UPDATE 2-CSX challengers broke law but can fight on-US judge
ju4 wa4i dia4n zo1ng he2 ba4o da4o :\n  (Recasts, adds details of proxy battle, TCI/3G statement)\nCHICAGO, June 11 (Reuters) - A federal judge ruled on\nWednesday that two investment firms waging a proxy battle at\nrailroad CSX Corp <CSX.N> violated securities law in acquiring\nlarge stakes in the rail company, but allowed them to continue\ntheir fight at the annual shareholder meeting in two weeks.\nJudge Lewis Kaplan of the U.S. District Court for the\nSouthern District of New York wrote that The Children's\nInvestment Fund Management (TCI) and 3G Capital Partners\ndeliberately evaded disclosure obligations as they "sought to\ncontrol CSX for over a year."\nThe judge added, "As obstacles to control surfaced, they\nadapted their strategy for achieving control, making\ndisclosures only when convenient to their strategy."\nThe judge ruled that the two funds violated securities law\nby planning to avoid making disclosures on beneficial ownership\nof shares amassed in swap positions and did not promptly\ndisclose that they had formed a "group" of investors.\nBut while the judge said the two funds had dodged their\ndisclosure obligations, he added that the court could not\npreclude TCI and 3G from voting their CSX shares and that any\npenalties related to violations must come from the U.S.\nSecurities and Exchange Commission or Department of Justice.\n"We are pleased that shareholders will be able to determine\nthe outcome of the June 25th Board election," TCI and 3G said\nin a statement. "We strongly believe we have complied with all\nsecurities laws and plan to appeal."\nThey also said they believed CSX shareholders had been\nfully informed for six months that the two funds have been\nacting as a group.\nThe judge also dismissed counterclaims brought by the two\nfunds against CSX.\nCSX sued TCI and 3G Capital Partners in March, seeking to\nblock the funds from running their slate of five board\ncandidates at the company's annual meeting on June 25 in New\nOrleans.\nThe Jacksonville, Florida-based company argued that the\nfunds did not properly disclose their holdings in CSX and had\nviolated federal securities laws aimed at preventing groups of\ninvestors from secretly coordinating their efforts.\nThe funds countersued, accusing CSX of breaches of\nsecurities law, including unlawfully enriching corporate\ndirectors. They contend that the CSX lawsuit is the latest in\n"a long series of scorched earth tactical maneuvers"\nby the board and CEO Michael Ward to entrench themselves.\nThe proxy battle has been raging since last December with\nregular claims and counter-claims made by both sides.\nThe two hedge funds maintain that CSX's potential for\nprofit over the next five years could be double what the\nrailroad's management says it is.\nCSX claims in return that TCI and 3G would impede the\ncompany's growth by cutting capital expenditures, which would\ndeprive shareholders of significant value.\nLike the other major U.S. railroads, CSX has seen rising\nprofits in recent quarters thanks largely to strong pricing and\nimproved network performance despite an overall slowing of the\nU.S. economy.\nTheir improved profitability has also attracted the\ninterest of investors. Warren Buffett's Berkshire Hathaway Inc\n<BRKa.N>, for instance, holds an 18 percent stake in No. 2 U.S.\nrailroad Burlington Northern Santa Fe Corp <BNI.N>.\n(Reporting by Martha Graybow, Nick Carey, Emily Chasan;\nEditing by Carol Bishopric, Richard Chang, Gary Hill)\n((martha.graybow@thomsonreuters.com; 1-646-223-6133; Reuters\nMessaging: martha.graybow.reuters.com@reuters.net))\nKeywords: CSX/TCI