Pekarek, Edward


Two-Thousand-Six was a year in which the opaque investment pools commonly known as “hedge funds”1 provided frequent headline-fodder through scandals,2 congressional testimony,3 and the collapse of Amaranth Advisors,4 a nine billion dollar hedge fund implosion that exceeded the financial scope of the Long Term Capital Management Asian currency debacle.5 Yet despite these swirling scandals and controversies, many of the broader equity indices established record levels and the domestic capital markets barely blinked. Among the luminaries of the 2006 hedge fund universe was Phillip Goldstein, a former New York City municipal employee6 who is now the activist manager of a group of pooled investments operating under the moniker “Bulldog Investors.”7 Mr. Goldstein took the Securities and Exchange Commission (“SEC”) to task in a successful challenge8 of the so-called “Hedge-Fund Rule.”9 The United States Court of Appeals for the District of Columbia Circuit was apparently persuaded by Mr. Goldstein’s definitional theory as to the term “client,”10 and vacated the entire investment adviser registration regime as “arbitrary.”11

Apparently emboldened by his appellate victory, Mr. Goldstein again tilted at regulatory windmills months later and petitioned the SEC to exempt his “Bulldog” hedge funds from certain portfolio reporting requirements.12 This Article analyzes Section 13(f) of the Securities Exchange Act of 1934 and Mr. Goldstein’s effort to avoid the Section 13 reporting regime through an intellectual property and due process theory. Mr. Goldstein has asserted that compulsory disclosure pursuant to Section 13(f) is an unconstitutional regulatory taking in violation of the Fifth Amendment because he contends that his hedge fund portfolio positions are trade secrets. Mr. Goldstein, however, has reportedly admitted his petition is merely a “pretext for a lawsuit,”13 and that petition failed to articulate the substance of these purported trade secrets with the required measure of particularity to properly assert a trade secrets claim. “Bulldog’s” October 24, 2006 petitioned to the SEC for an order pursuant to §13(f)(2) of the Exchange Act of 1934 that would exempt the “Bulldog” funds from the reporting requirements embodied in Rule 13f-1(the “Goldstein Application” or the “Application”) is also flawed due to the absence of any demonstration that he or his “Bulldog” funds utilized “reasonable efforts” to ensure that the portfolio holdings at issue remained secret. Mr. Goldstein’s trade secret theory is also significantly undermined because he and his funds have made public disclosures that could eliminate any trade secret status, which, among other facts and issues discussed herein, erode the theory of the Goldstein Application to such an extent that the SEC may properly deny the requested relief.


For approximately three decades, institutional investment managers,14 including certain hedge fund managers, broker-dealers, banks, and insurance companies have been required to file disclosure statements with the SEC on Form 13F if they possess investment discretion over at least $100 million worth of certain designated equity securities listed on domestic exchanges or quoted on Nasdaq.15 These disclosures reveal to the public certain aspects of a non-exempt investment manager’s portfolio holdings in a “snapshot” format,16 as authorized by Section 13 of the Securities Exchange Act of 1934, and articulated by SEC Rule.17

The disclosures required by non-exempt investment managers are to be submitted to the SEC on the proscribed Form 13F.’8 Disclosures must be filed no later than forty-five (45) days after the close of each calendar quarter,19 commencing with any quarter within any calendar year during which the investment manager maintained discretion over a minimum of $100 million worth of Section 13(f) securities holdings.20 The securities holdings to be disclosed on Form 13F are specifically identified on a “13(f) securities list” published quarterly by the SEC.21

Phillip Goldstein, SEC gadfly and Pleasantville, New York-based investment manager for the “Bulldog” hedge funds, revealed to BusinessWeek his intent to challenge the 13F disclosure requirement with an application to the SEC, not for mere confidential treatment but rather seeking a full exemption from Section 13(f) disclosure requirements.22 Seemingly sanguine from his widely reported victory in the D.C. Appellate Circuit, which vacated the “arbitrary” registration requirement for certain hedge fund managers pursuant to the so-called “Hedge Fund Rule” on June 23, 2006.” The “Bulldog” made good on his threat with the Goldstein Application.24

The Goldstein Application asserted that the very information required to be disclosed in a Form 13F is a protectable private property interest subject to the boundaries of the Fifth Amendment of the U.S. Constitution.25 The Application further contends that the SEC disclosure requirements embodied in Section 13(f) (and Rule 13f-l thereunder) are nothing more than a regulatory “taking” that deprives his hedge funds of due process, and that the SEC is constitutionally obliged to compensate his “Bulldog” funds for the allegedly unconstitutional appropriation of private property.26

This Article details the background of Section 13(f) legislation, the purposes and public benefits of the disclosures required by the Rule at issue, details notable market participants’ confidential treatment requests for their portfolio disclosures, evaluates arguments made in the Goldstein Application regarding the putative trade secret status of the “Bulldog” hedge fund holdings, and the related due process challenge to Section 13(f) reporting regime. Furthermore, it concludes that Goldstein’s attack of the Section 13 reporting regime is unavailing for multiple factual and legal reasons.


Congress granted the SEC broad authority to implement the Section 13 reporting requirements with ample regulatory and public policy purposes. The 1934 Securities Exchange Act was amended in 1975 to include subsection (f) to Section 13 of the 1934 Act,27 which “authorizes the Commission to require the disclosure of certain institutional portfolio holdings and transactions.”28 Congress also noted that one of the “important purposes of the bill . . . [was] dissemination of the institutional disclosure data to the public.”29 Among the primary objectives of the amended Section 13 was to empower the SEC to “create a central depository of historical and current data about the investment activities of institutional investment managers,” with the intent to advance the spirit of disclosure in the U.S. securities markets.30 The SEC was specifically granted “ultimate authority” for administration of the institutional disclosure program by the amended Section 13.31 Implementation of the amended Section 13 advanced at least two significant regulatory and policy objectives: (i) it placed responsibility for “gathering, processing, and disseminating the institutional disclosure data” with one federal agency, and (ii) it dramatically improved the availability of “factual data about large investment managers,” for federal and state regulatory agencies, other institutional investment managers, and the public.32

Despite Goldstein’s dubious contentions that no valid reasons exist for the disclosure regime,33 Congress articulated completely sound bases for amending Section 13. Legislative rationale for promulgation of the 13(f) reporting regime included reasoned considerations which focused on disclosure and transparency of information, the very foundation of U.S. securities law. Specific legislative concerns included the increasing trend toward voluntary34 and required disclosures35 by banks and other corporate fiduciaries;36 the material increase (in the mid to late 1960s) in the sheer volume of securities held and traded by institutional investment managers;37 the absence of any centralized data depository regarding institutional portfolio transactions and holdings; and growing concern about potential adverse effects “upon the securities markets, the issuer of the securities, and the interests of individual investors.”38 Mr. Goldstein’s position that no legitimate government interests exist for the Section 13 disclosure regime simply lacks credibility.

A. Section 13(f) Benefits Cited in Legislative History

Congress forecasted that a variety of public uses and benefits would result from institutional disclosure and data dissemination.39 Those stated benefits included: (i) a “higher degree of [market] confidence;”40 (ii) companies may have interest in acquiring 13F “data for subsequent sale to interested persons;”41 (iii) investors would find 13F holdings helpful to “track[] institutional investor holdings in their investments;”42 and (iv) issuers would find “institutional investor holdings useful because much of their shareholder list may reflect holdings in ‘street name’ rather than beneficial ownership.”43 Congress apparently expected these and other benefits from disclosure to be realized by the market, issuers, investors, and the general public.

According to Congress, various benefits were also expected to flow to regulatory agencies from 13(f) disclosures, including: (i) data to develop standards and protect the public interest;44 (ii) SEC analysis of the “characteristics of institutional investment managers,” and “impact of institutional investment managers on the securities markets;”45 (iii) block trading data to evaluate “market-making and specialist functions, and differences in discounts obtainable in various markets;”46 (iv) regulatory ability to “identify areas for close attention during examinations or inspections by the regulatory agency;”47 and, v) 13F data to benchmark “comparisons of one institutional investment manager with comparable institutional managers such comparisons might focus on the relative avoidance or use of specific securities markets or any dramatically different choices, in the aggregate, of brokers for execution.”48 The SEC has also stated that “information required on Form 13F can be of value to the marketplace and investors in evaluating the demand for a stock, and assessing the motivations of those holding or recommending a stock.”49 Goldstein’ s view that no legitimate reasons exist for the 13F reporting requirements is less than credible in the face of these many stated bases for the disclosure framework.

B. Expanded Form 13F Filing Frequency

Form 13F disclosures were initially required on an annual basis;50 but the SEC increased the disclosure frequency51 when it adopted Rule 13-f and Form 13F in 1978(52) and required quarterly reporting.53 During the relevant rule making period, the SEC also considered potential ramifications on market competition which might arise from more frequent 13(f) disclosures, and noted that “requiring the filing of Form 13F on a quarterly basis will not significantly burden competition.”54 House Representative John Dingell wrote in 1998 that this “information . . . does not reveal much about the trading activities of hedge funds or the ways in which they raise capital or their risk profiles.”55 A determined investment adviser can overcome any perceived “burden” in most instances by employing sophisticated derivative hedging techniques to create or enhance portfolio opacity, and circumvent Section 13(f), because, “holdings of other options and derivatives need not be disclosed in one’s 13(f) filings. As a result, hedge funds can use derivatives to accumulate large economic positions in portfolio companies without disclosure unless they become subject to the disclosure requirements under Section 13(d).”56

The SEC determined that any potential competitive burdens for 13F filers were necessary and appropriate in order to achieve proper legislative objectives, and would be outweighed by the benefits of an informed marketplace.57 The SEC perceived no “significant obstacle” or “undue hardship” from the regulatory regime and concluded that the quarterly filings requirement was a matter of public interest in furtherance of the protection of investors.58 At a minimum, increased 13F filing frequency appears to be rationally related to legitimate government interests and the requirements should certainly pass “rational basis” muster.

During the proposal period to increase the frequency of 13(f) disclosure intervals from annually to quarterly, the SEC received several comments which “argu[ed] in favor of quarterly rather than annual reporting.”59 The SEC also noted that numerous comments were received which expressed interest in receipt of quarterly 13(f) data,60 and if quarterly reporting was not implemented, the data representing those periods “might be lost altogether thereby creating gaps in the continuous flow of information which may be utilized for future policy decisions.”61 The SEC also received numerous 13(f)-related comments in 2004, when it adopted final rules regarding “Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies.”62 As part of that proposed rule, the SEC again63 requested “comments] generally on whether more frequent portfolio holdings disclosure should be required. . . .”64 There can be little debate that great public interest has been expressed in the disclosed data and its related benefits.

