icahn's attempt to oust the entire board of Yahoo! to punish their failure to agree a takeover by Microsoft.

In 2005, Mr Hohn shocked the continental European business establishment by leading the campaign to stop Deutsche Börse's planned takeover of the London Stock Exchange. He was said at the time to have peppered Werner Seifert, the Deutsche Börse chairman, with emails pressing his case, and when Mr Seifert refused to back down, Mr Hohn led an investor result that got him sacked. Last year, TCI's agitation for change at ABN Amro prompted bids from Barclays and its ultimate buyer Royal Bank of Scotland.

In Japan, TCI has come up against the limits of its bullying power, having been told by the Japanese government that it cannot increase its stake in J-Power, a utility company where it is demanding management agrees to double the dividend. Mr Hohn fired off an angry letter to Peter Mandelson, the European trade commissioner, saying he should impose sanctions on Japan for breaching free trade agreements.