Jun 6 2008 | 10:59am ET

In their acrimonious battle with U.S. railroad giant CSX Corp., The Children’s Investment Fund has found an ally in an unlikely place.

The U.S. Securities and Exchange Commission yesterday said it disagrees with CSX’s interpretation of disclosure rules. The railroad has sued TCI and another hedge fund, 3G Capital Partners, alleging that they illegally used equity swaps to mask its stake in the company and evade disclosure rules.

But the SEC, responding to a request from the judge in the case, rejected CSX’s reasoning, saying it believes that a swaps stake is “not sufficient to create beneficial ownership.”

“A person that does nothing more than enter into an equity swap should not be found to have engaged in an evasion of the reporting requirements,” Brian Breheny of the SEC wrote to U.S. District Judge Lewis Kaplan, who last month asked the agency a pair of questions about its beneficial ownership rules.

Kaplan, who had earlier expressed skepticism about the hedge funds’ practices, calling them “opaque to the broader market,” is due to rule on the case by Thursday.

Things were less favorable for TCI elsewhere in Washington. Six lawmakers have asked the Treasury Dept. to look into the British activist shop’s stake in CSX.

“Very little is known about the investors in the TCI Group or those investors’ agenda,” the June 3 letter reads. “They are anonymous and invisible to government regulators and the nation.”

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