C. Broker-Dealer Section 13(f) Disclosure Required

Broker-dealers are not exempt65 from Form 13F disclosure requirements if they exercise investment discretion66 over aggregated Section 13(f) securities holdings worth at least $100 million,67 even though broker-dealers are technically excluded from the definition of “investment adviser” in Section 202(a)(ll) of the Investment Advisers Act of 1940 (the “Advisers Act”).68 Broker-dealers who manage advisory accounts, trade proprietary accounts, execute block trades,69 or even those who act as market makers, are all generally considered institutional investment managers for Section 13 purposes70 and are required to file Form 13F quarterly.71

According to Congress, “[t]he SEC has the authority and responsibility to assure compliance by all broker-dealers with the legal requirements of the Exchange Act and of the rules which the SEC is authorized to promulgate under the Exchange Act.”72 Legislative history indicates that “institutional trading also has an impact on brokerage services and on the securities industry.”73 It is reasonable to conclude that the Section 13(f) securities disclosures are a necessary and appropriate measure used by the SEC to foster a safer and more informed securities market.

1. Broker-Dealer Benefit or Detriment-Block Trading Disclosure Required

Block trading74 currently represents more than half of all NYSE trading.75 Commentators have noted “quarterly data would provide information to brokers and institutional trading desks to facilitate the function of block trading and enhance the liquidity of the marketplace.”76 Disclosure of block trades pose a potential detriment to holders of those securities, at least to the extent that “[premature disclosure of a block position could cause harm (e.g., competitors could trade against the position and impede the block positioner’s ability to liquidate unobtrusively and without loss).”77 Nonetheless, this large segment of trading activity falls squarely within the Section 13 disclosure framework.

Congress and the SEC were apparently not persuaded that brokerdealers deserved extra protection from potential competitive losses due to disclosure of large concentrated equity positions. Legislative history suggests that Congress and the SEC were concerned about block trading activity and concluded that disclosure of information would be beneficial. The Institutional Investor Study Report,78 conducted by the SEC and authorized by Congress79 concluded that “the combination of block trading with investment management was troublesome because of the potential conflict of interest when a block trade assembler has accounts over which it exercises investment discretion and which participate in its block trades.”80

Not only direct participants in the block trade, but also other investors trading in the same securities in the same and other markets, can be affected by block purchases and sales by large institutions. Continuing information about large trades could be useful in analyzing, for example, market-making and specialist functions, and differences in discounts obtainable in various markets.81

2. Potential “Free Riders ” and “Front-Runners”

Some commentators have argued that the Section 13(f) reporting is ultimately more harmful than beneficial. Fidelity Investments noted that frequent disclosure of an investment advisor’s account holdings gives an advantage to non-client investors, and would enable others to “discern” the advisor’s trading techniques and investments-“something the advisor naturally does not want revealed to other advisors.”82 Fidelity also suggested that:

[T]o assess empirically the costs of front-running, the Commission take advantage of expertise in its staff who supervise the activities of broker-dealers in the secondary markets. It is undisputed that holdings information has value to traders – they would not pay to have access to 13F information if it did not – although there is debate as to how much less valuable that information becomes with a long time lag.83

Fidelity also recognized that information garnered from Form 13F filings can help investors to better understand a fund and make informed investment decisions, and that brokers acting on behalf of their clients, make practical use of holdings disclosures.84 Fidelity further lobbied to enlarge the 13F reporting period time lag from forty-five to sixty days, because in Fidelity’s view the current time lag permits others “who wish to trade on such information to their own benefit and to the detriment of [Fidelity] fund shareholders.”85 The current disclosure regime, according to Fidelity, “facilitatefs] free-riding and front-running behavior,”86 which is ironically the same conduct Goldstein was accused of in a November 2006 civil action.87 Goldstein has unapologetically admitted that if information is available in the public domain, he intends to use it to gain whatever advantage possible, and claimed throughout the Goldstein Application that 13F data has become a cottage industry for stealing investment ideas.88

Possible by-products of 13F disclosures can include a price increase of disclosed stocks. For example, shares of Black & Decker Corp. rose 6 percent following a November 15, 2006 13F filing by activist hedge fund manger Bill Ackman of Pershing Square Capital, which disclosed that it owned 1.3 million shares of the power tool manufacturer.89 Warren Buffet also commented in a 1984 Berkshire-Hathaway shareholder letter that revealing acquisition activity while in progress might result in a higher cost basis for that position.90 The available confidential treatment application relief and the Section 13 reporting time lag mitigate risks related to “tree riders” who might attempt to replicate a market participant’s securities acquisitions (or dispositions).


As was expressly intended by Congress, data culled from 13F filings has become a significant facet of the “total mix” of information available to market participants, regulatory agencies, and the public in general. A great deal of statistical analysis and market data interpretation might not have been otherwise possible absent the Section 13(f) reporting regime. A wide variety of other entirely proper public uses of 13F data, many of which are discussed herein, would also have not been available to the securities market without the Section 13 reporting requirements. Nonetheless, the Goldstein Application incredulously insisted that the only reason for public disclosure is to facilitate “free riders,” who allegedly steal investment ideas.

A. Data Service Providers and Form 13F ‘Information Utility

Market participants apparently do make investment interpretations based upon data gleaned from 13F filings. In fact, an entire cottage industry of subscription data services exists and depends heavily upon the reporting requirements to assemble statistics used by sophisticated market professionals. Thomson Financial, Inc. is among those 13F data providers, and investment industry professionals with information tools, data, and analysis through its “ShareWatch(TM)” and “BondWatch(TM)” data services,91 and derives holding statistics for its data services directly from 13F filings.92 Thomson’s services are marketed to “help brokerdealers identify and communicate directly with buyers, owners, and sellers of securities for whom the broker-dealers seek to execute securities transactions.”93 Thomson’s data services are also for the “exclusive” use of; (i) the institutional sales and trading desks of registered broker-dealers to streamline their communication with institutional investors for brokerage services, and (ii) a small number of fund managers who use Thomson’s services to monitor the portfolio holdings of competing funds with similar investment strategies.94 The 13F data provided by Thomson has become an integrated part of the “efficient market.”

Various other services offer data interpretation for market participants based in part upon 13F information. Wm. Smith & Co., is a registered broker-dealer and investment research firm that “provid[es] fundamental research . . . exclusively to institutional clients,” which utilizes “four catalysts” to develop its “stock ideas.”95 Two of the four data sources (“catalysts”) utilized by Wm. Smith & Co. are 13D and 13F filings. TheStreet.com operates a subscription-based data service called Lionshares.com that utilizes institutional securities ownership.96 Lionshares.com’s information is “gathered from 13(f) filings.”97 And according to AMG Data Services (“AMG”) correspondence with the SEC, it employs information culled from registered investment companies (including 13F data) and EDGAR filings in a relational database that seeks to “calculate investor demand.”98 The insights that can be gleaned from 13F data, whether individualized or analyzed in the aggregate, ultimately provides greater market transparency, which is the touchstone of the U.S. approach to securities market regulation.

AMG’s 2003 comment letter provided a detailed list of its “best customers” for Form 13F data that conspicuously included a number of investment managers.99 For example, among AMG’s clients is Forstmann-Leff, a 13F filer and boutique investment management firm serving high net-worth clients.100 Other AMG clients (who also file 13Fs) include the Leuthold Group, “a division of Weeden & Co., LP, a Greenwich, Connecticut based institutional broker-dealer,”101 and the Greenwich-based hedge fund, Lone Pine Capital.102 AMG asserted that quarterly 13F filings increase transparency of portfolio activity and “empower[s] investors to make better informed decisions [and providing responsible oversight of this kind will go far to protect investors and maintain the integrity of the securities markets.”103 While Goldstein contends that no plausible legitimate uses exist for Form 13F data, the information has without question become a component of the efficient market, as was the stated intent of Congress when it promulgated the reporting regime.104

B. Analytical Studies and Antitrust Actions

The Goldstein Application contended that “all evidence indicates that 13F filings are used by the public for only one reason: to obtain, without compensation, the trade secrets of successful filers.”105 Despite the blustery rhetoric, Form 13F data quite clearly has an array of legitimate uses. For example, a variety of academic studies have employed empirical 13F data: one such study analyzed the relationship between default probability106 and stock returns107 based in no small part on 13F disclosures; another analyzed 13F data to interpret insurance mutual fund performance;108 and a recent study evaluated merger-related arbitrage by way of 13F data analysis.109 Data culled from Form 13F filings is also a component of the Herfindahl-Hirschman Index (“HHI”) that is utilized in a variety of analytical studies.110 HHI concentration of ownership measurements that “accounts] for every institutional holding reported on the 13F disclosure form,”111 have been used by the U.S. Department of Justice in a number of antitrust actions.112 The Goldstein Application ignored the fact that an array of analytical techniques utilize 13F data in order to make interpretations of mergers and other securities market activities, a fact that directly rebuts Goldstein ‘s obtuse and incredulous theory that no legitimate reasons exist for the Section 13 disclosure framework.

C. SEC Section 13(f) Enforcement

A recent SEC securities fraud action against a hedge fund manager alleged 13(f) violations113 among a host of other alleged Advisers Act, Exchange Act, and Securities Act violations.114 One of the defendants was “a registered representative associated with various broker-dealers registered with the Commission,”115 and others were investment advisers to two hedge funds.116 The SEC alleged the defendants orchestrated fraudulent schemes in order to manipulate the stock of two equity issues to “artificially inflate the performance and value of the hedge funds . . . which garnered increased fees.”117 According to the SEC, the defendants not only defrauded investors, but also “breached their fiduciary duties to their advisers [sic] clients through the undisclosed manipulation, which had the end result of increasing the fees received paid by the clients and in the funds holding high concentrations of two thinly-traded stocks that defendants had manipulated.”118 The investment adviser defendants allegedly filed false 13Fs that underreported119 the investment company’s ownership of the 13(f) issuers’ shares and concealed the concentrated position.120 Such undisclosed positions could be precursors to “pump and dump” schemes, and accurate 13F disclosure can alert investors to what might otherwise be lurking in the market’s shadows.

