NEW YORK (HedgeWorld.com)–After years of shielding the details of its massive stock portfolio from the prying eyes of the public, and potentially competitors, hedge fund firm D.E. Shaw & Co. Inc. has been forced by the Securities and Exchange Commission to disclose every last share of its US$21.3 billion in equity holdings.

On Dec. 21, D.E. Shaw filed the first of a series of amendments to past quarterly holdings reports, known as Form 13Fs in reference to the section of the Securities Exchange Act of 1934 that mandates reporting and describes what securities must be reported. As of Jan. 6, D.E. Shaw had amended quarterly holdings reports for 13 periods dating to the quarter ended Sept. 30, 2001.

The latest amended report, for the quarter ended Sept. 30, 2004, shows that the company held US$21.3 billion in equity securities, more than its estimated US$11 billion in assets, which suggests the use of leverage, not uncommon for firms like D.E. Shaw. It details the number of shares, the share class and the total value of the holding. It also includes notations as to whether the holding was in the form of an outright share purchase, a put or a call.

For instance, the report shows that as of Sept. 30, D.E. Shaw owned 34,000 shares of American Airlines parent AMR Corp., Fort Worth, Texas. The value of those shares was listed at US$249,000, or about US$7.32 per share. Using a call, D.E. Shaw purchased the right to buy an additional 802,600 shares of AMR for US$5.9 million, or about US$7.33 per share. And a put option gave the hedge fund the right to sell 45,400 shares for US$333,000, or US$7.33 per share.

Elsewhere in the filing, D.E. Shaw listed ownership of 19,321 shares of cancer drug firm MGI Pharma Inc., Bloomington, Minn. The total value of the shares was listed at US$516,000, or US$26.70 per share. D.E. Shaw also listed call options for 72,000 shares at US$26.70 per share and put options for 40,000 shares at US$26.70 per share.

It’s this kind of detailed hedging information that hedge funds like D.E. Shaw often seek to keep secret. While they can keep the information from the public by requesting confidential treatment from the SEC, they must file the detailed information separately with the SEC. Typically confidential treatment is granted to investment managers if they prove disclosure of the information would reveal an investment strategy and thus harm their portfolios.

For statistical arbitrage hedge funds such as D.E. Shaw, which rely on proprietary trading models to identify securities to either bet on or against and which often move large numbers of shares rapidly through their portfolios based on these models, revealing the details of their quarterly holdings could tip off competitors, allowing them to replicate the hedge funds’ trading models and possibly trade against them.

Prior to the filing of the amended holding reports, all of D.E. Shaw’s 13F filings dating back to May 1999 included minimal details. At most, the firm included only the number of entries in its table (each entry corresponds to a separate kind of security, so in the case of the AMR Corp. shares, the straight share purchase, the put and the call count as three entries) and the total value of the entries in the table. Each of the entries includes a one-sentence disclosure that “confidential information” had not been included in the 13F, but instead was filed separately with the SEC.

Some of the firm’s earlier 13F filings don’t include any information about the number of entries or their value. And among previous 13F filings that did include information about the entries and their value, there were discrepancies with amended forms filed in recent weeks. For instance, in its original 13F holdings report filed Aug. 15, 2003 for the quarter ended June 30, 2003, D.E. Shaw listed two table entries valued at US$2 million. In the amended form covering that same time period, filed Dec. 23, 2004, the firm listed 1,703 table entries valued at US$10.6 billion.

It remains unclear exactly why D.E. Shaw was told to amend its 13F reports and fully disclose its positions. In each of its amended 13F filings, the company stated that the firm’s request for confidential treatment of the information contained in the original filing was denied by the SEC on Dec. 13.

This is boilerplate language lifted straight out of the SEC’s guidelines for filing 13F forms in cases where confidentiality requests have either expired or been denied.

Officials at D.E. Shaw declined to discuss the amended filings, saying the company as a general rule does not comment on regulatory matters. SEC spokesman John Heine said he was not aware of the specifics of the D.E. Shaw case, and did not know of any move on the part of the commission to force hedge funds in particular to disclose positions that previously had been kept confidential. The SEC recently targeted hedge funds for greater regulatory scrutiny by voting to require most managers with U.S. clients to register as investment advisers with the commission (see Previous HedgeWorld Story).

George Zornada, a partner at the Boston law firm Kirkpatrick & Lockhart Nicholson Graham LLP, said it is not uncommon for investment managers to seek confidential treatment for their equity positions. “They disclose their holdings to the [SEC] staff so they’re comfortable, but they don’t want to publicly reveal the secret formula for Coke,” he said.

In a story on D.E. Shaw’s recent disclosures, published on Bloomberg News, Douglas Scheidt, associate director and chief counsel for the SEC’s Division of Investment Management, said many of the firms that ask for confidential treatment aren’t entitled to it.

Based on a review of 13F filing guidelines and conversations with attorneys, there appear to be a number of possible reasons for the change in D.E. Shaw’s confidentiality status. It may be that D.E. Shaw was granted confidentiality for a specific time period that has now expired. For instance, investment managers can ask that information containing details about open risk arbitrage positions be kept confidential until the positions are closed. Managers can ask for confidentiality for up to a year after the date the manager is required to file the report.

But given that the positions for a firm like D.E. Shaw can turn over frequently, it’s possible the SEC reviewed the older filings and determined that they contained information on closed or outdated positions and that confidentiality was no longer warranted because disclosure would not harm D.E. Shaw’s strategy.

It’s also possible that D.E. Shaw filed its 13F forms requesting confidentiality and nobody at the SEC got around to reviewing them until recently. Every investment manager holding US$100 million or more in securities listed under Section 13(f) of the Securities Exchange Act of 1934 is required to file 13F holding reports every quarter. Given the volume of paper, it’s conceivable nobody looked closely at D.E. Shaw’s previous filings.

Once SEC officials reviewed the forms, it’s possible they asked D.E. Shaw to justify its request for confidentiality, which it may have been unable to do.

D.E. Shaw is far from the first or even the highest profile investment manager forced by the SEC to disclose securities information it would have preferred to keep secret. Warren E. Buffett’s Berkshire Hathaway Inc. asked the SEC for confidential treatment of the details of its 13F holdings reports for the quarters ended Sept. 30, 2002; December 2003; and March 2004. The SEC denied each of the requests, and Berkshire Hathaway was forced to disclose the positions.

CClair@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.