Einhorn case strikes mild blow against cronyism
By Richard Beales and Neil UnmackÂ
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
The allegations against David Einhorn donât make for a garden-variety insider trading case. The UKâs Financial Services Authority has fined the well-known U.S. hedge fund manager and his firm Greenlight Capital 7.2 million pounds between them for the manner in which they dealt in shares of Punch Taverns. Though the case is fuzzy, if nothing else it exposes cozy practices in financial circles.
Greenlightâs funds owned a 13.3 percent stake in Punch back in June 2009. Einhorn initially directed traders to sell it all on June 9, according to the FSA, though only part of it was sold quickly. A week later, Punch announced a big and dilutive equity issue. The company had been discussing it with some investors before Einhorn decided to sell – bringing them over the wall, as the practice is called. Einhorn was approached, but didnât want to hear confidential details that would have prevented his trading.
Here, it gets murky. The hedge fund manager still talked to Punch management and the companyâs broker, the FSA says. The way the regulator tells it, the broker in essence gave away the planned transaction and its timing despite Einhornâs refusal to cross the wall. Even the regulator, however, says Einhornâs alleged market abuse was âinadvertent.â
Einhorn says it wasnât abuse at all. He doesnât believe he got inside information. It seems other call participants agree. He says he had other reasons for selling Punch. Yet having declined confidential information on a deal, itâs surely a pretty obvious risk to then talk at length with the bosses and advisers of the company planning it.
Then again, the company might have been the party most eager to have the call. In June 2009, only three months after the post-crisis low point of the FTSE 100 index, itâs easy to imagine the managers of a troubled company and perhaps especially the broker being desperate to please Einhorn, with his prescient doom-laden assessment of Lehman Brothers still ricocheting around global markets.
The FSAâs logic for penalizing Einhorn seems stretched. Maybe the regulator isnât finished with others involved – after all, the company and its broker were the keepers of any confidential information. But even from whatâs known so far, the tale reeks of financial sector cronyism. The UK regulator has at least struck a mild blow against that.