The SEC also recently instituted administrative proceedings against the investment company Cabot Money Management,121 and its adviser, for “willful[] violations of Section 13(f)(1) and Rule 13f-1 thereunder.”122 The defendants were required to disclose quarterly holdings via Form 13F within forty-five days of March 31, 1996,123 but did not file until roughly three (3) months after the deadline.124 Due to the defendants’ alleged failure to timely file the relevant Form 13F, investors of the publicly traded companies were improperly deprived of the subsequently and untimely disclosed information.125 The SEC emphasized that the congressional purpose of requiring Form 13F filings was to create a “central depository of historical and current data about the investment activities of institutional investment managers,”126 and further asserted:

The importance of timely disclosure of such information is especially pronounced here, where the institutional investment managers’ holdings include a significant percentage of the outstanding securities of an issuer with a volatile stock price . . . These circumstances illustrate that the information required on Form 13F can be of value to the marketplace and investors in evaluating the demand for a stock, and assessing the motivations of those holding or recommending a stock.127

The SEC has also brought Administrative Proceedings against investment advisers who have failed to file required 13F disclosures.128 The SEC has made clear through its enforcement efforts that the Section 13(f) reporting requirements are a significant portion of the overall disclosure framework for the U.S. securities markets; and consistent with that position, has sought to sanction violators who attempt to evade the requirements to the detriment of the public.

However, under certain circumstances the SEC has demonstrated that it is receptive to relaxing various requirements for legitimate purposes, and Form 13F data has been a factor in certain requests for exemption. Examples of the SEC’s flexibility include use of 13F data to successfully support requests for exemption from registration requirements under Exchange Act Rule 10b-13,129 and companies have made use of Form 13F data to support requests for exemption from tender offer rules,130 which the SEC has granted on occasion.131

D. Civil Litigants Use Form 13F Data

A publicly traded company utilized Section 13(f) securities information against an alleged “group of secretive and interconnected New York and offshore hedge funds and investment bankers.”132 The alleged securities manipulation by defendants, according to plaintiff Payless Shoesource, Inc., was orchestrated through “suspicious” Form 13F disclosures by a group allegedly engaged in an “ongoing manipulative and misleading scheme and course of conduct in purporting to nominate and solicit proxies for their hand-picked candidate for election to the Board of Directors of Payless.”133 Full and accurate 13F disclosure can serve to inform shareholders as to the possible motive and nature of potential board of directors candidates, but if market participants file false or misleading Forms 13F, the shareholder franchise can be compromised and candidates possibly elected under false pretenses.

Class action litigants have also relied upon Form 13F data. An uncertified class of short-sellers asserted a Section 10(b) (and Rule 10b-5 thereunder) securities fraud claim against an investment adviser.134 The short-seller plaintiffs alleged that defendant Durus Capital’s Form 13F materially misrepresented its ownership in Aksys stock – claiming it only owned 5,283,248 shares of Aksys, when in fact it actually owned over 10 million shares (approximately 44 percent of Aksys common stock).135 Class action administrators have also utilized 13F data to identify eligible class member claimants in order to disburse settlement proceeds.136

The many methods which regulators, market participants, litigants and the investing public have all legitimately utilized 13F data seriously undermines Goldstein’s contention that no legitimate use for the disclosure requirements exists beyond “stealing” investment ideas. Beyond the citation of a handful of financial magazine articles describing the investment holdings of a handful of certain “celebrity” investment managers, Mr. Goldstein proffered no evidence whatsoever to show that the allegedly rampant idea theft that he claims is regularly perpetrated on Wall Street and Main Street even exists. Moreover, the Goldstein Application made no measurable attempt to cogently distinguish why his hedge fund holdings should not have been subject to a confidential treatment application prior to his request for full exemption from the Section 13 reporting framework.


A non-exempt investment manager may request to delay 13F disclosure137 through the filing of an application with the SEC,’38 which delays and if granted, may altogether prevent disclosure of Form 13F data. The confidential treatment remedy serves as a form of relief that is generally consistent with the confidentiality procedures for a variety of other federal agencies.139 confidential treatment applications are no longer routinely granted, and recent denials of high profile investors’ efforts to shield their equity portfolio holdings from public view have been widely reported; but even a denied confidential treatment application delays disclosure and increases the “stale” nature of the pertinent portfolio data because during the pendency of the confidential treatment application process, “the material for which confidential treatment has been applied will not be made available to the public.”140 The bureaucratic advantage inherent in the confidential treatment application process invariably reduces any potential utility to the “free riders” of which Goldstein complains, and savvy market players have increasingly exploited this “red tape” delay.141

Confidential treatment may be granted pursuant to Exchange Act Rule 24b-2.142 The pertinent analysis for a confidential treatment application includes evaluation of the Freedom of Information Act (“FOIA”) exemption criteria,143 and often includes assessment of FOIA Exemption 4, which contemplates “Trade Secrets,” and/or “Commercial or Financial Information.”144 A prudent confidential treatment applicant will articulate the facts that relate to FOIA exemption criteria and the “applicable exemption(s) from disclosure under the Commission’s rules and regulations adopted under the Freedom of Information Act.”145 An applicant’s bases for confidentiality must be self-evident and “fully substantiated” within the confidential treatment application,146 and the requested confidentiality must be demonstrably within “the public interest.”147

Congress was mindful of the possible legitimate purposes served by confidential treatment when it amended the Exchange Act in 1975. Legislative history indicates that Congress considered it to be “in the public interest to grant confidential treatment to an ongoing investment strategy . . . [as] [disclosure of such strategy would impede competition and could cause increased volatility in the market place.”148 The granting of a request for confidential treatment will maintain secrecy, for a period of time, over “that portion of any report filed by an investment manager covering holdings or transactions which are part of a program of acquisition or disposition in which the investment manager is engaged both at the end of the reporting period and at the time the report is filed.”149 A successful confidential treatment applicant typically receives confidentiality for two broad categories of securities information:

( 1 ) Information that would identify securities held by the account of a natural person or certain estates or trust; (2) information that would reveal an investment manager’s program of acquisition or disposition that is ongoing both at the end of a reporting period and at the time that the investment manager’s Form 13F is filed.150

A confidential treatment request filed in accordance with the instructions pursuant to Rule 24b-2, if granted, extends confidentiality to all documentation submitted in connection with the confidential treatment request, including the application itself.’51 Subsequent requests made to access the confidential treatment application, related documents, or the Form 13F data itself, by third parties pursuant to the FOIA, will be logically and summarily denied.152 There can be little doubt that Congress found that certain proprietary investment strategies may have merit and economic value, and that the confidentiality of those strategies was something worth protecting. Confidential treatment relief, however, is the exception that the Goldstein Application apparently seeks to convert into the defacto rule.

A. FOIA Request Denials and Exemption 4

The SEC General Counsel’s office affirmed the SEC Freedom of Information Officer’s denial of FOIA requests where a Form 13F filer was granted confidential treatment.153 Such a FOIA request can be denied pursuant to FOIA Exemption 4.154 The SEC requires that a FOIA request “[a]t a minimum . . . must satisfy the requirements of FOIA Exemption 4 which protects ‘trade secrets and commercial or financial information obtained from a person and privileged or confidential.'”155 Where confidentiality has been granted to a Form 13F filer, the SEC has stated its policy is to deny any FOIA request-not only for the securities holding information which has been granted confidential treatment-but also for the confidential treatment application and related documents which accompanied the confidential information.156

The FOIA and confidential treatment policies are not without critics, and some market participants deride the confidential treatment policies due to the enlarged time lag of Form 13F data disclosure attributable to the bureaucratic application process,157 and assert that confidential treatment policies create an unfair playing field for investors where “[s]ecret filings give unfair advantages to a few,” and that confidential treatment should be “abolish[ed].”158 Larry Feinberg, manager of the $500 million Oracle Partners funds, has argued that confidential treatment is inherently unfair, and quipped, “[i]f I’m going to pull down my pants in public I want everyone to pull their pants down too.”159

B. Risk Arbitrage Trumps Block Trading

The SEC amended its Form 13F instructions in 1985 in an effort to “simplify” confidential treatment requests for certain risk arbitrage positions.160 Although trading strategies that utilize block positioning are among the categories the SEC may delay or prevent public disclosure of, such strategies have simply not been afforded the same confidential treatment status as risk arbitrage techniques.161 Block trading secrecy is important for brokers and specialists seeking to buy or sell an inordinately large position, especially in illiquid issues, and the arguably inconsistent 13F policies potentially exacerbate the problem.162

During the proposed Rule comment period, at least two brokerdealers asserted that the SEC should include block positioning163 within the confidential treatment rubric, consistent with risk arbitrage confidential treatment requests. These broker-dealers took issue with the SEC proposing the release position that the Form 13F reporting time lag was sufficiently mitigating, and noted that “block positions ‘involve transactions which are completed during a very short period of time.'”164 These broker-dealers addressed the fact that block positions are sometimes held for longer than forty-five days, and asserted that the SEC’s “assumption” that block positions held that long are “for investment purposes” was inaccurate.165 The broker-dealers insisted that block positioners should receive the same confidential protection as risk arbitrageurs, and emphasized the significant liquidity effects of block trading, similar to the market efficiency contributions of risk arbitrageurs.166 The SEC has acknowledged that block positioners do in fact “facilitate the operation of the markets by offsetting temporary imbalances in the supply and demand for securities,”167 yet were not persuaded by the broker-dealer block trading arguments.168

The SEC excluded block trading from the “simplified” confidential treatment proposal, as it believed that such trading typically “involve[s] transactions which are completed during a very short period of time,”169 and that block positions still held at the quarter’s end, would likely “be disposed of by the date on which Form 13F is required to be filed (i.e., 45 days later).”170 Blocks still maintained forty-five days later “would be presumed to be maintained for investment purposes, rather than as a block position.”171 While the SEC conceded that aspects of the brokerdealer assertions had merit, it considered the possibility of a block trade requiring confidentiality to be aberrant considering the time lag for Form 13F disclosures. Combining the reporting time lag with the fact that only a “limited number of block positions [are] maintained for 45 days, . . . [and] requests for confidential treatment of block position data” the SEC has determined that such requests can be adequately addressed on a “case-by-case basis.”172

As a result, the amended Form 13F instructions173 specifically apply to risk arbitrage confidential treatment requests but exclude block traders. Applicants seeking confidential treatment for block positioning (which may include broker-dealers and specialists)174 are required to provide full factual support for the requests,175 and must demonstrate a likelihood of competitive harm if the positions are disclosed.176 The Goldstein Application made no mention of the varying considerations made by the SEC regarding its evaluation of differing factors for confidential treatment Applicants, and barely recognized the available relief of confidentiality, presumably because it profoundly undermines the conclusory contention that Section 13 reporting requirements are unconstitutional regulatory “takings.”

