‘Why do I want to protect their right to screw my state?’: Frank

A rail operator’s effort to stir national security fears on Capitol Hill over two foreign hedge funds’ investment in the company has hit an obstacle in Rep. Barney Frank (D-Mass.).

Frank, the top House lawmaker on foreign investment matters, said he wasn’t likely to weigh in on behalf of rail giant CSX Corp., which has been lobbying Congress to intervene in its battle with two funds trying to win five seats of the 12-member board.

{mosads}He cited a raging dispute between the company and the Massachusetts delegation over a new passenger rail service connecting Boston to Worcester, Mass.

 “CSX has been so incorrigible with us over the commuter rail, I’m disinclined to do anything for them,” Frank, the chairman of the Financial Services Committee, said. “Why do I want to protect their right to screw my state?”

Frank argued that the investment by the U.K.-based TCI, formally known as The Children’s Investment Fund, and 3G Partners, didn’t trigger security concerns.

“I’m not afraid of the English,” Frank said.

He also mused that a shakeup in CSX’s board would be appealing. “Maybe a new group would be nicer to me,” he said.

Frank is angry over CSX’s insistence that it won’t be held liable for deaths in train accidents, a demand it made in talks over a proposed sale of track to the state for the commuter line. CSX said it would agree to liability for train and track damage but not for loss of life, even if it were found to be at fault.

The Massachusetts delegation and state officials are furious over the demand. Sen. John Kerry (D) in April sent a harsh letter to CSX signed by every member of the delegation criticizing the company’s stance and threatening legislation.

The matter has now collided with the company’s effort to politicize its battle with the hedge funds.

The funds are agitating for a shakeup of CSX’s board, claiming the company has underperformed. Together, they have an 8.7 percent stake in CSX, which is the largest transporter of military freight in the U.S. Through derivatives contracts, the funds own an additional 12.3 percent of the company.

CSX has sued the two funds for allegedly violating disclosure laws by building what CSX calls a hidden stake in the company. It has also sounded the alarm on Capitol Hill about the national security risks of such foreign investment.

The railroad company’s efforts to stir up opposition to the hedge funds in Congress bore fruit last week when six members of the Senate Banking Committee sent a letter to Treasury Secretary Henry Paulson. They urged him to begin a federal interagency review of the funds’ stake in the rail operator, saying it raised security concerns.

Sens. Evan Bayh (D-Ind.), Tom Carper (D-Del.), Sherrod Brown (D-Ohio), Mel Martinez (R-Fla.), Jim Bunning (R-Ky.) and Robert Menendez (D-N.J.) argued that the hedge funds’ investment in CSX “lack transparency, leaving the ownership and control of critical U.S. infrastructure in the hands of unknown investors.”

They requested a review by the Committee on Foreign Investment in the United States (CFIUS), an interagency panel chaired by Treasury.

Any party to a transaction can request a CFIUS review or CFIUS can initiate one itself. It does not need to be requested by members of Congress. But clearly, a request by a bipartisan group of senators will grab attention.

“I imagine that the CFIUS committee will take this letter very seriously,” Sam Geduldig, a lobbyist with Clark, Lytle & Geduldig, said.

A spokesman for CSX, Garrick Francis, said the company did not ask Treasury to initiate a CFIUS review of the hedge funds’ investment.

“Congress has been concerned about security on critical national infrastructure for many years. If a review is undertaken, of course CSX will cooperate fully,” he said.

CSX has spent more than $1 million on lobbying in the first four months of 2008, according to a disclosure report it filed with Congress.

 In addition to appropriations bills and other legislation bearing directly on the rail industry, it lobbied on legislation sponsored by the top Republican on the Finance Committee, Sen. Chuck Grassley (Iowa), to require hedge funds to register with the SEC.

Rep. Corinne Brown (D-Fla.), the chairwoman of the House subcommittee on railroads, held a hearing on investment in the rail industry earlier this year. She argued that the hedge funds’ investment in CSX warranted a CFIUS review.

“I’m real concerned about the word foreign. Foreign makes me nervous in a situation where there is concern about our security,” she said in an interview.

Todd Malan, the executive director of the Organization for International Investment, argued strongly against any need for a CFIUS review. “This is a Plane Jane proxy fight that, while annoying to management, has nothing to do with national security,” he said.

To warrant a CFIUS review, a transaction must first be shown to give a foreign investor a controlling stake in a U.S. company, according to Mark Plotkin, a lawyer for Covington & Burling who is an expert on the CFIUS process. Secondly, there needs to be a national security component to the deal.

 “It’s not possible to tell based on the facts in the media whether there’s control here or not,” Plotkin said.