Billionaire hedge fund manager Carl Icahn and his company have agreed to pay $2 million for failing to disclose to investors that he pledged more than half of the company’s outstanding shares as collateral to secure billions of dollars worth of personal margin loans from a variety of lenders, the SEC announced.
Icahn Enterprises L.P. (IEP), which is located in Sunny Isles Beach, Florida, and Icahn agreed to pay $1.5 million and $500,000 in civil penalties, respectively, to settle the SEC’s charges. Under the settlement, neither admitted to nor denied the SEC's charges.
IEP is a publicly traded master limited partnership with $20.9 billion in assets invested in its subsidiary companies that are active in a variety of industries, including automotive parts, energy and real estate and its two funds, which have an additional $5.3 billon in assets under management.
Both Icahn, 88, and IEP are renowned activist investors who often take on beneficial ownership of companies to change their direction. In one example, Icahn took a significant position in Apple in 2013, advocating for the company to increase its share buyback program and making significant profits before selling in 2016, according to press reports.
Integral to Icahn’s and the firm’s investment strategy is the use of margin loans to purchase public equities and it is here where they allegedly ran afoul of disclosure laws, the SEC said. Generally margin loans work by allowing investors to borrow up to 50% of a brokerage portfolio’s worth. In this case, however, Icahn allegedly used his controlling interests in the company stock and the public company’s own assets as pledged collateral.
According to the regulator, “from at least December 31, 2018 through the present, Icahn, who is the controlling shareholder and Chairman of the board of directors of IEP, pledged between 51% to 82% of IEP’s outstanding securities as collateral to secure personal margin loans worth billions of dollars under agreements with various lenders.”
Despite Icahn, who has a reported net worth of $5.5 billion, signing various margin loan agreements and amendments to the loans, he and the firm “failed to disclose Icahn’s pledges of IEP securities as required in its Form 10K until February 25, 2022,” the SEC said.
In any given year since December 31, 2018, Icahn and the company have had outstanding margin loans ranging from $4.6 billion to $5.1 billion with between seven to nine lenders using company assets as collateral, according to the SEC settlement.
Icahn “also failed to file amendments to Schedule 13D describing his personal margin loan agreements and amendments, which dated back to at least 2005, and failed to attach required guaranty agreements. Icahn’s failure to file the required amendments to Schedule 13D persisted until at least July 9, 2023,” the SEC noted.
Osman Nawaz, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said, “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.”
Specifically, the firm violated Securities Exchange Act of 1934 and Rule 13a-1 while Icahn violated certain beneficial ownership reporting provisions of the Exchange Act, the SEC said.
Both IEP and Icahn agreed to cease and desist from future violations and to pay the civil penalties, the SEC said.
The company did not immediately respond to a request for comment.