C. Confidentiality Requests and SEC Application Review

Examples of the SEC’s recognition of the independent merits of confidential treatment applications abound. Despite the recent trend towards a lower likelihood of confidential treatment for 13F filers, ample support exists for the position that the SEC continues to give due consideration to confidential treatment applications. The SEC grants (or denies) individual requests based upon appropriate factors, and as noted herein, perhaps the most factor is whether the merits of an confidential treatment application demonstrate that confidentiality is a matter within the public interest. The SEC has adopted a case-by-case scrutiny of confidential treatment applications that have produced varied results.

I. End of Permissive Confidentiality-Bill Gates’s Cascade Investments, LLC

Cascade Investments, LLC, a money management firm formed to buy stocks on behalf of Bill Gates, filed its first Form 13F in November 1999, which publicly disclosed a portion of the Microsoft founders’ equity holdings. Gates had previously obtained repeated confidential treatment grants for his entire portfolio (for successive one year terms).177 According to market analyst Fred Huit, “[a]ny disclosure of (Gates’s) positions [is] going to have an influence on the price of the stocks.”178 Kathyrn McGrath, former director of the SEC’s Division of Investment Management stated that until that time, “institutions have been able to get confidential treatment with very little effort.”179 The permissive trend of granting confidential treatment came to a halt in 1999 when the SEC indicated that in order to obtain confidential treatment in the future, the SEC would require “more detailed information on trading strategies from those seeking to keep their stock selections secret.”180

2. Denial of Incomplete Confidential Treatment Applications-Two Sigma Investments

The SEC recently denied a confidential treatment application primarily because the applicant “failed to provide sufficient information, either in its [r]equests or in its [pjetition, to substantiate that confidential treatment [wa]s merited.”181 The SEC reasonably determined that it was in the interest of the public and protection of investors to deny this apparently incomplete confidential treatment request.182 The SEC set forth the information that must be included in a complete confidential treatment application,183 and found that Two Sigma failed to provide information sufficient to substantiate its request.184 Two Sigma argued that it is “engaged in a program of acquisition and disposition that employs a statistical arbitrage investment strategy,” and that disclosure of its securities position would expose its investment strategy to “reverse engineering.”185 Two Sigma claimed that even partial reverse engineering would place it at “a competitive disadvantage in the market,” and that outcome would “undermin[e] [the] public interest.”186

Despite the aforementioned favorable consideration for risk arbitrage strategies, the SEC found that Two Sigma failed to provide adequate information regarding “basic characteristics of its investment strategy,” and further failed to demonstrate “how its strategy is applied to each security for which [it] is seeking confidential treatment,”187 and provided insufficient clarity as to how its investment strategy would, in fact, be revealed through public disclosure in a Form 13F.188 Furthermore, Two Sigma did not support its conclusory claim of substantial harm from public disclosure,189 nor did it explain how disclosure would “prematurely reveal its investment strategy.”190

The Goldstein Application, as discussed in greater detail below, is similarly inconclusive in terms of the purported trade secret status of the “Bulldog” portfolio holdings and offers scant support for the position. Goldstein offered no measurable insight into the valuation methods he employs, nor the strategies utilized in the management of the “Bulldog” investments. And as described in detail below, the Goldstein Application is wholly lacking supportive facts and law to establish that anything that even resembles a trade secret exists in the components of his portfolio. Beyond Goldstein’s assertions that there is apparent public interest in what various other “celebrity” investors are holding, he cited nothing to demonstrate that any specific risk of competitive harm exists sufficient to warrant confidential treatment of his 13(f) securities holdings, let alone sufficient to merit exemption from the disclosure framework.

3. Public Disclosures by Form 13F Filers-Research Affiliates, LLC

The SEC affirmed the denial of a confidential treatment application on November 15, 2006. 191 The SEC determined that Research Affiliates failed to show that disclosure of the information contained in its Form 13F would cause it substantial competitive harm – largely because it had already publicly revealed its investment strategies.192 The SEC found that even if Research Affiliates had demonstrated it would be harmed – notwithstanding its public revelations – it failed to show “the likelihood that such harm would be substantial.”193

Phillip Goldstein’s widely publicized penchant for public interviews, proxy fights and protracted litigation all offer insight into the “Bulldog” investment method and its ostensibly “value” oriented strategy. Any confidential treatment application by Goldstein might have been considered somewhat analogous to Research Affiliate’s public disclosure of its passive indices, at least in terms of Goldstein’s irascible “activist” strategies, leaving only the mix of actual securities held as potential “trade secrets.” Mr. Goldstein’s Full Value Advisors, LLC filed an otherwise blank Form 13F-HR on or about May 10, 2007 that noted confidential treatment was requested.194 Various Schedules 13D and Proxy Forms 14 filed by Goldstein’s hedge funds, however, do shed light onto certain of his funds’ holdings, and tend to negate the contentions that his portfolio holdings are somehow secret.195

4. Failure to Demonstrate Substantial Likelihood of Harm-Berkshire Hathaway

The SEC recently denied confidential treatment to Berkshire Hathaway because it determined that the company “failed to demonstrate a likelihood of substantial competitive harm from the disclosure of its acquisition program for two securities.”196 The SEC determined that Berkshire’s showing was inadequate because it failed to demonstrate how public disclosure of its investment strategy would impair its “ability to acquire or liquidate a securities position, in the context of the market for those securities.”197 The SEC did recognize that there have been instances where temporary spikes in the market occurred upon disclosure of Berkshire-Hathaway’s “stock purchase and selling programs, acknowledging that Berkshire might be ‘foreclosefd] . . . [from] increasing] its holdings in that security at prices Mr. Buffett concludes are attractive.'”198 Still, the SEC seemed hesitant to declare that disclosure would inexorably cause market disruption “so severe as to cause substantial competitive harm to Berkshire’s competitive position in all cases,”199 noting that such a finding would lead to a “virtual per se justification for confidentiality for Berkshire, without specification of limits or specific time frames for any acquisition (or sales) program.”200 Yet, Berkshire-Hathaway has also been granted confidential treatment.201 At a minimum, the bureaucratic delay in processing Berkshire’s many confidential treatment requests has likely afforded it opportunities to quietly acquire (or dispose of) equity positions while the related confidential treatment requests were processed. The Goldstein Application fell far below the aforementioned denied Berkshire’s confidential treatment application because of a wholesale absence of any particularized factual statements or evidentiary showing that competitive harm would result from the “Bulldog” funds filing Forms 13F.

5. The “Small Handful Who Have Obtained Permission ” – Eddie Lampert

Eddie Lampert has filed numerous successful confidential treatment applications202 and his ESL hedge fund’s managing affiliate, RBS Partners, L.P.,203 has been granted confidentiality throughout the years.204 Lamport’s stealth investment approach requires his investors to lock-up their funds for at least five years (typical fund “lock-up” periods are between one and two years), and he “believes that secrecy is a key advantage for an investor,” even refusing to talk about details of his portfolio with his own investors.205

According to the Wall Street Journal “Lampert is one of a small handful who have obtained permission from the Securities and Exchange Commission to delay releasing details of at least some of those holdings.”206 The delay effect for confidential treatment applicants was underscored by the Journal when it described Lampert’s recent amendment of a prior RBS Form 13F filing as a “little noticed move,” which revealed that “Lampert’s firm owned 1.754 million shares of GM at the end of 2005, and that it reduced that stake to 633,000 shares of GM at the end of the first quarter of this year.”207 Upon the expiration of confidentiality treatment for those periods, Lampert had to amend those Form 13F filings.208

Lampert’s successful efforts in obtaining confidentiality have left market-watchers speculating on what firms his ESL Investments, Inc. might target next, and frustrated Michigan residents who watched Lampert export K-Mart jobs to Illinois as it consolidated its operations with Sears. Those Michigan residents presumably track Lampert’s trading of GM shares in an effort to discern what it might portend for the future of auto manufacturing jobs.209 This demonstrates yet another public benefit of Form 13F data, and other similar instances include critics decrying George Soros’s Halliburton holdings210 and the Yale University endowment’s investments in Halliburton, and Talisman Energy, which according to the Yale Daily News and the Yale Herald was “exposed as having ‘a not insignificant role’ in human rights violations in Sudan.”211

6. Broker-Dealers-Credit Suisse Confidential Treatment Success Suggests 13F System Efficacy

Credit Suisse Holdings (USA),212 acting on behalf of Credit Suisse, Inc.,213 filed an amended Form 13F on December 5, 2006 that disclosed Section 13(f) holdings which had previously been confidential and withheld from the publicly available Form 13F filed on November 14, 2006,214 “pursuant to a request for confidential treatment and for which that request is no longer necessary.”215 Credit Suisse has filed over thirty Forms 13F since June 16, 1999,216 including multiple amendments (Form 13F-HR/A) that suggest confidential treatment applications by Credit Suisse have been successful.217 For example, Credit Suisse filed a Form 13FCONP218 on February 15, 2005 for the period ending December 31, 2004, which does not provide any information, but for the fact that the document referenced was filed in “confidential” paper format.219 Additionally, Credit Suisse filed an amended Form 13F (13F-HR/A) on June 15, 2005 for the period ending December 31, 2004, “listfing] securities holdings reported on the Form 13F filed on February 14, 2005 pursuant to a request for confidential treatment and for which that request is no longer necessary.”220 To date, Credit Suisse has filed more than sixty-three other confidential treatment applications that successfully shielded its holdings from public view.221 The multiple successes Credit Suisse and Lampert’s RBS have achieved in obtaining confidentiality for Section 13(f) holdings, is testament that the current reporting regime is effective, and that confidentiality is an available form of relief for market participants, including Mr. Goldstein’ s hedge funds.


No known procedures or rules of practice yet exist to evaluate the unprecedented justification for Goldstein’s October 24, 2006 exemption request and, according to Mr. Goldstein, the SEC has not yet ruled on the Goldstein Application.222 The articulated basis for Goldstein’s exemption (or compensation) theory is that his unique combination of Section 13(f) equity holdings is, in and of itself, a form of intellectual property-a trade secret.223 While Goldstein’s various equity allocations may not rival the top-secret Coca-Cola formula224 or the Kentucky Fried Chicken “Colonel’s Secret Recipe”225 in terms of pop culture notoriety, some commentators have not taken the market maverick’s windmill-tilting lightly, though at least one legal expert has correctly noted that Goldstein’s latest battle is actually not with the SEC, but that this time he has picked a fight with Congress.226

According to at least one online financial publication, FINaltematives, Goldstein reportedly admitted that his Application was merely the “pretext for a lawsuit,” and presumably yet another round of high-profile litigation with the SEC, certain to keep Goldstein’s name in financial headlines for years to come.227 Mr. Goldstein’s reported admission that the Application is just a ploy to lure the SEC into further litigation might be perceived by a reviewing tribunal as indicia of bad faith. Despite that possibility, Goldstein seems undeterred and went on the offensive during a December 2006 CNBC televised interview, during which he seemed to suggest that the SEC somehow duped Congress into passing Section 13(f) and stated:

[T]here is no [legitimate government] interest, because the funny thing is, when they passed this law, the SEC told Congress that the reason they needed the law [Section 13(0] was that they were going to review this data and come up with regulatory initiatives. That was thirty-one years ago, and the SEC admitted that they do not look at the data so essentially you are making filings for no good reason at all . . . .228

The SEC did indicate the data would be used for policy development,229 and this Article is replete with valid regulatory and public purposes, despite Mr. Goldstein’s oft-stated viewpoint that there is no legitimate reason for Section 13 disclosures.230 Comment letters on a variety of SEC proposed rules, for example, referenced 13F filings,231 while the legislative history strongly suggests that Form 13F data would improve the availability of “factual data about large investment managers,” to individuals, federal and state regulatory agencies, and other investment managers.232 In an ironic twist, some of the suggested uses for 13F filings quoted in the Goldstein Application were submitted to the SEC during the rule making process.233 Despite the uses he suggested, Goldstein’s statement argued that the “primary purpose was to fill the information gap about the activities of institutional investment managers that would enable the Commission to devise regulatory initiatives.”234

The Goldstein Application asserts that the legitimate government interest in advancing laws and regulations to augment the “integrity” of American securities markets is “not the objective of [Section] 13(f).”235 The legislative history, however, compels a different conclusion. “The primary purpose of this section of the bill,” according to the conference report, “was to create a central depository of historical and current data about the investment activities of investment managers. The Committee believes that subjecting certain institutional investment managers to the reporting requirements of the bill will advance two important public policy and regulatory objectives.”236 Thus, Congress specifically recognized that “with the dissemination of data about institutional investment managers, an institutional disclosure program should stimulate a higher degree of confidence among all investors in the integrity of our securities markets.”237

Another instance of Goldstein’ s clever sleight-of-hand wordplay relates to the question of the “value” of Section 13(f) disclosures. Goldstein uses pretzel-logic when confronted with the issue of the “staleness” of Form 13F data as not posing any threat of significant harm to 13F filers, rhetorically noting that if the data is “worthless,” then its collection must certainly be nothing more than an “arbitrary exercise.”238 For whatever reason, Goldstein neglects to consider, facetiously or not, the many meanings of “value,” including, for example, the inherent utility of aggregated data to spot and forecast trends. JPMorgan Chase & Co. apparently found value in 13F data when it recently announced that it “is the leading depositary bank in Latin America,” for ADRs (“American Depositary Receipts”), as did The Bank of New York when it announced the release of its annual year-end report and included remarks regarding the international ADR market.239 Both JP Morgan Chase & Co. and The Bank of New York’s recent ADR market-related statements were based upon 13F data.


The trade secret has been regarded as among “the most elusive and difficult concepts in the law to define.”240 Significant aspects of U.S. trade secret doctrine (including the prevailing definition that is still widely used today) can be, in part, traced back to the “New Deal” era and the introduction of the RESTATEMENT (FIRST) OF TORTS, which according to the definition of trade secrets found within its comment, may consist of:

[A]ny formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.241

The drafters of the RESTATEMENT (FIRST) OF TORTS firmly established the foundation of trade secret doctrine in the concept of a confidential relationship, and a corresponding duty of good faith owed by one to maintain the other’s entrusted confidences, regarding almost any conceivable sort of confidential proprietary commercial information. Of course, Goldstein has, for whatever reason, elected not to submit a confidential treatment application to the SEC on behalf of his “Bulldog” funds and, as a result, nothing even resembling a confidential relationship exists between the SEC and Goldstein as it relates to his Section 13(f) portfolio holdings.

The U.S. Supreme Court followed the RESTATEMENT’S definition in Kewanee Oil Co. v. Bicron Corp. and specifically noted that the subject matter of any trade secret “must not be of public knowledge or of a general knowledge in the trade or business.”242 Common law precursors to the 1939 RESTATEMENT’S duty-based doctrine can also be found scattered throughout Industrial Revolution-era opinions, many of which still remain valid and controlling authority.243 Similarly, unfair competition law, from which much of modern trade secret protection is also derived, has a nearly two-century legacy in U.S. common law.244

It is the secrecy of the information itself that must create some sort of a competitive advantage (and a resultant economic value) for the “holder” of the secret, and “protection [is] accorded [to] the trade secret holder against the disclosure or unauthorized use of the trade secret by those to whom the secret has been confided under the express or implied restriction of nondisclosure or nonuse.”245 When one obtains the confidential proprietary information that qualifies as a trade secret of another through means that are deemed to be “improper,” the trade secret may be considered to have been misappropriated, and the holder ofthat trade secret may be able to prevent any further use (or disclosure) of the secret through injunctive relief, and can seek to be made whole for the misappropriation through a claim for damages.246 It is worth noting that what is considered “improper means” is typically determined on a case-by-case basis,247 and conduct by private actors that has been construed as actionable trade secret misappropriation, has also been held to be completely proper (and constitutional) when committed by the government in the furtherance of regulatory or law enforcement objectives.248 The Goldstein Application conspicuously avoided any discussion of the traditional deference that is typically afforded to the government when performing regulatory functions.

A. Are Trade Secrets Private Property?

The Kewanee Oil Court opined that trade secrets have “no property dimension” and stated that the term property as applied to trade secrets, “is an unanalyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith.”249 The Kewanee Oil Court, however, also apparently contemplated the “theft of a trade secret,” which necessarily implies certain property attributes, and intertwined such a hypothetical “theft” with torts remedies and the breach of a contract.250 Similarly, civil causes of action exist for trade secret misappropriation, which further suggests that there must be some element of property at issue for such a tort to exist.

What property rights, if any, are embodied in a trade secret? According to the intellectual property treatise MILGRIM ON TRADE SECRETS, the concept of a trade secret embraces, at a minimum, the holder’s right to exclude others and to dictate the manner in which the trade secret is used.251 Judge Taft (later President Taft, and later still, Chief Justice Taft of the United States Supreme Court) defined the ephemeral characteristic of the property rights embodied in trade secrets doctrine within his seminal Cincinnati Bell Foundry opinion:

The property in a secret process is the power to make use of it to the exclusion of the world. If the world knows the process, then the property disappears. There can be no property in a process, and no right of protection if knowledge of it is common to the world.252

Professor Jonathan S. Shapiro has noted that trade secrets are “some of the most valuable property” in American companies’ possession,253 and Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit has commented that the very “future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property.”254

An undisclosed trade secret could conceivably exist in perpetuity.255 A trade secret can also exist in an almost Lockean combination of characteristics and components, each of which may well exist by itself within the public domain (and not independently constitute trade secrets), but the unified process, design and operation of which, in its unique and otherwise unknown combined whole, typically created by the efforts of the putative trade secret holder, affords the holder competitive advantages that are a protectable secret.256 The government has acknowledged that trade secrets can constitute property under state law, and the U.S. Supreme Court has found that a trade secret can be considered property, which under certain circumstances may be protected by the takings clause of the Fifth Amendment of the U.S. Constitution.257

Trade secrets have also been considered alienable property interests, according to transactional documents on file with the SEC.258 Not entirely unlike an expired leasehold, or a terminated easement, mineral profit, or a vacated ingress-egress license in the realm of real property (or for that matter, a software, film, photo, literary or music license in the intellectual property digital realm), trade secret property rights can also be terminated, typically by public disclosure.259 Once an applicant seeks patent protection with the U.S. Patent and Trademark Office, in an application which details what was previously confidential proprietary information, the applicant loses any pre-existing trade secret status if a patent is granted and the application data is disclosed to the public.260 Other examples abound where a private actor seeks benefits from the government in exchange for certain social benefits (i.e., a limited monopoly is granted to the holder of a copyright in exchange for the copyrighted material joining the public domain at the conclusion of the copyright term).261 Intellectual property in general, and trade secret protection in particular, are not traditional property rights, but rather are a function of law. Whether that protection is judge-made or legislated, the privileges afforded are largely dependent upon correlative public benefits, and perceived encroachments onto those privileges, such as a regulatory requirement to report certain securities holdings, are probably much closer to a rebalancing of that relationship than to any sort of unconstitutional “taking.”

The Goldstein Application implicitly contended that in light of his investment acumen, the particular assemblage of securities gathered by Goldstein’s unspecified efforts are a protectable trade secret. This is the case, despite the fact that the names and ticker symbols of each of the particular Section 13(f) securities contained in his hedge funds’ portfolio holdings are known and readily ascertainable to the investing public.262 In the abstract, it would appear that closely guarded secret details of a portfolio might be considered a compilation of information that is appropriate for trade secret protection. Whether Goldstein effectively established that his Section 13(f) equity holdings are in fact trade secrets worthy of exemption from public disclosure is certainly another question altogether.

B. Trade Secrets Are Creatures of State Law

The Goldstein Application was filed in the name of Full Value Advisors, LLC et al., apparently of Pleasantville, New York.263 Goldstein reportedly moved his hedge fund operations to Saddleback, New Jersey, however, at least five weeks prior to filing the Application, and did not disclose the domicile of, or the laws under which, any of the entities on whose behalf the Goldstein Application seeks exemption relief were organized or registered.264 Presumably, the question of whether Goldstein holds a protectable property interest would be accordingly governed by New York trade secret law in that it is the only potential locus identified in the Application.265 The Third Circuit has addressed at least one matter where a question of Pennsylvania versus New Jersey conflict of trade secret law existed, and found little substantive difference.266 For the purposes of this discussion, New York trade secret principles are presumptively applied based upon the Application’s use of a New York address. Both New Jersey and New York base their trade secret doctrines on principles set forth in the RESTATEMENT (FIRST) OF TORTS.267

C. Trade Secret Ingredients

The Goldstein Application conclusively declares that the component securities of his portfolio holdings are de facto trade secrets.268 Notwithstanding the glaring potential conflicts of law issues that might exist due to the absence of any identified domiciles of the various “Bulldog” entities that are the putative co-applicants, there is scant reference to any of the required elements for a prima fade trade secret claim. Considering the paucity of any facts relating to the elements required pursuant to New York state law, if the rhetoric of the Goldstein Application were to be asserted as a civil claim, it would not likely survive a motion to dismiss due to its failure to state a claim for which relief could be granted.269 A successful civil claimant for trade secret misappropriation must establish that: (i) it possesses a trade secret, and (ii) the defendant(s) is using that trade secret “in breach of an agreement, confidence, or duty, or as a result of discovery by improper means.”270 Many New York state courts address the first element and premise decisions largely on whether the information at issue is considered a trade secret, without any reference to the second element of unlawful or “improper means” of appropriation.271 Of course exceptions exist,272 and it has typically been federal courts that have articulated a two-part analysis as the proper test for successful assertion of a trade secrets misappropriation claim while applying New York state trade secrets law.273

D. New York Definition of “Trade Secret”

The threshold question in a New York civil trade secret claim is whether the information at issue is actually a trade secret, and the “single most important factor in determining whether particular information is a trade secret is whether the information is kept secret.”274 While no one generally accepted definition of a trade secret exists in New York, according to the Court of Appeals, courts have traditionally employed the 1939 RESTATEMENT (FIRST) OF TORTS definition.275 The “New Deal” era definition was somewhat supplanted by a slightly modified modern description set forth in the RESTATEMENT (THIRD) OF UNFAIR COMPETITION, which is occasionally referenced by New York jurists, and characterizes a trade secret as “any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.”276 The modern definition does broaden the categories of potentially protectable subject matter to include “any information,” but limits the “do not know or use it” portion of the definition by requiring the information to be “secret” and further articulates that the secret must in fact be “sufficiently valuable.”277 Multiple potentially outcome-determinative nuances exist within these broad definitions, in terms of eligible trade secret subject matter, and in terms of the required competitive advantage and secrecy components.278 New York courts are likely to evaluate the relative ease with which a purported secret can be independently replicated by others in the field who possess reasonable knowledge,279 but often first employ the following six-factor threshold analysis to determine the question of whether a trade secret is even in dispute:

(i) the extent to which the information is known outside of [the] business; (ii) the extent to which it is known by employees and others involved in [the] business; (iii) the extent of measures taken by [the business] to guard the secrecy of the information; (iv) the value of the information to [the business] and [its] competitors; (v) the amount of effort or money expended by [the business] in developing the information; (vi) the ease or difficulty with which the information could be properly acquired or duplicated by others.28

It is highly improbable that any New York tribunal would interpret the factual averments within the Goldstein Application as satisfying the six-prong burden, and neither should the SEC.281 Certain factual subtleties that must be addressed by a successful trade secrets claimant are altogether absent from the Goldstein Application and could conceivably thwart his latest campaign. While no apparent framework for review of Goldstein’s request currently exists, it seems plausible that the SEC might apply an analysis similar to that employed with confidential treatment applications (as discussed above), only modified to evaluate whether a meritorious showing exists in support of the novel theory for exemption. Such a finding would seem implausible based upon the facts.

I. Trade Secrets Must Be Kept Secret-Reasonable Efforts and Improper Means

New York courts evaluate the measures used to preserve exclusivity of information, and such measures must guard the secret from outsiders and within the workplace.282 Secrecy need not be “absolute,”283 but “a substantial element of secrecy,” must exist to the extent that it would be difficult to acquire the information absent “improper means.”284 Unfortunately for the fate of the Goldstein Application, it contains almost nothing to demonstrate any measures used by the “Bulldog” to guard his purported “secret,” nor were any “improper means” attributable to conduct of the government cited. A prudent trade secret holder would employ reasonable efforts to exclude others from the secret and guard against its public disclosure.285 Such reasonable efforts would be likely to include, at a minimum: limiting employee access to any proprietary information;286 demanding that employees, agents, contractors and others with access to the information execute nondisclosure agreements;287 avoiding access to the “secret” by outsiders; and allowing only those who “need to know” to gain access.288 This is just one among many respects in which the Goldstein Application falls well short.

The one prominent measure claimed by the Goldstein Application is that investors in the “Bulldog” funds are supposedly not privy to any of the funds’ holdings.289 Goldstein’s claimed secrecy, however, is contradicted by a variety of public documents, including a Memorandum and Order in a civil matter adjudicated in 2001 in the Eastern District of Pennsylvania in a matter captioned Phillip Goldstein v. Lincoln National Convertible Securities Fund, Inc., in which Judge Dubois cited sworn testimony in her findings of fact, and clearly indicated that Goldstein had previously communicated specific information related to investment strategies and trading activities, and that he has actually consulted with certain of his hedge funds’ investor-limited partners about contemplated investments before the trades were actually executed.290

New York courts often assess a claimant’s conduct prior to seeking trade secret protection in order to discern whether, as a course of business, the putative holder considered and treated the information as a valuable secret, and would presumably take a dim view of Goldstein’s claims of secrecy because of the contradictory public records.291 New York courts are also generally receptive to protecting proprietary information where considerable time and money was expended in developing the secret.292 The Goldstein Application, however, reveals almost nothing quantifiable about any reasonable secrecy efforts or funds expended to maintain the secrecy of, or to select “Bulldog’s” various Section 13(f) stock picks, nor anything relating to his buy/sell/hold decisions regarding those securities.293 Moreover, in addition to Judge Dubois’ Findings of Fact in the 2001 matter, less than a month prior to filing the Application, Goldstein spoke in detail in various media interviews, and in late September, 2006, Goldstein revealed aspects of his hedge fund investment strategies for generating “alpha” during a conference call.294 A judicial review of prior conduct related to any purported trade secrets, especially the testimony from the 200 1 civil matter, would hardly bode well for any supposed trade secret status of the “Bulldog” portfolios.

Substantially more damaging to Goldstein’s purported trade secrets theory in terms of its glaring lack of any demonstrated “reasonable efforts,” is an administrative complaint filed January 31, 2007 by the Massachusetts Commonwealth Secretary, William F. Galvin.295 The Massachusetts administrative action charges Goldstein, his “Bulldog” funds, and his hedge fund lieutenants with what Reuters characterized as a failure “to restrict online access to the portfolios, which are considered a private offering,” and which the Financial Times noted, according to the complaint, that “Mr. Goldstein and Bulldog Investors failed to control access to fund information that should have been available only to password-holders screened by fund managers.”296 The complaint further alleges violations of the Massachusetts Uniform Securities Act and related regulations, “based upon the Respondents’ failure to ensure that the offer or sale of its securities in the Commonwealth were properly registered or exempted in accordance with §301 of the [Massachusetts] Act.”297

The administrative complaint alleges that “Bulldog” also sent email investment solicitations to a Massachusetts resident, which in combination with the website materials, included: “investment strategies;” “specific examples of investments;” “assets and firm information . . . historical performance, latest period returns, statistical analysis;” as well as a “detailed monthly breakdowns] of return estimates for the Full Value Fund.”298 The complaint further alleged that “[t]here are no controls on the Bulldog web site to prevent advertising and/or offering materials from being sent to Massachusetts investors.”299 A check of Bulldog’s website subsequent to the filing of the Massachusetts complaint confirmed that it did contain a “front page” message which indicated that the web site was “currently being updated,” however, the entire Bulldog website was readily available through the “Internet Archive,” despite the fact that relatively simple (and fairly well known) methods to avoid website archiving exist.300 The allegations within Secretary Galvin’s pleadings against “Bulldog” which relate to voluntary public disclosures of investments and strategies are among the many facts that call into serious question Goldstein’ s claims of secrecy in his Application, and strongly suggest a lack of “reasonable efforts” expended to protect the confidentiality of his purported trade secrets.301

Goldstein has publicly rebuffed the Massachusetts regulator’s allegations; characterized the administrative lawsuit as “bizarre;” referred to Secretary Galvin as a “bully” and a “pompous ass;”302 claimed Bulldog was subjected to “pretexting” and an innocent victim of a “sting operation;” and asserted during a CNBC televised interview and in periodicals such as the Boston Globe and The New York Times that unfettered online access to his hedge funds’ information is somehow constitutionally protected free speech. “If someone asks for info and you give it to them, isn’t that First Amendment activity? I’m not selling anything, I’m just providing information.”303 These remarks were all apparently foreshadowing Goldstein’s next high-profile regulatory windmill, a First Amendment-based challenge to long-standing state and federal prohibitions of general advertising or solicitations for private hedge fund offerings.304 These prohibitions include the Investment Company Act of 1940 that exempts certain private securities offerings from registration and disclosure if sold only to less than one hundred investors, and/or to so-called “qualified purchasers,” but which also require that any such offering not be made available to the public as a quid pro quo for the exemption.305

Goldstein told the Wall Street Journal “[w]e’re being punished for providing truthful information,” and added, “[i]t’s almost like mind control . . . [i]t’s what you would see in Communist China.”306 He has openly challenged the public “to find any First Amendment lawyer who’s not going to agree that this regulation, this attempt to strike down free communication, is going to be invalidated by a court” and even unsuccessfully dared an apparently unimpressed Connecticut Attorney General Richard Blumenthal, and former SEC Commissioner Laura Unger, to wager $100,000 with him regarding any judicial outcome of Goldstein’ s tenuous First Amendment theory during a televised CNBC interview.307 It seems unlikely that Goldstein’ s notions regarding the regulation of so-called “commercial speech”308 will persuade any court, and the revelations regarding the easy access to information about the “Bulldog” funds on the Internet, that came to light as a result of the Massachusetts administrative action, may very well be the absolute undoing of Goldstein’s rather suspect Application.

Subsequent to Secretary Galvin’s administrative action against “Bulldog,” a battle boiled over between the financial website DealBreaker.com and Solengo Capital, the new hedge fund start-up of former Amaranth trader Brian Hunter, over DealBreaker.com’s snarky and recalcitrant publication of the Solengo Capital initial investment brochure.309 The Solengo “imbroglio” led to public posturing between Mr. Hunter’s new hedge fund and the “Wall Street Tabloid,” threats of litigation, and a supposedly “loony-tunes confidentiality theory.”310 The disputed publication of Mr. Hunter’s new “confidential” hedge fund offering memorandum also acts to undermine the “Bulldog” trade secrets theory to some extent, notwithstanding the “loony-tunes” riposte, because Solengo’s “takedown” demand was predominantly premised upon a copyright infringement theory, and its lawyers did not include New York trade secrets law as an asserted ground for removal of the offering materials from the DealBreaker site.3″ Moreover, DealBreaker’s expected affirmative First Amendment defense is entirely distinguishable from the facts of the Massachusetts administrative matter against “Bulldog.” The most notable distinction being, in the former scenario, the offering materials were apparently leaked by third parties to various financial news websites who, in turn, published reproductions of the Solengo brochure, whereas the latter is an alleged instance of a hedge fund who made marketing materials directly available to the public through its own website, without regard for whether access was restricted to accredited investors.312 As such, it seems implausible that “Bulldog” can affirmatively defend its alleged public disclosures as a member of the “fourth estate,” or anything else even remotely analogous to a financial newsletter publisher that successfully defended itself against an SEC investigation on First Amendment grounds.313

At least in theory, there initially appears to be nothing to necessarily preclude a trade secret misappropriation claim where the subject matter is a secret combination of equity holdings in a hedge fund portfolio, notwithstanding the apparent lack of any “reasonable efforts” to protect the supposed Bulldog “secrets.” At least one New York hedge fund litigant has been successful in an equitable action related to the alleged “theft” of trade secrets.314 However, “isolated bits of useful competitive information are not likely to win protection in New York courts.”315 Goldstein’s collection of Section 13(f) securities, as a portion of a portfolio,316 would likely be construed by a New York court as mere “isolated bits” unworthy of trade secret status.317

New York jurisprudence has established the threshold trade secrets showing is simply not met by “information as to single or ephemeral events in the conduct of the business,” but instead requires the demonstration of “a process or device for continuous use in the operation of the business.”318 The composition of a hedge fund portfolio is likely to be as fluid and dynamic as the ebb and flow of market sentiment and individual stock picks are presumably not for “continuous use.” Moreover, Form 13F data is only revealed after more than a six week time lag319 from the last day of a respective reporting period (and a greater than four (4) month time lag from the first day of a respective reporting period). Such information could be reasonably construed as no longer possessing the qualities of “hot” news, and is perhaps unsuitable to receive the limited protection created by the doctrine of unfair competition by misappropriation.320

A New York tribunal could reasonably conclude that the subject matter of the Goldstein Application is something more akin to the aforementioned “ephemeral events,” than to any “process or device for continuous use,” and thus is not a trade secret at all.321 In fact, the drafters of the RESTATEMENT (FIRST) OF TORTS, §757 cmt. b specifically excluded “security investments made or contemplated” from its trade secret definition, and New York courts have traditionally followed the RESTATEMENT view.322 A potential Form 13F filer/petitioner located in a forum (e.g., California) that more closely follows the expansive Uniform Trade Secrets Act (“UTSA”)323 might have been better positioned to challenge the Section 13(f) reporting regime in part because of the UTSA’ s broad trade secret definition, which does not necessarily exclude arguably “ephemeral events” such as securities positions from trade secret status.324 Without a requisite showing of the necessary elements of a trade secret pursuant to New York law, it seems unlikely that Mr. Goldstein’s theory will triumph.

2. Alleged Harm of “Free-Rider” Trade Secret Stock Traders

While the information at issue need not be “vital” to a claimant’s business operations, it must be adequately important to the extent that a misappropriation would unfairly benefit another in a competitive market.325 This issue appears to be the one on which the Goldstein Application focused much of its energy and rhetoric, by repeatedly noting that third parties can hypothetically “free-ride” the investment acumen of various “celebrity” investment managers.326 A prudent trade secrets claimant would presumably be well served to articulate precisely how the information at issue is used in its operations and exactly why it is a substantial factor in the continued functioning of the business.327 Mr. Goldstein did sketch some broad strokes in media interviews, and within the Application itself, as to how others might hypothetically mimic his positions, but he did not describe with particularity the aforementioned “how” and “why” aspects of his purported trade secrets.328

While the Goldstein camp initially and inexplicably eschewed the available confidential treatment relief, and instead sought exemption from Section 13(f) reporting requirements, existing confidential treatment analysis may offer some guidance in terms of the likely SEC scrutiny of this unprecedented petition. As discussed above, a confidential treatment application must convincingly demonstrate that a Form 13F disclosure would create a substantial likelihood of competitive harm, whereas confidential treatment requests presenting mere conjecture are summarily rejected. The SEC could properly deny the Goldstein Application on numerous grounds, including the failure to specifically demonstrate a substantial likelihood of competitive harm by suspected “free riders.”329 The Goldstein Application also failed to particularize exactly what is the claimed trade secret(s), which if the context was a civil claim for trade secret misappropriation, that conspicuous lack of detail could result in dismissal for failure to adequately provide notice of the subject matter to the opponent.330

Considering that the required Section 13(f) disclosures are limited to positions in exchange-listed or Nasdaq quoted equities and options,331 it would seem that anyone who hypothetically sought to “free-ride” and mimic Goldstein’s positions would presumably provide some measure of bid support for those same equities (a potential detriment to an investment manager seeking to add to a long position).332 If a sufficient number of investors sought to mirror Goldstein’s “stale” disclosures,333 that “free rider” buy-side pressure might even cause the prices of Goldstein’s positions to increase.334 In fact, a clever (and presumably highly cynical) “celebrity” hedge fund manager might even deliberately hold long positions in equities in order to sell them subsequent to the 13F filing, and possibly even short-sell the issue into any “free-rider” fresh money buying.335

The Application misses the mark on a number of the aforementioned required elemental showings needed to establish a protected intellectual property trade secret interest in New York. Based upon the factual statements of record in the Goldstein Application, standing alone, it seems highly improbable that Mr. Goldstein’ s combination of Section 13(f) securities holdings would give rise to trade secret status in any court applying New York law. As such, based on matters of public record and the statements within the Goldstein Application and given the absence of any competent showing of the necessary elements required, the SEC may properly deny Goldstein’s request as it lacks the necessary elements for a protected trade secret

3. Inherently Unreasonable Expectations of a Regulated Market Participant?

Mr. Goldstein has operated his funds in an era that demands Section 13(f) disclosure. He presumably could have elected to structure his funds and portfolios in a manner that would have remained below the $100 million reporting threshold, just as a company who desires to avoid the reporting requirements of the 1934 Exchange Act (and the Sarbanes-Oxley Act of 2002) can refrain from becoming an issuer of publicly traded securities pursuant to the 1933 Securities Act (or can take the company private if it is already a public issuer).336 It is inherently unreasonable for Goldstein to conduct his business based on public disclosure requirements, essential in a market system, then to contend his business information is protected by the Fifth Amendment. This is an especially weak stance for Goldstein to take, considering portions of his “secret” information were allegedly made available to investors through solicitations on unsecured websites, pursuant to the First Amendment.337

There are numerous instances in U.S. commerce where public disclosure is an accepted requirement that is rationally related to legitimate government interests as part of a quid pro quo exchange for the privilege of conducting business in a regulated market. The Section 13(f) reporting regime is wholly consistent with that long-standing tradition.338 For example, a food manufacturer seeking to market a product in the U.S. would almost invariably fail to achieve trade secret protection for a list of ingredients (in contrast to a protectable and unique process or recipe, such as the “Coca Cola” formula) in a challenge to public disclosure regulations and the designation of ingredients (in descending order of predominance) via product labeling requirements.339 Unlike food products marketed in the U.S. (irrespective of the size of the marketer as there is nothing similar to the Section 13(f) $100 million threshold within the food labeling regime), Form 13F filers are only required to disclose Section 13(f) securities holdings (held on the last day of a respective reporting period), and as such, various hedge fund portfolio “ingredients” that are not included in the SEC’s Section 13(f) securities list need not be disclosed.340

Goldstein’s seemingly quixotic Section 13(f) challenge appears especially unreasonable in light of the fact, as noted earlier, that his “Bulldog” funds have filed numerous Schedules 13D and 14 (without seeking exemption or compensation) that have publicly disclosed concentrated positions in certain equities. Goldstein typically filed just before he launched an attempted putsch-by-proxy to overthrow a target issuer’s board of directors, install his confederates, and even force companies to sell off assets in order to supposedly unlock “value,” and apparently has used at least one of his targets’ servicemarks and trademarks without permission, in what seems to be a confusingly similar shareholder group name.34′ The Schedule 13D reporting requirement is also not unlike those within the Hart-Scott-Rodino Act (“HSR”),342 which compels an investor attempting to acquire a concentrated equity stake to file a pre-merger report notification with the Federal Trade Commission, which also establishes the beginning of a thirty-day agency review period where a proposed acquisition is scrutinized for potential antitrust violations.343

U.S. Bankruptcy Judge for the Southern District of New York Allan Gropper rejected similar unavailing non-disclosure arguments of an “unofficial equity committee” formed by hedge fund shareholders in the Norwest Airlines bankruptcy. The shareholders had contended that disclosure of the details of their respective Northwest stock positions “would give competitors insight into the funds’ strategies,” and “argued that just as car dealers and home builders don’t tell potential buyers their actual costs, the funds shouldn’t have to reveal their investments.”344 Judge Gropper responded to these contentions in a March 9, 2007 ruling that the first argument was an “improbable contention,” and quipped that “the committee members do not advance their position when they compare themselves to car or real estate salesmen.”345 The “Bulldog” claimed that Judge Gropper’s In re Northwest Airlines ruling was somehow “forcing the hedge funds to put information into the public domain that would allow their competitors to reverse-engineer the fund managers’ ideas.”346

Mr. Goldstein has not yet explained why he apparently deems public disclosure of equity holdings acceptable when he attempts to remove a target issuer’s board of directors (or when he allegedly makes selective private disclosures to investors, or alleged disclosures to prospective investors based on some unpersuasive First Amendment theory), but claims that the Section 13(f) disclosures at issue would somehow deprive him of trade secret property rights in violation of the Fifth Amendment. Goldstein advocates secrecy, even while many of those same “secret” equity positions have been previously disclosed in media articles touted on the Bulldog web site, in proxies and in Schedules 13D, and would presumably overlap with at least some of those required to be disclosed on Form 13F.347

Mr. Goldstein and his Bulldog outfit have not addressed a number of relevant issues still surrounding his Application, but a press release criticizing the Section 13 reporting requirements was issued on March 28, 2007.348 Although the release did directly quote Phillip Goldstein, and one other hedge fund manager named Nelson Obus from a firm named Wynnefield Capital, it did not identify any specific issuer.349 The press release, titled Investment Managers Urge Repeal of Rule 13-F, was distributed via BusinessWire by a Madison Avenue public relations firm known as Kekst and Company, which specifically notes on its website that as “a matter of policy, Kekst does not publish a list of its clients.”350 Perhaps the identity of the press release issuer is another theoretical trade secret?

The Goldstein Application included no substantive discussion of the many instances where disclosures are required in order to participate in a regulated market, nor did it distinguish any meaningful differences between the disclosures made within Forms 13F and those within Schedules 13D and Proxy solicitations.351 The cumulative effect of the many shortcomings of the Goldstein Application, coupled with the numerous inconsistencies and contradictions within the Bulldog Fund’s words and deeds regarding portfolio disclosures, invariably leads to the conclusion that the “Bulldog’s” expectations as a participant in a regulated market are highly unreasonable, and that the request for exemption should be denied.


When otherwise protectable trade secret property is subjected to government regulation, often related to health and safety concerns, the “constitutional dimensions of trade secret law are important,” and the regulation potentially implicates the Fifth Amendment’s “takings clause.”353 Typical examples of takings frequently involve a government occupation of realty or personalty, which have generally been considered per se invalid.354

Where regulatory activity touches a trade secret in a manner that might result in the public disclosure of the secret, such as the disclosure requirements contemplated in Section 13 of the 1934 Act, one should be cautious to not “overestimate the distinctive nature of intellectual property,” nor to “underestimate its continuity with tangible forms of property.”355 University of Chicago Professor Richard Epstein characterized the common law in this area as “a back-handed vindication of this thesis by its excessive reliance on and misapplication of the now-canonical but intellectually indefensible distinction between physical and regulatory takings.”356

The U.S. Supreme Court has emphasized that the main design of the Takings Clause is “to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”357 Courts have characterized this concept as the “notion of reciprocal benefit, or, in Justice Holmes’ words, the ‘average reciprocity of advantage.'”358 There are certainly different ways to process Holmes’ concept of “average reciprocity of advantage,” and a number of prominent cases in the Supreme Court’s takings jurisprudence find that “reciprocal benefit renders a governmental seizure of assets not a taking.”359 The Goldstein Application neglected to address this critical issue.360

A public benefit can arise indirectly, such as a municipal zoning ordinance that restricts or eliminates an undesirable property use.361 Where use restrictions are imposed, the “far lower standard[] of judicial review,” essentially a rational basis standard, is applied.362 The Section 13(f) reporting regime appears to pose certain restrictions, but leaves the non-exempt investment adviser in possession of the information. The Supreme Court has “identified several factors that should be taken into account when determining whether a governmental action has gone beyond ‘regulation’ and effects a ‘taking’: ‘[1] the character of the governmental action, [2] its economic impact, and [3] its interference with reasonable investment-backed expectations.'”363 Professor Epstein characterized this test as “dubious,” and the first prong to be “most uninformative because it does not explain why different treatments ought to be attached in the end to coercive government behavior. Coercive government behavior is the same no matter what form it takes.”364

Despite the academic excoriating of the Penn Central standard, no one factor controls the outcome. The character of the government’s action is designed to provide transparency through disclosure by major market participants. Any adverse economic impact to the Form 13F is potentially de minimus for investment managers who properly seek confidential treatment from the SEC,365 and the reasonable investment-backed expectations366 of investment managers cannot be credibly characterized as incurring interference, as the disclosure requirement has been in place for roughly three decades. Goldstein was certainly aware of this prior to his funds having greater than $100 million under management.

The spirit and function of the federal securities laws has always been to provide a “level playing field” and promote public confidence in the equity markets through disclosure, and whether an individual is a stock investor or not, certain benefits invariably flow to all Americans367 by virtue of a healthy, reliable and trustworthy securities market.368 As discussed above, one of the primary objectives of the Section 13(f) reporting requirement is “to improve the availability of ‘factual data about large investment managers’ to individuals, federal and state regulatory agencies, and other institutional managers.”369 Arguably the public as a whole benefits from this sort of populist regulatory function, as well as from its by-products, at least indirectly.370

The thrust of the legal substance and analysis contained in the Goldstein Application was in large part an almost rote recitation of authority consistent with constitutional interpretation of the takings clause in regulatory settings, with few exceptions.371 The Goldstein Application, however, apparently overlooked adverse relevant authority where the Supreme Court held that the termination of a trade secret did not warrant compensation to the holder because there was no actual “property taken.”372

As an investment manager, Goldstein is compelled to disclose certain holdings exceeding $100 million in 13(f) securities (absent an approved confidential treatment application373 or a full exemption pursuant to Section 13(f)(2)), and as the holder of that information, Goldstein still possesses it, but he no longer holds the exclusion right when that information becomes a public record (such as a Form 13F filing accessible at the SEC website). According to Professor Epstein, the “residual right to use [the information] along with others is not wholly worthless;” however, he contends it should still be considered a loss of property at the hands of a state actor.374 Courts have addressed this partial taking concept (although it is arguably a complete taking of the right to exclude others)375 and have applied the traditional takings analytical approach, holding the state action (without proper compensation) to be per se invalid, with the key test being “whether other individuals are allowed to go where before they were prohibited.”376

Mr. Goldstein ‘s “Bulldog” funds were not previously required to file a Form 13F,377 as the $100 million assets under management threshold had not yet been reached by his funds, and as such, it would seem credible that others, by having a peak into a portion of his portfolio holdings, would now be allowed to tread where they had formerly been restricted.378 The Goldstein Application does not appear to expressly assert, or even suggest, that this conceptual framework merits any consideration. However, the effect of the Form 13F disclosure could also certainly be reasonably construed as a mere diminution of Goldstein’s property value, which would not be considered a regulatory taking and would not offend the “Takings Clause” of the Fifth Amendment.379 The language in Goldstein’s Application is long on conclusory declarations380 and short on any factual support favoring exemption from the disclosure requirements of Section 13 of the Securities Exchange Act of 1 934 as a bona fide trade secret. Thus, where the reporting requirement is determined to be a regulation that is rationally related to a legitimate government interest, the Application can be reasonably denied as a result.


The Goldstein Application is certainly a creative and colorful document filled with the sort of irascible rhetoric that made Phillip Goldstein a recognized market maverick in 2006. However, when one delves deeper than what is in some instances little more than baseless bluster, the Application falls short at a number of levels. When plumbing the depth of the Application’s substance, it becomes apparent that its factual support is as sparse as the legal analysis is self-serving and shallow. Particularly unavailing is the absence of any factual showing that the information regarding his Section 13(f) securities holdings are protectable intellectual property under New York state trade secret law (or any other state law). The Goldstein Application makes no attempt to establish the required elements of a trade secret under any cognizable legal standard, and leaps into a conclusory due process diatribe that avoided adverse authority that may well spell the undoing of his regulatory reformist agenda. And just as the SEC had to endure its unfortunate historical use of the term “client” in the Goldstein v. SEC matter, this time the “Bulldog” is stuck with a variety of adverse facts that substantially undermine his trade secret theory.

The rational basis standard that is almost certainly the pertinent analytical framework for the issue of Section 13(f) disclosure is curiously missing in action from Mr. Goldstein’s manifesto,381 which is instead supplanted with naked assertions that all economic value is lost through disclosure (though the investment manager admittedly still possesses the information). Given the considerable deference that is traditionally afforded to the rule, regulation or statute in any judicial review following a rational basis analysis, surprisingly scant attention was dedicated to an attempted demonstration that the Section 13(f) disclosure rule is not rationally related to a legitimate government interest. The Goldstein Application conspicuously avoided any discussion of the litany of public purposes and populist benefits that flow from the Section 13 regulatory framework, just as it evaded any discussion of diminution of value considerations.

The Goldstein Application also largely skirted the issue of the alternate (and appropriate) confidential treatment remedy available to investment advisers. At a minimum, as Warren Buffet has demonstrated on an almost quarterly basis, the bureaucratic process involved in a confidential treatment application delays the public disclosure of the contents of a Form 13F for months, and substantially reduces what little (if any) economic harm might arise as a function of the disclosure of Section 13(f) securities holdings, as the data becomes increasingly “stale” with every additional day of delayed disclosure.

While the theoretical basis for the Goldstein Application is indeed novel in some respects, and certainly does raise some important implications regarding private property rights and due process, the approach taken rings hollow, and the result is probably more missed opportunity than anything else. Had the Application methodically addressed the necessary aspects required to properly establish an intellectual property right in trade secrets, and empirically demonstrated a substantial likelihood of the alleged economic harm resulting from the compulsory disclosure scheme, this issue may have fostered a Libertarian private property rights discourse and debate within the securities industry.

Instead, what is absent from the Application is far more notable than what is present, and it seems improbable that the SEC will grant “Bulldog” an exemption based upon the inadequate Application. It seems equally improbably that any subsequent reviewing tribunal would resuscitate the lackluster attempt. However, Mr. Goldstein ‘s creative theory does lay some groundwork for a future enterprising investment adviser who might seek to advance a regulatory reformist agenda by filling in some of the many legal and factual gaps of the Goldstein Application. On the other hand, the Application was reportedly just a “pretext for a lawsuit,”382 and perhaps a return to the spotlight was always the “Bulldog’s” underlying objective.

Edward Pekarek*

* The Author holds an LLM degree in Corporate, Banking and Finance Law from Fordham University School of Law; a J.D. from Cleveland-Marshall College of Law; and a B.A. from The College of Wooster. The Author thanks: Cleveland-Marshall Professor Michael H. Davis; and Fordham University School of Law Adjunct Professors Joan A. Caridi, Judith MacDonald, John F.X. Peloso, Barry W. Rashkover, and Jonathan S. Shapiro for their kind guidance and sage observations. The foregoing opinions, conclusions, and perhaps errors, are solely those of the Author, who can be contacted at mail@edpekarek.com

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